Economic Reporting Review
By Dean Baker
July 18, 2005
In This Issue:
• Outstanding
Stories of the Week
• June
Employment Report
• Drug
Patents in Brazil
• Oil
Prices and the Dollar
• Medicaid
• Aid
to Africa
• Drug
Costs
• Health
Care
• The
Trade Deficit
• CAFTA
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Outstanding
Stories
of the Week
Boom in Jobs, Not Just Houses, As Real Estate Drives Economy
David Leonhardt
New
York Times, July 9, 2005, Page A1
This article reports on the impact that the housing boom has had on
employment. It notes that housing-related employment growth has been larger than
total employment growth since the recession.
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Few Wealthy Farmers Owe
Estate Taxes, Report Says
David Cay Johnston
New
York Times, July 10, 2005, Page A5
This article reports on the findings of a study by the Congressional Budget
Office that shows that almost no family farmers pay the estate tax and that
almost all of the estates that do pay the tax have the financial assets to cover
the tax without imposing any burden on their heirs. In other words, almost no
one in the country will ever inherit a farm without having the resources to
immediately cover any estate tax liability.
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June
Employment Report
Economy Continued Steady Growth
in June
Nell Henderson
Washington
Post, July 9, 2005, Page D1
Hiring Picked Up Pace Last Month
Louis Uchitelle
New
York Times, July 9, 2005, Page C1
These articles report on the release of June employment data by the Labor
Department. At one point, the Post article notes that many economists consider
the economy's current unemployment rate of 5 percent to be full employment:
"many economists say … under normal conditions, the [unemployment] rate
cannot fall much below 5 percent for long without pushing inflation
higher."
It is worth noting that economists who hold this view formerly claimed that unemployment could not fall below 6 percent without leading to accelerating inflation. They argued strenuously against Greenspan's policy in the mid-nineties, when he allowed the unemployment rate to fall far below 6 percent, without raising interest rates. Now that the evidence has proven their theory wrong (there was no increase in the inflation rate during most of the nineties), these economists have simply changed the number at which they insist that inflation will accelerate, from 6 percent unemployment to 5 percent unemployment.
The Times article compares job growth in this recovery to job growth in prior recoveries. This is an inappropriate comparison, because the main factor determining the speed of job growth in the recovery is the severity of the recession. The deeper the recession, the more rapid is job growth in the recovery. The 2001 recession was the mildest of the post-war era, so it would not be surprising that job growth would be weak.
The more reasonable comparison is job growth in the period since the previous employment peak. By this standard the economy is performing very poorly. The economy has added an average of just of 200,000 jobs a year since the pre-recession employment peak in February of 2001 (less than 50,000 jobs a year in the private sector.) By comparison, the economy added an average of more than 1.5 million jobs a year in the 4 years following the 1982 employment peak, and more than 1.0 million in a year in the four years following the 1990 employment peak.
Arguably the better measure of
labor demand in the economy is total hours worked. While employment is above its
pre-recession peak, total hours worked is still 1.4 percent below its
pre-recession peak. Such a prolonged decline in total hours worked is without
precedent in the post-war era.
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Drug
Patents in Brazil
Brazil and U.S. Maker
Reach Deal on Aids Drug
Todd Benson
New
York Times, July 9, 2005, Page B2
This article reports on an agreement
between the Brazilian government and Abbot Laboratories, the pharmaceutical
company that produces the AIDS drug Kaletra, under which Abbot Laboratories
agreed to provide Kaletra at a large discount. The article repeatedly asserts
that the Brazilian government had threatened to "break" Abbot
Laboratories' patent on Kaletra.
Actually, Brazil's government was considering requiring that Abbot issue licenses to other producers to manufacture Kaletra. As a condition of these licenses, Abbot would still collect royalties on its patent.
Patents are a government-granted
monopoly. There is no unique set of conditions that define a patent. In this
case, Brazil's government is imposing conditions that are less generous to Abbot
Laboratories. While the company is understandably unhappy about the prospect of
making lower profits, compulsory licensing is not the same thing as breaking a
patent. It is also legal under the current WTO agreement.
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Oil
Prices and the Dollar
Dollar Strength Blunts Pain
Of Rising Oil Prices for U.S.
Floyd Norris
New
York Times, July 9, 2005, Page B4
This article discusses the impact of higher oil prices on Europe's economy. It
note that the impact of the rise in the price of oil to $60 a barrel in the last
two months has been even greater in Europe, because the euro has declined by 15
percent against the dollar this year. It implies that Europe is paying a higher
price for oil because it is priced in dollars.
Actually, the fact that the convention is to price oil in dollars does not affect the price to Europeans. The price of oil is determined by demand and supply conditions in the market; it is not an administered price set in dollars. (In other words, major oil producers do not write down a dollar price that they demand for their oil.) If the euro rose in value against the dollar, the price of oil would simply be higher measured in dollars.
It is also worth noting that
Europe gets approximately twice as much economic output for every barrel of oil
as compared to the United States, so a rise in the price of oil by a fixed
amount will actually have less impact on Europe's economy than on the U.S.
economy.
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Medicaid
Medicaid Commission
Formed To Tame Program's Growth
Robert Pear
New
York Times, July 9, 2005, Page A11
This article reports on a commission named by President Bush to find ways to
save money on Medicaid. It identifies one of the members of the commission as
being with the Galen Institute, which it describes as advocating health policies
"based on free market principles."
This is not true. The institute strongly supports government-guaranteed monopolies in the forms of patent protection for pharmaceuticals and medical equipment. These forms of government intervention raise the price of these items by 300-400 percent above free market prices.
The Galen Institute also does not
support mechanisms that would allow more international competition in the health
care sector. For example, it has not advocated the elimination of professional
restrictions that are designed to prevent foreign doctors from competing with
U.S. doctors and bringing down their wages. It also has not supported Medicare
Choice Plus, a proposal that would allow Medicare beneficiaries to obtain their
health care from countries with more efficient health care systems (see
"Medicare Choice Plus: The Answer to The Long-Term Deficit
Problem").
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Aid to
Africa
African Aid Is Doubled By G-8
Jim VandeHei and Paul Blustein
Washington
Post, July 9, 2005, Page A1
8 Leaders Hail Steps on Africa and Warming
Richard W. Stevenson
New
York Times, July 9, 2005, Page A1
These articles report on the commitments made at the G-8 summit conference on
aid to Africa and global warming. They report that the G-8 countries have
committed to raise annual aid to Sub-Saharan Africa to $50 billion a year by
2010 from $25 billion a year today.
It would have been useful to
point out that inflation is projected to erode the real value of the dollar by
approximately 15 percent in the United States by 2010. Furthermore, as the OECD,
IMF, and numerous economists have frequently noted, the United States has an
unsustainable current account deficit. The only way (other than a severe
recession) to bring this deficit down to a sustainable level would be to have a
sharp drop in the value of the dollar against other currencies. Conventional
estimates of trade elasticities imply that the dollar would have to decline by
approximately 30 percent against other currencies to bring the deficit down to a
sustainable level. This would mean that the real value of the G-8 aid commitment
expressed in non-dollar currencies would be an increase of approximately
one-third when measured against current levels.
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Drug Costs
Cancer Drugs Offer Hope, but at a
Huge Expense
Alex Berenson
New
York Times, July 12, 2005, Page A1
This article reports on the cost of a new generation of cancer drugs. According
to the article, the manufacturers charge as much as $100,000 for a three-month
course of treatment.
It would have been worth noting
that these high prices are entirely attributable to government-imposed patent
monopolies. In a competitive market, the price of these drugs would probably not
even be 1 percent of the price being charged by the pharmaceutical industry.
Drugs are almost invariably relatively cheap to produce. They are expensive only
because the government grants companies monopolies on items necessary for
survival.
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Health
Care
The Evolution of Hillary
Clinton
Raymond Hernandez and Patrick D.
Healey
New
York Times, July 14, 2005, Page B1
This article assesses the way that Hillary Clinton has positioned herself
politically since entering the Senate. At one point it asserts that the failure
of the health care plan advocated during her husband's presidency was
attributable to the mistake of "trying to sell an ambitious plan to a
public with no appetite for radical change."
While it is possible that the
plan failed because it was too ambitious for the public, there are other
plausible explanations. For example, it was an extremely complex plan that had
never been tried anywhere else in the world. It also would not have produced
large savings on administrative expenses, as would a universal Medicare plan. It
is possible that the plan failed primarily simply because it was a bad plan.
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The Trade
Deficit
Trade Gap Narrowed In May;
Trend Seen As Short-Lived
Vikas Bajaj
New
York Times, July 14, 2005, Page C3
This article reports on the Commerce
Department's release of trade data for May. At one point it notes that the
government budget deficit is projected to shrink over the next several years
even as the trade deficit is projected to continue to rise. It then comments
that they had moved in tandem in recent years.
Actually, the trade deficit has
been rising fairly consistently since 1997. From 1997 to 2000, the budget
deficit shifted from a small deficit to a large surplus. The trade deficit has
been driven over this whole period by a high dollar. The high dollar was a
deliberate government policy in the late nineties. While it had the short-term
benefit of reducing the price of imports and keeping inflation low, in the
long-term it leads to a build up of debt and lower living standards. It also
hurts workers in sectors of the economy affected by trade, primarily
manufacturing.
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CAFTA
G.O.P. Hopes Bill on China
Will Assist Trade Pact
Edmund L. Andrews
New
York Times, July 15, 2005, Page C3
This article discusses a bill being debated in the House that threatens punitive
measures against China over its trade practices. At one point it refers to the
CAFTA as a "free trade" agreement. While this term is part of the
name, presumably because of public support for the concept of "free
trade," it does not accurately describe the agreement. A major goal of
CAFTA is to increase protectionist barriers in the form of patent and copyright
protection.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.