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Outstanding Stories of the Week

Asian Maids Often Find Abuse, Not Riches, Abroad
Jane Perlez
New York Times, June 22, 2004, Page A3

This article discusses the situation of girls and young women from poorer Asian countries who travel to wealthier countries, often in the Middle East, in search of employment as maids. The article reports that they often end up in situations of near slavery, subject to abuse and assault by the families for whom they work.

The Ever More Graspable, And Risky, American Dream
Edmund L. Andrews
New York Times, June 24, 2004, Page C1

This article reports on the housing market in Southern California. Home prices have been rising rapidly in the region. This has led buyers to use exotic financial instruments to purchase homes.

Amid an Apartment Glut, Building Prices Move Up
Terry Pristin
New York Times, June 23, 2004, Page C7
Published online as, “Apartment Deals on the Rise”

This article reports on recent trends in the apartment market in which rents have been falling, due to record vacancy rates, but the sale price of apartment buildings has been rising rapidly. This seemingly contradictory behavior is characteristic of a speculative bubble.

Out of the Dark In Rural China
Peter S. Goodman
Washington Post, June 25, 2004, Page A1

This article reports on how the spread of electricity to rural areas of China has transformed life in many regions.

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The Current Account Deficit

Current Account Deficit Grew to a Record in the First Quarter
Bloomberg News
New York Times, June 19, 2004, Page B4

This article reports on Commerce Department showing that the current account deficit was running at a record $579.6 billion annual rate in the first quarter. The article quotes an economist at Lehman Brothers as saying, "the U.S. is still widely perceived to be the place to invest, and there isn't much competition from the rest of the world."

This is not true. Private investors are not the ones who are financing the U.S. current account deficit. The vast majority of this money is coming from foreign central banks. China and Japan alone lent the United States more than $400 billion in the last year. The United States will be able to continue to run its current account deficit only as long as foreign governments choose to subsidize U.S. imports by lending to the United States at below market rates (they hold U.S. financial assets at prices that are higher than what the market is would be willing to pay).

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Wage Growth

Quality of New Jobs Is Focus of Election-Year Debate
Jonathan Weisman and Nell Henderson
Washington Post, June 23, 2004, Page E1

This article reports on recent trends in wage growth and the competing claims of the presidential campaigns. The article implies that there is ambiguity depending on the choice of measurements, specifically whether wages are adjusted for inflation, or whether one simply examines nominal wage growth.

There actually is relatively little basis for debate over the pattern of wage and compensation growth during the Bush administration. No economist would argue that nominal wage growth - ignoring changes in the cost of living - is a reasonable measure of wage growth. (By this measure, annual wage growth peaked in the Carter administration, with the average hourly wage rising at a 8.1 percent annual rate over his term in office. Real wage growth was negative during these years, since inflation averaged 9.2 percent).

In the years from 1997 to 2001, the average hourly wage rose at an average annual rate of 1.4 percent, in real terms. The rate of wage growth began to fall in 2001 as the unemployment rate rose. The real average hourly wage grew 1.1 percent, 0.5 percent, and 0.1 percent in 2001, 2002, and 2003, respectively. Through May of 2004, real wages have been declining at 2.0 percent annual rate.

The article also implies that the mix of new jobs - the possibility that the new jobs being created are worse than the existing jobs - could explain recent wage trends. Over a relatively short period of time (2 or 3 years), the mix of jobs has almost no impact on wage growth, especially in a period of slow job growth. If the economy creates 1.4 million jobs in a year (more than has actually been the case over the last year), and the new jobs pay wages that on average are 25 percent lower than existing jobs (a very large gap), this would still only reduce the average hourly wage by 0.25 percent. Over a ten-year period, a change in job mix can have an important impact on the wage situation, but the job mix has not been an important factor in determining wage growth in recent years. The rate of wage growth within jobs has been far more important.

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Agricultural Subsidies

W.T.O Rules Against U.S. Cotton Subsidies
Todd Benson
New York Times, June 19, 2004, Page B3

This article reports on the ruling of a W.T.O. body that the U.S. system of subsidizing cotton producers violates W.T.O. rules. The article asserts that developing countries "feel unfairly punished by the $300 billion in annual farm subsidies and supports paid to farmers in the world's richest nations."

It is not clear why developing countries would feel "unfairly punished" by these subsidies and supports since the vast majority of this money has no direct relevance to them. According to the OECD, the largest component of the this $300 billion takes the form of higher prices that U.S. and European consumers pay to their own farmers as a result of domestic supply restrictions. For example, the price of milk and cheese in the United States is kept high by a system that restricts U.S. dairy output. It is not obvious why developing countries would feel "unfairly punished" by this system.

The $300 billion in subsidies also includes money spent on agricultural research, flood control, and food stamps -- all programs that don't punish developing countries in any obvious way. It is also worth noting that when the dollar falls to a level that is sustainable, it will lower the price of U.S. agricultural exports by a far larger amount than does the current system of agricultural subsidies and supports.

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Drug Patents

A Medical Journal Quandary: How to Report on Drug Trials
Barry Meier
New York Times, June 21, 2004, Page C1

NIH Scientists Broke Rules, Panel Says
Rick Weiss
Washington Post, June 23, 2004, Page A19

Democrats Take a Look At Drug Tests
Barry Meier
New York Times, June 23, 2004, Page C4

These articles report on some of the problems created by patent monopolies for prescription drugs - concealed research findings that reflect poorly on a firm's drugs, and drug company payments to government employees. None of these articles include any economic analysis of the problems discussed. The abuses described in these articles are exactly the sorts of problems that standard economic theory predicts would result from government-granted patent monopolies. The pursuit of large monopoly profits gives firms huge incentive to violate laws and engage in unethical practices.

Patent monopolies in prescription drugs also impose enormous costs on consumers. In the United States alone the value of this government support to the pharmaceutical industry is more than $200 billion annually. While both the Times and Post have given large amounts of attention to the considerably smaller level of government support to agriculture, neither has ever mentioned the size of government supports to the drug industry, or even acknowledged their existence.

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Copyright Enforcement

Bill to Curb Online Piracy Is Challenged As Too Broad
Matt Richtel and Tom Zeller Jr.
New York Times, June 24, 2004, Page C4

This article reports on the debate over legislation that would make producers of software that facilitated copyright violations liable for damages. It would have been useful to include some economic analysis of the ramifications of such efforts to enforce copyright monopolies. In recent years, the entertainment and software industry have used ever more costly and repressive measures to try to preserve copyright protection in the wake of technological advances. It is likely that the costs of such protection will rise further as Internet technology improves, making it even easier to transfer music, movies, software, and other material protected by copyright.

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The Minimum Wage

Kerry Backs $7-an-Hour Minimum Wage
Paul Farhi
Washington Post, June 19, 2004, Page A2

This article reports on John Kerry's decision to support an increase in the minimum wage to $7 an hour by 2007. At one point it quotes the statement of a spokesperson for the restaurant industry lobby, that raising the minimum wage will hurt small businesses "especially during an economic recovery."

The implication of this statement is that a rise in the minimum wage is more harmful to small businesses in a recovery than in a recession. It is unlikely that many economic analysts would agree with this perspective, which probably warranted some additional comment in the article.

It would also have been useful to provide more information on the size of the minimum wage relative to inflation and productivity. If the minimum wage had kept pace with inflation and the growth in productivity since the last increase in 1997, it would be $8.40 in 2007, assuming that productivity and inflation grow at the same rate over the next three years as they did in the last seven years.

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Durable Goods Orders

Durable-Goods Orders Down Again in May
Nell Henderson
Washington Post, June 25, 2004, Page A3

This article reports on new data from the Commerce Department showing that durable goods orders fell sharply for the second consecutive month. The article notes that most economists had predicted a substantial increase in orders, and quotes one economist describing the decline as "puzzling."

Durable goods orders are highly erratic, although two consecutive declines could suggest a real weakening in this sector of the economy. One possible explanation for this falloff could be the scheduled change in the tax treatment of investment at the end of 2004. In 2002, Congress put into place a temporary tax measure that allowed for the accelerated depreciation of capital goods through the year 2004. This was intended to give firms an incentive to move their investment plans forward and thereby boost the economy. With the end of this window of favorable tax treatment now approaching, it is possible that firms are cutting back on orders for new investment goods.

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Stock Options

Stock Options Debate Comes to Silicon Valley
Gary Rivlin
New York Times, June 26, 2004, Page C6

This article reports on a protest by workers from high tech firms in Silicon Valley over the Financial Accounting Standards Board's plans to change the rules governing the accounting of employee stock options. The new rules require that options be deducted as an expense against profits. The article includes several comments from rally participants asserting the importance of stock options to workers and/or firms in the tech sector.

It is important to point out that the new accounting rules do not raise the cost of providing stock options at all they simply require accurate accounting of these options. If this affects the issuance of stock options, then it could only be due to the fact that corporations currently see this as a way of deceiving stockholders about their actual profits.

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Federal AIDS Funding

Vietnam to Receive Help From U.S. In AIDS Fight
Washington in Brief (from staff reports and news service reports)
Washington Post, June 23, 2004, Page A7

This article reports on plans to include Vietnam as one of the countries to receive money from the federal fund that was established to combat AIDS in developing countries. The article describes the size of the AIDS fund as $15 billion. It is important to note that this is a five-year spending level, not a single year. It is equal to approximately 0.1 percent of projected spending over this period. It is also worth noting the President Bush has proposed annual spending levels that place five-year spending considerably below the $15 billion originally pledged. At this point, it is unlikely that the five-year spending total will reach that level; more likely it will be close to $13 billion