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Economic Reporting Review

November 22, 1999:

WTO & Chinese "reformers"; Canada's taxation; Social Security's stock option

By Dean Baker

China & the WTO | Japan | France | Canada | Social Security | Unemployment & Inflation | Outstanding Stories

CHINA & THE WTO

"U.S. Team Extends Trade Talks in Beijing"
Erik Eckholm
New York Times, November 13, 1999, page A5

"U.S. Business Lobby Poised for China Trade Deal"
Robert G. Kaiser and Steven Mufson
Washington Post, November 14, 1999, page A1

"China and U.S. Straining to Agree on a Trade Pact"
Erik Eckholm
New York Times, November 15, 1999, page A12

"U.S. China Agree on Trade"
John Burgess
Washington Post, November 16, 1999, page A1

"China's Bold Leap Into World Markets"
John Pomfert
Washington Post, November 16, 1999, page A1

"In WTO China Deal, Hard Part Starts Now"
Steven Mufson
Washington Post, November 16, 1999, page A26

"U.S. Reaches an Accord to Open China Economy as Worldwide Market"
Erik Eckholm with David E. Sanger
New York Times, November 16, 1999, page A1

"White House and Business Groups to Push Congress on China Pact"
Richard W. Stevenson
New York Times, November 16, 1999, page A1

"Reformers' Comeback: New Power Against Opponents of Open Markets"
Seth Faison
New York Times, November 16, 1999, page A11

"A Deal That America Just Couldn't Refuse"
David E. Sanger
New York Times, November 16, 1999, page A10

"Trade Path Is Not Clear"
Joseph Kahn
New York Times, November 17, 1999, page A1

"At the Last Hour, Down to the Last Trick, and It Worked"
David E. Sanger
New York Times, November 17, 1999, page A14

"Riding Winds of Reform, Yet Mired in Orthodoxy"
Elisabeth Rosenthal
New York Times, November 17, 1999, page A15

"Chinese Liberals Welcome WTO Bid"
John Pompert and Michael Laris
Washington Post, November 18, 1999, page 34

"Caught Between Eras: China's Factory Workers"
Erik Eckholm
New York Times, November 18, 1999, page A3

These articles report on issues related to the negotiations and subsequent agreement between the United States and China on conditions for China to enter the WTO. The discussion in these articles presents an overly narrow, and in some cases blatantly inaccurate, picture of the issues involved in this agreement.

For example, several of the articles (e.g. the first Sanger article, the Faison article, and the Pompert and Laris article) characterize the forces in China supporting the WTO agreement as being pro-growth reformers and modernizers, while the forces opposed to the agreement are characterized as nationalist and corrupt. Recent economic history, and the experience of other nations, would not suggest that the lines between these groups could be drawn so sharply. In other countries, such as Mexico and Russia, the sort of large-scale privatization that is expected to take place as a result of this agreement has often been accompanied by massive corruption. In these cases, state officials rigged the privatization process so that they or their business associates could profit through the sale of state assets. In the case of Russia, "privatization" was little different from outright theft.

Virtually all of these articles suggest that corruption is widespread in China at present. Given this situation, it would be remarkable if the sale of assets implied by this agreement were not accompanied by a considerable degree of corruption. Therefore, it is plausible that the government and party officials who are positioned to profit through this corruption are among the proponents of the WTO agreement. It is worth noting that the politicians who oversaw corrupt privatization processes in Russia, Mexico and elsewhere were also generally characterized in the press as "reformers" and "modernizers" prior to the point at which the corruption become widely known.

It also is not apparent that an abrupt privatization process is necessarily China's best path to a modern economy. Several of the articles note that the market openings required by this agreement are likely to throw millions of factory workers out of work, and displace as many as ten million poor farmers. This implies a major social and economic disruption that China's government may be ill-prepared to deal with. In Russia, the corruption and economic disruption associated with privatization were so great, that its health care and education system collapsed, and its economy contracted by approximately 50 percent (see "Wither Reform: Ten Years of the Transition." by Joseph E. Stiglitz, http://www.worldbank.org/research/abcde/stiglitz.html). Even in an optimistic scenario, it will be another decade before Russia attains the living standards it had in 1989. These articles provide no reason to assume that China's experience will necessarily be much better.

Several of the articles present an image of China as being mired in stagnation. Actually, its economy has been remarkably strong in recent years. According to the World Bank, China's GDP growth rate averaged 11.6 percent annually from 1990 to 1997, among the highest in the world over this period. While its economy slowed as a result of the East Asian financial crisis, it has continued to grow, virtually alone among the nations of the region, a fact that most economists attribute to the extensive state controls that remain. Given the economic performance of China under its current mixed economic system, and the generally poor performance of economies such as Mexico, the Philippines or Brazil that have adopted more strictly market-oriented growth, Chinese officials who desire rapid growth and modernization could reasonably be opposed to the conditions required by the WTO agreement.

It is also worth noting that not all of the conditions provide for market opening. Several of the articles suggest that China has committed itself to increased copyright protection for foreign music, movies and software. This will amount to a major restriction on trade within China. According to several of the articles, as much as 95 percent of the software in China is unauthorized, meaning that it was essentially reproduced at no cost. From the standpoint of China's economy, imposing copyright restrictions on the transfer of software is logically identical to imposing a huge tax on the sale of software, with the revenue collected being sent to foreign corporations. This could have very negative consequences for China's economy, since software is widely used throughout the economy. None of the articles even note that enforcing copyright protection will impose costs on China.

In discussing the impact on the United States, these articles mostly focused on the businesses that stand to profit from having access to China's markets, such as the telecommunications and financial industry. However, several articles do suggest that consumers and workers will benefit as well. While there will be some gains to consumers from lower-cost imports, virtually all economists recognize that trade with developing nations has been one of the factors responsible for the growth in wage inequality over the last two decades. By displacing large numbers of workers in the textile and apparel industries, this pact is likely to increase this problem in the future.

As several of the articles suggest, this pact was constructed primarily to meet the needs of major U.S. corporations. The article by Kaiser and Mufson discusses the strategy that these corporations intend to use to win congressional approval of the pact. At one point, as an example of the techniques that can be used, the article notes a study commissioned by the Business Roundtable. This study calculated the number of jobs in a particular congressional district that depended on international trade. It was apparently used by a member of Congress to justify his votes on trade issues.

The information provided by this study has absolutely nothing to do with the question of whether a particular trade agreement is good or bad for the workers in the district. For example, it could be the case that every single job in the district depends on trade, but a new agreement will alter trading patterns, and thereby displace many of the workers in this district. The implication of the use of this study as an argument for the China trade agreement is that the public and the media are so baffled by the issues involved in trade that businesses can effectively use nonsense to gain support for the pact with China.

More about China.

More about trade.


JAPAN

"Growth in Japan Is Expected to Lift World Rate in 2000"
John Tagliabue
New York Times, November 17, 1999, page C4

This article reports on growth forecasts for Japan for next year. At one point it asserts that "the yen's rise partly reflects the increased prospect of higher interest rates in Japan because of the heavy borrowing that the government must undertake to stimulate growth through spending."

This claim is dubious, because there has been no comparable rise in long-term interest rates in Japan. If actors in financial markets anticipate that interest rates will rise in the future when determining currency values, then they would presumably also make this assumption in making their decisions on holding Japanese bonds. If they expect interest rates to rise in the future, then they would sell low-interest bonds today, pushing down their price and thereby raising their yield. Since this has not happened, an expected rise in interest rates cannot explain the movement of the yen against the dollar.

It is more likely that investors recognize that the large U.S. trade deficit cannot be sustained indefinitely, and that the dollar must therefore fall significantly at some point. This expectation would make the dollar less attractive, causing investors to sell dollars, thereby depressing its price against the yen.

More about Asia.


FRANCE

"Cultivating a Taste for French Stocks"
Anne Swardson
Washington Post, November 17, 1999, page E1

This article discusses the reluctance of French people to keep their savings in the stock market. At several points the article implies that this reluctance is especially odd because the French stock market has risen dramatically over the last year.

In fact, this makes the reluctance less odd. A large run-up in the stock market increases the likelihood that the French stock market is currently over-valued and therefore may be due for a large correction in the future. The French public would be displaying rational economic behavior if they opted not to buy into an over-valued stock market.

More about Europe.


CANADA

"Is the Dollar Leaving Canada Feeling Drained? "
James Brooke
New York Times, November 13, 1999, page B1

This article discusses the state of Canada's economy ten years after its free trade pact with the United States. At one point, the article notes the increase in the size of capital flows both in to and out of Canada, quoting an economist: "The irony is that while Canadians have become net sellers of Canadian-based mutual funds, foreigners have been dramatically lifting their investments in Canada." Actually, there is no irony in this situation. Canadians can only be net sellers of Canadian-based mutual funds if foreigners are net buyers. The situation described in this quote is a logical necessity.

Later the article notes that Canada's tax revenue is equal to 37 percent of GDP, compared to 32 percent of GDP in the United States. It then asserts that "partly because of this higher tax burden, Canada's unemployment rate is 7.2 percent, well above the 4.1 percent rate in the United States." There is little or no evidence to support this assertion. There is no simple relationship between national tax rates and unemployment rates. For example, all through the '50s, '60s, and '70s, virtually all the nations in Europe had considerably higher tax rates than the United States and considerably lower rates of unemployment. Even today, the Netherlands enjoys a lower unemployment rate than the United States despite having a far higher average tax rate.

The article also presents, as evidence that the tax rates in Canada are too high, the results of a survey of "1800 senior Canadian executives." Half of these people agreed with the statement "talented people are leaving the country due to high income taxes." Since these senior executives likely view themselves as being among Canada's talented people, the question is the equivalent of asking them if they pay too much taxes. Most people in most nations would probably answer yes to this question.


SOCIAL SECURITY

"Baby Steps Toward Accord on Social Security"
Richard W. Stevenson
New York Times, November 14, 1999, Section 3 page 4

This analysis assesses the progress in the Social Security debate over the last year. Several of its main assertions are wrong or misleading. For example, the article claims a "remarkable agreement among almost all the voices in the debate ... that the power of the stock market to generate substantial returns over the long run should be used to help close the gap" between projected benefits and revenues.

In fact, MIT economist Peter Diamond, the nation's leading expert on this topic, recently wrote a paper showing that because of the current high price-to-earnings ratio and the Social Security Trustees projections of slow economic growth, the stock market will not be able to significantly outperform bonds unless it first plunges by 35-45 percent (see "What Stock Market Returns to Expect for the Future?," http://www.bc.edu/bc org/avp/csom/executive/crr ). No economist in the country has presented an alternative analysis of prospective stock returns.

The article also comments about the assets held by the Social Security trust fund that "the IOUs are not real assets like stocks or bonds." Actually, the assets held by the trust fund are government bonds.

Finally, the article comments on a "dawning recognition that solving Social Security's problems would require tradeoffs between the needs of today's workers...and later generations." This is trivially true, in that, under certain assumptions, any expenditure that goes to meet current needs can be viewed as coming at the expense of future needs. However, the tax increase needed to meet the projected shortfall in Social Security is small compared with the impact on the future living standards of typical workers of the continuation of recent trends in wage inequality, or the growth rate of private sector health care costs. Given these other trends, the article presents no reason why current workers should be particularly concerned about the relatively small burden that Social Security could impose on later generations. Furthermore, most of the projected shortfall is actually due to the fact that later generations of workers are expected to live longer than current generations.

More about Social Security.


UNEMPLOYMENT & INFLATION

"Rates May Rise, but This Bull Is Hanging On"
Gretchen Morgenson
New York Times, November 17, 1999, page C1

This article discusses the Federal Reserve Board's decision to raise short-term interest rates by a 0.25 percentage points. At one point the article comments on the 4.1 percent current rate of unemployment: "Such low unemployment cannot continue indefinitely without leading to higher labor costs and rising inflation."

The article does not indicate how it has made this determination. There are many economists who would argue this position, but these same economists also argued that the economy could not sustain an employment rate below 6.0 percent, and then 5.0 percent, without accelerating inflation. Events have proven these economists wrong on their earlier claims. In spite of the fact that unemployment rate has been largely constant at its current low level for the last eleven months, the economy continues to show no signs of wage-driven inflation. Given this evidence, there is no obvious basis for asserting that the economy cannot indefinitely sustain its present unemployment rate without inflation.

More about labor.

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OUTSTANDING STORIES OF THE WEEK

"Federal Funds for Teachers Reveal Surprising Hurdles"
Jacques Steinberg
New York Times, November 14, 1999, Section 1 page 14

This article examines the conditions placed on the federal funds that have been appropriated to hire additional teachers to reduce the average class size in the lower grades. The article points out that many school districts lack the resources, such as their own matching funds, or classroom space, to use the funding to reduce class size.

"Study Discerns Disadvantage for Blacks in Home Mortgages"
Bill Dedman
New York Times, November 14, 1999, Section 1 page 14

This article discusses the findings of a new study which showed that, even when controlling for income, black homeowners tend to disproportionately borrow from subprime lenders when refinancing their homes. These lenders charge considerably higher interest rates than major commercial banks.

"IRS Workers Face More Investigations by Treasury Agents"
David Cay Johnston
New York Times, November 18, 1999, page A1

This article reports on the increase in the number of investigations of IRS employees for abusing taxpayers. The article points out that these investigations have become so frequent that they are forcing the IRS to reduce its number of tax audits, because so much time must be spent providing information to the investigators.

"Annual Spending on Medicare Dips for the First Time"
Robert Pear
New York Times, November 14, 1999, Section 1 page 1

This article notes that Medicare spending dropped in 1999 compared with 1998, and examines the causes of this decline. It points out that one of the factors responsible was lower than expected HMO enrollments of Medicare beneficiaries, since HMOs end up costing the program more money.

"Minimum Wages, City by City"
Louis Uchitelle
New York Times, November 19, 1999, page C1

This article reports on the movement for "living wage" laws. These are local ordinances that require firms that do business with city governments, or receive city tax breaks, to pay wages that are substantially higher than the federal minimum wage.

"New Doctors Step Into a Turbulent World"
N.R. Kleinfield
New York Times, November 14, 1999, Section 1 page 1

"For Three Interns, Fatigue and Healing at Top Speed"
N.R. Kleinfield
New York Times, November 15, 1999, page A1

"After Med School, the ABC's of Insurance"
N.R. Kleinfield
New York Times, November 16, 1999, page A1

"Mixing Wariness and Joy, Interns Become Residents"
N.R. Kleinfield
New York Times, November 17, 1999, page A1

This excellent four-part series examines the ways in which managed care has affected the practice of medicine, focusing on the experiences of three interns at a major New York City hospital.

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Dean Baker is an economist and the co-director of the Center for Economics and Policy Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR.

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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