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 The formula is based on outdated state and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.
_____________________________________________________________________________________________________________________
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.