Economic Reporting Review
 By Dean Baker
May 9, 2005

In This Issue:

•  Outstanding Story of the Week

•  Social Security

•  The Budget Deficit and the Stock Market

•  Germany

•  Intellectual Property Rights

•  Rewarding Innovation


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Outstanding Story of the Week

Choosing Sides Over $9.68 an Hour
Steven Greenhouse
New York Times, May 4, 2005, Page C1
Printed online with the title “At Wal-mart, Choosing Sides Over $9.68 an Hour”

This article examines efforts to force Wal-Mart to pay higher wages, and its claims that substantial pay increases are unaffordable.

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Lawmakers' Help for Drug Firm Tests Limits
Dan Morgan and Marc Kaufman
Washington Post, April 30, 2005, Page A1

This article reports on campaign contributions by Bayer, the German pharmaceutical company, which were part of an effort by the company to have the FDA's ban on the use of one its antibiotics in animals overturned. This is the sort of rent-seeking behavior that economic theory predicts will result from government granted patent monopolies.

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Social Security: Help for the Poor Or Help for All?
Edmund L. Andrews and Eduardo Porter
New York Times, May 1, 2005, Page A1

This article examines the impact of President Bush's proposal to change the formula for indexing Social Security benefits. As the article notes, Social Security would eventually be turned into a near-poverty level benefit, which would be of relatively little value to all but the poorest retirees.

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Social Security

President's Big Social Security Gamble
Richard W. Stevenson
New York Times, April 30, 2005, Page A1


This article examines President Bush's strategy on Social Security. It includes several assertions that are misleading or wrong. For example, at one point it describes Social Security as a program facing "daunting demographic challenges." Actually, the demographic challenges facing Social Security are relatively minor compared to the challenges it faced in prior decades. The country has always had an aging population due to rising living standards and improvements in medical technology. However, unlike past decades, the program currently has a large surplus that will sustain it for 47 years with no changes whatsoever, according to the projections from the non-partisan Congressional Budget Office.

At one point the article refers to President Bush's speech as an effort to give political cover to members of both parties who "accept that something painful must be done to set Social Security right." It would be more accurate to use the word "believe" or phrase "claim to believe," since the projections do not show that anything painful has to be done to sustain Social Security.

The article also asserts that President Bush's plan clearly distinguishes between winners and losers with lower income workers being winners because their benefits would not be cut. This is a peculiar notion of winner, since lower income workers also would not see their benefits cut if nothing is done.

More importantly, President Bush's plan absolutely does not guarantee lower income workers that their benefits will not be cut. It puts in place a qualitatively different program under which large segments of the middle class will see themselves getting little or no benefit from the basic Social Security program. (Under President Bush's proposal, money placed in private accounts is treated as a loan against the traditional Social Security benefit. This system, coupled with the benefit cuts that President Bush laid out on Thursday, would quickly cut the traditional Social Security benefit to near zero for workers who opt for private accounts.)

Regardless of law that Congress approves in 2005 or 2006, there is absolutely nothing to stop it from changing the benefit formula in another 10 or 15 years. Given the history of low income programs in the United States, it is virtually certain that low income workers would see large cuts in their retirement benefits under President Bush's proposal.

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Speech Gives Republicans Lift In Social Security Fight
Robin Toner and Elisabeth Bumiller
New York Times, April 30, 2005, Page A10

This article reports on Republican plans to push ahead with a proposal for privatizing Social Security. At one point it describes President Bush's plan by saying that it would "reduce the growth in benefits" for future retirees. According to the projections from the non-partisan Congressional Budget Office (CBO), the benefits that many middle income retirees would receive under the Bush plan are less than the benefits they would receive even if the current system ran short of funds in 2052. President Bush has described the latter situation as involving large cuts because workers would receive less than the promised benefit. Therefore, to be consistent, his proposal must also be described as involving "cuts."

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Bush Extols Virtue of Private Investment
Peter Whoriskey
Washington Post, April 30, 2005, Page A7

This article reports on President Bush's efforts to promote his private account at one of his staged events. According to the article, President Bush made repeated references to the possibility that young people will not see their Social Security.

It is worth noting that there are absolutely no projections that show that young people will not get Social Security. In fact, the projections from the non-partisan CBO show that young people will always get a higher benefit than current retirees even if no changes are ever made to the program. This information should have been included in the article.

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A Democrat on Bush's Social Security Team
Eduardo Porter
New York Times, April 30, 2005, Page A10

This article profiles Richard Pozen, the author of the progressive indexation proposal that President Bush has embraced as part of his Social Security privatization plan. At one point it refers to the Social Security trustees' projection of a $4 trillion shortfall in the program over its 75-year planning horizon, as a projection of the Social Security Administration's actuaries.

This is an important distinction. While the SSA actuaries are civil servants, the trustees are political appointees of President Bush. It is also worth noting that their projections are far more pessimistic than the projections from the non-partisan CBO. The trustees projected shortfall could also be more meaningful as being equal to 0.6 percent of GDP, since most people are unfamiliar with the meaning of trillions of dollars over a 75-year horizon.

The article also raises the prospect that workers could get higher returns with private accounts. Projections of stock returns that are consistent with the trustees' growth projections show that the returns from private accounts will leave workers on average no better off than if they didn't choose private accounts (see "Social Security, Growth, and Stock Returns," New York Times, 3-31-05:A23).

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The Outer Limits Of National Debt
Anna Bernasek
New York Times, May 1, 2005, Section 3, Page 5

This article examines the extent of indebtedness of the U.S. government. It reports that the debt of the government is more than $40 trillion. It reaches this figure by projecting out the costs of Medicare over an infinite horizon.

It is important to note that these projections assume that U.S. health care costs rise to a level that would likely devastate the economy. These projections assume that U.S. health care costs, which are already more than twice as much person as the average for other rich countries, eventually rise to be five or even ten times as much. It is not surprising that if the country has an impossibly costly health care system, that it will also face terrible budget problems. Unfortunately, there has been almost no attention given to the problems of the health care system.

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In Miss., Bush Touts Social Security Plan
Michael A. Fletcher
Washington Post, May 4, 2005, Page A4

This article reports on a speech in which President Bush promoted his new Social Security proposal. At one point the article characterizes Bush as casting his plan "as the best way to salvage a system projected to be paying out more to retirees than it collects from workers by 2017."

Under the law, the fact that the program will pay more to retirees than it collects from workers in 2017 has no particular meaning for the program. Because the retirement of the baby boom generation was long anticipated, the program is deliberately building up a surplus in to help defray the costs. By 2017, the Social Security will hold $3.6 trillion (in 2005 dollars) in U.S. government bonds. This will be enough to keep the program fully funded until 2041 according to the Social Security trustees and until 2052 according to the independent Congressional Budget Office (CBO). While proponents of privatization have highlighted the 2017 date in an effort to lend urgency to their claims, it is important to point out that this date has no meaning for the solvency of Social Security.

The article also reports Mr. Bush's assertion that without his cuts workers will be stuck with a "sharp increase in payroll taxes or even steeper declines in benefits." The size of the tax increase that CBO estimates would be needed to keep the program fully solvent over its 75-year planning period is 1.04 percentage points (0.52 percentage points on both employer and employee), less than half the size of the tax increase seen in the eighties. Alternatively, most of the projected shortfall could be eliminated by raising the cap on wages subject to the tax, so that it again covers 90 percent of wage income (it currently covers just 84 percent). It would be helpful to include this background since most readers will lack the information needed to evaluate the truth of President Bush's claims.

The article also refers to President Bush's proposal to allow workers to put their money in a private account, which it asserts will give workers an opportunity to make up for the proposed benefit cuts. Projections of returns on these accounts that are consistent with the growth projections from Social Security trustees or CBO show that these accounts will on average leave benefits almost the same, although they would add risk.

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The Budget Deficit and the Stock Market

Tax Receipts Exceed Treasury Predictions
Jonathan Weisman
Washington Post, May 5, 2005, Page E1

This article reports on the fact that tax receipts are running considerably above the levels projected by the Congressional Budget Office (CBO). This should not be surprising. The CBO projections for capital gains are not explicitly based on the stock market's movements. As a result, they underestimate revenues in periods where there is a rapid run-up in the market and overstate revenues in periods when there is a decline in the stock market. The failure of the CBO to recognize the coming stock market crash led it to overstate capital gains tax revenue by more than $600 billion in its 10-year projections in 2001.

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Germany

Blaming the Foreigners
Mark Landler
New York Times, May 5, 2005, Page C1
Printed online with the title "Report to German Ruling Party Faults Overseas Investors"

This article reports on concern in Germany that foreign investors are buying up German companies and then laying off workers. The article includes a chart that shows Germany's unemployment rate hovering near 12.0 percent. It is worth noting that this is the official German government measure of unemployment. This measure counts people are involuntarily working part-time jobs as being unemployed. These workers would be counted as employed by the U.S. definition.

The OECD standardized unemployment rate shows the unemployment rate in Germany as 9.5 percent. Much of this unemployment is attributable to continuing high unemployment rates in former East Germany. The unemployment rate in the area that was formerly West Germany is close to 8.0 percent.

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Intellectual Property Rights

China Heads List of Problem for New Trade Official
Elizabeth Becker
New York Times, April 31, 2005, Page C3

This article examines the trade disputes that the United States has with China. At one point it cites an estimate from the U.S. Chamber of Commerce that U.S. firms lose $200 billion a year because China does not respect their copyrights and patents. While this figure is almost certainly a large exaggeration (it would imply that patent and copyright protection would cost China an amount equal to 15 percent of its dollar value GDP in royalties and licensing fees, with resulting deadweight loss likely doubling or tripling this cost), it demonstrates the enormous inefficiencies created by these forms of protectionism.

This sum is more than half as large as China's entire import bill. If copyright and patent protection raised the price of the affected goods and services above the free market levels by even one tenth as much as the Chamber of Commerce claims, the resulting distortions would still be enormous relative to the size of the Chinese economy.

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Rewarding Innovation

A Jolt to Team Japan: Bonus Demands
Norimitsu Onishi
New York Times, May 1, 2005, Page A8

This article reports on a growing tendency among Japan's scientists to demand large bonuses when they develop a product that produces large profits for the company for which they work. The article implies that Japan's system is very different from the U.S. system because scientists may only receive small bonuses for an invention that could earn a corporation hundreds of millions of dollars.

Actually, in standard employment contracts in the United States, the corporation completely owns any invention by its employees during their work time. While they may choose to give them generous compensation for particularly important breakthroughs, they have no legal obligation to do so, and often do not.

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