Economic Reporting Review
By Dean Baker
June 16, 2003

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OUTSTANDING STORIES OF THE WEEK

Striking It Poor: Oil as a Curse
Daphne Eviater
New York Times, June 7, 2003, page A17
http://www.globalexchange.org/campaigns/wbimf/695.html

This article examines evidence suggesting that many developing countries have actually been made worse off by having large amounts of oil or other mineral wealth. The article presents evidence from many critics of the orthodox view within the World Bank, that this wealth presents a boon to development.

Workers Paying A Larger Share For Drug Plans
Milt Freudenheim
New York Times, June 12, 2003, page A1
http://www.nytimes.com/2003/06/12/business/12CARE.html

This article reports on the trend for employers to force workers to pay a larger share of their prescription drug costs. It presents evidence from the Labor Department's consumer expenditure survey on the rise in out of pocket spending on drugs.

Change in Aid Rule Shifts More Costs to Students
Greg Winter
New York Times, June 13, 2003, page A1
http://www.nytimes.com/2003/06/13/education/13COLL.html

This article reports on a change in a financial aid formula calculated by the Department of Education, which will cause millions of college students to receive smaller benefits next year. The formula is based on outdated state and local tax data.

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Economic Policy and Economic Philosophy

Fight or Flight? G.O.P. Split Over Tax Credits
David Firestone
New York Times, June 8, 2003, page A18
http://www.house.gov/schakowsky/article_06_08_03childtaxcredit.html

Bush's Tightrope on Medicare Drugs
Richard W. Stevenson
New York Times, June 8, 2003, page A25
http://www.nytimes.com/2003/06/08/national/08MEMO.html?ex=1055908800&en=10e96f7a\125f67ea&ei=5070

These articles discuss the Republicans' approaches to tax cuts and restructuring Medicare. In both cases the articles attribute their motivations to their economic philosophy, ignoring the possibility that they are acting primarily to serve the interests of powerful political supporters.

For example, the Firestone article notes that some Republicans in the House are prepared to oppose refundable tax cuts for moderate income families because they have safe seats and "can afford to take a sharper ideological position." While it is possible that these Republicans are acting based on ideology, they may also be motivated by a desire to preserve as much money as possible for tax cuts for wealthy political backers. Any money paid out to moderate income households is likely to reduce the amount potentially available for tax cuts to the wealthy.

The article by Stevenson repeatedly attributes efforts by President Bush and Congressional Republicans to expand the role of private insurers in Medicare to a belief that it is necessary "to harness market forces to hold down health care costs." In fact, there have been numerous studies that find that increasing the role of private insurers in Medicare will raise costs, since private insurers have higher administrative expenses than those of the current system, and they have less market power to force providers to accept lower costs (e.g. "Critics Say Proposal for Medicare and Private Health Plans Could Increase Costs," by Robert Pear, New York Times, May 6, 2003, Page A23 http://query.nytimes.com/gst/abstract.html?res=F30917FC3A580C758CDDAC0894DB40448\2).

While President Bush and Congressional Republicans may believe that increasing the role of private insurers will lower costs, in spite of the evidence, it is also possible that they are simply trying to increase the revenue and profits of the insurance industry, which has been a powerful political backer of the Republicans. It also would have been helpful to include some discussion of the evidence of the impact of private insurers on costs in this article.


Medicare Drug Benefit

Medicare Debate Focuses on Merits of Private Plans
Robert Pear
New York Times, June 9, 2003, page A1
http://www.nytimes.com/2003/06/09/politics/09MEDI.html?th

House GOP Leaders Agree on Medicare Drug Benefits
Amy Goldstein and Helen Dewar
Washington Post, June 10, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A36920-2003Jun9.html

Both Parties Face Huge Risks In Prescription Drug Bill Fight
Helen Dewar
Washington Post, June 11, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A41960-2003Jun10.html

Health Plans Wary of Drug Proposal
Reed Abelson
New York Times, June11, 2003, page A1
http://www.nytimes.com/2003/06/11/politics/11DRUG.html

Medicare Overhaul by July 4 Predicted
Amy Goldstein
Washington Post, June 12, 2003, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A46546-2003Jun11.html

These articles report on the debate in Congress over adding a prescription drug benefit to Medicare. Several articles note the desire of Republicans to increase the role of private insurers in Medicare, while most Democrats would like to leave the existing program largely intact.

This split is explained by the Republicans' desire to reduce the cost of Medicare and/or a difference in ideological views about the role of government. For example, the article by Goldstein and Dewar described President Bush's goal as "expanding the role of private health plans in Medicare in an attempt to save the program money in the long run." The article by Pear includes a sub-headline asserting that "fundamental differences over role of government divide G.O.P. and Democrats."

It is not clear that differences in ideology, or a desire to contain costs, explain the Republicans' efforts to increase the role of private insurers in Medicare and the Democrats' opposition. The insurance industry is a powerful interest group that contributes tens of millions of dollars to political campaigns, most of it going to Republicans. It is possible that Republicans are more interested in doing favors for their backers than in promoting a particular ideology or in containing costs.

It is especially unlikely that cost control really is the Republicans' motivation, since there is a large body of evidence showing that an increased role for private insurers will raise costs. The article by Abelson presents some of this evidence, noting that managed care companies are "perturbed by Medicare's long history of reducing payments for care, or at least keeping those payments well below the pace of cost increases." Studies by the General Accounting Office and the Congressional Budget Office have found that it costs Medicare less to keep beneficiaries in the traditional program than to have them join H.M.O.'s. If managed care companies are still losing money on their Medicare patients, as this article claims, even though they raise the cost to Medicare, then it implies that managed care is less efficient than the traditional program in providing health care to the elderly. The article by Abelson does not comment on the logical implication of the evidence it presents.

Several of these articles include comments about the long-run programs facing Medicare. The most recent report from the Medicare trustees shows that the program can meet all scheduled benefits for the next twenty-five years. The program has never gone twenty-five years without requiring additional revenue. This means that if these projections prove correct, the program is currently in sounder financial shape than it has been through most of its existence.


Copyrights

Industry Offers a Carrot in Online Music Fight
Amy Harmon
New York Times, June 8, 2003, page A1
http://www.nytimes.com/2003/06/08/technology/08TUNE.html?ex=1370404800&en=70e481\d31554b1ac&ei=5007&partner=USERLAND

This lengthy article discusses efforts by the recording industry to be somewhat more flexible in their interpretation of copyright restrictions in order to encourage more respect for copyright restrictions. While the article includes the comments of some opponents of the recording industry's efforts to maintain copyright restrictions, it would have been useful to include some economic analysis in a piece of this nature. Such analysis could have compared the efficiency of funding creative work through copyrights as opposed to alternative mechanisms. For example, this work could be supported by a modest individual tax credit (e.g. $50 to $100 per person) that would be designated to support artistic and creative work of the individual taxpayers' choosing.

Such analysis could provide more context for this discussion, which can often be confusing. For example, a chief executive of a major recording company was quoted commenting on one such alternative proposal that "it sounds like communism." In fact, the enforcement of copyright, which requires the government to use police powers to interfere with the free exchange of products, has far more in common with Soviet-style communism, than do the alternative mechanisms that have been proposed to support creative work.


Deflation

T-Bill Yields Drop Further
John M. Berry
Washington Post, June 11, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A41777-2003Jun10.html

This article discusses the economy's near-term economic prospects. It notes Federal Reserve Board chairman Alan Greenspan's concern about the possibility of deflation, commenting that deflation "could cause numerous serious problems, such as making debts harder to repay." Actually, the problems associated with deflation are also caused by very low positive rates of inflation as well. In fact, debts become harder to pay off any time the rate of inflation decreases, since many borrowers will have negotiated an interest rate under the assumption that the inflation rate will remain at its prior level. If the rate of inflation falls, then their wages or the price of their products will not be increasing at the pace that the borrower had anticipated when he or she contracted the loan.


Housing Bubbles

Britain Keeps its Distance From the Euro, at Least for the Time Being
Alan Cowell
New York Times, June 7, 2003, page A2
http://query.nytimes.com/gst/abstract.html?res=F30712FE3C5D0C748CDDAF0894DB40448\2

This article reports on the fact that Britain seems likely to put off a referendum on joining the euro for the immediate future, meaning that it will keep the pound as a separate currency. At one point the article lists a series of reasons why it may not be a good time for Britain to join the euro at present. One item that should have been included in this list is the housing bubble, which the I.M.F. and many other experts believe that Britain is currently experiencing.

The collapse of this bubble is likely to have an enormous impact on Britain's economy and will require an aggressive response from the central bank. Since most euro zone countries have not experienced a comparable bubble, and therefore will not experience a bust, they would likely object to having the European Central Bank alter its monetary policy substantially to help Britain recover from the collapse of its housing bubble. On the other hand, if it continues to maintain a separate currency, the Bank of England could adjust its policy to try to counteract the effect of the collapse of the bubble.

Cash-Outs Let Homeowners Share the Wealth
Jonathan Weisman
Washington Post, June 8, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A29530-2003Jun7.html

This article describes the impact that low mortgage interest rates have had in sustaining the economy over the last two years. It notes the extent to which homeowners have taken advantage of low mortgage rates to reduce their monthly mortgage payments and/or to take equity out of their homes to finance other expenditures. It comments that "many economists struggle to find the downside of this."

Actually, many economists, including those at the I.M.F., have begun warning that the economy is experiencing a housing bubble (e.g. "The Run-Up in Home Prices: Is It Real or Is It Another Bubble?" [http://www.cepr.net/Housing_Bubble.htm ]. In the last seven years, home prices have outpaced the overall rate of inflation by more than 30 percentage points. There has never been a comparable run-up in home prices, which generally move in step with the overall inflation rate. As a result of homeowners pulling equity out of their homes, the ratio of equity to value stands at a record low 55 percent. Through most of the post-war period, the ratio of equity to value has been close to 70 percent. If home prices were to fall 20 percent, restoring the historic relationship between home prices and other prices, the ratio of equity to value would fall to less than 45 percent. Such a low ratio is extremely dangerous, since it means that many baby boomers approaching retirement will have little home equity to help sustain them. Such a plunge in home prices would also cause serious strains on the financial system.

The article does later note that some economists are concerned about a collapse of housing prices, but then comments "most economists studying the issue are sanguine about such prospects." It is worth noting that in 1999 and 2000 most economists were also sanguine about the possible collapse of the stock market bubble.


Health Care Costs

Medicare to Cover Heart Devices
David Brown
Washington Post, June 7, 2003, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A26358-2003Jun6.html

This article discusses the decision by the Medicare program to cover the cost of a new device that could benefit many patients with heart disease. According to the article, the device costs about $35,000 to buy and install. The article describes this decision as an example of the "quandary that health insurers ... face in this era of rapid medical innovation." It then notes the cost of new treatments that could provide benefits to patients.

It is worth noting that this quandary is largely a function of the patent system as a means of supporting biomedical research. In most cases, the actual cost of producing medical devices or drugs is low - the price that patients or insurers must pay is high solely because the item is protected with a patent monopoly. If the research were paid for directly by the government, and then the products were available in the market at their marginal cost of production - like most other goods - there would generally be little concern about the cost of providing beneficial care.


Europe and the United States

Why America Outpaces Europe (Clue: The God Factor)
Niall Ferguson
New York Times, June 8, 2003, Section 4 page 3
http://www.stern.nyu.edu/News/news/2003/june/0608nyt.html?wwwstern=277617089&_CH\=138.88.157.196&_CK=cfE/iPIdpPwXnE6x7O0iSQ==

This article discusses the difference in the numbers of hours per worker in the United States and Europe. It notes that productivity levels (output per hour) are comparable between the two, but there is a large and growing gap in output per worker, because workers in the United States have longer workweeks and less vacation time. The article concludes by asserting that as a result of this discrepancy "the loser will be the European economy, which will continue to fall behind the United States in terms of its annual output."

There is no obvious sense in which an economy is worse off if it produces less per year, but the same or more per hour worked. For example, if a couple had an income of $50,000 per year with both members working 30 hours per week, they are in no obvious way worse off than a couple that has an income of $65,000 per year with both members working 40 hours per week. Europe can only be described as a "loser" in this scenario by non-economic criteria, which are not explained in the article.