Economic Reporting Review by Dean Baker, January 30, 2006

Economic Reporting Review
By Dean Baker
Februrary 6, 2006

In This Issue:

• Outstanding Stories of the Week
• Medicare Drug Plan
• Productivity Growth and Inflation
• Health Care
• Social Security
• The Federal Reserve Board
• Oil Company Profits
• Transition at the Federal Reserve Board
• Health Care and Social Security
• Alternative Entergy
• Bush Agenda

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Outstanding Stories of the Week

Drug Maker's Efforts to Compete in Lucrative Insulin Market Are Under Scrutiny
Gardiner Harris and Robert Pear
New York Times, January 28, 2006, Page A1

This article reports on evidence that Novo Nordosk, a major Danish pharmaceutical company, had given out kickbacks to pharmacies and engaged in other unethical practices to promote its insulin drugs.

Budget Cuts Pass By a Slim Margin
Jonathan Weisman
Washington Post, February 1, 2006, Page A1

This article reports on the House's approval of a bill that would cut $40 billion over the next five years from Medicaid, student loans and other social programs. The article notes that the cuts are relatively small both in terms of the total budget and even the affected programs, but they can have a substantial impact on the beneficiaries of the programs since they will allow the states far more discretion in structuring benefits.

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Medicare Drug Plan

Federal Costs Dropping Under New Medicare Drug Plan
Robert Pear
New York Times, February 3, 2006, Page A20

This article reports on new projections from the Bush administration that show the Medicare prescription drug plan will cost considerably less in 2006 than previously projected. The article reports that this drop is attributable to the intense competition among insurers, but also notes that many people have not signed up for the benefit because of the complexity of the plans.

It would have been useful to provide some breakdown between these two sources of savings. Insofar as competition among insurers has led to lower than expected costs, this would be an indication of the program's success. On the other hand, the fact that many seniors have found the plan too complicated, and therefore have not signed up, is clear evidence that the program is failing to meet the needs of the population that it was intended to help.

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Productivity Growth and Inflation

Productivity Rose More Slowly in '05; Wages Rose More Quickly
Associated Press
New York Times, February 3, 2006, Page C3

This article reports on Labor Department data showing that productivity fell in the 4th quarter of 2005. The article goes on to note that productivity growth was slower in 2005 than in 2004 or 2003, but that the 2.7 percent growth rate is still double the average for the slowdown years from 1973-1995.

Actually, if the rate of productivity growth slows, then it implies higher inflation, holding other things equal. Of course, if wage growth slows or there is a shift back from profits to wages, then this can offset the impact of slower productivity growth on inflation. A modest uptick of inflation may not provide any real basis of concern from the standpoint of the economy by itself. However, financial markets have been very sensitive to inflation in recent years. Even a modest rise in the inflation rate may bring an end to the unusually low real interest rates that the economy has experienced over the last four years.

Health Care, Vexing to Clinton, Is Now at Top of Bush's Agenda
Robert Pear
New York Times, January 29, 2006, Page A1

This article discusses President Bush's new health care policy proposals. At several points the article discusses President's Bush's motives. For example, it attributes his promotion of health savings accounts his philosophy, which it asserts leads him to believe that "placing more responsibility in the hands of individuals will create market pressure to hold down costs."

It is very difficult to know politicians' true motives since the reasons they publicly give for their actions are often not their true motivations. While it is possible that President Bush's philosophy explains his proposals, it is also possible that he is motivated by a desire to help the insurance and financial industries, who will earn large profits if many people take advantage of his health savings accounts (see "Saving Accounts For Health Costs Attract Wall Street," New York Times, 1-27-06; A1). He may also be trying to give more tax breaks to upper income taxpayers, since they would benefit disproportionately by health savings accounts. All of these groups have been important political constituencies for President Bush, and it is common for politicians to do favors for their political supporters.

If President Bush believes that the sort of individual choice created by high deductible insurance policies could have a substantial impact on health care costs it would imply that he is not very familiar with the nature of the problem. The vast majority of the country's health care costs are attributable to a relatively small number of unhealthy people who incur very high expenses. The expenditures that might be discouraged by high deductible policies comprise a small fraction of health care costs. Furthermore, studies have shown that people are as likely to cut back on important preventive care as on unneeded expenses, which could actually result in higher total health care spending.

The Golden Years: Travels, Hobbies and a New Job, Too
Anna Bernasek
New York Times, January 29, 2006, Section 3, Page 5

This article reports on the sharp rise in employment among older people in the last decade. At one point the article attributes this rise in part to the uncertainty of Social Security benefits, noting that the program faces a shortfall of $4 trillion. It would have been helpful to note that this projected shortfall is over a Social Security's 75-year planning horizon. The shortfall is equivalent to 0.7 percent of projected GDP over this period.

It is also worth noting that this is the shortfall projected by the Social Security trustees, 4 out 6 of whom are political appointees of President Bush. Their projections are far more pessimistic than those of independent forecasters. The Congressional Budget Office projects that the shortfall over the 75-year planning horizon is equal to just 0.4 percent of GDP. Furthermore, they project that the program can pay full scheduled benefits for the next 46 years with no changes whatsoever. This puts any potential shortfalls far beyond the expected life-spans of the older workers discussed in this article, which means that uncertainties about Social Security should not be affecting their decision to work, unless they have been misinformed about the financial condition of the program.

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The Federal Reserve Board

Bush Picks 2 Economists For Federal Reserve Board
Paul Blustein
Washington Post, January 28, 2006, Page D1

This article reports on President Bush's selection of two people to serve as governors of the Federal Reserve Board. At one point the article asserts that "a consensus in recent years has formed in the economics profession that the best way to sustain growth is keep inflation in check."

This is not true. Benjamin Bernanke, the incoming chairman of the Federal Reserve Board has argued quite explicitly that it was very important for the Federal Reserve Board to run very expansionary monetary policies in the wake of the stock market crash in order to sustain growth. Alan Greenspan and the other members of the Fed's Open Market Committee endorsed this view as well. All of these people understood that this expansionary monetary policy carried with it some risk of higher inflation, but they were prepared to take this risk because they thought it was important to give the economy a boost with low interest rates.

While virtually all economists might agree that low inflation is better than high inflation, there are large differences within the economics profession on the priority given to sustaining low inflation rates and even on the definition of low inflation. (Some economists might consider an inflation rate between 2.0-3.0 percent to be "low," whereas others would consider this inflation rate to be excessive.)

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Oil Company Profits

Exxon Posts Record Profit
Justin Blum
Washington Post, January 31, 2006, Page D1

At Exxon Mobil, A Record Profit But No Fanfare
Simon Romero and Edmund L. Andrews
New York Times, January 31, 2006, Page A1

These articles discuss the record profits reported by Exxon Mobil and several other major oil companies. At one point both articles refer to the fact (noted by the oil companies) that their profits are not exceptionally large when measured as a percent of their revenue.

This is not a very meaningful measure of profits. When oil prices soar, revenue does as well. This brings down the ratio of profits to revenue. The more relevant measure of profits would be return on investment. The oil companies were prepared to invest and expected to make a normal profit based on oil prices that are less than half of their current level.

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Transition at the Federal Reserve Board

And in This Corner, Fed Choice Is Blip on Some Senators' Radar
Sheryl Gay Stolberg
New York Times, January 31, 2006, Page A1

This article reports on the small amount of attention that many senators appear to have given to Benjamin Bernanke as they about to vote on him to replace Alan Greenspan as Federal Reserve Board chairman. At one point the article asserts that the major ideological battles on monetary policy have long been resolved.

This is not true. Until 1996, the vast majority of economists believed that the unemployment rate could not fall below 6.0 percent without triggering inflation. Only a small group of progressive economists disputed this view. The subsequent history showed that the progressive economists were right and the bulk of the profession was wrong. This fact has barely been mentioned in the discussion of the Greenspan transition, largely because the economists who were proven wrong continue to be the dominant, if not only, sources for news stories.

There is also an ongoing debate over whether the Fed should intervene to prevent the development of financial bubbles, such as the stock market bubble or the housing bubble. The Fed under Greenspan has taken the position that it is not appropriate for it to intervene, but many economists differ with this position.

Health Care and Social Security

Bush Warns Against Shrinking Global Role
Peter Baker and Michael A. Fletcher
Washington Post, February 1, 2006, Page A1

This article reports on President Bush's State of the Union address. At one point it refers to the "spiraling costs" of Social Security, Medicare and Medicaid. It might be accurate to describe the costs of Medicare and Medicaid as "spiraling," as the rising cost of health care in the United States is projected to lead to large increases in the cost of these programs in coming years. However, projections show only a modest rate of growth in Social Security costs, comparable to what the country has experienced in prior decades.

President Bush lumped these programs together, presumably because he still has aspirations to privatize Social Security, and this agenda will be advanced insofar as he can scare people about the costs of the program. It would have been appropriate to call attention to this fact, since presumably President Bush and his aides are well aware of the fact that Social Security costs are not rising at anywhere near the rate of Medicare and Medicaid costs.

The article also asserts that President Bush "thinks" that his health savings accounts will lower health care costs. There is a large amount of evidence that they will have little effect on health care costs, although they will likely lead to large fees for the financial industry. The accounts will also be another tax break for higher income families. It is possible that President Bush's main motivation in proposing these accounts is to help these constituencies, both of whom are important political backers. However, he would stand a better chance of advancing this agenda if he claimed that his motivation was to lower health care costs rather than serving powerful interest groups.

Bush Will Use Address to Focus on Alternative Fuels and Nuclear Plants
Elisabeth Bumiller and David E. Sanger
New York Times, January 31, 2006, Page A18

This article discusses some of the proposals that will be mentioned in President Bush’s State of the Union address. The article asserts that he will focus on promoting alternative energy sources.

It would be helpful if the article offered some information on the size of the President Bush’s proposals. Virtually everyone supports alternative energy in the same way that they support good health, the real question is what sort of resources President Bush is prepared to advance the development of alternative energy.

Bush Agenda

Return of Congress; New Test for Bush
Sheryl Gay Stolberg
New York Times, January 29, 2006, Page A19

This article discusses some of the issues that President Bush will be dealing with as Congress comes back into session. At one point it refers to a budget bill, which it describes as including $40 billion in spending cuts. It would have been helpful to note that these projected cuts would take place over a five year period.

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