Beat the Press

Dean Baker's commentary on economic reporting


Do Trade Agreements Have to Be "Free"

I am continually amazed by the apparent need that reporters feel to describe the trade agreements negotiated by the U.S. government as "free trade" agreements. (See the Times article on the Colombian elections for the current target of my wrath.) What possible additional information do reporters and editors believe that they are conveying by including the word "free?"

As I have written elsewhere, these agreements do not free all trade -- there are still substantial obstacles facing Colombian doctors, lawyers, and other professionals who would like to sell their services in the United States. This agreement also increases protectionist barriers by stengthening patent and copyright protection. (Even if you think these protections are good, they are still forms of protection.) So, why don't these reporters just save themselves a word and more accurately describe these pacts as simply "trade agreements."


Right Wing Law and Economics: Free Market Economics at NPR

National Public Radio had a piece this morning about how some think tanks committed to "law and economics" (applying economic principles to the law) were hosting seminars for judges. The segment asserted that these think tanks, which purportedly receive large contributions from the tobacco industry, the oil industry, and other industry lobbies, are committed to free market economics.

This should have been one of those paid public relations spots that helps NPR pay the bills. The tobacco industry does not want to be held responsible for things like marketing to children or concealing evidence of the danger of cigarettes. The oil industry doesn't want to be held accountable for the damage that oil does to the environment.

Since when is the effort to avoid being accountable for the damages you cause free market economics? If I burn down by neighbor's house (accidentally), and then argue in court that I shouldn't have to pay for rebuilding, is that free market economics? According to NPR it is.


American Idol Special: Was the Vote Kosher?

First, Beat the Press extends its congratulations to Taylor Hicks, the new American Idol. Now, for the serious question, was the vote fair?

The issue here has to do with the voting mechanism. As we know the vote took place through phone-in voting. (People could also text message in their favorites). The problem is that the enthusiastic response by Idol fans often left the phone lines busy. For example, the Washington Post Idol wrap-up reported that a special on-line speed dialing service was able to get through with less than one-quarter of its calls. If most calls don’t get through, then the votes recorded for each contestant will end up being roughly the same, regardless of how many people intended to vote for them.

This can be seen with a simple example. Suppose the system accepts 10 calls a minute for each contestant (they had separate phone numbers). Now suppose that Katharine McPhee had 1000 calls and Taylor Hicks had 2000 calls. Since the system will only accept 10 calls a minute, both contestants will be recorded as having 600 votes (60 minutes times 10 calls a minute), even though Taylor had twice as many people call in to vote for him.

Now, as a practical matter, the vote count will never end up exactly the same. Some people may be a bit quicker with their calls, perhaps the percentage of text messagers in the vote will affect the recorded outcome, but the point is that the vote count will be largely determined by the mechanics of the system, rather than the numbers who vote for each contestant.

This would explain the incredibly close three way race between Taylor, Katherine, and Elliot, a week ago. The system let in almost exactly the same number of calls from all three. It would also explain the cliffhanger two years ago when Rueben Studdard edged out Clay Aiken. Any time when the system gets flooded, the vote counts will tend to converge.

Folks, this isn’t about hanging chads determining which of America’s political dynasties will place their scion in the White House. This is the American Idol. The people must have confidence in the system.

Can We Buy New Home Sales Data?

The Commerce Department’s data for new home sales in April showed a 4.9 percent increase from March. Many news reports took this as evidence of the continued strength of the housing market. A bit of caution is appropriate here.

First, monthly data are always erratic. This should be a mantra for anyone trying to track the economy. If a particular data source shows data that are out of line with other data we have on the economy, then it was probably driven by some quirk in the data.

Second, the new home sales data show contracts signed, not actual sales. The difference is the number of contracts that are cancelled. A year ago, when buyers thought that prices were going through the roof, cancellations were relatively rare. Now there are reports of cancellation rates in the neighborhood of 20-30% in some markets. This means that completed sales may actually be dropping, even if contracts are rising.

There is evidence for this proposition in the April report. The inventory of unsold homes rose 2.9 percent in April and now stands at a record high of 565,000 houses, 27 percent above the year ago level.


Problems With Venezuelan Numbers

It appears that Mexico is not the only Latin American country for which the media have difficulty with official statistics. Apparently, the media have been anxious to tout high poverty numbers for Venezuela. The problem appears to be that they want to cite poverty data for 2004, which showed a large upturn in the poverty rate in the immediate wake of a strike in the oil sector.

The Venezuelan economy rebounded sharply, beginning in 2004, and the poverty rate predictably fell back below its previous levels. However, even though the 2005 data is now available, the media continues to use the much higher numbers from 2004. My colleagues at CEPR posted a short piece on Venezuelan poverty today.

Rising Wages for Nurses? Nanny State to the Rescue

The New York Times had an article today that could have badly used a bit of economic analysis. The article reports on a provision in the Senate immigration bill that removes the cap on the number of nurses who can enter the country each year.

The problem, as described in the article, is that the country faces a large and growing shortage of nurses. The decision to turn to immigrants is striking, since this is not what Congress did to meet the large shortages of doctors, lawyers, accountants, economists, CEOs and other occupations that draw very high wages. In other words, the Senate is making a decision to consciously try to depress the wages of nurses, in a way that it has not done for other professions that command high wages.

It would have been reasonable to ask why nurses are being singled out in this way. There certainly is no economic argument for holding down the wages of nurses but not the wages of workers in more highly paid occupations.


Washington Post Still Believes in Mexico's Post-NAFTA Growth Miracle

It is now 36 days since the Washington Post published an article that reported that Mexico’s economy has grown at a world record 17.5 percent annual rate since NAFTA was implemented in 1994. (According to IMF data, annual growth averaged 2.9 percent.) They have refused to print a correction despite repeated calls and e-mails from my colleagues at CEPR.

The Post has a very strong policy on correcting errors, which was printed in a recent column by the ombudsman (“Policy vs. Reality in Correcting Errors” 5-7-06; B 6):

“The Washington Post is committed to correcting all errors that appear in the newspaper, just as we are committed to the kind of careful journalism that will minimize the number of errors we print. Preventing and correcting mistakes are two sides of the coin of our realm: accuracy. Accuracy is our goal, and candor is our defense.”

-- The Post Stylebook

As I noted before, the Post had taken a strong editorial stand in support on NAFTA. I will allow them to explain this situation themselves.

What if Money Managers Had to Work for a Living?

The Times had an article this morning about the effort by stock exchanges to merge across international borders. At one point, it comments about fears that this trend could make it easier for companies to shop among stock markets in order to list their shares in the country with the least restrictive accounting and reporting rules.

This is a reasonable concern. It is a safe bet that if companies can evade regulations that cost them money, they will.

But, there is a very important implicit assumption in this story which is worth noting – that investors don’t value the regulations that impose high standards for corporate accounting. This is probably an accurate assumption, but one that deserves to be examined more closely.

The Sarbanes-Oxley Act, and other examples of regulatory tightening, was prompted by massive fraud at companies like Enron, WorldCom, and Global Crossing. These companies were able to get away with their fraud because money managers that control billions of dollars of assets did not know anything about the companies in which they invested. No doubt these money managers received large bonuses when the soaring stock prices of these companies produced huge returns for their portfolios.

When it turned out that the stock price was driven more by fraud than profits, the money managers played the “who could have known game.” Maybe there was a money fund manager who lost their job for investing a large amount of money in one or more of the poster children for corporate fraud, but I certainly have not heard of such a person.

In short, investing in companies that play with their books does not seem to carry a cost for money fund managers. They get the benefit of the high returns for as long as the fraud can be perpetuated, but then suffer no consequences when the fraud is exposed and the stock loses most of its value.

In such a world, strong governmental regulation of accounting standards is especially important. But it is interesting to ask why highly paid money managers are not held accountable for their failings. This seems to be yet another example of an economy where those at the top enjoy employment security, even when their incompetence has huge costs. It is only factory workers and dishwashers who are responsible for the quality of their work.