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Outstanding Stories of the Week

Antidepressant Use in Children Soars Despite Efficacy Doubts
Shankar Vedantam
Washington Post, April 18, 2004, Page A1

This article reports on studies showing a sharp rise in the use of antidepressant drugs on children. The article also points out that the evidence of the effectiveness of these drugs is questionable. It notes that most of the studies that examine this issue have been carried through by pharmaceutical companies. The data produced by the studies are therefore proprietary and the companies have refused to make it publicly available. This is exactly the sort of abuse that economic theory predicts would result from government granted patent monopolies.


As Wealthy Fill Top Colleges, Concerns Grow Over Fairness
David Leonhardt
New York Times, April 22, 2004, Page A1

This article examines the composition of the student bodies at elite schools. It reports that a growing percentage of these students are coming from the richest quintile of families. This trend appears to be the result of both rising tuition and also the increased levels of preparation that the richest families are able to provide for their children.


NAFTA

NAFTA Tribunals Stir U.S. Worries
Adam Liptak
New York Times, April 18, 2004, Page A1


This article reports on one of the provisions of the NAFTA pact (chapter 11), which provides for reviews by secret tribunals of court cases relevant to cross border investment by the three member countries. These tribunals can provide damages require a state to pay damages if it finds a state law to be in violation of NAFTA. The tribunals can also over-rule decisions by state and federal courts.

The article quotes supporters of NAFTA as saying that they did not understand the meaning of this chapter 11. While it is possible that the senators and representatives who voted for NAFTA really didn't know what they were voting for, it is also possible that they did know what was in the agreement and opted to vote for it anyhow. These politicians may currently be misrepresenting their prior position because the provisions in chapter 11 have recently become an important political issue. It would have been appropriate to include the views of someone arguing for this position.

China

Looking for a Villain, and Finding One in China
Eduardo Porter
New York Times, April 18, 2004, Section 4, Page 3

This article discusses China's impact on the U.S. and world economy. At one point it refers to a projection in a Goldman Sachs study that China's economy will grow larger than the U.S. economy in 2041. This projection is based on currency conversions. Economists more typically compare countries using purchasing power parity measures of GDP. (Purchasing power parity measures output across countries as if goods and services sold at the same price everywhere in the world.)

The projections in the Goldman Sachs study show that the Chinese economy will be larger than the U.S. economy on a purchasing power parity basis by 2015. For many purposes, such as China's ability to export, its impact on world demand for raw materials, and its potential military power, purchasing power parity is clearly the more appropriate measure of an economy's size.


The World Bank

A World Bank Mission To Bring Help to the Poor
Elizabeth Becker
New York Times, April 22, 2004, Page W1

This article discusses James Wolfensohn's tenure as president of the World Bank. At one point it refers to the progress that has been made in reducing illiteracy and poverty over the last twenty years. Typically, poverty and illiteracy would be expected to fall through time, as technology improves and the world becomes wealthier. The more important question is the rate at which poverty and illiteracy decline. By this measure, the last two decades have been a relatively bad period, with the vast majority of the countries in the world experiencing less progress in the period from 1980 to 2000 (see "The Scorecard on Globalization 19802-2000: Twenty Years of Diminished Progress").

The major exceptions are India and China, which have seen a better performance over this period than in the prior twenty years. However, the improvement in measures such as literacy rates and health care outcome has not been not been very large given the extraordinary economic performance of these countries during this period. It is also worth noting that neither country followed closely the "Washington Consensus" model that the World Bank has promoted. They both have had very large state sectors, high import barriers through most of this period, and capital controls.

This article also includes an assertion that rich country governments spend $300 billion annually supporting their farmers. This is not true. According to the OECD, the amount of annual subsidies from rich country governments is approximately $80 billion. The article provides no source for this $300 billion figure.


Peacekeeping Forces

Bush Plans Aid to Build Peace Forces
Bradley Graham
Washington Post, April 19, 2004, Page A1

This article discusses a plan to appropriate $660 million over the next five years to train and equip foreign peacekeeping forces. This sum is equal to approximately 0.005 percent of projected government spending over this period. It is equal to approximately 0.03 percent of projected military spending over this period. It would have been useful to place this spending in some context since few readers have a clear sense of the importance of $660 million in spending over the next five years. Given the relatively small amount of money involved, it is questionable whether this item merited a front page story.


Stock Options

Battle Over Options Escalates
Carrie Johnson
Washington Post, April 21, 2004, Page E3

This article discusses testimony before a Senate Committee on a new accounting rule that would require that stock options be listed as an expense against profits. The article reports several assertions by representatives of the tech industry that this rule would make stock options more expensive and would lower profits.

This is inaccurate. The rule does not raise the cost of stock options at all. It only affects the way in which they are reported on financial statements. This change in reporting would have no effect whatsoever on tech companies, unless shareholders are currently being deceived about the value of the options that these companies are issuing.


Overtime Pay

Plan Expands Eligibility for Overtime Pay
Kirstin Downey
Washington Post, April 20, 2004, Page A1

This article discusses the debate over changing rules governing eligibility for overtime pay. The article notes the findings of research by the Economic Policy Institute (EPI), that shows the new rules would deny eligibility to 8 million workers. It contrasts this finding with the Labor Department's estimate that approximately 1 million workers would be affected by the new rules.

These estimates are actually not inconsistent. The EPI numbers refer to the number of workers who would no longer be covered by current overtime rules - regardless of whether or not they are currently working overtime. The Labor Department's estimate refers to the number of people who currently work overtime, who would no longer be protected after the rules change. This number of workers would certainly increase beyond the current 1 million after the rules change - the whole point of the change is to make it easier for employers to require workers to work overtime - although it will certainly not grow to the full 8 million who will no longer protected by overtime rules after this change.

Deflation

Greenspan Gives Upbeat Report To Congress
Nell Henderson
Washington Post, April 21, 2004, Page E1

This article discusses comments by Alan Greenspan on the current state of the economy. At one point it asserts that members of the Federal Reserve Board's open market committee are divided about whether the economy faces a greater threat from falling prices or rising prices.

It is not clear that this is actually the case. Members of the open market committee have made such statements publicly, but their public comments do not necessarily reflect their actual beliefs on the economy. Prices at all levels of production have been rising at considerably faster pace over the last three months than they had in 2002 or 2003. The consumer price index (CPI) has risen at a 5.1 percent annual rate over this period. The finished goods index in the producer price index has also risen at a 5.1 percent annual rate over the last quarter, while the intermediate goods index has risen at a 10.1 percent annual rate.

While some of this price rise has been due to unusually large price energy price increases, even the core indexes, which exclude food and energy prices, are showing more rapid inflation. The core CPI index rose at a 2.9 percent annual rate over the last quarter, while the core finished goods index rose at a 2.1 percent annual rate. The core intermediate goods index rose at an 8.9 percent annual rate. It is also important to note that higher energy prices are largely attributable to the decline in the dollar. This is not likely to be reversed, since it is unlikely that the dollar will again rise to the levels of 2000-2002.

Given substantial evidence of rising prices, and no real evidence of falling prices anywhere, it is questionable whether members of open market committee really view the threats of inflation and deflation as being equally likely. It is possible that the committee would claim that the threats of inflation and deflation are equally likely, even if they do not believe this to be true, in order to influence financial markets. Their statements about the possibility of deflation, even if they do not believe them, could help reduce the markets fears about future inflation and interest rate hikes. This could help keep long-term interest rates lower than they would otherwise be. In other words, if the Fed wants to keep long-term interest rates down, they may claim to be concerned about deflation, even if they don't really view deflation as a possibility.


Trade

Lowered Expectations
Paul Blustein
Washington Post, April 23, 2004, Page E1

This article examines the record of Trade Representative Robert Zoellick in arranging new trade agreements during his tenure. The article repeatedly refers to the agreements being negotiated as "free-trade" agreements saying in the first paragraph that the goal was to "knock down trade barriers at home and abroad."

This is not true. While the trade agreements being negotiated by Zoellick do provide for the reduction in the size of some barriers, they also provide for increases in the size of other barriers, most importantly by extending patent and copyright protection. This is especially important in this round of trade negotiations, because tariff barriers were already quite low with some of the countries that have been parties to recent negotiations, such as Singapore and Australia. In these cases, the added restrictions that are included in these agreements are likely to be of far more consequence than any further reductions in trade barriers. These restrictions have also been major points of contention in the negotiations. For example, in Australia, the possibility that a U.S. trade pact will lead to greater protection for pharmaceutical patents, and therefore high drug prices, has been a major political issue. It is therefore inaccurate to describe the pacts being discussed as "free-trade" agreements and to say that the goal is to reduce trade barriers.

At one point the article refers to concerns that countries have about losing privileged access to "the giant U.S. market." It is not clear that this would be a real basis for concern. The U.S. import market is virtually certain to shrink substantially over the next decade. Therefore, countries will only be able to increase their export volume to the U.S. by undercutting current exporters, such China or Mexico (see "Fool's Gold: Projections of the U.S. Import Market").