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Outstanding Stories of the Week

Medicare Rules Set Off a Battle on Drug Choice
Robert Pear
New York Times, September 26, 2004, Page A1

This article describes the battle between the drug industry and insurers over how narrowly the mandates for Medicare drug policies should be defined. The drug industry wants to ensure that the widest range of drugs is covered, whereas the insurance industry would like to restrict patients' options to force them to use lower-cost drugs.

A Primer for Tonight's First Debate
Neil Irwin Glenn Kessler and Ceci Connolly
Washington Post, September 30, 2004, Page A6

This article presents a number of false or misleading claims that the presidential candidates have frequently made in prior speeches. It encourages readers to examine how these issues are treated in the debates.

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The Economy

U.S. Revises 2nd-Quarter Growth to 3.3% Rate
Nell Henderson 
Washington Post, September 30, 2004, Page E1

This article reports on the Commerce Department's upward revision to its earlier estimates of GDP growth in the second quarter. The article includes the assessments of several economists pronouncing the revisions as a positive sign, and suggesting that the slowdown in the second quarter was not as large as previously believed.

It is worth noting that much of the upward revision from the initial report was attributable to more rapid growth in inventories than had previously been reported. The rate of inventory accumulation in the quarter was the most rapid since the second quarter of 2000. While some of this inventory accumulation may have been intentional, some was clearly unintended, for example the large backlog of unsold 2004 cars. If the higher rate of inventory accumulation was primarily unintended, then the revisions portend slower growth in the future, as firms cut back production to work off their inventories. This process is already taking place in the automobile industry.

It would have been helpful if this article had presented a broader range of views among economic analysts. The analysts cited in the article did not predict the recent economic weakness. It would be helpful to include the views of economists who have been shown to be accurate in their assessments of the economy.

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Social Security

Election May Hinge on Debates
David Von Drehle 
Washington Post, September 26, 2004, Page A1

This article discusses the potential impact that the presidential debates will have on the outcome of the election. At one point it comments that some issues are eternally talked about "but never resolved." It lists Social Security as one such example. It is not clear what the article means by "resolved." The most recent projections show that the program is completely sound for almost forty years with no changes whatsoever, putting it in far better financial shape than at any point during its first four decades of existence. While conservatives continue to propose changes to the program, there is nothing about the program that needs to be resolved.

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Welfare and Poverty

Poverty Up as Welfare Enrollment Declines
Griff Witte
Washington Post, September 26, 2004, Page A3

This article reports on the continuing decline in welfare rolls, even as the number of people in poverty increases. At one point it reports predictions about the change in the poverty rate for 2004. It cites a Bush administration official's view that the poverty rate will likely fall because of the job growth in 2004. It contrasts this position with the assessment of critics, that poverty will rise because the quality of the jobs being created is bad.

Actually, both of these claims are inaccurate. The number of jobs created between 2003 and 2004 will be approximately equal to the growth in the labor force, which means that there will be virtually no change in the number of workers per family, and therefore almost no impact on the poverty rate. While the economy is generating between 1.5 and 2.0 million jobs annually at present, it would have to generate about 3 million a year to appreciably affect the poverty rate.

On the other hand, the quality of the new jobs created also has relatively little impact on the poverty rate. The quality of new jobs has very little impact on the well-being of the bulk of the workforce (who remain in old jobs) especially when the economy is not creating many jobs. The more obvious issue is the change in overall wages. Adjusted for inflation, wages are about 1.0 percent lower on average in 2004 than in 2003. This is likely to lead to a rise in the poverty rate.

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Health Care

Health Care Costs Are a Killer, but Maybe That's a Plus
Steve Lohr
New York Times, September 26, 2004, Section 4, Page 5

This article discusses the rapid increase in health care costs that the country is currently experiencing. It argues that the rise in costs may be acceptable since it is associated with improvements in the quality of health care.

It would have been appropriate to discuss whether the increases in cost are necessary to achieve these improvements in health outcomes. Almost all the other industrialized countries enjoy better health care outcomes than the United States, yet spend far less on health care. This suggests that the higher costs are not necessary to enjoy better outcomes.

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Canada

Canada's Prophets of Pessimism (Is It the Weather?)
Clifford Krauss 
New York Times, September 29, 2004, Page A4

This article discusses what it perceives as a sense of pessimism among Canadians about the status of their country. One of the alleged causes of this pessimism is a shortage of "doctors, technology, and affordable drugs."

It is not clear what is intended by this assertion. Canadians enjoy better health outcomes than people in the United States, which suggests that shortages are not harming Canadians health - at least compared to the health of people in the United States. While Canadians may prefer more doctors, technology, and affordable drugs, they are still doing better in these categories than almost anyone else in the world. They also have the freedom to buy these items at higher prices in the United States, just like people living in this country.

It is worth noting that for close to a decade, the Times has been running pieces promoting the view that the Canadian health care system is in crisis. While the system clearly has problems, it has continued to provide high quality health care to Canadians at a price that is approximately half the per person cost in the United States.

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Controls on Car Emissions

Calif. Says Carmakers Must Cut Emissions
Greg Schneider 
Washington Post, September 25, 2004, Page E1

This article discusses a set of regulations that California implemented, which will require substantial reductions in greenhouse gas emissions by cars sold in the state. At one point the article reports the state regulators' estimate that the controls will add $1,050 to the price of a new car, and the industry's estimate that the cost will be more than $3,000 per car. It would have also been appropriate to mention the projected savings on gas that would result from increased fuel efficiency. The regulators estimated these savings at more than $2,100 over the life of a vehicle.

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Oil Prices and Inflation

Oil Passes $50, Then Pulls Back; Analysts Expect Market to Seek New Level
Jad Mouawad
New York Times, September 29, 2004, Page C2
Published online as, "Analysts Expect Market to Seek New Level"

This article discusses the impact that rising oil prices will have on the economy. At one point, the Times article asserts that "the Federal Reserve Board and the European Central Bank have each said recently that oil prices have not slowed economic recovery or contributed to inflation."

Both parts of this statement are clearly false. The overall rate of inflation in the United States over the last year, as measured by the CPI, was 2.7 percent. Excluding energy prices, the rate of inflation was 2.0 percent. With energy prices far outpacing the overall rate of inflation, it is simply definitional that they have contributed to inflation.

Similarly, higher energy prices pull money out of consumers' pockets in the same way as higher taxes, giving them less money to spend. They also raise costs for almost all types of business. Therefore they must have a negative impact on economic growth. This impact is most apparent at present in the airline industry, where higher fuel prices have helped to push several major carriers near the point of liquidation.

The article does not identify the central bank statements to which it is referring, but it is unlikely that either bank would make pronouncements that are so blatantly wrong.

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Copyright Protection

Senate Bill Aims at Makers of File-Sharing Software
Tom Zeller Jr.
New York Times, September 30, 2004, Page C7
Published online as, "Panel Considers Copyright Bill"

This article reports on legislation being considered by the Senate which would increase penalties for unauthorized duplication of copyrighted material and outlaw software and hardware that can be used for such duplication. While the economic costs from such measures are likely to be large, the article includes no economic analysis.

The costs are both direct, in the form of higher prices that consumers will pay for copyrighted protected material and indirect, due to costs of enforcement and the slowing of technological innovation. These costs are likely to run into the hundreds of billions of dollars annually, if one compares the situation to one in which copyrighted material is allowed to be transferred freely, as would be the case without government intervention.

In fact, the only comment about the economic impact is the pronouncement from Senator Bill Frist, a supporter of the bill, that copyrighted material adds more than half a trillion annually to the U.S. economy. This assertion is comparable to claiming that tariffs on clothes are important because the United States spends $330 billion a year on clothes. From an economic standpoint, the issue is the cheapest way to obtain the product, not the total amount being spent. There are many alternatives to copyrights which could be used to support creative and artistic work. Simple calculations suggest that such alternatives would be more efficient mechanisms for supporting this work and would require far less government intervention than the current copyright system (see "The Artistic Freedom Voucher: Internet Age Alternative to Copyrights ).

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Fannie Mae

Fannie Mae Takes New Approach in Crisis
Jeffrey Birnbaum and David A. Vise
Washington Post, September 27, 2004, Page A1

This article examines the scandal surrounding Fannie's Mae's accounting practices. It would have been appropriate to include a discussion of Fannie Mae's conduct with reference to the housing bubble.

While many economists and independent analysts have warned of a housing bubble in the United States, the bursting of which could lead to home price declines of as much as 30 percent in some areas, Fannie Mae's staff have consistently denied the existence of a bubble. They have encouraged home buying even in the most inflated housing markets and encouraged lenders to continue to support price run-ups in these markets.

The collapse of the bubble is likely to lead to a surge of personal bankruptcies, large-scale mortgage defaults, and will almost certainly lead to huge losses at mortgage guarantors, like Fannie Mae and Freddie Mac, which may require a government bailout. The failure of Fannie Mae to take actions to try to stem the growth of the housing bubble can potentially lead to far more damage than its abuse of accounting rules.

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School Vouchers

Study Bolsters Case for Tuition Vouchers
Sewell Chan
Washington Post, September 29, 2004, Page A12

This article reports on a study by a Wisconsin group advocating school vouchers. The study purportedly shows that students receiving vouchers to attend private high schools had much higher four-year graduation rates than students who remained in public schools, or even those who attended public high schools with selective admission criteria.

At one point the article notes the criticism of one independent expert, that the study only examined outcomes in ten schools and that this was not a random sample. This issue is crucial - if the 10 schools selected for the study were known to be especially good schools, then it would be surprising if graduation rates were not higher than in the public school system as a whole. In other words, if this study did not draw on a random sample of private high schools, then it provides no useful information and should not have been the subject of a news story.