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Outstanding Stories of the Week

A Great Fund (For Them Not You)
Gretchen Morgenson
New York Times, May 23, 2004, Section 3 Page 1

This article reports on the Federal Thrift Savings Plan, which members of Congress and other federal employers use for their retirement savings. The administrative costs of this plan are less than 0.1 percent of the stock of savings, compared to approximately 1.5 percent in privately administered plans.

Insiders Are Selling Like It's 1999
Eric Dash and David Leonhardt
New York Times, May 23, 2004, Section 3 page 1

This article reports on the stockholding practices of top corporate executives. Most are selling large portions of their holdings. This is usually a sign that stocks are about to dip.

Wall Street Firms Funnel Millions to Bush
Thomas B. Edsall and Jonathan Weisman
Washington Post, May 24, 2004, Page A4 

This article reports on the large flow of political contributions from major Wall Street financial firms to President Bush's re-lection campaign. The article notes that these firms could earn substantial profits if President Bush carries through with his plans to privatize Social Security.

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Housing

No Slowing Seen In Housing Boom
Sandra Fleishman
Washington Post, May 27, 2004, Page E4

This article reports on assessment of the housing market by a group of analysts employed by the housing industry. This assessment claims that the nationwide housing market should continue to expand with prices continuing to rise. (The subhead is "steady sales, rising prices forecast.")

The article does not include any comments from experts who are not employed by the housing industry. Such experts would have pointed out that the demand for new housing is not 2 million units a year, as claimed by the industry study. While there were approximately 2 million units built in the last year, the number of vacant units increased by more than 700,000 (see the Census Department's Housing Vacancy Survey), indicating that demand for new units is closer to 1.3 million a year.

Independent experts would have also pointed out that home sale prices have outpaced inflation by more than 40 percentage points over the last eight years. This nationwide run-up in home prices is unprecedented; in the past home prices had largely kept pace with the overall rate of inflation. Home prices have also far exceeded rental price increases, a divergence which also has no historical precedent. These facts should have been noted in an article assessing the future strength of the housing market (see "An Analysis of the Harvard Center's Case Against the Housing Bubble").

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The Economy

Economic Signs Point Up; Bush's Ratings Do Not
Richard W. Stevenson
New York Times, May 22, 2004, Page A1

This article reports on the fact that President Bush does not appear to be gaining in popularity in spite of recent reports showing that the economy is gaining strength. The article begins by describing the creation of nearly 900,000 jobs over the past four months as "a development that might otherwise have redefined the race in Mr. Bush's favor."

This rate of job growth is actually not particularly fast. Over the four years from 1996 to 2000, job growth averaged more than 250,000 per month. The performance of the last four months is especially unimpressive since if follows a prolonged period of job loss. The economy lost more than 2 million jobs from February of 2001 until it began generating jobs again last summer. This is the longest period of job loss since the Great Depression. The recent upturn would only be expected to work in Mr. Bush's favor if voters ignored the bulk of the administration's economic record and only focused on the period just prior to the election. The article presents no evidence that voters would behave in such an irrational manner.

The article also presents the views of "analysts" that the financial markets appear well prepared for a rise in interest rates. The article does not indicate the basis for this assessment. In the last eight years, housing prices have exceeded the overall rate of inflation by more than 40 percentage points, an unprecedented run-up. It is not clear that these prices can be sustained in the presence of higher mortgage interest rates. Home construction is also being carried through at a pace that exceeds demand by 400,000 units a year. It is not clear that this rate of excess building will continue in the presence of higher interest rates. A decline in home prices and residential construction could lead to a sharp downturn in the economy and presumably also the stock market. It is not clear that the unnamed analysts cited in this article have factored the situation of the housing market in to their assessment of the economy. It is worth noting that they probably also missed the stock crash in 2000-02.

Limiting the Damage From Sharply Higher World Oil Prices
Claudia H. Deutsch

New York Times, May 24, 2004, Page C1

This article reports on the impact of oil prices on the economy. At one point it quotes an economist who argues that employment growth is likely to offset the impact of higher oil prices on consumer purchasing power. Current wage trends do not indicate that this is the case. In the last six months, wages have grown at a 2.1 percent annual rate, while prices have risen at a 3.3 percent annual rate. This means that real wages have been declining at approximately a 1.2 percent rate. Even if job growth continues at a 200,000 monthly rate, this only translates into a 1.7 percent rate of annual job growth. Combining the 1.7 percent rate of job growth, with a 1.2 percent decline in real wages, gives a rate of growth in the wage bill of just 0.5 percent. This cannot support very rapid consumption growth unless consumers go even further into debt.

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Drug Prices

Washington Post, May 26, 2004, Page A4

This article reports on efforts by consumer groups to force the government to use its patent rights to bring down the price of Norvir, an AIDS drug that was developed in part with government funding. The consumer groups argue for intervention based on a provision in the Bayh-Dole Act, which allows the government to a reassert rights over a patent, if companies do not bring a product to market on "reasonable terms."

The article cites experts, including former Senator Birch Bayh, a co-sponsor of the law, as saying that the provision was meant to provide recourse if companies holding patents "bottled them up;" not to provide leverage over pricing. There is not a clear distinction between what could be meant by preventing patent holders from "bottling them up" and charging excessive prices. If a drug company set a high enough price for its drug (e.g. $10 million a year), then the effect would be virtually identical as if it just held it off the market altogether; virtually no one would be able to use it.

In this case, Abott Labs, the patent holder, proposes to charge more than $12,000 a year for a drug that probably costs them no more than $100 to produce. While it can be argued whether this price is reasonable, clearly some prices can be high enough that they are effectively the same thing as keeping the drug off the market altogether.

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Trade

Seeking Momentum, Canadian Leader Calls for June Election
Clifford Krauss
New York Times, May 24, 2004, Page A3

This article reports on Canadian Prime Minister Paul Martin's decision to schedule a general election for June. At one point, the article raises the possibility that Mr. Martin's liberal party may be forced to form an alliance with the New Democratic Party to stay in power. It then comments that the New Democratic Party's leader, Jack Layton, "is a critic of free trade."

All major political parties in Canada are opposed to free trade. For example, all of them support patent and copyright protections. Presumably, the article meant that Mr. Layton is a critic of recent trade agreements.

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Bio-engineered Food

Monsanto Beats Farmer in Patent Fight
Rick Weiss and Justin Gillis
Washington Post, May 22, 2004, Page A8

Monsanto Wins Patent Case On Plant Genes
Bernard Simon
New York Times, May 22, 2004, Page A1

These articles report on a Canadian court's decision that a farmer in Canada had to pay royalties to Monsanto for planting seeds from genetically modified canola, that had blown onto his land. It would have been useful if the articles had included some economic analysis of the implications of the court's decision.

First, and most directly, this ruling effectively gives Monsanto the right to impose a tax on farmers who did not deliberately seek out Monsanto's product. Second, the ruling is likely to impose substantial enforcement costs, which will be passed onto consumers, as Monsanto's agents will now attempt to police crop production to determine if the DNA of their products is appearing in the output of farmers who have not purchased their seeds. Economists usually argue against structuring property rules in ways that are likely to result in substantial enforcement costs.

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Russia

Siberian Dam Generates Political Wrangle Over Power
Steven Lee Myers
New York Times, May 25, 2004, Page A3

This article reports on a dispute over the ownership of a major damn in Siberia, which was privatized in the early nineties under questionable circumstances. At one point the article asserts that the dispute "has already caused considerable damage," and then notes the fall in the stock price of the company that currently owns the dam, and the Russian stock market more generally.

A fall in stock prices is not evidence of damage. There is no direct link between stock prices and Russia's economy. Only a tiny fraction of new investment is financed through issuing shares of stock, so lower stock prices have no obvious negative impact on the economy. A fall in stock prices simply redistributes wealth from people who own stock to people who don't. The only damage is to the people who own large amounts of stock.

Putin Calls for Convertible Currency
Erin E. Arvedlund
New York Times, May 27, 2004, Page W1

This article discusses Russian President Vladimir Putin's plans to adopt a convertible currency. At one point the article quotes an economist's comment that this shows that Putin "wants the country and its economy to be taken seriously."

There are reasons why a convertible currency is desirable, but there are also reasons why it may be desirable to maintain controls on exchanging currency. For example, nearly all economists agree that one of the reasons that China was protected from the East Asian financial crisis was that its currency was not freely traded. In spite of the lack of free convertibility of its currency, China does not seem to have any problems getting people to take it or its economy seriously. If Russia is not being taken seriously it is presumably not because of the lack of a freely convertible currency.

 Health Care

Sick About Health Care
Jonathan Weisman
Washington Post, May 26, 2004, Page E1

This article discusses the problem posed by rising health care costs. At one point it refers to the reluctance of businesses to turn to governmental solutions to rising costs, because it claims that they believe that any savings in insurance costs will be more than offset by higher taxes.

While it is possible that businesses have this view, there is little basis for it in reality. For example, the government-administered Medicare program has administrative costs that are far lower than private sector insurers and the program has managed to substantially outperform private insurers in head-to-head competition. Also, other wealthy countries, all of which have a much larger government role in the provision of health care, manage to provide health care to their citizens at a cost that is less than half as much per person as in the United States, on average. They all also enjoy longer life expectancies.

It is possible that business leaders are ignorant of this evidence or still believe that greater government involvement will lead to higher costs in spite of the evidence. However, it is also possible that they do not want to see major industries, such as the pharmaceutical industry, the insurance industry, and the medical equipment industry, harmed by a reformed health care system. It is almost certain that serious health care reform would come at the expense of the profits of these industries. It is possible that business leaders are motivated more by an ideological interest in protecting business profits from threats by government, than an actual concern about minimizing their health care costs.

This article could have benefited from some discussion of the health care situation in other countries. The fact that every other rich country has been far more successful in restraining health care costs, while still achieving better health outcomes, suggests that it should not be difficult to find ways to improve on the current system.