Economic Reporting Review
By Dean Baker
August 11, 2003

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OUTSTANDING STORIES OF THE WEEK

Fannie Mae’s Loss Risk Is Larger, Computer Model Shows
Alex Berenson
New York Times, August 7, 2003, page C1
http://www.nytimes.com/2003/08/07/business/07LEND.html

            This article reports on the possibility that Fannie Mae’s hedging practices may have caused it to lose as much as half of its net capital during the recent run-up in interest rates. This raises the possibility that the institution could be put in financial jeopardy by a further rise in interest rates and/or a significant increase in mortgage defaults.

 

Debate Resumes on the Safety Of Depression's Wonder Drugs
Gardiner Harris
New York Times, August 7, 2003, page A1
http://www.nytimes.com/2003/08/07/health/07DEPR.html
 

            This article reports on evidence that the new generation of anti-depressants both pose safety risks and may not be effective in combating depression. The article also documents efforts by the pharmaceutical industry to suppress this evidence. This sort of behavior by the pharmaceutical industry is a predictable outcome of a government imposed patent monopoly, which allows firms to earn extraordinary profits.  

 

A Fight for Free Access To Medical Research
Rick Weiss
Washington Post, August 5, 2003, page A1
http://www.washingtonpost.com/wp-dyn/articles/A19104-2003Aug4.html

            This article reports on efforts to ensure that new medical research is quickly placed on-line and is available to the general public at no cost. Private for-profit publishers are desperately fighting the spread of freely available research.

 

While in Rust Belt, Industrial Plight
Jonathan Weisman
Washington Post, August 2, 2003, page A8
http://www.washingtonpost.com/wp-dyn/articles/A13561-2003Aug1.html

            This article reports on the economic situation facing the nation’s manufacturing areas and how the sharp job loss in the last two years is affecting political attitudes.

 

July Employment Report

Jobless Rate Drops, but So Do Payrolls
John M. Berry
Washington Post, August 2, 2003, page E11
http://www.washingtonpost.com/wp-dyn/articles/A13503-2003Aug1.html

Job Losses in July Add To Mixed Signs On The Economy
Daniel Altman
New York Times, August 2, 2003, page A1
http://query.nytimes.com/gst/abstract.html?res=F70C11FD385A0C718CDDA10894DB404482

            These articles discuss the release of Labor Department’s July employment report. At one point the Times article notes that the jobs in the temporary help industry reportedly increased by 41,000 in July. It then cites an analyst who suggested that this could be a sign that firms will begin to increase hiring of permanent employees in the near future. It is worth noting that temporary employment was originally reported as increasing by 142,000 between February and June of 2002 (this gain was revised downward to 75,000 after the benchmark revision in May), without leading to any subsequent upturn in employment.

            At one point, the Post article notes the poor employment performance of the economy in the recovery thus far, which it attributes to “unusually big gains in productivity.” Actually, productivity growth in this recovery has not been very different from that during past recoveries. The table below shows the average rate of productivity growth in the current recovery and the prior five recoveries, for the non-farm business sector, during the first seven quarters of each recovery.

2001:3 -- 03:2 – 4.5%
1991:1 -- 92:4 – 3.7%
1982:3 -- 84:2 – 3.8%
1975:4 -- 77:3 – 3.0%
1970:4 -- 72:3 – 4.3%
1960:4 -- 62:3 – 5.4%  

            While the 4.5 percent rate of productivity growth in the current recovery is somewhat more rapid than the 4.0 percent average of the prior five, the difference is not large enough to explain the huge difference in employment growth. In the past, rapid productivity growth did not seem to impede employment growth. For example, the 4.3 percent rate of productivity growth following the 1970 recession did not keep the economy from creating 4.5 million jobs between November 1970 and November 1972. 

            The Post concludes by noting that the reported unemployment rate for blacks and Hispanics declined by 0.7 and 0.2 percentage points, respectively. It is worth noting that the percentage of people counted as in the labor force (either working or unemployed) fell by 0.7 percentage points for both blacks and Hispanics, meaning that large numbers from both groups gave up looking for work altogether in July.

Medicare Prescription Drug Benefit

Possible Voter Backlash Feared on Drug Benefit Measure
Helen Dewar
Washington Post, August 3, 2003, page A9
http://www.washingtonpost.com/wp-dyn/articles/A15169-2003Aug2.html

            This article reports on evidence that a prescription drug bill similar to the ones recently approved by the House and Senate could prove politically unpopular in the 2004 election. The article notes that many seniors view the benefits provided in these bills as grossly inadequate.

            Immediately after the passage of these bills, both the Times and the Post ran numerous articles asserting that the approval of a prescription drug benefit would be a big political plus for President Bush and the Republicans (e.g. “Medicare Drug Plan Could Be Painful for Democrats,” Washington Post, June 21, 2003, Page A6; “GOP Aims for Dominance in ’04 Race,” Washington Post, June 22, 2003, Page A1; “GOP May Get a Boost With Seniors,” Washington Post, June 28, 2003, Page A1; “G.O.P. Steals Thunder,” New York Times, June 28, 2003, page A1; and “Bush Touts Medicare Expansion,” Washington Post, July 1, 2003, Page A4). It would have been appropriate to have done more research about public attitudes toward these bills before asserting that their passage would help Republicans.

 

The Economy

Fed Expected to Leave Rates Alone
John M. Berry
Washington Post, August 8, 2003, page E1
http://www.washingtonpost.com/wp-dyn/articles/A31385-2003Aug7.html

            This article discusses the prospects for future interest rate changes by the Federal Reserve Board. At one point the article warns that “the closer to zero that inflation falls, the greater the danger that a shock of some sort …. could put the economy into a tailspin. A broad decline in the level of prices, known as deflation, could do significant damage to the economy and greatly reduce the Fed’s ability to use monetary policy to give it a boost.”

            This is inaccurate. There is no particular importance to the rate of inflation turning negative. The overall rate of inflation is simply an aggregate of hundreds of thousands of price changes for various goods and services. At any point in time some of these prices are rising and some are falling. If the rate of inflation goes from a small positive rate to a small negative rate it simply means that either more items have falling prices, or that the declining prices are falling more rapidly. While a lower rate of inflation can pose problems, for example it raises real interest rates, there is virtually no difference to the economy between a situation in which the overall rate of inflation declines from 1.5 percent point to 0.5 percent, and a situation in which the overall rate of inflation declines from positive 0.5 percent to deflation of 0.5 percent.

            The Fed can lose its ability to affect interest rates with monetary policy even if inflation stays positive. For example, long-term interest rates have risen by more than a full percentage point in the last six weeks, even though the Fed has not changed its short-term rate. It is not clear that further reductions in the short-term rate would be effective in lowering the long-term rate at this point.

 

Bush Takes Credit For Recovery Signs
Mike Allen
Washington Post, August 2, 2003, page A2
http://www.washingtonpost.com/wp-dyn/articles/A13448-2003Aug1.html

            This article reports on President Bush’s efforts to take credit for what he claims are signs of an economic recovery. It is far from clear that the economy is on a path towards an economic recovery. For example, the most recent employment report showed that the economy is continuing to lose jobs at a rapid rate and that a large number of unemployed workers are now giving up their efforts to find jobs. Since it is only a claim of President Bush that the economy is recovering, and not an established fact, it would have been appropriate to put the phrase “recovery signs” in quotes.

            The article also reports an assertion from President Bush that the recession in 2001 was the mildest in the post-war period, which he attributed to his tax cuts. It would have been appropriate to note that the last 29 months has been the most prolonged period of job loss in the post-war era. “Recession” has a technical definition that is not widely known, except among economists. The technical length and severity of a recession is likely to matter little to most people. The fact that the economy has lost 2,690,000 jobs since February of 2001 has far more impact on people’s lives.  


Contracting Out Government Work

VA Outsourcing Stirs Continuing Controversy
Christopher Lee
Washington Post, August 3, 2003, page A11
http://www.washingtonpost.com/wp-dyn/articles/A15207-2003Aug2.html

            This article reports on the Bush administration’s efforts to proceed with plans to contract out some of the work currently done by government employees in the Veteran’s Administration. At one point it asserts that “the driving principle behind Bush’s competitive sourcing initiative is the president’s belief that allowing private contractors to bid for more government work spurs efficiency and lowers costs.” The article does not indicate how it has determined that this is in fact something that President Bush actually believes and that it is the main motivation for his actions.

            Many of the private contractors that bid for government work have close political ties to the Bush administration. The unions that stand to lose jobs, if they are contracted out, disproportionately support Democrats. It is entirely possible that President Bush is promoting this bidding process as a way to help powerful political backers and to hurt political opponents. In the absence of any evidence to the contrary, this seems a better explanation for a politician’s behavior than his political philosophy.

 

Democrats and Tax Policy

For Edwards, Time to Play Catch-Up
Jim VanderHei
Washington Post, August 3, 2003, page A5
http://www.washingtonpost.com/wp-dyn/articles/A15214-2003Aug2.html  

            This article discusses Senator John Edwards' prospects in the race for the Democratic presidential nomination. At one point it refers to President Clinton’s “1993 economic stimulus plan, which increased taxes on the rich but reduced them on the middle class and the working poor. Many Democrats believe that balance is a key to economic growth.”

            Actually, President Clinton did not pass a stimulus package in 1993; it was a deficit reduction package. The stimulus component was defeated in a separate vote. This package did contain a tax cut for the working poor in the form of an increase in the earned income tax credit. It did not contain any tax cuts for people who would ordinarily be considered middle class. It also is not clear that any Democrats actually believe that tax cuts for the middle class are key to economic growth, although many may believe that professing to be in favor of  such cuts (as Clinton did) are important for winning political support.

 

Prescription Drug Prices

Panel Urges U.S. To Broaden Role In Vaccinations
Robert Pear
New York Times, August 5, 2003, page A1
http://www.nytimes.com/2003/08/05/politics/05VACC.html

            This article discusses a study of the problems of vaccine shortages in the United States. The study recommended that insurance companies be required to cover the costs of vaccines for their beneficiaries, and that the government provide subsidies to manufacturers for producing vaccines. At one point, the article quotes a section of the report that rejected a proposal that the federal government directly buy vaccines, on the grounds that “arbitrary government pricing would be devastating to vaccine research and development.”

            It is worth noting that if the government is setting subsidy levels, as this report suggests, and mandating that insurers cover the cost of certain vaccines, as this report also suggests, then it is effectively setting the price for vaccines by setting the level of demand.

            The difference between the method advocated by the report and the “arbitrary” method of directly setting the price, is the latter would presumably be done with greater reflection than the former, since there would at least be a recognition that the government was in fact setting the price.


Pfizer Moves to Stem Canadian Drug Imports
Gardiner Harris
New York Times, August 7, 2003, page C1
http://www.nytimes.com/2003/08/07/business/07DRUG.html

            This article discusses plans by Pfizer to cut sales of its drugs to wholesalers who sell allow their drugs to be imported into the United States. At one point the article comments that “the United States is the last industrialized country were drug manufacturers are allowed to set prices without government interference.” It is more accurate to say that the United States is the only country to give drug manufacturers unrestricted patent monopolies. While other countries also grant patent monopolies, they restrict firm’s pricing power during the period of monopoly. The U.S. system in fact involves more interference with the market – an unrestricted government- created monopoly – not less, as the article implies. 

 

Trade  

Gephardt Goes After AFL-CIO Endorsement
Dan Balz and Thomas B. Edsall
Washington Post, August 4, 2003, page A2
http://www.washingtonpost.com/wp-dyn/articles/A16857-2003Aug3.html  

Democrats Vie for Unions’ Support
Dan Balz
Washington Post, August 6, 2003, page A4
http://www.washingtonpost.com/wp-dyn/articles/A21539-2003Aug5.html

Democrats Largely Endorse Labor’s Views
Adam Nagourney
New York Times, August 6, 2003, page A14
http://www.nytimes.com/2003/08/06/politics/06LABO.html

            These articles discuss the Democratic presidential candidates efforts to win support from the AFL-CIO. All three include numerous references to the candidates’ positions on “free trade” or “protectionism” written from the standpoint that current trade policies amount to free trade.

            This is inaccurate since the United States has not pursued a free trade policy in its international trade agreements. It has consistently sought to increase protectionism in some areas, most obviously in the case of extending and strengthening patent and copyright protection. It has also not sought free trade in professional services. In the case of physicians’ services, the United States has actually increased the barriers that prevent foreign doctors from practicing in the United States as part of a deliberate effort to support doctors’ income (e.g. see “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; "Caught in the Middle," Washington Post, March 19, 1996, Health Section, page 10; "A.M.A. and Colleges Assert There is a Surfeit of Doctors," New York Times, March 1, 1997, page A7 and "U.S. to Pay Hospitals Not to Train Doctors, Easing Glut," New York Times, February 15, 1997, page A1).

            While U.S. trade policy has been directed towards reducing barriers in a way that puts many blue-collar workers in competition with low paid workers in developing nations, no administration has pursued free trade as a general policy.

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