Economic Reporting Review
By Dean Baker
July 21, 2003
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OUTSTANDING STORIES OF THE WEEK
Earnings Are Worse Without The Icing
Gretchen Morgenson
New York Times, July 13, 2003, Section 3 page 1
http://query.nytimes.com/gst/abstract.html?res=F40D13F73A590C708DDDAE0894DB404482
This article reports on an accountant’s assessment of the reported
earnings of the S.& P. 500 corporations. According to the article, the
accountant found that earnings in 2002 would be 42 percent lower than reported
if items such as newly issued stock options were properly counted.
Teenagers Facing Hard Competition For Summer Jobs
Kate Zernike
New York Times, July 14, 2003, Page A1
http://www.pushhamburger.com/competition.htm
This article discusses the difficulties that many teenagers are
facing in finding summer jobs, both because fewer of these jobs exist than in
prior summers, and also because they frequently find that they must now compete
against more experienced workers for the jobs that are available.
Budget Woes Trickle Down
Dale Russakoff
Washington Post, July 15, 2003, page A1
http://www.washingtonpost.com/wp-dyn/articles/A56160-2003Jul14.html
This article discusses how cutbacks in support at the federal and
state level have frequently led to cutbacks of government services and/or tax
increases at the city and county level.
___________________________________________________________________________________________________
Medicare Drug Benefit
Democrats Attack G.O.P. in TV Ads on Medicare Bill
Carl Hulse
New York Times, July 12, 2003, page A8
http://query.nytimes.com/gst/abstract.html?res=FB0816F835590C718DDDAE0894DB404482
This article reports on an ad campaign sponsored by House Democrats
opposing the Medicare prescription drug bill approved by House Republicans. The
article does not clearly identify the key issue between Democrats and
Republicans on this plan. It asserts that the Republican proposal links the drug
plan to “structural overhauls to increase the role of private health plans in
Medicare and keep the program solvent.”
The way the Republican proposal is designed, it will almost certainly destroy
the existing Medicare program. The vast majority of Medicare expenses are
incurred by a very small segment of beneficiaries; roughly 10 percent of the
beneficiaries account for 80 percent of spending. Under the Republican proposal,
private insurance plans can sign up relatively healthy beneficiaries. If they
can serve these people for less money than it costs the traditional program to
serve relatively sick beneficiaries (although at a higher cost than the
traditional program would pay for these healthy people), then funding for the
traditional program would be cut accordingly. If beneficiaries wanted to stay in
the traditional program, they would be forced to pay the difference between
these costs themselves. Such a system would very quickly lead to the destruction
of the traditional Medicare program and leave beneficiaries in private plans of
questionable quality. Since this is the key issue between Republicans and
Democrats, it should have been clearly presented in the article.
The claim that the Republicans are concerned about the program’s solvency is
also dubious. The program is projected to be fully solvent for the next
twenty-five years. Medicare has never gone through a twenty-five year period
without a major change or tax increase; therefore it seems implausible that this
distant financial threat is suddenly the basis for action by Republican
politicians.
Compromise Is Seen as Harder to Find on Medicare Drugs
Robin Toner and Robert Pear
New York Times, July 13, 2003, page A1
http://query.nytimes.com/gst/abstract.html?res=FA061FFB34590C708DDDAE0894DB404482
House Names 8 to Negotiate on Medicare Bill
Robert Pear
New York Times, July 15, 2003, page A16
http://www.nytimes.com/2003/07/15/politics/15MEDI.html
These articles report on efforts to produce a compromise between
the prescription drug bill passed by the House and Senate. The article by Toner
and Pear implies that the risk that no bill will pass represents a major loss to
the nation’s elderly, “for 40 million elderly and disabled Americans on
Medicare, that means the long-promised drug benefits, which could cover one
third or more of a beneficiary’s costs for prescriptions [are] not a sure
thing.”
If either bill became law, the average beneficiary would still pay more for
drugs in 2006 than they did when President Bush promised the benefit in the 2000
campaign. With these plans in place, in 2013 -- the last year of the budget
projection period -- the average beneficiary would be paying almost twice as
much for prescription drugs as in 2013. Therefore, it is not clear that the
elderly have very much at stake in this process.
Both articles include repeated references to the House Republican proposal’s
measures to install market competition into Medicare that are not fully
accurate. For example, at one point the first article asserts that under this
plan, “if the traditional program cost more than the private plans, elderly
beneficiaries would have to pay higher premiums to reflect the extra cost.”
As noted above, there already is competition within Medicare -- if private
health care plans can provide beneficiaries with better services for the same
price that it would cost Medicare to service the same beneficiary, then they are
free to do so. Insofar as they do so at lower costs than the existing system,
then they can keep the difference in profit. The experiment with this system has
shown that the private sector is less efficient, with most private insurers
complaining that they were losing money on their Medicare beneficiaries -- even
though they raised the total cost to the program, since the fees they received
to treat these beneficiaries have actually been somewhat larger on average than
the cost of serving people within the traditional program. The Republican
proposal essentially involves rigging the competition in such a way as to ensure
that the traditional program loses out, even though it will lead to worse
service for beneficiaries and/or higher costs.
Medicare Bill Has House Conservatives Grumbling
Juliet Eilperin
Washington Post, July 15, 2003, page A4
http://www.washingtonpost.com/wp-dyn/articles/A55936-2003Jul14.html
This article reports on the debate around the Republican
proposals for a Medicare drug benefit. At several points it presents comments
implying that Medicare and Social Security are in bad financial straits and in
need of reform. These assertions contradict the reports from the Medicare and
Social Security trustees. According to the trustees of these programs, Medicare
can pay all benefits for 25 years with no changes whatsoever and Social Security
can pay all benefits for 40 years. In both cases, the programs are projected to
be more financially secure at present than they have been for most of their
prior existence. The article does not indicate the basis for its assertions that
the programs face financial difficulties.
Drug Import Bill’s Sponsor Fires Back at Industry Ads
Ceci Connolly
Washington Post, July 15, 2003, page A4
http://www.washingtonpost.com/wp-dyn/articles/A56047-2003Jul14.html
This article reports on Representative Rahm Emanuel’s response
to drug industry ads criticizing a bill he proposed, which would facilitate the
importation of low-cost drugs. At one point the article contrasts drug prices in
Canada and Europe with U.S. prices, noting that the former are “government
set.” It would be appropriate to note that the U.S. prices are high because of
a government guaranteed monopoly to patent holders. Both systems involve
government intervention. The main difference is that the U.S. government
intervention is more favorable to the industry and less favorable to the
consumer.
Hormone Free Dairy Products
Monsanto Sues Dairy in Maine Over Label’s Remarks on Hormones
David Barboza
New York Times, July 12, 2003, page B1
http://www.goupstate.com/apps/pbcs.dll/article?AID=/20030712/ZNYT04/307120368/1026/business
This article reports on plans by Monsanto to sue dairies over labels
that say that their milk came from cows that did not receive growth hormones. At
one point the article reports that the Center for Global Food Issues of the
Hudson Institute is “concerned about what it considers misleading food
labeling.”
It is not clear that it considers this labeling misleading. While it is making
this charge, there is no information presented in this article to indicate that
this labeling is not fully accurate in every respect. The concern described in
this article is that consumers, when given the opportunity to choose, will opt
not to buy products produced from cows that are fed growth hormones. The article
does not describe anything that could be characterized as “misleading.”
Budget Deficits
White House Sees a $455 Billion Gap In the ’03 Budget
David E. Rosenbaum
New York Times, July 16, 2003, page A1
http://www.nytimes.com/2003/07/16/politics/16BUDG.html
This article reports on the latest projections for the budget
deficit for 2003 and 2004. At one point it lists the factors that have led to
the shift from large budget surpluses to large deficits. It does not include the
stock market crash on this list. The plunge in the stock market has cost the
government close to $100 billion a year in revenue due to loss of capital gains
taxes, as well as reduced tax collections on stock options and other forms of
compensation directly linked to the stock market.
At one point the article presents a comment from Representative Jim Nussle, the
chairman of the House Budget Committee: “tax cuts do not cause deficits. When
you reduce taxes, taxes stay in the pocket of people that earn it. We do not
have to borrow money in order to reduce taxes.”
The implication of this statement is that the size of the deficit is not
affected by the tax rate. If representative Nussle actually believes his
statement, then he believes that the budget could be balanced even if the
government did not collect any tax revenue. It would have been appropriate to
note the absurdity of the position being espoused by the chair of an important
committee. This statement could warrant a separate article.
Greenspan Testimony
Fed Chief Gives Bright Outlook; Cuts an Option
David Firestone and Jonathan Fuerbringer
New York Times, July 16, 2003, page A1
http://www.nytimes.com/2003/07/16/business/16FED.html
This article reports on Federal Reserve Board Chairman Alan
Greenspan’s testimony before the House Baking Committee. At one point the
article reports that “Mr. Greenspan sounded positively cheery about the rise
in household wealth.” The primary source of the increase in household wealth
has been the rise in housing prices. Since 1995, home prices have outpaced the
overall rate of inflation by more than 30 percentage points. This sort of run-up
in housing prices in the United States has no precedent. In the past, housing
prices have generally moved at approximately the same pace as the overall rate
of inflation (see “The Run-Up in Home Prices: Is It Real or Is It Another
Bubble?” [http://www.cepr.net/Housing_Bubble.htm]).
The fact that housing prices suddenly grew so far out of line with other prices
suggests that the housing market is experiencing a bubble. This is especially
likely since the run-up coincided with the stock bubble. In this sense, the
United States appears to be following the pattern of Japan, which also had a
real estate bubble coinciding with a stock bubble.
The recent recession and subsequent period of slow growth has been a result of
the collapse of the stock bubble. Mr. Greenspan has repeatedly claimed that he
was unable to recognize the stock bubble prior to its collapse. It would have
been appropriate to note the evidence for a housing bubble, and to mention the
implication of the possible loss of $3 trillion of bubble wealth in the housing
market, in addition to commenting on Mr. Greenspan’s cheery attitude.
Copyrights
Harry Potter and the Internet Pirates
Amy Harmon
New York Times, July 14, 2003, page C1
http://www.nytimes.com/2003/07/14/technology/14BOOK.html
This article reports on the spread of unauthorized versions of
Harry Potter on the Internet. It inappropriately uses the term “pirate” to
describe individuals who use these versions. In many cases, for example the
sharing of chapters translated into German, it is not clear that any copyrights
have been violated.
It also would have been appropriate to present the views of an economist on this
issue. This article demonstrates the growing inefficiency of copyright as a
mechanism to support creative and artistic work. It also shows how copyright
enforcement requires ever-greater levels of government coercion in the Internet
age. This is exactly the situation that economic theory predicts would result
from a government guaranteed monopoly, such as a copyright.
Japan
Hopes Brighten as Concern Persists in Japan
Ken Belson
New York Times, July 16, 2003, page W1
http://www.nytimes.com/2003/07/16/business/worldbusiness/16YEN.html
This article examines Japan’s current economic prospects. At
one point it comments that “rock-bottom interest rates” are hurting
household savings. Actually, because prices are falling (Japan has deflation),
the real value of household savings can be rising, even if the nominal interest
is close to zero.
Trade
Free Trade’s Muddy Waters
Paul Blustein
Washington Post, July 13, 2003, page F1
http://www.washingtonpost.com/wp-dyn/articles/A46460-2003Jul12.html
This article reports on a trade dispute that led to the
imposition of steep tariffs on catfish imported from Vietnam. At one point it
refers to “free-trade proponents.” It is not clear that the people being
discussed actually support free trade. In most cases, they support the extension
of protectionist measures like copyrights and patents and they generally have
not raised objections to professional restrictions that maintain high salaries
for doctors, lawyers, and other highly paid professionals. While these people
may refer to themselves as “free-trade proponents” because it casts their
views in a favorable light, it is not an accurate description of their economic
philosophy.