"Slide in Currency Is Chilling Europe"
Edmund L. Andrews
New York Times, July 10, 1999, page A1
"Euro's Value Slips to Near Parity With U.S. Dollar"
Washington Post, July 13, 1999, page E1
These articles report on the decline in the value of the euro against the dollar. Much of the discussion in both articles is of questionable accuracy and includes many unsupported assertions.
For example, the Post article asserts that "politically, the euro's decline is humiliating for a continent that wanted its new money to rival the dollar as the world's most desirable currency." There is no obvious reason that the decline in the euro should be a political embarrassment to anyone. In a system of floating exchange rates, currencies fluctuate in price against each other. There is no particular reason to desire a highly valued currency.
The last time the dollar experienced a significant run-up against other currencies, it was due to the high interest rates that followed in the wake of the large budget deficits of the 1980s. This run-up of the dollar destroyed much of the U.S. manufacturing sector by making it unable to compete with foreign producers. It is difficult to see why any foreign nation would have been embarrassed to see its currency decline against the dollar in the 1980s, just as it is difficult to see why the European nations should be embarrassed now.
Most economists recognize that the U.S. trade deficit, which is causing it to borrow more than $250 billion a year from abroad, cannot be sustained. Eventually, the dollar will have to decline to correct this imbalance. Since the Europeans are the ones lending, and the U.S. is the nation that is borrowing at an unsustainable rate, it might seem that the U.S. has more to fear if the dollar rises further, making the trade deficit even larger.
The Times article asserts that the euro has been damaged by the efforts of several of Europe's left-center governments to get the European central bank to lower interest rates, which it characterizes as a political miscue. The European central bank has pursued a monetary policy that has been far more contractionary than the one pursued by the Federal Reserve Board in the United States. Many of the world's most prominent economists believe that this is one of the main factors explaining Europe's slow growth and high unemployment. (See "An Economists' Manifesto on Unemployment in the European Union," BNL Quarterly Review, 9/98.) If slow growth is the main factor leading to the decline in the euro, as both articles assert, then it will be necessary to persuade the European central bank to reverse its policy in order to raise the value of the euro.
The Times article also asserts that investors are demanding a risk premium for holding the euro. In fact, the evidence suggest that investors are demanding a risk premium to hold the dollar. Interest rates on dollar-denominated bonds are significantly higher than on euro-denominated bonds. This means that investors must be anticipating that the dollar will decline against the euro.
At one point the Times article comments that there are increasing signs of economic strength in Europe, noting an increase in industrial orders in Germany, an upturn in business confidence in France and a more stringent deficit policy in Italy. While the first two items are indicators of economic strength, the third is a measure of government fiscal policy and bears no direct relationship to the strength of the economy.
"Asian Rebound Derails Reform as Many Suffer"
David E. Sanger and Mark Landler
New York Times, July 12, 1999, page A1
This article discusses the recovery of the East Asian economies from the 1997 financial crisis. The article's theme, stated in the title and first sentence, is that the East Asian countries have not abandoned their economic model, because "the symptoms have abated before the disease could be treated."
The article expresses a faith in the correctness of the U.S. economic model for these countries that is contradicted by virtually every piece of available economic evidence. The countries that have followed the model that this article views as a disease have achieved growth rates that have never been matched by any country following the U.S. model.
For example, according to data from the U.N. and the I.M.F., per capita income grew at a 7.0 percent annual rate in Korea from 1960 to 1994, a 5.2 percent rate in Thailand, and more recently at a 8.3 percent annual rate in China from 1978 to 1997. This growth has led to large improvements in living standards for the population of these countries, particularly in Korea, which has a strong union movement and a democratically elected government.
By contrast, nations that have closely followed advice from the U.S. and the I.M.F. have scarcely been able to show any gains for their populations. Per capita GDP in Brazil has grown just over 1.0 percent a year since its president introduced I.M.F. policies in 1994. Mexico's per capita GDP has grown by less than 1.0 percent annually since it first went this route in 1985. The Philippines, which has been under I.M.F. guidance since the late '60s, and was touted as a great success in a Times article following the crisis ("Last Laugh for the Philippines." by Edward A. Gargan, New York Times, 12/11/97, page D1), has seen per capita GDP growth of 1.0 percent annually over the last 30 years. At recent growth rates, it will take Brazil, Mexico and the Philippines approximately 230 years to achieve the same growth that Korea did between 1960 and 1994.
The article also includes the inaccurate assertion, which "American and I.M.F. officials note," that the countries that mostly closely followed the I.M.F.'s advice rebounded fastest. In making this statement, the article includes Russia as a country that did not follow I.M.F. advice, thereby ignoring the fact that I.M.F. policies led its economy to contract by 50 percent in the seven years prior to its financial crisis. The article also includes Brazil as an example of a country that has done well after heeding I.M.F. advice, even though it is obviously not part of Asia.
In comparing the winners and losers of the region, the article ignores the example of China, which largely escaped the effects of the crisis, and follows an economic model very far removed from the one advocated by the I.M.F. It also left Malaysia off its scorecard, which has done relatively well even though it has completely refused to negotiate with the I.M.F.
The article also includes some historical revisionism. It comments that "virtually all the crisis-hit countries frittered away state foreign currency reserves trying to keep their currencies strong." While this is true, the effort to maintain currency values came largely at the urging of the I.M.F., particularly in the case of Brazil.
The problems in this article's analysis are suggested at the beginning of the second paragraph, when it asserts in reference to the East Asian economies that "all the conventional measures of health look good." The article then comments on the region's stock markets, currencies and inflows of foreign investment. None of these are conventional measures of economic health. The more standard measures are GDP growth, unemployment rates and the overall level of investment. The measures the Times relies on may reflect the confidence of financial markets, but they bear little direct relationship to the actual health of the economy.
"Japanese Retirees Fill `Second Life' With Second Jobs"
Kevin Sullivan and Mary Jordon
Washington Post, July 13, 1999, page A1
This article discusses the increasing tendency among Japanese retirees to look for second jobs. At one point the article refers to the aging of Japan's population as "the greatest long-term obstacle to this nation's recovery."
It is not clear why the aging of the population should pose a long-term obstacle to the nation's recovery. The rate at which the population ages is very slow relative to Japan's productivity growth. Even with the higher tax burden needed to support a larger population of retirees, Japan's after-tax wages will more than double by the year 2030. This is a much more rapid rate of real wage growth than is projected for the United States, even before taking account of any additional tax burdens that might be associated with the aging of the population here.
"Senate G.O.P. Eyes Own Big Tax Cut"
Washington Post, July 10, 1999, page A1
"G.O.P. Renews Push For a Big Tax Cut, Citing Surplus"
Richard W. Stevenson
New York Times, July 11, 1999, Section 1 page 1
"Clinton Officials Say GOP's `Risky' Tax Cuts Would Cause Deficit"
Washington Post, July 12, 1999, page A8
These articles discuss the conflicting positions being set out by Republicans who advocate a tax cut and Democrats who insist that the money be used for a combination of debt reduction, Medicare support and additional funding for other government programs. The issues involved in this debate would be much clearer if the sums in question, such as the proposed tax cuts or the baseline level of discretionary federal spending, were expressed as a share of GDP.
The tax cut proposed by the Republicans is approximately $800 billion over ten years. This is equal to 0.7 percent of projected GDP over this period. By comparison, the Reagan tax cuts were equal to about 2.5 percent of GDP.
The baseline budget projections assume that discretionary federal spending will fall in real terms over the next three years and then stay constant in real terms in later years. Under these assumptions, discretionary spending falls from 6.5 percent of GDP in 1999 to less than 5.0 percent in 2009. This baseline implies that, on average, federal spending on items such as the military, education, research and development, and infrastructure will be cut almost 25 percent over the next decade, when measured relative to the size of the economy.
The second Post article notes the Clinton administration's contention that the Republican tax cut plan will lead to a deficit of $50 billion in 2009. GDP is projected to be $13.7 trillion in 2009, which means that if the Clinton administration's estimate is correct, the deficit in that year would be less than 0.4 percent of GDP if the tax cut went into effect. A deficit of this magnitude has no measurable economic consequences.
"Health Care Growing as 2000 Issue"
Amy Goldstein and David S. Broder
Washington Post, July 11, 1999, page A1
This article reports on growing public concerns over health care, as costs continue to rise and the public becomes increasing concerned about the quality of care provided by HMO's. The lengthy article characterizes the public's attitude towards government involvement in health care near the beginning: "Patients look to Washington for help, but not too much help." This comment is supported by a quote from Robert J. Blendon, a health policy professor at the Harvard School of Public Health: "There's no stomach for really big changes out there."
This would appear to be an inconsistent characterization of public attitudes. The public has just experienced a very large change in the provision of health care, which is still not completed. Ten years ago, the vast majority of the population received health care through traditional fee-for-service plans. Now the vast majority of the population is enrolled some type of managed care plan. If there is no stomach for big changes, then presumably the public is very angry about this change in the way health care is being provided.
This view is supported in comments by Bill McInturff, which appear near the end of the article. McInturff, who does polling for the Republicans and the health care industry, noted that the number of people who said that the health care system needed "radical change" is at its highest level since 1991-92.
"Report Says Profit-Making Health Plans Damage Care"
Sheryl Gay Stolberg
New York Times, July 14, 1999, page A16
This article reports on a new study that appeared in the Journal of the American Medical Association, which found that for-profit HMO's provided poorer quality health care than non-profit plans. In the second paragraph, the article asserts that "because the researchers favored national health insurance, some questioned their findings."
While the article gives extensive space to the representatives of the health insurance industry who questioned the study's findings, it does not provide any examples of substantive criticisms of the study. Nor does the article give any indication of how the researchers' political views might have biased their use of statistical data.
"Argentine Stocks Fall Again, and Other Latin Markets Follow"
New York Times, July 13, 1999, page C6
This article reports on a sharp drop in Argentina's stock market, which appears to be bringing down markets in other Latin American nations as well. The article notes that the decline in the stock market is associated with a recession in Argentina that is projected to push the unemployment rate above 15 percent.
At one point the article notes the upcoming elections in Argentina and comments that "the two leading presidential candidates have also contributed to the market's anxiety by not declaring their economic policies." This statement contradicts an earlier article in the Times, which asserted that both presidential candidates had indicated their support of the austerity policies being pursued by the current president, Carlos Saul Menem (see "Rivals in Argentina Rally Around the Beleaguered Peso," by Clifford Krauss, New York Times, 5/30/99, Section 1 page 9).
"Globalization Widens Rich-Poor Gap, U.N. Report Says"
New York Times, July 13, 1999, page A8
This article discusses a new report from the United Nations Development Program which documents the growing disparity in wealth and income between rich and poor around the world. The short article comments at length about what is not in the report: "As in previous reports, it says little about what role the poorest nations themselves play in their predicament. It says little about the corruption and mismanagement of resources in many of the poorest countries that have discouraged foreign investment and squandered millions of dollars in foreign aid." Apparently the article is suggesting that the report should have been written very differently.
The article also characterizes the report as "short on specific proposals for making international markets work `for people rather than profits.'" Actually, the report contains a whole set of fairly specific proposals, including a proposal for a tax on international financial transactions and a change in patent laws so that they cannot be used to deprive developing nations of access to new technology. In comparison with many other reports on the international financial system, these proposals are quite specific.
"Tracking Just What the Doctor Ordered"
New York Times, July 13, 1999, page C1
This article gives a careful explanation of the services provided by pharmacy benefit managers. These firms purchase drugs at wholesale prices from the pharmaceutical industry and pass on savings to HMO's or the government. They also act to steer patients to lower cost drugs.
"Freeways, Their Costs and 2 Cities' Destinies"
New York Times, July 14, 1999, page A1
This article discusses the ways in highway construction has promoted suburban sprawl and led to the deterioration of inner cities. Its focus is on Milwaukee and Salt Lake City, but the discussion examines the issue of government-subsidized sprawl more generally.
"Food Aid: Too Much, Too Late?"
Washington Post, July 12, 1999, page A1
This article reports on the food aid program that the Clinton administration established for Russia in the wake of the collapse of the ruble last summer. The article points out that the grain is just now beginning to arrive in Russia. Any grain shortages that may have existed in the past appear to have been eliminated, so that the main impact of the aid is to lower the price of wheat in Russia, thereby hurting their domestic agriculture. The main beneficiaries appear to have been the U.S. farmers who sold the grain to the government.
"In Japan, Mired in Recession, Suicides Soar"
New York Times, July 15, 1999, page A1
This article examines how Japan's recession and the resulting rise in layoffs and unemployment has led to a sharp upturn in suicides.
"Cutting the Tax on Capital Gains: The Theory and the Evidence"
Michael M. Weinstein
New York Times, July 15, 1999, page C2
This article gives a careful presentation of the economic theory behind a capital gains tax cut. It then notes the existing evidence, which suggests that the size of the economic impact would be negligible.
Dean Baker is a senior research fellow at the Preamble Center and at the Century Foundation.
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