Economic Reporting Review By Dean Baker June 23

Economic Reporting Review
By Dean Baker
June 23, 2003

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OUTSTANDING STORIES OF THE WEEK

Some Doubts About Logic Of Senate Plan For Drug Aid
Daniel Altman
New York Times, June 14, 2003, page B1
http://query.nytimes.com/gst/abstract.html?res=FB0D1EFC3C5C0C778DDDAF0894DB40448\2

This article examines the extent to which the prescription drug bill approved by the Senate will actually benefit senior citizens. It notes that many seniors would actually be better off not buying the coverage. Even those who would benefit from the insurance will still find themselves with large drug bills in many cases.

Making Trinkets in China, and a Deadly Dust
Joseph Kahn
New York Times, June 18, 2003, page A15
http://www.mindfully.org/WTO/2003/China-Deadly-Globalization18jun03.htm

This article reports on factory working conditions, a topic that is rarely addressed in news reporting on China.

Lingering Losses on Bonds Are Haunting Insurers
Norm Alster
New York Times, June 15, 2003, Section 3 page 4
http://www.nytimes.com/2003/06/15/business/yourmoney/15ACCO.html?ex=1371009600&e\
n=441b0957356755ce&ei=5007&partner=USERLAND

This article examines the impact of several major bankruptcies on the insurance industry. It reports that several major insurers held large amounts of bonds issued by companies that have declared bankruptcy. In some cases, this wave of defaults could damage their own creditworthiness.

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Medicare Prescription Drug Proposals

Senate to Take On Redesign of Medicare
Amy Goldstein
Washington Post, June 15, 2003, Page A5
http://www.washingtonpost.com/wp-dyn/articles/A59832-2003Jun14.html

Changing Prospects for Medicare Drug Benefits
Robin Toner
New York Times, June 15, 2003, page A15
http://query.nytimes.com/gst/abstract.html?res=F20815FF3F5C0C768DDDAF0894DB40448\2

These articles report on the progress of bills in Congress that would create a prescription drug benefit within the Medicare program. Both articles refer to efforts by the Bush Administration and Congressional Republicans and some Democrats to increase the role of private insurers in the Medicare program. Both articles refer to this effort as being motivated by a belief in the free market and the desire to use competition to hold down Medicare costs. For example, the Times article refer to the Bush administration's "free market principles."

It is not clear that such motivations can explain the actions of these politicians. The Medicare program has allowed beneficiaries to sign up with private insurers for more than a decade. Both the Congressional Budget Office and the General Accounting Office found that private insurers raised costs for the program. This is due to the fact that private insurers have larger administrative expenses than does the traditional Medicare program. They also cannot bargain down prices from health care providers as effectively as Medicare.

It is possible that the politicians who continue to advocate an expanded role for private insurers in Medicare are ignorant of this evidence. However, it is also possible that they are actually motivated primarily by the desire to serve the insurance industry, which is a powerful interest group and major contributor to political campaigns.

The Post article also asserts that Medicare is in "precarious" financial health because the Medicare trustees project that it will face a shortfall in twenty-three years. There has never been a twenty year period since the creation of Medicare in which it was not necessary to increase revenue for the program. By the standard used in this article, Medicare has always been in precarious financial health.

House Panel Approves Medicare Measure
Helen Dewar and Juliet Eilperin
Washington Post, June 18, 2003, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A7158-2003Jun17.html

This article reports on a Medicare prescription drug bill that was approved by a House committee. It notes a provision which would allow Medicare beneficiaries to join private health care plans and then force beneficiaries to pay the difference between the cost of the private plans and the cost of the traditional plan "if private plans proved cheaper."

Private plans within Medicare have generally charged slightly less per person than the traditional plan. This is due to the fact that these plans have generally attracted younger, healthier beneficiaries than the traditional plan. This is why studies by the General Accounting Office and the Congressional Budget Office have found that private plans raised costs for the program - even though their costs per person were slightly less than for the traditional plan.

Given this pattern of "cherry picking" by private insurers, the Republican proposal would probably lead to the destruction of the traditional Medicare system. It would set in motion a process where the traditional program would have to charge higher premiums, because it has less healthy beneficiaries. The higher premiums would lead the more healthy beneficiaries to switch to private insurers, making the per person costs even higher for the traditional system. This forces further increases in premiums, which would lead to more people leaving the system.

House Committee Approves Drug Benefits for Medicare
Robert Pear and Robin Toner
New York Times, June 18, 2003, page A20
http://www.nytimes.com/2003/06/18/politics/18MEDI.html

This articles reports on the debate in House Ways and Means Committee over the structure of a Medicare drug proposal. The article characterized the debate as an "impassioned partisan debate over the proper role of government and private industry in delivering health care to the elderly." The article later asserts that the Republicans wanted to "avoid any possibility that he government might set drug prices."

It is not clear that anyone in this debate cared about the "proper role of government." While the Republicans are adamantly opposed to government interventions that could reduce the profits of the prescription drug industry or the insurance industry - both large sources of campaign contributions - they are anxious to have the government play a very large role in the provision of health care by enforcing strong patent monopolies for prescription drugs. It is possible that the Republicans may be taking their positions on this issue on the basis of principles, but it is also possible that they are simply trying to do favors for powerful political backers.

The Democrats and Business

Democrats Court Business Owners
Juliet Eilperin
Washington Post, June 15, 2003, PageA4
http://www.washingtonpost.com/wp-dyn/articles/A59791-2003Jun14.html

This article discusses efforts by Democratic leaders to get more support from business. The article notes that businesses have been increasingly one-sided in supporting Republicans. It then comments that "in recent years, the Democratic Party has taken stands that are anathema to many corporate executives and small business owners: support for stiffer environmental regulations and workplace rules; backing for labor unions and caps on prescription drug prices; and opposition to curbs on legal liability, often called 'tort reform.'"

These are not new positions for Democrats. The items in the list have become major political issues because Republicans have changed their stands on them in the last two decades. For example, both the Environmental Protection Agency and the Occupations Safety and Health Administration were established during the Nixon presidency. The Democrats' opposition to "tort reform" has only become an issue because Republicans are now trying to pass such legislation. Democratic support for unions is also not new. What has changed is the effort by businesses to try to eliminate unions from the workplace. Prior to the eighties, most large firms accepted that they would have to learn to get along with unions in their firm. In all these cases, and many others that could be cited, Democrats have not become more anti-business, as this discussion implies. Rather, Republicans have become more extreme in their willingness to promote policies that serve powerful business interests.

Tax Cuts

Anti-Tax Crusaders Work for Big Shift
Jonathan Weisman
Washington Post, June 14, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A57236-2003Jun13.html

This article discusses efforts by conservatives in the Bush administration to reduce or eliminate taxes on investment income and shift these taxes to wage income. It asserts that these efforts are motivated the belief that this shift will lead to more economic growth. While these officials may be motivated by this belief, it is also possible that they simply want to cut taxes for wealthy taxpayers, who derive the bulk of their income from investments.

At one point the article refers to the $400 billion projected deficit for 2003 as a record. While this will be the highest figure in nominal dollars, measured as a share of GDP, the current deficit will be approximately 3.7 percent. This deficit is considerably smaller than the deficit of 6.0 percent of GDP in 1983 and deficits exceeding 20 percent of GDP during World War II. If the deficit were measured excluding the Social Security surplus, which is arguably the more appropriate measure, it would be approximately $580 billion, or 5.6 percent of GDP, still slightly less than 1983 level. Expressing the deficit as a share of GDP is the only meaningful way to assess its importance to the economy.

Fate of Tax Credits Rests With Houses Divided
David Firestone
New York Times, June 16, 2003, page A14
http://story.news.yahoo.com/news?tmpl=story&cid=68&ncid=68&e=4&u=/nyt/20030616/ts_nyt/fateoftaxcreditsrestswithhousesdivided

This article reports on the prospects for a new tax cut that would extend the rebate to workers who earned too little to be paying income tax. At one point it repeats the assertions of House Republicans that they consider the purpose of tax cuts to "stimulate economic growth" and that growth will eliminate the deficits created by the tax cut. It is worth noting that the Congressional Budget Office projected that the tax cuts would slow growth as a result of their effect on the deficit. There is no plausible scenario under which the tax cuts could stimulate enough growth to offset their impact on the deficit. It would have been worth noting this fact in the article.

Presidential Campaign

Democratic Rivals' Missed Target: Economy
Dan Balz
Washington Post, June 18, 2003, PageA1
http://www.washingtonpost.com/wp-dyn/articles/A7156-2003Jun17.html

This article discusses the various positions that some candidates for the Democratic presidential nomination have taken on the economy. At one point the article asserts that to either promote fiscal responsibility or new social programs "Democrats would have to repeal some or all of the Bush tax cuts."

This is not clear. President Bush is apparently prepared to push ahead with more tax cuts next year - indicating that he does not feel constrained by the deficit in his political agenda. There is no obvious reason that Democratic candidates should feel more constrained by the deficit than President Bush. While there may be legitimate reasons for asserting that such deficits would be irresponsible, that does not mean that they necessarily present a political problem.

Democratic Candidates Assail Bush Across a Wide Spectrum
Adam Nagourney
New York Times, June 18, 2003, page A21
http://www.nytimes.com/2003/06/18/politics/campaigns/18DEMS.html

This article reports on the recent speeches of several contenders for the Democratic presidential nomination. The article notes that Senator Joseph Lieberman pledged to reduce the poverty rate to the lowest in the nation's history, and then comments "though he gave scant details on how he would accomplish that." Actually poverty rates typically fall as the economy grows, and the economy generally does grow. If the economy experiences normal growth during a Lieberman presidency, and there is not a large turn towards greater inequality, then it should be very simple to accomplish this goal.

The article also describes a set of tax credits proposed by Senator John Edwards as "probably the most extensive tax-cut plan offered by any of the Democratic candidates. According to the article, the plan would cost $160 billion over ten years, an average of $55 per person per year. The tax credits that Representative Richard Gephardt proposed in connection with his health care plan are considerably larger.

Copyrights

Harry Potter and the Copyright Lawyer
Ariana Eunjung Cha
Washington Post, June 18, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A7412-2003Jun17.html

This article reports on efforts by the entertainment industry to use copyright law to limit the dissemination of "fan fiction," writings that are derivative of major works and extend them in new directions. It would have been useful to include the views of economists on this issue. It provides yet another example of the increasing inefficiency of copyright law in the modern economy. Millions of people will potentially be denied the opportunity to read or write these derivative works due to the government's intervention on behalf of copyright holders.

The State of the Economy

3 Economic Reports Point to Improvement
Charles Duhigg
Washington Post, June 18, 2003, Page E3
http://www.washingtonpost.com/wp-dyn/articles/A7144-2003Jun17.html

Hints of Upturn Begin to Ease Gloom at Banks And Businesses
Daniel Altman
New York Times, June 18, 2003, page C1
http://www.nytimes.com/2003/06/18/business/18ECON.html

These articles report on the release of several new data reports on the economy. Both articles refer to the Federal Reserve Board's new data on industrial production for May as a positive report because it showed that production had risen by 0.1 percent in the month. Many analysts had expected the report to show that industrial production was unchanged. It is worth noting that industrial production for April was revised down by 0.2 percentage points in this report, so the figure released for May is still 0.1 percentage point lower than the measure that previously been reported for April.