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Outstanding Stories of the Week

Web Still Helps the Medicine Go Down
Bill Brubaker
Washington Post, April 30, 2004, Page E1

Web Site Shows Variation in Drug Prices
Robert Pear and Milt Freudenheim
New York Times, April 30, 2004, Page A16

These articles report on the large variation in drug prices that can be found on a new government sponsored web site. The articles report that, in some cases, prices varied by more than 100 percent for the same drug in the same store, depending on the Medicare discount card a patient used. In general, the articles found very large price differences for the same drug among stores in the same market.


Immigration and Aging Populations

Immigration Matters Raise New Concerns for Czech Republic
Ian Fisher
New York Times, April 25, 2004, Page A4

This article discusses the demographic situations facing the countries of central and eastern Europe, some which are about to be admitted to the European Union, while some will still remain outside the Union. The article asserts that most of these countries "face the same kind of demographic crisis as their European Union counterparts in the west - populations that are both aging and declining as people have fewer babies." Later it refers to the "problem of a shrinking population."

The article does not indicate why it describes this situation as a crisis. These countries have been experiencing a rising ratio of retirees to workers for the last century, as well as a declining birth rate. This pattern has been associated with rapid improvements in living standards over the past hundred years, and standard economic theory predicts that this will continue to be the case in the future. Countries can sustain a higher ratio of retirees to workers because they have continually rising productivity. Higher productivity typically translates into higher before tax wages, which means that workers can have higher after-tax wages, even if they pay a higher tax rate to cover benefits for retirees.

In fact, productivity growth is likely to rise even more rapidly if labor becomes scarce due to retirees not being replaced by new workers. This will lead to a situation in which the least productive jobs (e.g. the midnight shift at a convenience store or parking valets at restaurants) go unfilled. The loss of these low productivity jobs will raise the average level of labor productivity and the average wage in the economy.

In this vein, the article inaccurately asserts that immigrants take jobs "like cleaning, construction and restaurant work" that the native born population does not want. The decision to work at these jobs depends on the pay they offer. If it is possible to fill these jobs with immigrant workers who will accept very low wages, then the jobs will offer wages that may be too low to make them acceptable to the native population. However, if immigrant workers were not available, then these jobs would offer higher wages and the native work force would be willing to take them.

It is also worth noting that the cost of supporting retirees is not projected to rise nearly as rapidly in Europe as in the United States. In the United States, the large baby boom cohort will be retiring in large numbers over the next two decades. European nations have no comparable demographic bulge. Also, unlike the United States, the government provides health care to people of all ages in Europe. This means that there is no big jump in public health care expenditures when people suddenly reach retirement age.

The article also describes a shrinking population as a problem. According to standard economic theory, a shrinking population will typically be associated with higher per person wealth, since it will reduce the strain on natural resources and the amount of pollution. The article gives no explanation for its assertion that a shrinking population is a problem.


Trade

War on Peruvian Drugs Takes a Victim: U.S. Asparagus
Timothy Egan
New York Times, April 25, 2004, Page A14

This informative article reports on how efforts by the U.S. government to get Peruvian coca growers to switch to asparagus has hurt asparagus farmers in the United States. At one point the article refers to transition assistance programs that are designed to help people employed in industries that are harmed as a result of "free trade" agreements. The assistance is designed to help people affected by trade agreements, regardless of whether or not the agreements are associated with freer trade.


World Bank Meeting to Focus on Poverty
Elizabeth Becker
New York Times, April 24, 2004, Page B2

WTO Rules Against Cotton Subsidies
Paul Blustein
Washington Post, April 27, 2004, Page E1

Lawmakers Voice Doom and Gloom On W.T.O. Ruling
Elizabeth Becker
New York Times, April 28, 2004, Page C1

These articles both include assertions that rich country governments pay their farmers hundreds of billions annually in subsidies and support. This is not true. According to the OECD (the ostensible source for this figure), the amount of annual subsidies from rich country governments is approximately $90 billion. Most of the subsidies noted in these articles take the form of indirect benefits that farmers derive from government policies. By this measure, the pharmaceutical industry in the United States receives more than $160 billion annually, because the government gives it patent monopolies. Doctors receive more than $80 billion annually, because the government limits competition from foreign physicians. The OECD explicitly complained about this sort of misuse of its work in a recent letter to the Financial Times (3-30-04).

The Post article also refers to a World Bank estimate that 140 million people would be lifted out of poverty if all countries eliminated their agricultural barriers. It is worth noting that the vast majority of this impact is estimated to come from the developing countries lifting their own barriers. The World Bank's research concludes that the impact of the elimination of rich country barriers is far less important.


Britain's Housing Bubble

British Boom Driven by Personal Debt
Alan Cowell
New York Times, April 28, 2004, Page W1

This article discusses the housing and debt boom that have sustained relatively rapid growth in Britain. In assessing the risks posed by the run-up in debt, the article cites comments by British Finance Minister Gordon Brown. Mr. Brown claims that the current run-up is not a problem because debt payments are only 7 percent of household income at present, compared to 15 percent during a prior credit boom.

It is important to note that Britain currently has a very low inflation rate (just over 1 percent). This means that nominal income is rising very slowly. In the eighties, the inflation rate was considerably higher, and nominal incomes were rising more rapidly. (If real income increases by 1 percent annually and the inflation rate is 4 percent, then nominal income is growing at a 5 percent annual rate. If real income increases by 1 percent annually and the inflation rate is 1 percent, then nominal income is rising at a 2 percent annual rate.) This means that a fixed debt burden would decline relative to income at a much more rapid pace in the eighties than at present. It would be appropriate to adjust the ratio of debt payments to income for the rate of inflation in order to make meaningful comparisons across time.


Child Protection

U.S. Finds Fault in All 50 States' Child Welfare Programs, and Penalties May Follow
Robert Pear
New York Times, April 26, 2004, Page A17

This article reports on federal data showing that child protection agencies are performing poorly in all fifty states. At one point it refers to a proposal from Representative Benjamin Cardin that would increase federal funding by $500 million over a five year period. According to the data in the article, this would be a funding increase of approximately 1.4 percent.

It would have been useful to put the amount of funding in this proposal in some context - clearly it will not be large enough to seriously address the problems identified in this article. It is also worth noting that President Bush has proposed real annual cuts (e.g. 1.4 percent after one year, 2.8 percent after two years, etc.) in federal funding that are approximately the same size as the increase proposed by Representative Cardin.


Brazil

Brazil's President Pressed to Spend More
Todd Benson
New York Times, April 29, 2004, Page W1

This article reports on the pressure on Brazil's President, Luiz Inacio Lula da Silva, to abandon his current policies of fiscal and monetary austerity. The article describes the current policies as "sound economics" and claims that Mr. da Silva believes in them. By contrast, it implies that he would only depart from these policies as a result of political pressure, and that this would be bad economics.

Mr. da Silva is a politician. It is reasonable to assume that his motivations are political. This means that he is responding to political pressures not only when he proposes expansionary policies, but also when he proposes policies that are intended to please financial markets. The article presents no evidence whatsoever as to which policies Mr. da Silvia actually views as best.

The article also presents no evidence to support its assertion that the current austerity policies amount to "sound economics." Economists usually judge the merits of a policy by its outcome. Mr. da Silva's economic policies caused Brazil's economy to contract in 2003, and it is projected to have only modest growth in 2004. As a developing country, Brazil should be experiencing growth in a 5 to 7 percent annual range, as it did in the twenty year period from 1960 to 1980. There are no forecasts that show Mr. da Silva's policies raising Brazil's GDP growth anywhere close to this range.

While the article implies that Brazil will be forced by financial markets to maintain the sort of policies currently being pursued by the government, it can be argued that the only responsible path is ignore the wishes of financial markets and adopt growth oriented policies. This path would almost certainly lead to a short-term contraction resulting from a financial panic. However, the recent experiences of Russia and Argentina suggest that this downturn can lay a basis for healthy sustainable growth. While Argentina has yet to fully recover from its financial collapse in 2002, Russia has experienced more than five years of solid growth since it defaulted on its debt and devalued its currency in 1998. This record suggests that the long-term gains may more than justify the short-term pain from a financial panic.


Chile

Chile, the Rich Kid on the Block (It Starts to Feel Lonely)
Larry Rohter
New York Times, April 28, 2004, Page A4

This article discusses Chile's current political situation in relation to the rest of Latin America. At one point it quotes a political commentator saying that all the other nations in Latin America would also like to have a trade agreement with the United States, similar to the one Chile has. It would have been appropriate to note that a number of polls have shown widespread opposition among the populations in other Latin American countries to entering a comparable trade agreement with the United States. Popular opposition has been one of the main reasons that other Latin American governments have not followed through in concluding trade agreements with the United States.

The article also refers to the trade agreement between Chile and the United States as "free-trade" agreement. This is inaccurate. The agreement actually increases protectionism in some areas, most notable by increasing patent and copyright protections in Chile. It would be more accurate to simple refer to the pact as "trade" agreement.