Economic Reporting Review
 By Dean Baker
May 16, 2005

In This Issue:

•  Outstanding Story of the Week

•  April Employment

•  Chinese Currency Reevaluation

•  British Politics

•  Trade

•  The Trade Deficit

•  Benefits for Immigrants

•  Transportation Spending



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Outstanding Story of the Week

Drug Makers Reap Benefits Of Tax Break
Alex Berenson
New York Times, May 8, 2005, Page A1

This article reports on the amount of foreign profits that the major pharmaceutical companies are transferring back into the United States in order to take advantage of a one-year tax break on foreign earnings. The data presented in the article shows that the industry claims it is earning a higher profit margin on its foreign sales of prescription drugs than its domestic sales. Numerous studies have found that U.S. drug prices are far higher than drug prices anywhere else in the world, a point often argued by the industry itself. This suggests that the industry is misrepresenting its true profits in order to avoid paying taxes in the United States.

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Low Cost and Sweatshop-Free
Elizabeth Becker
New York Times, May 12, 2005, Page C1
Published online with the title "Cambodia's Garment Makers Hold Off a Vast Chinese Challenge"

This article reports on the status of Cambodia's apparel industry. Cambodia has sought to distinguish itself from other developing countries by making a point of respecting core labor standards and allowing unions to organize. According to the article, these practices have allowed Cambodia's industry to capture a niche market that appears to be holding up, even as China is gaining a much larger share of the world's production.

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April Employment

U.S. Labor Picture Improved In April
Nell Henderson
Washington Post, May 7, 2005, Page A1

This article reports on the Labor Department's release of jobs data for April. At one point, it comments that the Commerce Department's productivity data showed labor costs rising at a 2.2 percent annual rate in the first quarter. The April employment data revised job growth in the first quarter upward by 93,000. This implies that productivity growth is approximately 0.3 percentage points slower than previously reported. Such a revision would raise the rate of growth of labor costs to 2.5 percent, if other measures are unchanged.

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Chinese Currency Reevaluation

Putting Pressure on China's Peg
Paul Blustein
Washington Post, May 11, 2005, Page E1

This article reports on efforts in Congress to force China to revalue its currency against the dollar. The sub-headline of the article is "U.S. Wants Change in Currency Policy, but Benefits Aren't Clear-Cut."

Actually, the benefits of a higher valued Chinese currency are quite clear cut. It makes Chinese goods relatively less competitive in the United States, reducing U.S. imports from China, and helping to bring down the deficit from an unsustainable level. There is no alternative to a fall in the value of the dollar for correcting the trade deficit, except a severe recession.

The arguments presented in the article do not raise any questions about the nature of the benefits of a revaluation of the Chinese currency, just the magnitude of these benefits. For example, the article quotes Douglas Holtz-Eakin, the head of the Congressional Budget Office, as saying that much of the value added of good imported from China comes from inputs that China imports from other countries. According to the article, based on this fact, he argued that a 20 percent revaluation of China’s currency may lead to only a 4-5 percent increase in the price of goods produced in China. It is worth noting that this 4-5 percent increase in price is approximately equal to the profit margin. (After-tax profits have averaged approximately 5 percent of sales in manufacturing over the last decade.) This means that a 20 percent revaluation would be expected to have a very significant impact on the competitiveness of Chinese exports in U.S. markets.

The article also raises the possibility that production will simply shift from China to other countries in response to a revaluation, leaving the trade deficit unchanged. While this may happen to some extent, it is also likely that many other countries will follow China in raising the value of their currency against the dollar, further improving the trade deficit. It is widely recognized that many countries are reluctant to unilaterally raise the value of their currency because of the fear of losing market share to China. If China raises the value of its currency, then other countries (especially those in East Asia) would be likely to follow suit.

Finally, the article raises the prospect that the U.S. will see higher interest rates as a result of China's raising the value of its currency. While this would be a likely downside, it is part of a necessary adjustment process. In effect, the United States is currently living beyond its means by buying much more from abroad than it is selling to foreigners. This is comparable to a family running up a large credit card debt by spending more than it earns every month. The adjustment to living within its means is inevitably painful, but there is no way around it.

In the same way, the process of bringing the trade deficit down to a sustainable level requires raising the price of imported goods. There is no way to avoid an increase in the price of imported goods (except a severe recession, as noted earlier). Presumably, advocates of the revaluation of the Chinese currency recognize this fact.

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British Politics

Democrats Could Profit From Blair's Labor
Dan Balz
Washington Post, May 8, 2005, Page A5

This article reports on the political success of British Prime Minister Tony Blair, in the wake of his third election victory. The article notes the relatively strong economy that Britain has enjoyed during Blair's term in office and makes comparisons with the U.S. economy during Bill Clinton's presidency.

It would have been worth mentioning that Blair, like Clinton, opted to promote the short-term prosperity associated with a financial bubble (a housing bubble in the case of Blair, a stock bubble in the case of Clinton). The collapse of the housing bubble in Britain is likely to have serious consequences for the long-term health of the British economy, just as the collapse of the stock bubble did in the United States. (These consequences of the stock bubble in the U.S. have yet to be fully appreciated because of the growth of the housing bubble here since 2001).

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Trade

Free Trade Pact in Americas Faces Trouble
Elizabeth Becker
New York Times, May 10, 2005, Page C1

This article discusses the opposition both in the United States and Central America to the Central American Free Trade Agreement (CAFTA). The article repeatedly refers to the agreement as a "free trade" pact. This is inaccurate. While the agreement does remove some barriers to trade, it leaves others in place, such as professional restrictions that sustain high wages for doctors and lawyers in the United States, and it increases other barriers, most notably patent and copyright protection.

The latter protections are especially important in the context of this trade agreement, since the United States has made increasing foreign protection for U.S. patents and copyrights one of the top priorities of its trade agenda. These forms of protection add hugely to the cost of the protected items. Patents often raise the price of prescription drugs by more than 1000 percent above the free market price. Copyrights can make items very expensive that could otherwise be transferred at zero cost, such as recorded music and movies.

The article also includes, without comment, two inaccurate statements from opponents and proponents of CAFTA. It reports a claim by a CAFTA opponent that NAFTA cost 750,000 jobs. It is implausible that NAFTA led to job loss of this magnitude. The United States has lost a large number of jobs to Mexico as a result of its growing trade deficit, but it is likely that most of this job loss would have occurred even without NAFTA.

The article reports the claim that of a CAFTA proponent that Mexico "is better than it has ever been." While Mexico has gotten richer through time, like almost every other country, its growth rate in the years since NAFTA was implemented has been very slow. Its per capita GDP growth in the decade since NAFTA has been just over 1.0 percent annually. By comparison, its per capita GDP grew at more than a 3.3 percent annual rate through the decades of the sixties and seventies.

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Bush Brings In Backup to Help Sell CAFTA
Peter Baker
Washington Post, May 13, 2005, Page E1

A Push For a Central America Trade Pact
Elizabeth Becker
New York Times, May 13, 2005, Page C3

These articles report on the Bush Administration's efforts to gain approval for the Central America Free Trade Agreement. The Post article refers at one point to the Bush administration's claim that the United States will benefit disproportionately from the trade agreement because most goods from Central America already enter the United States duty free, while the Central American countries impose substantial tariffs on U.S. imports. According to standard trade theory, if the Central American countries have larger reductions in tariffs, then they will benefit more from the trade agreement. This point should have been noted in the article.

At one point the Times article refers to demands by some Democrats that the agreement should include labor and environmental standards. The article then comments that the Bush administration "views" such talk as protectionism.

The Bush administration calls such provisions protectionism. It is not clear what its actual views on the issue are. Labor and environmental standards would restrict the ability of U.S. firms to profit by ignoring international labor rights or destroying the environment. While the administration may claim to be concerned about “protectionism,” it is possible that it is actually just responding to the interests of the corporations who stand to benefit. It is also worth noting that the Bush administration is eagerly pushing for protectionist provisions by demanding increased patent and copyright protection in CAFTA and in other trade negotiations.

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The Trade Deficit

Trade Deficit Narrows to a 6-Month Low
Elizabeth Becker
New York Times, May 12, 2005, Page C7

This article reports on the Commerce Department's release of trade data for March. The data showed a sharp decline in the trade deficit driven mostly by a sharp drop in imports. Monthly trade data are erratic, so it is possible that the March decline in imports was simply a statistical fluke. It is possible that it is also evidence of weakening demand in the economy, especially coincided with a slower pace of inventory accumulation (businesses may be trying to pare back inventories, and therefore buying fewer goods from abroad). However, this was an important and surprising report. It should have received more prominent attention.

This article also includes a reference to a report by the U.S. Chamber of Commerce that claims that U.S. businesses lose $200 billion a year because China does not enforce U.S. patents and copyrights. This is a clearly implausible estimate of the loss to U.S. businesses. It would imply that their losses are equal to more than 12 percent of China's dollar value GDP. If it were true, it implies that copyright and patent protection would be an enormous drag on China's economy - they would effectively be equivalent to imposing a 12 percent value added tax, with the revenue generated by the tax simply being transferred out of the country.

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Benefits for Immigrants

Payments to Help Hospitals Care for Illegal Immigrants
Robert Pear
New York Times, May 10, 2005, Page A11

This article reports on the decision by the Bush administration to begin compensating hospitals and doctors for providing emergency care for illegal immigrants. According to the article, the administration is committing $1 billion for this purpose over the next three years and four months. This amount is equal to 0.01 percent of projected federal spending over this period. It will cost the typical household an average of less than $2.50 per year. It would be helpful if this number had been placed in some context, since many readers have little knowledge of the importance of $1 billion in the context of three years of spending.

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Transportation Spending

Senate Approves More Highway Funds
Shailagh Murray
Washington Post, May 12, 2005, Page A4

Senators Exceed Bush's Budget On Highway Bill by $11 Billion
Carl Hulse
New York Times, May 12, Page A23

These articles report on the Senate's approval of a new transportation bill that allocates $295 billion to transportation over the next six years. In both articles, the fact that spending will take place over a six year period is not mentioned until far into the article, where it can easily be missed.

It would be helpful if this spending were put in some context, since few readers are likely to have much sense of the significance of $295 billion in spending over a six year period. This appropriation is equal to approximately 1.8 percent of projected federal spending over this period.

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