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Outstanding Stories of the Week

Tear Up the Mortgage? Not Yet: Elderly Face Rising Debt Load
Jennifer Bayot
New York Times, July 4, 2004, Page A1

Published online as “As Bills Mount, Debts on Homes Rise for Elderly.”

This article reports on the high debt loads being carried by many elderly households. It notes that a far higher percentage of elderly continue to have mortgages after retirement than was the case 15 years ago. Other forms of debt have also increased among the elderly in this period.

Knowing Their Politics by Their Software
Steve Lohr
New York Times, July 5, 2004, Page C1
Published online as “Knowing Their Politics by the Software They Use.”

This article discusses the fact that the Democrats have opted to use open-source software, rather than copyright protected software to operate their website. At one point the article correctly notes that proponents of open-source software base their argument on the greater efficiency of this mode of software development, although this efficiency will lead to a massive "reshuffling of corporate wealth."

Drugmakers Prefer Silence on Test Data
Shankar Vedantam
Washington Post, July 6, 2004, Page A1

This article reports on the fact that most drug companies do not register their clinical trials with the Food and Drug Administration (FDA), in defiance of a law requiring such registration. The FDA has chosen not to enforce the law.

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Employment Data

Fewer Jobs Added In June
Nell Henderson
Washington Post, July 3, 2004, Page A1

This article reports on the Labor Department's release of employment data for June. It notes the sharp falloff in average weekly hours that the report shows between May and June. It then comments that "some analysts speculated that these declines might reflect the closing of many businesses and government offices for former President Reagan's state funeral." [Hours in the payroll survey only refer to private sector workers; hours worked by government employees are not factored into this index.]

While the adjustment for this sort of unexpected loss of work hours cannot be done perfectly, a good check as to whether it led to an understatement of hours is the number of people who are classified as working part-time (less than 35 hours during the reference week) in the household survey. This number actually fell slightly from May to June, dropping from 24,286,000 to 24,046,000. If the adjustment for the holiday had failed to account accurately for people working fewer hours, then more workers should have been counted as working part-time in June.

It is more likely that the June falloff in hours was inflated because the May data, which showed a rise in hours, overstated actual hours worked in the month. Monthly data on hours is highly erratic. Therefore, it is dangerous to read too much into the data from a single month.

Jobs Report Puts Bush on the Defensive
Edmund A. Andrews
New York Times, July 3, 2004, Page B1

Published online as “Trend Still a Friend, the Bush Camp Says”

This article discusses the impact that the most recent economic data is having on the presidential campaigns. At one point it notes the sharp falloff in the percentage of the population that is employed during the Bush administration. It then comments that some of the decline can be explained by demographic shifts and "an increase in self-employment that does not show up in the official numbers."

Actually neither of these factors can explain the fall off in employment rates. There has been a substantial increase in the percentage of the population that is over age 55, as the older baby boomers move into this age grouping. Ordinarily, this could explain a decline in employment rates, but in the last four years there has been a huge surge in the number of people over age 55 who are working. This is likely the result of losses in 401(k) plans due to the stock market crash and the rapidly rising cost of health care.

Self-employed workers are not counted in the Labor Department's survey of businesses, but they are included in the survey of households. Data from the household survey is the basis for the employment rate.

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Tort Reform

Senate Republicans Seek to Limit Class-Action Suits
Helen Dewar
Washington Post, July 6, 2004, Page A2

This article discusses the prospect of legislation that would impose restrictions on class-action lawsuits. The article notes the complaints of proponents of restrictions that trial lawyers are often the main beneficiaries of these suits. It gives as an example a case in which plaintiffs sued a bottled water distributor over impurities in the water. The plaintiffs only received discount coupons for the water, while their lawyers received $1.35 million in fees.

The information in this piece does not indicate that anything improper happened. Lawsuits serve both a private purpose - collecting damages for plaintiffs - and a public purpose, punishing individuals and firms for harmful actions. In this case, the firm paid $1.35 million in legal fees to the plaintiff's lawyers. It almost certainly paid at least as much for its own lawyers. This is equivalent to a $2.7 million fine to the company. If the company allowed impurities in its water, but there was no substantial demonstrative harm to any of the plaintiffs, then this sort of fine may have been entirely appropriate. It will presumably encourage the company to use greater care so that its water does not contain impurities in the future.

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Health Care

Two on Democratic Ticket Have Similar Records
John Wagner
Washington Post, July 7, 2004, Page A12

This article compares the positions of Senators John Kerry and John Edwards. At one point it examines the health care proposals that each had put forth in the Democratic presidential primaries. This analysis also refers to the Medicare for All (single-payer) plan put forward by Representative Dennis Kucinich.

The article claims that this proposal is estimated to cost $22 trillion over the next decade. This number is off by approximately $11 trillion. All the other estimates in this piece show the marginal cost – the expected addition to current spending. It is reasonable to believe that the Kucinich plan may cost $22 trillion over a decade, but that is the total cost. The government is already projected to spend close to $11 trillion on Medicare, Medicaid, and other programs, as well as tax credits and deductions for health care spending.

It is worth noting that there has been virtually no coverage in the Times or Post of the single-payer proposal put forward by Mr. Kucinich and two other democratic presidential candidates. The very limited coverage that has appeared has often been inaccurate (e.g. see ERR 10-20-03).

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Social Security

Democratic Platform Assails Administration
Dan Balz
Washington Post, July 4, 2004, Page A4

This article reports on the status of the Democratic Party platform. At one point it refers to Social Security (along with Medicare) as one of the entitlement programs that will "face strain as the baby-boom generation retires."

It is not clear what this comment means. The most recent Social Security trustees report shows that the program will be able to pay scheduled benefits until 2042, at which point the oldest baby boomers will be age 96 and the youngest will be age 78. The Congressional Budget Office just completed an independent analysis of the program which showed that it will be able to pay all scheduled benefits until 2052. At that point, the oldest baby boomers would be age 106 and the youngest would be age 88.

The official projections clearly show that the program will be able to cover the cost of the retirement of the vast majority of the baby boom generation. The article does not indicate the source for its claim that the program will face strains when the baby boom generation retires, a process that begins in 2008.

It is worth noting that the strains affecting Medicare are primarily attributable to rapidly rising health care costs. If health care costs only rose in step with nominal GDP growth and due to demographics, the program's shortfall would be relatively modest.

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Trade

China Agrees to Phase Out Tax on Imported Chips
Elizabeth Becker
New York Times, July 9, 2004, Page C3

This article reports on China's decision to phase out tariffs on imported silicon chips in response to pressure from the Bush administration. At one point, the article presents criticism of the Bush Administration's trade policy by Robert Altman, a deputy Treasury Secretary in the Clinton administration. The article quotes Altman as saying that President Bush "is on track to be the first since President Hoover to see net exports go down during his term."

Actually, he would be the first president since President Clinton to see a decline in net exports in his term. Net exports fell from $-33.2 billion in 1992 to $-379.5 billion when President Clinton left office in 2000.

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China

The China Bind
Ted C. Fishman
New York Times, July 4, 2004, Magazine, page 24
Published online as “The Chinese Century.”

This article discusses the growth of China's economy and impact on the United States. At one point it refers to a calculation by Gary Hufbauer, an economist at Institute for International Economics, that the average household saves $500 a year by buying lower cost goods from China. It is important to recognize that this is a partial analysis that effectively assumes that buying goods from China has no effect on the value of the dollar

A fuller analysis would count the effect of increased imports from China on the value of the dollar. By sending more dollars abroad to pay for Chinese imports, the dollar will fall, other things equal. The decline in the value of the dollar raises the price of other imported goods. The fact that U.S. consumers have to pay more for other imported goods, as a result of their purchases from China, substantially reduces the gains that the average family can expect to receive.

It is also important to note the downward effect of Chinese competition on the wages of certain workers. Manufacturing workers, who must compete with low paid Chinese workers, are likely to see substantial cuts in pay. By contrast, workers in highly paid professions, like doctors and lawyers, have obtained protection from the U.S. government in the form of professional and licensing restrictions, which largely prevent Chinese professionals from entering the U.S. market. In this scenario, where some workers are forced to compete with Chinese workers, whereas other groups enjoy protection, increased trade with China leads to redistribution from the unprotected group to the protected group.

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Russia

Pressure Builds In Kremlin Vs. Oil Giant
Erin E. Arvedlund
New York Times, July 6, 2004, Page C1

This article discusses the implications for the future of Russia's economy of the tax evasion trial of Mikhail B. Khodorkovsky, the founder of Yukos, the country's largest oil producer. At one point the article describes the outcome of the trial as determining whether "property rights in Russia exist only at the whim of the state and that the direction of Russia's economy is moving toward a government-controlled model rather than a free-market model."

It is not clear that this is an accurate framing of the issues at stake. Virtually all analysts of Russia's economy acknowledge that Mr. Khodorkovsky is almost certainly guilty of tax evasion, which is widespread among the wealthy. It is also widely accepted that Mr. Khodorkovsky acquired much of his wealth through insider dealings that allowed him to buy assets at a fraction of their market value during Russia's privatization process of the early and mid-nineties. It is not clear that taking legal action against Mr. Khodorkovsky, or others who gained wealth by violating the law, is a violation of free-market principles. While President Putin clearly is considering political factors in this action, there does appear to be a sound legal basis for this trial.

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Welfare Reform

Campaign Politics Seen as Bottleneck For Welfare Law
Robert Pear and Raymond Hernandez
New York Times, July 6, 2004, Page A1
Published online as "Campaign Politics Seen as Slowing Welfare Law"

This article reports on the ongoing political deadlock over a bill reauthorizing funding for the reformed welfare bill. The article includes comments from a variety of political figures and policy analysts who describe the bill as a great success. It would have been helpful to also present the views of critics of the welfare bill.

While it clearly succeeded in helping to reduce the number of people receiving welfare, there is also evidence, such as rising demand at food kitchens and homeless shelters, that the reform undercut an important source of support for many poor families. Furthermore, many of the time limits imposed by the bill are only now beginning to hit families. There is not yet good data on the impact of these time limits, nor on how former welfare families have managed to get by during the recent recession and the weak labor market that has persisted in its aftermath.

The article reports that annual spending on welfare is set at $16 billion. This is equal to approximately 0.6 percent of current spending. At one point the article describes a provision in the bill approved by the Senate, which would increase annual child care funding by $1.2 billion, as providing a "big increase" in money for childcare. This amount is equal to 0.05 percent of annual spending.

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Europe

Voters in Much of Europe Seem to Want the Ins Out
Richard Bernstein
New York Times, July 6, 2004, Page A3

This article discusses the anti-incumbent sentiment that seems to be sweeping Europe. At one point it attributes this sentiment to the fact that Europe has entered a new era "where social protections have become too expensive and a globalized economy … has made vigorous economic growth almost a memory."

The article does not indicate its basis for asserting that social protections have become too expensive or that globalization has slowed growth in Europe. Most economists argue that globalization has led to more rapid growth, which, in principle, should make it easier to support social protections.

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Property Rights

A Wine Region's Future Is Centered on 2 Rivals
Carol Pogash
New York Times, July 6, 2004, Page A14

This article reports on a contested election for the Napa, California board of supervisors, in which one candidate favors more real estate development (Harold Moskowite) and the other candidate prefers to protect the country's agricultural character. The article describes the proponent of development as favoring "property rights over environmental protection."

While this may be Mr. Moskowite's characterization of his views, it is not an unbiased description. Property rights almost invariable include the right to limit what is done in adjacent areas, if that activity can have a negative impact on other property owners. For example, zoning restrictions generally prohibit the construction of factories in expensive residential neighborhoods. In this case, some groups of property owners and residents believe that the best way to protect their area is by restricting development and keeping the area rural. Others support opening it up to more development. Neither group advocates a situation in which property owners can do whatever they want with their land without regard to the impact on others.

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Cost of Government Day

'Cost of Government' Date Is Reached Today
Christopher Lee
Washington Post, July 7, 2004, Page A17

This article reports on the "cost of government" date, the day when the Americans for Tax Reform calculate that the average citizen is done meeting their tax and other obligations for the year. It is questionable whether this should be a news story.

Americans for Tax Reform is a group with an explicit anti-tax agenda. Their calculation uses an arbitrary methodology that does not have any clear meaning. Government spending is in fact equal to approximately one-third of GDP, which indicates that by other methods the "cost of government" day would be closer to May 1.