Economic Reporting Review
 By Dean Baker

Februrary 27, 2006

In This Issue:

 Outstanding Stories of the Week
 
Alternatives to Imported Oil
 
Canadian Health Care
 
Medicare Drug Plan
 
The Fed and the Housing Bubble
  Germany
  Trade
  China
  U.S. Port Management
  Brazilian Debt
  Dollarization


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Outstanding Stories of the Week

Chad’s Oil Riches, Meant for Poor, Are Diverted
Lydia Polgreen and Celia W. Dugger
New York Times, February 18, 2006, Page A1

This article discusses the impact that Chad’s oil wealth has had on the country. The government had signed an agreement with the World Bank, in exchange for a loan to build an oil pipeline, requiring proceeds from oil sales to go directly toward alleviating poverty. The article reports that most of this money appears to have been stolen and that there is little evidence of oil money having improved the situation of the poor in Chad. This is exactly what critics of the agreement claimed would happen at the time it was signed.

For Minorities, Signs of Trouble In Foreclosures
Vikas Bajaj and Ron Nixon
New York Times, February 22, 2006, Page A1

This article reports on the high foreclosure rate for minorities in several major cities. It notes that government policies, along with some private non-profits, have actively promoted homeownership among minorities, but many recent homebuyers have been forced to give up their homes.


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Alternatives to Imported Oil

Bush Urges Funding for Alternative Energy
Jim VandeHei
Washington Post, February 21, 2006, Page A1

In Visits to 3 States, Bush Pushes Alternative Energy
Elisabeth Bumiller
New York Times, February 21, 2006, Page A1

These articles report on speeches by President Bush in which he emphasized the importance of reducing the country’s dependence on foreign oil. It would have been helpful if the articles had devoted some space to assessing what President Bush is actually doing to reduce the country’s dependence on foreign oil, instead of simply telling readers what he said. (The Post article actually told readers what the President believes, noting “his belief that the nation is ‘addicted to foreign oil’” although it did not indicate how it gained insight into the President’s beliefs.)

Virtually all analysts agree that any large-scale switch away from oil as a primary energy source will require massive investments in research and substantial subsidies for alternative fuels and possibly increased restrictions on the use of oil, such as higher mileage standards for automobiles. President Bush’s budget actually cuts funding for research into alternative energy sources. He has also proposed no important new regulatory measures that might have a substantial impact on the country’s use of oil. (One modest measure would be tax credits to promote pay-by-the-mile insurance policies, which would provide almost as much disincentive to driving as a $2 a gallon gas tax, without increasing average insurance costs at all [see “Energy Insurance”]

Bush Admits to ‘Mixed Signals’ Regarding Laboratory on Renewable Energy
Elisabeth Bumiller
New York Times, February 22, 2006, Page A12

This article discusses the apparent contradiction between President Bush’s recent speeches emphasizing the importance of moving away from dependence on foreign oil and his budget request that cuts funding for the country’s primary laboratory for researching renewable energy. It would have been helpful to readers to put the lab’s $179 million (before cuts) annual budget in some context.

This level of spending is approximately 0.007 percent of total federal spending. It is equal to approximately 0.3 percent of what the United States is spending at present on the war in Iraq, the cost of the war for a day.


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Canadian Health Care


Ruling Has Canada Planting Seeds of Private Health Care
Clifford Krauss
New York Times, February 20, 2006, Page A4

This article reports on plans by the Canadian government to allow the public to obtain some types of health care services from private providers. The article notes that there are waiting lists for some types of non-essential medical procedures in Canada. It implies that Canada’s health care system is facing a serious crisis.

It would have been useful to readers to point out that, according to data from the OECD, Canada spends approximately half as much per person on health care as the United States. Its population also enjoys substantially longer life expectancies than do people in the United States.

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Medicare Drug Plan

Millions Not Joining Medicare Drug Plan
Ceci Connolly
Washington Post, February 21, 2006, Page A1

This informative article reports on the low enrollment in the new Medicare drug program by low income seniors. Under the provisions of the 2003 law, these people are entitled to substantial subsidies when buying a drug insurance plan covered by the program. According to the article, many seniors are still not signing up because they find the system too complicated.

It is worth noting that it was possible to design a simple benefit that would have been managed by the Medicare system and added on to the existing Medicare program. The Republicans in Congress instead opted to design a system where the benefit would only be offered by private insurers. The law explicitly prohibits Medicare from offering its own plan.

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The Fed and the Housing Bubble

Fed Suggests Its Future Decisions May Be Less Predictable
Associated Press
New York Times, February 22, 2006, Page C3

This article reports on the release of minutes from the January meeting of the Federal Reserve Board’s open market committee. At one point the article reports on the committee’s assessment of the nation’s housing market. It reports that the committee expects that the market will slow from its rapid growth of the last 8 years, but that the committee anticipates that the slowdown would be gradual rather than a sudden crash.

On this topic, it is worth noting that Alan Greenspan made a conscious decision not to warn of the dangers of a stock market crash because he thought it would be inappropriate for the Fed to intervene in financial markets in this way. If the open market committee’s members continue to share Mr. Greenspan’s views, then they would not publicly warn of a crash in the housing market even if they anticipated one. This would mean that we really cannot know their true assessment of the housing market regardless of what they say at this point.

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Germany

Selling Well Everywhere But Home
Mark Landler
New York Times, February 23, 2006, Page C1

This article discusses the slow growth of consumer demand in Germany in the context of a toy company’s sales. The article reports that German firms have been successful in boosting exports, but that domestic demand growth remains relatively weak.

It is worth noting that the weakness in demand is at least in part attributable to policies that have been promoted by the OECD, the IMF and many prominent economists. They have argued that Germany’s social security system is too generous and that benefits for retirees should be cut back. According to standard economic theory, if workers expect that their retirement benefits will be reduced, then they will cut back their consumption and increase their savings, as German workers have apparently done. Presumably the economists who advocated cutbacks in retirement benefits understood the implications of this policy and intended this outcome.

At one point the article asserts that Germany’s unemployment rate is 12 percent. This figure is the official German measure of unemployment which includes people who are working less than 15 hours per week, but desire full-time employment. In the United States these workers would be counted as employed. The article does include a chart of German unemployment which shows the OECD standardized measure of unemployment, which is virtually identical to the U.S. measure. This chart shows the German unemployment rate to be approximately 9.5 percent.

German unemployment is concentrated in former East Germany, as large problems from the transition remain. In the area that was formerly West Germany the unemployment rate by the OECD measure is a bit over 7.0 percent. While this is a high unemployment rate, it is not a level that implies a serious job crisis.

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Trade

U.S. Sees Emirates as Both Ally and, Since 9/11, a Foe
David S. Cloud
New York Times, February 23, 2006, Page A17

This article discusses the relationship between the United States government and the government of Abu Dhabi. At one point the article quotes a former U.S. ambassador to the United Arab Emirates as saying that Abu Dhabi has been at the forefront in pushing “free trade” in the Middle East.

It would have been helpful to note that the United States government does not support free trade. It supports strong protection for doctors, lawyers and other highly paid professionals in order to ensure high wages for these occupations. It also supports extending copyright and patent protections for a wide variety of items. The ambassador obviously meant that Abu Dhabi supports the U.S. trade agenda, not free trade.

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China

China Addresses Plight of Farmers
Edward Coy
Washington Post, January 23, 2006, Page A11

This article discusses new proposal by the Chinese government which it claims are intended to improve the quality of life in the countryside. At one point the article reports on the gap in income in urban and rural areas, reporting that per capita income of farmers in 2005 was $402.80, while per capita income of city dwellers was $1,292.

It is important to note that these figures are based on currency conversion calculations that take China’s income in Chinese currency and convert it into dollars at the official exchange rate. Economists more typically use purchasing power parity measures of GDP that assume goods and services in all countries sell at the same price. By this measure, China had a per capita GDP in 2005 of close to $6,000. Assuming that the ratios are correct, then the per capita income of people in the countryside would be somewhat under $4,000, while the per capita income of people in the cities would be close to $11,000.

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U.S. Port Management

A Ship Already Sailed
Simon Romero and Heather Timmons
New York Times, February 24, 2006, Page C1

This article discusses the current state of the port management business. It reports that all of the biggest firms in the industry are foreign-owned. It lists high labor costs as one of the reasons that U.S. firms have fallen behind.

It is not clear how high labor costs could have been an important factor in determining which firms manage a port. Only ports in the United States can be used to bring goods into the United States, so the high labor costs in U.S. ports cannot explain a shift to foreign management. Top executives at U.S. corporations are paid considerably more than top executives in foreign corporations, which would have placed U.S. owned companies at a disadvantage, but the article does not appear to be referring to executive compensation in its discussion of labor costs.


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Brazilian Debt

Brazil Will Buy Back Bonds Issued During Financial Crisis
Paulo Prada
New York Times, February 24, 2006, Page C4

This article reports on plans by the Brazilian government to buy back bonds that it issued in the early nineties and replace them with dollar-denominated bonds that will be offered at lower interest rates. At one point it asserts that it is easy for Brazil to do this now, because the dollar has fallen against the Brazilian currency.

Actually the current value of the dollar against Brazil’s currency does not matter in this decision. Brazil’s government cares about the future direction of the dollar. By issuing debt denominated in dollars, they presumably expect that the dollar will fall further in the future, which means that it will be cheaper for Brazil’s government to repay the money it is borrowing.

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Dollarization

The Case for Fewer but Stronger Currencies
Daniel Gross
New York Times, February 20, 2006, Page A19

This article discusses the potential benefits and losses to developing countries when they give up their own currency and adopt the dollar as their national currency. It would have been worth noting that the dollar is virtually certain to fall by 30-40 percent against other major currencies over the next decade because the United States is running an unsustainable trade deficit. This means that any country that switched to the dollar would be virtually guaranteeing itself higher inflation at some point in the not too distant future, as the price of imported goods would rise in response to the dollar’s loss of value. This would have more impact on most developing countries than the United States, because imports generally comprise a larger share of their economy.

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