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Outstanding Stories of the Week

Oil Companies Resist Investment
Justin Blum
Washington Post, November 3, 2004, Page E1

This article examines oil company profits and investments. It shows that investments in finding new oil has increased very modestly, even as profits have risen by almost 50 percent over the last four years.

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The Ownership Society

Experts: Rivals Agendas’ Impact on Economy Similar
Jonathan Weisman
Washington Post, October 31, 2004, Page A23

This article discusses some of the presidential candidates' key economic positions. It begins by asserting that President Bush's proposals would "fundamentally change the relationships between citizens and their government, giving taxpayers more control over their health care, retirement savings and investments - and shifting much of the risk, as well."

The information presented in the article does not support this assertion. In fact, it shows that President Bush's agenda will have almost no effect on their relationship with the government, except by cutting their Social Security benefits.

Two of the proposals highlighted in the article – new accounts that allow individuals to invest $5,000 a year, with the earnings untaxed, and health savings accounts, are likely to have no direct effect on the vast majority of the population. Less than 5 percent of the population reaches the limits on the money that can currently be invested in tax-sheltered accounts. Raising these limits will therefore provide no benefit for about 95 percent of Americans.

Similarly, health savings accounts – which allow individuals to place a substantial sum in a tax sheltered account to be saved or used for health related items, and to buy a high deductible insurance policy – are not likely to be a good investment for most people. That is the reason there has been very little interest from the public in the accounts that are currently available. However, these accounts will allow wealthy and healthy people to save more money without paying taxes. They will also contribute to the fracturing of the insurance pool. Healthier people will buy high deductible accounts, making the pool of people for standard policies relatively sicker and more costly. While this does not fundamentally change the relationship between individuals and government, it is likely to make it more difficult for most people to afford insurance.

The Bush administration's proposals for privatizing Social Security will cut benefits and allow workers to replace a portion of their remaining benefit with earnings from a government supervised account. (While the article claims that the earnings from these accounts can make up for the benefit cuts, no economist has been able to produce a set of stock return projections consistent with the Social Security trustees profit projections that would make up for the benefit cuts.) While the proposed cut in benefits will reduce the government's support for individuals' retirement, it is not clear that having money in a government supervised account will be seen as a meaningful change in people's relationship to government, compared to the current situation where the benefit is guaranteed by the government. The switch will mean that more money is diverted from workers' retirement income to management fees for the financial industry.

Bush Pledges a Broad Push Toward Market-Based Policies
Robin Toner and Richard W. Stevenson
New York Times, November 4, 2004, Page P1

This article discusses President Bush's agenda in his second term. At one point it asserts that his "ownership society" agenda is based on "the assumption that giving individuals more responsibility for their financial lives, combined with a greater alliance on the private market, can slow the growth of government, reduce the cost of social welfare programs and modernize programs created in the New Deal."

The article does not present any evidence that this view is actually the motivating force behind President Bush's agenda. There is no evidence that his proposals would lower costs - in fact, some of them clearly raise costs. For example, his subsidies for private insurers that compete with the traditional Medicare program raises the cost of Medicare. Similarly, the administrative costs of individual accounts would increase the cost of the Social Security program (although this may be offset by cuts in benefits).

While President Bush uses rhetoric about the free market to promote his agenda, the most obvious outcome is to increase the profits of powerful political backers, like the financial and insurance industries. It would be helpful to readers to simply report on the effects of these policies and what President Bush and his supporters say, rather than trying to ascertain the motives behind these policies, which reporters cannot generally know.

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Social Security 

Confident Bush Outlines Plan for Second Term
Richard W. Stevenson
New York Times, November 5, 2004, Page A1
Published online as, “Confident Bush Outlines Ambitious Plan for 2nd Term"

This article discusses President Bush’s agenda for this second term. At one point it refers to "Social Security's long-term financial problems, which will become acute over the next several decades as the baby boom generation begins reaching retirement age and life expectancies continue to rise."  According to the most recent projections from the Social Security trustees, the program can pay benefits through the year 2042 with no changes whatsoever.  The baby boom generation begins retiring in just over 3 years. Even through 2080, the Trustees' projected shortfall for the whole 75-year period is less than that which taken care of in each of the decades of the 1950s, 1960s, 1970s, and 1980s.

Campaign '04, Bar Trivia '05 
Hoard Kurtz 
Washington Post, November 1, 2004, Page C1

This article examines some of the seemingly trivial issues that have dominated coverage of the presidential campaign. At one point the article lists issues that have been neglected as a result of this focus on trivia. One of issues listed is “baby boomers threatening to bankrupt Social Security.” 

The article does not indicate why this should have been an issue. The Social Security trustees projections show that Social Security will be fully solvent until 2042, long past the point where the baby boom cohort has retired. A separate analysis by the Congressional Budget Office shows that the program will be fully solvent until 2052. In both cases, the projections show that the program would always be able to pay a higher real benefit than what current retirees receive, with no changes whatsoever. Since all independent analyses show that Social Security is in much better financial shape than it has been through most of its history, it is not clear why its health should have been a major topic in the presidential campaign.

Deficits and Tax System Changes In Bush's Second-Term Economy 
Edmund L. Andrews 
New York Times, November 4, 2004, Page C1

This article discusses some of the economic problems that will confront President Bush during his second term. At one point it asserts that “the biggest problem of all is …. The looming retirement of 76 million baby boomers.” Actually, the bigger problem facing the budget is the projection that health care costs will continue to rise at a very rapid pace. This is the main factor driving the costs of retirement programs, not the aging of the population. If health care costs only increased due to aging, and otherwise rose in step with per capita GDP (as is the case in most other countries), the budget impact of the demographic changes over the next twenty years would not be qualitatively different from the impact of these changes over the last twenty years.

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Health Care

In American Health Care, Drug Shortages Are Chronic
Gardiner Harris
New York Times, October 31, 2004, Section 4, Page 12

This article reports on the frequency of drug shortages in the United States, pointing out that the current shortage of flu shoots is not an exceptional event. The article notes that government regulation of supply, similar to systems in place in other countries, could create more even supplies. However, it asserts that such a solution is impossible in the United States because there is "little political support for government intervention in the health care market in the United States."

This is not true. The use of government-granted patent monopolies as a mechanism to finance prescription drug research enjoy widespread political support, as does the $30 billion in annual government payments to support bio-medical research. President Bush also increased the subsidies granted to private insurers operating in the Medicare program and does not appear to be paying a major political price for this measure. The public has clearly been willing to support a wide variety of interventions into the health care market; it is not obvious why it would oppose measures that would ensure stable drug supplies.

Measure Passed, California Weighs Its Future as a Stem Cell Epicenter
Andrew W. Pollack
New York Times, November 4, 2004, Page C10

This article reports on the passage of a ballot initiative in California that appropriates $3 billion for stem cell research. The article does not indicate who will own the research findings produced with this funding. This is extremely important. If the findings are placed in the public domain, for all to use, then it could make many cutting edge treatments available at very low prices. Alternatively, if the researchers are allowed to patent the findings and sell products at patent protected prices, this spending is essentially $3 billion in welfare payments to the bio-tech industry.

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The Trade Deficit

Dollar Falls On Fears of U.S. Deficits
Paul Blustein and Jonathan Weisman
Washington Post, November 5, 2004, Page E1

This article discusses the recent decline in the U.S. dollar against other major currencies. At one point the article asserts that reducing the budget deficit will reduce the trade deficit by reducing the demand for imports. While this is true, the impact is very modest. Imports account for approximately 15 percent of U.S. domestic demand. This means that a reduction in the budget deficit, either through tax increases or spending cuts, should reduce imports by an amount approximately 15 percent as large. For example a $200 billion decline in the deficit should imply that the $600 billion trade deficit will decline by approximately $30 billion (15 percent of $200 billion) to $570 billion.

Economists usually link the two deficits through the effect that interest rates have on the value of the dollar. The standard view is that a lower deficit will lower interest rates. Lower interest rates in the United States should reduce the value of the dollar. With a cheaper dollar, imports become more expensive and exports become cheaper to people living abroad. The impact of a prospective change in the value of the dollar on the trade deficit vastly exceeds any potential impact of changes in aggregate demand due to reduced deficit spending.

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Japan’s Economy

Japan's Long Run of Deflation Is Expected to End Next Year
Todd Zaun
New York Times, October 30, 2004, Page B2

This article reports on the state of Japan’s economy. It notes that many forecasters are projecting that prices will begin rising some time next year, ending a long period of deflation. The discussion of deflation is somewhat confused. For example, at one point it reports that the deflation has lowered the “once sky-high prices of food, clothing and other goods to levels closer to those in other developed countries.”

There are two ways to make comparisons of prices in Japan to prices in other countries. The first is by converting into a common currency. However, the main determinant of relative prices in these comparisons is the exchange rate of the currencies. The yen has actually risen relative to the dollar during this period, with its current value approximately 20 percent higher than its value in 1998. This increase in the value of the yen more than offsets the fall in Japanese prices over this period when comparing the prices of goods in Japan and the United States in a common currency.

The second method of assessing prices is relative to wages. This is really a question of real wage growth. Real wages can increase either due to prices getting lower or wages getting higher. By most measures, real wage growth has been weak in Japan over its period of deflation.

When assessing the current state of Japan's economy the article reports that the unemployment rate fell by 0.2 percentage points to 4.6 percent in September, but points out this reduction was attributable to people dropping out of the labor market. It is worth noting that Japan's unemployment rate is down almost a full percentage point from the 5.5 percent peak of two years ago. The labor market is still weak, but clearly much better than it had been at the trough of the cycle.