Economic Reporting Review
By Dean Baker
December 1, 2003

OUTSTANDING STORIES OF THE WEEK

2 Bills Would Benefit Top Bush Fundraisers
Thomas B. Edsall
Washington Post, November 22, page A1
http://www.washingtonpost.com/wp-dyn/articles/A5053-2003Nov21.html

This article examines the benefits that some major contributors to President Bush's campaign will receive in the Medicare and energy bills currently being considered by Congress. This analysis is especially useful, since many prior articles asserted that members of Congress were motivated by ideology in their votes on the Medicare bill.

Drug Benefit's Impact Detailed
Edward Walsh and Bill Brubaker
Washington Post, November 26, page A10
http://www.washingtonpost.com/wp-dyn/articles/A14673-2003Nov25.html

This article discusses some of the details of the Medicare proposal passed by Congress. It shows how different groups of seniors will be affected by the legislation.

Pay Package at Risk? Quick, Get Creative
Gretchen Morgenson
New York Times, November 23, 2003, Section 3 page 1
http://www.nytimes.com/2003/11/23/business/yourmoney/23watc.html?ex=1070427600&en=0062909905b15b1d&ei=5070

This article reports on some creative bookkeeping at Union Pacific, one of the country's largest transportation companies, which allowed its top executives to collect large bonuses. If profits had been calculated in the standard manner they would have missed their performance target.

Medicare

For White House, 2 Bills Offer Route to Political High Ground
Elisabeth Bumiller
New York Times, November 23, 2003, A1
http://www.peaceredding.org/For%20White%20House,%202%20Bills%20Offer%20Route%20to%20Political%20High%20Ground.htm

This article reports on the political implications of the passage of the Medicare bill being debated by Congress. It asserts that the passage of the bill will allow the administration to claim the "high ground" on the issue in the 2004 election. It is not clear that this will be the case. The benefit package in the bill is not very generous, and will still leave many seniors with high drug costs. Also, seniors will not actually be able to get the new insurance until 2006. This contrasts with President Bush's tax cuts, most of which went to the wealthy, which took effect as soon as he took office. Prior articles had noted the possibility that the Medicare plan could prove an albatross for Republicans, based on polling data (e.g "Possible Voter Backlash Feared on Drug Benefit Measure," Washington Post, August 3, 2003, page A9).

House Set to Vote on Drug Bill
Helen Dewar and Amy Goldstein
Washington Post, November 22, page A9
http://www.washingtonpost.com/wp-dyn/articles/A5037-2003Nov21.html

As Filibuster Threat Fades, Medicare Bill Nears Vote
Robert Pear and Robin Toner
New York Times, November 22, 2003, A11
http://query.nytimes.com/gst/abstract.html?res=F00D11F9395F0C718EDDA80994DB404482

Medicare Bill Squeezes Through House at Dawn
Helen Dewar and Amy Goldstein
Washington Post, November 23, page A1
http://www.washingtonpost.com/wp-dyn/articles/A5882-2003Nov22.html

Health Care Bill Would Revive Public-Private Alliance
Bill Brubaker
Washington Post, November 23, page A7
http://www.washingtonpost.com/wp-dyn/articles/A6934-2003Nov22.html

Sharply Split, House Passes Broad Medicare Overhaul; Forceful Lobbying By Bush
Robert Pear and Robin Toner
New York Times, November 23, 2003, A1
[link not available]

These articles report on the progress of the Medicare prescription drug bill in Congress. Several of the articles include assertions that the bill would place the traditional Medicare plan in competition with private plans. This is inaccurate. The traditional plan already competes with private plans. The bill would change the nature of this competition by providing additional subsidies to private plans, preventing Medicare from using its purchasing power to lower drug costs, and by making it easier for private plans to "cherry pick" the healthiest beneficiaries.

It also changes the nature of the guarantee that Medicare provides to seniors. Currently the seniors are guaranteed that they will be able to purchase the traditional plan, but have the option to choose a private alternative, if they believe it provides better benefits. This guarantee would be eliminated in certain "test" markets under the bill, with seniors only guaranteed a voucher sufficient to purchase a private plan. They may be forced to pay several thousand dollars, if they choose to stay in the traditional plan.

Several of these articles assert that this change is part of a desire to make Medicare more efficient. It is not clear that this is the goal of these changes. The evidence to date indicates that private plans are a less efficient way to provide benefits. It is possible that Congress is motivated more by a desire to benefit powerful political backers in the pharmaceutical and insurance industry, than a desire to make the program more efficient (see "2 Bills Would Benefit Top Bush Fundraisers," Washington Post, November 22, page A1).

These articles include very little information on some of the most important features of the bill - most notably which of the formulas will be indexed. This will make an enormous difference to the future of Medicare. For example, the bill provides that individuals earning more than $80,000 a year pay an additional premium for their benefit. At present, this would only affect the richest 4 percent of beneficiaries. However, if this figure is not indexed to wages, in twenty years most middle-income retirees will find themselves paying higher premiums as a result of this clause.

The article by Brubaker describes Medicare as "financially hobbled." This assessment differs from the Medicare trustees' report. The most recent report shows that the program can pay all benefits until 2028 with no changes whatsoever. The article does not indicate the basis for the assertion that Medicare faces financial problems.

Senate Vote Clears Way for Drug Benefit, Competition
Amy Goldstein and Helen Dewar
Washington Post, November 26, page A1
http://www.washingtonpost.com/wp-dyn/articles/A12583-2003Nov25.html

An Imperfect Compromise
Robin Toner
New York Times, November 25, 2003, A1
http://www.nytimes.com/2003/11/25/politics/25ASSE.html

These articles discuss the meaning and the politics of the Medicare drug bill after its passage. Neither article discusses the role of the Republicans' political backers in shaping this legislation, thereby minimizing their importance to the debate.

For example, at one point the Post article asserts that "ideological conflicts" have obstructed changes to Medicare in the past. It is not clear that ideological conflicts have been a major factor in this debate in the past or at present. The Republicans have been anxious to pass legislation that promotes the interests of the pharmaceutical industry and the insurance industry, which this bill does (see "2 Bills Would Benefit Top Bush Fundraisers," Washington Post, November 22, page A1). They also want to minimize the tax burden faced by the wealthy, another important source of political support. While this bill could lead to higher taxes at some point in the future - if it does not provide a basis for cuts in Medicare to offset the cost of the drug benefit - it immediately includes another substantial tax break for the wealthy in the form of health savings accounts.

Democrats have historically relied on strong support from seniors who value the security provided by programs like Medicare and Social Security. Some of the provisions in this bill could jeopardize that security - such as the proposals to restructure competition in a way that puts the traditional program at a huge disadvantage and also the ends the guarantee that seniors will be covered by the traditional program, if they choose.

The debate between competing Medicare proposals by Republicans and Democrats seems entirely explainable by referring to their respective political backers. The article presents no evidence whatsoever that ideological considerations have been a major factor.

This article also asserts that Medicare is "forecast to run out of money in two decades." Actually, the date at which the program is first expected to have its trust fund depleted is 2028, which is twenty-five years in the future. More importantly, through most of its history Medicare has been projected to face long-term funding shortfalls. Its current financial situation is actually relatively strong.

The Budget

Alarms Sounded On Cost of GOP Bills
Jonathan Weisman
Washington Post, November 24, page A1
http://www.washingtonpost.com/wp-dyn/articles/A8763-2003Nov23.html

Spending Discipline Proves Unfashionable This Year
David E. Rosenbaum
New York Times, November 25, 2003, Page A18
http://www.nytimes.com/2003/11/25/politics/25BUDG.html

These articles examine some of the long-term fiscal implications of bills that have recently been approved by Congress. The discussion provides little information to readers, since the spending figures are expressed in dollar terms. Since most readers have little familiarity with the size of the budget and the economy, especially over the next ten years (it is not always clearly indicated that the spending figures refer to ten-year totals), there is little basis for readers to assess the importance of the numbers cited in these articles. This is especially true for the spending projections that refer to the next ten-year period. Almost no one will have a clear sense of the projected size of the budget and the economy over the period 2014-2023.

The articles would be far more informative if spending and revenue figures were expressed as percentages of the budget and/or GDP.

It is also important to note that some of the assertions in these articles rest on dubious assumptions. For example, cost projections for the Medicare drug programs assume either a radical change in the way the rest of the world pays for its prescription drugs, or that the difference between prices in the U.S. and elsewhere will continue to increase. The latter seems extremely unlikely, unless there is a massive increase in repression to prevent the free flow of drugs across national borders.

The Post article also includes an assertion from former Senator Warren Rudman, that large budget deficits will lead to "inevitable currency devaluations." Actually, the large trade deficit that the United States is currently running will force a large currency devaluation at some point. According to standard economic theory, large budget deficits will lead to higher interest rates, which would increase the value of the dollar.

The Economy

Federal Reports Show Economy Growing More Robust
Fred Barbash
Washington Post, November 27, page E2
http://www.washingtonpost.com/wp-dyn/articles/A16732-2003Nov26.html

Reports Indicate the Economy Is Continuing Its Expansion
Bloomberg News
New York Times, November 27, 2003, Page C5
http://www.nytimes.com/2003/11/27/business/27econ.html

These articles report on a series of releases on new economic data. At one point the Post article discussed the Federal Reserve Board's Beige Book, which presents accounts of economic activity around the nation prepared by the twelve Federal Reserve district banks. The article describes the report as largely upbeat, noting that "with a few exceptions, all the regional Federal Reserve banks expect holiday sales to 'match or exceed last year's levels.'" It is important to realize that holiday season in 2002 had the worst sales growth since the 1990-91 recession. Therefore, the expectation that this year's sales to match or exceed those of last year is not necessarily a very positive picture.

The Times article reports that the Mortgage Bankers Association mortgage refinancing index was up 27.8 percent from its level the prior week. It is worth noting that this increase is from an extremely low level. The new reading is still down nearly 75 percent from the peaks hit at the beginning of the summer.

Venezuelan GDP

Venezuelan Economy Declines Again
Bloomberg News
New York Times, November 22, 2003, Page B3
http://query.nytimes.com/gst/abstract.html?res=F20716FD385F0C718EDDA80994DB404482

This article reports on data for Venezuela's GDP in the third quarter. The article reports that GDP declined, based on the fact that third quarter GDP was 7.1 percent below its year ago level. In fact, Venezuela's GDP is growing at present, as it recovers from the impact of an oil strike that ran from the fourth quarter of 2002 into the first quarter of this year. Third quarter real GDP was up 7.1 percent from the second quarter.

Fiscal Restraint in Europe

France and Germany Given More Time to Curb Deficits
Mark Landler and Paul Meller
New York Times, November 26, 2003, Page C1
http://www.nytimes.com/2003/11/26/business/worldbusiness/26euro.html

This article reports on the decision by the euro zone's finance ministers to give France and Germany another year to meet the deficit target of 3.0 percent of GDP laid out in the euro zone's stability pact. At one point the article expresses concern about the implications of this precedent for some of the eastern European countries that will soon join the euro zone. It notes that several of these countries have run large deficits in the recent past.

In fact, the precedent is likely to have little impact on these nations' abilities to run deficits. These nations will have to convince private financial markets to buy their debt, just as do states in the United States. If they were to run large deficits, without any obvious means of repaying their debt, they would quickly find themselves unable to obtain credit. There is no obvious reason that the other euro zone countries would have to intervene to impose fiscal discipline.

Energy Bill

Senate Energy Bill Is Blocked
Dan Morgan
Washington Post, November 22, page A1
http://www.washingtonpost.com/wp-dyn/articles/A5016-2003Nov21.html

This article reports on the status of the energy bill being considered by Congress. At one point the article reports Republican claims that the bill will create 800,000 jobs. It is important to note that this figure is essentially a fabrication. There is no serious economic analysis to support this estimate. It would have been appropriate to note this fact, rather than allowing this number to appear without comment.

Trade

New Doubts About Bush Trade Agenda
Paul Blustein
Washington Post, November 22, page E1
http://www.washingtonpost.com/wp-dyn/articles/A5204-2003Nov21.html

Labor Leaders Add Their Heft to Dean Rallies
Michael Slackman
New York Times, November 23, 2003, Page A24
http://query.nytimes.com/gst/abstract.html?res=FA0715FD3B5F0C708EDDA80994DB404482

These articles both make references to U.S. trade policy. Both articles include references to the promotion of "free-trade." The United States has never had the policy of promoting free trade in general. While it has generally sought to reduce barriers to trade in manufactured goods, which has the effect of putting U.S. manufacturing workers in competition with low paid workers in developing countries, it has not sought to lower trade barriers in other areas.

Both the Clinton and Bush administration have been willing to leave in place, or even raise, barriers to trade in high paid professional services, such as those provided by doctors and lawyers. They have also made increasing patent and copyright protection one of the central focuses of their trade policy. It is therefore inaccurate to imply that the promotion of free trade has been a policy of recent administrations.