Economic Reporting Review
April 28, 2003

By Dean Baker, co-Director of the Center for Economic and Policy Research

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OUTSTANDING STORIES OF THE WEEK

 I.R.S. Tightening Rules for Low-Income Tax Credit
Mary Williams Walsh
New York Times, April 25, 2003, Page A1
http://www.nytimes.com/2003/04/25/business/25TAX.html

This article discussed plans to require that families receiving the earned income tax credit (EITC) offer more proof of eligibility than is currently necessary. The article points out that estimates of the amount of excess payments under the (EITC) are dwarfed by the amounts that high income taxpayers cost the government through unlawful tax evasion. In addition, studies indicate that much of the excess cost of the EITC is a result of confusion and honest mistakes, rather than deliberate fraud. Also, since the average size of the tax credit is only $2,000, the government is likely to net little, if any, revenue by applying greater scrutiny to taxpayers receiving the EITC. 

Drug Makers Expand Their Medicaid Role
Melody Peterson
New York Times, April 23, 2003, Page c1
http://www.nytimes.com/2003/04/23/business/23PRES.html

This article discusses the growing role of major pharmaceutical companies in several state Medicaid programs. The article reports that several companies are offering drug management plans, under which they supervise the provision of drugs to Medicaid beneficiaries. The article notes the concerns of health care professionals that, in some cases, that this could lead to situations in which drug companies prescribe their own drugs even in cases in which they may not be the best and/or cheapest available drug.

Medicare

On Medicare, Bush Left Details to Congress
Amy Goldstein
Washington Post, April 20, 2003, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A58100-2003Apr19.html

This article discusses President Bush’s proposal for restructuring Medicare. At one point it asserts that Medicare “faces severe financial strains.” According to the report of the Medicare trustees, the program is currently running a surplus and is projected to be able to meet all expenses for the next quarter century. This implies that the Medicare program is in much better financial shape than it has been though most of its existence. The article does not indicate the basis for its assertion that the program is facing severe financial strains.

The core of the article addresses President Bush’s plan to increase the role of private insurers within the Medicare system. At this point, there is now a considerable body of evidence, including studies by both the General Accounting Office and the Congressional Budget Office, that shows that a greater role for private insurers will likely increase, not lower costs. It would have been appropriate to refer to this evidence in this article. It would have also been helpful to note than approximately one-third of the Medicare beneficiaries who signed up for private H.M.O.s were later thrown off these plans, because the H.M.O.s claimed that they could not make a profit when paid the standard Medicare fee.  

Health Care

Gephardt Health Plan to Cover All
Dan Balz
Washington Post, April 24, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A27256-2003Apr23.html

Gephardt Issues Proposal on Health Insurance
Adam Nagourney
New York Times, April 24, 2003, Page A26
http://www.nytimes.com/2003/04/24/national/24DEMS.html

Proposals Attach a Price to Universal Health Care
Milt Freudenheim
New York Times, April 24, 2003, Page A26
http://www.nytimes.com/2003/04/24/national/24CARE.html

Health Care Plan Could Help to Redefine Gephardt
Dan Balz
Washington Post, April 25, 2003, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A34717-2003Apr24.html

These articles discuss some of the implications of Representative Richard Gephardt’s plan to extend health insurance coverage if he is elected president. The articles focus much more attention on the plan’s implications for the federal budget than the health care system. This is unfortunate, since the projected impact of the plan on the deficit will likely have much less effect on people’s lives than its impact on the provision of health care.

The Fruedenheim article does include some discussion of the impact of the proposal on the nation’s health care system. This article refers to several different proposals that were analyzed in a study commissioned by the state of California. The article does not include any discussion of universal plans modeled along the lines of the Canadian health care system. The California study looked at three Canadian type plans and found that these three plans would provide care at a lower cost than the other 6 plans examined, since they eliminated a layer of administration, and would also provide the best quality care [www.healthcareoptions.ca.gov].

The second Balz article includes the assertion that Gephardt’s plan “would forfeit Democrats' ability to cast Bush as fiscally irresponsible.” This claim is justified on the basis that the proposal would cost as much as Bush’s tax cut. It is entirely reasonable to view deficit spending to provide health care as warranted, while viewing deficit spending to pay for tax cuts to the wealthy as fiscally irresponsible. The largest deficits in the nation’s history were the result of World War II, but few people would characterize these deficits as fiscally irresponsible, because they viewed this spending as essential.

Copyright Enforcement in the Internet Age

Recording Industry Goes After Students Over Music Sharing
Amy Harmon
New York Times, April 23, 2003, Page A1
http://www.nytimes.com/2003/04/23/national/23STUD.html

This article discusses lawsuits being brought by major entertainment companies against students who transfer copyrighted music over the Internet. The article is written from the standpoint that such transfers are morally wrong. For example, at one point it comments that “college administrators say they are mindful of their responsibility to teach students that what they are doing is wrong.”

There is no obvious reason that transfers of copyrighted material should be viewed as morally wrong, nor that college administrators should feel any responsibility to tell students that such transfers are wrong. Copyrights are an interference in the free market that leads to large economic distortions of the sort described in this article. (These distortions – the resources spent enforcing copyrights, and the increase in costs that result from its enforcement – are not described as economic distortions in the article.) By the logic of this article, it was morally wrong for people in the Soviet Union to engage in black market purchases, and school administrators would have had an obligation to lecture their students on immorality of making such purchases.

It would have been helpful to include the views of an economist in this article, comparing the relative efficiency of copyrights with alternative methods (e.g. individual tax credits) for supporting artistic and creative work.  

Bush Tax Cut

Administration Launches Tax Cut Blitz
Mike Allen
Washington Post, April 19, 2003, Page A2
http://www.washingtonpost.com/wp-dyn/articles/A53486-2003Apr18.html

In GOP Holdout’s State, Bush Pitches tax Cut
Dana Milbank and Jonathan Weisman
Washington Post, April 25, 2003, Page A2
http://www.washingtonpost.com/wp-dyn/articles/A34715-2003Apr24.html

Bush Takes Tax Cut Battle on the Road
Elisabeth Bumiller
New York Times, April 25, 2003, Page A26
http://www.nytimes.com/2003/04/25/politics/25BUSH.html

These articles discuss President Bush’s effort to get his tax cut approved by Congress. All three articles imply that there is reason to believe that the tax proposal will boost the economy. For example, the article by Allen asserts that “both parties said that the fight is ultimately over whether Bush will go into 2004 looking like a strong steward of the economy.”

There is no basis for presenting the tax cuts in this manner since virtually all economic analysis of the cuts indicates that they are likely to have little effect, and the impact is more likely to be negative than positive. For example, a recent analysis by the Congressional Budget Office (which is now headed by a former Bush economic advisor) found that the Bush tax cut will have a limited impact on the economy in the immediate future, and will likely have a negative impact in the longer term [http://www.cbo.gov/showdoc.cfm?index=4129&sequence=0]. Given this and other, analyses, if the Congressional action on the tax cut will determine whether or not President Bush looks like a strong steward of the economy, then it will only be due to the fact that the public will have been misinformed about the potential impact of the tax cut.

Similarly, the article by Bumiller cites Republican strategists as saying that “it would be political suicide for the president to ignore the shaky economy after weeks in which his attentions have been focused on Baghdad.” Given the projected impact of the tax cut, it appears that the president is ignoring the economy and instead concentrated his attention on a tax cut aimed at the wealthy.

The Milbank and Weisman article includes some estimates of short-term job gains from the tax cut. It would have been helpful to note that any boost to the deficit, whether through greater spending or tax cuts, will lead to a short-term job gain. It would have been appropriate to compare the projected short term job gain from the Bush tax cut with any alternative use of this money, such as revenue sharing for state and local governments or a more progressive tax cut. According to President Bush’s Council of Economic Advisors, the much cheaper tax cut of $300 to all income tax payers in 2001 produced many more jobs.

The Milbank and Weisman article also quotes President Bush as saying that the reason the nation has a deficit is because it is at war. President Bush’s budget office estimated that the deficit would have been nearly $300 billion this year even without the war.  

Efficiency and Equity (In the Same Breath)
Daniel Altman
New York Times, April 20, 2003, Section 3 page 4
http://query.nytimes.com/gst/abstract.html?res=F00F1FFC3F5E0C738EDDAD0894DB404482

This article discusses the Bush tax cut in the context of the more general issue of trade-offs between equity and efficiency. At one point the article describes the logic of the Bush tax cut by saying that the wealthy will spend most of their tax cut, thereby generating growth and jobs for the rest of the population. Actually, this would be the logic of a demand-side tax cut. Poor and middle income people are most likely to spend a tax cut; therefore if the point of the tax cut is to generate demand, then the tax cut should be directed toward the lower end of the income ladder.

However, President Bush’s proposed tax cut is usually justified as a supply-side tax cut. This means that the hope is that the wealthy will save most or all of their tax cuts, leading to an increased supply of savings. In principle, this should lead to lower interest rates, which could then fuel more investment. While the Bush Administration has not been consistent in explaining how the tax cut is supposed to help the economy, this would be the only economic rationale for targeting the tax cut to rich people.

White House May Reduce Plan for Dividend Tax Cut
Elisabeth Bumiller
New York Times, April 22, 2003, Page A16
http://www.nytimes.com/2003/04/22/politics/22TAX.html

This article discusses the Bush administration’s plans to get its tax cut passed by Congress. The article asserts that President Bush’s tax plan would “eliminate the tax that individuals pay on stock dividends.” This is not true. The vast majority of stockholders hold most of their stock in retirement accounts. The taxation of dividends in these accounts will not be affected by the president’s tax plan. These dividends will still be taxed as normal income when the money is withdrawn from these accounts.

 
State Budget Crises

States, Facing Budget Shortfalls, Cut the Major and the Mundane
Timothy Egan
New York Times, April 21, 2003, Page A1
http://query.nytimes.com/gst/abstract.html?res=F50711F8385E0C728EDDAD0894DB404482

This informative article examines some of the cutbacks that have been instituted around the country as state and local governments have attempted to cope with massive budget shortfalls. At one point the article cites a study from the Cato Institute which attributes the budget crises to excess spending. According to the article, the study claims that state spending rose an average of 5.7 percent annually between 1990 and 2001, which it describes as “nearly double the inflation rate.”

The more obvious basis of comparison is the rate of economic growth. Other things equal, we would expect state spending to grow at roughly the same rate as the economy, implying that the states’ share of economic output is neither increasing nor decreasing. From 1990 to 2001, the economy grew at an average annual rate of 5.2 percent, only slightly less rapidly than the growth of state spending.

Greenspan Reappointment as Fed Chair

Bush Signals Another Term For Greenspan
John M. Berry
Washington Post, April 23, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A17684-2003Apr22.html

President Willing to Give Greenspan New Term at Fed
Richard W. Stevenson
New York Times, April 23, 2003, Page A1
http://www.nytimes.com/2003/04/23/business/23GREE.html

These articles report on President Bush’s statement that he intends to reappoint Alan Greenspan as chairman of the Federal Reserve Board. Both articles include only a passing mention of the stock market bubble. The stock market bubble was the largest financial bubble in the history of the world. It would be difficult to imagine a more serious mistake for a central banker than to allow this sort of bubble to develop and grow.

Tens of millions of families lost much of their retirement savings because they placed their money into a hugely over-valued market. The 2001 recession and the subsequent period of slow growth are direct outcomes of the collapse of the bubble. The fact that President Bush would opt to reappoint a person whose tenure was marked by such a calamity deserved more attention. The negative effects of the collapse of the housing bubble and the dollar bubble, both of which Mr. Greenspan has also fostered, are likely to be comparable to the impact of the collapse of the stock market bubble.

At one point the Times article cites an assertion by Alan Greenspan that it is difficult to recognize financial bubbles. In fact, the over-valuation of the stock market in the late nineties was quite easy to recognize (e.g. “Too Much of the Bubbly on Wall Street,” [http://www.cepr.net/too_much_bubbly.htm] ). This should have been noted.

The Post article cites critics who blame Mr. Greenspan for not raising interest rates to deflate the stock market bubble. It is not clear that it would have been necessary to raise interest rates to deflate the bubble. When Mr. Greenspan made his famous “irrational exuberance” comment in 1996, the market quickly plunged. It bounced back when he subsequently backed away from this comment. If Mr. Greenspan had used his stature and his public platform to carefully explain why the market valuations of the late nineties did not make sense, it seems unlikely that the bubble would have grown to the extent it did.

The Post article also includes a reference to the “double taxation” of dividends. This is a term used by proponents of President Bush’s dividend tax cut. The use of this term is comparable to the use of the term “death tax” by people who propose eliminating the estate tax. Since corporations and individuals are legally separate entities, it is not accurate to assert that dividends are subject to double taxation.

Shaping Perceptions if Not the Economy
Adam Clymer
New York Times, April 25, 2003, Page A6
http://www.nytimes.com/2003/04/25/national/25TALK.html

This article discusses the factors that may have led President Bush to announce that he is reappointing Alan Greenspan as Federal Reserve Board chairman. At one point the article asserts that the administration and Congress cannot control the economy. While this is literally true – just as generals cannot literally control a war – they can have an enormous impact on the economy’s course in both the short and long-run.

In assessing the political merits of reappointing Greenspan, it would have been appropriate to note that it associates President Bush with the policies that led to the stock bubble. Had President Bush opted not to reappoint Greenspan, he could have (correctly) blamed most of the economy’s problems on the fallout from the collapse of a stock bubble that was allowed to grow to dangerous levels in the Clinton era. His decision to reappoint the person most directly responsible for allowing the growth of the bubble makes it much more difficult to do this.