Economic Reporting Review
 By Dean Baker
May 5, 2005

In This Issue:

•  Outstanding Story of the Week

•  Social Security

•  The Housing Bubble

•  Mexico and Venezuela

•  Health Care and Protectionism

•  Trade

•  The Economy

•  Germany

•  Czech Republic and the Euro


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Outstanding Story of the Week

Evidence in Vioxx Suits Shows Intervention by Merck Officials
Alex Berenson
New York Times, April 24, 2005, Page A1

This article reports on evidence obtained by the plaintiffs in a suit against Merck, indicating that officials at Merck had intervened in the conduct of a clinical trial to conceal the cause of death of one of the subjects.

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Big Tax Break Often Bypasses Idea of Charity
Stephanie Strom
New York Times, April 25, 2005, Page A1

This article reports on a loophole in tax law which some wealthy families have used to shelter hundreds of millions of dollars that remain under their control. This loophole allows them to get tax breaks for contributing to "supporting organizations" that are linked to a charity, but may still be under the donor's control.

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Social Security

Panel to Start Writing Social Security Bill
Jonathan Weisman
Washington Post, April 24, 2005, Page A4

This article reports on plans by the Senate Finance Committee to begin drafting legislation on Social Security this week. At one point the article refers to polling data that shows most people support the idea of investing some Social Security money in private accounts. While this is true, most polls show that a majority reject private accounts, if they are coupled with cuts in the guaranteed Social Security benefit, which would almost certainly be the case.

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Senate Takes Up Bid To Overhaul Social Security
Robin Toner and David E. Rosenbaum
New York Times, April 26, 2005, Page A1

This article discusses the Senate Finance Committees plans for dealing with President Bush's Social Security proposal. At one point the article asserts that "small fixes can sustain the program." It is worth noting that this is also the evidence put forward in the Social Security trustees report and the Congressional Budget Office's analysis of Social Security. Both sets of projections show that the program can be kept fully solvent throughout its 75-year planning horizon with changes that are comparable in size, or smaller than, the changes put in places in each of the decades from the forties to the eighties.

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At Opening Social Security Hearing, Bush's Fight Looks Largely Uphill
David E. Rosenbaum and Robin Toner
New York Times, April 27, 2005, Page A17

This article discusses the status of President Bush's efforts to overhaul Social Security as the Senate Finance Committee began hearings on the future of the program. The article reports on a visit by President Bush to Galveston, Texas, which has its own retirement program outside of Social Security.

The article reports that President Bush claimed that the Galveston system gave workers a better deal than Social Security by allowing them to invest in stocks and bonds. It is questionable whether the Galveston system provides a better deal, but one important distinction between this program and Social Security is that workers in Galveston did not have to share in the cost of paying benefits for current retirees. If this were the model for an overhaul of Social Security, then there would be no money to pay current benefits. For this reason, Galveston cannot provide much of an example unless President Bush plans to substantially cut or eliminate benefits for current retirees.

The article also raises the question of what sort of changes are needed to "put the Social Security system on sound financial footing." It is not clear that Social Security is not currently on "sound financial footing." According to the non-partisan Congressional Budget Office, the program can pay all scheduled benefits for the next 47 years with no changes whatsoever. These projections show the program to be in better financial condition than it has been through most of its history.

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President's Plan Shields Benefits of Low Earners
Jonathan Weisman
Washington Post, April 29, 2005, Page A8

This article examines the effect of the "progressive indexing" benefit formula endorsed by President Bush in his press conference. It compares the benefits that workers would receive under this proposal with the benefits that they would be projected to receive by the Social Security trustees, if the program ran short of money in 2041 and could not pay full scheduled benefits.

It is worth noting that the projections of the non-partisan Congressional Budget Office (CBO) would show a much brighter picture. These projections show that most workers would do far better even if nothing is ever done to fix the system than with President Bush's program.

While the CBO is non-partisan, four of the six Social Security trustees are political appointees of the President. Their growth projections assume that immigration will be much slower in future decades, even as the country is experiencing a labor shortage, than it was in the decade of the nineties. The trustees also assume that long-term productivity growth will be 0.5 percentage point slower each year than what President Bush's economists assume in planning his budget.

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Bush Cites Plan That Would Cut Social Security Benefits
Richard W. Stevenson and Elisabeth Bumiller
New York Times, April 29, 2005, Page A1

This article reports on President Bush's press conference, in which he provided more details on a plan for privatizing a portion of the Social Security program. At one point the article refers to the "benefits cuts or tax increases needed to balance the system's books as the baby boom generation ages and life expectancy increases."

Actually no benefit cuts or tax increases will be needed to cover the costs of the baby boomers aging, since this event had already been covered by the 1983 reforms. The Social Security trustees project that the program will be fully solvent until 2041, at which point the youngest baby boomer will be age 77 and the oldest will be age 95. The non-partisan Congressional Budget Office projects that the program will be able to pay all benefits through the year 2052, at which point the youngest baby boomer will be age 88 and the oldest will be 106.

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After 99 Days, Testing Winds
Todd S. Purdum
New York Times, April 29, 2005, Page A1
Published online with title "After 99 Days, Bush Uses News Conference to Test Winds"

This article discussed the progress that President Bush has made in promoting his Social Security plan. At one point it describes his plan for "progressive indexing" as cutting Social Security benefits for the wealthy. Actually, this proposal would cut benefits on any worker with an average wage of more than $20,000 a year. Such workers are usually not regarded as wealthy.

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Bush's Plan: Investing Part of the Nest Egg and Slowing the Growth in Benefits
David E. Rosenbaum and Robin Toner
New York Times, April 29, 2005, Page A16

This article examines some of the details of the "progressive indexing" formula that President Bush endorsed in his press conference. At one point it notes that President Bush claims that workers will be better off even with the benefit cuts he has proposed than under the existing system, because of the higher returns available from his private accounts. Actually, the returns on private accounts will be approximately the same as the returns on the government bonds held by the Social Security trust fund, when projections are made for stock returns that are consistent with the Social Security trustees growth projections (see the Accurate Benefits Calculator).

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The Housing Bubble

Consumers Are Wary, But Housing Remains Hot
Edmund L. Andrews
New York Times, April 27, 2005, Page C1

This article reports on the release of several new economic reports. At one point the article reports that the Fed has argued that there is little danger of a national housing bubble. It is important to note that the Fed also never warned of the dangers of a stock bubble during the tech bubble. Alan Greenspan claims that he chose not to directly address the stock bubble and instead chose to deal with the consequences of the crash. Presumably he would have the same attitude toward the housing bubble as the stock bubble, which means that the Fed would not be warning of a housing bubble even if its economists determined that it was a real problem.

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Mexico and Venezuela

A Self-Styled Class Warrior Has Major Battle at Hand in Mexico
Mary Jordan
Washington Post, April 24, 2005, Page A16

This article discusses the possibility that Mexico City's mayor, Andres Manuel Lopez Obrador, may be prevented from running for president next year because of pending criminal charges. At one point, the article compares Mr. Obrador to Hugo Chavez, the president of Venezuela. It asserts that Mr. Chavez's "giveaways to the poor have slowed economic progress."

According to the Penn World Tables, which is the standard source for data on real GDP, per capita GDP was roughly one-third lower when Mr. Chavez took office in 1999 than it had been in 1970. During Chavez' term per capita GDP has grown slightly; although this growth has been slowed by several oil strikes, a military coup, and political turmoil, there is no evidence that government programs for the poor have had a negative impact on growth.

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Health Care and Protectionism

Hospital Services Performed Overseas
Rob Stein
Washington Post, April 24, 2005, Page A1

This article reports on the growing tendency for hospitals and labs to outsource various medical tests to doctors and medical professionals in foreign countries. The article notes that these services are generally provided at far lower prices in developing countries.

The article notes the concerns raised by those who are opposed to this trend. It does not discuss at all the potential economic gains from this sort of outsourcing, Since prices for U.S. medical services are so much higher than in the rest of the world, the potential gains from freer trade in this area would vastly exceed the gains from trade pacts like NAFTA or CAFTA. The economic gains from such agreements have been frequently mentioned in the news and editorial sections of the Post.

The article also never mentions that restricting the foreign outsourcing of medical services is a form of protectionism. Articles that have report on efforts to restrict other types of trade, such as tariffs on steel or quotas on textiles, routinely note that such measures are protectionist and usually include warnings of the economic costs and the potential for retaliation by U.S. trading partners.

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Trade

Pro-CAFTA Humane Society Has Sister Groups Fuming
Paul Blustein
Washington Post, April 28, 2005, Page E1

This article reports on the Humane Society's support for CAFTA. At one point the article describes proponents of CAFTA as "free-traders."

Most supporters of CAFTA do not support free trade. In fact, the pact increases protectionism in many important areas, most notably in the case of the patent and copyright protection. While most CAFTA supporters may support liberalizing trade when increased competition has the effect of lowering the wages for less-educated workers in the United States, they generally accept protectionist barriers that have the effect of raising wages of highly paid professionals and other relatively well-off workers.

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The Economy

Economy Surprises Experts With Sudden Slowdown
Nell Henderson
Washington Post, April 29, 2005, Page E1

This article reports on the release of GDP data for the first quarter that showed the economy growing at just a 3.1 percent annual rate. (Final demand, which excludes inventory accumulations, grew at just a 1.9 percent annual rate.) It would have been helpful if the article included analysis from experts who were not surprised by the slowdown.

The slowdown was entirely predictable, since job growth has been modest and wages have actually been falling in real terms, which means that workers' purchasing power has been stagnating. With investment tax credits ending with the new year, investment has weakened significantly over the last three months. Furthermore, the soaring trade deficit, which subtracted 1.5 percentage points from the quarter's growth, was also reported previously.

In the fall of 2000, not one of the Blue Chip "Top 50" forecasters predicted the onset of the recession that began just six months later. It would be beneficial if reporters sought out divergent views among economists instead of relying on a small group who seem to share the same analysis.

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Germany

Fears Mount That Germany Faces Recession
Mark Landler
New York Times, April 27, 2005, Page C1

This article reports on the current state of Germany's economy. At one point it reports that Germany's unemployment rate is 12 percent. This measure uses the official German government measure of unemployment, under which any worker who works less than 15 hours a week is classified as unemployed. Using the OECD measure, which is comparable to the U.S. definition of unemployment, Germany's unemployment rate is approximately 9.5 percent. In the area that was formerly West Germany, the unemployment rate is close to 8.0 percent.

The article notes that some critics of Germany’s government claim that efforts to cut back welfare state protections have not gone far enough. It is also worth noting that many economists argue the main reason for slow economic growth in Germany has been contractionary monetary policy pursued by the European Central Bank.

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Czech Republic and the Euro

Bohemian Border Town Blues: The Euro's to Blame
Mark Landler
New York Times, April 26, 2005, Page A4

This article reports on the situation of a town on the Czech-German border, which apparently has lost tourist business as a result of the appreciation of the Czech currency against the euro. The article reports that the residents are reluctant to have the Czech Republic adopt the euro, as it is obligated to do by virtue of joining the European Union. It quotes one resident as saying that adopting the euro will cause prices to rise in the Czech Republic, as happened in Germany when it adopted the euro.

Actually there was no significant rise in prices associated with the adoption of the euro. The inflation rates across euro zone were virtually unchanged in the months after the euro was adopted. While there were undoubtedly instances where stores used the opportunity of the currency switch to raise prices, this effect was too small to be picked up in aggregate data.

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