Economic Reporting Review
By Dean Baker
August 18, 2003
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OUTSTANDING STORIES OF THE WEEK
How One Hopsital Benefited
on Questionable Operations
Kurt Eichenwald
New York Times, August 12, 2003, page A1
http://www.nytimes.com/2003/08/12/business/12TENE.html
This article presents evidence that a major hospital in California was performing unnecessary open heart surgery on patients in order to collect large fees from insurers.
More
Doors Closing on Working Poor
Mary Otto
Washington Post, August 12, 2003, page A1
http://www.washingtonpost.com/wp-dyn/articles/A46532-2003Aug11.html
This article reports on the dwindling supply of affordable housing in the Washington metropolitan area. It notes that many units of federally subsidized housing, which were built in the fifties and sixties, are now being torn down or abandoned, without any new low income housing units being constructed to replace them.
A
North Carolina Town, Unraveled
Michael Barbaro
Washington Post, August 9, 2003, page E1
http://www.washingtonpost.com/wp-dyn/articles/A36361-2003Aug8.html
This article examines the impact that the decline of the textile industry has had on Kannapolis, North Carolina. This town is one of many in the region that had been heavily dependent on the industry for its prosperity.
______________________________________________________________________________
The Economy
Not
Much Job Growth, But Mediocre May Look Good in 2004
Floyd Norris
New York Times, August 15, 2003, page C1
http://www.nytimes.com/2003/08/15/business/15NORR.html
This article assesses the rate of job growth over the last year. It notes that the Labor Department’s survey of households shows a gain of more than 1 million jobs over the last year, even though its survey of business establishments continues to show job loss. The article suggests that the measure in the household survey may be more accurate. It is not clear that this is the case.
This discrepancy is largely explained by the Labor Department’s re-benchmarking of the household survey in accordance with the 2000 Census data. The re-benchmarking both increased the absolute size of the population shown in the household survey (the re-benchmarking added nearly 1 million people to the size of the non-institutionalized population in January of 2003) and also increased the annual rate of population growth, from approximately 2.1 million people a year prior to the re-benchmarking, to a growth rate of 2.8 million a year since the re-benchmarking. This upward revision in the growth assumption was due to the fact that the household survey substantially understated the rate of population growth in the nineties, primarily because it underestimated immigration during the decade.
The household survey is now effectively assuming that the rapid rate of immigration growth of the nineties is continuing through to the present. This is likely to lead to a substantial overstatement of population growth for two reasons. First, the weak economy of the last two years is unlikely to have pulled in immigrants in the same way as the strong economy of the late nineties. In fact, there could be a significant flow in the opposite direction, as immigrants who held jobs when the unemployment rate was 4.0 percent lose their jobs and return to their home countries. The other reason why the current immigration rate may be substantially slower than the late nineties rate is the increased scrutiny of immigrants and curtailment of immigrant rights since September 11th.
The number of employed persons in the household survey is derived from its estimates of population, which in turn depends on its assumptions about immigration. If immigration has slowed substantially for the reasons noted here, then the household survey would be overstating the rate of growth of jobs in the economy. This overstatement of employment growth, coupled with the one-time January increase in the household survey’s population estimate, explains how the household survey could show an increase of more than one million employed people over the last year, even if the economy was actually losing jobs.
Citing
Upturn, Bush Rejects More Tax Cuts As Vote Nears
Elisabeth Bumiller
New York Times, August 14, 2003, page A14
http://www.nytimes.com/2003/08/14/politics/14BUSH.html
This article discusses President Bush’s assessment of the current state of the economy. The article concludes with a discussion of the rate of economic growth that is needed to create jobs. The article asserts that many economists believe that a 4.0 percent rate of growth is needed to generate jobs, but N. Gregory Mankiw, President Bush’s chief economist, believes that only a 3.1 percent rate of growth is necessary.
It is unlikely that there is a qualitative disagreement on this issue between Mr. Mankiw and other economists. In order to have any increase in the demand for labor, the economy must grow more rapidly than the rate of productivity growth. Most economists would currently place this growth rate at close to 2.5 percent. However, there is an underlying rate of growth of the labor force, which is close to 1.0 percent annually. This means that the economy must grow at least a 3.5 percent annual rate to absorb the new entrants to the labor force each year. Growth in excess of this rate can begin to absorb some of the people who are currently counted as unemployed or who have left the labor force. It is important to note that some of the increased labor demand will be filled by increased hours per worker, rather than an increase in the number of workers. There has been a sharp falloff in average weekly hours over the last three years, which will be at least partially reversed during an upturn.
Fed
Keeps Rates on A Level, Low Course
John M. Berry
Washington Post, August 13, 2003, page E1
http://www.washingtonpost.com/wp-dyn/articles/A49517-2003Aug12.html
This article discusses the Federal Reserve Board’s decision to leave its interest rate policy unchanged. At one point the article notes the Fed’s concern about the possibility of deflation, which it asserts “could do severe damage to the economy.”
It is not clear that deflation is necessarily harmful. Deflation simply means that prices are on average falling. At present, the prices of many items (e.g. cars, clothes, and computers) are already falling. The switch from a low rate of inflation to a low rate of deflation simply means that the number of goods and services for which prices are falling has increased, or the rate of price decline for those items has accelerated.
While a decline in the overall price level does hurt borrowers and benefit lenders, this is also the case with any decline in the rate of inflation. A loan that was negotiated at a 10 percent interest rate, with the expectation that the inflation rate would be 4.0 percent, becomes harder to pay off if the inflation rate ends up being just 2.0 percent. The drop from a 1.0 percent inflation rate to a 1.0 percent rate of deflation is no different in this respect.
The article also asserts that the economy’s rapid pace of productivity growth in this recovery has lessened its ability to create jobs, since more output can be generated by the same number of workers. Actually, the rate of productivity growth in a recovery is always fast; the current rate of productivity growth is only slightly more rapid than the average growth rate following the last five recessions (see ERR, 8-11-03). Rapid productivity growth cannot explain the lack of job growth in this recovery.
Business
Spending Helps To Offset Lag In Refinancing
Louis Uchitelle and Jennifer Bayot
New York Times, August 10, 2003, page A1
http://www.nytimes.com/2003/08/10/business/10ECON.html?ex=1061352000&en=c1f39fd3b7da9934&ei=5070
This informative article discusses the extent to which an upturn in business investment in coming months may offset the contractionary impact of the recent decline in mortgage refinancing. It is worth noting that a large portion of investment in equipment is now imported, which will significantly lessen the extent to which an upturn in investment can provide a stimulus to the U.S. economy.
For
example, in the most recent quarter, computer investment would have added nearly
0.4 percentage points to GDP, if all computers were produced domestically.
However, the Commerce Department’s measure of GDP growth excluding computers
was only 0.1 percentage point less than its measure of total GDP growth (2.3
percent without computers, compared to 2.4 percent GDP growth including
computers), which suggests that most of the growth in computers sales was
attributable to imports.
Health Care
Report
on Medicare Legislation Raises Concern on Costs
Reed Abelson
New York Times, August 11, 2003, page C2
http://www.startribune.com/stories/587/4035116.html
This article discusses a new report that shows that Medicare beneficiaries who are in preferred provider organizations have higher out-of-pocket medical expenses than beneficiaries who are in the traditional fee for service program. At one point the article comments that lawmakers who support increasing the role of private insurers in Medicare “expect private plans to be able to deliver care more efficiently than the traditional Medicare program.”
It is not clear that a concern for efficiency explains congressional votes on Medicare. At this point there is a great deal of evidence showing that the traditional Medicare program is more efficient than private sector plans. While it is possible that members of Congress are unaware of this evidence, or that they believe that the private sector is more efficient in spite of the evidence to the contrary, it is also possible that they are not primarily motivated by the concern to save Medicare money. The insurance industry is a major contributor to political campaigns, with most of its money going to Republicans. It is at least as likely that members of Congress support increasing the role of private insurers in Medicare out of a desire to satisfy their contributors from the insurance industry, as out of concern for the public good.
Democrats
Clash Over Iraq War, Tax Cuts
Dan Balz
Washington Post, August 12, 2003, page A4
http://www.washingtonpost.com/wp-dyn/articles/A47024-2003Aug11.html
Democrat
Hopefuls Crisscross Iowa
Dan Balz
Washington Post, August 15, 2003, page A6
http://www.washingtonpost.com/wp-dyn/articles/A60241-2003Aug14.html
These articles report on the Iowa campaigns of the candidates for the Democratic presidential nomination. Both articles include some discussion of their views on health care reform. In both cases, the articles report that three of the candidates, Dennis Kucinch, Al Sharpton, and Carol Mosley Braun, favor a “single-payer system.”
It is unlikely that many readers know what a single payer health care system is, since the topic is almost never mentioned in major media outlets like the Washington Post. It would have been more informative if the article had described the plan as a “universal Medicare system.” Since most readers have some familiarity with Medicare, and at least one of the candidates has explicitly modeled his proposal for universal health care coverage on the Medicare system (Kucinch), it is likely that this description of the plan would give readers a clearer idea of what is being proposed.
A
Nagging Pain in Britain: How to Find a Dentist
Lizette Alvarez
New York Times, August 12, 2003, page A4
http://www.nytimes.com/2003/08/12/international/europe/12WALE.html
This
article reports on the difficulty that many people in Britain face in finding a
dentist through the system’s public health care system. It is worth noting
that Britain pays less than 40 percent as much per person for health care as the
United States. The article never discusses the amount that Britain pays for its
health care.
Trade and Agricultural Subsidies
U.S.,
EU Forge Compromise On Farm Trade
Naomi Koppel
Washington Post, August 14, 2003, page E1
http://www.washingtonpost.com/wp-dyn/articles/A56291-2003Aug13.html
Framework
Set For Reduction Of Subsidies
Paul Meller with David Barboza
New York Times, August 14, 2003, page C1
http://www.nytimes.com/2003/08/14/business/worldbusiness/14TRAD.html
These articles report on an agreement between the United States and Europe regarding the reduction of protection for agriculture. Both articles include several assertions that the reduction of protection for agriculture in rich nations is very important for poor nations.
While poor nations may have political reasons for placing a high priority on this issue, there is a large amount of economic research showing that the ending of protection in rich nations will on average have little or no effect on developing nations. For example, a recent World Bank study found that the elimination of all merchandise trade barriers and subsidies in the United States would have no net impact on growth in sub-Saharan Africa (http://econ.worldbank.org/files/1715_wps2595.pdf).
Both articles assert that subsidized exports from rich nations are undermining farmers in developing nations. Insofar as this is the case, developing nations could prevent this sort of disruption to their economy if they were allowed to impose import tariffs without fear of retaliation from rich nations. Of course, many developing nations may opt to benefit from export subsidies, since it gives their consumers access to cheap food. Export subsidies of rich nations have the same impact on agriculture in developing nations as increases in agricultural productivity in rich nations. This means that if export subsidies are causing serious damage to developing nations, then rapid increases in productivity in rich nations would also be harmful.
Both articles refer to studies showing that rich nations spend $300 billion a year subsidizing their agriculture. (The Times article puts this as “$15,000 to $20,000 per farmer each year.”) It is important to note that this is an estimate of the total cost to consumers and taxpayers, not an estimate of the money that actually goes to farmers. It includes the tax money used to subsidize agricultural exports to developing nations. It also includes the higher prices that consumers in rich nations pay to farmers in developing nations as a result of the imposition of quotas on their exports.