Economic Reporting Review
By Dean Baker
May 31, 2005
In This Issue:
• Outstanding
Stories of the Week
• Social
Security
• Canada's
Health Care System
• Savings
• Germany
• Europe
• The
Housing Bubble
• Trade
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Outstanding
Stories
of the Week
Medicare
Will Revise Guide To New Benefits for 2006
Robert Pear
New
York Times, May 22, 2005, Page A20
This article reports on a guide that the Bush administration has prepared that
describes the benefits offered under the new Medicare prescription drug
program. The article points out that much of the discussion is confusing, and
some of it is deceptive in implying that beneficiaries will get a better deal
with private insurers than with the traditional government-run Medicare plan.
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The College
Dropout Boom
David Leonhardt
New
York Times, May 24, 2005, Page A1
This article
examines the economic prospects of people who drop out of college compared to
those who manage to complete a four-year program.
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Social
Security
Bush Touts
Social Security Plan
Michael A. Fletcher
Washington
Post, May 25, 2005, Page A7
This article reports
on a speech in which President Bush promoted his plans for overhauling Social
Security. At one point the article notes that in 2017 Social Security benefits
are projected to exceed any tax revenue.
While President Bush has highlighted this date in an effort to make the problems facing Social Security appear more urgent, it actually has no particular meaning for the program. Under the plan designed by Alan Greenspan in 1983, the program has been building up a surplus for the last 22 years to help cover its costs when the baby boom cohort retires. By 2017, it will have accumulated more than $3.6 trillion (in 2005 dollars) worth of government bonds. The program is not projected to actually face a shortfall until 2041 according to the Social Security trustees, or 2052 according to the non-partisan Congressional Budget Office.
The fact that there will
be smaller Social Security surpluses in future years would be an important item
to mention in the context of the affordability of President Bush's tax cuts or
his increases in military spending, but it has no direct bearing on the health
of the Social Security system.
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Canada's
Health Care System
A
Doctor-Lawyer-Gadfly v. Canada's Medical System
Clifford
Krauss
New
York Times, May 21, 2005, Page A4
This article
reports on a court case in Canada in which a doctor is questioning the
constitutionality of Canada's national health care system. At one point the
article characterizes the quality of Canada's health care system by saying that
"many agree [Canada's health care system] is an ailing health care
network." Such a vague phrase could be used to describe any health care
system in the world. The Times has run numerous articles over the last decade
warning of the problems of the Canadian health care system, with some implying
it is on the brink of collapse.
It is worth noting that Canadians enjoy a life-expectancy that is more than two years longer than for people in the United States. It also spends less than 60 percent as much per person health care. This would be helpful background in assessing the Canadian healthcare system.
The article later describes the situation of a person who claims that he was forced to wait a year for hip replacement surgery. The article notes that he could have gotten the surgery in the United States, but he was unable to afford the surgery. It claims that the Canadian's system of prohibiting private insurance thereby prevented him from getting his hip replacement more quickly.
Private insurance
companies are in business to make a profit. If a person in need of hip
replacement applies for insurance, they will either charge this person a premium
high enough to cover the cost of the surgery, or they will deny the person
insurance (assuming that the person does not commit fraud and conceal this
pre-existing condition). This means that the lack of access to private insurance
did not keep this person from getting an early hip replacement; the obstacle
this person faced was the lack of money.
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Savings
Automatic Signup In
401(k)s Backed
Jonathan Weisman
Washington
Post, May 22, 2005, Page A5
Is It a Saving Crisis Or
a Math Error
Daniel Gross
New
York Times, May 22, 2005, Section 3, Page 5
These articles discuss
issues related to the low savings rate. The Post article discusses proposals to
require employers to have automatic enrollment in 401(k) plans, so that all
workers are enrolled unless they request not to be. According to research on the
topic, making enrollment the default option will increase savings by $20 billion
a year, an amount equal to approximately 0.3 percent of disposable income.
The second article discusses a recent paper that argues that savings has been underestimated because the standard measure of savings does not include capital gains in homes. This is true and by design. The measure also does not include capital gains in the stock market, nor does it include capital losses in either set of assets. If it did, it would have shown very large negative savings rates in the years when the stock market plummeted.
It is worth noting that there is a direct connection between capital gains in housing values (or stocks) and savings. According to research from the Federal Reserve Board, every dollar of additional housing value reduces annual saving by between 4 and 6 cents. The housing bubble has created more than $5 trillion in housing bubble wealth (the difference between the current value of residential housing and the value if home prices had just followed their historic trend.
Based on the Fed's
research, this amount of bubble wealth implies that the housing bubble has
reduced annual savings by between $200 billion and $300 billion, approximately
10 to 15 times the amount of additional savings that it is estimated would be
created by automatic enrollment in 401(k) plans. This is the reason that many
economist who are concerned about inadequate national savings have focused on
trying to end the housing bubble.
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Germany
German Leader,
Losing a State, Calls for Early Election by Fall
Richard B. Bernstein
New
York Times, May 21, 2005, Page A4
German Surprise:
Is Schroder Giving Up?
Richard B. Bernstein
New
York Times, May 24, 2005, Page A12
German Leader
Gambles in Call for Early Election
Mark Landler
New
York Times, May 25, 2005, Page C6
These articles report
on the decision by German Chancellor Gerhard Schroder to call for early national
elections after his party suffered a major defeat in state elections. All three
articles note the weak performance of the German economy and its high rate of
unemployment. All three attribute this weakness to Germany's welfare state
protections for its workers. In fact, the May 21 article refers to these
protections as "obsolete in a world of globalized competition."
None of these articles present any evidence to support this assertion. Virtually the only authorities cited are economists with banks or other financial institutions. In fact, there is little reason to believe that such protections are obsolete. Many countries with stronger protections than Germany, such as the Nordic countries, Austria and Ireland, have very low unemployment rates and prosperous economies.
The most obvious reason that the German economy remains weak is that the European Central Bank has consistently run a much more contractionary monetary policy than the Federal Reserve Board in the United States. For example, in response to the 2001 downturn, it never lowered its short-term interest rate below 2.0 percent. The Fed held short-term rates at 1.0 percent for almost 2 full years. There are few, if any, economists who would dispute that the Fed's expansionary policies helped to boost the U.S. economy following the recession. The European economies received no comparable boost. Even the OECD has noted this point and called on the ECB to lower interest rates. It would have been useful if these articles had presented a broader range of opinions among economists.
At one point the article
by Landler reports that Germany's reform of its unemployment insurance program,
which reduces the generosity of benefits, has slowed consumer spending as
workers are now more worried about losing their jobs. The article presents this
outcome as an unfortunate side effect. In fact, workers always cut back their
spending in response to uncertainty about their future. It would be remarkable
if Mr. Schroder's advisors had not anticipated a slowdown in consumption when
they implemented their reforms.
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Europe
Europeans' Anger
May Step Up the Pace of Change
Floyd Norris
New
York Times, May 24, 2005, Page C3
This article
reports on the likelihood that political discontent in Europe may lead to an
acceleration of steps to dismantle welfare state protections. At one point it
notes that the unpopularity of these measures "has done nothing to shake
the consensus among political leaders that legislation to reduce the welfare
state and make it easier to hire and fire workers is needed for Europe to regain
its competitive position."
It is worth noting that
the political leaders in Europe not only lack popular support for their
unshakeable beliefs, they also lack economic evidence. Many of the countries
that have been most successful in Europe also have strong welfare state
protections (see "Unemployment
and the Case for Labor Market Deregulation.") . It is also worth noting
that Europe is currently far more competitive internationally than the United
States. Europe is able to sell more goods and services abroad than it buys. By
contrast, the United States buys $700 billion more than it sells each year.
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The
Housing Bubble
Greenspan Is
Concerned About Froth in Housing
Edmund L. Andrews
New
York Times, May 21, 2005, Page B1
This article
reports of Federal Reserve Board Chairman Alan Greenspan's comments warning that
some housing markets are experiencing a bubble. It is worth noting that Mr.
Greenspan made a conscious decision to never warn the public about the stock
market bubble in the late nineties. This fact is important because it could mean
that he views the current housing bubble as posing a greater threat to the
economy than the stock bubble did even at its peak in March of 2000.
Greenspan's comments were
only noted in the Post with a one paragraph item in Business in Brief section,
which was headlined "No Housing Bubble, Greenspan Says." Greenspan's
comments on the bubble were extremely important. They should have been presented
correctly in a prominent place in the newspaper.
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Home Sales Continue at
Torrid Pace
Nell Henderson
Washington
Post, May 25, 2005, Page E1
This article
discusses the state of the housing market in the wake of the release of April
data reported a record level of existing home sales. It is worth noting that
existing home sales are reported at the time a sale is closed. House sales are
typically negotiated 6-8 weeks before closing. This means that the April sales
data is primarily reflecting conditions in the housing market in February and
March. It therefore is providing little evidence about the current state of the
housing market. This information is better provided by data on new homes sales,
construction activity and housing starts and new mortgage applications, all of
which provide a more timely picture of the housing market.
The article also includes
an assertion that job growth is now providing a healthy basis for income growth,
which can support the economy if the boost from the housing boom fades.
Actually, wage income has been virtually stagnant over the last year as the
increase in employment has been largely offset by declining real wages. Unless
real wages start growing again, there will be little, if any, boost to income
from the current rate of job creation.
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Trade
'New Democrat' Bloc
Opposes Trade Pact
Thomas B.
Edsall
Washington
Post, May 21, 2005, Page A4
This article reports
on the decision of a number of pro-business Democrats in Congress to oppose
CAFTA. The article includes a number of references to recent trade pacts as
"free-trade" agreements. This is inaccurate. Why While the pacts are
intended to facilitate trade in some areas, they also increase some forms of
protectionism, most notable notably by increasing protection for copyrights and
patents. They also do little or nothing to remove barriers that protect highly
paid professionals, like doctors and lawyers, from foreign competition.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.