Economic Reporting Review
 By Dean Baker
April 11, 2005

In This Issue:

•  Outstanding Story of the Week

•  Social Security

•  March Employment Data

•  Drug Patents

•  Medicare

•  Trade


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Outstanding Story of the Week


My Big Fat C.E.O. Paycheck
Claudia H. Deutsch
New York Times, April 3, 2005, Section 3 page 1

This article reports on the rise in CEO pay over the last year. The article points out that in many cases, large increases in CEO pay had no obvious connection to performance.

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Low Costs Lure Foreigners to India for Medical Care
Saritha Rai
New York Times, April 7, 2005, Page C6

This article discusses the growing number of people from the United States and Western Europe who are traveling to India for medical procedures. The article points out that many Indian medical facilities have staff and equipment comparable in quality to those available in the United States, but charge fees that are often less than one fifth as high as prices in the United States. This trend is a predictable result of the protectionist measures that restrict the ability of foreign medical professionals to sell their services in the United States.  

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Big-Game Hunting Brings Big Tax Breaks
Marc Kaufman
Washington Post, April 5, 2005, Page A1

This article reports on a tax break that allows hunters to donate the animals they kill and take tax deductions that are often several times larger than the market value. 

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Illegal Immigrants Are Bolstering Social Security With Billions
Eduardo Porter
New York Times, April 5, 2005, Page A1

This article reports on the fact that millions of illegal immigrants pay Social Security taxes into the system, but never collect benefits, thereby improving its financial condition. 


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Social Security


Doing Good by Doing Without Social Security
John Leland
New York Times, April 3, 2005, A19

This article reports on efforts by a group of wealthy retirees to encourage other wealthy retirees to contribute their Social Security checks to charities that help poor children. At one point, the article quotes one of the organizers of the group as suggesting that once a wealthy person has gotten his investment back from Social Security, they might want to consider contributing the rest of their benefits to charities.

Actually, most wealthy workers will not get their investment in Social Security back, by most measures. The rate of return for wealthier workers is low by design – in most cases less than 2.0 percent. While most people who have always earned near the maximum taxable Social Security wage probably do not need their benefits in retirement, it is likely that they also don’t need other income – for example interest income on government bonds, or compensation from insurance companies for out-of-pocket health care payments. There is no obvious reason why it would be more appropriate to donate Social Security benefits than these other forms of income.

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Graham Fills Social Security Void With a Plan Bound to Irk All Sides
Charles Babington
Washington Post, April 2, 2005, Page A4

This article discusses Senator Lindsey Graham’s plans for privatizing Social Security. At one point the article discusses the various options for dealing with Social Security and describes them all as “unpleasant,” including doing nothing for now. The article does not explain why it views the option of doing nothing unpleasant. Congress ignores far more pressing problems all the time (e.g. Medicare’s projected shortfall, soaring health care costs, an unsustainable defense policy), yet the decision to do nothing on these matters is rarely described as being “unpleasant,” more typically the media simply chooses to ignore inaction. 

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A Blitz to Attack Private Social Security Accounts
(Washington in Brief) Compiled from reports by staff writer Mike Allen and news services
Washington Post, April 5, 2005, Page A7

This article discusses an advertisement by a group opposing President Bush’s Social Security privatization plan. The article reports that the ad claims that benefit checks would be cut almost in half under the plan. It then comments that this would be the case for workers who “have not been born yet and are at most 5 years old.”   

The cuts under the plan put forward by President Bush’s commission are phased in, so that they only approach 50 percent for people who today are very young. However, a worker who is 20 today would see a benefit cut of close to 40 percent under this plan. 

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Hill Takes a Back Seat on Social Security
Mike Allen and Peter Baker
Washington Post, April 6, 2005, Page A4

This article reports on the reluctance of Republican members of Congress to take a leadership role in pushing for Social Security privatization. At one point the article discusses President Bush’s trip to the site where the Social Security trust funds bonds are held in West Virginia.  The article then asserts that Mr. Bush made the “symbolic point that Social Security is not a trust fund with money set aside for recipients, but a pay-as-you go system facing huge shortfalls in the future.” 

Actually, the trust fund’s existence as an accounting entry or sheets of paper is no different than any other fund. In a modern economy almost all stores of wealth are in fact simply sheets of paper or accounting entries. It has not been common to hold wealth in a physical form, such as gold or silver, for more than a century. It is not clear what symbolic point President Bush could have hoped to make with this trip, except possibly to suggest a desire to default on the bonds held by the Social Security trust fund. Such a default would imply a massive redistribution from low and middle income families who primarily benefit from Social Security to the wealthy taxpayers that pay the bulk of income taxes (see “Defaulting on the Social Security Trust Fund Bonds: Winners and Losers,” [http://www.cepr.net/Social_Security/defaulting_ss.htm]).

The characterization of the projected shortfall as “huge” is also questionable. According to the projections from the Congressional Budget Office, the size of the projected shortfall is less than one-fifth as large as President Bush’s tax cuts. It is only about 40 percent as large as the increase in annual defense spending since President Bush took office. 

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March Employment Data

Fewer Jobs Added Than Expected In March
Jonathan Weisman
Washington Post, April 2, 2005, Page E1

This article reports on the Labor Department’s release of employment data for the March. At one point it reports the argument presented by some analysts that firms are reluctant to add new workers because of high health insurance and benefit costs and that they would rather try to get more work out of the existing workforce. If this really explained the slow growth in employment, then we should expect to see a rise in the average number of hours per worker. In fact, the average number of hours worked per week is down by 0.8 hours from its pre-recession peak in 1998. The decline in hours per worker suggests that high per worker overhead costs are not a major obstacle to additional hiring.

The article also suggests that the informal economy is booming, noting that the number of people describing themselves as “self-employed” rose by 253,000 in the last two months. Actually, these data are highly erratic. The number of self-employed workers rose by 251,000 between June and August of last year. Self-employment then dropped by 149,000 in September. These sharp movements are more likely attributable to measurement error than actual changes in the labor market.  

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Drug Patents

New Ethics Rules Cost NIH Another Top Researcher
Michael S. Rosenwald and Rick Weiss
Washington Post, April 2, 2005, Page A1

This article reports on the decision of a prominent scientist to leave his position at the National Institutes of Health (NIH) because of restrictions the agency imposes on his dealings with the drug industry. It would have been worth including some discussion of drug patents in this article. 

The potential financial windfalls from government granted patent monopolies create enormous incentives to misrepresent research findings and conceal results. The NIH is taking steps to try to counter this rent seeking behavior, but it is extremely difficult to design effective rules. The standard solution that economists would propose is to eliminate the source of the distortion – government granted patent monopolies.   

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Medicare

Doctors Lobbying to Halt Cuts to Medicare Payments
Robert Pear
New York Times, April 4, 2005, A18

This article reports on efforts by doctors to overturn scheduled cuts in Medicare’s payments to physicians over the next five years. The article reports warnings that an increasing number of doctors may refuse to accept Medicare patients if the cuts go into effect. 

In the context of this article, it would have been appropriate to discuss the protectionist measures that have restricted the supply of foreign doctors and kept their wages high. In 1997, Congress reduced the quota on foreign medical residents who can enter the country each year. It also imposed other restrictions that were intended to keep out foreign doctors, because the physicians’ lobbying groups complained that foreign doctors were reducing their wages.

If it becomes difficult for Medicare beneficiaries to find doctors at the pay scales being set by Medicare, then one possible policy response would be to allow in more foreign doctors who would be willing to work for the compensation provided by Medicare. The economic gains from reducing the barriers to foreign doctors would be many times larger than the predicted gains from trade agreements like NAFTA or the Uruguay round of the W.T.O.

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Trade

Stream of Chinese Textile Imports Is Becoming Flood
David Barboza
New York Times, April 4, 2005, Page C3

This article reports on the rapid growth in imports of textile and apparel from China since quotas were removed at the beginning of the year. At one point the article cites industry sources as saying that there are 665,000 jobs in textile and apparel. Actually, this estimate comes from the Bureau of Labor Statistics survey of business establishments. 

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Europe to Issue Guide on Textile Imports
Paul Keller
New York Times, April 6, 2005, Page C4

This article discusses the responses of Europe and the United States to the surge in textile imports from China, after the removal of quotas at the beginning of the year. It presents one possible response as a series of guidelines that set specific import targets for various types of textiles. It then reports the concern of Gary C. Hufbauer, an economist at the Institute for International Economics, that such guidelines could revive protectionism.

It is worth noting that protectionism is already a widely used practice in the United States. Highly paid professionals, such as doctors, lawyers, and economists, are paid wages far above world levels because professional restrictions and licensing requirements make it very difficult for foreign professionals to sell their services in the United States. The United States has also been vigorously pursuing the extension of copyright and patent protection both internationally and domestically.

While trade policy has been directed towards eliminating the protection of manufacturing industries, thereby placing manufacturing workers in direct competition with low paid workers in developing countries, it has accepted or extended protectionism in other areas. 

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Decision Over Mayor Polarizes Mexico City
Mary Jordan
Washington Post, April 7, 2005, Page A28 

This article reports on a debate in Mexico’s Congress to strip Andres Manuel Lopez Obrador, a leading candidate for president, of immunity from prosecution as a member of Congress. This step could deny him the opportunity to run for president.

At one point the article reports that Mr. Lopez Obrador questions the “U.S. formula of democracy, open markets and free trade as a way to help the poor.” The U.S. does not support open markets and free trade. It has directed much of its trade policy in the last decade towards increasing protectionist barriers, specifically by strengthening copyright and patent protection. There are also many other sectors where it maintains strong protectionist barriers.

It is also questionable whether anyone in the U.S. really sees its trade policy as a mechanism for aiding the poor. In the 11 years since Mexico implemented NAFTA, its growth rate has been extremely weak, just over 1.0 percent per capita annually. 

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