Economic Reporting Review
By Dean Baker
August 25, 2003

OUTSTANDING STORIES OF THE WEEK

2 New Fronts in Heartburn Market Battle
Gardiner Harris
New York Times, August 20, 2003, page C1
http://www.nytimes.com/2003/08/20/business/20DRUG.html

This article discusses the market for heartburn medication as some of the leading heartburn drugs come off patent. It describes how the makers of branded drug plan to try and maintain the market share for their product, even as generic equivalents become available at one-tenth the price.

Mortgage Markets Are Out of Control
Gretechen Morgenson
New York Times, August 17, 2003, Section 3 page 1
http://query.nytimes.com/gst/abstract.html?res=F10F16FE3F540C748DDDA10894DB404482

This article discusses the recent volatility in the mortgage and treasury bond market. It notes that the major mortgage traders - Fannie Mae and Freddie Mac - appear to have had hedging strategies that increased market volatility, and which could have serious consequences for the financial system.


Blackout Is Just Latest Woe For a Troubled Utility
James Dao with Eric Lipton
New York Times, August 22, 2003, page A1
http://www.nytimes.com/2003/08/22/national/22ENER.html

This article reports on the environmental, safety, and financial problems of the First-Energy Company, one of the utilities that played a prominent role in the prior week's blackout. The article documents a long history of problems at the utility.

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The Economy

Recovery Shows Signs of Pickup
Steven Gray
Washington Post, August 22, 2003, page E1
http://www.washingtonpost.com/wp-dyn/articles/A28972-2003Aug21.html

This article reports on the release of several pieces of new economic data, which appear to suggest an upturn in the economy. At one point the article refers to a projection that the economy will create one million new jobs in 2004. It describes this as an optimistic assessment.

The economy needs to create approximately one million jobs per year just to keep pace with the growth of the labor force. If it achieves this target in 2004, then it will mean that there will be little, if any, decline in the unemployment rate. It also means that less than half of the jobs lost in the last two and a half years will have been regained by the end of the 2004.

One of the items cited as a basis for optimism was a decline of 17,000 in the number of new unemployment insurance claims last week, to 386,000. Since close to one fifth of the country was unable to file claims on the prior Friday due to the blackout, it is not clear that there would have been a decline in claims without the blackout.  


East Coast Power Blackout

Which Party Gets the Blame? They Agree: It's the Other One
David M. Halbfinger and Katherine Q. Seelye
New York Times, August 16, 2003, page B1
http://query.nytimes.com/gst/abstract.html?res=F60915FF3E540C758DDDA10894DB404482

This article discusses accusations concerning the cause of the East Coast power blackout. Many of the allegations are plausible, for example that in an era of deregulation, government officials have not ensured the adequacy and security of the nation's electricity transmission system. At one point it reports the comment of Sean Hannity, a conservative talk show host, that the Democrats are to blame because they have blocked oil drilling in the Arctic National Wildlife Refuge.

 If proponents of drilling in the Wildlife Refuge are correct in their claims, then the oil from the region would reduce oil prices in the United States and the world by approximately 1.0 percent. This would have absolutely nothing to do with the set of circumstances that have been identified as factors in the power blackout. The article either should not have included this comment or pointed out that Mr. Hannity's attacks do not make sense.


Power Grid More Vulnerable Daily
Justin Gillis
Washington Post, August 17, 2003, page A14
http://www.washingtonpost.com/wp-dyn/articles/A4434-2003Aug16.html

This article reports on the problems associated with maintaining the electricity transmission network. It would have been appropriate to include some discussion of the incentives created by the deregulated structure that has been in place in much of the nation over the last two decades.

While the generation of electricity has been largely deregulated in much of the country, the transmission of electricity, as a natural monopoly, is still regulated. Under this system, the deregulated generators have a strong incentive to keep transmission costs low, even at the risk of the security of the system. If the transmitters of electricity are allowed to raise their fees in order to provide more secure service, then this will come partially out of the profits of the generators.

On the other hand, if inadequate transmission facilities lead to spot shortages or blackouts, the generators may stand to profit from selling some electricity at exorbitant prices. At the same time, the generators suffer no consequence from having large populations deprived of electricity, since they do not have the responsibility to ensure electricity service, unlike the days when electricity generation was fully regulated. This asymmetric set of incentives for politically connected generators of electricity, like Enron, may have been an important factor behind the failure of the northeast region to design an adequate electricity grid. It should have been noted in this article.


Under Deregulation, Montana Power Price Soars
Jonathan D. Glater
New York Times, August 21, 2003, page A16
http://www.nytimes.com/2003/08/21/business/21MONT.html

This article reports on the sharp rise in electricity prices in Montana following its decision to deregulate. The article concludes with a comment from Bob Rowe, the chairman of the state's Public Service Commission, which implies that no one could have foreseen the jump in prices following deregulation.

Actually, it is not clear how any informed analyst would not have anticipated a jump in electricity prices in Montana. Prior to deregulation, Montana enjoyed the lowest electricity prices in the country, because it had large amounts of cheap hydroelectric power. Deregulation allowed this electricity to be sold on a larger regional market, where it would command a higher price. It was inevitable that this change would raise electricity prices in Montana and bring them closer to the regional level. Presumably, this was the intention of those who supported deregulation.   


The Democratic Presidential Campaign

Make-or-Break Period for Edwards As He Woos Iowans
Adam Nagourney
New York Times, August 17, 2003, page A14
http://www.nytimes.com/2003/08/17/politics/campaigns/17EDWA.html?ex=1061956800&en=0389a3d84577deb6&ei=5070

This article reports on the presidential campaign of North Carolina Senator John Edwards. The article includes a box that assesses one of his campaign ads. According to the box, the ad criticizes President Bush for believing that "if we take care of folks at the top, that somehow the whole country will be lifted."

A portion of box that is headlined "accuracy" asserts "President Bush has not said he favors the nation's wealthiest; Mr. Edwards seems to base this on tax cuts and tax breaks that benefit mostly those in upper-income levels."

It is not clear why this comment appears in an assessment of the ad's accuracy. The assertion in the ad is entirely consistent with the article's own assessment of President Bush's tax policy. Both the ad and the article assert that President Bush's tax cut primarily benefits the wealthy, therefore the ad is not inaccurate in the way that the box implies.


Lieberman Rejects Strategy Of Running to the Left
Jim VanderHei
Washington Post, August 19, 2003, page A1
http://www.washingtonpost.com/wp-dyn/articles/A11748-2003Aug18.html

This article discusses Connecticut senator Joe Lieberman's campaign for the Democratic presidential nomination. At one point the article refers to Lieberman's "centrist ideas of supporting Bush on Iraq and shying aware from costly health care proposals." Since the costs of the Iraq war and subsequent occupation are comparable in magnitude to many of the health care proposals being discussed in the campaign, the term "costly" should have either been applied to both the war on Iraq and the health care proposals, or neither.

It is also worth noting that the Centers for Medicare and Medicaid services project that annual health care spending will increase by approximately 3.0 percentage points of GDP over the next decade. This translates into approximately $2 trillion in spending. The Universal Medicare proposal put forward by representative Dennis Kucinch, one of the other Democratic presidential candidates, provides a mechanism for containing these costs, as has been done in every other industrialized nation. It would have been appropriate to note Lieberman's failure to support a plan to prevent this explosion of private sector health care costs. 

The headline of his article should have put the term "left" in quotation marks. While it may be Lieberman's assessment of the political views of his competitors, it is not their own assessment - for example Howard Dean refers to himself as a "centrist," as noted in the article. Also, since large segments of the population, if not outright majorities, report to pollsters that they agree with the views in question (e.g. opposition to the war in Iraq and extending health care coverage) there is no objective basis for characterizing such positions as being on the left.


Health Care Costs

Newest Treatments Create a Quandary On Medicare Costs
Gina Kolata
New York Times, August 17, 2003, page A1
http://query.nytimes.com/gst/abstract.html?res=F50E16F939540C748DDDA10894DB404482

This article discusses the growing use of expensive medical procedures that offer limited benefits to patients. The article notes that the spread of these procedures could lead to soaring costs for Medicare and other government health programs.

It would have been appropriate to include some discussion of some of the factors that lead to such high costs. In many cases the price of the procedures are much higher due the fact that the medical devices being used are subject to patent protection. For example, the article refers to a device that is used to repair heart damage that costs $60,000 per patient. It is unlikely that this device would sell for $60,000 in a competitive market. This price is almost certainly a result of the fact that its manufacturer has a patent monopoly. It is also worth noting that doctors in the United States are paid more than twice as much on average as doctors in other wealthy nations.

This article asserts that the public faces a choice between higher taxes and denying needed medical care to a substantial segment of the population. However, a third option is developing more efficient means of promoting research in medical technology and eliminating the protectionist barriers that keep doctors' salaries artificially high. This third option should have been discussed in a lengthy analysis of this type.


Prescription Drugs Now, Day of Reckoning Later
Robert Pear
New York Times, August 19, 2003, page A17
http://www.nytimes.com/2003/08/19/politics/19MEDI.html

This article discusses the implications of the fact that a prescription drug benefit for senior citizens will add to the federal budget deficit. The main point of the article - presented in the first two paragraphs - is that future generations of workers will be forced to pay for this benefit, when they are forced to pay the interest costs that result from an increased debt.

This sort of article is unusual, because all government spending (such as the invasion and occupation of Iraq) and tax cuts add to the deficit; therefore it would be equally accurate to assert that future generations of workers will pay for any category of public spending or any tax reduction. While this point is often a topic of columns and editorials, it is rarely the theme of a news story.

The claim that the cost of this program is coming at the expense of future workers may be especially dubious in this case. Many children would directly try to assist their parents in paying for their drugs, if their parents lacked the money to purchase essential medicines. Alternatively, many parents will spend down savings that might otherwise be passed down to their children after their death. In such cases, money being paid through tax dollars is replacing money that would otherwise go from children to parents, or vice versa, directly. This suggests that the key issue is how this bill will affect the distribution between families, rather than across generations.

It would have also been helpful to place the projected spending on this bill in some context. The $400 billion cost, over ten years, that is currently projected for the bill is less than 2 percent of the federal budget, and less than one-tenth of projected spending on defense over the next ten years. 


Trade

In South Carolina, Jobs Losses May Erode Support for Bush
Michael Janofsky
New York Times, August 18, 2003, page A1
http://www.nytimes.com/2003/08/18/national/18SOUT.html?th=&pagewanted=print&position=

This article discusses the impact of import competition on manufacturing in Sooth Carolina. At one point the article discusses the positions of the Democratic candidates on trade. It asserts that Senators John Kerry, Joe Lieberman, and Bob Graham are "strong supporters of free trade." This is inaccurate. All three senators have been strong proponents of measures that increase protectionism in the form of copyrights and patents. They also have not sought to lessen or remove the licensing and professional barriers that protect highly paid professionals, such as doctors and lawyers, from foreign competition. While these senators are strong supporters of measures that force less skilled workers to confront foreign competition, they oppose measures that would reduce trade barriers in ways that hurt many corporations or highly paid professionals;  therefore they cannotaccurately be called supporters of free trade.

At one point the article cites the location of a BMW plant in South Carolina as an example of how free trade has benefited the state. Actually, foreign investment is a direct alternative to trade. Many foreign companies, including in the auto industry, have chosen to locate manufacturing facilities in the United States precisely because imports into the country faced barriers.  


Copyrights

Helped by Technology, Piracy of DVD's Runs Rampant in China
Chris Buckley
New York Times, August 18, 2003, page C9
http://www.nytimes.com/2003/08/18/business/media/18PIRA.html?ex=1376539200&en=77346c542d2bc701&ei=5007&partner=USERLAND

This article reports on the large-scale production and distribution of unauthorized versions of DVDs in China. The article notes the failure of the Chinese police to rein in this practice. The article should have included some discussion of the economics involved - reining in the gray market in DVDs would be as difficult as eliminating black market transactions in the former Soviet Union or other centrally planned economies. It also would have been appropriate to note that forcing the payment of royalties on DVDs amounts to a massive transfer of income from China to rich nations. This transfer of income would almost certainly exceed standard estimates of the gains from reducing trade barriers to the markets of the rich countries. .


Italian Pensions
 
A High Quality of Life, A Strained Pension Plan
Eric Sylvers
New York Times, August 20, 2003, page W1
http://www.nytimes.com/2003/08/20/business/worldbusiness/20ital.html

This article discusses the state of Italy's social security system. It raises the possibility of a "financial collapse" of the pension system, and that there would be no money to pay the pensions of future generations of retirees.

It is not clear what a financial collapse would mean, nor how it could be possible that there would be no money for future generations. The pension system is funded primarily by taxes on current workers; if benefit payments exceeded tax revenue for a sustained period of time, then presumably the parliament would at some point either raise taxes or cut legislated benefits. The notion that Italy's parliament would take no action under such circumstances seems somewhat absurd. This sort of extreme negligence has never happened in Italy or any other modern democracy.

When assessing the ways in which the pension system can be made sound, it notes that the retirement age can be raised or immigration can be increased. It is also important to note that benefits could be cut in other ways and that taxes could be increased. The article also notes that Italy has a very low rate of labor force participation among its working age population. This is presumably in part attributable to the lack of jobs, which has led to high unemployment. If the country faces a future labor shortage, which is the main theme of the article, then presumably the unemployment rate will fall and the labor force participation rate will rise, which will substantially alleviate any shortage of workers. 


Industrial Production

Large Gain in Factory Output; Consumer Prices Rise Slightly
Bloomberg News
New York Times, August 16, 2003, page C2
http://query.nytimes.com/gst/abstract.html?res=F60B14FA3F540C758DDDA10894DB404482

This article reports on the release of new data on industrial production and consumer prices. The headline asserts that there was a large gain in factory output. While there was a 0.5 percent jump in industrial production reported in June, this was mostly explained by a reported 3.9 rise in utility production. Output from utilities is primarily driven by unusual weather conditions rather than changes in the economy. Factory output was up by just 0.2 percent. It is also worth noting that the May level was revised down in the new report. Factory output in June was virtually unchanged from the level that had previously been reported for May.