Economic Reporting Review
By Dean Baker
December
5, 2005
In This Issue:
• Outstanding
Stories of the Week
•
Trade
• China
• Immigration
• German
Unemployment
• Welfare
Restructuring
• Global
Warming
• Housing
Sales
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Outstanding
Stories
of the Week
Drugmakers
Win Exemption in House Budget-Cutting Bill
Jonathan
Weisman
Washington Post, November 30, 2005, Page A8
This article reports on a provision that was slipped into a large budget
bill, which will require state Medicaid programs to pay for a brand drug for
depression rather than generics which are far cheaper and generally considered
to be every bit as effective. The main beneficiary of this provision is the
pharmaceutical company Eli Lilly, which managed to have the provision inserted
with very little attention prior to the bill's passage.
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Pension
Funds Putting Billions in Hedge Funds
Riva
D. Atlas and Mary Williams Walsh
New York Times, November 27, 2005, Section 3, Page 1
This article reports on the growing tendency of pensions to invest in hedge
funds in the hope of raising their returns. The article points out that hedge
funds are largely unregulated, although defined benefit pension plans are
guaranteed by the government, which means that the government will ultimately be
liable if these investments turn out badly.
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Gimme
an RX! Cheerleaders Pep Up Drug Sales
Stephanie
Saul
New York Times, November 29, 2005, Page A1
This article reports on the growing tendency of drug companies to hire former
cheerleaders to market their drugs to doctors. The article reports that the drug
companies like to have attractive sales representatives to better promote their
drugs.
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Trade
A Warning Of Trade Suits Over Farming
Alexei Barrionuevo
New York Times, November 30, 2005, Page C1
This article discusses the possibility that there could be more lawsuits brought before the W.T.O. on trade, if there is no agreement on the reduction of agricultural subsidies and tariff barriers at the Hong Kong W.T.O. meetings. The article refers to efforts to eliminate rich country agricultural subsidies as part of an effort to promote development in poor countries. It also asserts that the current round of W.T.O. negotiations is "meant to lift the world's poor nations out of poverty by giving their farmers better access to developed world markets."
In fact, research from the World Bank and elsewhere shows that the removal of rich country subsidies will be a net loss to the developing world. If the rich countries removed all their export subsidies on agricultural products it would mean that developing countries would be paying more for these products. In standard trade models, like those used by the World Bank and IMF, this leads to slower growth. The costs might be especially high to developing countries that are large net importers of agricultural goods.
Research from the World Bank and elsewhere does show that the removal of rich country import barriers on agricultural products can be beneficial to developing countries, but the impact is modest, with a plausible agreement almost certainly producing an eventual gain (after 10 years) of less than 0.3 percent of GDP, the equivalent of 2 weeks of growth in China. The most obvious gainers from a reduction in agricultural trade barriers would be politically connected grain traders, like Archer Daniels Midland.
In this respect, the article notes that the Hong Kong round has been dubbed
the "development round" of the W.T.O., and implies that this in fact
indicates that promoting development is the main purpose of the trade talks. If
the main goal of the negotiators was to advance the interests of major
corporations, it would certainly never be publicly acknowledged. The fact that
politicians chose to say they were motivated by promoting development does not
mean that these politicians necessarily are motivated by promoting development.
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China
U.S. Avoids
Calling China A Currency Manipulator
Paul Blustein
Washington Post, November 29, 2005, Page D1
U.S. Declines A
Chance To Criticize Yuan Policy
Edmund L. Andrews
New York Times, November 29, 2005, Page C1
This article reports on the decision by the Bush administration not to identify China as a country that manipulates its currency in a semi-annual report from the Treasury Department. At one point the Times article notes the Bush administration's opposition to legislation that would impose steep tariffs on imports from China. The article reports that the administration claims the measure would "jeopardize trade and hurt consumers."
This is presumably the intention of the measure. The proponents of the bill are quite explicit in their desire to reduce imports from China. They hope to do this by raising the price of these imports, which means that consumers would pay more for the goods they buy. (A rise in the value of the Chinese currency would have the same effect.) While the rise in prices might be unpleasant for consumers, it is inevitable, since virtually all economists recognize that the country cannot continue to borrow to finance a large trade deficit indefinitely, just as the government cannot sustain a large budget deficit indefinitely.
It would have been useful to note that the Bush administration is opposing the bill precisely because of its intended effects.
The Times article comments that a higher value of the Chinese yuan may not "offset China's huge cost advantage in cheap labor." The higher value of the yuan would not be expected to fully offset the difference in labor costs; however, it would make the differences smaller, thereby reducing the outflow of production and jobs to China, and possibly even allowing U.S. producers to regain lost markets in some items.
At one point the Post article quotes Timothy Adams, the undersecretary of the
Treasury for International Affairs, as saying that the Bush administration would
"oppose any kind of protectionist legislation." This is not true. The
Bush administration has supported many types of protectionist legislation. It
has actively promoted expansion of copyright and patent protection. It has also
been content to leave in place laws that protect highly paid professionals like
doctors and lawyers from international competition.
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Immigration
Bush Pushes
Guest-Worker Program
Michael A.
Fletcher and Darryl Fears
Washington Post, November 29, 2005, Page A2
President
Renews Effort to Overhaul Immigration Policy
Richard W. Stevenson
New York Times, November 29, 2005, Page A16
These articles discuss President Bush's plan to change rules for immigrants entering the country to work. At one point the Times article describes the two competing views on immigration as being those of employers who complain about not being able to find citizens or legal immigrants to fill jobs and conservatives who complain about immigrants who break the laws and use welfare.
It is also important to note that some people are concerned that immigrants drive down wages in certain segments of the economy, for example in the sectors where employers refuse to offer wages high enough to attract citizens or legal immigrants. This concern explains the regulations that doctors imposed in 1997 to limit the extent they were forced to compete with foreign-born doctors. Farm workers, custodians, and other workers in less-skilled occupations have less political power so they are less able to structure immigration laws in ways that protect their wages.
The Post article describes the jobs taken by immigrants as "jobs that go
unwanted by Americans." It is important to note that they are only unwanted
because of the low wage that employers are offering. There are a large number of
citizens who are willing to work as custodians at a wage of $20 an hour. The
problem is that employers want to pay below a market-clearing wage.
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German
Unemployment
In Guarded Tones,
European Bank Raises Rates for First Time in 5 Years
Mark Landler
New York Times, December 2, 2005, Page C3
This article reports on the decision of the European Central Bank to raise its short-term interest rate. At one point the article refers to the unemployment in Germany, reporting that it just slipped below 11.0 percent.
This figure refers to Germany's official measure of unemployment, which
counts part-time workers as being unemployed. Using the OECD's standardized
unemployment rate, which is virtually identical to the U.S. method of measuring
unemployment, Germany's unemployment rate is approximately 9.0 percent.
Unemployment is still disproportionately high in the areas that were formerly
East Germany. In the area that was formerly West Germany, the unemployment rate
is close to 7.0 percent, using the standardized measure of unemployment.
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Welfare
Restructuring
House Bill Raises
Welfare Work Requirement
Jonathan Weisman
Washington Post, November 27, 2005, Page A10
This article reports on a provision of the budget bill approved by the House which would substantially increase the amount of work required each week from parents receiving welfare benefits. At one point the article points out that to meet the increased need caused by the work requirement, the bill includes $500 million in additional funding for childcare over the next five years.
This amount is equal to $100 million a year, approximately 0.004 percent of
federal spending over the period. This is enough to pay an average of
approximately $30 per year towards childcare for each of the 3 million children
currently receiving welfare benefits.
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Global
Warming
World Leaders to Discuss Strategy for Climate Control
Juliet Eilperin
Washington Post, November 27, 2005, Page A10
This articles reports on efforts to develop a long-range worldwide strategy for reducing greenhouse gas emissions. At one point the article notes that many state governments and private corporations are moving ahead with plans to reduce emissions, even though the federal government has not made any binding commitments. In this vein, it cites the Johnson & Johnson corporation, which it claims has reduced emissions by 3.1 percent since 1990, even though its sales have expanded by a factor of 4.
It is not clear what this reduction means. The company may have been able to
achieve these reductions simply contracting out for its manufactured products.
If this is the case, then the reductions would be absolutely meaningless from an
environmental standpoint. It would have been useful if the article had made some
independent effort to verify the company's assertion, instead of just reporting
it as fact.
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Housing
Sales
Upbeat Signs Hold Cautions For the Future
Vikas Bajaj
New York Times, November 30, 2005, Page A1
This informative article examines several recent releases of economic data that suggest that the U.S. economy is growing at rapid pace. At one point it notes an extraordinary 13 percent jump in new homes sales in October as evidence that housing market may still be strong.
It is worth noting that virtually of this gain was accounted for by a 46.9 percent jump in new home sales reported in the west. There was a similar sharp jump in monthly sales reported in the west in July. That rise was followed by a sharp fall in August that completely reversed the prior month's increase. Sales in the region fell further in September.
This pattern suggests that there is a problem in the reporting of data from
the region since it is implausible that sales would actually rise and fall by
such large amounts in a single month. Therefore the large reported rise in new
home sales in October is probably attributable to measurement error rather than
an actual surge in home buying.
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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.