Economic Reporting Review
By Dean Baker
October
24, 2005
In This Issue:
• Outstanding
Stories of the Week
• Agricultural
Subsidies
• Inflation
• The
Budget Deficit
• The
Budget
• China
• Immigration
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Outstanding
Stories
of the Week
Lipitor or Generic? Billion-Dollar Battle Looms
Alex Berenson
New
York Times, October 15, 2005, Page A1
This article reports on efforts by Pfizer to try to
establish that its cholesterol-lowering drug, Lipitor, is sufficiently better
than generic alternatives that will soon be available, that insurance companies
should still pay the much higher price for Lipitor. The price difference is
likely to be on the order of 10 to 1.
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Temptation Near for Military's Problem Gamblers
Diana B. Henriques
New
York Times, October 21, 2005, Page A1
This article examines the pervasiveness of gambling
problems in the military. It reports that slot machines are readily accessible
on military bases, and that gross revenue from these machines exceeds $2 billion
a year.
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The Hidden Cost of Documentaries
Nancy Ramsey
New
York Times, October 16, 2005, Section 2, Page 13
This article reports on the costs incurred by many
documentary filmmakers as a result of incidentally including copyrighted
material, such as the ring on a cell phone or the singing of happy birthday.
Copyright holders have sometimes demanded fees in the neighborhood of ten
thousand dollars to use such material. Such a charge could be equal to 5 to 10
percent of the expected revenue for many documentaries.
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Agricultural
Subsidies
An Optimistic Voice for Deal on Farm Aid
Keith Bradsher
New
York Times, October 17, 2005, Page C2
This article reports on the prospects of an agreement on reducing agricultural tariffs and subsidies at the W.T.O. meetings in Hong Kong in December. At one point the article singles out U.S. cotton subsidies which it asserts "are widely faulted for increasing poverty in poor cotton-growing countries like Mali."
It is worth noting that virtually all economists agree that the dollar is substantially over-valued against other major currencies. When the dollar adjusts to a sustainable level (a decline of approximately 30 percent against other currencies), it will make the price of all goods produced in the United States, including cotton, roughly 30 percent cheaper in the rest of the world.
In other words, the effect of the dollar adjusting to a
sustainable level will be roughly the same for cotton producers like Mali as the
current effect of U.S. cotton subsidies. This means that any gains that Mali's
cotton producers receive from the elimination of U.S. cotton subsidies will
largely disappear once the over-valuation of the dollar is corrected.
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Nations Blame E.U. For Stalling Trade Talks
Paul Blustein
Washington
Post, October 21, 2005, Page D1
This article discusses the state of W.T.O. negotiations over reducing agricultural tariffs and subsidies. At one point, the article asserts that an agreement on reducing trade barriers would "benefit developing countries in particular because so much of their economies are devoted to farming."
This is not true. There is a large body of economic research from the World Bank, the OECD, and elsewhere that shows that developing countries on aggregate would experience modest gains (less than 0.5 percent of GDP, approximately 3 weeks worth of growth in China) from the elimination of rich country trade barriers in agriculture. This research also shows that many developing countries, including many of the poorest, would actually be hurt by the elimination of rich country barriers and subsidies. Many of the poorest developing countries are net importers of agricultural goods. If rich countries eliminate food subsidies and other policies that lower world agricultural prices, then many developing countries will be hurt because they will have higher import costs.
It is worth noting that those who stand to gain the
most from reduced barriers to agricultural trade are the major grain trading
companies, such as Archer Daniels Midland. These companies are extremely
well-connected politically and have actively promoted agricultural trade
liberalization over the last two decades.
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Inflation
Inflation In Sept. Highest Since '80
Nell Henderson
Washington
Post, October 15, 2005, Page A1
Inflation Jumped 1.2% in September to a 25-Year High
Vkias Bajaj
New
York Times, October 15, 2005, Page B2
These articles report on the Labor Department's release of data on consumer inflation for September. The Post article includes a quote from Janet Yellen, the President of the San Francisco Federal Reserve Bank, saying that there has been no evidence of a pass- through of higher energy prices to other areas since the early eighties. This is not true. There was a large jump in energy prices following the invasion of Kuwait in 1990. This was quickly passed on in more rapid price increases in the core consumer price index (which excludes food and energy). Energy price rises in 2000 were also associated with somewhat more rapid core inflation. It is reasonable to expect that this round of energy prices increases will also be passed on at least partly in the prices of other products.
The Times article includes a quote from Steve
Roach, the chief economist at Morgan Stanley, in which he asserts that the Fed's
decision to raise interest rates in advance of inflation prevents the
development of inflationary psychology in which people start buying items before
they rise more in price. While the state of people's psychology is difficult to
determine, consumers are actually buying things at a very rapid pace. The
savings rate has been negative in the last two months; this is the first time
since data has been kept that the savings rate has been below zero.
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The
Budget Deficit
Federal Deficit Fell in Past Year
Paul Blustein
Washington
Post, October 15, 2005, Page A8
This article reports on data on the federal budget deficit for 2005. At one point it notes that the deficit was down from "record" deficit in 2004, but then points out that the 2005 deficit was the third largest deficit on record.
While the 2004 deficit was the largest in dollar terms, it was not close to the largest when measured as a share of the economy. The 2004 deficit was equal to approximately 3.6 percent of GDP, far below the post-war peak deficit of 6.0 percent of GDP hit in 1983. It does not make sense to compare deficits at different points in time in dollar terms. This is comparable to comparing the U.S. deficit to that of other countries (the U.S. budget deficit is the largest in the world), without adjusting for the differences in the size of the economies.
It is worth noting that the gross federal deficit (which
includes money borrowed from the Social Security trust fund) is larger than the
deficit reported here by an amount equal to approximately $220 billion, or 1.9
percent of GDP. The gross federal deficit for 2004 was almost as large as in
1983 measured as a share of GDP. For some purposes the gross deficit is the more
meaningful measure to report. This is the change in the total amount of money
owed by the federal government.
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The
Budget
House GOP Leaders Set to Cut Spending
Jonathan Weisman
Washington
Post, October 17, 2005, Page A1
Congress Returns, to a Major Spending Fight
Carl Hulse
New
York Times, October 18, 2005, Page A18
These articles reports on plans by Republicans in Congress to impose cuts in Medicaid and other programs intended to benefit the poor. The articles report that the Republicans propose to cut as much as $50 billion from these programs over the next five years.
It would have been helpful to report this proposed cut in percentage terms. While the full range of affected programs is not clearly indicated, the combined budget for the ones listed is approximately $300 billion for 2006 and more than $1.7 trillion over 5 years, which means that these programs could be cut by approximately 3 percent. The proposed cuts would be under 0.4 percent of the total budget.
The Post article never mentioned that the cuts were supposed to apply over five years, instead of just one year. Any reader who was not independently familiar with the proposed legislation would have been led to believe by this article that the proposed cuts applied to only the 2006 budget, which implies that they are five times as large as is actually the case. If the article had referred to the cuts as a percentage of total spending in the affected programs (e.g. "3 percent of spending in the affected programs"), this confusion would have been avoided.
The Post article also refers to rapid budget growth
under President Bush, with total spending rising by one-third. The vast majority
of this spending growth was attributable to inflation and growth in the economy.
Typically, the budget rises roughly in step with growth in the economy, unless
there is a change in policy. It would be more meaningful to point out that
spending has risen by approximately 1.8 percentage points of GDP, from 18.4
percent of GDP in 2000 to 20.2 percent of GDP in 2005. Approximately half of
this increase is attributable to higher defense spending.
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China
Snow Shifts His Demands On China
Edmund L. Andrews
New
York Times, October 18, 2005, Page C1
This article reports on Treasury Secretary Jack Snow's meeting with Chinese leaders. At one point it refers to Snow's efforts to persuade China to adopt a floating exchange rate.
There is no obvious reason why the U.S. would want China to adopt a floating exchange rate. The demand is also a substantial departure from past U.S. practices in which the United States has often insisted that countries maintained a fixed exchange rate. For example, in 1998 in Russia, 1999 in Brazil, and 2001 in Argentina, the United States worked to ensure that countries maintain a fixed exchange rate. It actually insisted that these countries impose harsh austerity policies rather than adopting a flexible exchange rate.
The United States does have an interest in seeing the value of the Chinese currency rise against the dollar (a goal it could bring about itself by having an official exchange rate for the Chinese currency that is higher than the one offered by the Chinese government), but it has no obvious reason to insist that China adopt a flexible exchange rate. Many countries have found that a fixed exchange rate can lend stability to international trade and capital flows, which is presumably the reason that the U.S. government had been so supportive of fixed exchange rates in other circumstances.
The article also discusses a bill before Congress that would impose high tariffs on imports from China, if it does not increase the value of its currency. The article reports that Mr. Snow and Alan Greenspan are opposed to the measure because "it would cripple trade with China and merely shift part of the trade deficit of the United States from China to other countries in Asia and Latin America."
It is worth noting that the point of the tariff is to
cripple trade with China. The members of Congress who support the tariffs
presumably want to reduce U.S. imports from China, so claiming that it would
have this effect would not be an argument against the tariff. If the United
States reduced its imports from China (either as a result of tariffs or a higher Chinese currency) other developing countries would almost certainly raise the
value of their currencies against the dollar, as they did in August when China
first re-valued its currency slightly against the dollar. The main factor
holding down the price of exports of other countries is competition from China.
While third countries may gain some share if the price of Chinese exports rose,
they would almost certainly take this opportunity to raise their prices as well.
This means that the net effect of higher Chinese export prices would almost
certainly be a reduction in the dollar value of U.S. imports, and therefore a
smaller trade deficit.
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Immigration
Bush Renews Push for Immigrant-Worker Plan
Elisabeth Bumiller and Eric Lipton
New
York Times, October 19, 2005, Page A17
This article reports on a new proposal by the Bush Administration on immigration. According to the article, the proposal would allow in a certain number of immigrant "guest-workers" each year, who would have limited rights to work in the United States for a period of time. The proposal also calls for increased enforcement of immigration restrictions at the border, as well as increased measures against immigrants living illegally in the United States.
It is worth noting that the bill does not appear to
include any provisions for employer sanctions. This means that employers who
knowingly hired undocumented workers because they did not want to pay a high
enough wage to attract citizens, or immigrants with legal work status, would
face no repercussions from breaking the law. Only the immigrant worker would be
at risk, as this proposal is described. If this is in fact the way that the Bush
administration intends for the new law to work, then it is an important feature
that should have been highlighted.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.