Economic Reporting Review
 By Dean Baker
May 23, 2005

In This Issue:

•  Outstanding Stories of the Week

•  Social Security

•  Inflation

•  Germany

•  The War on Poverty

•  China

•  Recycling Prescription Drugs

•  Greenspan's Tenure


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Outstanding Stories of the Week

Life at the Top in America Isn’t Just Better, It’s Longer
Janny Scott
New York Times, May 16, 2005, Page A1

This article discusses the impact that class has on the quality of medical care that people receive.

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Who's Preying On Your Grandparents?
Gretchen Morgenson
New York Times, May 15, 2005, Section 3, Page 1

This article reports on the practices of many financial companies that market variable annuities to senior citizens. The article reports that the contracts for these annuities are often quite complex and that many purchasers do not fully understand the restrictions until after the fact. Financial firms typically charge high fees for these policies.

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Class in America: Shadowy Lines That Still Divide
Janny Scott and David E. Leonhardt
New York Times, May 15, 2005, Page A1

This article examines social mobility in the United States. It shows that mobility appears to have diminished in the last quarter century. It also shows that the United States has less mobility that many other rich countries.

The article highlights polling data that indicate the public hugely exaggerates the degree of mobility in the United States. It would have been helpful if it noted more prominently that widely held public perceptions on mobility are wrong.

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Social Security

Retirement's Unraveling Safety Net
Dale Russakoff
Washington Post, May 15, 2005, Page A1

This informative article examines how young and middle age workers face the prospect of a less secure retirement than their parents, due primarily to rising health care costs, disappearing corporate pensions, and inadequate personal saving. The article includes repeated assertions that President Bush wants to replace Social Security with private accounts, due to his belief in an "Ownership Society."

While President Bush has used this rationale in his public statements, politicians do not always reveal the true motives for their actions. It is entirely possible that the "Ownership Society" is simply a rhetorical ploy being used to hide his efforts to undermine Social Security. One important fact supporting this assessment is that President Bush has expressed no interest in creating private accounts outside of Social Security, a project that would almost certainly get substantial support from Democrats. If his real goal were to create an ownership society, rather than dismantle Social Security, then it would be reasonable to expect him to promote all avenues that lead to more broadly based ownership, not just those that led to the weakening or destruction of Social Security.

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Fight on Judges Obscures Social Security
Richard W. Stevenson
New York Times, May 20, 2005, Page A19

This article reports on a trip by President Bush in which he sought to promote his plan for privatizing Social Security. The article quotes President Bush as saying that young people are concerned about paying money into a Social Security system that is "going broke."

It is worth noting that under all projections Social Security will always be able to pay young workers a higher benefit than what current retirees receive. While it is projected by the Congressional Budget Office to be unable to pay full benefits after 2052, if the standard for "going broke" is that the program will not be able to pay full benefits at some point in the future without changes, then Social Security has always been "going broke."

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Inflation

Price Report Eases Fear on Inflation
Eduardo Porter
New York Times, May 19, 2005, Page A1

This article reports on the release of new inflation data by the Labor Department. The article asserts that the data indicated that inflation is well under control, because the core consumer price index was flat for the month.

Actually, this report provides little evidence that inflation is abating. There is always a large random element in price movements, so the specific month when inflation appears in the CPI is somewhat arbitrary. The core inflation rate for April was held down by some unusual price declines in April that followed unusual price increases in prior months.

For example, hotel prices, which account for 5 percent of the core CPI, reported fell 1.2 percent in April, after rising by 1.1 percent in February and 3.9 percent in March. Similarly, apparel prices reportedly fell 0.6 percent in April, after rising 0.8 percent in March. Most likely, prices for these items did not really rise rapidly in February and/or March and then suddenly plunge in April. Rather, these price movements are probably attributable to measurement problems.

The best way to avoid such problems is to rely on a longer period. Over the last three months, the core inflation rate has been 2.6 percent, the fastest rate since the recession.

The article also reports that recent data suggest that the economy remains strong. In fact, the latest data are mixed. Data on industrial production show that manufacturing output is actually falling. The decline in the March trade gap, which is presented as a positive measure, could be due to the fact that declining demand has slowed import growth. Given the sharp decline in real wages over the last quarter, it would not be surprising if many families are cutting back their consumption.

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Germany

Europe: The Unlevel Playing Field
Mark Landler
New York Times, May 20, 2005, Page C1

This article reports on the difficulties that the European Central Bank faces in designing a single monetary policy for the euro zone counties, given the large differences in growth they are experiencing. At one point, the article asserts that Germany has an 11.8 percent unemployment rate. This is the unemployment rate using the German government's definition of unemployment. Using the OECD standardized definition, which is virtually identical to the U.S. definition of unemployment, the unemployment rate in Germany is 9.7 percent. The OECD standardized unemployment rate for Germany is readily available on its website.

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The War on Poverty

Two Fronts in the War on Poverty
Michael A Fletcher
Washington Post, May 17, 2005, Page A1

This article reports on the Bush administration's efforts to reallocate anti-poverty funding from traditional social service agencies to religious organizations. The amount of money that it proposes to reallocate in the 2006 budget is $385 million. It would be helpful to put this number in some context. This sum is equal to 0.015 percent of projected 2006 spending. While it may be important to the agencies directly affected, it is not a major item in the budget.

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China

Bush's Choice: Anger China Or Congress Over Currency
Edmund L. Andrews
New York Times, May 17, 2005, Page C1

U.S. Warns China on Currency Policy
David S. Hilzenrath
Washington Post, May 18, 2005, Page E1

These articles discuss the pressures on the Bush administration to try to force China to revalue its currency. Both articles refer to charges that China is "manipulating" its currency.

It would have been helpful if the articles explained what is meant by "manipulation." The Chinese government fixes it currency against the dollar. This means that it intervenes in financial markets to keep the value of its currency down. However, this is not a secret policy, China quite openly acknowledges that it pegs it currency against the dollar. Many other countries also peg their currency against the dollar, often with the quite explicit support of the U.S. government. (In recent years, the U.S. government worked hard to keep Russia, Brazil, and Argentina from removing the peg of their currencies to the dollar and allowing them to float.) Since the link to the dollar is completely open and a longstanding policy, it is not clear what could be meant by the claim it is "manipulating" its exchange rate.

The Times article also includes the additional charge that the purpose of the currency manipulation is to gain an "unfair" advantage over the United States. It is not clear what an "unfair" advantage would be. The lower the price of the Chinese currency against the dollar, the cheaper will be its exports to people in other countries. It is not clear at what point the currency would be priced so low that this led to an "unfair" relationship.

At one point, the Times article includes an assertion that raising the value of the Chinese currency "might have only a limited impact on the United States trade deficit but a significant impact on inflation." If the Chinese currency rises in price against the dollar it will make imports from China more expensive. This will have an impact on both inflation (if imports rise in price, then this leads to higher inflation) and the trade deficit. Higher import prices will lead people in the United States to purchase fewer imports. The trade deficit can only be addressed by having the dollar fall in value, thereby making imports more expensive, or by throwing the U.S. economy into a recession. While the fall in the dollar may lead to higher inflation, apart from a recession, this is the only way to reduce the trade deficit.

The Times article also cites Nouriel Roubini, an economist at new York University, as saying that a fall in the dollar could cause the U.S. to "pay dearly in higher interest rates." The United States is currently living beyond its means by running up a large trade deficit. It has no choice but to "pay dearly" as it reduces its demand for imported goods. This is comparable to a family that spends more than its income by borrowing on its credit cards. When it stops or cuts back its borrowing, it will endure hardship, because it must cut back its consumption to bring it in line with its income. However, the problem is not cutting back consumption, the problem was spending beyond its means in the first place-the exact same logic applies to the U.S. trade deficit.

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Recycling Prescription Drugs

Old Pills Finding New Medicine Cabinets
Stephanie Strom
New York Times, May 18, 2005, Page A17

This article discusses programs to recycle prescription drugs that were not used by the original patient, for example the pills that a patient may have left over after they have been cured of a specific disease or switched to a different medication.

The article reports on the potential savings that could result from this sort of recycling, as it reports that more than $1 billion worth of prescription drugs are thrown out each year. It is worth noting that the discarded drugs are valuable primarily because of patent protection. In most cases, drugs would sell for less than one-third of their patent protected price if drugs were sold in a competitive market without patent monopolies.

This point is worth mentioning in this context, because there are safety issues raised by recycling drugs from one person to another, as this article points out. Insofar as high drug prices lead people to recycle drugs, this is another of the problems associated with patent-financed drug research.

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Greenspan's Tenure

Administration Considers Delaying Fed Chief's Exit
Nell Henderson
Washington Post, May 18, 2005, Page E1

This article discusses the possibility that President Bush will arrange to have Federal Reserve Board Chairman Alan Greenspan stay on in an interim capacity for several months after his term as a board member is scheduled to expire. The article includes comments from several economists who discuss his tenure as chairman as a great success story. It would have been appropriate to include comments from critics of Mr. Greenspan as well. Mr. Greenspan ignored the largest financial bubble in the history of the world, when he let the value of the U.S. stock market rise to almost $20 trillion in 2000. The country still has not fully recovered from the effects of the stock crash.

Perhaps even more importantly, his main tool to offset the impact of the stock crash has been to promote the growth of a housing bubble. While housing prices have largely kept pace with inflation throughout U.S. history, in the last nine years they have risen by 45 percent in real terms, creating more than $4 trillion in housing bubble wealth. The collapse of this bubble will have a devastating impact on the millions of families for whom a house is their primary financial asset. It will also lead to a recession as the construction sector contracts and consumption slumps due to the fact that consumers are no longer able to borrow against their homes. The collapse of the housing bubble is also likely to leave the secondary mortgage market in precarious shape as Fannie Mae and Freddie Mac are not prepared to deal with large scale mortgage defaults.

A full view of Mr. Greenspan's tenure would not only mention his successes, but would also discuss some of his failures.

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