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Economic Reporting Review

August 16, 1999

By Dean Baker

Federal Budget | Health Care | Japan | Europe | Russia | Outstanding Stories

FEDERAL BUDGET

"Despite Lessons of Past, GOP Picks a Budget Fight"
John F. Harris and Juliet Eilperin
Washington Post, August 7, 1999, page A1

"With Fiscal Battle Plans Drawn, Lawmakers Begin Recess"
Alison Mitchell
New York Times, August 7, 1999, page A8

Both of these articles assess the battle between President Clinton and the Republican Congress over the tax cut Congress recently approved. At one point, the Post article comments that "the argument that Clinton's spending plans are a threat to Social Security could be made just as plausibly about the Republican tax cut proposals."

In fact, neither argument is very plausible. If the whole of the $792 billion that the Republicans want to use for tax cuts were instead used to pay down the debt, the difference in the real interest burden (interest payments net of inflation premium) would be approximately $24 billion annually by 2009. This amount is less than 0.2 percent of GDP projected for that year, and approximately 1.0 percent of projected government spending in that year. If there is a serious commitment to maintaining Social Security in 2009 and subsequent years, then this amount of money is not likely to impose a serious obstacle. In short, the interest savings from paying down the debt will have only a limited impact on the government budget in future years.

The Times article characterizes the battle as a "high-stakes" confrontation over how to divide the $3 trillion projected surplus between tax cuts, federal programs and debt reduction through the next decade. In fact, Congress and the president will not be making these decisions for the next decade. The Congress and president elected in 2000 will in no way be bound by the decisions made by this Congress. The same applies to the Congresses and presidents elected in subsequent years. In fact, if there is a major change in the economy, such as a recession, it is possible that in its second session, even this Congress and president will not adhere to whatever tax and spending guidelines it approves this year.

"Clinton Wants to Widen Economic Boom"
Ceci Connolly
Washington Post, August 8, 1999, page A4

This article reports on President Clinton's claim that he is determined to widen the nation's prosperity to reach depressed inner cities and rural areas. It then notes his proposal for subsidized loans and other aid to these regions. This proposal is projected to cost less than $1 billion over the next five years. The article does not note that this is less than 0.01 percent of projected federal spending over this period.

"A Debate Over Dividing Tax Dollars Yet to Be Collected"
Richard W. Stevenson
New York Times, August 10, 1999

This article discusses the debate over what should be done with projected budget surpluses. At one point the article notes calculations done by the Democratic staff of the House Budget Committee, which show that most of the surplus being contested is based on the assumption that a wide variety of domestic programs will be cut in real terms. However, it repeatedly asserts that the Democratic position favors increased spending on domestic programs. In fact, both sides in the debate are apparently accepting cuts in spending, although the Democrats favors smaller cuts than the Republicans.

At one point the article asserts that "Democrats, Republicans and most economists agree that reducing the debt would leave lower interest rates, stimulating more economic growth, and would make it easier to address long-term problems like the solvency of Social Security."

While most economists would agree with this view, they also would say that the effect of this amount of debt reduction is very limited. According to standard growth models, if the entire amount being contested were used for debt reduction, it would increase GDP by a cumulative total of approximately 0.3 percentage points by 2010. This is roughly the same amount that the economy grew in February of this year.

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HEALTH CARE

"Clinton Chides States for Failing to Cover Children"
Robert Pear
New York Times, August 8, 1999, Section 1, page1

This articles discusses a speech President Clinton made to the National Association of Governors convention, in which he criticized the states for not enrolling more children in the Children's Health Insurance Program. This program was started in 1997 and, according to the Administration's figures, now enrolls 1.3 million children. President Clinton that he would have expected at least 3 million children by now and therefore was "a little disappointed."

The article did not mention the research of the Congressional Budget Office, which should have alerted the president to the limited impact of this program. A study done prior to the passage of the program in 1997 found that it would only insure approximately 1.4 million additional children. (See "Health Care Bills Don't Meet Goals Budget Aides Say," by Robert Pear, New York Times, 7/2/97, page A1.)

The program only provides $4.8 billion a year in additional revenue. The average cost of health care in the U.S. is approximately $4,500 per year. (See "What Cost Health Care?" Washington Post, 8/7/99, page A13; "Outstanding Stories of the Week," below.) If the expense of providing insurance to children is the same as the average health care expenditure for the whole population, then the money appropriated for this program could pay to insure approximately 1.2 million children.

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JAPAN

"Japan's Ruling Party Ends Standoff on Bond Policy"
Stephanie Strom
New York Times, August 7, 1999, page B2

This article reports on the decision by Japan's government not to pressure its central bank to buy government bonds in order to prevent interest rates from rising. The article said that the standoff between the bank and the government had attracted the interest of international investors and economists "who viewed it as a test of Japan's commitment to free-market principles, one of which is the maintenance of a central bank free of political interference."

The article does not explain where it obtains its definitions of free-market principles. It is worth noting that many nations that are thought to practice free-market economics have explicit political involvement in the determination of monetary policy. For example, until two years ago, England's central bank was under the control of its Treasury Ministry.

Also, even if a central bank is not subject to explicit government control, it does not mean that it is free of political interference. In the United States, five of the twelve members of the open market committee that determines monetary policy are appointed through a process dominated by banks. It is reasonable to expect that these members will represent the political interests of banks, just as if they were appointed through a process controlled by organized labor, it would be expected that they would represent the interests of unions.

"Economy's Ebb in Japan Spurs Temporary Jobs"
Howard French
New York Times, August 12, 1999, page A1

This article discusses the growth of the temporary help industry in Japan. It explicitly criticizes the Japanese government for placing restrictions on the use of temporary workers, asserting that temporary workers "represent the future of the job market in this country, it is a future that a crisis-stricken Government is being dragged towards with its heels planted firmly in the ground."

The article appears to have based its assessment of the structure of Japan's future labor market on the views of a temporary worker interviewed for the article; an economist at an investment bank in Japan; and Yasuyuki Nambu, the founder of Japan's largest temporary employment agency.

It also presents the views of Mr. Nambu that the Japan's economy needs to be fundamentally restructured, and asserts that most economists agree this position. The article does not indicate how it has determined the views of a majority of economists on this issue. Many prominent economists do not hold this perspective. For example, M.I.T. professor Paul Krugman, one of the world's most respected economists, argues that Japan is most in need of expansionary monetary policy to stimulate demand. (See Paul Krugman, "Japan's Trap." 5/98, http://web.mit.edu/krugman/www/japtrap.html.)

It is worth noting that one of the practices that the article complains is inhibiting the growth of temporary employment is the government's practice of encouraging firms to keep workers on their payroll when their is a downturn in demand, instead of just laying them off. This practice probably does inhibit the growth of temporary employment, since most people will not seek out temporary work as long as they have well-paying regular jobs.

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EUROPE

"In Europe's Big Economies, New Signs of Brisk Growth"
John Tagliabue
New York Times, August 9, 1999,

This article discusses evidence of a small acceleration in growth in Europe's largest economies, Germany, France and Italy. The article attributes the acceleration to the improving situation in export markets in developing nations and "tentative changes aimed at making European economies more nimble."

It is questionable how much impact such changes could be having on European economic growth at this point. Some of these changes, for example the plans by German Chancellor Gerhard Schroder to cut taxes and government spending, have not even been approved by parliament yet.

Insofar as there is evidence of more rapid growth, the more likely candidate is the decision in the spring by the European Central Bank to cut short-term interest rates from 3.0 percent to 2.5 percent. This move should have had some positive impact on economic growth. It is worth noting that even with this rate cut, the European Central Bank is still pursuing a far more contractionary policy than the Federal Reserve Board did during the last recession in the United States. The real interest short-term interest rate in Europe is still close to 2.0 percent; by comparison, it fell to zero in the United States in 1992.

As evidence that France is developing greater flexibility, the article cites an economist at French bank asserting that the French economy now begins to create jobs when the growth rates exceeds 2.0 percent, whereas formerly it did not create jobs unless growth exceeded 3.0 percent. It's not clear what this would say about flexibility, but this claim would imply that productivity growth is now significantly less rapid than it had been in the past. (Growth without job creation indicates that each worker is producing more value.)

This article quotes and/or cites four economists. Every one of them works for a bank or brokerage firm.

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RUSSIA

"Yeltsin Fires Russian Premier"
Associated Press
New York Times, August 9, 1999, page A1

"Yeltsin Fires Russian Prime Minister"
Greg Myre
Washington Post, August 9, 1999

These articles report on Russian President Boris Yeltsin's decision to fire his prime minister, Sergei Stepashin. Both articles state that "Russia's economy is still struggling following a financial crash last year." Actually, the economy has largely recovered from the effects of the crash last summer, with industrial production now having passed the pre-crisis level and overall GDP close to its pre-crisis level. However, its economy is still suffering from the impact of the IMF's transition program, which has caused it to contract by close to 50 percent (see "Wither Reform: Ten Years of the Transition," by Joseph E. Stiglitz, http://www.worldbank.org/research/abcde/stiglitz.html).

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OUTSTANDING STORIES OF THE WEEK

"What Cost Health Care? "

Washington Post, August 7, 1999, page A13

This set of charts shows data comparing international health care spending. The chart shows that health care spending in the United States averages more than $4,000 per person, more than twice as much as in most other industrialized nations.

"At Camp For Migrants, the Living Isn't Easy"
Steven Greenhouse
New York Times, August 9, 1999,

This article reports on the living and working conditions of migrant farm workers who go up to the eastern shore of Maryland each summer to pick tomatoes. The farm workers live in overcrowded buildings made of corrugated steel, with limited access to showers and toilets. In some cases they are paid less than the minimum wage.

"Crackdown on Housing for Migrant Workers"
Tina Kelley
New York Times, August 11, 1999

This article discusses living conditions for migrant farm workers who pick fruit in the Northwest. It notes that many farm owners are unwilling to spend $200 to rent a six-person tent for a month, under a Washington state government program. Such tents apparently would provide substantial improvements in living conditions. The cost of these tents is equivalent to a pay increase of approximately 33 cents per hour.

"In Harm's Way and in the Dark"
Joby Warrick
Washington Post, August 8, 1999, page A1

This article reports on the results of a Post investigation, which examined court documents, plants records and interviewed workers and supervisors at a nuclear fuel processing plant in Paducah, Kentucky. The investigation found that the workers had been exposed to high levels of radiation over a 23-year period.

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Dean Baker is a senior research fellow at the Preamble Center and at the Century Foundation.


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