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Outstanding Stories of the Week

Forced to Work Off the Clock, Some Fight Back
Steven Greenhouse
New York Times, November 19, 2004, Page A1

This article discusses the practice of many businesses of forcing their workers to put in additional hours for which they are not paid. While this is a clear violation of labor laws, these laws are poorly enforced. Even if workers are aware of the law, they often do not complain out of fear of being fired.

Teamsters Find Pension Fund At Risk
Mary Williams Walsh
New York Times, November 15, 2004, Page A1

This article examines the state of Teamsters Central States pension fund. It points out that the fund is hugely under-funded at present. This is especially ironic, because the fund has been managed by highly paid professionals for the last quarter century. In contrast, it previously had been controlled by union officials, who had used its assets to make loans to organized crime. However, the fund remained solvent through that period.

FDA Is Flexing Less Muscle
Marc Kaufman and Brooke A. Masters
Washington Post, November 18, 2004, Page A1

This article examines the effectiveness of the Food and Drug Administration as a monitor of drug safety. It reports that the pharmaceutical industry appears to have been effective in efforts to restrain regulation.


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Tax Policy

If A Tax Overhaul Has Winners, It Will Also Have Losers
David E. Rosenbaum
New York Times, November 14, 2004, Section 4, Page 5

This article assesses the distributional impact of two of the tax reform proposals that have been mentioned by members of the Bush administration. The article reports that the wealthy will be winners if the income tax is replaced with a sales tax, because they spend a smaller share of their income than the average family. It is also worth noting that the wealthy would have greater opportunities to evade the tax by carrying through their consumption outside the country. If they earned their income in the United States, but did much of their consumption in other countries (either on vacation or in retirement), then they can largely evade a sales tax.

Bush Plans Tax Code Overhaul
Jonathan Weisman and Jeffrey H. Birnbaum
Washington Post, November 18, 2004, Page E1

This article discusses the prospects of a major reform of the tax code. At one point it discusses the idea of changing the tax code so that corporate profits are either taxed at the corporate level, but not at the individual level, or vice-versa. It describes this change as ensuring that income "is taxed only once."

Actually, under the law, a corporation is a distinct entity, which means that income is only taxed once even if it is taxed at the corporate level and the individual level. The government provides corporations with many privileges (most importantly limited liability), which is why individuals opt to form corporations, instead of simply creating partnerships.

In this sense, the corporate tax is entirely voluntary. If shareholders believed that the privileges that the government grants corporations did not exceed the cost of the corporate income taxes that they must pay, then they would dissolve the corporation and form a partnership. The proposal discussed in the article is not to only have income taxed once - rather it is a proposal to have the government grant the privilege of corporate status to shareholders at no charge.

Action on a Web Tax Ban
Reuters
New York Times, November 18, 2004, Page C1

This article reports on Congressional action to extend a ban on the taxation of access to the Internet. At one point the article quotes Senator Lamar Alexander as saying that this ban on taxation supports the principle of “free markets.”

Actually the ban does the exact opposite. Since most items are subject to sales tax, the government is creating a preferential status for Internet access. This special treatment is more in keeping with government industrial policy – which seeks to promote key industries – than a free market policy, which subject all sectors to the same level of taxation.


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Trade

A New Pattern Is Cut for Global Textile Trade
Peter S. Goodman and Paul Blustein
Washington Post, November 17, 2004, Page A1

This informative article reports on the loss of jobs in the textile industry in much of the developing world, as import quotas in the United States and Europe end at the beginning of the year. The article reports that many of these jobs are being shifted to China, which has established itself as a low cost and reliable producer.

At one point the article notes that many of the developing countries losing jobs had actually pushed for an end to the quotas in the belief that this would increase their exports to the United States and Europe. It is worth noting that developing countries held this view because they were told that they would benefit from the elimination of these quotas by top political leaders and development experts. The Clinton administration often argued for the removal of quotas as a way to help countries in Sub-Saharan Africa, South Asia and other poor regions. Many prominent pundits, for example New York Times columnists Thomas Friedman and Nicholas Kristof, also made this argument.

Upside of a Down Dollar
Paul Blustein
Washington Post, November 19, 2004, Page E1

This article discusses the benefits to U.S. manufacturers from the decline in the dollar. At one point it discusses the causes of the decline in the dollar and it lists the budget deficit.

Actually, the budget deficit would be a factor pushing the dollar up, rather than down, in standard economic theory. Other things equal, a higher budget deficit should lead to higher interest rates, which makes it more attractive to hold dollar denominated assets. This was one reason that the dollar rose so much against other currencies in the mid-eighties. There was a considerable amount of economic literature at the time that discussed this relationship between high budget deficits, high interest rates, a high dollar, and therefore a high trade deficit in the context of "twin deficits."

U.S. and Australia Resolve Disputes in a Trade Agreement
Elizabeth Becker
New York Times, November 19, 2004, Page C6

This article reports on an agreement between trade negotiators in the United States and Australia on the final matters in dispute in a new trade agreement. At one point the article asserts that the agreement should be a boon to the U.S. because it, "pays 10 times as much in tariffs as Australia does in trade between the two countries."

In fact it is Australia that has more to gain in this situation.. Australia imposes tariffs that are approximately ten times as large on its imports as the tariffs paid by the United States on U.S. imports. In standard trade theory, the vast majority of the benefits of trade liberalization go to the country that reduces its barriers. This means that Australia stands to gain from the lower prices that will result from the tariff reductions. The gains in the United States will be much smaller.


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Drug Patents and Market Distortions

FDA Bars Critic From Meeting
Marc Kaufman
Washington Post, November 13, 2004, Page A5

This article reports on the decision by the Food and Drug Administration (FDA) to remove a scientist from a panel evaluating the safety of a category of arthritis drugs, due to the fact that he indicated that the drugs were dangerous based on his own research. The article reports the statement of Sandra Kweder, the deputy director of the FDA, that it is common for researchers to be removed from panels when they have a financial interest or intellectual position that may affect their assessment.

In fact, a very high percentage of the experts on FDA panels have financial relationships with companies whose products they assessing. Because the pharmaceutical industry hires so many researchers in various capacities, it would be difficult to assemble an expert panel that did not include some members with financial conflicts.

Tiny Antennas To Keep Tabs on U.S. Drugs
Gardiner Harris
New York Times, November 15, 2004, Page A1

This article reports on plans to use microchips to track prescription drugs and prevent counterfeit drugs from being sold on the market. It is worth noting that the problem of counterfeiting is almost entirely attributable to patent protection. If drugs were sold at their competitive market prices, there would be very little incentive to produce counterfeit drugs. The fact that government patent monopolies keep drug prices far above the free market price creates a large incentive for counterfeiters.

Drug Dispute Snags U.S. Australia Pact
Elizabeth Becker and Robert Pear
New York Times, November 17, 2004, Page W1

This article reports on an ongoing dispute between the United States and Australia over provisions in a new trade agreement on prescription drug patents. At one point the article cites a representative of the pharmaceutical industry as saying that lower drug prices will give the industry less incentive to introduce new drugs quickly in Australia.

While this is true, the statement is largely meaningless. Any price drop - for example a cut in the wages of airline workers-by definition provides less incentive for those receiving the lower price, whereas any price increase provides more incentive. The Australian government is already proposing to grant drug companies patent monopolies, which will allow them to sell their drugs at prices far above the cost of production. Since they can make additional profit on each prescription they sell in Australia, the only reason that they would not introduce new drugs there is if they wished to punish the country for not allowing it to charge higher prices. This is a political motivation, not an economi


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The Rising Euro

In Europe, Rising Euro Gathers Much Angst
Mark Landler
New York Times, November 13, 2004, Page B1

This article discusses the impact of the euro's recent rise against the dollar and the limited policy options available to the European Central Bank (ECB). At one point the article cites analysts as saying that the ECB is not likely to raise interest rates because it could derail the euro zone's recovery.

Usually, a central bank would lower its interest rates in order to limit the rise in the value of its currency. (With lower interest rates, it would be less desirable to hold euro denominated assets.) It is not clear why the ECB would raise interest rates to keep the euro down - this action would be expected to raise the value of the euro even more.

There is a chart accompanying the article that shows growth rates for the countries of the European Union. The growth rates are expressed as quarterly rates of growth. In the United States, it is standard for growth rates to be presented as annual rates. It would be helpful to readers to adhere to this convention.


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The Budget

Lame Duck May Do Housekeeping
Dan Morgan
Washington Post, November 14, 2004, Page A4

This article discusses Congressional negotiations over major budget bills that still need to be approved for the current fiscal year. At one point it reports that President Bush has proposed restricting the increase in spending on non-defense discretionary programs (e.g. education, environmental regulation, health research) to 1.0 percent, while Congress has proposed a freeze in this category of spending.

These figures are in nominal dollars. Since inflation is running at approximately a 3.0 percent rate, this means that President Bush has proposed cutting these areas of spending by approximately 2.0 percent in real terms (inflation adjusted), while Congress is proposing a cut of 3.0 percent.


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Retail Sales

Oil Prices Don't Deter Shoppers; Consumer Confidence Index Up
Reuters
New York Times, November 13, 2004, Page B2

This article reports on the Commerce Department’s data on October retail sales. The article notes that the growth in overall retail sales was very weak, but if autos are excluded, then sales grew 0.9 percent in October. It is worth noting that approximately half of this increase was attributable to higher gasoline sales. Most of this increase was in turn due to higher gas prices, not increased sales.