Economic Reporting Review
By Dean Baker
July 15, 2002

OUTSTANDING STORIES OF THE WEEK

Bush Failed To Stress Need To Rein In Stock Options
Gretchen Morgenson
New York Times, July 11, 2002, Page B1
http://www.nytimes.com/2002/07/11/business/11PAY.html

This article discusses some of the way that stock options have encouraged the sort of accounting abuses that have been made public in the last year.

Accounting Bill Draws Scrutiny
David S. Hilzenrath
Washington Post, July 10, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A46796-2002Jul9.html

This article examines the accounting reform bills currently being considered by the House and Senate. It points out problems and limitations in both bills.

$100 Million More for SEC Not Enough, Ex-Officials Say
Anitha Reddy
Washington Post, July 10, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A46673-2002Jul9.html

This article assesses President Bush's request for $100 million of additional funding for the SEC against the need perceived by former SEC officials. It points out that this request would still leave funding levels significantly below the amount requested by the Republican commissioner who run at the agency at the beginning of the Bush administration.


Budget Deficit Projections

White House Expected to Project A Deficit Topping $150 Billion
Richard W. Stevenson
New York Times, July 12, 2002, Page A15
http://www.nytimes.com/2002/07/12/politics/12DEFI.html

This article reports on new budget projections from the Office of Management and Budget, which are expected to show a deficit for 2002 of between $150-$160 billion. This deficit would be far larger than the projections from earlier in the year, which showed a budget that was almost in balance.

The article comments that the change is "largely reflecting a downturn in tax receipts from capital gains because of the weak stock market." It is worth noting that the lower than expected capital gains tax revenue has nothing to do with the current weakness of the stock market. The capital gains taxes that are collected in the current year are based almost entirely on stock sales in 2000 or 2001. (Taxes are due in April of 2002 on capital gains realized in 2001.) The levels of the stock market in 2000 and 2001 were known at the time that budget forecasters were making their projections for fiscal 2002.

The fact that these forecasters seriously overestimated capital gains tax revenue for 2002 was due to their failure to properly account for the effect of the weak stock market in the prior two years, not their inability to forecast the downturn in 2002. Some economists tried to warn these forecasters of their mistake at the time (e.g. see "Letter to Dan Crippen, Director of the Congressional Budget Office, 2-26-02 [http://www.cepr.net/Dean%20CBO%20letter.htm]).


The Stock Market Slide

2 Key Indexes Skid to Levels Seen in 1997
Alex Berenson
New York Times, July 11, 2002, Page C1
http://www.nytimes.com/2002/07/11/business/11STOX.html

This article reports on the sharp fall in the stock market the previous day. In assessing the market's prospects it presents the views of several analysts who claim that investors have become irrationally pessimistic. It is worth noting that the stock market is still priced at about 20 times its cyclical peak profits (2000). This is about one-third higher than its historical average price to earnings ratio of 15 to 1. Unless investors in stock are willing to accept considerably lower returns than they have in the past, the market continues to be irrationally over-valued.


June Employment Data

Jobless Report Shows Rebound Has Weakened
Neil Irwin
Washington Post, July 6, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A30193-2002Jul5.html

U.S. Jobless Rate At 5.9% in June, A Slight Increase
David Leonhardt
New York Times, July 6, 2002, Page A1
http://query.nytimes.com/search/abstract?res=F40F10FC35550C758CDDAE0894DA404482

These articles discuss the Labor Department's release of employment data for June. Both articles refer to the views of economists that a double-dip recession is unlikely. It is worth noting that very few economists predicted the onset of the recession.

In assessing the economy's near-term prospects, neither piece mentions the impact of cuts in state and local spending (or tax increases) due to their current fiscal crises. These governments account for approximately 12 percent of GDP. In an economy that currently has weak growth in consumer spending and slowing construction spending, this impact can be substantial.

At one point, the Post notes that the average workweek was reported as rising by 0.3 percent, which it takes as evidence that workers are putting in more hours, even though employers are not hiring more workers. The data for average weekly hours are erratic, and a reported change of this magnitude does not necessarily reflect what is actually happening in the economy. There were comparable increases in the reported workweek in September, November, and December of last year.


Health Insurance Premiums

Health Care's Soaring Cost Takes a Toll
Ceci Connolly
Washington Post, July 9, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A41642-2002Jul8.html

This article discusses the impact that rising health insurance premiums are having on employers and workers. The first line asserts that "for the first time in nearly a decade, rapidly rising health care costs are squeezing governments, private businesses and patients who say they cannot afford the return to double-digit increases." Actually, 2002 was the third consecutive year in which there were double-digit increases in insurance premiums (see "High Cost of Being Well: Benefits at a Premium," by Milt Freudenheim, New York Times, October 16, 2001, page C1 http://query.nytimes.com/search/abstract?res=F3091EFF345B0C758DDDA90994D9404482).


At one point the article claims that experts agree that "if there is one overarching cause of soaring health care expenditures, it is Americans' insatiable appetite for each and every medical treatment." It is not clear that this is the main cause of high health care prices in the United States. According to research by the Australian Productivity Commission, the United States pays about twice as much, for the same drugs, as other OECD nations. If drug prices were the same in the United States, it would save the country about $60 billion annually. This would lower health care costs by approximately 5 percent. Similarly, the United States pays its doctors more than twice as much as the average for other OECD nations. If the United States paid its doctors the same amount as other rich nations, it would save the country about $80 billion a year, reducing expenses by close to 6 percent.

The third major difference between the United States and most other OECD countries is that our system of private health care insurance has far higher administrative expenses than the universal health systems in place elsewhere in the OECD. Administrative costs account for more than one quarter of total health care spending in the United States. These higher costs, rather than better care, are the more obvious cause of expensive medical care in the United States.


Patent Supported Drug Research

Committee Backs Expansion Of Access to Low-Cost Drugs
Robert Pear
New York Times, July 12, 2002, Page A15
http://www.nytimes.com/2002/07/12/politics/12HEAL.html

This article reports on a vote by a Senate Committee which approved a bill that would limit the ability of drug companies to gain automatic patent extensions when filing suits against generic competitors. At one point the article quotes Alan F. Holmer, the president of the pharmaceutical industry's trade group, who criticized the bill, "this legislation undermines the patent system that has brought us a cure for polio, four new medicines to combat Alzheimer's disease, a breakthrough treatment for leukemia and every AIDS treatment we have now."

This claim is wrong since many of these breakthroughs actually came about through research supported by either the government or private universities or charities. For example, the polio vaccine was developed by Jonas Salk who was working under a grant from the March of Dimes charity. While he took out a patent for the vaccine, this was only to ensure that no one else could do so. He immediately placed the patent in the public domain so that the vaccine would be as widely available as possible.

According to economic theory, patents create perverse incentives that impede medical progress. For example, the patent system provides incentives for secrecy, falsifying results, and pursuing copycat research. The latter has little social value, but that may allow a firm to get around a competitor's patent. It would have been appropriate to point out the inaccuracy of Mr. Holmer's statement and to present the views of an economist on the relative efficiency of research supported by patents versus the public or non-profit sector.


European Farm Subsidies

European Union to Tackle Overhaul of Farm Subsidies
Steven Erlanger
New York Times, July 11, 2002, Page A9
http://www.nytimes.com/2002/07/11/international/europe/11EURO.html

This article reports on a proposal being considered by the European Union which would reduce the level and change the structure of its system of farm subsidies. The article twice comments that these subsidies harm developing nations, at one point saying that subsidized food dumped in developing nations is "ruining their domestic markets." It is worth noting that food which is sold at a low cost to developing nations due to subsidies has the exact same effect on their markets as food that is sold at a low cost due to high productivity. If the subsidies on exports to developing nations are harmful to their economies, then selling them food that is cheap as a result of technological innovations, such as bio-engineering, is also harmful.

It is also worth noting that developing nations could in principle prevent damage to their domestic market from low cost food by erecting trade barriers. The W.T.O. and other trade agreements can make it more difficult to impose such protectionist measures.


Brazil

Skepticism Greets Leftist's Makeover in Brazil
Larry Rohter
New York Times, July 7, 2002, Page A3
http://query.nytimes.com/search/abstract?res=F60717FB35550C748CDDAE0894DA404482

This article discusses the presidential campaign of Luiz Inacio da Silva, the candidate of the Workers' Party in Brazil. At one point it notes the sharp decline of Brazil currency and stock market in recent weeks, which it attributes to "fears that Mr. da Silva and his party are still firebrand revolutionaries at heart and will govern that way if he becomes president."

It is not clear that concern about the prospect of Mr. da Silva taking power is the main factor driving markets. The current government has built up a massive foreign debt. According to the World Bank, the servicing of this debt currently accounts for 90 percent of Brazil's export earnings. It is possible that the markets are concerned that Brazil will be unable to meet its debt obligations regardless of who wins the elections this fall.

It is worth noting that a Times article the previous week also attributed the markets' slide to concerns over the prospect of Mr. da Silva winning the election (see "Mexico and Brazil Sign Bilateral Trade Pact, " by Tony Smith, New York Times, July 4, 2002, Page W1 http://query.nytimes.com/search/abstract?res=F20D10FC39550C778CDDAE0894DA404482).



The State of the Economy

U.S. Consumers Keep the Faith, Despite Woes
Daniel Altman
New York Times, July 8, 2002, Page A1
http://www.nytimes.com/2002/07/08/business/08ECON.html

This article discusses the state of the economy in light of the most recent data. It asserts that, "the evidence suggests that the economy ... is still on track to grow 3 percent for the spring and summer quarters." It is not clear what evidence the article uses to support this assessment. The available data for the second quarter indicate that consumption, which accounts for 70 percent of the economy, is growing at close to a 1.0 percent annual rate. It seems unlikely that consumption growth will accelerate significantly in the immediate future, since the savings rate is already very low, and with virtually no job growth, and real wage growth close to zero, real income is rising very slowly. Also, with the sharp fall in the stock market in the last two years, it is reasonable to expect some decline in consumption due to the reversal of the wealth effect (high stock prices leading people to consume more).

The other components of demand are unlikely to improve the picture. Housing will likely be flat or slightly down from its high levels earlier in the year. Non-residential construction will likely fall further, as more projects reach completion. Equipment investment remains weak by all indications, and the trade deficit is likely to deduct 1.0 to 2.0 percentage points from the growth rate in the current quarter. In addition, budget cutbacks by deficit-ridden state and local governments will also slow growth in the next few quarters. The end of inventory depletions will provide some boost, but will not come close to offsetting these negative factors.

It would have been useful if the article had presented the views of an economist who had not been surprised by the onset of the last recession when discussing economists' assessment of the economy's prospects.

At one point, the article presents the views of a real estate analyst that, "people have come to the realization in the last 12 months that they can make more money by investing in a new home than investing in the stock market or mutual funds." If this assessment is accurate it is evidence that the nation's housing market is facing a bubble. Housing prices, like stock prices, cannot continue to rise indefinitely just because people think housing is a good investment.


U.S. Spending on AIDS in Africa

Americans on AIDS in Africa: Help and Discipline Needed
Richard Morin and Claudia Deane
Washington Post, July 6, 2002, Page A3
http://www.washingtonpost.com/wp-dyn/articles/A30670-2002Jul5.html

This article discusses the results of a new poll showing public sentiments towards assisting Africa in combating its AIDS epidemic. At one point the article presents the answer to a question as to whether the country is spending too much or too little on helping Africa combat AIDS.

Past research on public attitudes towards foreign aid indicates that this question is virtually pointless. The public has almost no idea how much the United States spends on foreign aid, with most people thinking that a large share of the budget is devoted toward this purpose. In reality, about 0.2 percent of the budget is devoted to foreign aid, with President Bush's latest commitment to combat AIDS projected at less than 0.01 percent of federal spending over the next three years.

Most people tend to answer that the United States is either spending too much or about the right amount on foreign aid, when the question is posed this way. However, when asked how much money the United States should spend, the responses average between 5-15 percent of its budget. This would require more than a 25-75 fold increase in the foreign aid budget.

The public would be better informed on this issue if reporters expressed aid figures, as well as other budget figures, as shares of the total budget. Only a tiny fraction of readers is sufficiently familiar with the budget to recognize whether a specific expenditure is large or small when only informed of the dollar amount.


Accounting Scandals

Senate Set For Action To Reform Audit Sector
David S. Hilzenrath
Washington Post, July 7, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A33602-2002Jul6.html

This article reports on the progress in the Senate of accounting reform legislation. At one point the article comments that, "one concern of the industry [accounting] and other businesses is that the bill could unreasonably increase their vulnerability to lawsuits." While these interest groups claim that they are concerned about "unreasonable" exposure to lawsuits, they are undoubtedly also opposed to any measures that increase their exposure to legal liability.


Recycling Bottles and Cans

Can or Bottle, Bill Wants Makers to Pay For Recycling
Greg Winter
New York Times, July 11, 2002, Page A16
http://www.nytimes.com/2002/07/11/politics/11RECY.html

This article discusses a bill put forward by Vermont Senator James Jeffords, which would require that 80 percent of all cans and bottles are recycled within two years of the bill's passage. The article reports the objections of the soft drink industry, that this requirement would force the industry to "spend up to $10 billion to get a national recycling system operating."

It is difficult for most readers to know the significance of the industry's figure. If each person used one can or bottle a day, on average, then this would come to just over 100 billion bottles year or more than 500 billion over five years. This means that if the high end of the industry's cost estimate is accurate, it would come to less than 2 cents per can or bottle, if the start-up costs were fully recovered over five years.