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Outstanding Stories of the Week

Results of Drug Trials Can Mystify Doctors Through Omission
Barry Meier
New York Times, July 21, 2004, Page C1

This article reports on the fact that drug companies often market their drugs for uses in which test results indicate they are not effective. The Food and Drug Administration does not require that companies list negative findings on drug labels.

Basic Training Doesn't Guard Against Insurance Pitch to G.I.'s
Diana B. Henriques
New York Times, July 20, 2004, Page A1

This article is part of a two-part series that reveals how the Army helps private insurers market plans to its soldiers. The articles show how these plans are generally ill-suited to the needs of these soldiers, providing very little in benefits in exchange for the premiums that soldiers pay.

No Wonder C.E.O.'s Love Those Mergers
Gretchen Morgenson
New York Times, July 18, 2004, Section 3 Page 1

This article reports on clauses in the contracts of several CEO's that provide them with multi-million dollar payouts, if their company merges with another company

Boeing Has a Powerful Ally With Hastert
Jeffrey H. Birnbaum
Washington Post, July 10, 2004, Page A10

This article reports on House Speaker J. Dennis Hastert's efforts to promote Boeing's interests in its dealings with the government. In particular, Mr. Hastert has been a major proponent of a $23.5 billion dollar lease arrangement with the Pentagon for 100 airplanes that is of questionable merit from the government's perspective.

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Wage Growth

Hourly Pay in U.S. Not Keeping Pace With Price Rises
Eduardo Porter
New York Times, July 18, 2004, Page A1

This informative article examines recent patterns in wage growth, pointing out that wages are not keeping pace with inflation. At one point the article reports that the real average hourly wage fell by 1.1 percent in June after declining by 0.8 percent in May. It is worth pointing out that these numbers represent changes over the prior year. In other words, the 1.1 percent decline for June refers to the cumulative change in the real wage from June of 2003 to June of 2004. Similarly, the 0.8 percent decline reported in May refers to the cumulative decline from May of 2003 to May of 2004. These periods overlap 11 months, with the June data only adding one month of additional information. Therefore, it is not surprising that both would show similar rates of wage decline.

The article also notes that the length of the average workweek was reported as falling by 12 minutes in June, contributing to a sharp decline in the average weekly wage. Monthly data on the length of the average workweek is highly erratic (the workweek reportedly increased by 6 minutes in May). It is likely that much of this decline was a statistical aberration, possibly attributable in part to an overstatement of hours in May.

Greenspan Says Workers' Lack of Skills Lowers Wages
Nell Henderson
Washington Post, July 22, 2004, Page A1

This article reports on Alan Greenspan's congressional testimony, in which he attributed the recent decline in wages for most workers to lack of skills. According to the article, Mr. Greenspan asserted that wages for less skilled workers have not kept pace with inflation for most of the last fifty years.

Actually, wages of less skilled workers largely kept pace with overall productivity growth (which means that they rose much faster than inflation) for most of the first three decades after World War II, until the oil price shocks of the seventies, which lowered the real wages of most workers. The gap in wages between less-skilled and more skilled workers did not begin to increase until the eighties. In the late nineties, when the unemployment rate fell to the lowest levels since the sixties, wages of less-skilled workers actually rose somewhat more rapidly than the average wage, suggesting that low unemployment is a key factor in sustaining wages for less-skilled workers.

It is also worth noting that the government has pursued a conscious policy of exposing less-skilled workers to direct competition with workers in the developing world through trade, thereby depressing their wages. In contrast, it explicitly protects highly skilled workers like doctors, lawyers, and economists, through licensing and professional restrictions. Any serious discussion of the wage gap should take these policies into account.

The article also notes Mr. Greenspan's stated belief that a higher minimum wage leads to job loss. It is worth noting that there is now a large body of economic research that indicates that moderate increases in the minimum wage lead to little or no job loss. The article did not indicate if Mr. Greenspan cited any research to support his views.

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Budget Items

U.S. Cuts Off Financing Of U.N. Unit For 3rd Year
Christopher Marquis
New York Times, July 17, 2004, Page A6

U.N. Funding for Halting Diseases Faces Money Woes
Sharon LaFraniere
New York Times, July 17, 2004, Page A6

These articles discuss U.S. funding levels for U.N. funds that deal with population issues and diseases in the developing world. It would be helpful to readers if the sums at issue were placed in some context.

For example, the $34 million that the United States is withholding from the United Nations population agency for 2005 is equal to approximately 0.0014 percent of the federal budget. Alternatively, it is equal to less than 1 penny for each person living in the developing world. The $200 million that the Bush administration is requesting for the global AIDS fund is equal to approximately 0.008 percent of the federal budget, or approximately $6 for every person with HIV/AIDS in the developing world.

Bush Pushes Congress To Extend Tax Cuts
Jonathan Weisman
Washington Post, July 20, 2004, Page A4

This article reports on efforts by Republicans in Congress to extend some of the expiring provisions of President Bush's tax cuts. It would be helpful to readers if the sums involved were expressed as a share of projected spending or revenue, rather than in dollar amounts. For example, according to the article, one bill would reduce taxes by $130 billion over the next five years. This is equal to approximately 1.1 percent of projected revenue over this period. This sum is equal to approximately 1.9 percent of the general revenue (excluding Social Security and Medicare taxes and government employee retirement payments) projected for the next five years.

$1 Billion Is Pledged to Help Haiti Rebuild, Topping Request
Christopher Marquis
New York Times, July 21, 2004, Page A4

This article reports on international aid commitments to rebuild Haiti. According to the article, the United States pledged $230 million over two years. This is equal to approximately 0.005 percent of projected spending over this period.

White House Helps Block Extension of Tax Cuts
Edmund L. Andrews
New York Times, July 22, 2004, Page A17

This article reports on the defeat of a bill that would have extended provisions in President Bush's tax cuts. The article reports that the bill would have cost $80 billion over the next two years. This is equal to approximately 4.0 percent of projected revenue over this period.

War Costs Exceed Budget, Watchdog Panel Says
Edmund L. Andrews
New York Times, July 22, 2004, Page A10

This article discusses the extent to which war-related expenditures in Iraq and Afghanistan have exceeded budget projections. According to the article, expenses are exceeding the budgeted amount by $12.3 billion this year. This is equal to approximately 0.5 percent of federal spending.

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Inflation

Consumer Prices Gain At a Slower Pace in June
Nell Henderson
Washington Post, July 17, 2004, Page E1

This article reports on the Labor Department's release of the consumer price index for June. At one point the article presents Alan Greenspan's view (expressed in recent testimony), that "inflationary pressures are not likely to be a serious concern in the period ahead." It is worth noting that as recently as March, Mr. Greenspan said that the threats from inflation and deflation are roughly equal. The annual rate of inflation has been just under 5.0 percent in the intervening four months.

Later, the article presents the view of Fed officials that "the recovery remains on track." In the fall of 2000 and right into 2001, Alan Greenspan and other top Fed officials continued to say that the economy was doing fine, even as it was sinking into a recession. It would have been helpful to note this recent track record when reporting these assessments and to present the views of economists with different opinions.

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Medical Malpractice

Cheney Urges Cap on Malpractice Awards
Ceci Connolly
Washington Post, July 20, 2004, Page A1

This article reports on a speech by Vice President Richard Cheney, in which he called for legislation that would limit the size of medical malpractice awards to $250,000. The sub-head of this article asserts that the "proposal aims to improve health care."

While Mr. Cheney claims that improving health care is the motivation for this proposal, it is not obvious that this is true. The immediate beneficiaries of this proposal will be insurance companies and doctors, both of whom are powerful political constituencies who disproportionately favor Republicans. It is also entirely possible that this legislation will lead to worse health care, since it will remove an important sanction for providing inadequate care. Since the impact of this legislation on the quality of care is not clear, and the immediate beneficiaries are important political backers of the Republicans, it is inappropriate to tell readers that the purpose is to improve care, when the real purpose may simply be to reward a powerful interest group.

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European Economic Growth

Amid Aging Smokestacks, Job Creation
Eric Pfanner
New York Times, July 22, 2004, Page W1

The Struggle to Get Europeans To Do Their Duty and Spend
Nicola Clark
New York Times, July 23, 2004, Page W1

These articles discuss the state of Europe's economy. The first article reports on the fact that many of the pre-expansion members of the European Union are losing jobs to the newly admitted countries, because these countries have far lower labor costs. The second article reports on the fact that consumers in many of these countries have been saving at a high rate, due to concerns about their economic future.

It would be helpful if articles on Europe's economy attempted to place the topics discussed in a larger perspective. For example, if Western European countries are really being forced to accept lower wages and a smaller welfare state as a result of the admission to the EU of countries in central and eastern Europe, it implies that the admission of these countries will lead to lower living standards for large segments of the population in western Europe. Yet, this point was almost never mentioned in coverage of the expansion of the EU. Presumably, there would have been large-scale opposition in Western Europe to the admission of these countries, if the public knew that it would reduce their standard of living.

The second point portrays a high savings rate in Western Europe as a problem. The vast majority of economists try to promote higher savings, so it is worth noting that this view is at odds with standard economic doctrines. It is also worth noting that the predicted effect of many of the policies being pursued by European governments, such as reducing pensions, cutting back unemployment benefits, and pushing down wages through international competition, is a rise in the savings rate. Presumably, European governments recognize this fact when they promote these policies.

It is also worth noting that the contractionary effect of high private savings rates can be counteracted with low public savings rates (i.e. budget deficits). However, the Maastricht agreement, which governs the fiscal policy of countries that use the euro, sharply limits the size of budget deficits.

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Russia

Russia Plans to Seize, Sell Oil Giant's Key Subsidiary
Peter Baker
Washington Post, July 21, 2004, Page A13

This article reports on the Russian government's plans to break up the Yukos Oil Company in order to penalize the company for tax evasion. The article describes this plan as being part of a "politically charged campaign" against the company.

While it is reasonable to believe that politics are a major factor in the government's prosecution of the oil company, it is also worth noting that the company is almost certainly guilty of large-scale tax evasion. According to most experts on Russia's economy, it is standard practice for large companies to evade most of their tax liability. The article should have noted that this is a possible motive for the government's actions.

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Intellectual Property Claims

Software Group Enters Fray Over Proposed Piracy Law
Steve Lohr
New York Times, July 19, 2004, Page C9

This article reports on a study commissioned by a software industry trade group that finds that the industry is losing $29 billion a year due to unauthorized copying of its software.

The article describes this copying as "piracy." It is not clear that all the instances of unauthorized copying examined in this study can accurately be termed "piracy." There are instances, for example when a person makes a copy of software that she has purchased to use on a different computer, where the legal status of the action may not be clear. Also, duplicating software in countries where it is not protected by copyrights is not piracy.

It have been useful to include some economic analysis in this article. Software can be transferred at near zero cost over the Internet. If the industry succeeds in increasing its cost by several thousand percent through copyright protection, then it will lead to a substantial loss of economic efficiency. The potential losses to consumers in this situation would be at least an order of magnitude larger than the losses from the steel tariffs imposed by President Bush.

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