Economic Reporting Review
 By Dean Baker

December 12, 2005

In This Issue:

 Outstanding Stories of the Week
 
Agricultural Subsidies
 
Greenspan
 
Climate Change
 
Medicare Prescription Drug Benefit
  Japan
  Health Care Costs 
  November Employment Report
  Immigration
  Germany


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Outstanding Stories of the Week

Journal Questions Data in Vioxx Study
David Brown
Washington Post, December 9, 2005, Page B2

Medical Journal Criticizes Merck Over Vioxx
Alex Berenson
New York Times, December 9, 2005, Page B1

These articles report on an editorial in the New England Journal of Medicine that criticizes Merck for concealing evidence that its drug Vioxx may be harmful to people with heart conditions. Economic theory predicts that government- granted patent monopolies would lead to exactly this sort of corruption.

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Agricultural Subsidies

Sometimes a Bumper Crop Is Too Much of a Good Thing

Alexei Barrioneuvo and Keith Bradsher
New York Times, December 8, 2005, Page C1

This article reports on how increased agricultural productivity in rich countries has led to overproduction which creates downward pressure on prices and how rich country governments have in turn subsidized their farmers to keep them in business. The article reports that this overproduction hurts agricultural producers in developing countries by lowering world prices, and implies that the policies are therefore bad for developing countries.

According to research from the World Bank and elsewhere, rich country subsidies on agricultural products are a net benefit to developing countries. According to these models, rich country subsides lower the prices that developing country consumers must pay for food and other products (e.g. clothes made from cotton). This frees up money that they can spend on other products, allowing for both higher living standards and higher growth.

While standard economic models indicate that certain agricultural interests in developing countries would benefit from higher world prices for agricultural products, as would politically connected grain traders in the rich countries, these models unambiguously show that the developing world as a whole would lose from the removal of rich country subsidies.

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Greenspan

Greenspan Points to Danger Of Rising Budget Deficits

Heather Thompson
New York Times, December 3, 2005, Page B3

This article reports on a speech by Federal Reserve Board chairman Alan Greenspan. The article reports that Greenspan claimed that the Social Security program will begin to face stress in 2008 when the first of the baby boomers retire. It then notes that Greenspan suggested raising the retirement age, commenting that a commission in Britain suggested raising their retirement age from 64 to 67.

It is worth noting that the Social Security program has long been prepared for the retirement of the baby boom cohort. It has been running large surpluses for the last twenty years, accumulating more than $1.7 trillion in government bonds to help defray the cost of the baby boomers retirement. According to the most recent projections from the Congressional Budget Office, the program will be able to pay all benefits through the year 2052 with no changes whatsoever. The baby boom cohort will be between the ages of 88 and 106 when Social Security is first projected to face a shortfall. Presumably Mr. Greenspan is aware of these facts since he chaired the commission that designed this path for the program. It is also worth noting that the retirement age for Social Security is already rising to 67, so if Mr. Greenspan wants to raise the retirement age, then it would be to a higher age than in the proposal put forward in Britain.

The article also quotes Greenspan as saying that "we do not as yet have a firm grasp of the implications of cross-border financial imbalances," referring to the $700 billion plus annual current account deficits that the United States is now running. Actually economists understand very well the implications of large current account deficits. They are very similar to large budget deficits. While a country is running a large current account deficit it is enjoying a better standard of living as a result of the deficit - just like a family borrowing $1,000 a month on its credit card.

However, a country cannot run a large current account deficit indefinitely, just as a typical family cannot borrow an additional $1,000 a month on its credit cards indefinitely (unless it has a rapidly rising income). When the foreign creditors, in this case largely the central banks of Japan and China, decide it is no longer in their interest to continue to lend money, then the United States must reduce its current account deficit. This is accomplished through a fall in the value of the dollar, which makes imports more expensive in the United States and makes U.S. exports cheaper to foreigners.

This process will lead to a substantial jump in the inflation rate, since imports (and some exported products) will become more expensive to U.S. consumers. For example, if the dollar falls by 30 percent on average, then it would be reasonable to expect roughly half this change to be passed on in higher import prices, which means that they would rise by an average of 15 percent. Since imports account for 16 percent of GDP, this would translate into an increase in the inflation rate of approximately 2.4 percentage points. If the Fed responds to the rise in inflation by raising interest rates sharply, this could also result in a severe recession.

The basic tools for this sort of analysis can be found in any standard macroeconomics textbook. For this reason it is very strange that Mr. Greenspan would say that the implications of a current account imbalance are not understood.

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Climate Change

On Climate Change, a Change of Thinking

Andrew C. Revkin
New York Times, December 4, 2005, Section 4, Page 3

This article discusses the status of the Kyoto agreement, which will impose restrictions on the emission of greenhouse gases in the signatory developed countries (not the U.S.) for the years 2008-12. At one point it asserts that the "United States" says that emissions targets would stunt economic growth and therefore should not be considered. This is the position of the Bush administration, not the United States.

Opinion polls consistently show that large numbers of people in the United States support restrictions on greenhouse gas emissions. This has been translated in legal restrictions into California and other states.

It is also worth noting that the fact that a policy might cost jobs does not mean that it will not be pursued. Standard economic models show that the military expenditures associated with the Iraq war have cost approximately the same number of jobs as a Kyoto type agreement on greenhouse gas emissions, yet potential job loss has not even been raised as an issue in the context of the war.

At one point, in discussing the prospects of curbing greenhouse gas emissions, the article notes the importance of carbon-based fuels to the world economy and then asserts that "economic growth is inconceivable without it [carbon- based fuels]." This assertion has little to do with reducing greenhouse gas emissions. If SUVs were replaced with compact cars (even ones with standard engines) it would result in an enormous reduction in greenhouse gas emissions. Similarly, if buildings used more efficient insulation it would substantially reduce emissions associated with heating and cooling.

There is enormous potential for such reductions in energy use, even in the absence of any breakthroughs in alternative forms of energy. Reductions of this sort are the basis for most policy discussion on restricting greenhouse gas emissions. Virtually all the participants in the debate recognize that the economy will still depend on forms of energy that emit greenhouse gases for the foreseeable future.

The article also notes the refusal of developing countries, most notably China and India, to agree to any restrictions on their emissions. Since these countries emit far smaller amounts of greenhouse gas on a per capita basis than rich countries, it is absurd to believe that they would agree to any restrictions without compensation. For that reason, those who actually want to include these countries in a global process of restricting greenhouse gas emissions support paying them for slowing the growth in their emissions (e.g. see "Cleaning Up the Kyoto Protocol: Emission Permit Trading Would Allow Developing Nations to Reap Profit from Green Policy").

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Medicare Prescription Drug Benefit

Republicans Find They Have to Sell Medicare Drug Benefit

Robin Toner and Robert Pear
New York Times, December 5, 2005, Page A1

This article reports on Republican efforts to convince seniors that the Medicare prescription drug benefit that they passed will actually help them. In discussing the design of the bill, which prohibits Medicare from negotiating with drug companies over prices, the article asserts that the Republicans were motivated by their ideological beliefs. While this is possible, it is also possible that they were motivated in part by their desire to serve the pharmaceutical and insurance industries, both of which are important backers of Republican politicians. While the stated reason for the design of the benefit may have been ideological, politicians sometimes are not entirely honest about the motives for their actions.

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Japan

New Optimism About the Japanese Economy After a Bleak Decade

Martin Fackler
New York Times, December 7, 2005, Page C1

This article reports on recent economic data from Japan that indicates the economy is again growing at a healthy pace, after almost 15 years of stagnation. In citing the benefits to the world from more rapid growth in Japan the article asserts that more rapid growth could allow Japan to invest more overseas. Actually, the opposite is true. If Japan grows more rapidly, it will have a smaller trade surplus (other things equal) and therefore have less money to invest overseas.

At one point the article notes that Japan's projected growth of 2.4 percent is still well below the 3.6 percent growth projected for the United States in 2005. It is important to note that Japan's population is virtually stagnant, while the U.S. population is growing at the rate of 1.0 percent annually. This means that per capita GDP growth, the measure most often used by economists to examine changes well-being, is virtually the same between the two countries at the moment.

The article also reports as a continuing negative feature of Japan's economy that prices are still falling. There is no obvious problem associated with falling prices. In the U.S. economy, prices in many sectors, such as clothes and computers, have been falling for decades. If the aggregate price level is falling, it simply means that the sectors with falling prices outweigh the sectors with rising prices. There is no obvious harm to the economy as a result of the balance shifting in this way.

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Health Care Costs

Employer-Backed Health Care Is Here to Stay For Lack of a Better Choice

Reed Abelson
New York Times, December 5, 2005, Page C11

This article discusses the future of the employer-based health care system in the United States. At one point it asserts that there are no plausible alternatives, because "corporate executives and many others are leery of a government solution."

Corporate executives comprise a tiny portion or the electorate. If the media reported on alternative options for health care - and the fact that the United States pays more than twice as much per person as the average for other rich countries, and gets worse outcomes - it is possible that the leeriness of corporate executives would not impose a veto on health care reform.

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November Employment Report

Growth in Jobs Overcame Slump In November
Nell Henderson and Michael A. Fletcher
Washington Post, December 3, 2005, Page D1

This article reports on data from the Labor Department's November employment report. At one point, the article notes that nominal wage growth appears to have accelerated, with the average hourly wage rising by 3.2 percent over the last year, which it reports as the highest growth rate since 2003. Using year over year growth understates the extent of the acceleration, since wages had been growing at just a 2.5 percent annual rate in the first half of this year. In the last quarter wages have risen at a 3.5 percent annual rate, which indicates a sharp recent acceleration which is consistent with the recent tightening in the labor market, coupled with workers' efforts to compensate for sharply higher energy prices.

The November data also showed a jump in the unemployment rate among African American teens of 5.9 percentage points to 39.2 percent, the highest rate since May of 1994. These numbers are highly erratic and most of this jump may be reversed in the December data, but it is worth noting a reported change of this magnitude.

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Immigration

Most Mexican Immigrants in New Study Gave Up Jobs to Take Their Chances in U.S.
Nina Bernstein
New York Times, December 7, 2005, Page A26

This article reports on a new study that shows that most of the Mexicans who immigrated to the United States in search of employment had jobs in Mexico, but were looking to get higher wages. At one point the article quotes a representative of the National Restaurant Association as saying that restaurants are unable to find domestic workers "regardless of what wage is offered."

It does not seem plausible that U.S. born workers would be unwilling to work in restaurants if they were paid $15 an hour. Clearly, this spokesman means that the members of his association were unable to get workers at a wage that is below the market clearing level. This is the way markets are supposed to work.

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Germany

The New Berlin Wall
Peter Schneider
New York Times, December 4, 2005, Magazine, Page 66

This article discusses the extent to which people of non-European ancestry have been integrated into German society. At one point the article asserts that "4.8 million people, roughly 12 percent of the work force" are unemployed in Germany. This figure includes people who are involuntary working part-time. These people would be counted as employed in the United States. Using the U.S. definition, there would be approximately 3.6 million unemployed workers in Germany, approximately 9 percent of the labor force.

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Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.