Beat the Press

Dean Baker's commentary on economic reporting

7/01/2006

Xenophobia at the New York Times

The New York Times editorial page went a bit overboard in its anti-Bush tirade on the budget deficit. The basic point, that the Bush administration deficits are too large, is on the mark. (By the way, they could better make this point using the gross deficit [4.0 percent of GDP], which includes the money borrowed from Social Security, or better yet, just report the change in the ratio of gross debt to GDP.)

If the Times had left the issue there, all of us econ types could happily applaud this push for fiscal responsibility. But our intrepid Times editorial writers felt the need to push further. They tell us that the debt is especially troublesome because 43 percent is in foreign hands and “debt owed to bankers in Beijing, Tokyo and elsewhere could destabilize the dollar and from there, drive up interest rates and prices.” Huh?

Okay, let’s check the bases here. Most foreigners hold government debt for the same reason that investors in the U.S. hold debt, they value its safety, and also expect a decent return. Is there a set of events that will cause bankers in Beijing, Tokyo, and elsewhere to dump their U.S. government debt, which will not also cause bankers in New York, San Francisco and Chicago to dump their debt? Is the Times promoting the image of the patriot banker who holds onto their U.S. government bonds, even as their price falls through the floor? In the interest of the environment, the NYT should save a few trees and not print such nonsense.

Of course not all foreigners hold bonds for their safety and return. Foreign central banks (most importantly the Chinese and Japanese central banks) have bought up vast amounts of U.S. government debt in order to keep the dollar high. Their reason is that a high dollar makes their exports cheap to people in the United States, and export growth was helping to drive their economies.

These central banks will stop buying, and possibly start selling, U.S. debt when it fits their economic strategy. This can be destabilizing for the U.S. economy – leading to higher interest rates and higher prices, as the NYT editorial suggests – but this has nothing to with Bush’s budget deficits. The problem here is simply that the U.S. allowed the dollar to get overvalued.

The main villain here is Robert “strong dollar” Rubin. He was the one who initiated the high dollar policy back in the mid-nineties. Politically, this is great policy. It allows for substantial short-term gains (low inflation and higher living standards for those protected from import competition), at a cost of substantial long-term pain. Bush of course is complicit in this high dollar policy, since he did not move aggressively to bring the dollar down to a sustainable level.


Anyhow, we will pay a large price, possibly in the near future, for this short-sighted high dollar policy. But, the fault here lies primarily with Rubin and Clinton, not the current occupant of the White House.

6/30/2006

Getting Tough on Immigrants Seeking Health Care

To paraphrase my friend Brad DeLong, “why oh why do newspapers have to use meaningless numbers when it is so easy to provide information.” Today’s example is a Washington Post article about a new rule that requires people to show proof of citizenship before they can be covered by Medicaid.

The article includes much useful information and comments from both proponents and opponents of the rule. Then it tells us that the Congressional Budget Office estimates that this rule will save Medicaid $735 million over the next decade.

Great – everyone realize how much money that is? Okay, we know the Washington Post has an educated readership, but virtually none of their readers has any idea how important $735 million over the next decade is to the budget or their pocketbooks.

Let’s suppose the reporters had taken a moment to look at projected spending for this period. CBO projects total spending over the next decade at $33.3 trillion, or approximately $111,000 per person. The potential savings from the tighter Medicare rules comes to approximately $2.50 per person, or 0.002 percent of projected spending over the next decade. In other words, the potential savings will have no visible impact on the budget, the deficit or the public’s tax burden.

My guess is that most people who read the Post article do not recognize this fact. If the spending figure had been expressed as a share of the budget or a per person cost, readers would know this hugely important part of the story. What do newspapers have such an aversion to providing information? (Yes, I did blog on this before in reference to an NYT article.)

If the Politicians Say It, It Must Be True


That’s the word from the Washington Post when it comes to the WTO negotiations. Today’s article on the prospects for the Doha round asserts that “unlike previous negotiations with similar aims, this set of talks has an ambitious twist: The main goal is to change rules that have put poor countries at a disadvantage in the global marketplace.”
Yes, and we know that because ……

Look, the people structuring the Doha round are politicians. It should not be news that politicians are not always entirely truthful in their public comments. In other words, just because they say that the purpose of the Doha round is to help developing countries, this does not mean that the real purpose of the round is to help developing countries.

The evidence actually shows that the Doha round is likely to do very little for developing countries and will actually hurt some who are net importers of agricultural products. (The removal of rich country subsidies causes agricultural prices to rise, which means that these countries will have to pay more for their imports.) Based on projections of gains, a reasonable person might be led to believe that the main purpose of the Doha round is to assist politically connected grain traders like Archers Daniel Midland.

It would not be hard to redesign global trade rules in ways that actually did offer substantial benefits to developing countries. For example, not requiring them honor rich country patents and copyrights would be a huge boon to developing countries. But such obvious winners for the world’s poor are not on the Doha agenda.

In any case, the simple point here is that reporters should be clear on distinguishing between what politicians say, and what is true. Politicians say that the main purpose of the Doha round is to help the world’s poor. The reporter who wrote this article does not know what the main purpose of the round actually is. Therefore, the article should simply report the claims of the politicians, and identify them as claims, not truth.

6/29/2006

The Problem of Rising Wages in China


The Times had one of the most convoluted articles yet on demographics. Apparently, China’s slowing population growth may lead to a shortage of cheap labor – no kidding the headline is “As China Ages, a Shortage of Cheap labor Looms.”

It wasn’t that long ago that I learned my economics, but back then this was THE POINT of economic development. Countries wanted to have more good paying jobs relative to the size of their population so that people would not be forced to take the bad paying jobs. I am not quite sure what theory of economic development the Times has where a lack of people in low-paying jobs is a problem. (Maybe we can make Times reporters do them.)

Just about everything else in the piece is equally incoherent. It gives us the warning of the rising ratio of retirees to workers. But let’s toss in some arithmetic. China’s per capita GDP is growing at more than 8 percent annually. This means that in a decade, per capita income will have more than doubled. Suppose the tax burden was raised by 10 percentage points to cover the higher ratio of retirees to workers, this would leave the average worker more than 80 percent better off (assuming that income growth is distributed in proportion to current income, a very big assumption). What is the problem?

The article even warns that raising the retirement age may not help because that would mean fewer jobs for young workers. (But, wasn’t the problem supposed to be a shortage of young workers?)

The ratio of confusion to information in this article is extraordinary. It would be good if the reporter and/or the editor could give this issue some more serious thought.

The Post Doesn't Think That Mexican Voters Care About the Economy Either


Here's the proof.

Do Mexican Voters Care About the Economy?


The New York Times apparently doesn’t think so. In an article assessing the Mexican presidential campaign in its final days, there is no mention of the economic performance of the current administration. Since one of the two leading candidates is from the same party as the incumbent president, and pledges to continue the same policies if elected, the recent economic record would appear to be relevant.

For those who care about such mundane things as economic growth, the cumulative per capita GDP growth in the first five years of the current president has been approximately 2.0 percent. By contrast, Mexico’s per capita GDP grew 4.0 percent annually over the years from 1960-80. In other words, in 5 years under the current president, Mexico’s economy grew as much as it typically did in 6 months over the period from 1960-80. As a general rule, weak economic growth will mean weak job creation and few gains in reducing poverty, and this appears to have been the case in Mexico.

This weak economic performance probably explains much of the support for the main challenger, Lopez Obrador. As it is, the article contains very little of substance. It can probably be best described as a careful examination of the “swift boat” allegations of Mr. Obrador’s opponents. It would be great stuff for the National Inquirer, but we should expect better from the New York Times.

6/28/2006

Good Piece in the NYT on the Evils of Protectionism (drug patents)

When the government imposes restrictions that artificially raise prices above the competitive market level, economic theory predicts that producers will engage in anti-social rent-seeking behavior to maximize their rents. Drug patents, which raise drug prices by several hundred percent above the competitive market price (sometimes several thousand percent), lead to all sorts of corruption, just as economic theory predicts.

Unfortunately, economists show relatively little interest in this interference with the free market. Fortunately, the NYT shows more interest. It has a good article on doctor run foundations that receive large payments from drug and medical supply companies. These foundations tend to produce research that shows the effectiveness of their donors' products.

6/27/2006

What Is $16 Billion to the Federal Governemnt?

The Times ran an informative article on the Bush administration's new rules requiring states to impose more stringent work requirements on welfare recipients. However, the piece fell short in telling readers the cost of welfare. It reports that welfare is blockgranted at $16 billion annually between 2007 and 2010. It would have been helpful to tell readers that the cost of the program will fall from 0.6 percent of total spending in 2007 to 0.5 percent of spending by 2010. Alternatively, government spending is projected to be approximately $50,000 for every person in the country over the next five years, of this $270 will be spent on welfare.

When Numbers Don't Add Up at the New York Times


I have complained in the past about reporters' willingness to accept corporate numbers uncritically. My favorite example is the widely reported claim that the compensation of Delphi's unionized workers averaged $65 an hour. This implied a benefits package worth more than $70,000 a year. Anyone believe that?

We have another example from the Times today. Its article on GM's buyout offer to workers reports that getting rid of 35,000 workers will save GM $8 billion a year. Hmmmm, my calculator puts that at a savings of just under $230,000 per worker.

If you think this number sounds a bit high, you would get confirmation by the end of the article. The last paragraph reports the assessment of a stock analyst that GM earnings will rise $1.25 a share for each 10,000 workers who accept the offer. With 565.6 million shares outstanding, this implies additional earnings of $707 million for each 10,000 workers, or $2.47 billion for the 35,000 workers who accepted the buyout. That comes to a more pluasible gain of $70,700 per worker.

I am not an expert on the auto industry and cannot assess how much GM will actually benefit from this buyout (the net gain will depend on whether GM can lose one-third of their workers and still produce the same number of cars, or will have to hire replacement workers), but the $8 billion figure reported in the Times article is obviously ridiculous. Someone involved in the publication of this article should have been able to recognize this fact.

6/26/2006

New Homes Sales, the Rest of the Story

The May data for new home sales came in somewhat higher than expected. It is important to keep in mind that the home sales data record contracts, not completed sales. In the boom period a year ago, broken contracts were rare. Now that prices are weakening in many of the formerly hot markets, broken contracts are becoming common.

To my knowledge, no one keeps data on the percentage of contracts that are broken, but there have been reports from some builders in California and Florida of cancellation rates in the range of 20-30 percent. If the nationwide rate of cancellation is even 5 percentage points higher than last year, it would conceal a sharp falloff in actual sales.

One key measure that gets around this issue is the number of unsold homes. This was 556,000 in May, essentially the same as April's record high of 560,000, and more than 100,000 higher than the inventory of 450,00 reported in May of 2005.

Trade Nonsense in the NYT

For reasons that I will not pretend to understand, newspaper editorial boards are huge proponents of trade agreements as a remedy to world poverty. They endlessly promote these agreements on their editorial and oped pages. Papers like the New York Times and Washington Post are as likely to print an oped critical of recent trade agreements, as Pravda would have been to print an anti-communist diatribe back in the days of the Soviet Union.

Today’s piece in the NYT is a great example. It touts a new W.T.O. agreement which would raise world income by $54 billion annually. Even better, the piece tells us that the lowest income countries, which have just 1.2 percent of world income, would get 1.9 percent of the gains.

Before anyone celebrates this prospect, let’s have some context. World income is approximately $50 trillion. So, the prospect of $54 billion in annual gains comes to 0.1 percent of world income. If the poorest countries get 1.9 percent of these gains, that comes to just over $1 billion a year. I’m not sure of their list of poorest countries, but if their total population is 500 million, then they will get $2 per capita annually from this deal.

Even this may be an exaggeration. There are many reasons for criticizing these trade models (the assumption of full employment ranks high), but I will only mention my favorite. These trade models all assume that lost tariff revenue is replaced by a lump sum tax.

This can get heavy into econ nerdism, but let me try to make the point simple. In economic modeling, taxes typically lead to economic distortions that reduce output. Tariffs are one such tax. If we reduce tariffs, then by definition, we will be raising GDP in these models.

Of course, tariffs provide revenues to government. If a government wants to make up this revenue (which it must do in the real world) then it must raise some other tax to offset the loss of tariff revenue. In these models, it is assumed that governments offset the lost tariff revenue by raising lump sum taxes.

A lump sum tax means that the government just sucks a specified sum of revenue from the economy. It is of course a fictitious concept. In the real world, governments must impose specific taxes – income taxes, sales, taxes, value-added taxes, etc. However, a lump sum tax is a useful fiction from the standpoint of those promoting these trade agreements, because it does not lead to any economic distortions.

In other words, the economic modeling shows what happens when we replace a tax that leads to economic distortions with a fictional tax that does not lead to economic distortions. Excuse me if I am not impressed.