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Outstanding Stories of the Week

Hut by Hut, AIDS Steals Life in a Southern Africa Town
Michael Wines and Sharon LaFraniere
New York Times, November 28, 2004, Page A1

This article examines the impact that AIDS has had on a small town in Swaziland, the country hardest hit by the AIDS epidemic. A large segment of the town’s working age population is either suffering from AIDS or has already died. As a result, many children have been orphaned and there are few adults who can care for them.

In China, Workers Turn Tough
Edward Cody
Washington Post, November 27, 2004, Page A1

This article reports on the growing willingness of Chinese workers to confront their bosses over wages and working conditions. The strength of the economy has given workers more employment options, so some are now willing to risk their jobs to improve their situation at work.

E-Mails Provide a Glimpse Into 'Iron Triangle'
R. Jeffrey Smith
Washington Post, December 2, 2004, Page A33

This article reports on a series of Defense Department e-mails that expose its relationships with Boeing. The e-mails indicate that the department had knowingly signed a leasing agreement with Boeing for a set of tanker planes that would cost considerably more than buying the planes outright.

A Rough Ride for Schwinn Bicycle
Griffe Witte
Washington Post, December 2, 2004, Page A

This article reports on the collapse of the Schwinn bicycle company. It holds it up as an example of how the country has lost good paying jobs for less educated workers in the manufacturing sector over the last quarter century.

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Social Security

Vast Borrowing Seen in Altering Social Security
 Richard W. Stevenson
New York Times, November 28, 2004, Page A

This article discusses the additional borrowing that would be needed to finance the Social Security privatization plans being considered by President Bush. It includes several inaccurate assertions.

For example, the article asserts that the Social Security system is "about to come under intense financial stress from the aging of the baby boom generation and the increase in life expectancies." This is not true. As noted later in the article, the Social Security trustees project that the program will be able to pay all benefits through the year 2042, with no changes whatsoever. Even after this date, the projections show that the program will always be able to pay a higher real benefit than that received by current retirees. The non-partisan Congressional Budget office projected Social Security's finances as being even stronger - concluding that it can pay all benefits through the year 2052 with no changes whatsoever.

These projections indicate that Social Security is far stronger than it has been through most of its existence. It was necessary to raise taxes in each of the decades from the fifties to the eighties to keep the program solvent.

The article also includes an inaccurate assertion from proponents of privatization, that individual accounts will allow workers to earn higher returns than the current program. The only projections of stock returns derived from the Social Security trustees projections for profit growth show that returns in the future will be only slightly higher than the returns projected for the government bonds held by the trust fund. After deducting the administrative costs of private accounts, there will be very little difference between the returns on private accounts and the returns on government bonds.

From Bush Aid, Warning on Social Security
Edmund L. Andrews
New York Times, December 3, 2004

This article reports on a speech by N. Gregory Mankiw, President Bush's chief economic advisor, in which he warned about the long-term shortfall facing the Social Security program. At one point the article asserts that the Social Security actuaries project that the program will first face a shortfall in 2042. In fact, this is the projection of the Social Security trustees. Four of the six trustees are political appointees of the Bush administration.

The views of the actuaries themselves are not publicly known. Their assessment may be closer to the assessment of the Congressional Budget Office, which found that the program can pay all benefits through 2052, with no changes.

The article also comments that the idea behind Bush's privatization plan is that higher returns from the stock held in these accounts will offset the benefit cuts that he is proposing. Actually, the only projections of stock returns that are derived from the Social Security trustees' profit growth projections and based on the current price to earnings ratios in the stock market show that stock returns will not come close to offsetting the proposed cuts in benefits. An average twenty year-old will see cuts (measured against currently scheduled benefits) of close to $100,000 measured over the course of their retirement.

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Prescription Drugs

Contracts Keep Drug Research Out of Reach
Barry Meier
New York Times, November 29, 2004, Page A1

This informative article details how drug companies restrict the dissemination of the findings from the research fund. Their restrictions often prevent researchers, many of whom are based at universities, from disclosing evidence that certain drugs may ineffective or even harmful.

The article does not mention the importance of government patent protection in this process. If companies did not stand to make monopoly profits from patent protection, then they would not have the same incentive to conceal negative research findings. The fact that concealment of research findings is widespread suggests the importance of developing a more modern system for financing pharmaceutical research.

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The Federal Reserve Board

Keeping Politics Out of the Fed
Daniel Altman
New York Times, November 28, 2004, Section 3, Page 6

This article discusses efforts by political figures to influence the Federal Reserve Board in its conduct of monetary policy. The article implies that the only time that politics affects the Fed is when an elected official tries to affect monetary policy.

In fact, politics affects the Fed's conduct all the time. For example, wealthy individuals and powerful corporations fund certain types of economic research in the hope of getting results that will push Fed policy in a specific direction. They also use their access to the media, and often to Fed officials, to promote specific monetary policies.

Given the extensive political considerations that are inherent in the conduct of monetary policy (the costs of inflation are disproportionately born by the rich while the costs of higher unemployment are disproportionately born by the middle class and the poor), there is no obvious reason to object to elected officials' efforts to influence the process.

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The Euro

Dollar's Fall Drains Profit of European Small Businesses
Mark Landler
New York Times, December 2, 2004, Page C1

This article discusses how the fall in the dollar has cut into the profits of many small businesses that export from euro zone countries, because they have been unable to raise their prices by enough to offset the loss in the dollar's value. At one point the article notes the unwillingness of the ECB to offset the impact of the rise in the dollar, either by intervening in currency markets or by lowering interest rates, which should increase domestic demand within the euro zone.

It would have been useful to include some discussion explaining the unwillingness of the ECB to lower interest rates. Other things equal, the rise in the euro will mean both slower growth, as exports fall, and less inflationary pressure, due to availability of low-priced imports. Usually a central bank would see the combination of slower growth and reduced inflation risk as an occasion to lower interest rates. It is not clear why the ECB apparently does not view the situation this way.

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Trade

Simmering Trade Disputes Will Greet Bush in Canada
Ian Austen
New York Times, November 27, 2004, Page B3

Nominee Led Kellogg's Upswing
Jonathan Weisman
Washington Post, November 30, 2004, Page E1

These articles both include discussions of trade issues. In both articles the term "free-trade" is used where the term "trade" would be more accurate. The Times article repeatedly refers to a trade pact between the United States and Canada as a "free trade pact." The Post article refers to the Bush administration's "free-trade agenda."

The use of the expression "free-trade" in these contexts is not accurate. While the trade agreement between the U.S. and Canada did liberalize trade in many areas, it also increased protectionism in some areas, most notably in the case of pharmaceuticals. This is the case with the Bush administration's larger trade agenda as well.

It is understandable that the Bush administration would use the term "free-trade" to promote its trade agenda, since "free" obviously has positive connotations, but neutral observers should not adopt this terminology, except in quotes or when referring to a formal name, such as the North American Free Trade Agreement.

L.I. Clash on Immigrants Is Gaining Political Force
Patrick Healy
New York Times, November 29, 2004, Page A1

This article reports on political disputes in Long Island over the employment and housing of undocumented immigrants. At one point the article asserts that Long Island has "a need for cheap laborers to do work rejected by others."

It is not clear that Long Island has a need for "cheap laborers." The employers of immigrants who are willing to work for very low wages obviously benefit from having access to low cost labor, but if they are unwilling to pay the prevailing wage for domestic workers, then there is no "need" for this labor in the normal economic usage of the term. Of course, if the wages were higher, then the work done by immigrants would not be rejected by the native born work force.

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The Economy

Income, Consumer Spending Up
Nell Henderson
Washington Post, December 2, 2004, Page E1

This article reports on the release of data on consumer income and spending in October by the Commerce Department. It would have been worth noting that the October data showed the savings rate fell to 0.2 percent of disposable income, one of the lowest rates ever. The savings rate has been extraordinarily low since the late nineties as a result of the wealth effects from the stock market bubble and more recently the housing bubble. More typically, the savings rate would be around 8 percent. It is unlikely that the current low level of savings, which is associated with a very high rate of borrowing, will be sustained for long.

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The Budget

Congress Trims Money for Science Agency
Robert Pear
New York Times, November 30, 2004, Page A16

This article reports on a cut of $105 million in the annual budget of the National Science Foundation (NSF). While the article does include a chart showing the NSF budget over the last twenty years, it would have been useful to indicate the size of this cut using inflation adjusted dollars. Adjusted for inflation, the cut was equal to approximately 4.5 percent of NSF's budget.

It also would be helpful to report on the NSF budget as a share of total spending. Its budget is equal to approximately 0.2 percent of total federal spending.

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Internet Access

Fast Internet Service for the People
Jonathan Krim
Washington Post, December 2, 2004, Page A1

This article reports on efforts by the Internet providers to restrict the ability of local governments to make free wireless Internet service available to residents. It would have been helpful to include some economic analysis in this article. In many ways wireless Internet service is comparable to the light from streetlamps. Once it is available, there is no limit to how many people can use it at no additional cost. For goods of this nature, it is far more efficient to provide the service publicly - letting everyone who cares to use the light or wireless access at no cost - and pay for the provision of the service with tax revenue.

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Colombia

Colombia Passes Change in Charter Permitting President to Run Again
Juan Forero
New York Times, December 2, 2004, Page A5

This article discusses a change in Colombia's constitution that allows the current President, Alvaro Uribe, to run for a second term. At one point the article discusses Mr. Uribe's successes, and notes that the economy is expected to grow nearly 4 percent this year. Actually, 4 percent is not a very good growth rate for a developing country. Since Colombia has population growth of close to 2 percent, this growth rate translates into per capita GDP growth of approximately 2 percent. While this is a respectable growth rate for a rich country, successful developing countries, like China and India, sustain per capita growth rates of more than 4 percent, and sometimes more than 6 percent.