Economic Reporting Review
By Dean Baker
August
15, 2005
In This Issue:
• Outstanding
Stories of the Week
• Bioterrorism
Drugs
• Productivity
• Federal
Reserve Board Policy
• Germany
• European
Economic Growth
• China's
Energy Use
• Transportation
Bill
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Outstanding
Stories
of the Week
Economic News Isn't Helping Bush
Jonathan Weisman and Nell Henderson
Washington
Post, August 6, 2005, Page D1
This article discusses the public's negative views of
President Bush's handling of the economy. It points out that, even though
economic growth has been reasonably healthy for the last couple of years, the
labor market remains quite weak and most workers continue to feel insecure.
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Bioterrorism
Drugs
Bioterrorism Response Hampered by Problem of Profit
Marc Kaufman
Washington
Post, August 7, 2005, Page A5
This article discusses a bill put forward by Senators Orrin Hatch and Joe Lieberman, which would allow drug companies that developed a drug, vaccine, or diagnostic tool that is useful against bioterrorism, to get an 18 month patent extension of the drug of their choice. It quotes a former aid to Senator Lieberman claiming that such rewards are necessary "to incentivize" the market.
It would have been helpful to present other views on how the government could finance research in this area. For example, the government could simply pay for the research directly, either by having work done in government labs or contracting with private companies. Such funding has led to many other important breakthroughs, for example a vaccine against the Avian flu (see "Vaccine Appears to Ward Off Bird Flu," Rob Stein, Washington Post, August 7, 2005, Page A1). Currently, the government spends approximately $30 billion a year on such research. The drug industry and other observers argue that this spending is extremely important to developing new drugs and improving the nation's health.
It is also important to note that the Hatch-Lieberman bill
would amount to a "taking," since it would deny generic drug
manufacturers the opportunity to sell a drug if a company chooses to get a
patent extension on it. Conservatives in congress have argued strongly against
such takings over the last decade.
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Productivity
Productivity Is the Issue Of the Hour For the Fed
Edmund L. Andrews
New
York Times, August 9, 2005, Page C1
This informative article notes the importance of productivity growth for the economy and examines its recent path as well as the likely future course of productivity growth. At one point it notes that the rapid productivity growth of the last decade has allowed for workers to experience real wage growth without it leading to inflation.
While more rapid productivity growth allows for more rapid real wage growth, in fact, any level of productivity growth should allow for real wage growth without inflation. In the last quarter century, income has been increasingly been skewed upward so that wage increases went primarily to more educated workers, and in the last few years most of the gains from productivity growth have been absorbed in higher profit margins. However, if distribution does not change, real wages should be able to rise at the rate of productivity growth (ignoring some measurement issues).
In assessing future productivity growth it is important to note the role of the over-valued dollar. The high dollar has contributed to productivity growth by making a vast quantity of low cost imports available. These low cost imports substitute for labor, raising the average level of productivity in the economy. This effect will be felt in reverse when the dollar declines, raising the price of imports. The effect of rising import prices will be to lower productivity growth.
To see how this effect can be felt, consider what would happen to the demand for shoe repairmen, as cheap imported shoes become available. If it is very cheap to simply replace shoes, then consumers will be less likely to have their shoes repaired. This means that there will be few people working in the shoe repair industry. If we assume that this is a low productivity job, then the loss of jobs in this sector raises overall productivity, and productivity growth, other things equal.
If this process goes in reverse - for example imported shoe prices rise by 40 percent - then the demand for shoe repairmen may rise. This will have the effect of lowering average productivity, and productivity growth.
The availability of low cost imports would have this effect throughout the economy. As the dollar falls to bring the trade deficit down to a sustainable level, it is likely that productivity growth will slow, as workers are employed in relatively low productivity jobs in order to save money on increasingly expensive imports.
At one point the article asserts that the Bureau of Labor
Statistics (BLS) data show that hourly wages in the non-farm business sector
rose at a 10.2 percent annual rate in the fourth quarter. Actually, this is the
rate of growth of compensation, not wages. The distinction is important both
because sharply higher payments for health insurance were a major contributor to
this increase and also because much of this gain was attributable to year-end
bonuses that went to mostly high-end wage earners. The BLS data show that
average hourly wages for production non-supervisory workers (about 80 percent of
the work force) was rising at less than a 3.0 percent annual rate during this
period.
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Federal
Reserve Board Policy
Interest Rate Raised Again
Jonathan Weisman and Nell Henderson
Washington
Post, August 10, 2005, Page D1
Suggesting No Letup, Fed Raises Rates Again
David Leonhardt
New
York Times, August 10, 2005, Page C1
These articles report on the Federal Reserve Board's decision to raise the short-term federal funds rate by a quarter of a percentage point to 3.5 percent. Both articles note that long-term interest rates have stayed low and imply that this is difficult to explain.
While the fact that long-term rates have remained so low even as the fed has raised short rates is striking (the ten-year Treasury bond rate was approximately 4.5 percent last June, when the federal funds rate was still 1.0 percent, at present it is just 4.2 percent), there is relatively little mystery in this story. The Japanese and Chinese central banks have bought up several hundred billion dollars of long bonds over the last 14 months.
The intervention of the Japanese and Chinese central banks in the U.S. treasury markets has kept long-term interest rates low. In effect, these central banks have decided to counteract the monetary policy of the Fed. While the Fed wants to slow the U.S. economy by raising interest rates, the Japanese and Chinese central banks want to keep the U.S. economy (and their exports) growing rapidly, and therefore have decided to act to keep U.S. interest rates low. These central banks have been far more effective than the Fed, because they intervene directly in the long-term bond market, while the Fed only acts in the overnight money market.
If the Fed continues to raise short-term rates, then it may eventually force the Japanese and Chinese central banks to abandon their efforts to keep down long-term interest rates, since this drive will become increasingly costly for them. However, to date, they have been willing to risk the losses that they can expect to absorb, due to both to a decline in the value of the dollar and a fall in bond prices, in order to sustain the U.S. market for their exports.
At one point the Post article refers to the fact that
"foreign lenders" have been willing to finance the U.S. trade and
budget deficits. It is important to note that these lenders are largely central
banks, who act for policy reasons. There has been relatively little net inflow
of capital from private lenders, who invest to maximize returns, over the last
two years.
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Germany
Just When You Thought Schroder Was History …
Richard Bernstein
New
York Times, August 11, 2005, Page A4
This article discusses the re-election prospects of German Chancellor Gerhard Schroder. At one point the article refers to Germany's "sad economic picture." The article then goes on to describe Germany's labor costs as "uncompetitive."
The article does not indicate the basis for these assessments. While the country does have relatively high unemployment (approximately 9.5 percent), this unemployment is heavily concentrated in the part of the country that was formerly East Germany. Workers continue to enjoy relatively high wages, living standards and high degrees of economic security throughout the portion of the country that was formerly West Germany.
Also, unlike the United States, which has a large trade
deficit, Germany has consistently enjoyed a trade surplus. This means that the
value of the German goods and services purchased by foreigners is greater than
the value of the foreign goods and services purchased by Germans. The article
must therefore be using a non-market-based assessment in describing Germany's
labor costs as "uncompetitive."
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European
Economic Growth
Economic Growth Slows to 0.3 Percent
Complied from News Services
Washington
Post, August 12, 2005, Page D5
See article under the heading "European Union"
This article reports on a new forecast for European
economic growth from Eurostat, the European Union's statistical agency. The
forecast is expressing GDP growth as a quarterly rate. It is standard in the
United States to express GDP growth as an annual rate. It would be helpful if
the article reported the projected growth rate as annual rate (1.4 percent) or
if it at least informed readers that the numbers refer to quarterly rates.
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China's
Energy Use
Electrical Inefficiency A Dark Spot for China
Peter S. Goodman
Washington
Post, August 11, 2005, Page D1
This article discusses the relative energy efficiency of China and other countries. It reports that China uses 2.5 times as much energy per dollar of GDP as the United States and 4.9 times as much as the European Union. This comparison uses an exchange rate conversion measure of GDP. This measure calculates China's GDP in its own currency and then converts it into dollars at the current exchange rate. By this measure, China's GDP is approximately $1.5 trillion.
Virtually all economists would use a purchasing power
parity measure of GDP in making these sorts of international comparisons.
Purchasing power parity measures of GDP attempt to price all goods and services
produced in China at the same price that these items would sell for in other
countries. China's GDP using a purchasing power parity measure of GDP is close
to $8 trillion, approximately 5 times as large as the currency conversion
measure. By this measure, China's economy is approximately as energy efficient
as the European Union and nearly twice as efficient as the United States.
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Transportation
Bill
Fresh Pork, Coming to a District Near You
Bill Marsh
New
York Times, August 8, 2005, Section 4, Page 3
Bush Signs Major Transportation Measure
Anne E. Kornblut
New
York Times, August 11, 2005, Page A15
These articles discuss the new transportation bill recently signed by President Bush. While both articles refer to the $296 billion appropriated in the bill, neither points out that this appropriation is for a 6-year period. This appropriation accounts for approximately 1.7 percent of projected spending over this period.
According to article by Marsh, approximately 8 percent of
the spending in the bill is in the form of earmarked appropriations, the
standard definition of a pork-barrel project. This spending is equal to
approximately 0.14 percent of the federal budget over the next six years.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.