Economic Reporting Review
By Dean Baker
November
21, 2005
In This Issue:
• Outstanding
Stories of the Week
• Greenspan
and Trade
• Medicare
Prescription Drug Benefit
• Medical
Devices
• Tax
Cuts and Budget Deficits
• Mexico
• Brazil
• The
Budget
• Delphi
Labor Costs
• Germany
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Outstanding
Stories
of the Week
A
Harvest of Hunger In Parched Malawi
Craig
Timberg
Washington Post, November 13, 2005, Page A23
This
article reports on the failure of Malawi's agricultural development following
its liberalization in the last 15 years. According to the article, Malawi
followed the advice of the World Bank and other international development
agencies and dismantled a state-run farm agency that was responsible for
maintaining the irrigation system and providing other aid to farmers. The
article reports that this led to a sharp falloff in agricultural output, leading
to famine conditions, since no effective private sector systems replaced the
state-run system.
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An
Industrial Town Stares Change in the Face
Sholnn
Freeman
Washington Post, November 12, 2005, Page A1
This
informative article examines the likely impact on the workers at Delphi auto
part factory in Lockport New York, if the factory closes due to Delphi's
financial problems.
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Oohs
and Ahs At Delphi's Circus
Gretchen
Morgenson
New York Times, November 13, 2005, Section 3, Page 1
This
article reports on the ways in which Delphi's top executives have managed to
secure themselves healthy bonuses even as the company defaults on debts to its
creditors and its employees' pension and health care funds.
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Buy
a Home, and Drag Society Down
Eduardo
Porter
New York Times, November 13, 2005, Section 4, Page 3
This
article assesses the net social benefits of higher homeownership. It points out
that homeownership is often associated positive social benefits, but it can also
have negative effects. For example it can make it more difficult for workers to
move to follow employment opportunities. The net effect of increased
homeownership rates on society may not necessarily be positive.
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Greenspan
and Trade
Greenspan
Says Policy Has Little Effect on Trade Gap
Nell
Henderson
Washington Post, November 15, 2005, Page D6
This article reports on a speech by Federal Reserve Board chairman Alan Greenspan in which he addressed a variety of policy questions. At one point, the article quotes Greenspan as saying that the current account balance is not affected by the exchange rate. If this quote is accurate, it would be a remarkable statement from the head of a central bank.
Virtually all economists would agree that the decision to buy imported or domestically produced goods is primarily determined by their relative prices. If imports are cheaper, then consumers are more likely to buy imported goods. The exchange rate directly affects the price of imported goods. Most studies show that roughly half of any changes in the value of the dollar are passed on the price of imported goods. This means that if the dollar fell by 20 percent, then the price of imported goods in the United States would rise by approximately 10 percent. There would be a similar change in the price of goods exported from the United States, so that U.S. exports would be cheaper for people living in other countries.
For
this reason, economists generally believe that a fall in the dollar will lead
people in the United States to purchase fewer imported goods and will cause
foreigners to buy more goods exported from the United States. In his speech, Mr.
Greenspan was apparently differing with this conventional view of trade and the
economy, since the conventional view certainly implies that the exchange rate
has a very direct impact on the current account balance. In fact, the
conventional view suggests that the exchange rate is by far the most important
single determinant of the current account balance. If Mr. Greenspan has an
alternative view of the economy, it would be very interested to have its logic
explained in more detail.
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Medicare
Prescription Drug Benefit
Confusion
Is Rife About Drug Plan As Sign-Up Nears
Robert
Pear
New York Times, November 13, 2005, Page A1
This article reports on the difficulty that many Medicare beneficiaries are facing in trying to navigate the various insurance plans through which they can take advantage of the new prescription drug benefit. At one point the article asserts that President Bush and the Republicans in Congress insisted on offering the plan through private insurers (instead of just attaching it to the existing Medicare program) because "they firmly believe that competition among private plans will hold down costs."
While President Bush and many Republicans in Congress claim that this is their belief, politicians sometimes say things that are not true. There is a large body of evidence, including numerous studies of the record of private insurers in Medicare, which indicates that private insurers will raise the cost of the prescription drug benefit, not lower it. This is especially likely to be the case since Medicare would have had enormous bargaining power with pharmaceutical companies, if approached them as the buyer for all seniors covered under the plan.
It
is worth noting that the insurance industry has contributed heavily to
Republican politicians, as has the prescription drug industry. It is possible
that the campaign contributions from these industries played as much role in
shaping the prescription drug bill as the philosophical beliefs of Republican
politicians.
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Medical
Devices
To
Fight Rising Costs, Hospitals Seek Allies in the Operating Room
Reed
Abelson
New York Times, November 18, 2005, Page B1
This informative article reports on efforts by hospitals to reduce costs by providing incentives to doctors to save money on medical devices by providing them with a portion of the savings from using less expensive devices. It would have been helpful to include a discussion of the role of patents in inflating the prices of these devices.
As
is the case with prescription drugs, most medical devices are relatively cheap
to produce. They are expensive because the medical supply industry is granted
patent monopolies on their inventions. This allows them to charge high prices
and gives them an incentive to use aggressive and misleading marketing tactics.
If an alternative mechanism for supporting innovation was used (e.g. direct
public funding, which already supports much medical research), and devices were
sold in a competitive market, prices would fall dramatically, and the incentive
for abusive marketing practices would be eliminated.
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Tax
Cuts and Budget Deficits
Director of
the Congressional Budget Office to Leave
David
E. Rosenbaum
New York Times, November 15, 2005, Page A23
This article reports on the announcement that Douglas Holtz-Eakin will be leaving his position as the director of the Congressional Budget Office (CBO). At one point the article reports that Mr. Holtz-Eakin angered Republicans because he "rejected demands that budget forecasts take account of strengthened economic activity from tax cuts without analyzing the drag caused by increased spending."
Actually,
Mr. Holtz-Eakin produced projections under a wide variety of tax and spending
assumptions. The main source of the Republicans' anger with Mr. Holtz-Eakin
appeared to be that he insisted on using projections on the potential stimulus
from tax cuts that were consistent with existing economic research. Many
proponents of tax cuts have tired to argue that such tax cuts would lead to
enough growth so as to be self-financing. The projections done by the CBO under
Mr. Holtz-Eakin's direction showed that, at best, only a small portion of the
lost tax revenue would be recouped through additional growth. In some scenarios,
the larger budget deficits actually resulted in slower growth, compounding the
impact of the tax cuts on the budget.
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Mexico
Name
Calling Erodes Ties Between Fox and Chavez
James
C. McKinley Jr.
New York Times, November 15, 2005, Page A6
This article reports on a dispute between Mexican President Vincente Fox and Venezuelan President Hugo Chavez over the merits of trade pacts with the United States. The article repeatedly asserts that the dispute is over "free trade." In fact, the pacts in question (NAFTA and the proposed FTAA) are not free trade agreements. They leave many barriers in place, and actually expand protection in some areas, most notably in the case of patent and copyright protection.
At
one point the article refers to Mr. Fox's assertion that NAFTA had been
indispensable in improving living standards in Mexico. Actually, there has been
very little improvement in living standards in Mexico in the post NAFTA period.
Per capita GDP has grown at a rate of just over 1.0 percent annually. By
contrast, it grew at a .3.4 percent annual rate in the years from 1960 to 1980.
While it is possible that Mexico's economy would have performed even more poorly
without NAFTA, its growth record in the last decade is very weak for a
developing country.
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Brazil
Unfolding
Scandal Nears Finance Official in Brazil
Paulo
Prada
New York Times, November 15, 2005, Page C2
This article discusses evidence tying Brazil's finance minister, Antonio Palocci, to a political scandal. At one point, the article refers to the policies pursued by Mr. Palocci and asserts that many economists believe that they have provided the basis for sustained growth.
It
is worth noting that Brazil's economic record to date under Mr. Palocci's
policies has not been very good. The country had almost no growth in 2003. It
grew at a respectable 5.0 percent rate in 2004. It is projected to grow at
little more than a 3.0 percent rate in 2005. This leaves an average per capita
growth rate (population growth is approximately 1.0 percent a year) of less than
2.0 percent annually. By contrast, Brazil had a per capita growth rate of more
than 4.0 percent annually from 1960 to 1980.
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The
Budget
Battle
Is Drawn in G.O.P. Over How Conservative to Be
Edmund
L. Andrews and Carl Hulse
New York Times, November 12, 2005, Page A12
This article reports on divisions among Republicans on several tax and spending measures. It would be helpful to readers if the items at issue were placed in some context, instead of just being reported as dollar amounts.
For
example, the $50 billion in proposed cuts to entitlement spending over the next
five years is equal to approximately 0.4 percent of projected spending over this
period. The article reports that the proposed repeal of the estate tax would
cost the government approximately $90 billion in annual revenue. This amount is
equal to approximately 3.0 percent of projected spending.
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Foreign
Aid Chief Pledges Reforms
Celia
W. Dugger
New York Times, November 13, 2005, Page A11
This
article reports on bureaucratic obstacles that have prevented most of the $2.5
billion appropriated for President Bush's Millennium Challenge from being spent
over the last two years. The money appropriated for this foreign aid program is
equal to approximately 0.005 percent of federal spending over the last two
years.
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Delphi
Labor Costs
Delphi
Unions Balk at Plan To Eliminate 18,000 Jobs
Jeremy
W. Peters
New York Times, November 17, 2005, Page C3
This
article reports on negotiations between Delphi, the bankrupt auto parts
manufacturer, and its unions. At one point the article reports Delphi's claim
that their labor costs are $65 an hour. It is important to note that this figure
is not the compensation received by an average Delphi worker for an hour of
work. This is a figure that averages all of Delphi's labor costs, including
payments to laid off workers, by the number of hours worked by its current
workforce. The actual compensation to its current work force is substantially
lower.
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Germany
Deal Reached On German Government
Geir Moulson
Washington Post, November 12, 2005, Page A19
This article reports on an agreement between Germany's two major parties over an economic agenda for the country's new government. The article asserts that Germany's unemployment rate is 11 percent.
While
this is the official government figure, this counts workers who have part-time
jobs as being unemployed. According to the OECD's standardized measure of
unemployment, which is essentially the same as the measure used in the United
States, Germany's unemployment rate is currently 9.3 percent. The area that was
formerly East Germany continues to have much higher unemployment than the rest
of the country. The unemployment rate in the area that was formerly West Germany
would be about 7.3 percent, using the U.S. measure of unemployment.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.