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Outstanding Stories of the Week

The Rise of the Homeland Security-Industrial Complex
Louis Uchitelle and John Markoff
New York Times, October 17, 2004, Section 3, Page 1
Published online as, “Terrorbusters Inc.”

This article reports on the rapid growth of a group of companies based primarily on providing security devices to protect against terrorist attacks. The article points out that homeland security appears to be providing a rapidly growing and highly profitable market for many companies.

Insurance Scandal Jolts Industry but Devastates Workers
Gretchen Morgenson
New York Times, October 20, 2004, Page C1

This article reports on the losses in 401(k) accounts suffered by workers at Marsh & McLennan, after it was reported that the company was getting kickbacks to steer customers to certain insurers. According to the article, much of the money in workers’ 401(k) accounts was held in the company’s stock, which has plummeted in the wake of the scandal.

Ambitious Dream for Girl in India: Schooling
John Lancaster
Washington Post, October 16, 2004, Page A1

This article examines attitudes towards educating girls in rural India and the struggles that some girls go through in order to obtain an education.


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Social Security

Kerry Goes Beyond Some of Bush Positions (Fact Check)
David E. Rosenbaum and David M. Halbfinger
New York Times, October 19, 2004, Page A21

This article assesses the accuracy of some of Senator Kerry's remarks on the campaign trail. When discussing Kerry's criticisms of President Bush's plans to privatize Social Security, the article asserts that the theory of privatization is that "the increased earnings" from private accounts would more than offset cuts in Social Security benefits.

It is questionable whether there is any "theory" that private accounts would provide increased earnings relative to government bonds in which Social Security money is currently invested. Proponents of privatization have routinely assumed returns from the stock market that were clearly impossible given the price-to-earnings ratios in the stock market. For example, they assumed that the stock market would provide 7.0 percent real (inflation-adjusted) returns even at the peak of the stock bubble, when the price to earnings ratio was over thirty to one.

With the current price to earnings ratio still over 20 to 1, the difference between the return on individual accounts invested partly in the stock market, after deducting administrative costs, will be virtually identical to the returns from the government bonds held by the Social Security trust fund.

If the proponents of privatization actually had an explanation of how they could get much higher returns from the stock market than government bonds, it would be a very simple exercise to write down the dividend yields and capital gains that would generate the higher returns that they assume (see CEPR Challenges Privatization Advocates on Projected Stock Returns).

Ads Push The Factual Envelope
Howard Kurtz
Washington Post, October 20, 2004, Page A1

This article examines the accuracy of some of the claims that have been made in the ads run by the presidential campaigns. At one point it discusses an ad by the Kerry campaign that claims that President Bush wants to privatize Social Security and may cut benefits by 30 to 45 percent.

The article implies that the Kerry ad is inaccurate, asserting that President Bush has never endorsed a specific plan and has vowed to protect the benefits of retirees and older workers. In fact, one of the three plans put forward by President Bush's Social Security commission did call for benefit cuts of this magnitude. While Bush did not endorse this proposal (or the other two), he did not repudiate it either.

Bush Defends Himself Against Kerry's Charges
Dana Milbank and Lois Romano
Washington Post, October 20, 2004, Page A4

This article reports on the Bush campaign's response to criticisms from John Kerry. At one point it reports the campaign's criticism of John Kerry's approach to Social Security, which it describes as "head in the sand." The article goes on to assert that without changes, the program would eventually run out of money.

According the Social Security trustees' most recent projections, Social Security can pay all scheduled benefits until the year 2042 with no changes whatsoever. The non-partisan Congressional Budget Office did an independent analysis, which projected that it could pay benefits through the year 2052. These dates are 30 years and 40 years, respectively, after the end of a hypothetical second Kerry term. It is also important to note that the tax increases needed to fully fund Social Security over its seventy-five-year planning horizon are less than three quarters the size of the increase in annual military spending (adjusted for inflation) since 2001.


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The Ownership Society

Health Plans Differ in Philosophy and Scope
Ceci Connolly
Washington Post, October 22, 2004, Page A6

This article discusses the differences between the health care plans put forward by Senator Kerry and President Bush. The article asserts that these differences are rooted in philosophy. Both Senator Kerry and President Bush are politicians seeking to be elected. It is not clear that either has ever paid much attention to political philosophy.

While it is possible that political philosophy shaped the plans put forward by the two candidates, it is also plausible that the primary factor determining the structure of the plans being put forward was the desire to serve important political interests. The Bush proposal will likely to lead to more profits for the insurance industry, the pharmaceutical industry, and the financial industry, which would manage the health savings accounts he has proposed. All three of these industries are big financial backers of his campaign. His proposal would also allow relatively healthy and wealthy people to shelter more of their income from taxes and self-select in lower cost insurance pools.

Senator Kerry's plan would likely benefit more low and middle-income people who currently do not have insurance. He is expecting to win a large majority from this group of voters.

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Pensions

S.E.C. Inquires Into Pension Accounting at Ford and G.M.
Mary Williams Walsh and Stephan Labaton
New York Times, October 20, 2004, Page C3

This article reports on an investigation by the Securities and Exchange Commission into the pension accounting at General Motors and Ford. The article includes a table showing the average annual returns assumed by several large companies. The article implies that returns are largely a matter of speculation. However, pension returns can be reconciled with standard projections for profit growth by government and private forecasters. Determining whether a specific assumption on returns is consistent with these projections is a very simple exercise. (The returns assumed in these pension plans imply sharp rises in the price to earnings ratios in the stock market, which most analysts would almost certainly view as implausible.)


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Medical Care

Bush Takes New Course in Kerry Attacks
Elisabeth Bumiller
New York Times, October 16, 2004, Page A1

This article reports on the rhetoric used by President Bush in his latest campaign appearances and ads. The article reports that President Bush is claiming that Senator Kerry wants to create a new government-provided health insurance program that will enroll 22 million people. The article also reports the Kerry campaign's response, that it is proposing the expansion of existing programs and subsides for private insurers and employers.

It would have been helpful to remind readers that Mr. Bush's accusation is not true. He has made this charge before, including in two of the debates. While the accusation has been corrected in many "fact check" pieces, some readers may not have seen these pieces or might have forgotten them. Therefore it would be helpful to remind them that Mr. Bush's charge is not true.

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The Economy

Bullish on the Economy, But Only Cautiously So
Ellen L. Rosen
New York Times, October 21, 2004, Page C8

This article reports on a series of private surveys that it claims suggest a bullish outlook on the economy. It is questionable whether this evidence can be described as bullish. For example, an American express survey of small employers showed that 35 percent expected to hire new workers in the next six months. This is described as "a drop from the April survey, but above the 26 percent that reported planning to hire in 2002."

In the five months since April, private employers have added just 544,000 jobs, an average of just 109,000 per month. This is too slow a pace to even keep up with the natural growth in the labor market. If the American Express survey indicates that in the next six months employment growth will be even slower, then it implies that we will be seeing a rising unemployment rate during this period. In the six months following October of 2002, the private sector lost 446,000 jobs.

Holiday Spending Expected to Rise
Michael Barbaro
Washington Post, October 21, 2004, Page E1

This article reports on surveys of retailers' expectation for the Christmas shopping season. The surveys imply that nominal holiday sales will grow by 3 to 4.5 percent. While this is presented as a reasonably strong projection, it actually implies that retail sales will fall from their current levels. Nominal sales of the goods sold at retail stores are currently close to 6 percent above their year ago level. If they end up only 4.0 percent above year ago levels in the fourth quarter, then it would mean that real (inflation-adjusted) retail sales are flat or declining slightly between the third and fourth quarter of this year.

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Central Banks and Democracy

Europe's New Members Not Ready for the Euro
Mark Landler
New York Times, October 21, 2004, Page W1

This article discusses the prospect that the eastern European countries, which were recently admitted to the European Union, will soon join the euro zone monetary union. At one point it notes current disputes in Hungary over the conduct of monetary policy and comments that events are "taking on a less-than-democratic flavor." The article then reports that Hungary's elected prime minister is seeking legislation in Hungary's elected parliament, which would give him the authority to appoint half of the governing board of Hungary's central bank.

The article is wrong in calling this proposal "less-than-democratic." The move to give elected officials more authority is by definition democratic, although it can be argued that it is not desirable to have more democratic control over central banks (some economists argue that central banks operate most effectively when they are not accountable to elected officials). In the United States, the President appoints seven of the twelve people who determine central bank monetary policy.

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Prescription Drugs

Importing Less Expensive Drugs Not Seen as Cure for U.S. Woes
Eduardo Porter
New York Times, October 16, 2004, Page A1

This informative article examines the potential impact of imported drugs on prescription drug prices in the United States. At one point it describes "free-market" pricing of drugs as politically sacrosanct in the United States. Actually, the current patent system does not have free-market pricing. It is a system of monopoly pricing, in which the government threatens to arrest any manufacturer who competes with a patent holder. A bill recently introduced in Congress would establish free-market pricing for prescription drugs [see "Prescription Drug Patents: What is the best way to lower prices?"].

The article goes on to note that critics of the pharmaceutical industry complain that much of the industry's research spending is wasted on copycat drugs, rather than being spent researching new cures. This is not just the assessment of critics. The industry recently sponsored a study that found that copycat drugs cost 90 percent as much to research as breakthrough drugs. According to the ratings of the Food and Drug Administration, 75 percent of new drugs fall into this copycat category. This suggests that close to two-thirds of the industry's research spending on prescription drugs goes into researching copycat drugs.

A.M.A. Says Government Should Negotiate on Drugs
Robert Pear
New York Times, October 17, 2004, Page A15

This article reports on the American Medical Association's decision to support bulk buying of prescription drugs by the government for Medicare beneficiaries. At one point the article discusses the decision by Congressional Republicans to prohibit bulk buying, attributing it to "fear that government involvement would overwhelm the free market, leading to federal regulation of drug prices."

While it is possible that members of Congress were motivated by such fears, it is worth noting that drugs are currently not sold in a free market. Instead, the government gives firms a patent monopoly and threatens competitors with arrest.

It is also worth noting that many Republican members of Congress received substantial amounts of campaign contributions from the drug industry. While it is possible that Republican members of Congress were motivated by their perceptions of a free market, it is also possible that they were acting to repay major financial backers.