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Outstanding Stories of the Week

Early Tests for U.S. in Its Global Fight on AIDS
Reported by Deborah Sontag, Sharon LaFraniere and Michael Wines, and written by Ms. Sontag
New York Times, July 14, 2004, Page A1

This article examines the record of the Bush administration's AIDS program for developing countries.

GE Lobbyists Mold Tax Bill
Jeffrey H. Birnbaum and Jonathan Weisman
Washington Post, July 13, 2004, Page A1

This article reports on General Electric's lobbying efforts on a bill that changed the tax rules for corporations operating abroad. The article reports that General Electric was able to have the new bill written so that it will receive an even larger tax break than it did under the old bill.

That High Tech Balloon Is Going SSSSSSSSSSS
Gretchen Morgenson
New York Times, July 11, 2004, Section 3 page 1

This article presents evidence that high tech companies are facing another downturn. It reports on a rapid build-up of inventories in many firms.

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Intellectual Property Claims

In China, A Growing Taste for Chic
Peter S. Goodman
Washington Post, July 12, 2004, Page A1

As Online Sales Soar for Used Books, the Publishing Industry's Fears May Sound Hauntingly Familiar to the Music Industry
By Bob Tedeschi
New York Times, July 12, 2004, Page C5

Published online as "Online Battle of Low-Cost Books"

These articles discuss issues related to trademarks and copyrights. The Post article reports on the widespread production of unauthorized copies of high-priced fashion items. The Times article discusses the impact of the resale of used books over the Internet on publishers and authors.

It would have been useful to include some economic analysis of the issues being discussed. In the case of unauthorized copies of trademarked items, the issues are very different depending on whether or not the consumer is deceived about the nature of the product. If the consumer is not deceived, and recognizes that the unauthorized copy is in fact not made by the trademark holder (which the Post article indicates is usually the case), then unauthorized copies can offer large gains by making products available at far lower prices. While this may result in somewhat less compensation to the holder of the trademark, the lost revenue is likely to be small, especially in cases where the price differentials are very large. In such cases, relatively few purchasers of the unauthorized products would have otherwise been able to afford the trademarked version. The only potential economic loss to society is the reduced incentive that companies would have to establish a reputation for high quality products.

There are no obvious losses whatsoever in the case of used books being sold over the Internet. This is a pure efficiency gain, it allows book owners to sell books that they no longer want and it allows buyers to get used books a lower price than the new book. In principle, authors and publishers should be largely unaffected, since they should be able to charge more for new copies when buyers recognize that they can more easily recoup part of the price by reselling the book.

Trade Agreement May Undercut Importing of Inexpensive Drugs
Elizabeth Becker and Robert Pear
New York Times, July 12, 2004, Page A1

This informative article reports on how provisions in a new trade pact with Australia may prevent the importation of low-priced drugs into the United States. The article notes that the Bush Administration's trade policy has sought to raise the price that consumers in other countries pay for prescription drugs. It contrasts this effort with proposals to allow the importation of cheaper drugs into the United States, asserting that these approaches "represent very different ways of helping Americans who typically pay much more for brand-name drugs than people in the rest of the industrialized world."

It is not clear that the Bush Administration's policy is aimed at helping American consumers. The immediate beneficiary of higher drug prices in other industrialized countries is the pharmaceutical industry. This industry has been a large contributor to President Bush's political campaigns and to those of other Republicans. While it is possible that the proponents of this policy really believe that it will indirectly benefit consumers in the United States, it is also possible that they are simply acting to serve the interests of their political backers. Even if their motive is to help the pharmaceutical industry, they would almost certainly never admit to this in a public discussion, offering instead a rationale that claims to benefit consumers.

The article also includes a quote from a representative of the pharmaceutical industry's trade organization (PHRMA), in which he purports to favor a free market in prescription drugs instead of "artificial price controls." In fact, PHRMA is adamantly opposed to a free market in prescription drugs, having fought hard to protect and extend government-granted patent monopolies.

Drug Re-importation Plan Saves City $2.5 Million
Ceci Connolly
Washington Post, July 15, 2004, Page A3

This article reports on a program in Springfield, Massachusetts that allows city workers to buy prescription drugs from Canada over the Internet. At one point the article contrasts the views of a supporter of the program with the arguments put forward by the pharmaceutical industry in defense of the high prices charged in the United States. The supporter is quoted as saying that he appreciates the value of the research done by the industry, but that he doesn't see why we should still be paying for old innovations. The article then presents the response of the industry, that current payments are made for new and ongoing research.

It would have been appropriate to present a more compelling argument against the industry's position. No one disputes that some of its profits go to support ongoing research. The issues raised by most opponents of the current system of unconstrained patent monopolies concern the portion of current profits devoted to research (as opposed to marketing or dividends to shareholders) and the usefulness and efficiency of the research being conducted by the industry.

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Brazil

Brazil's President Is Cautious Despite Signs of a Recovery
Todd Benson
New York Times, July 16, 2004, Page W1

This article discusses the reaction of Brazil's President, Luiz Inacio Lula da Silva, to recent economic data indicating that the economy is growing. The article asserts that "the president is getting the results he needs to silence critics of his conservative economic policies."

It is not clear why any critics would be silenced by the growth numbers reported in the article. After shrinking slightly last year, the article reports that economists now expect Brazil's economy to grow by 4.0 percent this year. It is then projected to grow at a 3.0 percent annual rate in subsequent years.

This is actually an extremely weak growth rate for a developing country. Since Brazil's population is growing at close to a 2.0 percent annual rate, this forecast implies that Brazil will have had zero per capita GDP growth for Mr. da Silva's first two years in office, and that it will only have 1.0 percent per capita GDP growth in later years. By contrast, Brazil's per capita growth averaged 4.6 percent annually from 1960 to 1980.

The weak growth performance indicated in this article would seem to give opponents of Mr. da Silva's conservative economic policies plenty of ammunition. If Brazil follows the macroeconomic targets set out in its agreements with the IMF for inflation and budget deficits, and it only grows at a 3.0 percent annual rate, then its ratio of debt to GDP will continue to rise, leading to ever larger interest burdens (see "Paying the Bills in Brazil: Does the IMF's Math Add Up.").

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Germany

Lessons in Reality for Apprentices
Kevin J. O'Brien
New York Times, July 13, 2004, Page W1

This article reports on the opposition by German businesses to a government proposal to require firms to hire apprentices as 7 percent of their workforce, or pay a penalty to the government. At one point the article notes that Germany's unemployment rate of 10.5 percent. It is worth noting that this is the German government's measure of unemployment, which applies a more stringent standard than in the United States. According to the OECD's standardized unemployment measure, which is similar to the one used in the United States, Germany's unemployment rate is approximately a percentage point lower at 9.6 percent.

It is also important to recognize that much of this unemployment is attributable to the continuation of high levels of unemployment in the areas that were formerly East Germany. The unemployment rate, by the U.S. methodology in the areas that were formerly West Germany is close to 7.5 percent.

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Nursing Shortages 

An Exodus of African Nurses Puts Infants and the Ill in Peril
Celia W. Dugger
New York Times, July 12, 2004, Page A1

This article reports on the outflow of trained nurses from many sub-Saharan African countries to England, where they can earn much higher wages and enjoy better working conditions. At one point the article asserts that England is confronting an "acute shortage of nurses to care for an aging population."

The article does not indicate why this shortage is developing. Ordinarily, economists expect wages to rise to the point where people are attracted to a profession in high demand. In addition, higher wages should reduce demand and lead to the substitution of less-skilled labor. It would be helpful to explain why the market has not corrected the imbalance in the supply and demand for nurses that the article claims exists.

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Government Spending

U.S. Urged to Increase Payments to AIDS Fund
Ellen Nakashima
Washington Post, July 13, 2004, Page A10

This article reports on requests from international health experts for the United States to increase its level of support for the global AIDS fund. At one point the article refers to President Bush's commitment of $15 billion over five years to treat and combat the spread of AIDS in developing countries. It would be helpful if this figure were expressed as a share of total spending over this period. It is equal to approximately 0.12 percent of federal spending for the years of the commitment

Unlikely Riders Seek Path Into Law
Dan Morgan
Washington Post, July 15, 2004, Page A19

This article reports on some of the riders being placed into a spending bill for the departments of Labor, Education, and Health and Human Services. The article refers to most of the spending items in their current year dollar amounts. For example, the cost of the annual appropriation for these departments is $143 billion. It would be more informative to readers if it were described as a share of the federal budget (5.7 percent). It also refers to a $9.6 billion buyout of tobacco farmers which is included in the bill. It is worth noting that this money would be paid out over a ten- year period, not a single year.

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Trade

Trade Gap Narrows as Exports and Imports Rise to Records
Bloomberg News
New York Times, July 14, 2004, Page C3

This article reports on the Commerce Department's release of data on the size of the May trade deficit. The trade deficit corresponds to foreign borrowing that will lead to an outflow of interest and dividend payments in future years, thereby lowering living standards.

At present, the current account deficit (the broadest measure of the trade deficit) is running at close to a $600 billion annual rate. It has approximately the same impact on future living standards as a budget deficit of the same size. While discussions of the budget deficit have often appeared in the front section and even on the front page, the new information on the trade deficit was only noted in a wire service article inside the business section. The Post only mentioned the new trade data in a two sentence item in its "Business in Brief" section.

The Times piece includes a comment from an economist forecasting the U.S. economy will grow by 4.5 percent in 2004. The economy grew by 3.9 percent in the first quarter and growth is likely to be less than 3.0 percent in the second quarter. Based on these numbers, growth would have to be more than 5.5 percent in the second half of the year to average 4.5 percent for the year. This seems unlikely, especially given recent evidence of slowing growth.

Outcry Greets Europe's Plan To Overhaul Beet Subsidies
Paul Meller
New York Times, July 15, 2004, Page W1

This article reports on a proposal by the European Commission to reduce its subsidies for beet sugar. At one point the article presents the criticism of Oxfam International and the World Wildlife Fund that the subsidy reduction "will not reduce poverty or achieve higher environmental standards."

It is not clear why anyone would expect that the reduction in subsidies would reduce poverty. The subsidies effectively mean that the European Union (EU) is paying people to buy its sugar. In general, standard economic models show that the subsidies will be beneficial to consumers by lowering prices of the subsidized product (sugar in this case). In standard economic models, people in developing countries benefit from EU subsidies in the same way as they would benefit if the EU developed more productive technology that allowed them to grow sugar more efficiently. While some sugar producers in the developing world may be hurt by the competition, almost by definition the subsidies are a net gain for the developing world in these models.

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