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Outstanding Stories of the Week

Rivers Run Black and Chinese Die of Cancer
Jim Yardley
New York Times, September 12, 2004, Page A1

This article examines conditions in rural China, focusing specifically on the environmental degradation that has taken place as a result of the country’s single-minded focus on economic growth over the last two decades.

Collapse of 60 Charter Schools Leaves Californians Scrambling
Sam Dillon
New York Times, September 17, 2004, Page A1

This article reports on the collapse of a chain of privately run charter schools in California. The collapse of the chain, which relied on public money, left 6000 children without a school, dozens of school teachers unemployed, and in some cases may have to led to the loss of students’ school records.


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Medicare

Kerry Criticizes Drug Plan
Paul Farhi
Washington Post, September 11, 2004, Page A6

This article reports on a speech by Democratic presidential candidate John Kerry in which he criticized the Bush administration for breaking the law when it withheld its estimates of the cost of its Medicare prescription drug bill from Congress. The administration's internal cost estimates were more than $100 billion higher over ten years (25 percent of the total cost) than estimates Congress had available when it voted on the bill.

At one point the article refers to the assessment of several members of Congress that the bill may not have passed if it had the newer estimates at the time of the vote. In fact, it is almost certain that the bill would not have passed. The Republican leadership lacked a majority in the House, and was only able to get the votes for passage by suspending the normal voting rules, and then pressuring individual members to change their vote. Since the cost was the main objection of several recalcitrant Republicans, it is very questionable if they could have still mustered a majority for a bill that cost 25 percent more than the estimates available at the time of the vote.

In discussing the administration's ethics violations in withholding the cost estimates, it is also worth noting that Thomas Scully, the former head of Medicare and Medicaid Services who made the decision to withhold the cost estimates from Congress, was negotiating for a job with lobbyists for insurance and pharmaceutical companies at the time the drug bill was being structured by Congress. Ordinarily, top officials are prohibited from seeking employment while still in their job, if such employment is with firms directly affected by legislation under their purview, but the Bush administration waived this rule for Mr. Scully.

Kerry Asserts Bush Has Misled Voters
Jim VandeHei and David Snyder
Washington Post, September 15, 2004, Page A1

Kerry Says Washington Hides Medicare's Cost to People
Jodi Wilgoren
New York Times, September 15, 2004, Page A21

These articles report on a speech in which John Kerry criticized President Bush for concealing the full cost of his Medicare bill. This bill has led to the sharpest increase ever in the premiums that seniors must pay for Medicare coverage. It would have been worth mentioning that one of the reasons that premiums rose so much was that part of the bill increased subsides to private insurers so that they would be better able to compete with the traditional public Medicare insurance.


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Japan

In Japan, Measuring A Recovery’s Strength
Peter S. Goodman and Akiko Kashiwagi
Washington Post, September 11, 2004, Page A1

This article assesses the strength of Japan’s economy. It describes Japan as the world’s second largest economy. While this is true when using currency conversions of GDP, economists usually use purchasing power parity (PPP) measures of GDP for most purposes. (Purchasing power parity measures GDP assuming that all goods and services sold at the same price in all countries.) Using a PPP measure of GDP, China’s economy is the second largest, approximately 50 percent bigger than Japan’s economy.

At one point the article asserts that economists say that Japan’s ability to sustain growth depends on its ability to end its deflation. It is not clear why any economists hold this view. While deflation can have harmful effects, there are many examples of economies that have sustained healthy growth through periods of deflation. The article does not cite any economists who hold the view about deflation that it attributes to them.

The article discusses at length the problems that Japan’s banking system has had in dealing with bad loans. As an example of its failure in this area, the article refers to a resort center in which all the hotels are behind on their loans, but none have been shut down. It is not clear that shutting down these hotels would be to anyone’s advantage. While the loans to build the hotels may have been mistakes, since the hotels have already been built, it may be better for everyone to keep them operating (possibly under current management), than to shut them down and seek to sell them to new owners. This is not the clear example of the failings of the banking system that the article implies.


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The Trade Deficit

Smaller Trade Gap Still a Chasm
Paul Blustein
Washington Post, September 11, 2004, Page E3

This article discusses the release of new data on the trade deficit in July. The article notes that in July, the deficit was running at a $600 billion annual rate (5.5 percent of GDP), the second highest level in history after June. After noting the size of the deficit, the article refers to "the problem that most worries economists about the trade deficit - the danger that it will cause a deep decline in the dollar, eroding U.S. living standards."

Actually, economists recognize that the main cause of the trade deficit is an over-valued dollar. The value of the dollar is the primary mechanism that brings exports and imports into balance. The Clinton administration consciously pursued a high dollar policy, which the Bush administration has largely continued. This policy has the positive short-term effect of making low- cost imports available, thereby raising living standards and keeping down inflation. In the long-term it is unsustainable, as it leads to a large and growing foreign debt. At present, the value of the dollar is only being maintained by massive purchases of dollars by foreign central banks (primarily Japan and China's), not by foreign investors as this article claims.

There is no plausible story in which the U.S. trade deficit is brought down to a manageable level without a large decline in the value of the dollar. While this may have unpleasant consequences, economists recognize that this decline is part of an inevitable adjustment process.

The article includes a reference to the Bush administration's claim that the trade deficit is due to the fact that the U.S. economy is growing more rapidly than the economies of our trading partners, which causes our imports to rise by more than our exports. It is easy to show that this assertion is wrong. If growth, and therefore imports, had been a full 5 percentage points less over the last four years, it would have reduced our trade deficit by $80 billion. This would still leave the trade deficit running at an annual rate of $520 billion.


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Bias in Economic Reporting

Do Newspapers Make Good News Look Bad?
Eduardo Porter
New York Times, September 12, 2004, Section 3 Page 6

This article discusses a new study from the American Enterprise Institute, which finds evidence that economic reporting was more positive during the Clinton years (adjusting for the actual state of the economy) than during the two Bush administrations. It is worth noting that the study did not control for the fact that during large portions of the Clinton years, most business economists were concerned that the economy was growing too rapidly and that the unemployment rate was too low. This means that reports showing slow growth in these years (e.g.,1997-2000), might have been reported positively in the media, since many analysts were worried that more rapid growth would lead to inflation.


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Canada

Canada Looks for Ways to Fix Its Health Care System
Clifford Krauss
New York Times, September 12, 2004, Page A3

Canada Agrees to Increase Its Spending on Health Care
Clifford Krauss
New York Times, September 17, 2004, Page A6

These articles report on plans by the Canadian government to improve its health care system. In order to reduce Canada's budget deficit, the government had actually reduced per person spending on health care (adjusted for inflation) over the last decade.

Both articles include references to the possibility of privatizing Canada’s publicly managed system, as though this is an option that would lower costs. The article presents no evidence that supports this perspective and it certainly contradicts most evidence on this issue. For example, the September 17th article notes that health care costs in Canada have increased from 7.5 percent of GDP in 1975 to 10 percent at present. By contrast, in the United States, over the same period, costs increased from roughly 7.5 percent of GDP to more than 15 percent of GDP at present. It is also worth noting that Canada has better health care outcomes by most measures.


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Health Care

A Health Insurance Option Coming to Federal Workers
Milt Freudenheim
New York Times, September 16, 2004, Page C7

This article reports on the introduction of a “health savings account” option for federal employees. This option will allow workers to buy insurance policies with high deductibles, and then to place a substantial amount of money in a tax sheltered account. The money in this account could either be used to pay for expenses not covered by the insurance plan or saved for some future use.

The article asserts that these accounts are “meant to let people decide for themselves whether to pay for high-priced drugs or treatment.” It is not clear that this is their purpose. Virtually all health care economists recognize that this option will fracture the insurance pool. Relatively healthy people are likely to find this option attractive. It will let them buy a lower cost insurance plan and bank the savings tax free. On the other hand, sicker people, whose expenses are almost certain to exceed the deductible on these low cost insurance policies, would opt for traditional insurance plans. If the traditional plans drawing a relatively less healthy mix of insurees, then their costs will inevitably rise, as will their premiums.

While proponents of health savings accounts use rhetoric about “individual choice,” it is possible that they are aware of the impact that this proposal will have the insurance pool. In this case, their goal may have nothing to do with choice, but may simply be another way to transfer income from sicker, and generally less affluent people, to relatively healthier and wealthier people. This has been the effect of many of the other measures supported by proponents of health savings accounts. Since the article presents no reason for believing that the stated goal of these politicians is their actual goal, the assertion about the purpose of health savings accounts is unwarranted.


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Harvard Money Managers

Markets Help Endowment Pass $22 Billion at Harvard
Karen W. Arenson
New York Times, September 16, 2004, page A21

This article reports on the increase in the value of Harvard’s endowment in 2003. At one point it notes that Harvard had been criticized in the past because it paid two of its money managers $35 million each, and a third $6.9 million. The article then comments “it is too early to say whether the strong results at Harvard will quiet any of the criticism that it pays its money managers too much.”

According to the article, the endowment produced a 21.1 percent return on its investment in 2003. The S&P500 index produced a 20.2 percent return for the year. It is not clear why anyone would be very impressed by highly paid money managers who barely edge out the return from the major stock index. Presumably, the people who had previously been critical of the pay received by these money mangers would still be critical.


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Grazing on Public Lands

In Grazing Debate, Some Ranchers Are Switching Sides
Juliet Eilperin
Washington Post, September 13, 2004, Page A2

This article reports on ranchers’ attitudes towards a program that would ban cattle grazing on government lands. Under this program, ranchers who currently use public land would receive a one-time payment in order to compensate them for losing access. According to the article, implementing this program would cost the government $100 million in payments to ranchers. By contrast, the article reports that the current system has a net cost to the government in administrative fees of $38 million a year, with additional maintenance costs for the land estimated at $50 million a year.

At one point, the article cites a Bush administration official as questioning whether the government could afford to buyout the ranchers through this program. If the numbers that appear in the article are correct, the government could fully recoup a $100 million buyout in less than two years.