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.
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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.

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