Economic Reporting Review
By Dean Baker
September
19, 2005
In This Issue:
• Outstanding
Stories of the Week
• Conservatives
and Big Government
• Hurricane
Katrina
• Job
Growth and Accounting Fraud
• Germany
• Medical
Patents
• Debt
Relief and the World Bank
• Bush
at the United Nations
• Size
of Economies
• Inflation
and Home Prices
• Airline
Prices
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Outstanding
Stories
of the Week
Disasters Waiting To Happen
Louis Uchitelle
New
York Times, September 11, 2005, Section 3, Page 1
This article discusses areas in which infrastructure
repairs and improvements have been neglected in an effort to save money. While
the failure to repair the levees in New Orleans is one example of neglected
infrastructure, there are many others across the nation, some of which may also
have serious consequences in an emergency.
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Workers' Family Coverage Reaches $10,880 Average
Albert B. Crenshaw
Washington
Post, September 15, 2005, Page D2
This article reports on a new study by the Kaiser family
Foundation showing 2004 data on the costs and extent of employer provided health
care coverage. It would have been appropriate to feature this article
prominently in the front section rather than inside the business section where
relatively few people will see it.
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In Storm's Ruins, a Rush to Rebuild and Reopen for
Business
John M. Broder
New
York Times, September 10, 2005, Page A1
This article discusses the speed with which FEMA is
awarding contracts for post-hurricane reconstruction and the likelihood that
many no-bid contracts will go to politically connected firms at excessive
prices.
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Conservatives
and Big Government
Thumbing Nervously Through the Conservative Rulebook
Robin Toner
New
York Times, September 11, 2005, Section 4, Page 1
This article discusses the reaction of conservatives to the damage caused by Hurricane Katrina and its aftermath. The article repeatedly asserts that conservatives favor small government.
This is not true. Conservatives like to say that they favor small government, but this is rhetoric that is used for its political appeal; it is not an accurate representation of their views. While conservatives generally oppose government social programs that are designed to benefit large segments of middle class and poor, and they strongly support government intervention when its primary beneficiaries are upper income people.
For example, most conservatives are strong proponents of
copyright and patent monopolies which transfer hundreds of billions of dollars
every year from consumers to the entertainment, software, and pharmaceutical
industries. Enforcement of these monopolies often requires extensive government
involvement in the economy. Similarly, most conservatives supported the new
bankruptcy law, which gives the government large responsibilities to act as a
bill collector for credit card companies and other creditors.
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Hurricane
Katrina
Storm Stretches Refiners Past a Perilous Point
Jad Mouawad
New
York Times, September 11, 2005, Page A27
This article discuses the impact of the storm on the country's oil refining capacity. At one point the article notes that the storm idled 5 percent of the refining capacity in the United States. It then quotes an analyst who comments that this is just 1 percent of world production, and that there is a world market.
Actually, for refined products, like gasoline and home heating oil, to a large extent the market is national or even regional. Many states have very specific rules on emissions of various pollutants. Refineries have to be set up to produce fuel that meets these requirements. In many cases, few, if any, foreign refiners will be set up to meet these standards. While they can change over time, at the moment foreign refiners may have little ability to meet U.S. demand for gasoline or other refined products.
It is also worth noting that major U.S. oil companies may
benefit by deliberately keeping capacity off line. The loss of capacity will
push up prices and possibly raise profits.
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Job
Growth and Accounting Fraud
The Crime: Slow Job Growth. A Suspect: Enron
Daniel Gross
New
York Times, September 11, 2005, Section 3, Page 11
This article discusses the possibility that the fallout
from the accounting fraud of the nineties boom may partially explain the slow
job growth in the recovery. It is worth noting that some economists had
predicted, even before the collapse of the stock bubble, that accounting fraud
associated with the bubble would inhibit future growth (see "The
Costs of the Stock Market Bubble"). Many economists believe that
even 3-4 percent inflation leads to serious economic distortions. If modest
inflation can lead to economic distortions, then it must be the case that huge
financial bubbles (like the stock market or housing bubbles) would lead to
serious distortions, resulting in a negative impact on growth and jobs.
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Germany
Germans See Pain but No Gain as Schroder's Star Dims
Mark Landler
New
York Times, September 11, 2005, Page A3
This article discusses the likelihood that German Chancellor Gerhard Schroder will lose his position in elections later this month. At one point the article notes that Schroder has supported a reduction in unemployment benefits and a cutback in other welfare state protections for workers. It also notes that these measures have not led to a reduction in the unemployment rate.
The only expert that it cites on this issue is Dennis Snow, an economist who supports such cuts. Snow is quoted as saying that the measures "did not significantly raise the incentives for Germans to join the workforce." It is understandable that Mr. Snow would not want to acknowledge the failure of policies that he supports. It would have been appropriate to include the views of economists who see the fact that Schroder's measures have not led to a reduction in unemployment as evidence that Germany's problem is not really the generosity of its welfare state.
The more obvious explanation of high German unemployment
is the contractionary monetary policy of the European Central Bank (ECB).
Virtually all economists agree that the United States would have a higher
unemployment rate if the Fed had followed the same monetary policy as the ECB in
recent years.
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Germans Haven't Forgotten Schroeder's Unfulfilled
Pledge
Craig Whitlock
Washington
Post, September 16, 2005, Page A22
The Front-Runner in Germany Runs Scared
Mark Landler
New
York Times, September 16, 2005, Page A3
This articles report on the upcoming German elections. At one point the Times article refers to Germany's "ballooning budget deficit." Germany's budget deficit is not ballooning. It has been between 3 and 4 percent of GDP for the last several years, approximately the same size as the current U.S. deficit.
The Post article asserts that "an aging workforce, generous social welfare programs and a cultural resistance to change have stymied efforts by a succession of governments to fix the economic problems." The article does not explain how it determined that these factors prevented Germany from fixing its economic problems. Other countries, such as Sweden, Denmark, and Austria, who also have aging populations, generous welfare states, and cultures that limit change, have very healthy economies.
In discussing Germany's economic problems, the Post
article never mentions the contractionary economic policies of the European
Central Bank (ECB). Virtually all economists would agree that growth in the
United States would have been slowed and unemployment higher, if the Fed had
pursued the same sort of the contractionary policies as the ECB.
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Medical
Patents
F.D.A. Had Report Of Short Circuit In Heart Devices
Barry Meier
New
York Times, September 12, 2005, Page A1
This article reports on the fact that the Food and Drug Administration had evidence of a defect in a heart device for several months before it issued a public warning. The article reports that the information was withheld from the public because the F.D.A. must initially keep all information provided by the industry strictly confidential, until it can determine that there is an important public health issue at stake.
It is worth noting that this secrecy is a result of the
patent system. If corporations were not selling drugs or medical devices at
monopoly prices, they would have little stake in keeping evidence of potential
harm secret. The monopoly profits provided by patent protection provide an
incentive for secrecy that would not exist in a competitive market.
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Debt
Relief and the World Bank
Objections Emerge to G-8 Debt Relief Plan
Paul Blustein
Washington
Post, September 13, 2005, Page A8
This article reports on efforts to block a G-8 plan for 100 percent debt forgiveness for the world's poorest countries. The main point made by these critics is that by reducing the flow on money in loan repayments, the plan would reduce the resources of the World Bank.
It would have been helpful if the article stated more
clearly what is at issue. In effect, the world's poorest countries provide
funding for the World Bank for loan repayments, which the Bank can then use to
make new loans, presumably mostly to these same countries. If the poor countries
cutback their repayments, then the Bank will have less money for new loans, but
the poor countries will presumably also have less need for new loans. Debt
forgiveness effectively eliminates the role of the World Bank as a middleman in
recycling loans (with the associated costs) and simply leaves the money in the
developing countries.
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Bush
at the United Nations
At U.N., Bush Links War on Terrorism to Anti-Poverty
Efforts
Peter Baker and Colum Lynch
Washington
Post, September 15, 2005, Page A8
This article reports on President Bush's speech at the United Nations. According to the article, President Bush claimed that the United States was committed to dropping all barriers to free trade in goods and services. It would have been appropriate to point out that this is not true. One of the top priorities of the Bush administration in its trade agreements has been increasing patent and copyright protection for items produced by U.S. pharmaceutical, entertainment, and software companies.
These forms of protection impose a substantial burden on
developing countries, making items that would other wise be available at no cost
(e.g. software and recorded music) or little cost (prescription drugs) very
expensive. Paying royalties and licensing fees on protected goods can be a
substantial drain on the economies of developing countries.
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Size
of Economies
Koizumi Supported in Difficult Mission
Anthony Faiola
Washington
Post, September 13, 2005, Page A20
No-Frills Candidate Aims For Germany's Top Spot
Craig Whitlock
Washington
Post, September 14, 2005, Page A1
These articles discuss elections in Japan and Germany,
respectively. The article on Japan refers to its economy as the world's second
largest, while the article on Germany describes Germany's economy as the world's
third largest. These rankings are based on a currency conversion measure of GDP,
in which GDP is calculated in the country's own currency, and then converted
into dollars at the official exchange rate.
Economists generally use purchasing power parity measures
of GDP for this type of international comparison. This measure uses a common set
of prices for the goods and services produced in each country. By this measure,
China has the world's second largest economy, at approximately $8 trillion.
Japan would be third at $3.8 trillion, India is fourth at $3.3 trillion, and
Germany comes in fifth at $2.4 trillion.
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Inflation
and Home Prices
Hurricane's Economic Impact Not Felt at Retail Level -
Yet
Nell Henderson and Dana Hedgpeth
Washington
Post, September 16, 2005, Page D2
This article discusses the release of August inflation data by the Labor Department. At one point it asserts that the large number of people displaced by hurricane Katrina will lead to continuing increases in home prices. Actually, this is likely to have a minimal impact on home prices, since the run-up in prices is being driven a speculative bubble rather than the fundamentals of supply and demand in the housing market.
The percentage of vacant housing units nationwide is at
near record levels. As a result, rents have actually been falling behind the
rate of inflation for the last two years. However, home prices have continued to
rise due to speculation, just as prices in the stock market continued to outpace
profit growth during the nineties bubble. The displacement from Katrina will
have no obvious impact on this pattern of speculation.
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Airline
Prices
Delta and Florida: No Longer So Happy Together
Micheline Maynard
New
York Times, September 16, 2005, Page C3
This article discusses the prospects for Delta airlines
after it declared bankruptcy. At one point the article notes that Delta's
average one-way airfare to or from Florida averaged $182 ten years ago, compared
to just $148 at present. To properly compare these two fares it is necessary to
adjust for inflation. The current $148 fare would be equal to approximately $117
in 1995 dollars, indicating that Delta's airfares have dropped by more than
one-third in real terms over this period.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.