Economic Reporting Review by Dean Baker, February 13, 2006

Economic Reporting Review
By Dean Baker
Februrary 13, 2006

In This Issue:

• Outstanding Stories of the Week
• The Budget: Politics and Ideology
• Protectionism and Free Trade
• Aging and Budget Deficits
• January Employment Report
• The Budget
• Medicare
• Trade

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Outstanding Stories of the Week

Rising Prices Lift All Bonuses
Gretchen Morgenson
New York Times, February 5, 2006, Section 3, Page 1
Available to Times Select readers only

This article reports on the surge in compensation for the top executives at major oil companies. Rising oil prices have led to rising profits and therefore higher compensation.

Benefits Go The Way of Pensions
Eduardo Porter and Mary Williams Walsh
New York Times, February 9, 2006, Page C1

This article discusses the cuts in retiree health care coverage by large employers.

Generic Drugs Hit Backlog At FDA
Marc Kaufman
Washington Post, February 4, 2006, Page A1

This article reports on a growing backlog in the testing of generic drugs by the FDA. The backlog has slowed the rate at which generic drugs can be brought on the market. The article reports that FDA is apparently unconcerned by this backlog. It is worth noting that if generic drugs are not available, then the manufacturers of brand drugs can enjoy higher profits, since they effectively gain longer patent protection.

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The Budget: Politics and Ideology

Rival Visions Led to Rocky Start for Drug Benefit
Robin Toner
New York Times, February 6, 2006, Page A1

In Budget, Bush Holds Fast to a Policy of Tax Cutting
Robin Toner
New York Times, February 7, 2006, Page A14

These articles discuss the motivations behind the structure of the Medicare prescription drug bill and President Bush's 2007 budget. Both articles assert that ideology has the main motivation in each case.

The article provides no evidence for this assertion. The actors involved are all politicians, not political philosophers. The Republicans in Congress received substantial amounts of campaign contributions and political support from the pharmaceutical industry and the insurance industry, two constituencies that gained enormously in the bill at the expense of taxpayers and Medicare beneficiaries. The article claims that the Republicans were motivated by a belief in the free market.

In the case of the tax cuts in President Bush's budget, a small group of wealthy taxpayers will be the primary beneficiaries. The lost revenue from these cuts will require cuts in areas of the budget that serve tens of millions of people. The article claims that President Bush is motivated by the belief that tax cuts spur the economy.

It is extremely rare for politicians to ever publicly announce that they are acting to serve the goals of special interests at the expense of the larger public, even if this is in fact the explanation for their actions. In such circumstances they generally ascribe their motives to some larger principle that can be construed to further the public interest. However, there is no reason to believe that this larger principle explains their actions, since politicians are often not truthful. This article should not have asserted that the rationales given by politicians for their actions were actually the basis for their actions, without any evidence to support this claim.

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Protectionism and Free Trade

Bush Urges Study of Math and Science
Elisabeth Bumiller
New York Times, February 4, 2006, Page A8

This article discusses President Bush's plans to improve the quality of math and science education in the United States. The article concludes with a quote from President Bush in which he holds out that the alternative to improving math and science skills is to "retreat" and "become protectionist."

It would have been appropriate to point out that President Bush is actually an ardent protectionist. He has done absolutely nothing to reduce the barriers that protect highly educated professionals in areas like medicine and law from foreign competition. If he were committed to free trade he would have worked to standardize professional education and licensing requirements in these areas so that highly skilled foreign professionals would be able to compete on equal footing for jobs in these areas.

The potential gains from free trade in these areas are far larger than the potential gains from the trade agreements that President Bush has focused on. For example, doctors in the United States earn an average of more than $200,000 a year (after paying their malpractice fees). By comparison, doctors in Europe earn an average of approximately $100,000 a year. This suggests that the consumers could save approximately $70 billion a year (@$700 per family) just by freeing up trade in doctors services. The total gains from freeing trade in highly skilled professions would run in the hundreds of billions.

President Bush is evidently content with the protectionist barriers that sustain the high incomes for highly skilled professionals. He apparently only objects to protectionist measures that might benefit workers lower down on the wage distribution. It would have been appropriate to note this fact, given Mr. Bush's implicit assertion that he views protectionism as bad.

Bush to Propose Curbing Growth In Medicare Costs
Robert Pear
New York Times, February 4, 2006, Page A1

This article discusses plans by President Bush to cut back spending on Medicare. At one point it refers to "rapid increases in federal spending linked to the aging of the population." Actually, the aging of the population is relatively minor factor in projections showing rapid increases in spending. The major factor is rising national health care costs. Since the government pays for roughly half of national health care costs (primarily through Medicare and Medicaid), rapidly rising health care costs will impose a large burden on the government, unless the health care system is reformed.

Domestic Spending Squeezed Throughout the Government
Robert Pear
New York Times, February 7, 2006, Page A14

In Calculating the Shortfall, Likely Costs Are Left Out
Edmund L. Andrews
New York Times, February 7, 2006, Page A16

These articles discuss various aspects of President Bush's proposed budget for 2007. Both articles lump together Social Security, Medicare, and Medicaid as programs whose costs are projected to soar as the population ages. The article by Pear reports that the costs of the three programs are projected to rise by 8 percent in 2007.

Actually, the projected cost of Social Security is projected to rise at a relatively modest pace. The costs of Medicare and Medicaid are projected to rise rapidly, but this is primarily attributable to rapidly rising national health care costs, not the aging of the population. It is misleading to lump Social Security together with these two health care programs, since their costs are being driven by different factors. This is shown clearly in the budget projections for 2007. While the costs of Medicare and Medicaid together are projected to rise by more than 10 percent, the cost of Social Security is projected to grow by just 5 percent, approximately the same as the nominal rate of growth of the economy.

Jobless Rate Drops To 4.7%
Paul Blustein
Washington Post February 4, 2006, Page D1

This article reports on the Labor Department's release of employment data for January. At one point the article notes that bond prices fell because of the strength of report, but "later recovered smartly, fueled in part by expectations that the recent increase in yields … will lure investors in increasing numbers."

Since the increase in yields is due to low bond prices (when bond prices fall, yields rise and vice versa), the article is effectively claiming that bond prices rose because investors believe that at low prices foreign investors will enter the market. If this explanation was true, then bond prices never should have fallen in the first place.

In Bush's Budget Plan, Shifting Priorities
Robert Pear
New York Times, February 5, 2006, Page A23

These articles report on President Bush's plans for the 2007 budget. Both articles describe a number of proposed cuts or increases in percentage terms or dollar terms. For example, at one point the Post article refers to Bush's intention to cut the Medicare budget by $105 billion over the next decade (actually the article refers to the cut as though it is a reduction in annual spending in the year 2006).

It is difficult for most readers to assess the meaning of these proposed changes. It would be helpful if dollar cuts (or increases) were expressed as a percentage of projected spending for the program. Also, percentage changes should be adjusted for inflation so that readers can know whether the proposal will increase or decrease the appropriation in terms of purchasing power. In addition, budget items should be described as a share of the total budget so that readers can determine their significance for total spending and the deficit.

At one point the Post article asserts that spending for Social Security, Medicare, and Medicaid will swell dramatically as the baby boom ages. Actually, only Medicare and Medicaid are projected to experience rapid increases in costs. This is due to the assumption that private sector health care costs will continue to rise rapidly, which will lead to sharp increases in the cost of these programs. This would be the case even if the U.S. population were not aging.

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Medicare

Many Proposed Cuts Have Met Limited Success in the Past
Amy Goldstein
Washington Post, February 8, 2006, Page A4

This article discusses some of the proposed cuts in President Bush's budget. At one point the article notes that Democrats focused their criticism in part on Bush's recommendation to "slow the growth" of Medicare by $36 billion.

There has been a semantic contest between Democrats and Republicans on this point in prior years. Democrats have referred to plans to reduce projected spending in Medicare as "cuts" because focus groups show that cuts are unpopular. Republicans have used the expression "slow the growth" because focus groups show that people are less concerned about the prospect that growth in spending will be slowed.

News reports should try to avoid adopting either side's terminology and instead focus on the substance of the issue in dispute. In this case, the question is whether the level of services provided to Medicare beneficiaries will deteriorate as a result of this reduction in spending against the baseline projection, or whether health care providers simply would have been forced to accept lower payments. If the reduction in spending actually would lead to reduced services, then it is appropriate to describe them as "cuts" since that is how most people would understand the meaning of the term.

It also would have been useful if the article had put the proposed reduction in spending in context. Medicare spending is expected to be approximately $2.5 trillion over the five year budget period, which means the proposed spending reduction would be approximately 1.5 percent of baseline spending. (It is equal to approximately 0.3 percent of total government spending over this period.) It also would have been helpful to point out that the spending reduction is for a five-year period. The article does not clearly indicate the time-period over which the spending reduction will take place.

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Trade

Some Assembly Needed: China as Asia Factory
David Barboza
New York Times, February 9, 2006, Page C1

This article discusses patterns of trade between the United States, China, and other East Asian countries. At one point it lists the winners and losers from U.S. trade with China. It reports that consumers in the United States are winners, because they are able to buy low priced goods.

This is only partially true. The United States is not currently paying for these goods with exports, instead it is borrowing capital from abroad. At some point in the future, it will have to reduce its trade deficit, and pay interest on the money it has borrowed during the years it was running deficits. This is accomplished through a fall in the value of the dollar, which will mean higher import prices. Because the United States is borrowing large amounts of money from abroad, the dollar will have to fall further than would otherwise be the case, in order to cover this interest, which will mean even higher priced imports in the future.

Asserting that consumers are benefiting from cheap imports today, even as the country runs a large trade deficit, is comparable to saying that taxpayers are gaining from recent tax breaks, even though the government is running a large deficit that will impose substantial interest costs in future years. Such a statement presents a misleading analysis of the situation.

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