"Is $1 Trillion Windfall as Ephemeral as a Breeze? "
Richard W. Stevenson with Michael M. Weinstein
New York Times, July 3, 1999, page A8
"Federal Seers, Telling Nation's Fiscal Fortune"
New York Times, July 5, 1999, page A8
These articles discuss the most recent round of budget projections. These projections show a cumulative surplus that is projected to be more than $1 trillion larger, over the next 15 years, than the surplus projected six months earlier. The articles present considerable information about the process and problems of making long-term projections. However, neither article relates the surplus projection to the size of the economy over this period.
The cumulative output over the 15-year planning period is projected to be approximately $200 trillion. This means that the revision in the projection is equal to approximately 0.5 percent of projected GDP.
While this is a significant upward revision, it is not particularly large by historical standards. For example, in 1997, the Congressional Budget Office reduced its projected deficit for fiscal year 1997 by more than 1.0 percentage point of GDP between its January and July projections. In 1998, the revision in the surplus projection for 1998 from the January to July projection was equal to 0.75 percent of GDP.
In these cases, the revisions were made to projections for fiscal years that had already begun, not for a set of years that stretched 15 years into the future. The fact that the size of the revision is large relative to the size of problems that have received significant public attention, such as the projected Social Security shortfall, provides as much information about the actual magnitude of these problems as it does about the extent of the improvement in the budget outlook.
"Clinton Urges Corporate Investment to Fight Pockets of Poverty"
Washington Post, July 6, 1999, page A2
"A Pledge of Federal Help for the Economic Byways"
John M. Broder
New York Times, July 6, 1999, page A10
"Departing Foreign Aid Chief Says Cuts Are Dangerous"
New York Times, July 6, 1999, page A4
These articles discuss two areas of federal spending, a proposed fund to provide incentives for private businesses to invest in depressed areas and the foreign aid budget. Readers would be far better able to evaluate the significance of both areas of spending if the numbers were expressed as a share of the total budget.
The proposal to provide business incentives is projected to cost $980 million over five years, according to the Post article. This is equal to 0.01 percent of projected federal spending over this period.
The second Times article notes that the foreign aid budget has declined from $14.1 billion at the start of the Clinton Administration in 1993 to $13.7 billion in the 1999 budget. While the article notes that the decline would be even larger if the spending were adjusted for inflation, the best metric is the share of total federal spending. The 1993 spending was equal to 1.0 percent of federal spending. The 1999 appropriation was equal to 0.79 percent of federal spending.
"G.O.P. to Seek Cut in Capital Gains Tax"
Richard W. Stevenson
New York Times, July 8, 1999, page A18
This article discusses the Republicans' plans for a passing a capital gains tax cut. The article focuses on a plan being proposed by Rep. Bill Archer, the chair of the House Ways and Means Committee. It notes that this plan would reduce the capital gains tax rate for taxpayers in the 15 percent income bracket from 10 percent to 7.5 percent.
It is worth noting that few of these taxpayers will ever have any significant capital gains to be taxed in any case. While many may sell a home for a capital gain, these gains are already virtually exempt from taxation. Any capital gains that people in this tax bracket get from financial assets are likely to be extremely small, since most of the people in this category own no stocks whatsoever.
"Archer's Last Stand: A Social Security Crusade"
Washington Post, July 6, 1999, page A3
This article discusses the efforts of Rep. Bill Archer, the chair of the House Ways and Means Committee, to pass Social Security legislation before he retires at the end of his current term. At one point, the article discusses Archer's proposal, and states that it would allow Americans to invest a portion of their Social Security taxes in the stock market.
Actually, this is a dubious characterization of Archer's proposal. While the plan does provide for individual accounts, the government would determine exactly how this money was invested. Then when workers retire, they would surrender these accounts in order to get their regular benefit. Unless workers chose to accept a smaller retirement benefit, they would never see the proceeds from their private accounts.
"After Brief Pause, Strong Job Gains Reported in June"
New York Times, July 3, 1999, page A1
This article discusses the Labor Department's June employment report. At one point, the article compares the current economic situation to the one that existed in 1989, which is described as "the end of the long, strong 1980s boom."
By standard economic measures, there was no strong 1980s boom. The average annual growth rate from the previous cyclical peak in 1979 to 1989 was 2.7 percent. By comparison, the average growth rate from 1969 to 1979 was 3.2 percent, and the average growth rate from 1959 to 1969 was 4.8 percent.
The slower rate of overall GDP growth was attributable to a slowdown in both the rate of job growth and productivity growth from their 1970s levels. The investment share of GDP plunged by more than 2 full percentage points in the 1980s and the trade deficit, measured as a share of GDP soared to record highs. By almost any measure, the economy performed worse in the 1980s than in any other decade since the Great Depression.
The article also refers to an increase of 400,000 in the size of the labor force, as measured by the Bureau of Labor Statistics household survey, as evidence that many more people are deciding to work in the current economic boom. The size of labor force, as measured by this survey, jumps around enormously due to seasonal factors. For example, from February to March, the survey showed a drop of 455,000 in the size of the labor force. This drop was almost certainly driven by statistical factors rather than an actual decline in the size of the labor force. The same is the case for the large rise reported in the data for June.
"Brazil's Leader Undercut by His Quarrelling Allies"
New York Times, July 8, 1999, page A6
This article discusses the current political situation in Brazil. It notes that Brazil's Congress has not been acting on President Fernando Cardosa's economic agenda, which the Times presents as an act of negligence. The article complains that "instead of approving bills, lawmakers have been fighting over government appointments, grandstanding at hearings and maneuvering for advantage in next year's municipal elections and the battle to succeed Mr. Cardosa in 2002."
The economic package being put forward by Cardosa includes many unpopular features, including budget cuts and tax increases. It is possible, if not likely, that the Congress is quite deliberately placing other items on the political agenda as a way to block Cardosa's economic plan.
[Top] Outstanding Stories of the Week
"When Hope Springs Eternal, Ask Why"
New York Times, July 4, 1999, Section 3, page 1
This article examines the discrepancy between the performance of a high-tech company that appears to be failing and a new "buy" recommendation for the company's stock issued by two brokerage houses. The article points out that these brokerage houses are subsidiaries of banks that are providing lines of credit to the firm. Insofar as these "buy" recommendations affect the market for the company's stock, it will significantly enhance the profitability of the banks' loans to this company.
Federal laws separating the operation of brokerage houses and banks have been severely weakened in the last decade. Current legislation before Congress will eliminate many of the remaining restrictions. If the remaining restrictions are removed, it will be extremely difficult for federal regulators to detect and prevent firms from acting based on a conflict of interest.
"Signals on Interest Rates"
New York Times, July 4, 1999, Section 3, page 5
This article examines the current state of the economy and points out the lack of evidence of any acceleration in wage increases.
"Record Labels Assert Control in Cyberspace"
New York Times, July 5, 1999, page C1
This article chronicles the extravagant efforts of the recording industry to maintain traditional copyright protections in the face of new digital technologies. The article notes that the industry has even tried expensive campaigns to convince college students that making unauthorized copies of music is morally wrong.
Economists usually ridicule such efforts to persuade individuals to act against their own self-interest. From an economic perspective, the resources deployed in the effort to preserve copyright protection are a complete waste. This is part of the inefficiency associated with this form of protectionism.
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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