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Economic Reporting Review

December 27, 1999:

Election and Entitlements; Canada's Health Care; Japan's Debt

By Dean Baker

Election Campaign | Stock Market | Germany | Canada | Japan | East Asia | Russia | Turkey | Outstanding Stories

ELECTION CAMPAIGN

"Candidates Accomplish Their Missions in Democratic Debate"
Dan Balz
Washington Post, December 18, 1999, page A8

This article reports on the previous night's debate between Vice President Al Gore and former Senator Bill Bradley. At one point the article asserts that Gore "may have left Bradley vulnerable over the future of Medicare" because he did not propose to set aside money to preserve the system beyond 2017, when its trust fund is projected to be depleted. The article goes on to point out that Medicare is an extremely important program to Democratic voters.

It is not clear why Bradley's decision should leave him vulnerable. Putting aside money over the next four or eight years (the constitutional limit on the term of the person elected president next year), will have almost no impact whatsoever on the nation's ability to pay for Medicare in years after 2017. At most, this decision can have a small impact on the size of the nation's debt in 2017, which will affect interest payments in 2017.

For example, if $150 billion is put aside for Medicare in the eight years a president can hope to serve, this would lower the real interest burden (adjusting for inflation) by approximately $4.5 billion annually in subsequent years. This savings will be equal to approximately 0.02 percent the GDP projected for 2017 and approximately 0.10 percent of projected federal spending for that year.

The biggest threat to Medicare is the continued growth in per person health care costs in both the public and private sector. If these costs can be brought under control, it will dwarf the potential interest savings that can result from setting aside money now for Medicare. Alternatively, if health care costs are not brought under control, the interest savings from paying down the debt will barely affect the nation's ability to pay for Medicare or health care more generally.

"Gore Dares Bradley to Jointly Forgo Ads"
Mike Allen and Ceci Connolly
Washington Post, December 20, 1999, page A1

"No Radio or TV? No Way, Bradley Responds to Gore"
Richard L. Berke
New York Times, December 20, 1999, page A1

These articles report on a debate the previous day between the two contenders for the Democratic nomination. At one point, the Times article notes that neither candidate wanted to raise the retirement age for Social Security or Medicare, then adds "neither delved in specifics about how they would forestall an expected cash shortfall in these programs."

According to the latest report from the Medicare trustees, the program will be fully solvent until 2017, with no changes whatsoever. The most recent report from the Social Security trustees indicates that the program will be fully solvent until 2034. Under the constitution, the person elected next year will not be able to serve beyond the year 2008.

In the past, shortfalls in these programs have been dealt with at very short notice without causing major economic disruptions. For example, in 1982 the Social Security trust fund was literally out of money at the point at which a commission was established to design a rescue package. There is no obvious reason that presidential candidates in the year 2000 should have a plan in place for a problem that is not even predicted to occur for a decade or more after they would leave office.

At one point the Post article asserts that "Tim Russert [an NBC journalist and the moderator of the debate] quoted a government report indicating that if no changes were made to Social Security before 2035, benefits might have to be cut by one-third or taxes raised by as much as $9000 per family." The article does not indicate which government report Russert might have been quoting, but his projection for the prospective tax increase is extremely far removed from the accepted projections on this topic.

According to the intermediate projections in the 1999 Social Security trustees report, if the person elected president in the year 2000 and the eight subsequent elections never implement any changes in the program, there will be an shortfall equal to 5.05 percent of taxable payroll in the year 2035. The average annual wage is projected to be $39,723 in that year (in today's dollars). The additional tax on a worker earning the average wage would therefore be $2,185. If there were two average wage workers in a family the additional tax would be $4,370, less than half the figure used by Russert. (It is worth noting that a family with two workers earning the average wage would be far wealthier than the typical family.) In these projections, even after paying this higher tax rate, workers in 2035 would still have an after-tax wage that was approximately 30 percent higher than workers do today.

"Gore and Bush Differ Over Teachers' Salaries, School Vouchers"
Kenneth J. Cooper
New York Times, December 19, 1999, page A6

This articles reports on an exchange between Gov. George W. Bush and Vice President Al Gore on their plans for education. The article reports Bush's criticism that Gore is a "big spender" because he wants to spend an additional $115 billion on education over the next decade, if he is elected president.

It is worth noting that this proposed spending 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.


STOCK MARKET

"Engineering the Nation's Longest Expansion"
Richard W. Stevenson
New York Times, December 20, 1999, page C3

This article examines the role of the Federal Reserve Board in sustaining the economy's growth in the '90s. At one point it notes the extraordinary rise in the stock market and comments, "It is anyone's guess whether the booming stock market is a reflection of and contributor to the economy's improved long-term prospects or a bubble that will end in tears."

Actually, it more than a guess; economists have done research in this area. For example, MIT Professor Peter Diamond, perhaps the nation's most prominent expert in this area, recently concluded that the stock market was over-valued at the beginning of 1999 by 35-45 percent. (See "What Stock Market Returns to Expect for the Future?," http://www.bc.edu/bc_org/avp/csom/executive/crr.) The market has since risen by 20 percent from these levels. No economist has yet been able to produce a plausible set of profit projections that would make current stock prices appear rational.


GERMANY

"Germany Proposes Some Tax-Free Stock Sales, Lifting Market"
Edmund L. Andrews
New York Times, December 24, 1999, page C1

This article reports on a plan by German Chancellor Gerhard Schroder to allow financial firms to sell off stock without paying taxes on the capital gains. The article asserts that by making it less costly for these firms to sell their stock, the proposal would be "unleashing tens of billions of dollars into the German economy."

This is inaccurate. The proposal will, on net, not unleash any money into the German economy. The financial firms will only get additional money as a result of other investors buying the stock they currently hold. For every dollar in new money held by the financial firms, another investor has parted with a dollar that could have been invested elsewhere. The net effect of the sale of assets that is expected to ensue from this measure is simply a redistribution of stock holdings, not a net increase in the amount of money available to finance investment.

In fact, the net amount of money available for investment may actually fall as a result of this measure. This tax cut could cost the government a significant amount of revenue, which would lead to increased government borrowing. Increased government borrowing would reduce the amount of money available to finance private investment.

At one point the article refers to this measure in the context of Schroder's past political shifts between "pro-business pragmatism and the Social Democrats' more traditional left-wing positions." While this proposed tax cut and several other recent measures put forward by Schroder are clearly pro-business, the article does not present any evidence to support its contention that they are also pragmatic.


CANADA

"Health Care on the Critical List"
Steven Pearlstein
Washington Post, December 18, 1999, page A20

This article discusses the problems facing the Canadian health care system which, according to the article, include serious delays for many types of essential treatment. At one point the article presents the comments of a professor at the University of Toronto, who attributes the problems to the inefficiency of the government's management of the national health care system.

According to OECD data, in 1997 (the most recent year for which data is available) Canada spent 9.3 percent of its GDP on health care. The United States spent 14.0 percent. Since the United States is a wealthier country, the discrepancy in dollars spent is even larger: $2095 per person in Canada, compared with $4090 for the United States. Measured by health care outcomes, such as life expectancy at birth or life expectancy at age 65, Canada's system scores better than the U.S. system. This data suggests that, despite its problems, the Canadian government managed system is far more efficient that the market-based system in the United States.


JAPAN

"Japan's Contradictions Cloud Future Direction of Economy"
Stephanie Strom
New York Times, December 20, 1999, page C24

"Global Economy Dances to Political Tune"
David E. Sanger
New York Times, December 20, 1999, page C21

The first of these articles discusses Japan's economic prospects. The second article examines the future of Japan's economy in the context of a larger discussion of the political and economic challenges faces the global economy. Both articles either assert or imply that Japan's economy requires a fundamental restructuring to sustain growth since its existing economic structure is fundamentally flawed.

This conclusion is not apparent based on the data. Over the period from 1969 to 1994, Japan averaged per capita GDP growth of 4.9 percent annually, more than twice the rate of any nation that has followed the market-oriented growth model advocated in these articles.

Furthermore, even in the years since the Japanese stock market crash of 1990, the immediate cause of the current slump, Japan has managed to maintain a more rapid rate of productivity growth than the United States. According to OECD data, productivity grew an average of 2.3 percent annually from 1990 to 1994 (the most recent years for which data is available). Productivity growth in the United States has averaged just 1.9 percent from 1989 to 1999. Economists usually view productivity growth as the best measure of an economy's dynamism.

Since no economist has identified any factor that suddenly made Japan's previously successful system dysfunctional, the more plausible explanation is the economy simply needs a large demand stimulus to offset the depressing effects of its real estate and stock market crash. This was the argument put forward by MIT Professor Paul Krugman in a paper last year. (See Paul Krugman, "Japan's Trap," 5/98, http://web.mit.edu/krugman/www/japtrap.html.) In this paper, Krugman argued that Japan's central bank should deliberately cause inflation in order to give firms and consumers a reason to spend their money rather than save it. At present, prices are falling in Japan at the rate of approximately 1 percent annually. The nation has the highest saving rate of any industrialized nation.

Both articles include statements that imply or assert that Japan's government is in danger of losing its ability to borrow money because it already has accumulated such a large debt. This concern is based on a gross measure of government debt, which includes money that the government effectively owes to itself, like the government's debt owed to Social Security in the United States. The more commonly used measure of debt is the amount owed to the general public. Japan's ratio of public debt to GDP is just over 30 percent, well below that of most industrialized countries, including the United States, which has a debt to GDP ratio of approximately 40 percent.

At one point the first article refers to the build-up of government debt as "saddling future generations with an enormous burden." Actually government debt does not, by itself, create any generational burden at all. Since the vast majority of the debt is held by Japanese citizens and corporations, it simply creates a distributional issue among future generations of Japanese. Virtually all the money will stay within the country.

By contrast, a foreign debt does create a burden for future generations. Nations that accumulate large foreign debts eventually have to export more than they import in order to pay the interest in their debt. Japan has actually been an enormous net foreign lender for the last two decades, accumulating assets at the rate of approximately $1000 per person per year. By contrast, the United States is currently a new borrower, presently accumulating foreign debt at the rate of approximately $1200 per person per year. This rate of acquiring foreign debt does have the potential to impose very large burdens on future generations.


EAST ASIA

"Asia Watchers Now Looking at Economies of U.S. and Japan"
Wayne Arnold
New York Times, December 20, 1999, page C 24

This article discusses the growth prospects for the smaller East Asian economies. It notes that most of these economies appear to be surging ahead even though they have not carried through with the reform programs advocated by the IMF. The article then adds: "It appears good things can happen to bad economies."

Economists usually evaluate an economic structure by its ability to produce a good standard of living. The "crony capitalism" of East Asia has produced remarkable gains in living standards for the people of the region over the last four decades. South Korea, for example, had a 7 percent rate of per capita GDP growth from 1960 to the mid '90s. During this period, the nation went from being one of the poorest in the world to enjoying living standards comparable to those in Greece or Portugal. In the last year, its economy surged at a 12.3 percent rate. By most measures it has already made up the ground it lost in the wake of the financial crisis.

Most of the other East Asian economies have also performed far better than economies that have clung more closely to the IMF approach. Thailand and Malaysia had annual per capita GDP growth averaging 5.2 percent and 4.2 percent respectively, from 1960 to 1994. By comparison, Brazil and Mexico, two countries that have tried to follow IMF dictates, averaged per capita GDP growth of just 1.7 percent and 1.0 percent in the period since their reforms were put in place. Given this track record, it is not clear what criteria the article is applying when it characterizes the East Asian economies as "bad."


RUSSIA

"Election May Break Russian Impasse"
David Hoffman
Washington Post, December 19, 1999, page A49

"Russian Vote Bolsters Pro-Yeltsin Camp in Parliament"
Celestine Bohlen
New York Times, December 20, 1999, page A1

"Russian Voters Back New Party"
David Hoffman
Washington Post, December 20, 1999, page A1

These articles discusses the outcome of Russia's parliamentary elections. Both articles repeatedly refer to parties that were associated with Yeltsin's privatization program as being "liberal reformers."

Virtually all economists familiar with Russia's privatization process acknowledge that it was enormously corrupt (e.g. see "Wither Reform: Ten Years of the Transition," by Joseph E. Stiglitz, http://www.worldbank.org/research/abcde/stiglitz.html). The auctions at which state-owned firms were sold off were rigged, so that well-connected business people could buy them at a fraction of their true price. It would not appear to be especially accurate to characterize the proponents of these auctions as "liberal reformers."


TURKEY

"Turkey Puts New Steam in Old War on Inflation"
Stephen Kinzer
New York Times, December 20, 1999, page A7

This article discusses plans to implement economic policies in Turkey that will significantly reduce its rate of inflation. At one point the article comments that Turkey is "one of the few countries in the world that has not managed to break an inflationary cycle." It then presents some of the main features of an IMF program to reduce inflation.

It is worth noting that Turkey has consistently enjoyed a more rapid rate of growth than many countries that have low rates of inflation. According to data from the World Bank, Turkey's growth rate averaged 4.1 percent annually from 1990 to 1997. By contrast, over the same period, growth in Brazil and Mexico, two low-inflation countries, averaged 3.4 and 2.2 percent, respectively.

Economists generally value growth much more than low inflation, since it can lift people out of poverty. Low inflation just means that prices are changing less rapidly. If low inflation doesn't bring about more rapid growth, then it has very little economic value.


OUTSTANDING STORIES OF THE WEEK

"As Labor Pool Shrinks, a New Supply Is Tapped"
Louis Uchitelle
New York Times, December 20, 1999, page C4

This article examines the extent to which increased immigration has been a factor in reducing upward wage pressures in the current business cycle.

"Ousted IRS Collector Charges Favoritism"
David Cay Johnston
New York Times, December 20, 1999, page C

This article reports on a hearing where an IRS official in Northern California, Peter W. Coons, is attempting to regain his job. The official had accused the IRS of giving favored treatment to wealthy and politically connected taxpayers. He was ostensibly fired for using his office computer to visit web sites that were not related to his work.

"Plant Hid Risk From Workers"
Joby Warwick
Washington Post, December 23, 1999, page A1

This article reports evidence that a government contractor for processing plutonium falsified data on workers' exposure to radiation. Many of the workers in the factory have since contracted cancer or other diseases that were likely caused in part by exposure or radiation.

"For Cruise Ships' Workers, Much Toil, Little Protection"
Douglas Frantz
New York Times, December 24, 1999, page A1

This article examines the pay and working conditions for crews on cruise ships.

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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.

You can sign up to receive ERR via email every week at www.preamble.org/columns/subbaker.htm. ERR is archived at www.fair.org/err/.


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