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Economic Reporting Review

November 1, 1999:

Social Security and the witch trials; recalculating growth; Indonesia's economy

By Dean Baker

Social Security and the Budget | Financial Deregulation | Economic Growth |
Indonesia | Argentina | Outstanding Stories

SOCIAL SECURITY AND THE BUDGET

"Clinton Will Submit Social Security Plan"
Eric Pianin and Juliet Eilperin
Washington Post, October 24, page A1

"House GOP Seeks Broad 1.4 Percent Spending Cut"
Eric Pianin
Washington Post, October 23, page A1

"Republicans Seek a Uniform Paring of 1.4 Percent In Budget"
David E. Rosenbaum
New York Times, October 23, 1999, page A1

"Spending Plan of the G.O.P. Draws Dissent"
Tim Weiner
New York Times, October 27, 1999, page A1

"Maneuvering on Budget Bills Continues as Social Security Surplus Grows"
Tim Weiner
New York Times, October 28, 1999, page A1

"House Cuts Across the Board"
Eric Pianin and Juliet Eilperin
Washington Post, October 29, page A1

"House Approves a 1 Percent Budget Cut Across the Board"
Tim Weiner
New York Times, October 29, 1999, page A1

These page 1 articles discuss the status of the current debate over the federal budget. All the articles uncritically report allegations by various partisans in the debate that their opponents plans would "raid" or drain money from the Social Security system. Some of the articles directly assert that certain proposals would drain money from the Social Security system.

In reality, the Social Security system will not be affected at all by the outcome of this budget debate. The Social Security trust fund will receive exactly the same amount of government bonds in exchange for the surplus funds it lends to the government, regardless of how, or whether, the government chooses to spend the Social Security surplus. This point is universally acknowledged by those familiar with the government accounts, as has been pointed out in recent articles in both newspapers (see e.g. "Hands-Off Social Security Vow Ignores Reality, Experts Say," by George Hager, Washington Post, 10/10/99, page A5; or "Noble Talk of Saving Social Security Is Muted by Political Gamesmanship," by Richard W. Stevenson, New York Times, 9/29/99, page A20).

By reporting on this debate as though Social Security could in any way be affected by its outcome, these articles are seriously misleading the public. It would be more appropriate to report on the fact that the president and Congress feel a need to stage a debate over a non-issue, rather than confront any of the real problems facing the nation.

The debate about "raiding" Social Security is analogous to a conflict among the town leaders of Salem over the best method to eradicate witches. It would be irresponsible for Salem's reporters to focus on the details of the various plans being put forward, instead of continually pointing out that there are no witches.

Reporting the details of the budget proposals as though there is a real issue involving Social Security gives credibility to false claims. It also makes it far more difficult for the political leaders who might like to address budget problems in an honest manner.

These articles also are misleading in their treatment of Republican proposals to impose across the board spending cuts of 1.0 percent-1.4 percent next year, in order to meet spending targets. This figure refers to the size of the cut in nominal dollars. When measured in real dollars (adjusting for inflation), the proposed cuts would be close to 4.0 percent.

"Standoff on Budget Yields An Unexpected Dividend"
Richard W. Stevenson
New York Times, October 25, 1999, page A1

This article discusses the implications of the current standoff on the budget between President Clinton and the Republican Congress. The discussion at several points misrepresents budgetary and economic issues.

For example, the article's first paragraph asserts that the current stalemate has set the government on a path towards paying down the national debt, and "that could have enormous political and economic consequences." According to standard economic models, the impact of paying down the national debt over the next 15 years would be to raise GDP by a cumulative total of less than 1.5 percent. While this increment to growth is desirable, it is questionable whether it can be characterized as "enormous." This increment is approximately equal to the amount of economic growth in the last three months of 1998.

The article also wrongly implies that President Clinton is proposing to increase government spending. If his spending proposals were approved, discretionary government spending would be roughly constant over the next ten years in real terms, and would fall significantly when measured as share of GDP. The current debate on spending is over how much it should decline, not whether to increase it.

The article also misrepresents the nature of the decisions, or non-decisions, that have been taken. As a result of the current standoff, the government is paying off more debt than if new tax cuts or spending programs were approved. However, this can change in the next session of Congress, or after any of the elections that will take place between now and when the debt would be paid off under the current spending trajectory. The economic impact of the additional debt reduction that has taken place to date is too small to even be measured accurately.

The article states that this path of debt reduction has been locked in because both President Clinton and Congress have promised to use the Social Security surplus to pay down the debt and since this is "a promise that could bring swift political retribution if broken by either side--the fiscal debate in coming years is likely to be biased toward debt reduction." It is questionable whether the political pressures would be the same if the public actually knew the limited economic impact of debt reduction predicted by standard economic models. If the media did a better job of educating the public on these magnitudes, the political debate might be quite different.

"Clinton Abandons Idea of Investing Retirement Funds"
Richard W. Stevenson
New York Times, October 24, 1999, Section 1 page 1

This informative article reports on President Clinton's decision to drop the idea of investing the Social Security trust fund in the stock market from his proposal to strengthen the Social Security system. Near the end, the article refers to the type of asset held by the trust fund as a "government IOU." The trust fund holds special-issue government bonds. All bonds are, by definition, IOUs; however, other government or corporate bonds are never referred to as IOUs in the media.

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FINANCIAL DEREGULATION

"Accord Reached on Lifting of Depression-Era Barriers Among Financial Industries"
Stephan Labaton
New York Times, October 23, 1999, page A1

This article reports on an agreement between President Clinton and Republican members of Congress on legislation that would overhaul the nation's system of financial regulation. The article is accompanied by a front-page box that presents some of the legislation's main features. One of the items mentioned is "community reinvestment." The box states that "banks must have satisfactory records of lending to the disadvantaged before expanding into new businesses."

This comment may lead readers to believe that community-reinvestment requirements had been strengthened in this legislation. In fact, since it is very rare for a large bank to get an unsatisfactory rating, this restriction is not likely to affect banks' lending behavior at all. The weakening of the review requirements for small banks, which is also noted in the box, is likely to have far more impact.

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ECONOMIC GROWTH

"Economy Underrated -- and Still Booming -- U.S. Says"
John M. Berry
Washington Post, October 29, page A1

"A Clearer View of the Economy"
Louis Uchitelle
New York Times, October 29, 1999, page C1

Both of these articles report on the Commerce Department's release of data on the rate of economic growth for the third quarter of 1999. The articles also discuss the revisions to data for previous years which were released at the same time.

The articles note that the revisions have the effect of raising measured GDP growth for prior years. The main reason for this upward revision was a change in the treatment of computer software. Previously, software was treated as an intermediate good like steel. As an intermediate good, it was not counted as part of GDP. In the revised data, software is counted as an investment good, meaning that it would be counted in GDP in the same way as a factory or computer. This change has the effect of raising GDP.

However, if software is counted as an investment good, then the extent to which it loses value each year (by becoming obsolete) must be added to depreciation. Because software becomes obsolete very quickly, the amount of depreciation of existing software each year has been roughly equal to amount of new software purchased. This means that the net national product--the amount of goods and services produced in the economy after deducting the value of worn out (or obsolete) investment goods--was largely unchanged by the inclusion of software as an investment good. An increase in GDP that does not lead to an increase in net national product implies no gain in the nation's economic well-being.

The otherwise insightful analysis in the Times article wrongly asserts that these revisions applied a change in price measurement to GDP data going back to 1959. In fact, these revisions only apply the change in price measurement to years after 1978. This means that there is an inconsistency in the measurements used before and after 1978. The system of measurement used after 1978 has the effect of lowering the measured rate of inflation reported by the GDP price deflator by approximately 0.15 percentage points annually. It also raises the reported annual rate of GDP growth by the same amount. This inconsistency must be kept in mind when comparisons are made between the two periods.

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INDONESIA

"In Indonesia, All Eyes on Economy"
Mark Landler
New York Times, October 23, 1999, page A8

"Post-Suharto Dawn"
Seth Mydans
New York Times, October 24, 1999, Section 1 page 14

Both of these articles discuss the situation in Indonesia in the wake of a new president being selected by the Indonesian parliament. Both articles include economic assertions that are of questionable accuracy.

For example, at one point the first article notes that the chief economic advisor to the new vice-president had advocated pegging the Indonesian currency to the dollar, which it describes as "a policy that is anathema to the monetary fund [the IMF]." Actually, the IMF has often approved of, and even advocated, the pegging of currencies to the dollar. For example, Argentina has been praised by the IMF and others for its decision to peg the Argentinean currency to the dollar. The IMF clearly does not view the policy as anathema, although it has opposed in particular circumstances.

The first article also includes an unchallenged assertion by an Indonesian economist that the government has "got to reduce expenditures, including some sensitive ones, like fuel subsidies." While Indonesia does have a dangerously large budget deficit, it can use other measures to help reduce it. For example, it could try to reclaim money or assets that were effectively stolen from the government in previous years. Efforts to account for and retake stolen property have been belittled in past articles in the New York Times (e.g., "World Bank Beats Breast for Failures in Indonesia," by David E. Sanger, 2/11/99, page A14 ).

The second article asserts that economic recovery in Indonesia "will require cultural changes--an end to crony capitalism that closes off foreign competition and drives away foreign investors." While Indonesia's economy has obviously been hurt by corruption, the argument that the country suffers from fundamental cultural flaws is contradicted by the evidence. During the period from 1960 to 1994, Indonesia's per capita economic growth averaged 3.4 percent annually, a rate far more rapid than that sustained by any nation following the U.S.-I.M.F. development model. In spite of its crony capitalism, foreign investment poured into the country during this period. Other nations that supposedly are characterized by "crony capitalism," such as South Korea and Thailand, had even more rapid growth during this period.

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ARGENTINA

"Sour on the Status Quo, Argentines Vote Today"
Clifford Krauss
New York Times, October 24, 1999, Section 1 page 3

This article discusses political attitudes in Argentina on the eve of its presidential election. At one point the article comments on a speech by Eduardo Duhalde, one of the two leading candidates, in which he proposed a one-year suspension of debt-service payments by developing nations: "It was a line that used to win applause in the 1980s. This year, the response was an 8 percent fall in the Argentine stock market, which forced Mr. Duhalde to beat a retreat."

It's likely that the Argentine stock market didn't respond very positively to calls for debt-service moratoriums in the 1980s either. The major difference between the two periods is probably not the response of the stock market to such rhetoric, but rather that a major political figure may have been willing to ignore the stock market in the 1980s. Apparently this is no longer the case.

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OUTSTANDING STORIES OF THE WEEK

"The Quiet Help of Family Members"
Louis Uchitelle
New York Times, October 24, 1999, Section 3 page 4

This article reports on recent research findings, and the experiences of several poor families, which show that many poor families are only able to survive through the assistance of friends and relatives.

"Type of Penicillin Is in Critical Supply"
Abigail Zuger
New York Times, October 29, 1999, page A16

This article reports on a developing shortage of penicillin G as a result of a plant shutting down due to quality-control issues. As a result of the shortage, doctors may be forced to proscribe less desirable types of antibiotics, which could have significant negative consequences for public health. The article points out that drug companies have little interest in producing penicillin G, even though it continues to be the preferred drug for many diseases, because its patent has expired and therefore there is relatively little profit to be made in its production.

"Manager Fired by Company Supports Teamsters on Strike"
Steven Greenhouse
New York Times, October 27, 1999, page A16

This article reports on a former manager at Overnite Transportation, who claims that the company has fired several hundred workers because of their support for joining a union. Although it is illegal for companies to fire workers for supporting a union drive, it has become a standard practice, because the law is difficult to enforce and the penalties are trivial. Usually such firings receive little attention in the media.

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

ERR is edited by Jim Naureckas.


Recent articles can be found on the websites of the New York Times and Washington Post.

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