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Outstanding Stories of the Week

Bush Health Care Plan Seems to Fall Short
Ceci Connolly
Washington Post, August 22, 2004, Page A1

This article examines the likely impact of President Bush's new health care proposals. It presents the assessment of experts that they are not likely to be very effective in reducing the size of the uninsured population.

Boy's Murder Case Entangled In Fight Over Antidepressants 
Barry Meier
New York Times, August 23, 2004, Page A1

This article discusses the withholding of evidence that drugs have harmful side effects in the context of the murder trial of a boy who was taking the anti-depressant Zoloft. Government patent monopolies give companies strong incentives to conceal evidence that reflects poorly on their drugs.

A Windfall From a Student Loan Program
Greg Winter
New York Times, August 27, 2004, Page C1

This article reports on a provision in the government guaranteed student loan program that has allowed banks to charge interest rates that are far above market levels on these loans. The interest rate was set in law at a time when rates were considerably higher than at present, and efforts to correct this mistake have been blocked by the administration and/or Congress.

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Oil Prices and Economic Growth

An Oil Shock That Could Be an Economic Stimulus in Disguise
Eduardo Porter
New York Times, August 21, 2004, Page B1

This article discusses the possibility that the recent run-up in oil prices could actually be boosting the economy. None of the evidence presented in the article supports the view that oil price increases are an economic stimulus.

The article reports that, in contrast to past periods of sharp oil price increases, "this time prices are not soaring." It also notes that the Fed may see the run-up in oil prices, and the resulting economic weakness, as a reason not to raise interest rates.

While the inflation rate - 3.0 percent for the last year - is not high by historical standards, it has increased compared to 2001 and 2002, when it averaged 2.0 percent. Economists typically worry more about the change in the inflation rate, rather than the level. In this sense, the oil induced change in the inflation rate has been consistent with the impact that generally would be expected.

It is possible that Alan Greenspan and the Federal Reserve Board will see the economic weakness from higher oil prices as a reason not to further slow the economy by raising interest rates. However, this scenario still means that the oil price rises have been dampening growth, not stimulating it.

Furthermore, the more important interest rates for the economy are the long-term rates paid on home mortgages and corporate bonds, rather than the short-term rate under the Fed's control. These rates typically respond to movements in the overall rate of inflation, since investors care about the real return they can get on their money. If oil price increases push up the overall inflation rate, then typically long-term rates would follow. It appears that the Fed has been actively trying to keep long-term rates low (for example, Greenspan was still expressing concern about the risk of deflation as recently as March, a time when virtually no prices were declining), but it is implausible that higher inflation will actually lead to a decline in long-term interest rates.

At one point the article refers to the predictions of a group of economic forecasters, that the economy will grow at a 3.8 percent rate over the second half of the year. These forecasters have an especially bad track record - for example, not one of the Blue Chip 50 forecasters predicted the 2001 recession in their forecasts from the prior fall - it would be helpful to present the assessments of people who have a better track record of predicting what the economy will do.

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Protection for Doctors

Los Angeles Emergency Care Crisis Deepens
Nick Madigan
New York Times, August 21, 2004, Page A8

This article reports on the closing of a number of emergency care facilities in the Los Angeles area and around the state of California. At one point, the article refers to the difficulty that these facilities have in attracting doctors who are willing to staff the facilities late at night and on weekends.

It would have been useful to note that this shortage of doctors is largely attributable to the protectionist policies of the Clinton and Bush administrations. In 1997, Congress reduced the number of foreign medical residents who could practice in the United States with the purpose of raising the salaries of U.S. doctors. The tests required of foreign physicians to practice in the United States was also made more difficult for the same reason. As a result, there has been a sharp reduction in the number of foreign physicians entering the country each year.

Any politician or economist who is committed to free trade would be seeking to reverse these protectionist measures given the harm that they have caused to the nation's health and the economy. However, these protectionist measures - which benefit some of the richest people in the country (doctors earn $200,000 a year on average) do not get the same sort of attention as the protectionist measures that help other workers, for example steelworkers or textile workers.

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The Budget

Kerry's Dueling Promises on Economy
Jonathan Weisman
Washington Post, August 25, 2004, Page A8

This informative article assesses the likely impact of the policies proposed by Senator Kerry and President Bush on the budget deficit. It would be useful if the dollar amounts were expressed as percentages of the budget or GDP since most readers will not otherwise be able to recognize their importance.

For example, the article refers to a proposal by President Bush to increase the amount of money that people can invest without paying taxes on the income. The article notes that the lost revenue will be relatively small over the first decade, but "during ensuing decades, the cost could be as high as $50 billion a year." The importance of this figure is difficult to determine. By 2025, the Congressional Budget Office projects that annual GDP will be almost $30 trillion. This means that a loss of $50 billion a year in revenue would be less than 0.2 percent of GDP. While this sum is not trivial, it also would not have a very large economic impact.

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Labor Shortages

Skilled Labor in High Demand
Nell Henderson
Washington Post, August 25, 2004, Page E1

This article argues that there is a shortage of skilled labor based on the statements of a number of employers. At one point it reports that it is not realistic for employers to offer higher wages "because it would make them uncompetitive."

If this is true, then there is not really a shortage of skilled workers. Employers always want to pay workers less than they do. Other things equal, lower pay for workers leads to higher profits. However, if the market will not support paying these workers higher wages, as this article claims, then there is no shortage of supply. Firms simply want to be able to hire workers at below the market price in the same way that homebuyers would like to buy a home at below the market price.

At one point the article notes the trend over the last quarter century for the wages of highly educated workers to rise relative to less educated workers. It is worth noting that this has not been an accident. The government consciously pushes up the wages of highly educated professionals like doctors and lawyers by restricting the supply. This is especially evident in the case of doctors, where the number of foreign physicians who can practice in the United States was reduced by legislation in 1997 because doctors complained that their wage were being pushed down by the inflow of foreign doctors.

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Germany

It's Monday in Germany. Time for Social Protest
Mark Landler
New York Times, August 25, 2004, Page W1

This article reports on protests in Germany against the government's moves to reduce unemployment benefits and to roll back other protections for workers. At one point, the article asserts that "experts say, the measures will generate new jobs by shaking up Germany's calcified labor market." It then goes on to note that the supposed benefits may not come for several years, while Germany's Chancellor, Gerhard Schroder comes up for re-election in 2006.

It would have been helpful to describe the full process through which Mr. Schroder's changes are supposed to generate new jobs. The theory holds that if workers lose unemployment benefits and other protections, then they will be forced to accept lower wages. Eventually, their wages will fall enough that employers will be prepared to hire more workers. In other words, the "success" of this policy is that workers are willing to take jobs at wage levels for which they currently refuse to work. Given the implications of his agenda, it is not clear that Mr. Schroder will be substantially more popular once the full effects of his policy are felt (assuming it works as theory predicts), than he is at present.

It is also worth noting that Mr. Schroder has consistently refused to try to take any steps to pressure the European Central Bank (ECB) to adopt a more expansionary monetary policy. In response to economic weakness in the United States, the Federal Reserve Board pushed short-term interest rates down to 1.0 percent. Virtually all economists recognize that this decision has been effective in helping the U.S. economy to recover.

The ECB never lowered its short-term rate below 2.0 percent, even though by most measures there was considerably more economic slack in the euro zone region than in the United States. The ECB has been criticized for this contractionary policy by numerous economists, including those at the IMF, who argue that it has slowed growth and raised the unemployment rate. Mr. Schroder has implicitly acquiesced in this ECB policy, instead focusing on cutting workers' benefits as the best route to reduce unemployment. This aspect of the policy debate is not mentioned in the article.

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Medicare

Insurers Object To New Provision In Medicare Law
Robert Pear
New York Times, August 22, 2004, Page A1

This article reports on the reluctance of private insurers to establish multi-state insurance pools, as required under the recent Medicare prescription drug bill. It would have been helpful to include the views of experts who had anticipated this sort of problem, and for that reason had advocated the expansion of the existing government run program.

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The Dollar

Bush Team Lacks Clear Economic Plan, Critics Say
Jonathan Weisman
Washington Post, August 24, 2004, Page E1

This article assesses the economic record of the Bush administration. At one point the article cites the assessment of a group of economists that the Treasury Department "has deftly handled an orderly decline in the value of the dollar, boosting U.S. exports through dollar deflation without creating a currency crisis." Actually, the U.S. trade deficit has continued to grow throughout the Bush administration, reaching a record 5.5 percent of GDP ($600 billion at an annual rate) in the most recent quarter. This deficit implies that the dollar will have to decline by a far larger amount than it has thus far. At the moment, central banks in China, Japan, and India have been willing to support this trade deficit, but no economist believes that these foreign governments will continue to subsidize U.S. consumption indefinitely.

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Overtime Pay 

Controversial Overtime Rules Take Effect
Steven Greenhouse
New York Times, August 23, 2004, Page A11

This article reports on the Labor Department's implementation of a new set of rules covering which workers are legally entitled to premium pay for overtime. The article reports that there is a serious dispute over how any people will lose protection with the new rules. The administration claims that only a small number of workers will lose coverage, while opponents of the change argue that 6 million workers will lose protection.

This dispute is primarily due to confusion over two different questions:
1) how many people who currently work overtime will no longer be guaranteed premium pay with the new rule, and
2) how many people who are currently protected by the law will no longer be protected with the new rule.

The answer to the first question is somewhere in the neighborhood of 160,000 -- in some cases these workers will still get an overtime premium either due to union contracts or simply due to market conditions (nurses are one of the categories of workers losing protection - in many areas there are severe shortages of nurses. Employers will be reluctant to cut back their overtime premiums for fear of losing workers.)

The answer to the second question is approximately 6 million (8 million including workers who currently work part-time). While all of these workers will not now be required to work overtime, the number of people who are forced to work overtime without premium pay will surely rise from current levels, since employers now have added incentive to force people to work overtime.