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Economic Reporting Review

December 20, 1999:

Election problems; Internet taxes; record trade gap

By Dean Baker

Election Campaign | Education | Internet | Health Care | Trade | IMF | Russia | Venezuela | Outstanding Stories

ELECTION CAMPAIGN

"Candidates' Problem Is Finding One to Fix"
Howard Kurtz
Washington Post, December 16, 1999, page A2

This article argues that the major problem facing the presidential candidates is that the nation doesn't have any big problems that demand attention. It is worth noting that approximately 20 percent of the nation's children are in poverty. More than 43 million people currently lack health care insurance, a number that is projected to grow to 55 million in a decade. The people who are raising children in poverty or are unable to afford health care coverage may view these issues as serious problems.

At one point the article states, "Gore and former Senator Bradley are arguing about dueling health care plans on a scale that would have been unthinkable in 1992, when the country was struggling to emerge from a recession." Actually, two of the Democratic candidates explicitly endorsed national health care insurance in the primaries, Senator Bob Kerrey and President (then Governor) Bill Clinton. While neither of them put forward specific proposals, both of them discussed national health care insurance in terms that implied a plan at least as far-reaching as Bradley's proposal, and considerably more extensive than the proposal put forward by Gore.

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EDUCATION

"Gore to Pledge $115 Billion in New Education Aid Over 10 Years"
Ceci Connolly
Washington Post, December 16, 1999, page A11

"Gore Proposal Would Set Aside $115 Billion for Education Fund"
Katherine Q. Seelye
New York Times, December 16, 1999, page A1

These articles report on a proposal from Vice President Al Gore to increase federal spending on education by $115 billion over the next decade if he is elected president. Neither article notes that the proposed increase is measured against a baseline budget that provides for large cuts in education spending. If education spending followed the baseline for discretionary spending it would be cut by approximately 10 percent in real terms over the next decade, and by close to 25 percent measured as a share of GDP. The additional amount that Gore is proposing to spend is roughly what would be needed to keep federal spending on education constant as a share of GDP.

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INTERNET

"Online Sales Heating Up Tax Debate"
Rajiv Chandrasekaran
Washington Post, December 13, 1999, page A1

This article discusses the debate over applying sales taxes to the Internet. At one point it presents without response the view of Virginia Gov. James Gilmore, that the imposition of such taxes would pose a significant technical problem. According to the article, Gilmore and other argue that it would be very difficult for an Internet retailer to keep track of the applicable sales taxes in all the various states, counties and cities across the country.

Actually, with computer technology this is a very simple process. In nearly all cases, the customer's zip code, which is necessary to ship the item, would provide sufficient information to determine the relevant tax jurisdictions. The coding to the tax rate would be extremely simple. It is unlike that a successful Internet retailer would lack the technical skills to accurately calculate sales tax based on zip codes.

Later, the article refers to arguments from Gov. Gilmore and his allies that applying sales tax to Internet transactions would reduce business by 30 percent. If this claim is accurate, it implies that Internet sales are being driven largely by their special tax status. There is no obvious economic rationale for providing special tax treatment for a particular type of business, which is effectively a government subsidy. If Internet retailers cannot compete on an even playing field with traditional retailers, then they must be providing an inferior service.

It also worth noting that the special tax status of Internet transactions is largely a subsidy to relatively affluent people. Disproportionately, shoppers on the Internet are higher income consumers; most low income people still do not have Internet access. If lower income consumers continue to pay sales tax on goods bought at WalMart or other traditional retailers, but Interent buyers are allowed to evade taxes, this is a shift of the tax burden towards lower income households.

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HEALTH CARE

"New England Lawmakers Consider Drug Strategies"
Carey Goldberg
New York Times, December 17, 1999, page A20

This article discusses efforts by legislative leaders and policy analysts in the New England states to control drug prices. At one point the article presents the comment of a representative of the pharmaceutical industry, who warns that price controls will "tell private investors around the world that they can earn a higher return on their money if it's invested in other industries."

Actually, data on industry profits suggest that private investors may not be able to earn higher returns elsewhere even with price controls. According to data from Fortune magazine, the return on equity in the pharmaceutical industry has been close to twice the overall average. This implies that even if price controls reduced profits somewhat, the pharmaceutical industry could still offer higher returns than would be available elsewhere.

More about health care.

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TRADE

"Trade Gap at Record in October"
John Burgess
Washington Post, December 17, 1999, page E1

"Trade Deficit Rises Again as Imports Continue to Climb"
Robert D. Hershey
New York Times, December 17, 1999, page C23

These articles report on the release of data from the Commerce Department which showed that the trade deficit had hit a new record of $25.9 billion in October. Both articles imply that a trade deficit of this magnitude does not pose a serious problem for the United States.

While this is certainly true for any short period of time, a deficit of this magnitude clearly cannot be sustained for very long. If the trade deficit were to remain at its current level for a decade, measured as share of GDP, then the ratio of foreign debt to GDP would rise to 60 percent. At current GDP levels, this would mean a foreign debt of more than $5.5 trillion.

A large foreign debt lowers future living standards, since the United States will have to export more goods in order to keep its current account in balance. While the effect of foreign debt and government debt on future living standards are not identical, their impact can loosely be viewed as comparable.

The trade deficit is the equivalent of the primary government budget deficit, which excludes interest payments. If the primary budget deficit were as large as the current trade deficit, then the standardized budget deficit, which is the deficit number most often reported, would be approximately $550 billion in the current fiscal year. It is likely that a budget deficit of this magnitude would draw more attention than the surge in the trade deficit has received. These articles both appeared in the business section.

The Post article presents a surge in imports related to holiday shopping as one of the reasons for the growth in the trade deficit. In principle, this should not be the case, since the data is seasonally adjusted. Holiday sales should only affect the size of the deficit if there is something unusual about this holiday season compared with previous ones.

More about trade.

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IMF

"U.S. Will Urge IMF to Scale Back Role"
John Burgess
Washington Post, December 14, 1999, page E1

This article reports on a proposal from the Treasury Department to reduce the role of the International Monetary Fund in the world economy. At one point the article refers to the IMF's role in the East Asian bailout, commenting that "many economists are praising its role." The article then refers to conservative critics of the IMF, "who see it as oversized, unaccountable and incompetent," and liberal critics who are "calling the fund heartless for demanding painful economic changes from already poor countries."

This line-up of supporters and critics misrepresents the range of views on the IMF. While there are many economists who believe that the IMF's policies helped to limit the impact of East Asian financial crisis, many other economists have argued the opposite. For example, Harvard economist Jeffrey Sachs has argued that the IMF austerity measures worsened the financial crisis in East Asia. He also argued that excessively positive country reports from the IMF, along with an insistence on removing capital controls in developing nations, contributed to the excessive capital inflows to the region that created the conditions for the subsequent financial collapse.

Joseph Stiglitz, the outgoing chief economist at the World Bank, has made similar criticisms. An accurate portrayal of the range of views would point out that its critics include some of the world's most prominent economists.

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RUSSIA

"Russian Campaign Ads Highlight Economic Ills"
David Hoffman
Washington Post, December 13, 1999, page A19

This article discusses the campaign ads being run by various parties contesting Russia's parliamentary elections this month. At one point the article refers to Russia's recent economic history as one of "boom to bust and halfway back again." It then adds that Boris Yeltsin's re-election in 1996 "touched off a burst of foreign investment in Russian stock and bonds."

While there was a boom and subsequent bust in Russia's financial markets, there was nothing resembling a boom in Russia's economy as whole. The Russian economy shrank by close to 40 percent between 1990 and 1997. It began to level off and grow at a very slow rate (approximately a 1 percent annual rate of GDP growth) in 1997 and into 1998. In the summer of 1998, the ruble and the Russian stock market both collapsed. This led to a surge in inflation and temporarily halted growth, but the economy has since begun expanding at a moderate pace again. By most measures, such as GDP and industrial production, it has surpassed its pre-crisis levels.

More about Russia.

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VENEZUELA

"A Divided Venezuela Votes on New Charter Today"
Larry Rohter
New York Times, December 15, 1999, page A3

"Venezuelans Give Chavez All the Powers He Wanted"
Larry Rohter
New York Times, December 16, 1999, page A13

"Chavez Faces 'Tough Road' in Venezuela"
Serge F. Kovaleski
Washington Post, December 16, 1999, page A30

These articles discuss the political and economic situation in Venezuela, as it approved a new constitution in a referendum. The constitution was designed by an elected assembly that was dominated by supporters of Venezuela's president, Hugo Chavez.

The first Times article notes that the constitution would place Venezuela's central bank under the control of the government. It refers to newspaper ads taken out by the bank that warned that this would weaken its ability to fight inflation. It is worth noting that it is not uncommon for a central bank to be subordinate to a government. Most industrialized nations have subjected their central banks to varying degrees of government control through most of this century. England's central bank, for example, had been under its finance ministry until just two years ago.

Both the second Times article and the Post article refer to the rapid rise in the price of oil in the last year as though it were an unusual dividend for Venezuela, with the Times article characterizing it as a "windfall." The rise in the price of oil over the last year was primarily reversing an extraordinary drop in oil prices the previous two years. The net effect has been to restore oil prices to their mid-'90s level. This is not exactly a windfall to a relatively high-cost producer of oil like Venezuela.

Both of these articles also comment on the sharp contraction in Venezuela's economy this year, with the Post article putting the decline at 7 percent and the Times article at close to 10 percent. While Venezuela's economy has been in a recession, virtually every economy in Latin America has also been contracting thus far this year. With Argentina, Ecuador, Honduras and Colombia all experiencing declines in GDP of close to 5 percent, the economic troubles being experienced by Venezuela cannot be attributed exclusively to Chavez's policies.

More about Latin America.


OUTSTANDING STORIES OF THE WEEK

"Reducing Audits of the Wealthy, IRS Turns Eye on Working Poor"
David Cay Johnston
New York Times, December 15, 1999, page A1

This article reports on a large drop in the number of tax audits done by the IRS, from levels that were already at record lows. The article points out that while the number of audits have declined, the IRS is devoting more resources to investigating people who take the earned income tax credit or who fail to file returns altogether. Disproportionately, the people who are subject to audits are high-income households, while the increased scrutiny will be applied almost exclusively to low-income workers.

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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.


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