Economic Reporting Review
By Dean Baker
January 6, 2003

OUTSTANDING STORIES OF THE WEEK

Options Payday: Raking It In, Even as Stocks Sag
David Leonhardt
New York Times, December 29, 2002, Section 3 page 1
http://www.nytimes.com/2002/12/29/business/yourmoney/29CASH.html?pagewanted=print&position=top

This article reports on the large compensation packages that many top executives received in the last year, even as the price of their company's stock fell. Some company executives in serious financial difficulty received pay packages of more than $100 million.


Label Issues Are Delaying Generic Drugs
Melody Peterson
New York Times, January 3, 2003, Page C1
http://www.nytimes.com/2003/01/03/business/03DRUG.html

This article reports on ways in which pharmaceutical companies have managed to delay the approval of labels for generic drugs by the Food and Drug Administration.  By using legal actions to delay approval, drug companies are effectively able to extend their patents, often for several years beyond their normal expiration.


Budget Deficits

Deficit Spending Can Help Republicans
Daniel Altman
New York Times, December 29, 2002, Section 3, page 4
http://www.taxpolicycenter.org/news/deficit_spend.cfm

This article examines the possible political strategy that might explain Republican attitudes towards the deficit. It argues that the public may have tolerated the large deficits of the eighties because they viewed them as protection against excessive government spending.

It is not clear that the public was aware that the deficits of the eighties were qualitatively larger than the deficits of the sixties and seventies. While the deficits of the eighties exceeded 5.0 percent of GDP well into the mid-decade recovery, deficits of the previous two decades rarely exceeded 2.0 percent of GDP, except in recession. However, the media rarely reports deficits as a share of GDP, and most Republican politicians claimed that the eighties deficits were just like the deficits of prior decades. Therefore, it is unlikely that a significant segment of the public was aware of the difference between the size of the deficits in the eighties compared to prior decades.

The article asserts that "President Clinton did have to raise taxes to bulk up social programs." Actually President Clinton cut social programs. Total spending on entitlements plus domestic discretionary spending fell from 14.6 percent of GDP in 1993 to 14.0 percent of GDP in Clinton's 2001 budget. Clinton raised taxes to cut the deficit, not to increase social spending.


Tort Law

GOP Plans New Caps on Court Awards
Jim VandeHei
Washington Post, December 29, 2002, Page A5
http://www.washingtonpost.com/wp-dyn/articles/A48549-2002Dec28.html

This article discusses Republican plans to impose caps on damage awards in civil cases. At one point it reports claims by proponents of such ceilings that "cynical trial lawyers and sympathetic juries have slapped outrageous penalties on companies for regrettable but understandable events, such as a fast-food diner being scalded by spilt coffee."

It would have been appropriate to note that current law already provides significant protection against this possibility. Large jury awards are routinely reduced by the trial judge, or on appeal, as was the case in the example cited here. In this case, a jury awarded an elderly woman more than $3 million dollars in punitive damages because she was badly burned after spilling MacDonald's coffee in her lap. Evidence in the trial showed that MacDonald's had consciously decided to serve extremely hot coffee, because the high heat concealed the taste, thereby allowing them to use a cheaper brand of coffee. There had been several previous instances where customers complained after being burned by the coffee. In this case, both the trial judge and an appellate court substantially reduced the size of the jury's award.

While this article describes the issue of capping awards as a matter between individual plaintiffs and defendants, there is a far more important issue at stake which is not discussed in this article. Punitive damages create the possibility for individuals to act as law enforcement agents when the state lacks the resources or the will to enforce the law. This can be extremely important in circumstances where the government may be too corrupt to enforce laws against powerful corporate interests. If the law enables plaintiffs to collect large punitive damages for egregious behavior, then individual plaintiffs can have both the incentive and the means to penalize lawbreaking activity, even when the perpetrator has powerful political connections. This aspect of the debate should have been discussed.   


Brazil

Departing President Leaves a Stable Brazil
Larry Rohter
New York Times, December 29, 2002, Page A12
http://www.felsberg.com.br/Ingles/Noticias/12.02/30.12.02_departing.html

This article examines the record of Brazil's President, Fernando Henrique Cardoso, as he is about leave office. The article lists a number of President Cardoso's achievments. It would have also been appropriate to note that Brazil's debt increased from 29 percent of GDP when he took office in 1994 to more than 63 percent of GDP at present. This run-up in debt is substantially larger than the run-up in the United States during the Reagan years, which added 18.6 percentage points to the debt-to-GDP ratio.  


Taxes

Bush Aides Rethink Politics of Tax Cuts
Dana Milbank
Washington Post, December 28, 2002, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A45596-2002Dec27.html

This article examines the Bush Administration's political strategy in developing its tax cut package. At one point it describes the package as a "stimulus package." Some of the proposals being suggested, such as a cut in the tax rate on dividends paid on stock outside of retirement accounts, have no obvious stimulatory effect. In fact, this measure would ordinarily be seen as increasing the incentive to save, thereby discouraging current consumption - the direct opposite of stimulus. For this reason, it would be more appropriate to describe the proposal as an "economic package."

The article also should point out that most stockholders will not see the taxes they pay on dividends reduced under President Bush's proposal, since the tax cut would only affect stock held outside of retirement accounts. The majority of stockholders have most of their holdings in retirement accounts. The tax on these accounts will not be reduced under the president's proposal.

At one point, the article describes the stock market as "ailing." Actually the stock market is high by historic measures, with the average price to earnings ratio at close to 18 to 1, measured against trend corporate earnings. (It would be close to 20 to 1 when measured against the current depressed level of earnings.) Historically, the price to earnings ratio has averaged 14.5 to 1.


The Stock Market

Wall St. Down a 3rd Year, Leaving Fewer Optimists
Alex Berenson
New York Times, January 1, 2003, Page C1
http://www.nytimes.com/2003/01/01/business/01STOX.html

This article reports on attitudes among investors to the stock market after the third consecutive year of sharp declines. At one point the article asserts that, "even longtime professional investors say they have been dismayed by how much stocks . . . have fallen from their peak in March 2000."

There is no reason that professional investors - or any competent analyst - should have been surprised by the market's decline over the last three years. At its peak in March of 2000, the price-to-earnings ratio for the market as a whole was 33 to 1, more than twice its historic average. Unless investors were suddenly willing to accept far lower returns on stock than they had been historically, stock prices had to fall back to a level that brought the price-to-earnings ratio closer to its historic average. Therefore the decline of the last three years was entirely predictable, and predicted.
(see "Dangerous Minds: The Track Record of Economic and Financial Analysts," [http://cepr.net/dangerous_minds.htm]).


Investors, Bruised, Hope It's Over
Floyd Norris
New York Times, January 2, 2003, Page C1
http://www.nytimes.com/2003/01/02/business/businessspecial/02MARK.html

This article examines the stock market's prospects for 2003. The discussion focuses largely on the size of the decline from the market peak in 2000 and the fact that there have been three straight years of decline.

Neither of these facts have any relevance to the market's future prospects. The market's current levels are relevant for its future prospects, but its movements in the recent past are not. If the market had gone from a situation where it was overvalued by 100 percent as measured by price-to-earnings ratios and profit projections (roughly the case in 2000), to one where it was over-valued by 50 percent, it would still not be a good investment. The fact that it had just fallen by 25 percent does not change this fact. The fact that the market is a bad investment in these circumstances also would not be changed if the decline had taken place over three years, even though four consecutive years of market declines are
rare. Any serious discussion of the market's prospects should focus on its current level; the direction of recent changes cannot affect its future prospects. 


The Housing Market

New Home Sales Hit Record High Last Month
Jeannine Aversa
Washington Post, December 28, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A46116-2002Dec27.html

This article reports on data released by the Commerce Department, which showed new home sales hitting a new record in November. The data also showed that the average home price in November was 5.8 percent above its year ago level. It describes this increase in housing prices as a positive economic factor, since it has helped to maintain consumption.

There is substantial evidence that the housing market is currently in an unsustainable bubble (see "The Run-Up in Housing Prices: Is It Real or Is It Another Bubble?"). If the housing market is experiencing a bubble, then it is not good news that housing prices continue to outpace inflation, just as the extraordinary run-up in the Nasdaq before its collapse should not have been viewed as good news.


The Dollar

Dollar's Year-End Plunge Increases Prospects for a Decline
Jonathan Fuerbringer
New York Times, January 2, 2003, Page C11
http://www.nytimes.com/2003/01/02/business/businessspecial/02CURR.html

This article discusses the dollar's prospects in 2003. It never mentions the United States current account deficit. The current account deficit for 2003 is almost certain to exceed $500 billion. To sustain a deficit of this level, foreigners would have to buy $500 billion of U.S. financial assets in excess of the foreign financial assets purchased by U.S. individuals and corporations. This rate of foreign capital inflows cannot be sustained for long, since the United States would quickly run out of assets to sell. For this reason, the current account deficit will have to be reduced in the near future, which will require a decline in the dollar.


Medicare

Bush to Propose Changes in Medicare Plan
Robert Pear
New York Times, January 3, 2003, Page A1
http://www.halftheplanet.com/departments/new_content/medicare_bush_proposal.html

This article reports on President Bush's plans to restructure Medicare. It reports that he plans to restructure the current fee for service system and force more beneficiaries into HMO's. The article reports that he intends for this change to save money. It would have been appropriate to note that the use of HMO's to date has raised the cost of Medicare, as several studies have shown. President Bush's proposal would likely to lead to increased profits for insurers, but it does not offer any obvious mechanism for reducing costs.

The article also asserts that Medicare faces a shortfall due to the retirement of the baby boom generation. It would have been worth noting that the Medicare trustees most recent projections show the program will be able to meet all its obligations through the year 2025 with no changes whatsoever. There has been no point in Medicare's history at which the program has been this strong
financially.


Copyrights

Companies in U.S. Sing Blues as Europe Reprises 50's Hits
Anthony Tommasini
New York Times, January 3, 2003, Page A1
http://www.unitethecows.com/forums/printthread.php?threadid=4757

This article reports on the fact that many music hits from the 50's are now coming off copyright in Europe, because the duration of copyright enforcement there is fifty years. The article includes several comments from music company executives, which describe European companies distributing this music as "pirates." There is no logical or legal basis for this pejorative comment. While the companies that distribute material in the public domain may be reducing the profits of competitors that formerly held copyrights on the material, there is nothing illegal or unethical about this
activity.

It would have been appropriate to present the views of an economist on this issue. While copyrights are one mechanism for providing an incentive for creative work, they cannot provide an incentive retroactively. Extending copyright protection for work already produced, as the industry desires, cannot possibly increase incentives. It only raises costs to consumers and leads to increased economic inefficiency. 


Doctors and Malpractice Insurance

W.Va. Surgeons Taking Leave Over Insurance Costs
Gavin McCormick
Washington Post, January 3, 2003, Page A2
http://www.washingtonpost.com/wp-dyn/articles/A64607-2003Jan1.html

West Virginia Doctors Protest Insurance Costs
AP
New York Times, January 2, 2003, Page A12
http://www.siouxcityjournal.com/articles/2003/01/03/news/breaking_news/f41dfd0bfcceaeab86256ca2001fd6bd.txt

These articles (which were derived from a single article) report on a strike by surgeons in West Virginia over the high cost of malpractice insurance. The articles provide no information on either the average malpractice premium or the average earnings of surgeons in West Virginia.

Both articles include the example of a surgeon who claims that he paid $73,000 in malpractice premiums last year. Without knowing this doctor's record, it is impossible to determine whether this fee is high or low. If this particular doctor had a poor history, and often injured his patients, then a premium of this amount could be appropriate.


South Africa

Disillusion Rises Among South Africa's Poor
Rachel L. Swarns
New York Times, December 31, 2002, Page A4
http://www.nytimes.com/2002/12/31/international/africa/31AFRI.html?ex=1041915600&en=98ff6aa4baf0bc52&ei=5007&partner=USERLAND

This article reports on the disenchantment of many poor South Africans with their current economic situation. The article points out that the economy has worsened in many respects, including a sharp rise in the unemployment rate, since the country adopted democratic rule.

While the article contrasts the situation before and after the end of Apartheid, the more obvious factor that is hurting the economy is the adoption of neo-liberal policies by the post-Apartheid government. The rapid removal of import barriers - some self imposed and others the result of sanctions - had a devastating impact on South Africa's manufacturing sector.