Economic Reporting Review By Dean Baker June 2

Economic Reporting Review
By Dean Baker
June 9, 2003

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OUTSTANDING STORIES OF THE WEEK

Company's Pledge To Donate a Drug Is Falling Short
Stephanie Strom and Matt Fleischer-Black
New York Times, June 5, 2003, page A1
http://www.nytimes.com/2003/06/05/business/05DRUG.html

This article examines the extent to which Novartis, a major pharmaceutical manufacturer, has followed through on a pledge to make Glivac, a new cancer drug, available to anyone who cannot afford it. According to the article, the patent-protected price for the drug is $27,000 per year. The article reports that very few people have actually received charitable donations of the drug. It also reports that Novartis has used the promise of such donations for political purposes, as when it threatened to end its program in India, if it approved a generic version of Glivac. (It subsequently did end its program after the generic was approved.)

Drug Companies Increase Spending on Efforts to Lobby Congress and
Governments
Robert Pear
New York Times, June 1, 2003, page A1
http://query.nytimes.com/gst/abstract.html?res=F10C16FE3E540C728CDDAF0894DB404482

This article reports on plans by the pharmaceutical industry to have a stepped up lobbying campaign against efforts to increase competition in the pharmaceutical market and restrain drug prices. The article, which is based on leaked documents from the trade association, reveals plans not only to lobby Congress but to use funds to support research from sympathetic economists and to try to persuade African-American and Hispanic groups to support the pharmaceutical industry.

It's a Feast. Now See If Wall Street Can Resist.
Gretchen Morgenson
New York Times, June 1, 2003, Section 3 page 1
http://query.nytimes.com/gst/abstract.html?res=FB0D1FFD3C540C728CDDAF0894DB404482

This article considers the extent to which Wall Street banks and brokerage houses appear to have redressed the conflict of interest problems that led to situations in which efforts to gain underwriting business influenced market research reports. The article notes that a subsidiary of Citigroup upgraded its assessment of the telecom sector, for no obvious reason, at a time when the telecom companies are heavily engaged in new bond issues.

__________________________________________________________________________

The Deficit and Debt

Democrats Expect Record Debts
Jonathan Weisman
Washington Post, May 31, 2003, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A59930-2003May30.html

This article reports on a new set of budget projections from the Democrats on the House Budget Committee. It refers to a projected deficit for 2003 of $416 billion as a new record, exceeding the $290 billion deficit of 1992 even after adjusting for inflation. The more relevant measure is the deficit to GDP ratio, which measures the economic impact of the deficit. By this measure, the post-World-War- II record was 6.0 percent of GDP in 1983, with the 2003 deficit coming in at approximately 3.9 percent of GDP. The present deficit would be closer to the record if one used the "on-budget" deficit, which excludes the Social Security surplus. This deficit in 2003 will be approximately $600 billion, or 5.6 percent of GDP.

The article goes on to discuss projections for the national debt. It reports that the publicly held debt is projected to reach $7.9 trillion, or 44 percent of GDP in 2013. For purposes of assessing the nation's overall debt burden, the total federal debt (including the debt owned by the Social Security trust fund) would probably be more appropriate. This is projected to be close to $12 trillion in 2013, just under 69 percent of GDP.

Rising Bond Prices

Money Flows to Bonds, Despite Red Flags
Daniel Altman
New York Times, May 31, 2003, page B1
http://query.nytimes.com/gst/abstract.html?res=F30817F83C540C728FDDAC0894DB404482

This informative article examines explanations for the sharp run-up in bond prices over the last year and a half, and the implied decline in long-term interest rates. At one point it notes the mortgage refinancing boom and run-up in housing prices that has been associated with declining mortgage interest rates. It then comments that Federal Reserve Board Chairman Alan Greenspan "dismissed the notion of a bubble in the housing market." In evaluating Mr. Greenspan's assessment of the housing market it is worth noting that he failed to recognize the stock market bubble and has argued that it is generally not possible to recognize a financial bubble until after the fact (see "To Greenspan, 90's Bubble Was Beyond Reach of the Fed," New York Times, August 31, 2002, page B1).

In presenting the list of explanations for the run-up in bond prices, it would have been appropriate to note the possibility that it is driven by pure speculation, with investors buying bonds simply because they have been rising in price. While this behavior is extremely irrational, it is exactly what many investors did in the stock market bubble of the late nineties.

Drug Patents

Canada Fills U.S. Prescriptions Under the Counter
Gardiner Harris
New York Times, June 4, 2003, page A1
http://www.nytimes.com/2003/06/04/business/04DRUG.html

This article reports on some of the intermediaries who bring relatively low-priced drugs from Canada to consumers in the United States. At one point the article reports the claims of the pharmaceutical industry, that if the United States weakened patent protection, it would see less innovation in pharmaceuticals. As evidence in support of this claim, the article reports that many European firms moved their research to the United States when European governments weakened patent protection two decades ago.

If this is true, it would have been the result of a political decision on the part of the drug companies. The strength of the patent protection awarded in both Europe and the United States is not affected by where the research took place. Therefore strong patent protection provides no economic reason to locate research in one country rather than another. This means that if the drug industry actually shifted research to the United States from Europe, because it wasn't satisfied with Europe's patent policies, then it must have been attempting to influence these policies by shifting its research. The pharmaceutical industry has often used similar threats in other contexts (see "Company's Pledge To Donate A Drug Is Falling Short," New York Times, June 5, 2003, page A1 – noted above).

The article incorrectly contrasts the system in Canada, in which the government sets drug prices, with the "unregulated drug prices" in the United States. The government in the United States gives firms a complete patent monopoly in the United States; this can be viewed as more heavily regulated than the system in Canada and other countries in which the impact of the government-enforced monopoly is more constrained. This is why it is the U.S. and not Canada that has a problem with a black market -- a black market appears when people try to engage in free trade outside of the reach of government regulations.

Summit Leaders Talk Tough On Spread of Nuclear Arms
John Tagliabue and Elisabeth Bumiller
New York Times, June 3, 2003, page A1
http://www.nytimes.com/2003/06/03/international/europe/03SUMM.html

This article reports on the G-8 summit meeting in France. It concludes by noting that the leaders rejected resolutions that would limit patent monopolies on essential drugs in developing nations. The article reports that the U.S. blocked such resolutions because it "saw them as a menace to intellectual property rights in pharmaceuticals." While it is possible that Bush administration officials felt that these measures violated their views of intellectual property, it is also possible that they were motivated simply by the desire to protect the profits of the pharmaceutical industry, a powerful political backer and large contributor to election campaign funds.

Japan

Frugal Japanese Dig Into Savings
Ken Belson
New York Times, May 31, 2003, Page A8
http://query.nytimes.com/gst/abstract.html?res=F70916F83C540C728FDDAC0894DB404482

This article discusses Japan's current economic situation. It describes Japan as "the most heavily indebted nation in the developed world." While Japan's ratio of government debt to GDP may be the largest in the world, the vast majority of this money is owed to Japanese banks (including the central bank), corporations, and citizens. The country has net foreign assets of approximately $2 trillion, or nearly $20,000 for every person in Japan. By contrast, the U.S. has a negative net asset position that is close to $2.5 trillion, implying that the net claim of foreigners on the U.S. is equal to approximately $9,000 per person.

The article includes a quote that "if things continue as they are, Japan will subside toward a middle income country." Actually Japan has continued to experience productivity growth of approximately 1.0 to 1.5 percent annually even through its long slump, which means that on a per-hour-worked basis the Japanese are still getting richer. Until the country solves its macroeconomic problems, it will not reap the full benefits of productivity growth, but its economic potential is continuing to expand.

The State of the Economy

Snoozing Economy May Be Stirring
John M. Berry
Washington Post, May 31, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A59915-2003May30.html

This article reports on the release of several new economic reports. At one point it notes that the University of Michigan's consumer confidence index was up from 86.0 in April to 92.1 in May. It notes that this increase was driven by a jump from 79.3 to 91.4 in the consumer expectations' index (up from 69.6 in March), which more than offset the effect of a fall in the current conditions index. The article then asserts that "many analysts regard the expectations index as the more important indicator of likely consumer behavior in the future." The article does not identify any analyst who holds this view. In fact, the expectations index is poorly correlated with future consumer behavior and is not a very reliable measure, in large part because it is so much more volatile than the current conditions index.

Europe

Many Say Europe Needs More Than Just a Rate Cut
Mark Landler
New York Times, June 5, 2003, Page W1
http://www.nytimes.com/2003/06/05/business/worldbusiness/05EURO.html

This article reports on the likelihood that European Central Bank (ECB) will lower interest rates to help boost Europe's economy. It begins by asserting that the continent's stagnation has thrust the bank "into a new, not entirely comfortable role: economic savior for the Continent." This is a questionable characterization of its role. There are many economists, notably Nobel Laureate Robert Solow and Princeton University Professor Paul Krugman, who argue that the ECB's contractionary policy is one of the main reasons that the continent's economy is stagnating. Virtually all economists agree that the Fed's willingness to cut interest rates aggressively – now at 1.25 percent – has been an important factor in sustaining the U.S. economy over the last two and a half years. By contrast, the ECB has left its key interest rate at 2.5 percent. If the Fed had followed similar policies, the U.S. economy would surely be in worse shape at present.

The article also asserts that Europe must weaken its labor market protections and roll back its welfare state "to restore growth in a more lasting way." It is not clear that such measures are necessary to sustain growth. Most of the European economies with low unemployment rates (e.g. Denmark, Ireland, the Netherlands, and Sweden) have very generous welfare states (see "Labor Market Institutions and Unemployment: A Critical Analysis of the Cross- Country Evidence," [http://www.newschool.edu/cepa/papers/archive/cepa200217.pdf]).

Trade and Genetically Modified Foods

Bush, Chirac Minimize Rift, Stress Common Goals
Keith B. Richburg
Washington Post, June 3, 2003, Page A15
http://www.washingtonpost.com/wp-dyn/articles/A5326-2003Jun2.html

This article discusses the negotiations at the G-8 summit meetings. At one point it asserts that the United States is pressing Europe to agree to "free trade in genetically modified foods." This is not the current U.S. negotiating position. The Bush administration is trying to force Europe to allow genetically modified foods to be marketed to consumers as conventionally grown food (see "Battle Over Biotechnology Intensifies Trade War," New York Times, May 29, 2003, Page C1). It would be more consistent with free trade to allow consumers to be accurately informed about the goods in the market and to let them make their own choices.

Trade and Immigration

Putting A Price on Immigration Backlogs
Daniel Altman
New York Times, June 1, 2003, Section 3 page 4
http://query.nytimes.com/gst/abstract.html?res=F70F17FE3C540C728CDDAF0894DB404482

This article discusses the importance of immigration to the economy. It begins with the assertion, "the economy needs immigrants." This is not true. If the flow of immigration were to stop immediately, the price of labor in occupations where immigrants are especially important, such as farm work, would rise significantly. This would cause some farms and other firms heavily dependent on immigrant workers to go out of business. It would also lead to a relative rise in the price of goods produced in these sectors. The result of a cutoff of immigration would be a change in relative prices and wages, and a decline in the overall (not necessarily per capita) growth rate; however there is no reason whatsoever to believe that the economy would stop functioning, or that the majority of people here would suffer a decline in living standards.

The article also notes that immigration has contributed to economic growth by contributing to population growth. Economists usually evaluate the health of an economy by its GDP per person, or per person-hour of work. Growth that is simply the result of more people does not improve living standards, and may actually be associated with a decline in living standards, insofar as increased population density is associated with a deterioration in environmental factors that are not picked up in standard GDP measures.

Globalization Hits a Political Speed Bump
David Leonhardt
New York Times, June 1, 2003, Section 3 page 1
http://query.nytimes.com/gst/abstract.html?res=F00915FA3C540C728CDDAF0894DB404482

This article discusses the status of major trade agreements such as the next round of WTO negotiations or the U.S. proposed trade agreement for the western hemisphere. The article notes the problems posed by the rise of some types of protectionism in the United States – specifically agriculture and steel. The economic impact of these forms of protectionism are relatively minor compared to other protectionist barriers that were not mentioned as problems – such as increased patent protection for drugs, more extensive copyright protection, or professional restrictions that maintain high salaries for doctors and other paid professionals. For example, if a loosening of protectionist barriers allowed salaries of U.S. doctors to fall to the level of doctors in other rich nations (e.g. Western Europe), it would save consumers more than $80 billion annually, or close to $600 a year for an average family.

The Stock Market

States Use Gimmicks To Tackle Deficits
Dale Russakoff
Washington Post, June 1, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A63383-2003May31.html

This article discusses some of the accounting gimmicks that state governments are using to make their budgets appear balanced, even though they still have large shortfalls. At one point the article notes a plan by Illinois' governor to invest bond revenue in the stock market, which it describes as "an uncertain prospect in the current stock market." Actually investing in the stock market at present is a far better bet than before the bubble collapsed, when it was virtually certain that the investment would turn out badly.