Economic Reporting Review
By Dean Baker
July 7, 2003
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OUTSTANDING STORIES OF THE WEEK
Who’s
Minding the Drugstore?
Melody Petersen
New York Times, June 29, 2003, Section 3 page 1
http://query.nytimes.com/gst/abstract.html?res=FB0C16F9345F0C7A8EDDAF0894DB404482
This article examines the Food and Drug Administration’s (FDA) oversight of the claims made by pharmaceutical companies in promoting their drugs. It reports that the FDA had written an average of 10 letters per months warning of inappropriate advertising between 1997 and 2000, but has written an average of less than 2 letters per month in the last three years. This decline in warnings has taken place at a time when spending on drug advertisements directed at the general public has increased dramatically.
Lucrative
Deals for Executives Tie the Hands That Pay Them
Patrick McGeehan
New York Times, June 28, 2003, page B1
http://query.nytimes.com/gst/abstract.html?res=FB0A17FA3D5E0C7B8EDDAF0894DB404482
This article reports on some of the complex clauses in executive contracts at major corporations, that ensure that they will be very highly compensated even if they manage their companies poorly.
Forced
Down or Out in Grand Rapids
Jonathan Weisman
Washington Post, June 28, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A43062-2003Jun27.html
This article examines the impact that the weak economy and the decline in manufacturing employment have had in Grand Rapids, Michigan. Grand Rapids is a mid-sized city that is still heavily dependent on manufacturing employment.
______________________________________________________________________________
Medicare Prescription Drug
Proposals |
GOP May Get a Boost With Seniors
David Broder
Washington Post, June 28, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A42992-2003Jun27.html
G.O.P.
Steals Thunder
Robin Toner
New York Times, June 28, 2003, page A1
http://query.nytimes.com/gst/abstract.html?res=FA0D1FFC3D5E0C7B8EDDAF0894DB404482
Bush
Touts Medicare Expansion
Dana Milbank
Washington Post, July 1, 2003, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A54507-2003Jun30.html
These articles discuss how the approval of Medicare prescription drug benefit could take away an important political issue from the Democrats in the next election. As was noted in the last ERR (6-30-03), it is not clear that if the public were aware of the limited nature of the benefits in these proposals that it would be a boost for the Republicans.
Under both the House or Senate version of the bills, senior citizens will on average pay more money -- in real, inflation-adjusted terms -- for prescriptions in 2006, when the prescription drug plan first is scheduled to go into effect, than they did when President Bush proposed such a plan as a candidate in 2000. In 2013, the last year in the Congressional Budget Office’s projections, the average senior is projected to be paying nearly twice as much for prescription drugs under these plans as they did without a Medicare prescription drug benefit in 2000.
It is also worth noting that the Republicans implemented tax breaks targeted toward the wealthy in the first year of the Bush administration, but that seniors will have to wait until 2006 to see the benefits of their Medicare prescription drug plan. It is not clear that if the public were aware of these facts that the Republicans’ prescription drug bill will be a plus for them in the 2004 election.
The article by Toner includes an assertion that conservative Republicans “believe that the country cannot afford a vast new entitlement [the prescription drug plan].” It is not clear that conservative Republicans believe that the country cannot afford such a plan, since most just voted for a tax cut which will likely cost the government even more money. The article should simply report what they say rather than speculating on their beliefs.
The Milbank article comments that in the 2004 election Democrats “face the prospect of a GOP president talking about the added assistance he has provided to seniors.” It is worth noting that seniors will not have received any assistance from these prescription drug bills by the 2004 election. It is not obvious that the promise of a future benefit will be a big political gain for President Bush.
House
and Senate Face Big Job To Settle Differences
Robert Pear
New York Times, June 28, 2003, page A1
http://query.nytimes.com/gst/abstract.html?res=FB0B1EFC3D5E0C7B8EDDAF0894DB404482
This article reports on efforts by House and Senate Republicans to reconcile their different versions of a Medicare prescription drug benefit. At one point it asserts that the House plan sets up “direct competition” between private insurance plans ad the traditional Medicare program.
There already is direct competition between private plans and the traditional program. However, many private insurers have dropped out of the market because they found that they could not service beneficiaries profitably for the same cost as Medicare. The key innovation of the House plan is that it would structure the competition in such a way that the traditional Medicare plan would have to provide services to the least healthy beneficiaries at the same cost that a private plan incurs to provide care for the most healthy beneficiaries.
While past studies have found the traditional plan to be more efficient than private plans, the difference is not so large that it would be able to cover the cost differences between serving the least healthy and serving the most healthy segments of the population. Therefore, the formula put in place in the House bill would likely lead to the destruction of the traditional Medicare program.
Private
Health Insurers Begin Lobbying for Changes in Medicare Drug Legislation
Robert Pear
New York Times, July 1, 2003, page A20
http://www.nytimes.com/2003/07/01/national/01MEDI.html
This article reports on lobbying efforts by the insurance industry to make the prescription drug bills before Congress more profitable for them. In the second paragraph the article notes the industry’s efforts to gain “increased subsidies” for offering insurance. In the third paragraph it reports on the industry’s praise of Congress “for it efforts to inject market forces and competition into Medicare.
It would have been appropriate to note the contradiction between the explicit goal of the lobbying effort – more government subsidies – and the industry’s professed interest in markets and competition.
Prescription
Drug Plan Faces Tests
Amy Goldstein
Washington Post, June 30, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A48983-2003Jun29.html
This article discusses some of the obstacles to implementing a prescription drug plan. At one point it asserts that the debate over a prescription drug plan “has revolved around whether the country could afford to help pay for older Americans’ medicine.” This is not a plausible claim, since the Congress just approved a tax bill that is likely to cost considerably more than the prescription drug bills being considered by Congress. The issue was whether the country should help older Americans pay for their drugs.
The
article also notes the insurance industry’s complaints that the government has
been “stingy” in its payments to HMOs in Medicare. It is worth noting, that
even though HMOs have claimed that Medicare did not pay them enough to cover
their costs, it cost the program more money on average to have beneficiaries in
HMOs than in the traditional program. This history indicates that increased
involvement of private insurers will likely increase the cost of Medicare
further.
Implications of Aging Populations
An
Aging Europe May Find Itself on the Sidelines
Richard Bernstein
New York Times, June 29, 2003, page A3
http://query.nytimes.com/gst/abstract.html?res=F30D15FC3C5E0C7A8EDDAF0894DB404482
This article discusses demographic trends in Europe. It includes several assertions that are inaccurate and in some cases contradictory. For example, it notes that the median age of the European population is projected to increase by approximately 15 years over the next half century, while the median age of the U.S. population is not expected to change very much. Furthermore, Europe’s population is projected to decline over this period, while the population of the U.S. is projected to continue growing. The article then asserts that these trends imply the declining importance of Europe in the world relative to the United States.
This does not follow. While population is a factor determining a nation’s influence in the world, it is clearly not the only factor – otherwise China and India, both with populations exceeding 1 billion people, would be the most influential nations in the world. Economic strength is a key factor. There is no information in this article that suggests that Europe’s economic strength will decline relative to that of the United States. While an aging population implies a growing number of elderly who will depend on the working population for their support, it also implies a diminished number of children who depend on the working population. There is no major difference in projections for the change in the total dependency ratio (young and old) between Europe and the United States.
A declining population will also lead to increases in economic output that are not generally picked up in conventional price and output indices. For example, people are generally willing to pay a premium to live in less congested neighborhoods, have shorter commutes to work, and have less crowded travel options. As Europe’s population declines, it is likely to experience increases in its standard of living for these and other reasons related to a diminished population. However, most price and output indices are not constructed to pick up these economic gains.
A diminished population will also lead to an improved environment, other things being equal. A declining population should also reduce the cost of reaching the targets for lowering greenhouse gas emissions to which the European nations have committed themselves.
It is also worth noting that several current trends suggest a growing economic influence of Europe relative to the United States. Europe is a net international lender, while the United States is currently borrowing an amount in excess of 5 percent of its GDP ($560 billion annually) from abroad. At this pace of borrowing, the net indebtedness of the United States will exceed the total capitalization of its stock market in fifteen years, and the total capitalization of both the stock market and the nation’s housing stock in less than thirty years. The cost of the U.S. health care system is also spiraling out of control and consuming an ever larger share of output. In addition, U.S. expenditures on the military, homeland security, and prisons are imposing an ever larger drain on productive activity. In the United States these expenditures exceed 5 percent of GDP, whereas in Europe they are approximately 1.0 percent of GDP. The additional spending in the U.S. for these purposes has roughly the same impact as an additional $440 billion in annual Social Security spending.
The
article also notes that many European workers take earlier retirement at close
to age 50, because there are few jobs available. The main concern raised in the
article is the opposite -- that Europe’s demographics are leading to a
shortage of workers. The lack of jobs implies that a labor shortage is not
currently a problem, nor is likely to be in the near future.
California Fiscal Crisis
Calif.
Near Financial Disaster
Rene Sanchez
Washington Post, June 30, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A48925-2003Jun29.html
This article reports on the impasse on California’s budget as the state attempts to close a projected $38 billion deficit over the next two years. At one point the article reports that Republicans are objecting to tax increases, saying that tax increases will damage an already weak economy. It then reports that they are arguing for spending cuts instead. It would have been worth noting that spending cuts will have an even larger effect on the economy than a tax increase of the same size. (A reduction in state spending of $10 billion reduces demand in the state by roughly this amount, since most of it would typically be used on services provided within the state. A tax increase of $10 billion is likely to have a somewhat smaller effect, since some of this money would have otherwise been saved [rather than spent], and much of the spending by households would have taken place outside of the state.)
When listing the reasons that California is now facing a shortfall, the article should have mentioned that the state projected that it would continue to collect an amount of capital gains tax revenue based on continued expansion of the stock market bubble. If the state’s budget forecasters had used reasonable projections of stock prices, they would not have so badly over-estimated capital gains tax revenue.
The Stock Market
Wall Street Ends
Second Quarter With Best Gains Since 1998
Jonathan Fuerbringer and Floyd Norris
New York Times, July 1, 2003, page A1
http://www.nytimes.com/2003/07/01/business/01STOX.html
This
article discusses the large run-up in stock prices in the first quarter. It
never mentions the current price-to-earnings ratio in the stock market. It is
impossible to have a meaningful discussion of stock prices without noting the
relationship between stock prices and corporate earnings.
Germany
Schroder’s
Economic Plan Is Aided by a Union and His Party
Mark Landler
New York Times, July 1, 2003, page A4
http://www.nytimes.com/2003/07/01/international/europe/01BERL.html
This article reports on plans by German Chancellor Gerhard Schroder to cut taxes and spending. At one point, the article reports that his plans to accelerate a tax cut “to revive lackluster consumption” have even won support from economists, in spite of its effect in raising the deficit. It later reports that “to pay for the tax cuts … economists say the government will have to reduce its generous subsidies.”
If the government cuts taxes and subsidies by an equal amount, then the net effect will be a reduction in consumption. Since this fact is well known among economists, it is unlikely that economists in Germany actually support a tax cut financed by reductions in subsidies, if their goal is to increase consumption, as claimed in the article.
Brazil
Inflation
Eases, But Other Worries Build Up in Brazil
Tony Smith
New York Times, June 28, 2003, page B1
http://query.nytimes.com/gst/abstract.html?res=F30A1EFB345F0C7B8EDDAF0894DB404482
This article discusses the current economic situation in Brazil. At one point it notes that inflation has fallen sharply in recent months. It then comments that this decline in the inflation rate “allowed the central bank to lower rates by half a percentage point less week.” Actually, the central bank could have always lowered interest rates, or alternatively, it did not have to raise them to 26.5 percent in the first place. The decision to raise rates this high was undoubtedly motivated in part by fear of inflation, but this was a decision made by the bank in light of its assessment of the risks posed by inflation, versus the negative effect of high interest rates on growth and employment – the high interest rates were not directly forced on the central bank by the inflation itself.