ERR December 15, 2003

Economic Reporting Review
By Dean Baker
December 15, 2003

Outstanding Stories of the Week

New Medicare Plan For Drug Benefits Prohibits Insurance

Robert Pear

New York Times, December 7, 2003, Page A1

http://query.nytimes.com/gst/abstract.html?res=F0081FF938590C748CDDAB0994DB404482

This article reports on a provision of the Medicare prescription drug bill that will prohibit seniors from buying supplemental insurance policies that would cover their share of prescription drug costs. This provision was generally overlooked in the debate prior to the bill’s passage.

November Jobs Report

Jobless Rate in U.S. Falls To 5.9%

John M. Berry

Washington Post, December 6, 2003, Page A1

http://www.washingtonpost.com/ac2/wp-dyn?pagename=article&node=&contentId=A40089-2003Dec5&notFound=true

Employers Balk At New Hirings, Despite Growth

Louis Uchitelle

New York Times, December 6, 2003, Page A1

http://query.nytimes.com/gst/abstract.html?res=F50910FC39590C758CDDAB0994DB404482

Grasping at the Statistics on the Self-Employed

Floyd Norris

New York Times, December 6, 2003, Page B1

http://query.nytimes.com/gst/abstract.html?res=F00610FA39590C758CDDAB0994DB404482

These articles report on the Labor Department’s release of employment data for November. At one point the Post article comments that the unemployment rate has fallen by half a percentage point since it hit 6.4 percent in June. It is worth noting that the unemployment rate was just 6.2 percent in both May and July. While it is possible that the unemployment rate actually jumped 0.2 percentage points in June and then fell back down the following month, it is more likely that this reported increase was simply a random error in the survey.

It is not uncommon to see movements of this type. For example, in April of 2002 the reported unemployment rate jumped 0.3 percentage points to 6.0 percent, from 5.7 in March. It fell back to 5.8 percent in May. It is more likely that monthly movements of this size are attributable to errors in measurement than actual changes in the labor market. If the unemployment rate in June was actually close to the 6.2 percent reported for the prior and following months, then the decline to the 5.9 percent unemployment rate reported for October is far more modest.

Both the Times articles make references to the differences between the job growth reported in the Labor Department’s survey of establishments and the employment growth reported in the household survey. The employment growth reported in the household survey has been substantially higher than the job growth reported in the establishment survey over last six months.

While the establishment survey is almost universally regarded as the more accurate of the two surveys, it does tend to miss turning points in the economy. As a result, it tends to overstate job growth when the economy falls into a recession and understate job growth at the start of a recovery. This is exactly what happened at the end of 2000 and the beginning of 2001 (see Jobs Byte, January 2001 [http://www.cepr.net/Bytes/jobs_byte_010105.htm]), when the establishment survey substantially overstated job growth, and it was necessary to revise down the number of reported jobs in the benchmark revision the following year. If the economy is in fact on a path towards faster job growth, as recent GDP data suggest, then it is likely that the establishment survey is understating the current pace of job growth. In an article by the Bureau of Labor Statistics this issue is discussed in greater detail. [http://www.bls.gov/web/cesbmart.htm].

Restaurant Hiring May Lead the Way To Wider Job Gains

Sherri Day

New York Times, December 10, 2003, Page A1

http://www.nytimes.com/2003/12/10/business/10FOOD.html

This article presents evidence that growth in restaurant employment is providing a leading edge for job growth in the economy as a whole. It reports, “Since the beginning of August, the restaurant business ….has accounted for 18 percent of the 300,000 jobs created in the nation.”

While this is true (there has been an increase of 53,000 jobs in restaurants over this three month period), it is not especially robust growth. In the three months from September to December of 2002 the restaurant industry created 72,000 new jobs. This did not lead to a generalized spurt of job growth economy-wide, as the economy lost jobs in the first seven months of 2003.

Government Spending

Conservatives Criticize Bush on Spending

Dana Milbank

Washington Post, December 6, 2003, Page A1

http://www.washingtonpost.com/wp-dyn/articles/A40090-2003Dec5.html

This article reports on the complaints by some conservatives that President Bush has allowed government spending to continue to increase during his term. The article reports that adjusted for inflation, spending per household is at its highest level since World War II.

Actually, it should not be surprising that government spending would be rising through time. Economists usually expect that spending on most items keeps pace with income; therefore as household income rises it would be reasonable to expect that spending on the goods and services provided by government (e.g. education, healthcare for the elderly, parks, etc.) would also rise roughly in step with household income. Apart from military expenditures, this pattern of rising government spending per household has held for as long as there is data available.

The article also includes a chart that shows the movements in discretionary federal spending over the last decade. The chart uses nominal spending, which cannot provide a basis for meaningful comparisons. The spending figures should have been adjusted for inflation or shown as a share of GDP.

Tax Sheltered Accounts

Treasury Renews Campaign for Tax-Free Savings Accounts

Jonathan Weisman

Washington Post, December 6, 2003, Page E1

http://www.washingtonpost.com/wp-dyn/articles/A40044-2003Dec5.html

This informative article examines a new proposal being considered by the Bush administration, which would create a new type of tax-sheltered account that would replace traditional individual retirement accounts (IRAs). According to the article, the money in these accounts would be taxed when it is first deposited, but all subsequent accumulations would be tax-free.

It is important to note that if this tax treatment were adopted, as opposed to the tax treatment of traditional IRAs (in which money is taxed when it is withdrawn, but not when deposited), it would be disadvantageous to millions of middle-income households. Many middle-income families face a higher tax rate during their working years than after they are retired; therefore it is beneficial to them to be able to defer their taxes until after retirement. This is not an issue for most upper-income households, who will be in the top tax bracket throughout their whole life.

Free Trade and Protectionism

Europeans Plan to Press For Tariffs Against U.S.

Alan Cowell

New York Times, December 6, 2003, Page C1

http://query.nytimes.com/gst/abstract.html?res=FB0A11FA39590C758CDDAB0994DB404482

This article discusses ongoing trade disputes between the United States and European Union. At one point it refers to the W.T.O.’s success in forcing the United States to abandon its tariffs on imported steel as a boost to the organization’s credibility “and to its ability to promote the liberalization of world trade.”

Actually the W.T.O. does not necessarily seek to liberalize world trade. A major responsibility of the W.T.O. has been to increase protectionism by applying U.S.-type patent and copyright protection throughout the world. These forms of protectionism raise prices by several hundred percent above the competitive market price, leading to far larger distortions than the tariff and quota restrictions that have been relaxed through the W.T.O.

Demographic Burdens and the Budget

Bush Can Have Both Guns and Butter, At Least for Now

Niall Ferguson

New York Times, December 7, 2003, Section 4, Page 1

http://query.nytimes.com/gst/abstract.html?res=FB061FF839590C748CDDAB0994DB404482

This article examines the current and future budget problems facing the United States. At one point the article refers to a study that shows that the United States faces a long-term budget shortfall of $45 trillion. It is unlikely that any readers can attach a meaning to this figure – which represents the present discounted value of all future budget deficits. Measured as a share of future GDP, the deficit is 6.6 percent, which means that if future taxes were increased by 6.6 cents on every dollar of income, it would cover this deficit.

It is also worth noting that most of this deficit projection is driven by the assumption that U.S. health care costs continue to grow until they reach 30 percent of GDP. Such an explosion of health care costs would make health care in the United States approximately three times as expensive as in the rest of the world and would almost certainly wreck the U.S. economy. If it is assumed that health care costs only rise for demographic reasons and otherwise move in step with GDP (a feat accomplished by every other industrialized country in the world), then the deficit would be 1.6 percent of future GDP (see “The Forty-Four Trillion Dollar Deficit Scare [http://www.cepr.net/Deficit_Scare.htm]).

The article also includes an assertion that there will be “difficult decisions” about the future of Social Security and Medicare. According to the Social Security trustees report, the Social Security program is currently in sounder financial shape than it has been through most of its existence. While the Medicare program is projected to run short of money in just under a quarter century, this is primarily due to projected increases in health care costs. If the United States is able to contain the growth in health care costs, Medicare could be almost entirely financed at the current level of taxation far into the future.

The Fed and Interest Rates

Will the Fed Stick to Its Plan on Low Rates?

Edmund L. Andrews

New York Times, December 8, 2003, Page C1

http://query.nytimes.com/gst/abstract.html?res=FA0C15F63B590C7B8CDDAB0994DB404482

Fed Rate Hike Still Far Off, Minutes Hint

John M. Berry

Washington Post, December 12, 2003, Page E1

http://www.washingtonpost.com/wp-dyn/articles/A57942-2003Dec11.html

Fed Minutes Suggest Rates Could Stay Low Until 2005

Edmund L. Andrews

New York Times, December 12, 2003, Page C1

http://www.nytimes.com/2003/12/12/business/12fed.html

These articles examine the Fed’s likely course in setting interest rates over the coming year. None of the articles discuss the current account deficit and the dollar. One of the factors that may play a large role in determining long-term interest rates, and will quite likely also affect the Fed’s decisions on short-term interest rates, is the course of the dollar. Its recent decline and the possibility of a continuing future decline, increase the prospects of inflation due to rising import prices, and also make dollar-denominated assets less attractive to investors. If the dollar does continue to decline, it will almost certainly cause long-term interest rates to rise, and it may prompt the Fed to raise short-term interest rates as well.

The Presidential Campaign

Democrats’ Ads Take Swipes At Bush Tax Cuts

Howard Kurtz

Washington Post, December 8, 2003, Page A6

http://www.washingtonpost.com/wp-dyn/articles/A44085-2003Dec7.html

This article evaluates a series of campaign ads being run by the Democratic presidential candidates. At one point the article repeats a criticism made in a similar commentary the previous week (see ERR 12-8-03), that North Carolina Senator John Edwards had misrepresented President Bush’s tax cut in one of his ads. The Senator’s add claims that “a millionaire sitting beside his swimming pool” can pay a lower tax rate than a school teacher, police officer, or secretary as a result of President Bush’s tax cuts. The article claims that Edwards’ charge is inaccurate, because the top tax bracket is 35 percent under President Bush’s tax plan, while middle-income workers pay an income tax rate of 15 or 25 percent.

In fact, the richest families get most of their income from capital gains or dividends, not from wages. As a result of President Bush’s tax cuts, this income is taxed at a 15 percent rate, less than the rate paid by many middle-income workers. Therefore, the situation described in Edwards’ ad is completely accurate.

Optimistic Again, Investors Drive Dow Past 10,000

Ben White

Washington Post, December 12, 2003, Page A1

http://www.washingtonpost.com/wp-dyn/articles/A57999-2003Dec11.html

This article reports on the stock market as the Dow Jones index once again crossed the 10,000 mark. The article includes a quote from an analyst noting the large rise in profits. The analyst then adds that if the market continues to rise then it should be hard for a Democrat to unseat President Bush next year.

The logic of this assessment is somewhat dubious. The reason for the sharp rise in profits has been a substantial and unprecedented redistribution from wages. Wages are now growing at their lowest nominal rate on record, and declining in real terms, in spite of high recent productivity growth. Since the vast majority of the population holds little or no stock and gets the vast majority of their income from their wages, it is not clear that President Bush’s election prospects will be especially good if workers continue to experience falling real wages, even if the stock market is rising.

Medicare Drug Benefit

Medicare Prepares to Cut the Cards

Ceci Connolly

Washington Post, December 11, 2003, Page A37

http://www.washingtonpost.com/wp-dyn/articles/A54452-2003Dec10.html

This article reports on plans for issuing drug discount cards, a feature of the recent Medicare prescription drug plan. At one point the article notes that the bill appropriated $400 billion and then adds “not all that money is spent on medicine.” It then reports that $1 billion will cover administrative costs at the department of Health and Human Services and that $500 million will cover administrative costs at the Social Security Administration.

Actually, much bigger portions of this $400 billion program went to other purposes. At the top of this list is the $90 billion in tax benefits to private firms to persuade them to keep existing retiree drug coverage. The bill also includes $25 billion to subsidize private insurers that compete with the traditional Medicare program.