Economic Reporting Review by Dean Baker
March 14, 2005
In This Issue:
• Outstanding
Stories of the Week
• Social
Security
•
Job
Growth
• Taxes
and Spending
• Oil
Drilling in the Arctic Wildlife
• Bankruptcy
Bill
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Outstanding
Stories of the Week
Pfizer
Stirs Concern With Plans To Sell Heart Drugs Only as Pair
Alex
Berenson
New
York Times, March 7, 2005, Page A1
This
article reports on plans by the Pfizer drug company to test a new heart
medication only in conjunction with its own cholesterol lowering drug, Lipitor.
The intention would be to get the Food and Drug Administration to only approve the
combination of Lipitor and the new drug--i.e., the new drug would not be
available by itself. This is yet another example of how the
incentives created by government patent monopolies distort the direction of
medical research.
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Social
Security
For
Bush and Foes, Dueling Social Security Efforts
Peter
Baker and Jeffrey Birnbaum
Washington
Post, March 5, 2005, Page A2
This
article discusses President Bush’s trip to South Bend, Indiana, where he
promoted his Social Security agenda. At one point, the article refers quotes
President Bush as saying that Social Security “goes broke” in 2042. It would
be helpful to note that, according to the Social Security trustees, the system
will still be able to pay retirees a larger real benefit than what current
retirees receive. While the definition of “broke” is debatable, the fact
that the system will always be able to pay a substantial benefit, under any
circumstances, is not in dispute.
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Pro and Con Line Up as Bush Presses Social Security
Anne
E. Kornblut and Sam Roberts
New
York Times, March 5, 2005, Page A1
This
article reports on the debate over the future of Social Security. At one point
the article comments that a group of Democratic Senators “acknowledged that
the retirement system faced deficits in the longer run, but their only solution
… was to scrap scheduled income tax cuts for wealthier Americans.”
The article appears to be using “only” as a criticism of these senators.
According to the Congressional Budget Office, the Social Security system will
not face a shortfall for 47 years. The shortfall projected at this point is not
qualitatively different than the shortfalls addressed in prior decades, such as
the seventies and eighties.
By contrast, Medicare is projected to run short of funds in 13 years. The
current U.S. defense policy of maintaining unchallenged military supremacy will
require enormous increases in spending in a decade, when China’s economy will
first grow larger than the U.S. economy. These crucial issues have barely even
been mentioned by the media – it is not clear why these senators would be
expected to have a long list of remedies to a relatively minor and distant
problem.
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Republicans
Float Ideas for Social Security
Charles
Babington and Jim VandeHei
Washington
Post, March 6, 2005, Page A6
This
article reports on a set of Social Security proposals being put forward by
Republicans in Congress as alternatives to President Bush’s plan. At one point
the article refers to a proposal from Senator Chuck Hagel, which it says would
“slow the growth of benefits.” This proposal would reduce benefits from
their currently scheduled levels. Most people in the Social Security debate,
including President Bush, have described a reduction from scheduled benefits as
a “cut” even if the benefit is still higher than the current benefit.
The article also asserts that Social Security faces a $3.7 trillion shortfall
over its 75-year planning period. It would be more informative to describe this
shortfall as being equal to 0.7 percent of GDP over this period. (The
Congressional Budget Office projects the shortfall at 0.4 percent of GDP.)
The article also discusses a proposal by Senator Lindsey Graham which would
raise the cap on covered wages to $200,000 a year, but reduce the tax rate from
12.4 percent to 11.9 percent. The article quotes Graham as saying that this
measure would raise about $1 trillion over a decade. Actually, this combination
of a higher cap and lower tax rate would raise about $500 billion over the next
decade.
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The
Late, Great ‘Golden Years’
Steve
Lohr
New
York Times, March 6, 2005, Section 4, page 1
This
article examines retirement patterns and argues that, due to changing
demographics, older workers will not be able to continue to enjoy a substantial
period of retirement before they become infirm due to old age. The article
neglects to discuss health care costs as major factor driving up costs for
retirees.
Per person health care costs for people over age 65 are close to half the median
income for this group, and they are rising rapidly. The United States pays more
than twice as much per person for health care as other rich nations, yet it has
shorter life expectancies and does poorly by other outcome measures. If the
United States fixed its health care system (or contracted out with other
countries that provide health care more efficiently), it would free up large
amounts of resources to support retirees.
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Tax
Cuts Lose Spot On GOP Agenda
Jim
VandeHei
Washington
Post, March 7, 2005, Page A1
This
article discusses the difficulty that Republicans face in securing more tax
cuts. At one point it refers to the projected 75-year shortfalls in Social
Security and Medicare, as $3.7 trillion and $28 trillion, respectively. Few
readers would be able to assess the importance of these numbers, since they have
no idea how large income will be over the next 75 years. It would be more useful
to express these shortfalls as a share of projected income, 0.7 and 5.3 percent,
respectively.
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In
Partisan Haggling Over Private Accounts, Even the Middle Ground Is Perilous
Richard W. Stevenson
New
York Times, March 7, 2005, Page A13
This
article examines the potential for a compromise over Social Security. At several
points the article raises the issue of creating a national system of private
accounts outside of Social Security as part of a potential compromise.
The key issue in the design of such a proposal is whether such a system of
accounts is effectively to designed to substitute for the existing Social
Security system or whether it would be designed to substitute for the existing
system of defined contribution pensions. A centrally administered system of
accounts would be considerably more costly to administer than the Social
Security system, although it could offer very large savings relative to the
administrative costs of 401(k)s or other defined contribution pensions.
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At
Heart of Social Security Debate, a Misunderstanding
David E.
Rosenbaum
New
York Times, March 8, 2005, Page A16
This
article discusses the meaning of the Social Security trust fund and its
implications for the solvency of the program. The article concludes by saying
that whether the bonds held by the trust fund are actually used to pay Social
Security benefits “will be a political decision, not a legal one.”
This is not true. Under current law, the bonds held by the trust fund must be
used to pay Social Security benefits. If the law is not changed, as long as the
trust fund has money, all benefits will be paid in full.
Congress can change the law governing the trust fund, just as it can change any
other law. Any decision to change a law through legislative action is of course
a political decision, but a law has legal force unless it is changed. It is not
clear what possible point the article might have intended to make by pointing
out that the law governing the trust fund is no different from any other law in
this respect.
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Graham
Says GOP Erred By Focusing on Accounts
Mike
Allen
Washington
Post, March 9, 2005, Page A8
This
article reports on Republican Senator Lindsey’s Graham’s comments about
President Bush’s approach to overhauling Social Security. At one point it
refers to the “solvency problem Social Security faces as baby boomers begin to
retire.”
Social Security does not face any solvency problems as the baby boomers begin to
retire. According to the Social Security trustees projections, the program can
pay all scheduled benefits through the year 2042, with no changes whatsoever.
The Congressional Budget Office (CBO) projects that the program can pay all
benefits through the year 2052. The trustees' projection implies that the program
will be fully solvent for 11 years after the last baby boomer has reached normal
retirement age, while the CBO projection implies that Social Security will be
solvent for 21 years after this point.
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Job
Growth
Job
Growth Rises, to Delight of Investors
Eduardo
Porter
New
York Times, March 5, 2005, Page B1
This
article reports on the Labor Department’s release of employment data for
February. At one point it reports that the recent pace of job growth should
provide enough income growth to sustain consumer spending. Actually, the recent
data have shown real wages falling at approximately a 1.0 percent annual rate.
This means that the economy has to create 1.4 million jobs a year just to keep
purchasing power constant. While the recent pace of job growth has been somewhat
faster than this (approximately 2.2 million), the implied rate of income growth
is very weak.
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Taxes and Spending
Tax,
Spending Cuts Packaged
Shailagh
Murray and Jonathan Weisman
Washington
Post, March 9, 2005, Page A8
This
article reports on the progress of a 2006 budget resolution in Congress. At one
point it reports on proposals to provide $70 billion and $100 billion in tax
cuts. The time frame over which these tax savings would be incurred is not
clearly indicated. If this is over a 10-year projection period, then these
proposed tax cuts would be equal to 0.2 and 0.3 percent of projected revenue,
respectively.
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GOP Lawmakers Present Tax-Cutting Budgets
Jonathan
Weisman
Washington
Post, March 10, 2005, Page A4
This
article reports on the progress of a budget resolution in Congress. At one point
refers to an effort by Representative Jim Nussle to reduce the growth in
entitlement spending. It cites his claim that he only wants to slow the growth
rate from 5.6 percent to 5.5 percent.
Most readers would not be able to assess the significance of this assertion.
Many entitlement programs, like Social Security and Medicare, are not facing
cuts. This means that some programs, like Medicaid are facing substantial cuts
that will prevent them from maintaining the current level of services.
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Oil
Drilling In the Arctic Wildlife Refuge
Senate
Gearing Up for Fight Over Oil Drilling in Alaska
Sheryl
Gay Stolberg
New
York Times, March 9, 2005, Page A13
Bush
Steps Up Pitch for Drilling in Alaska Refuge
Justin
Bush and Jim VandeHei
Washington
Post, March 10, 2005, Page A2
These
articles report on the battle in Congress over allowing oil drilling in the
Arctic Wildlife Refuge. The articles present the arguments of proponents of
drilling that it will reduce U.S. dependence on foreign oil. It would have been
helpful to note the counter argument presented by opponents of drilling. While the oil in
the refuge could meet approximately 5 percent of U.S. needs for twenty years,
after the point where the oil is depleted, the United States would have lost a
potential reserve that could have been tapped in the event of a national
emergency. It is not clear why anyone would value reducing dependence at a time
when oil is freely available on world markets.
The articles also report the claim of drilling proponents that they would only
drill on 2000 acres of the refuge. This figure refers to the land that will
literally be occupied by the oil platforms, not the area in which drilling will
take place.
The Post article reports that the refuge will produce 10 million barrels of oil
a day at its peak production. Actually, most estimates put its peak production
at close to 1 million barrels a day.
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Bankruptcy
Bill
Democrats
Are Divided, As Some Back G.O.P. Bills
Carl
Hulse
New
York Times, March 11, 2005, Page
This
article reports on the fact that many Democrats in Congress have voted with
Republicans on recent bills, such as the bill restricting malpractice suits
and a bill tightening bankruptcy laws. In discussing the latter, the article
quotes South Dakota Senator Ben Nelson as saying that he supported the measure
because he felt it was a good idea to expect people to be financially
responsible.
While this bill will hold individuals more accountable for their debts, it
removes responsibility from lenders from making bad loans. Usually lenders are
careful to scrutinize credit risks and not make loans to individuals who are not
likely to be able to pay them back. This bill rewards irresponsible
lenders, by using the power of the government to help them collect loans that
would otherwise be uncollectible. If the purpose was simply to impose
responsibility in a neutral way (rather than reward creditors), then the bill
would not apply to pre-existing debts.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.