Economic
Reporting Review
By Dean Baker
February 9, 2004
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Outstanding Stories of the Week
The 2005 Budget
Washington Post, January 31, 2004, Page A4
This chart illustrates the share of federal revenue from each tax and the share of spending by major category. This gives readers a clearer sense of the importance of various items in the budget. For example, the chart notes that the $1.8 billion in spending on energy is "too small to represent." Items that are even less important in the budget, for example spending on the National Endowment for the Arts, which is less than one-tenth as large as spending on energy, have occasionally provided the basis for articles on the budget ("Bush Is Said to Seek More Money for Arts," New York Times, January 29, 2004, Page A22 article).
Making Drugs, Shaping the Rules
Melody Petersen
New York Times, February 1, 2004, Section 1 Page 1
This article reports on the efforts of drug companies to promote their products by influencing state Medicaid rules on drug procurement.
New Math Aside, Earnings Still Reign
Gretchen Morgenson
New York Times, February 1, 2004, Section 1 Page 1
This article discusses a study by David Bianco, an analyst at UBS, which found that companies that reported one-time charges to raise their reported earnings were more likely to have one-time charges in the future.
Drug Discount for Elderly May Confuse as Well as Help
Milt Freudenheim
New York Times, February 6, 2004, Page C1
This article discusses the proliferation of Medicare drug discount cards that are being issued by insurers and pharmacies. It notes that it may be difficult for many seniors to intelligently evaluate the benefits of the various options, especially since this is a population that often has limited mobility, poor eyesight, and in some cases is afflicted with dementia.
The Economy
Growth Again, but Slower
Nell Henderson
Washington Post, January 31, 2004, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A64693-2004Jan30.html
Economy Remained Strong in 4th Quarter, U.S. Says
Edmund L. Andrews
New York Times, January 2631, 2004, Page CA1
http://www.cepr.net/Economic_Reporting_Review/nytimesarticles/economyremainedstrong.htm
Debt-Heavy Economy May Be Too Jittery About Rates
Eduardo Porter
New York Times, January 31, 2004, Page B1
http://www.cepr.net/Economic_Reporting_Review/nytimesarticles/debtheavyeconomy.htm
These articles report on the economy’s near-term prospects in the wake of the release of new government data on fourth quarter GDP and debt burdens. None of the articles noted that the savings rate out of disposable income reported for the fourth quarter was 1.5 percent, the second lowest quarterly savings rate on record.
This is important, because such a low savings rate implies extremely high levels of consumer borrowing, which are unlikely to be sustained. During the sixties, seventies, and eighties, savings out of disposable income averaged more than 8 percent. The low savings rate of recent quarters is especially striking because the demographics of the labor force, with the bulk of the baby boomers in their peak savings years, should be leading to a higher than normal savings rate.
If the savings rate moved toward a more normal level – for example if it rose to 4.0 percent by the fourth quarter of next year (still a historically low savings rate) – real income would have to grow by 2.6 percent just to leave consumption steady. In order for consumption to maintain a modest 3.0 percent rate of growth over this period, real personal income would have to rise by 5.7 percent, a rate that is 3.2 percentage points faster than its growth rate over the last year. In other words, the low current savings rate implies that consumption growth is likely to be much weaker (and possibly negative) in the future, as the savings rate moves towards a more sustainable level.
The Post article noted that investment spending on equipment and software grew at a 10 percent annual rate in the fourth quarter, which it described as "strong." In the event that consumption spending slows, the economy will need far more rapid growth in this sector to sustain a healthy overall growth pace. Consumption spending accounts for approximately 70 percent of GDP, while equipment and software spending accounts for less than 8 percent of GDP. Furthermore, close to half the spending on equipment and software goes to buying imported goods, and therefore provides no direct boost to the U.S. economy. Given the relative size of the two sectors, if the growth in consumption spending falls by 1.0 percentage point, the growth in spending on equipment and software will have to increase by approximately 17 percentage points to compensate. This means that, given the likely weakness of future consumption growth, investment spending of the size that we have been seeing will not be fast enough to sustain the pace of GDP growth over the last year.
The article by Andrews also raised the possibility that restocking of inventories will lead to more rapid growth in the future. While the pace of inventory restocking is likely to be faster in future quarters than it was in the fourth quarter, the impact on GDP growth would be limited. A large percentage of the goods kept in inventories are imported. This means that more rapid growth in inventories will be associated with an increase in imports, and therefore the impact on domestic GDP will be considerably smaller than would otherwise be implied by a more rapid rate of inventory accumulation.
The Post article discusses the prospect that households will receive big tax refunds this spring, which it suggests will help to sustain consumption. Actually, it is unlikely that refunds will be much higher this year than last year. While tax rates were lowered in the middle of the year, which means that many taxpayers overpaid in the first half of the year and therefore should be entitled to large refunds, this is likely to be offset by the rising stock market. With the large rise in the stock market in 2003, taxpayers are likely to have substantial capital gains tax liability for the first time since 2001. In that year, the government collected $100 billion in capital gains taxes (down from $119 billion in 2000). This compares to capital gains tax receipts of just $45 billion in 2003. If capital gains tax collections were raised just halfway back to their 2000 level, it will almost completely offset the refunds attributable to the tax cut.
In assessing the near-term prospects for the future of the economy and the implications of the large consumer debt burden, the article by Porter comments that "most economists are quite sanguine" about the risks posed by high consumer debt levels. It is worth noting that nearly all economists were quite sanguine about the risks posed by the stock bubble in the late nineties, and that virtually all of them failed to foresee the stock market crash and the onset of the recession of 2001. In September of 2000, the average 2001 growth forecast of the Blue Chip top fifty economic forecasters was 3.5 percent. Not one of the Blue Chip fifty predicted a recession – the lowest growth forecast among the group 2.8 percent. (Actual growth for 2001 was 0.0 percent.)
Medicare
Higher Medicare Costs Suspected for Months
Amy Goldstein
Washington Post, January 31, 2004, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A64627-2004Jan30.html
Bush Says He’ll Press Ahead On Deficit Despite Drug Costs
Richard W. Stevenson
New York Times, January 31, 2004, Page A7
http://www.cepr.net/Economic_Reporting_Review/nytimesarticles/bushsays.htm
These articles report on a new projection from the Office of Management and Budget (OMB) that the Medicare prescription drug benefit will cost $134 billion more over the next decade than had previously been projected. This difference is equal to approximately 0.45 percent of projected spending over this period. It would be helpful to express this amount as a share of total spending, since few readers would otherwise be able to determine the consequences of this projected increase in spending.
It is worth noting that, according to the Post article, one reason that OMB raised its projections for the cost of the program is that it assumed that more people would opt to select private insurers in place of the traditional Medicare plan, than had been the case in earlier projections. The fact the Bush Administration’s Office of Management and Budget believes that increasing the role of the private sector raises Medicare’s costs should have been a central point in this article, rather than an item mentioned in passing in the last paragraph.
Insurers Plan Broader Medicare Coverage
Robert Pear
New York Times, February 4, 2004, Page A17
This article discusses the response of the insurance industry to the Bush administration’s plan to raise Medicare payments to private insurance companies by 10.6 percent this year. At one point when referring to Republican efforts to increase enrollments in private insurers, the article asserts that Republicans see private insurers "as more efficient than the traditional Medicare program."
While Republicans actively support private insurers at the expense of the traditional Medicare program, it is not clear that they really believe that private insurers are more efficient. The evidence to date suggests that the private plans have increased costs to Medicare (see "Medicare + Choice: Payments Exceed Cost of Fee-for-Service Benefits, Adding Billions to Spending," General Accounting Office, August, 2000). The fact that the administration proposes a large increase in compensation of private plans – when they already get more per person than the traditional plan – means that the cost of providing care through private plans will rise even further, relative to the cost of the traditional program.
It is possible that Republicans believe that private insurers are more efficient than the traditional Medicare program, in spite of the evidence to the contrary, but it is also possible that this is not the motivation for their actions. The Republican Party receives a large amount of campaign contributions from the insurance industry. It is possible that they are motivated more by the desire to serve powerful political backers, rather than a desire to reduce costs for Medicare.
The Budget
Anti-Terrorism Efforts Key in Budget, Bush Says
Mike Allen
Washington Post, February 1, 2004, Page A10
http://www.washingtonpost.com/wp-dyn/articles/A1859-2004Jan31.html
Bush to Back Off Some Initiatives For Budget Plan
Robert Pear and Edmund L. Andrews
New York Times, February 1, 2004, Page A1
These articles discuss President Bush’s plans for the 2005 budget. The articles express spending and deficit amounts in dollar terms. It would be helpful to readers if these items were expressed as shares of the budget or shares of GDP. Both articles also report President Bush’s plan to hold non-defense discretionary spending (e.g. spending on education, the environment, transportation) to an increase of 1.0 percent. It is worth noting that, due to inflation and economic growth, it would require an increase in spending of approximately 3.0 percent to maintain current service levels in these areas. Therefore, President Bush’s plan amounts to a cut of approximately 2 percent in this category of spending.
The Times article also comments that President Bush is apparently backing off a plan that would create a new set of tax-sheltered savings accounts. The article says that these new accounts "would eventually allow people to shelter most of their investment income from taxes." Actually existing tax sheltered accounts, such as 401(k)s and IRAs already allow the vast majority of workers to shelter all of their investment income from taxes. Only a tiny segment of mostly wealthy people (less than five percent) hit the allowable ceilings in these accounts. This is the only group that would benefit from allowing more investment income to be sheltered from taxation.
Deficit Spurs GOP to Trim Energy Bill
Dan Morgan and Juliet Eilperin
Washington Post, February 4, 2004, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A10955-2004Feb3.html
This article reports on the congressional debate over a new energy bill. The article refers to "$24 billion in tax breaks and $7 billion in other incentives" that had been included in the most recent version of the bill. It is important to note that these are ten--year totals. This fact would be more apparent if the numbers were expressed as a share of total spending.
Trade
Global Trade Issues Hit Home
Jonathan Weisman
Washington Post, February 2, 2004, Page A7
http://www.washingtonpost.com/wp-dyn/articles/A4124-2004Feb1.html
This article discusses the impact of trade policy on the current political environment. At one point it refers to the trade policy of the Clinton era as "free-trade." This is inaccurate. The Clinton administration pursued many openly protectionist policies, most prominently increasing the extent of patent and copyright protection. These forms of protectionism create economic distortions that are equivalent to imposing tariffs of 400 to 500 percent on the affected products.
The Clinton administration also supported tighter restrictions on the number of foreign doctors who can enter the United States in order to protect the salaries of American doctors. The cost of this measure to consumers is approximately one hundred times as large as standard estimates of the cost of President Bush’s tariffs on imported steel.