Economic Reporting Review by Dean Baker
February 28, 2005
In This Issue:
• Outstanding
Stories of the Week
• Social
Security
• Trade
• The
Dollar
• Copyrights
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Outstanding
Stories of the Week
Big
Oil Steps Aside in Battle Over Arctic
Jeff Gerth
New
York Times,
February 21, 2005, Page A12
This
article examines the attitude of the big oil companies toward the prospect of
drilling in the Arctic National Wildlife Refuge. The article reports that the
industry does not seem to place much value on the prospect of having the
wilderness opened to drilling, presumably because they believe that there is
relatively little oil there and/or it would be very expensive to recover.
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Behind
Those Medical Malpractice Rates
Joseph B.
Treaster and Joel Brinkley
New
York Times, February
22, 2005, Page C1
This
article examines the factors driving up the cost of medical malpractice
insurance in recent years. The article indicates that lawsuit settlements do not
appear to be the main factor driving cost increases, and that many states that
limit the size of malpractice awards are seeing increases in insurance rates
comparable to the increases in states without limits.
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10
Voters on Panel Backing Pain Pills Had Industry Ties
Gardiner Harris
and Alex Berenson
New
York Times, February
25, 2005, Page A1
This
article reports on the fact that 10 of the 32 medical experts who sat on a panel
deciding whether a set of painkillers should be allowed to remain on the market
had financial ties to the firms who made the drugs they were evaluating. The
Food and Drug Administration frequently faces similar conflicts of interest
among its expert consultants, because major pharmaceutical companies often have
financial dealings with a high percentage of the researchers with expertise in a
particular area.
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Social
Security
Operating
Slowly on Social Security
Washington
Post, February
20, 2005, Page F3
This
business section overview on the last week discusses Federal Reserve Board
Chairman Alan Greenspan's testimony on President Bush's Social Security plan. It
describes the overhaul of Social Security as part of the "bigger question
of how the nation is going to finance a rising standard of living for both young
and old Americans in coming decades."
Actually, there are no credible projections anywhere that suggest that Social
Security will be a factor impeding both young and older Americans from enjoying
rising standards of livings in coming decades. For example, the Social Security
trustees projections show that the average payable benefit in 2043, after the
trust fund is depleted, will be higher than it is today, even if nothing is
done. The average wage, net of Social Security taxes, would still be more than
40 percent higher, even if the payroll tax was raised enough to maintain full
benefits.
The Congressional Budget Office's (CBO) projections show an even brighter
picture. If nothing is ever done, the payable Social Security benefit in 2053
(the year after CBO projects the trust fund will be depleted) will be almost 50
percent higher than benefits today. If payroll taxes are increased to maintain
full benefits, after deducting Social Security taxes, wages will still be more
than 80 percent higher than they are today.
There is simply no plausible scenario in which the cost of financing Social
Security raises any possibility that future generations of workers will not
enjoy higher living standards than current workers. By far, the biggest threat
to future living standards is the rising cost of the nation's health care system
- although this topic has received very limited attention in the media.
The
article also asserts that Mr. Greenspan has “long argued that large federal
deficits can drive up interest rates, reduce investment and limit the rise in
American living standards.” Actually, Mr. Greenspan argued in favor of
President Bush’s tax cuts in 2001, because he felt the budget surpluses were
too large, and he was concerned that the government would pay off its entire
national debt too quickly. While Mr. Greenspan has often expressed concern about
large deficits he has also been willing to take the exact opposite position on
certain occasions.
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Poorest
Face Most Risk on Social Security
Jim VandeHei
Washington
Post, February 19, 2005, Page A1
This
article discusses the potential impact of President Bush's Social Security
proposals on low-income workers. At several points, the article makes assertions
about President Bush's beliefs. For example, it claims that he "sees
personal accounts as the gateway to their [low-income families] financial
security and that he "envisions" that the personal accounts will
generate large enough returns to offset cuts in the guaranteed benefits.
While President Bush makes such claims, it is not clear that he believes them.
For example, if he placed such importance on private accounts for low income
families, then he could very quickly reach an agreement with Congressional
Democrats for creating accounts outside of Social Security. Similarly, there are
no projections of stock returns consistent with the Social Security trustees'
profit growth projections that show the accounts replacing more than a small
fraction of the proposed benefit cuts.
At one point the article asserts that workers would be able to pass on their
accounts to heirs. This is not necessarily true. President Bush requires that
workers use their account to purchase an annuity that is at least large enough
to ensure a poverty level income. For many low-income workers, the cost of this
annuity will exceed their entire account (See "Empty
Promise: The Benefit to African-American Men of Private Accounts Under President
Bush's Social Security Plan).
In addition, many low-income people die in debt. In such cases, the accounts
will be bequeathed to a finance company or other creditors. The likelihood of
dying in debt will be increased if Congress tightens bankruptcy rules, which
appears likely.
The article also refers to the date 2018 as being important for Social Security
because it is when projected benefits are first projected to exceed Social
Security tax revenue. While many proponents of privatization have pointed to the
fact that annual benefit payments exceed tax revenue in 2018 as a way to raise
fears about Social Security's health, under the law, 2018 has no special
importance for Social Security whatsoever. By design the program has been
building up a large surplus to help cover costs after 2018, when the retirement
of the baby boom generation raises the cost of Social Security. According to the
projections of the Social Security trustees, this surplus will cover all benefit
payments until 2052.
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Private-Account
Concept Grew From Obscure Roots
Jeffrey H.
Birnbaum
Washington
Post, February 22, 2005, Page A1
This
article reports on the political development of the idea of Social Security
privatization over the last quarter century. At one point it refers to an
article by Harvard Professor Martin Feldstein, which purported to show that
Social Security reduces private savings, as an important step in the advancing
Social Security privatization.
It is worth noting that researchers at the Social Security Administration
discovered that Professor Feldstein's results were attributable to a computer
programming error. When the error was corrected, Professor Feldstein's tests
indicated that there was no statistically significant relationship between
Social Security and private savings.
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Competing
Visions For Social Security
Jonathan
Weisman
Washington
Post, February 24, 2005, Page A1
This
article reports on the various plans being put forward to restructure Social
Security. It twice refers to the $3.7 trillion shortfall that the Social
Security trustees project for the program over its 75-year planning horizon. It
would be more informative to refer to this shortfall as a percentage of taxable
payroll (1.9 percent) or as a percentage of national income over this period
(0.7 percent). Few readers have the ability to assess the importance of a
multi-trillion dollar sum over a 75-year period.
The article also notes the potential to reduce the size of the projected
shortfall by allowing more immigrants into the country, reporting that
increasing the annual rate of immigration by 264,000 would cut the shortfall by
10 percent. It is worth noting that the trustees assume that annual
immigration will average 400,000 less than in the nineties, even as the country
is projected to experience a labor shortage due to the retirement of the baby
boom generation. This fact indicates that the trustees may be overly pessimistic
in their projected immigration rates, even assuming no changes in policy.
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Trade
Medical
Companies Joining Offshore Trend, Too
Andrew Pollack
New
York Times, February 23, 2005, Page A1
This
article reports on the growing trend for firms in the medical technology sector
to move jobs overseas. At one point, it describes this trend as
"worrisome." It goes on to assert that because of the technology and
skills involved in the industry, "it is viewed as an economic growth engine
and source of new jobs."
It would have been useful to include the views of a trade economist. According
to standard trade theory, if the United States is losing jobs in the medical
technology sector to foreign competition, then this is a positive development,
in the same way that they view losing jobs in the textile industry as a positive
development. If work in the medical technology sector can be done at a lower
cost in foreign countries, then this will lead to lower prices for consumers,
thereby creating more jobs, just as lower prices for textiles is also supposed
to lead to more jobs.
According to standard trade theory, if the medical technology industry in the
United States is not competitive with the industries in India and China, then
the United States would benefit by losing this sector and concentrating its
resources on sectors in which it enjoys a comparative advantage.
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The Dollar
Korea
To Limit Its Dollar Holdings
Paul Blustein
Washington
Post, February 23, 2005, Page E1
This
article discusses the impact that a decision by South Korea's central bank to
reduce its holding of the dollar as a reserve currency could have on the price of
the dollar, especially if other central banks follow the same path. At one
point, it cites an economist who argues that the potential impact would be
limited, because central banks only hold 12 percent of the country's outstanding
debt.
While 12 percent may not be that large as a share of the outstanding stock of
government debt, it is quite large as a share of annual capital flows. This
figure amounts to more than $500 billion. The net flow of capital into the
United States is approximately $700 billion a year at present. If foreign
central banks were simply to stop buying government bonds at their current rate
($100 to $200 billion a year), it would lead to a large decline in the value of
the dollar. If they also began to unload some of their existing holdings,
private investors may not be willing to fill the gap unless there was a large
decline in the dollar and/or a sharp rise in interest rates.
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Foreign
Investment's Flip Side
Paul Blustein
Washington
Post, February 25, 2005, Page A1
This article points out that the inflow of foreign capital into the
United States is going primarily to finance current consumption. It contrasts
this with the late nineties, when it implies that foreign capital inflows were
largely financing investment.
In fact, while the portion of GDP going to investment in the late
nineties was higher than at present, it was still quite low by historical
standards. In 1999, at the peak of the late nineties cycle, net investment was
8.8 percent of GDP. By contrast, net investment was equal to 10.3 percent of GDP
in 1969 and 11.0 percent of GDP in 1979. Since investment in the nineties was
still far below its peak in prior business cycles, the foreign capital inflows in
that decade can also be viewed as going to support consumption.
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Copyrights
High-Tech
Tension Over Illegal Uses
Jonathan Krim
Washington
Post, February 22, 2005, Page E1
This article examines the conflicts over new technologies between the
entertainment industry, which is interested in preventing unauthorized
duplication of copyrighted material, and the consumer technology industry, which
wants to be able to take full advantage of new technologies. It would have been
useful to include the views of an economist on these issues.
The restrictions on technology being demanded by the entertainment industry slow
progress and artificially raise prices. This leads to slower economic growth,
costing the economy hundreds of thousands of jobs.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.