Economic Reporting Review
By Dean Baker
July 28, 2003
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OUTSTANDING STORIES OF THE WEEK
Suddenly, Greenspan Is, Well Mortal
Gretchen Morgenson
New York Times, July 20, 2003, Section 3 page 1
http://www.nytimes.com/2003/07/20/business/yourmoney/20WATC.html?ex=1374033600&e\
n=adbef248fa374f35&ei=5007&partner=USERLAND
This article discusses the current economic situation and Federal Reserve Board
Chairman Alan Greenspan's failure to accurately predict it. It also notes
evidence that the housing market is currently experiencing a bubble, which could
have disastrous consequences when it deflates.
________________________________________________________________________________
The Economy
Opinions on Economy Are Easy; Proof Is Tough
Daniel Altman
New York Times, July 19, 2003, page B1
http://query.nytimes.com/gst/abstract.html?res=F40C15FD3A580C7A8DDDAE0894DB40448\
2
This article discusses the economy's near-term prospects and the likely impact
of President Bush's tax cut. The article notes differing opinions about the
extent to which the tax cut will lead to higher interest rates and the effects
that this could have on economic growth.
It would have been useful if the article had distinguished more clearly between
the long-term impact and short-term impact of the tax cuts. There are few
economists who would dispute that the tax cuts will provide a short-term
stimulus, so that the economy will be stronger in the next year or two than if
there were no tax cuts. However, most economists would question whether the Bush
tax cuts were the best form of stimulus. Tax cuts that were more heavily
directed toward moderate income families, who would have a higher propensity to
spend, would have probably provided more stimulus, as would aid to state and
local governments, who are being forced to raise taxes and cut spending as a
result of large budget shortfalls.
The article also notes complaints by Democrats that the Bush tax cuts will lead
to future cuts in Social Security and Medicare. These programs should be largely
unaffected by the tax cuts since Social Security and most of Medicare (part A)
are financed by separate taxes. Both programs are still projected to have
substantial balances well into the future - twenty five years in the case of
Medicare and forty years in the case of Social Security.
U.S. Won't Oppose Japan Efforts to Lower Yen's Value
Mark Landler
New York Times, July 19, 2003, page B3
http://www.nytimes.com/2003/07/19/business/19EURO.html?ex=1374033600&en=0c6d763b\
c26d996b&ei=5007&partner=USERLAND
This article discusses Treasury Secretary John Snow's statement that the Bush
administration remains committed to a strong dollar. The article does not
discuss the implications of this position. Currently the United States is
borrowing more than $550 billion a year from abroad, which is approximately 5.1
percent of GDP. If the dollar remains near its current level, then the trade
deficit will remain at its current level, or even grow larger. On this path, the
net indebtedness of the United States will exceed the value of the stock market
in fifteen years. It will exceed the combined value of the stock market and the
housing stock in less than thirty years.
The build-up of foreign indebtedness of this magnitude would imply enormous
costs for future generations. However, this fact is not even noted in this
piece, and is virtually ignored in most other reporting on the economy as well.
By contrast, the budget deficit, which is somewhat smaller than the current
account deficit, has been given enormous attention.
National Health Care Insurance
A 'Moral' Mission In Political Final Act
Jim VandeHei
Washington Post, July 20, 2003, page A4
http://www.washingtonpost.com/wp-dyn/articles/A14905-2003Jul19.html
This article discusses Representative Dick Gephardt's campaign for the
Democratic presidential nomination. At one point the article asserts that
Gephardt does not mention that his health care proposal would require taking
back all of President Bush's tax cuts. While this is probably an accurate
assessment of the program's costs, the fact that the proposal does not contain
any mechanism to control health care costs would have far more impact on most
families' living standards than the prospect of reversing the Bush tax cuts.
Given limited space, it would have been more appropriate to devote attention to
the proposal's impact on health care costs than its impact on taxes.
Medicare Drug Benefit
Medicare: Battleground for a Bigger Struggle
Robin Toner
New York Times, July 20, 2003, Section 4 page 1
http://gainesvillesun.com/apps/pbcs.dll/article?AID=/20030721/ZNYT04/307210308/1\
014/SCHOOLS
Report Challenges Medicare Reform Bills
Amy Goldstein
Washington Post, July 23, 2003, page A2
http://www.washingtonpost.com/wp-dyn/articles/A31358-2003Jul22.html
Bush Calls for Bipartisan Bill on Medicare Prescription Benefit
Robert Pear
New York Times, July 24, 2003, Page A16
http://www.nytimes.com/2003/07/24/politics/24MEDI.html
These articles report on the prospects for reconciling differences between the
Medicare prescription drug bills approved by the House and Senate. All three
articles include assertions that members of Congress are being motivated
primarily by political philosophies in their differences on these bills. For
example, the article by Toner asserts that the differences between the bills
will be difficult to resolve because the "conservatives in the House and
the liberals in the Senate have profoundly different visions of Medicare, of
social welfare programs and of government in general." The article by
Goldstein asserts that "the differences revolve around how far the
government should go to tilt the 1960s-era system from a federal entitlement to
a program built on market competition."
The representatives and senators who will be haggling over these bills are
politicians, not political philosophers. While politicians usually like to
justify their actions with claims that they are acting out of principle, as a
practical matter they must satisfy powerful political backers to hold onto their
office. The prescription drug bill approved by the House is likely to be far
more favorable to the insurance industry and the pharmaceutical industry - two
powerful political interests - than the Senate bill. The Senate bill would
almost certainly provide better quality health care services to the elderly, an
important constituency for many Democratic members of Congress. While it is
possible that members of Congress will be guided by principles in their vote on
this issue, it is also possible that they are responding to political pressure.
The article presents no evidence that these politicians are in fact being
motivated by principles on this issue.
Both the articles by Goldstein and Pear refer to a provision of the House bill
that it says will place the traditional Medicare program in competition with
private health care plans. Actually, the traditional program already must
compete with private plans. The provision in the House bill would tilt this
competition in favor of the private plans. Under this proposal, the private
plans could offer insurance to the relatively healthy segment of the Medicare
population. The fee charged to this group would set the compensation level for
the traditional Medicare program. Since the beneficiaries in the traditional
program would be less healthy on average than those in private plans, it would
likely cost more to serve them. The traditional program would then have to
charge a fee to beneficiaries to make up the difference between the cost of
serving them and the compensation level provided by the government.
Drug Importation
FDA Chief Protests Bill On Drug Reimportation
Marc Kaufman
Washington Post, July 23, 2003, page A6
http://www.washingtonpost.com/wp-dyn/articles/A30933-2003Jul22.html
For House GOP, 1 Vote Came With Hefty Price
Juliet Eilperin
Washington Post, July 24, 2003, page A19
http://www.washingtonpost.com/wp-dyn/articles/A37209-2003Jul23.html
These articles discuss a bill that would facilitate the importation of
prescription drugs from other countries. The article by Eilperin asserts that
some conservatives oppose the bill because they "see it as anathema to
free-market principles." It is not clear how a bill that allows freer
imports could be viewed as anathema to free market principles. The bill would
cut into the profits of the pharmaceutical industry - a powerful backer of many
"conservative" members of Congress. It is difficult for members of
Congress to openly admit that their vote is being determined by their need to
appease a powerful interest group. It is much easier to explain a vote by an
adherence to a political position, whether or not this is the actual
explanation.
The article by Kaufman notes that prices are lower in Canada because of price
controls. It would be at least as accurate to note that prices are higher in the
United States because it is alone among industrial nations in granting
government patent monopolies to drug firms, without placing any limit on the
prices they can charge during the period in which they enjoy this monopoly.
AIDS Funding
House Wrangles Over Levels Of Global Spending on AIDS
Sheryl Gay Stolberg
New York Times, July 24, 2003, page A6
http://www.nytimes.com/2003/07/24/health/24AIDS.html
This article reports on the debate in the House over the level of funding for
programs to combat AIDS in the developing world. The Republicans are supporting
an appropriation of $2 billion, even though President Bush had promised to spend
$15 billion over the next five years. The article reports the contention of
House Republicans that the infrastructure is not in place in Africa to absorb
larger amounts of spending.
It would have been appropriate to note that the United Nation's AIDS fund is
currently operating and recognized to be extremely efficient by external
auditors. The Republicans have chosen to commit most of this AIDS funding
elsewhere, but the UN AIDS fund would almost certainly be able to effectively
and immediately use any money that Congress appropriated.
Labor Shortages
Young Foreign Workers Fill Summer Shortages
Steven Greenhouse
New York Times, July 20, 2003, page A24
http://www.nytimes.com/2003/07/20/national/20LABO.html?ex=1374033600&en=c10e95ed\
d1441145&ei=5007&partner=USERLAND
This article reports on the inflow of foreign workers to fill low paying jobs in
tourist areas. The headline of the article refers to "shortages." The
information in the article makes it clear that there is no shortage of people to
do the jobs in question. The business owners and managers quoted in the article
indicate that they can get foreign workers to accept these jobs at lower wages
than U.S. citizens. Insofar as there is a shortage of workers, it is due to the
fact that these businesses are trying to hire workers at below the market wage.
The Budget
Bush Predicts That His Tax Cuts Will Soon Produce More Jobs
Reuters
New York Times, July 20, 2003, page A23
http://query.nytimes.com/gst/abstract.html?res=F70716FB35580C738EDDAE0894DB40448\
2
This article discusses the prospects for the economy and the budget deficit. At
one point it comments that it will be difficult to maintain a slow rate of
spending growth in fiscal 2004, in part because of a Medicare prescription drug
benefit being considered by Congress. The prescription drug proposals approved
by both the House and Senate would not begin to provide benefits until 2006, so
they should not affect spending growth in 2004, even if a final bill is
approved.
Climate Change
Taking on Global Climate Change
Guy Gugliotta
Washington Post, July 24, 2003, page A6
http://www.washingtonpost.com/wp-dyn/articles/A37478-2003Jul23.html
This article reports on the Bush Administration's plans for a new study to
examine the link between human caused emissions of greenhouse gases and climate
change. At one point, it asserts that "Bush's critics say the preponderance
of scientific opinion holds that emissions of carbon dioxide and other
heat-trapping industrial and tailpipe gases" are leading to climate change
at a dangerous rate. It is not only Bush's critics who make this assertion - the
vast majority of climate experts agree with this view, as has been demonstrated
by the work of several international commissions on the topic.
Argentina
Argentina's Leader Charts New Course
Jon Jeter
Washington Post, July 23, 2003, page A19
http://www.washingtonpost.com/wp-dyn/articles/A31838-2003Jul22.html
This article discusses the path pursued by Argentina's new president, Nestor
Kirchner, since he took office two months ago. At one point the article traces
Argentina's recent economic problems. It asserts that its reforms in the
nineties "were followed by heavy spending." This is not true.
Excluding interest payments, Argentina's spending, measured as a share of GDP,
remained constant from 1994 until its economic collapse in 2001. Its crisis
resulted from higher interest rates, which were in turn largely attributable to
crises elsewhere in the developing world. The government also lost a large
amount of revenue when it partially privatized its Social Security system in
1994. Had it not privatized its system, Argentina would have had a balanced
budget in 2001.
Japan
Insular Japan Needs, but Resists, Immigration
Howard W. French
New York Times, July 24, 2003, page A1
http://www.nytimes.com/2003/07/24/international/asia/24JAPA.html
This article reports on projections that Japan's population will decline,
possibly to half of its current level by 2100, unless it gets a large influx of
immigrants. It refers to this scenario as a disaster and warns that the country
faces "a scarcity of workers and falling demand" in addition to a
collapse of its pension system.
There is no economic theory that would support the views expressed in this
article. In standard economic analysis, the fact that there will be fewer people
on the same amount of land should make the country richer on a per person basis.
This should be especially true in a relatively crowded country like Japan. If
the population diminishes, cities will be less crowded. This will allow a larger
percentage of the population to live in desirable areas. It will also reduce
demands on the infrastructure, especially the transportation system. In
addition, a smaller population will mean less pollution, including less
greenhouse gas emissions.
There is no reason to believe that a declining population will be associated
with a shortage of labor. At present, Japan has a large surplus of labor - its
high unemployment and large-scale underemployment have been widely reported. It
would take a very long time for the natural decline in population simply to
absorb this excess labor supply. When it eventually does, a smaller supply of
labor would simply mean that wages rise more rapidly and less productive jobs
(e.g. the night shift clerk in a convenience store or the valet parker at a
restaurant) go unfilled.
There is also no reason to believe that a declining population will lead to a
collapse of the pension system. If the ratio of workers to retirees fell at the
rate of 0.5 percent annually (an extremely rapid rate) and productivity
increased at 1.5 percent annually (a very slow rate), then if one-third of the
annual gains of productivity were used to support the national pension system,
it could maintain its financing forever, with workers enjoying continually
higher standards of living.
This article is one of many in the Times asserting that Japan, or other
countries projected to have declining populations, face economic crises as a
result. It would be helpful if these articles included the views of someone
familiar with standard economic theory.
Copyrights and Protectionism
House GOP Clears Way For Free-Trade Deals
Dan Morgan
Washington Post, July 24, 2003, page A5
http://www.washingtonpost.com/wp-dyn/articles/A37197-2003Jul23.html
This article refers to a congressional debate over conditions on trade
agreements. It repeatedly refers to these agreements as "free-trade"
pacts. This is inaccurate since the agreements will not necessarily reduce
barriers to the trades and goods and services. Most recent trade pacts have
included provisions that would increase protectionism in the form of stronger
copyright and patent protection.
At one point the article asserts that a goal of future trade pacts is preventing
"copyright piracy." In some of the nations with whom trade pacts are
being negotiated, U.S. copyrights are not currently recognized. In this
situation, it is impossible to have piracy. Piracy is only a logical possibility
if a copyright is legally in effect. It would be more accurate to say that the
goal is to prevent "unauthorized copies."