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Economic Reporting Review

September 6, 1999

By Dean Baker

Genetic Modification | Japan | Stock Market | Savings Rate | Education | Outstanding Stories


"New Trade Threat For U.S. Farmers"
Melody Peterson
New York Times, August 29, 1999, Section 1 page 1

"Fearful Over the Future, Europe Seizes On Food"
Roger Cohen
New York Times, August 29, 1999, Section 4 page 1

These articles discuss opposition to the sale of genetically modified foods from the United States, in Europe and elsewhere. Both articles implicitly or explicitly assume that it is implausible that these foods pose any real health or environmental danger.

For example, the first article asserts that "there is no compelling evidence that shows the foods are unsafe" adding "but there is not enough evidence to prove the foods' safety to a minority of scientists." The article does not indicate how it has assessed either the state of scientific evidence on this issue or the balance of views among the scientists who do research in this area.

Similarly, the second article treats the issue as simply a concern over excessive U.S. power in the world, as indicated by the title. It quotes without comment a statement from Sen. Richard G. Lugar that "in the United States, we have not seen a scintilla of ill effects, and on my farm alone we have been modifying corn and soybeans since the 1930s."

Unless Senator Lugar's farm was well ahead of the forefront of bio-technology, it would have been impossible for them to have been genetically modifying crops prior to the last few years. While farmers have altered crops by cross pollination throughout the century, this is qualitatively different than the sort of genetic engineering allowed by recent breakthroughs in technology. It is only the latter that is at issue in current trade negotiations.

This article continues to quote Senator Lugar, again uncritically, to the effect that the choice facing the world is to either adopt genetically engineered foods, or see billions of people go hungry. This characterization of the issue is inaccurate. No one is starving in the world at present because of inadequate world-wide food production. While this situation may arise in the future, at present there is an opportunity to experiment widely with various methods of increasing food production.

It is entirely possible that, with poor planning, genetically altered crops could lead to less food production. For example, if a large part of the world's arable land was planted with a crop that proved particularly susceptible to a new type of blight, food production could plummet.

It is also worth noting that restrictions on genetically altered foods are not trade restrictions, as implied in these articles. They either prohibit the sale of genetically altered foods altogether or require that such foods be labeled. In the case of mandatory labeling, the rules are simply requiring that consumers be informed about the product they are purchasing.



"Japan as No.1? In Debt, Maybe, at the Rate Things Have Been Going"
Sheryl WuDunn and Nicholas D. Kristof
New York Times, September 1, 1999

This article discusses the increase in public indebtedness in Japan, as its government uses deficit spending to attempt to boost the economy out of recession. The article contains several important misrepresentations of economic data and at least one very serious flaw in logic.

The flaw in the article's logic appears in its opening sentence, where it that it is surprising that Japan could be accumulating large amounts of government debt, even though its citizens are known for their thrift: "One of the striking paradoxes of Japan is that this is a country with the greatest savers in the industrialized world, and yet everywhere one looks there is debt."

In fact, it is a principle of accounting that a nation's total savings, public plus private, is by definition equal to its total investment. While Japan does invest a somewhat higher share of its GDP than the United States, its citizens save at far higher rate (the personal saving rate in the United States has been negative for the last year). With its extremely high private savings rate, accounting principles imply that as a result the government must have very low savings (i.e. a large deficit). In other words, it is precisely the high level of private savings that is causing the budget deficits. There is nothing at all paradoxical about this situation.

At several points the article suggests that Japan's high level of indebtedness has raised questions about its creditworthiness. Financial markets do not seem to share the article's concern. The interest rate on a ten-year Japanese government bond is currently just under 2.0 percent. By contrast, the interest rate on a ten-year U.S. government bond is approximately 5.8 percent. This suggests that investors demand a much higher interest premium to hold U.S. government debt than Japanese government debt.

Along the same lines, the article includes the comment that in Japan, "Already, long-term rates are nearly 60 times the level of short-term rates." While this fact would appear to suggest an atmosphere of crisis, in actuality, it just means that Japan has extremely low short-term interest rates, currently about 0.02 percent. Under such circumstances, a ratio of long-term to short-term rates of even 100 to 1 would not be a problem.

It also worth noting that nearly all of the discussion in the article refers to Japan's gross debt figure, a measure that also includes the liabilities of its Social Security system. At one point the article does note that Japan's net debt figures "look much better than the gross figures usually cited." While it is not obvious which debt figure, gross or net, is more often cited, it is the net figure which is used in making international comparisons by the OECD and most economists. (See ERR, 1/4/99, 2/22/99.)



"Greenspan Sounds a Warning"
John M. Berry
Washington Post, August 28, 1999, page A1

This article discusses a talk by Federal Reserve Board Chair Alan Greenspan in which he assessed the possibility of the stock market being over-valued and the possible implications that this situation would have for monetary policy. The article notes Greenspan's comments that "the value of all assets is rooted in the future.... When someone buys a corporate stock, part of the value is determined by expectations about the firm's future earnings." The article then goes on to note the difficulty of projecting future earnings, according to Greenspan.

While the future is always hard to predict, it is done all the time in formulating economic policy, for example in budget projections. These budget projections are based on projections of economic growth, and the growth of both wages and profits. If these projections are being used for constructing tax and spending policy (which Greenspan has felt competent to comment on), there is no obvious reason why the same projections would not be used to assess the current value of the stock market.

The Congressional Budget Office projects that profits will grow by a cumulative total of 4.7 percent over the next ten years (adjusted for inflation). This is a growth rate of just less than 0.5 percent annually. If stock prices rise at the same pace as corporate earnings--and no economist has argued that stock prices can consistently outpace earnings growth--then the total real return on stocks (capital gains plus dividend payments) will average less than 2.5 percent annually.

By contrast, an investor can purchase an inflation-indexed government bond that will pay a real return of more than 4 percent annually over the next ten years. Unless stocks are somehow viewed as less risky then inflation-indexed government bonds, the projections of corporate profits from the Congressional Budget Office imply that stocks are enormously over-valued.

"Stock Prices Aren't Forcing Fed's Hand"
Louis Uchitelle
New York Times, August 31, 1999, page C1

This articles reports on the debate over the relationship between the stock market and the economy at the annual meeting of central bankers in Jackson Hole, Wyoming. The article discusses at some length the ability of the Federal Reserve Board to deal with the effects of a stock market crash. At one point it notes its success in offsetting the impact of the 1987 crash.

In the case of the 1987 crash, the stock market had returned to its pre-crash levels within six months of the crash, thereby limiting the potential impact on the economy. Measured relative to corporate profits, the stock market is more than 50 percent higher at present than it was prior to the 1987 crash. The fact that the market is so much higher by traditional measures makes it far less likely it will recover in the same way as it did in 1987.



"Experts: Spending Belies Slowing Growth"
George Hager
Washington Post, August 28, 1999, page E2

"Consumption and Incomes Up Yet Again"
Bloomberg News
New York Times, August 28, 1999, page B4

Both of these articles report on new data from the Commerce Department on personal income and spending in July. The data show that consumption increased more rapidly than income in July, leading to a near-record low savings rate of negative 1.4 percent. Both articles seek to explain away the evidence of negative household savings.

The Post article notes that June's income numbers were unusually high because of large disaster relief payments. It points out that if these relief payments were removed from the income numbers for both months, then consumption would not have risen more rapidly than income in July. While this is true, the removal of the disaster relief payments from the income side would imply that consumption rose far faster than income in June, and that savings had been at near record lows in both June and July.

The Times article notes that the Commerce Department measure of savings does not include the increase in value of assets such as stocks or homes. This is true; the Commerce Department measure only takes into account savings out of current income.

In principle, the savings rate should correspond to the resources used to finance new investment. This measure excludes capital gains, since increases in the price of stocks or housing do not directly affect the nation's ability to produce goods or services. Investment in new plant and equipment will increase the nation's ability to produce goods and services in the future, while a more high-valued stock market has no comparable effect.

It is also worth noting that this measure of savings excludes capital losses, such as those that hit the stock market in the late '70s and many local real estate markets in the late '80s. Including these losses would have significantly lowered the measured savings rate.



"As Students Return, Schools Cope With Severe Shortage of Teachers"
Jacques Steinberg
New York Times, August 31, 1999, page A1

This article reports on the difficulties that many school districts are encountering in attracting enough teachers. The article notes that there are an adequate number of teachers nationwide; the problem is that they are unwilling to move to some of the areas that need more teachers.

While the article characterizes this problem as a "shortage" of teachers in such areas, it would be more accurate to state that some state and local governments are unwilling to pay enough money to get teachers for their schools. If the places mentioned in the article, such as Texas and California, paid higher salaries, then they would be able to attract enough teachers to fill their schools.

Usually, when the free market produces undesirable results, the problem is thought to be with the economic policies being pursued, not the market. For example, if a state was losing jobs and industry to its neighbors, it would usually be attributed to high taxes or other factors that created an undesirable business climate, not an "investment shortage."



"Leftover Money for Welfare Baffles, or Inspires States"
Jason DeParle
New York Times, August 29, 1999, Section 1 page 1

This article notes the large decline in welfare costs for states, as welfare roles have declined due to the strong economy and as a result of tighter eligibility restrictions. The article examines what various states have chosen to do with the excess funds that they are now receiving from the federal government.

"In Truckers' Pay, a Lesson About the Inflation That Isn't"
Louis Uchitelle
New York Times, August 29, 1999, Section 3 page 4

This article discusses the effect that deregulation in the trucking industry has had in reducing the real wages of truck drivers over the last 20 years.

"Pay Gap Widens Between Worker, Boss"
By Tim Smart
Washington Post, August 30, 1999, Page A6

This article reports on a new study from the Institute for Policy Studies and United for a Fair Economy which shows that the wages of top executives continue to grow far more rapidly than those of ordinary workers. According to the study, the ratio of the pay of top executives to a typical factory worker is now 419 to 1. This means that a typical CEO should expect to make as much in five hours as a typical worker does in an entire year.

"Economic Boom Is a Distant Rumble in South Central L.A."
Rene Sanchez
Washington Post, August 31, 1999, Page A1

This article examines the economic situation in South Central Los Angeles, the location of the Rodney King riots in 1992. The article notes the problems that people in the area face getting jobs, even as the nationwide unemployment rate is at a 30-year low.


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

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