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Economic Reporting Review

October 18, 1999

By Dean Baker

Trade | The Budget & Social Security | Employment | Health Care | Britain | Outstanding Stories

TRADE

"AFL-CIO Poised for Endorsement of Gore"
Frank Swoboda
Washington Post, October 11 1999, page A7

"Activist Group Public Citizen Joins Attack on WTO"
John Burgess
Washington Post, October 14, 1999, page E1

"U.S.'s WTO Focus Is Open Markets"
John Burgess
Washington Post, October 14, 1999, page E1

These article all discuss the Clinton administration's trade policy. The first article discusses it in the context of the AFL-CIO's leadership's decision to endorse Vice President Al Gore for president. The other two articles discuss trade policy in the context of the World Trade Organization's meetings which are scheduled to take place next month in Seattle.

All three articles refer to the administration's agenda as promoting "free trade" or "open markets." It is inaccurate to characterize the Administration's policies in this manner. As noted in the past (e.g., ERR, 10/11/99), the administration has promoted trade agreements that remove barriers to importing manufactured goods like automobiles, but it has done little or nothing to promote trade in services provided by highly paid professionals such as doctors, lawyers, or accountants. (See, e.g., "A.M.A. and Colleges Assert There Is a Surfeit of Doctors," by Robert Pear, New York Times, 3/1/97, page A7; and "U.S. to Pay Hospitals Not to Train Doctors, Easing Glut," by Elisabeth Rosenthal, New York Times, 2/15/97, page A1.) This trade policy has the effect of putting workers in manufacturing industries in competition with low-wage labor throughout the world, while protecting highly educated professionals from the same sort of competition. The administration has also worked hard to increase protectionism by extending patent and copyright protection to developing nations.

"President Worked Hard to Win A.F.L.-C.I.O.'s Support for Gore"
Steven Greenhouse and Katharine Q. Seelye
New York Times, October 12, 1999, page A1

This article discusses President Clinton's efforts to persuade the AFL-CIO to endorse Al Gore for president. At one point the article refers to a meeting that Al Gore held with eight union presidents "who wanted the administration's help in saving factory jobs." This presentation misrepresents the impact of the administration's policies on manufacturing employment.

The administration has been actively pursuing a trade policy that is intended to facilitate U.S. investment in developing nations. The predicted and actual result of this policy is a shift of factory jobs from the United States to developing nations. Similarly, the Clinton administration has actively promoted a strong dollar. The effect of a highly valued dollar is to make U.S. manufactured goods less competitive, both domestically and internationally. The result has been the run-up in the trade deficit, which is now approaching $300 billion annually. This trade deficit has cost more than 1 million manufacturing jobs. While the unions might want the administration's help in saving factory jobs, they would benefit enormously if it just stopped pursuing policies that have the effect of destroying factory jobs.

"Nations Maneuver for Position in Trade Negotiations"
John Burgess
Washington Post, October 13, 1999, page E1

"Anger on Agenda for World Trade Meeting"
Elizabeth Olsen
New York Times, October 14, 1999, page C9

These articles discuss intellectual property claims in the context of the upcoming WTO meetings. At one point, the Post article asserts that the industrialized nations are trying to extend protection on intellectual property claims such as patents and copyrights, but "lesser-developed nations do not see the issue of piracy as so critical."

In many cases, there are no laws that protect patents and copyrights in developing nations. If such laws do not exist in these nations, then free market transactions in items subject to patent and copyright protection in the industrialized nations do not involve "piracy." Piracy is only possible in nations that have already agreed to respect patents or copyrights.

The Times article claims that developing nations want to be able to "force pharmaceutical companies to sell essential drugs at affordable prices." This claim completely reverses the reality. The pharmaceutical companies want to prevent developing nations from buying essential drugs without paying their patent-protected price. It is the developing nations that want a free market in this instance. The pharmaceutical industry is insisting on its right to a state-protected monopoly in patented drugs.

"For Seattle, Triumph and Protest"
Sam Howe Verhovek
New York Times, October 13, 1999, page A12

This article reports on the plans of labor, environmental and human rights groups to protest at the meetings of the World Trade Organization in Seattle next month. The article notes the concern of a spokesperson for a business group that they will not get sufficient attention for the business viewpoint, because "they do not exactly plan to rappel down the Space Needle to explain their point of view and therefore may not draw as much attention."

It doesn't seem likely that business groups will ever have difficulty getting their views on trade presented in the media, even if they don't rappel down the Space Needle.

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THE BUDGET & SOCIAL SECURITY

"Democratic Duel's Costly Promises"
George Hager and Ceci Connolly
Washington Post, October 9, 1999, page A1

"Hands-Off Social Security Vow Ignores Reality, Experts Say"
George Hager
Washington Post, October 10, 1999, page A5

These articles discuss aspects of the current debate over the federal budget. Both articles convey the view that the government is being fiscally irresponsible if it does not use the entire Social Security surplus to pay down the debt. In doing so, they also misrepresent the record on recent fiscal policy and the nature of the projected budget surpluses in the future.

On the first point, after correctly pointing out that it is impossible to "raid" Social Security, the second article asserts that "budget experts endorse the idea of trying not to spend it, because that encourages fiscal discipline and leaves the surplus available for paying down the national debt." While some budget experts do adhere to this view, many do not. Extrapolating from estimates from the Congressional Budget Office, the potential economic gains from paying down by $2 trillion-$3 trillion over ten years will be less than the economy grew in the first three months of this year. Many experts believe that it is more important to address problems like child poverty or inadequate health care coverage than to worry about such small potential economic gains.

This article states that Congress has already used the non-Social Security portion of the surplus to "fatten spending bills." This claim is misleading. The baseline projections assume significant cuts when spending levels are adjusted for inflation. The cuts are even larger when measured as a share of Gross Domestic Product.

In fact, virtually the entire surplus projected for the next ten years in the non-Social Security portion of the budget is based on the assumption that there will be large cuts in the discretionary portion of the budget. The baseline projections from the Congressional Budget Office assume that discretionary spending will be just $680 billion in 2009. This is $50 billion less than would be needed to keep discretionary spending at its 1998 level, adjusted for projected inflation; it is $213 billion less than is needed to keep discretionary spending constant measured as a share of GDP. In short, while the second article presents both Gore and Bradley as making lavish spending promises, in reality they are proposing to keep the discretionary component of government spending roughly constant when measured as a share of GDP.

Finally, the second article characterized the '90s as "a decade of huge deficits." The debt to GDP did rise slightly over the decade from 40.9 percent in 1989 to a projected 41.9 percent at the end of fiscal 1999. However, it has actually been falling since 1993. In that year, the ratio hit 50.2 percent. In the last six years, the debt-to-GDP ratio has declined by 8.3 percentage points. This seems inconsistent with the characterization of the '90s as a decade of huge deficits.

"G.O.P. Eyes Clinton Tax Hike Vote"
Eric Pianin and Juliet Eilperin
Washington Post, October 14, 1999, page A4

This article discusses plans by Republicans in Congress to make a political issue out of President Clinton's proposal for an increase in the federal tobacco tax. According to the article, the Republicans intend to attack the tax proposal for being unfair to low- and middle-income families. It notes a study by the Joint Congressional Committee on Taxation which shows that "people earning less than $10,000 would see an effective 15 percent federal tax increase, compared with a 5 percent average increase for all U.S. taxpayers."

While a tobacco tax is regressive, since poor people on average spend a higher share of their income on tobacco, this study is extremely misleading about the magnitudes involved. Since federal taxes are on net progressive, poor people pay a much smaller share of their income in taxes. For example, an average family earning $10,000 annually may pay on net $500, or 5 percent of their income in taxes. In contrast, a family earning $100,000 may pay $25,000, or 25 percent of their income in taxes.

If a tobacco tax raised the average tax burden for both families by $100, the impact would be regressive, since this additional tax burden is 1 percent of the income of the poor family compared to 0.1 percent of the income of the wealthy family. However, the regressive impact is exaggerated when measured as a share of current taxes. The tax increase would be a 20 percent increase in the tax burden for the poor family, but just a 0.4 percent increase in the tax burden for the wealthy family.

Using this measure, even a progressive tax could appear regressive. For example, a tax that cost the low-income family $100 and the high income family $2,000 (1 percent and 2 percent of their income, respectively), would increase the tax burden of the low-income family by 20 percent, while only increasing the tax burden of the high income family by 8 percent.

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EMPLOYMENT

"Payroll Jobs Fall Due to Hurricane"
John M. Berry
Washington Post, October 9, 1999, page E1

This article reports on the Labor Department's release of employment data for the month of September. It gives considerable attention to a reported increase of 7 cents in the average hourly wage, commenting that "some analysts said the 7-cent jump...was an indication that the low unemployment rate and employers' efforts to find additional workers were causing wages to rise rapidly." It also quoted analysts who suggested that this rapid rate of wage growth may lead the Federal Reserve Board to raise interest rates.

The average hourly wage number is notoriously erratic, fluctuating considerably--as in August, when hourly wage growth was reported as being just 2 cents. A jump of 7 cents in a single month is not particularly large, and does not necessarily indicate much about the general path of wages or the state of the labor market. For example, in October of 1994 the average hourly wage increased by 8 cents. At that time the unemployment rate was 5.7 percent.

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HEALTH CARE

"President Urges Government To Reach Uninsured Children"
Robert Pear and Robin Toner
New York Times, October 13, 1999, page A1

This article reports on a new effort by President Clinton to extend health insurance coverage to uninsured children. The article notes that the president's "Children's Health Insurance Program" only provides insurance to about 2 million children, far short of its goal of extending coverage to five million children.

This outcome should not be surprising. A study by the Congressional Budget Office projected that this program would extend coverage to less than 1.5 million children. (See "Health Care Bills Don't Meet Goals Budget Aides Say," by Robert Pear, New York Times, 7/2/97, page A1; ERR, 8/16/99.)

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BRITAIN

"Blair Calls Ruling Out One Currency 'Madness'"
Warren Hoge
New York Times, October 15, 1999, page A15

This article reports on a speech by British Prime Minister Tony Blair, in which he criticized political figures who wanted to rule out the possibility that Britain would join the common European currency. At one point the article asserts that "there is virtually no lobby for Britain's immediate entry, because by every standard the British economy is outperforming those on the Continent."

It is not clear what the article means by this assertion. First, there is no reason that economies have to be performing at the same level to be linked in a currency union. There are considerable differences in economic performance between nations in Europe and between regions in the United States.

Second, it is not clear by what standards Britain is out performing the Continent. Britain does have a lower unemployment rate than the average on the Continent (primarily due to workers leaving the labor force, so they are not counted as unemployed). But there are two countries in the currency union, Austria and the Netherlands, have a considerably lower unemployment rate than Britain.

Britain's GDP growth over the last quarter was 2.0 percent, almost exactly the rate on the Continent. Over the previous year Britain's GDP growth has been 1.2 percent, a bit slower than the 2.0 percent rate on the Continent. Britain's rate of productivity growth, in both manufacturing and in the economy as a whole, has been well below the average on the Continent in recent years. Britain is also currently running a trade deficit equal to 1.0 percent of its GDP. The nations in the euro collectively are running a trade surplus of approximately the same magnitude. In short, by most standard economic measures, Britain does not appear to be outperforming the Continent.

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OUTSTANDING STORIES OF THE WEEK

Health Care

"How HMOs Became the Enemy"
Amy Goldstein
Washington Post, October 10, 1999, page A1

This article chronicles the history of the HMO industry. It examines how HMOs went from being innovative non-profit providers of health care, to being primarily run by large insurance companies that have developed reputations for sacrificing the quality of care to cut costs.

"In China's Boom, Rural Poor Feel a Widening Gap"
Erik Eckholm
New York Times, October 9, 1999, page A3

This article investigates the extent to which some areas have been largely left behind during the last two decades of rapid economic growth in China.

"I.R.S. Is Allowing More Delinquents To Avoid Tax Bills"
David Cay Johnston
New York Times, October 10, 1999, Section 1 page 1

This article reports on a recent change in tax collection procedures at the I.R.S.. Under the new procedure, agents are evaluated on their ability to close cases quickly, even if this results in large amounts of overdue taxes going uncollected.

"As Benefits Expire, Experts Worry"
Jason DeParle
New York Times, October 10, 1999, Section 1 page 1

This article examines the situation facing several welfare recipients in Wisconsin who are approaching the time limits allowed under the new welfare laws. It notes that many face circumstances that are likely to prevent them from holding a regular job.

"Housing Crunch Worsen for Poor"
Michael Grunwald
Washington Post, October 12, 1999, page A1

This article discusses the growing shortage of housing for low-income people. The shortage has resulted from rising rents and reduced federal subsidies.

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OUTSTANDING STORIES OF THE WEEK

"Business Thrives on Unproven Care, Leaving Science Behind"
Gina Kolata and Kurt Eichenwald
New York Times, October 3, 1999, Section 1 page 1

This article investigates the extent to which untested medical procedures are being promoted by doctors and hospitals. It focuses on the practice of using bone marrow transplants as a treatment for some types of cancer, noting that this procedure came to be widely used without any medical evidence to suggest that it was effective. The article points out that doctors and hospitals could earn high fees by giving patients this expensive treatment.

"Recording Industry Escalates Crackdown on Digital Piracy"
Sara Robinson
New York Times, October 4, 1999, page C5

This article reports on the difficulties that the recording industry is encountering in trying to develop devices that will obstruct the reproduction of recorded music. The industry's latest invention has the problem that if a person decides to get a new disc player, then their entire music collection would be worthless. This is exactly the sort of inefficiency that economic theory predicts will result with a government-regulated monopoly, such as copyrights.

"Support Grows in Congress for a Pension Overhaul Plan That Would Aid High Earners"
David Cay Johnston
New York Times, October 7, 1999, page C7

This article discusses various proposals being considered in Congress that would remove restrictions on the amount of pension savings that workers could shield from taxes. The article points out that the changes being considered will almost exclusively benefit high-end wage earners.

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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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