Economic Reporting Review by Dean Baker, January 30, 2006

Economic Reporting Review
By Dean Baker
January 30, 2006

In This Issue:

• Outstanding Stories of the Week
• Greenspan Legacy
• Textbook Prices
• The Trade Deficit
• Greenhouse Gas Emissions
• Ford Layoffs
• Bush Health Care Proposals
• China And India
• Free Trade

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Outstanding Stories of the Week

As Profits Soar, Companies Pay U.S. Less for Gas Rights
Edmund L. Andrews
New York Times, January 23, 2006, Page A1

This article reports on the fact that energy companies are paying the U.S. government less in royalties on gas produced from government land, even as their profits have soared. Under the lease agreements, the royalty payments should rise in step with gas prices. The article also exposes behavior by the Interior Department that appears to be an effort to cover-up discrepancies between profits reported by the affected companies to shareholders, and the profits reported to the government.

Whistle-Blower Suit Says Device Maker Generously Rewards Doctors
Reed Abelson
New York Times, January 24, 2006, Page C1

This article reports on court documents revealed in a whistle-blower lawsuit, that reveal millions of dollars of payments from Medtronic, a medical device manufacturer, to doctors, in exchange for getting them to use its products. The payments included excessive consulting fees, expensive vacations, and other forms of kickbacks.

Saving Accounts For Health Costs Attract Wall Street
Eric Dash
New York Times, January 27, 2006, Page A1

This article reports on the revenue that the health savings accounts proposed by President Bush could generate for the financial industry. According to the article, the annual fees on the accounts would average $40. If the average account holds $2,000 over the course of a year, this implies that 2 percent will be pulled away in fees. For most workers, the fees would be equal to 13 percent of the tax savings from establishing an account.

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Greenspan Legacy

Chairman Moved a Nation
Nell Henderson
Washington Post, January 27, 2006, Page D1

This article discusses Alan Greenspan's career in public life. At one point it asserts that Alan Greenspan "believed" that the large budget surpluses would continue when he testified in favor the Bush tax cuts in 2001.

This claim seems unlikely. Alan Greenspan recognized that there was a stock bubble at the time. This presumably means that he anticipated that the bubble would burst. A collapsing stock market means the government would not collect the capital gains tax revenue that it was projecting based on the assumption that the bubbles would not burst. It was also predictable that a bursting bubble would lead to an economic downturn, which would also lower tax revenue.

Presumably, Mr. Greenspan anticipated this chain of events, which did in fact occur. This means that he did not believe that the large surpluses of the time would continue when he testified in favor of the Bush tax cuts.

The article also comments that Greenspan helped engineer a "temporary" fix of the Social Security system in 1983. According to the most recent projections from the Congressional Budget Office, this fix is projected to keep the program solvent until 2052, at which point it will have sustained the system for 69 years.

As Economy Thrived Under Greenspan, So Did Debt
Nell Henderson
Washington Post, January 23, 2006, Page A1

This article discusses the legacy of Alan Greenspan as he is about to retire as Chairman of the Federal Reserve Board. The article discusses at some length the recent run-up in debt associated with the record increase in house prices. It reports that Greenspan felt that this debt was an acceptable risk in order to avoid a prolonged downturn in the wake of the stock market crash.

It is important to note that Greenspan's policies were also in part responsible for the stock market bubble and the ensuing crash. Greenspan has argued that it was inappropriate for the Fed to attempt to reign in the stock bubble (for example by pointing out how stock prices were inconsistent with generally accepted projections of profit growth) before it rose to levels that could damage the economy. Had he taken steps to prevent the stock bubble from growing to such dangerous levels, the economy would have not risked a prolonged downturn when it burst. With the housing bubble now having generated comparable levels of unsustainable wealth, the economy faces even greater dangers today than it did when the stock market crashed.

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Textbook Prices

Swelling Textbook Costs Have College Students Saying 'Pass'
Susan Kinzie
Washington Post, January 23, 2006, Page A1

This article reports on the high cost of college textbooks. According to the article, textbooks now cost an average college student more than $900 a year. The article implies that the cause of high textbook prices is a mystery. Textbooks would be cheap if the government did not grant textbook publishers copyright monopolies. These monopolies encourage publishers to constantly make new editions (undercutting the market for used copies), add small amounts of peripheral material, and find other ways to maximize their monopoly rents. It would have been useful to discuss the inefficiencies associated with the copyright system and the potential for more efficient mechanisms to support textbook production (see "Are Copyrights A Textbook Scam? Alternatives to Financing Textbook Production."

Exporting Expertise, and Not Much Else
Daniel Altman
New York Times, January 22, 2006, Section 3, Page 4

This article discusses the areas in which the United States still does not import most of what it consumes. The article concludes that the United States has an advantage in areas like medical services, legal services, and management services, and that its manufacturing has become uncompetitive.

It would have been appropriate to note that the main reason that foreign firms/individuals do not dominate the market for medical services is that these professionals have erected legal barriers that largely exclude foreign competition from the United States. While a hotel or restaurant can hire any foreign worker, regardless of whether they are in the United States legally, firms will not hire high level professionals who have not entered the country legally. Since immigration law is effectively enforced in high end professions, it prevents foreign workers from competing, based on a willingness to work for lower wages.

Professionals in law, medicine and other highly paid occupations have also erected licensing barriers that exclude foreign professionals. While such protectionist barriers have been banned in other areas by trade agreements, these professions have powerful lobbies which have ensured that they will not have to face international competition.

It is also worth noting that the over-valuation of the dollar has done much to make U.S. goods less competitive internationally. The over-valuation of the dollar effectively imposes a tariff of 30-40 percent on U.S. exports and a subsidy on imports of the same amount. U.S. manufacturing would be substantially more competitive if the dollar fell to a sustainable level.

'Blue' States Tackling Energy On Their Own
MJustin Blum
Washington Post, January 22, 2006, Page A1

This article reports on states that are imposing regulations restricting energy use by appliances and greenhouse gas emissions by cars. At one point the article reports a comment by a Bush administration official, that they did not object to such regulations as long as they did not cost jobs or move emissions from one state to another or out of the country.

It is worth noting that Bush administration has shown no concern whatsoever over the job loss created by the military spending associated with the war in Iraq. Standard economic models - using the methods that project job losses from reduced energy use -- imply that this spending would lead to the loss of close to 1 million jobs. The Bush administration has also expressed little concern about the loss of jobs to other countries because of the over-valued dollar. It appears to be only in the context of restricting greenhouse gas emissions that its concern for job loss arises.

The article also includes a quote from an industry trade group saying that the states can do nothing by themselves to combat global warming. It would have been appropriate to note that virtually the entire industrialized world, with the exception of the United States, has signed onto the Kyoto agreement. This commits these countries to take steps to reduce greenhouse gas emissions, so the states are not acting on their own - they acting in conjunction with the rest of the industrialized world.

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Ford Layoffs

Ford to Cut 14 Plants And Up to 30,000 Jobs
Sholnn Freeman and Amy Joyce
Washington Post, January 24, 2006, Page A1

Ford Eliminating Up To 30,000 Jobs and 14 Factories
Micheline Maynard
New York Times, January 24, 2006, Page A1

These articles report on Ford Motor Company's announcement that it will be reducing its work force by up to 30,000 in the next six years. Both articles note that the loss of jobs at the big three U.S. automakers has been associated with a reduction in auto employment in northeast and Midwest as jobs have been relocated to foreign owned auto manufacturers that have built factories in the south.

It is worth noting that there has been an important racial dimension to this shift. The share of African Americans employed in auto manufacturing has fallen from 2.1 percent in 1979 to just 1.3 percent in 2004 (see "The Decline in African American Representation in Unions and Auto Manufacturing, 1979-2000." In the past, employment in the auto industry had been an important source of middle class jobs for African Americans. It appears that these jobs are rapidly disappearing.

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Bush Health Care Proposals

New Tax Breaks for Medical Expenses
Amy Goldstein
Washington Post, January 25, 2006, Page A1

This article reports on a series of health care proposals that the Bush administration is expected to announce in the near future. The proposals center on extending tax breaks to individuals for health related expenses and encouraging them to buy high deductible insurance policies.

The article includes several assertions about President Bush's motives, saying for example, that these proposals are "designed to help the uninsured" and to "tackle medical costs." The article does not indicate how it determined President Bush's intentions. Politicians often do not publicly reveal the true motives for their actions. Unless a reporter has special access, there is no obvious way for them to determine a politician's actual motives.

In this case, most evidence indicates that the policies will not accomplish the claimed goals. For example, most of the uninsured are in low tax brackets. This means that they would get little or no benefit from more tax breaks. It is likely the President Bush or his health care advisors are aware of this fact, which would mean that the tax breaks are not really intended to help the uninsured.

Similarly, the sort of expenses deterred by high deductibles (e.g. doctor visits and check-ups) account for a very small share of total health care expenditures. In many cases, low cost preventative care may prevent the development of more serious and costly conditions. This means that high-deductible policies might actually raise health care costs. However, high-deductible policies do provide relatively healthy and wealthy people an opportunity to get into lower cost insurance pools. It is certainly possible that President Bush is more interested in providing a benefit to the upper income taxpayers who disproportionately support him, than in lowering national health care costs.

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China and India

Economy in China Is No. 5 in World
Bloomberg News
New York Times, January 25, 2006, Page C10

Too Fast in China?
Peter S. Goodman
Washington Post, January 26, 2006, Page D1

China Reports Another Year of Strong (or Even Better) Growth
Keith Bradsher
New York Times, January 26, 2006, Page C5

These articles report on new data showing that China's economy is now the 5th largest in the world. Actually, on a purchasing power parity basis, which is the standard method for making international comparisons, China already has the second largest economy in the world. Its economy is far larger than Japan or Germany's and is close to 70 percent of the size of the U.S. economy.

'India Everywhere' in the Alps
Mark Landler
New York Times, January 26, 2006, Page C3

This article reports on India's large contingent at the World Economic Form in Davos, Switzerland. At one point it refers to projections that India's economy will grow to be the third largest in the world by 2050 after the economies of the U.S. China. Actually, according to projections by Goldman Sachs, India's economy will be approximately 50 percent larger than the U.S. economy by 2050. (China's economy will be more than twice as large.)

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Free Trade

Bolivian Nods To Indian Roots
Monte Reel
Washington Post, January 22, 2006, Page A18

Bolivia Leader Tilting Region Further to Left
Juan Forero and Larry Rohter
New York Times, January 22, 2006, Page A1

Bolivian President Sworn In
Monte Reel
Washington Post, January 23, 2006, Page A1

These articles discuss the inauguration of Bolivia's newly elected president, Evo Morales. All three include assertions that the United States is promoting "free trade" or "free trade" agreements. This is not true. The United States does not support free trade. It maintains strong barriers to ensure that highly educated professionals receive wages that are far above world levels. It also insists on strong protectionists barriers, in the form of patent and copyright protection, in its trade agreements.

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