Economic Reporting Review
By Dean Baker
August 4, 2003
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OUTSTANDING STORIES OF THE WEEK
Tide of China’s Migrants: Flowing to Boom, or Bust?
Erik Eckholm
New York Times, July 29, 2003, page A1
http://www.nytimes.com/2003/07/29/international/asia/29CHIN.html
This article discusses the experience of Chinese workers who migrate from rural areas to cities and towns that are experiencing more rapid economic growth. The article examines the working and living conditions that these workers experience.
Red Ink In
States Beginning To Hurt Economic Recovery
Louis Uchitelle
New York Times, July 28, 2003, page A1
http://query.nytimes.com/gst/abstract.html?res=F60A15F6355B0C7B8EDDAE0894DB404482
This article examines the extent to which tax increases and cutbacks in spending at the state and local level are currently a drag on economic growth.
U.S. to Vote on
Aid for Peruvian Gas Project
James V. Grimaldi
Washington Post, July 28, 2003, page
A17
http://www.washingtonpost.com/wp-dyn/articles/A54069-2003Jul27.html
______________________________________________________________________________
The Budget
The Amazing
Disappearing Tax Revenue
Jonathan Weisman
Washington Post, July 26, 2003,
page E1
http://www.washingtonpost.com/wp-dyn/articles/A48107-2003Jul25.html
This informative article reports on the fact that tax collections have declined considerably more rapidly over the last three years than can be explained by the Bush tax cuts. It notes several explanations that economists and budget analysts have put forward for this decline.
One factor that could both explain a portion of the falloff in revenue in the last three years, and may lead a larger shortfall in revenue in future years, is the growing net foreign indebtedness of the United States. As a result of the large trade deficit of the last three years, the net indebtedness of the United States increased from $784 billion at the end of 1999 to $2,387 billion at the end of 2002, an increase of $1,603 billion. If these foreign assets earn an average nominal return of 5 percent in 2003, this would imply $80 billion in capital income that is going to foreign asset holders, rather than to people living in the United States. If this income would have been taxed at an average rate of 30 percent, then the government will lose approximately $24 billion in revenue in 2003 due to the increase in the net foreign indebtedness of the United States over the prior three years.
The revenue shortfall resulting from increasing foreign indebtedness could be substantially larger in future years. In the first quarter of 2003, the current account deficit was equal to 5.1 percent of GDP. If it remains constant as share of GDP over the next decade, then the net foreign indebtedness of the United States will increase by approximately $7.9 trillion from 2002 to the end of 2013. Assuming that these foreign-owned assets provide an average nominal return of 5.0 percent (which implies a real return of 2.5 percent) and this income would have been taxed at an average rate of 30 percent, if it had gone to U.S. nationals, then the cumulative tax shortfall over the next ten years will be $640 billion compared to a situation in which net foreign indebtedness had stayed constant.
Since the impact
of increasing indebtedness is cumulative, it is considerably larger at the end
of the period than at the beginning. The projected revenue loss in the year 2013
due to the increase in foreign indebtedness would be $120 billion, slightly less
than 0.7 percent of projected GDP for the year.
Trade
U.N. Will Back Entrepreneurs In Bid to Lift Poor Nations
Felicity Barringer
New York Times, July 27, 2003, Page A5
http://query.nytimes.com/gst/abstract.html?res=F10F14FB3A5B0C748EDDAE0894DB404482
This article
reports on plans put forward by a United Nations development commission to
promote entrepreneurship in developing nations. Near the end, the article
presents a quote from former Mexican president Ernesto Zedillo, the co-chairman
of the commission, about the need of developing nations for free trade. The
article then mentions rich nation subsidies for agriculture and barriers to
textile imports as a source of friction. World Bank research indicates that the
efforts of rich nations to impose protection for patents and copyrights in
developing nations are likely to impose far greater costs on developing
countries than subsidies and/or trade barriers on agricultural goods and
textiles. [See "The Relative Impact of Trade Liberalization on
Developing Countries" http://cepr.net/Will_Trade_Make_Developing_Countries_Rich-FINAL3.pdf
Re-importation of Prescription Drugs
House Approves
Drug Reimports
Jim VanderHei and Juliet Eilperin
Washington Post, July 26, 2003, page A1
http://www.washingtonpost.com/wp-dyn/articles/A48206-2003Jul25.html
House Passes
Drug Bill; Battle Is Likely in Senate
Sheryl Gay Stolberg
New York Times, July 26, 2003, Page
A11
http://query.nytimes.com/gst/abstract.html?res=F30E10F73B5B0C758EDDAE0894DB404482
These article discuss the House of Representatives' vote to allow the importation of prescription drugs from other industrialized nations. Both articles include assertions that drug prices are lower in other industrialized countries because they are subject to government price controls. It would be equally accurate to point out that drug prices are higher in the United States because the government grants an unrestricted patent monopoly, allowing drug companies to charge as much as they like, without threat of competition, for the duration of the patent.
The Post article asserts that many senators, as well as the House Republican leadership, “share a concern” about the safety of imported drugs. While these politicians have given safety concerns as a reason to oppose this measure, it is not clear that this is their true motivation. The quality of drug regulation in other industrialized countries is comparable to that of the Food and Drug Administration in the United States. While there are possibilities for tampering, these exist within the United States. Furthermore, the best way to promote counterfeiting of drugs is to maintain the artificially high drug prices currently being charged in the United States.
Politicians
often do not act based on their stated motives. The drug industry is a powerful
political backer of many members of Congress. It is generally more acceptable to
claim to be opposing a bill out of a concern for the public interest (e.g. drug
safety) than to admit to serving the special interest of a political supporter.
Medicare Drug Benefit
Medicare Talks
Moving Slowly
Amy Goldstein
Washington Post, July 27, 2003, page
A1
http://www.washingtonpost.com/wp-dyn/articles/A51464-2003Jul26.html
This article discusses efforts by a conference committee to resolve differences between the Medicare prescription drug bills passed in the House and the Senate. At one point the article asserts that there are deep differences over “whether the program should largely remain as a government-run entitlement or whether it should rely mainly on market competition.”
This is not the
difference between the two bills. The House bill includes a mechanism under
which private insurers could receive the same amount of money per person to
provide care for the healthiest Medicare beneficiaries as the traditional
program would receive to provide care to less healthy beneficiaries. This
structure of competition would strongly favor private insurers at the expense of
the traditional program and the quality of care provided to beneficiaries. There
is already market competition in the current Medicare program. The difference
between the current arrangement and the House bill is that the current system is
not so deliberately skewed to favor private insurers.
Trade and the Economy
Enhancing
Education, Not Protecting Beleaguered Industries, Will Help the Economy, Experts
Say
Daniel Altman
New York Times, July 28, 2003, Page C3
http://query.nytimes.com/gst/abstract.html?res=FB0F10FC355B0C7B8EDDAE0894DB404482
This article discusses the problems facing workers who lose their jobs as a result of foreign competition. At one point it comments that imposing trade barriers to protect domestic jobs will “probably bring outrage from consumers and from the many businesses that depend on cheaper raw materials from abroad.” At present, the United States is running a current account deficit of $550 billion a year, approximately 5.1 percent of GDP. Economists recognize that a deficit of this size cannot be sustained for long. The only plausible way that it can be corrected is if the dollar falls – which will raise the price of imported goods. At that point, consumers and businesses may be unhappy, but they will have no choice except to pay higher prices. Higher prices for imported goods are inevitable, regardless of whether they are brought on by protectionist measures or by a falling dollar.
The article also reports that several economists have argued for a system of insurance, whereby workers who lose their jobs due to trade will be reimbursed by the government for a portion of any wage loss that results from taking a new job at lower pay. It is worth noting that this would only help a small fraction of the workers who are hurt by trade. Most of the negative impact on workers occurs as a result of the depression of wages in general for workers without college degrees (about three quarters of the work force). This proposal would only help the small subset of this group who can show that they directly lost a job as a result of import competition.
It is worth noting that the reason that less educated workers in the U.S. tend to be hurt disproportionately by trade is that highly educated workers have more power to impose protectionist barriers. For example, in 1997 doctors in the United States successfully lobbied the government to tighten restrictions on the number of foreign residents who enter the country to practice medicine. As a result of this change, the number of foreign residents was cut in half (“Fewer Foreign Doctors Seek U.S. Training,” Washington Post, September 4, 2002, Page A7; “Test Tied to Slip in Foreign Applicants for Medical Residences,” New York Times, September 4, 2002, page A19; and "Caught in the Middle," Washington Post, March 19, 1996, Health Section, page 10).
Copyrights in the Internet Age
Subpoenas Sent
to File-Sharers Prompt Anger and Remorse
Amy Harmon
New York Times, July 28, 2003, Page C1
http://query.nytimes.com/gst/abstract.html?res=F60912FA355B0C7B8EDDAE0894DB404482
This article reports on plans by the entertainment industry to use increased levels of coercion and surveillance in order to scare people into respecting their copyrights. The article assumes that it will be possible to get courts to enforce the harsh penalties for copyright infringement that the entertainment industry seeks to impose. This may not prove accurate. Virtually any jury will include at least one or two people who have made unauthorized reproductions of copyrighted material. It is not clear that these people will be persuaded to impose harsh penalties on others who engage in the same activity.
It would also be
appropriate to include some economic analysis of this plan. As the recording
industry turns to harsher repression, the inefficiencies associated with
copyright protection grow ever larger. By comparison, the much smaller levels of
inefficiency associated with protection of steel, textiles, and other items have
been a frequent topic in news stories.
Health Care Reform
Edwards Advances
Health Insurance Plan in N.H.
Jim VanderHei
Washington Post, July 29, 2003, page A3
http://www.washingtonpost.com/wp-dyn/articles/A58859-2003Jul28.html
This article reports on a new health care proposal being put forward by Senator John Edwards and contrasts it with some of the proposals for health care reform put forward by other presidential candidates. The basis for the discussion is almost exclusively the cost to the federal government. The article does not include any discussion of the impact of the proposals on either the quality of health care or the cost of health care to the private sector. These factors are likely to have far more consequences for the vast majority of people in the country than the cost of the proposals to the federal government.
The article also neglects to mention the universal Medicare proposal being forward by Representative Dennis Kucinch, one of the announced candidates for the Democratic presidential nomination. Unlike the other proposals, the Kucinch proposal is modeled on existing health care systems that have been tested, specifically the health care systems in Canada and several other developed nations, and the traditional Medicare system for the elderly in the United States. The evidence shows that this system provides better care than the fragmented system currently in place in the United States, and also costs far less.