Economic Reporting Review
By Dean Baker
March 17, 2003


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OUTSTANDING STORIES OF THE WEEK

Plan Restricting Stock Options Stalls at S.E.C.
Gretchen Morgenson
New York Times, March 13, 2003, Page A1
http://www.nytimes.com/2003/03/13/business/13OPTI.html

This article reports on how the S.E.C. has failed to issue promised rules that would limit the ability of management to make grants of stock options without the approval of shareholders.

Documents Detail Big Payments By Drug Makers to Sway Sales
Milt Freudenheim
New York Times, March 13, 2003, Page C1
http://www.nytimes.com/2003/03/13/business/13DRUG.html

This article reports on evidence filed in a court case showing that Merck-Medco Managed Care, a large manager of prescription drug plans, received kickbacks from drug manufacturers to get them to buy their drugs.

More Students Line Up at Financial Aid Office
Greg Winter and Jennifer Medina
New York Times, March 10, 2003, Page A1
http://www.wcu.edu/news/story.asp?ID=918

This article reports on the impact of the weak economy on the ability of students to pay for college. The increased demand for aid is coming at a time when public colleges are facing cutbacks in state support and private colleges are feeling the effect of large losses in their endowments.

Lifeline for Troubled Oregon Teenagers Is Imperiled by Planned U.S.
Cuts
Fox Butterfield
New York Times, March 9, 2003, Page A20
http://query.nytimes.com/gst/abstract.html?res=F30D16FF345B0C7A8CDDAA0894DB40448\2

This article reports on a program designed to assist teenagers who have been in trouble with the law. This is one of the programs that is slated to be eliminated by proposed Bush administration budget cuts.


The Budget

Chronic Budget Deficits Forecast
Jonathan Weisman
Washington Post, March 8, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A59396-2003Mar7.html

Troop Movement Alone Could Cost $25 Billion, Congressional Office
Finds
David E. Rosenbaum
New York Times, March 8, 2003, page A11
http://www.nytimes.com/2003/03/08/politics/08BUDG.html

These articles report on new estimates from the Congressional Budget Office on the cost of a war with Iraq and on the size of the deficit in coming years. Both articles only express these numbers in dollar terms; it would be more helpful if they were expressed as shares of the budget or relative to GDP. For example, the $25 billion estimate of the cost of sending troops to the Middle East is equal to approximately 1.1 percent of total spending in 2003. The projected deficits of $287 billion for 2003 and $338 billion for 2004 (not counting the costs of a war or additional tax cuts) are equal to approximately 2.7 and 3.2 percent of GDP, respectively.

The deficit figures reported in this article include the Social Security surplus. For some purposes it is appropriate to present the deficit without including the Social Security surplus, since this is money borrowed from the Social Security trust fund, which must be repaid. Without the Social Security surplus, the deficits for 2003 and 2004 would be approximately $470 billion (4.6 percent of GDP) and $530 billion (5.2 percent of GDP), respectively. Since many people seem to view this as the more important measure of the budget deficit [it is often claimed that politicians use the Social Security surplus to "hide" the true size of the deficit], the deficit numbers should be reported without including the Social Security surplus.

At one point the Post article refers to Medicare's "slide towards insolvency." The most recent projections from Medicare's trustees show that the program will be able to pay all scheduled benefits through the year 2027 with no changes whatsoever. There has never been a period in which Medicare has been able to go such a long period without a tax increase. Therefore, if Medicare can be currently be described as "sliding towards insolvency," then it has been sliding towards insolvency through its entire existence.

House Budget Chair Has Balancing Plan
Jonathan Weisman
Washington Post, March 11, 2003, Page A4
http://www.washingtonpost.com/wp-dyn/articles/A8185-2003Mar10.html

This article reports on a budget proposal put forward by Jim Nussle, the chairman of the House Budget Committee. At one point it notes that House Republicans frequently complain about the size of government, "but have allowed spending to surge since they gained control of the Congress in 1995." In 1994 federal government spending was 21.0 percent of GDP. In 2003 it was projected to be 19.7 percent of GDP, not counting the cost of a war with Iraq. Discretionary spending fell from 7.8 percent of GDP to 7.4 percent of GDP over the same period (also not including the cost of a war Iraq).


The Trade Deficit

Trade Deficit Lower, but Not by Much
Compiled from reports by the Associated Press, Bloomberg News, Dow
Jones News Service and Washington Post staff reporters
Washington Post, March 13, 2003, Page E2
http://www.washingtonpost.com/wp-dyn/articles/A18072-2003Mar12.html

Trade Deficit is Narrower As Economy Slows Buying
Bloomberg News
New York Times, March 13, 2003, page C2
http://www.nytimes.com/2003/03/13/business/13ECON.html

These articles report on the release of data on the size of the trade deficit in January. The trade deficit is running at annual rate of close to $500 billion. As a result, the United States is now borrowing from abroad at an annual rate of close to $550 billion. The impact of foreign borrowing of this magnitude is approximately the same as the impact of a budget deficit of the same size.

While the budget deficit is the frequent topic of major news stories, the trade deficit has been neglected in these papers' new coverage. Both of these articles are wire service stories, with the Post article a three sentence item in the "Business in Brief" section. The amount of coverage given the budget deficit compared to the trade deficit cannot be justified by their relative economic importance.


Oil Drilling in the Arctic Wildlife Refuge

Both Sides Confident as Senate Nears Vote on Alaska Drilling
David Firestone
New York Times, March 14, 2003, page A14
http://www.nytimes.com/2003/03/14/politics/14DRIL.html

This article reports on the debate over allowing oil drilling in the Arctic National Wildlife Refuge. At one point it presents the argument of proponents of drilling that "oil production is needed more than ever on the approach of a war with Iraq and with gasoline prices rising sharply." It would have been appropriate to note that it will take approximately five years after drilling is approved before any significant amounts of oil can be drawn from the refuge. In other words, allowing drilling in the refuge would have no impact whatsoever on the current oil market.

At the point where oil is drawn from the refuge, it would meet roughly one tenth of U.S. import needs for approximately two decades. After that point, the U.S. would be just as dependent on foreign oil as before, but would no longer have the oil in the refuge to rely on in an emergency. This means, for example, that if Congress had allowed drilling in the Refuge in 1980, there would currently be no oil left there to shield us from the impact of a possible cutoff of imports.


February Employment Report

Jobs Fall Takes Experts by Surprise
John M. Berry
Washington Post, March 8, 2003, page E1
http://www.washingtonpost.com/wp-dyn/articles/A59812-2003Mar7.html

308,000 Jobs Lost in February, The Most Since Post-9/11 Period
Daniel Altman
New York Times, March 8, 2003, page A1
http://query.nytimes.com/gst/abstract.html?res=FA0B14FE355B0C7B8CDDAA0894DB40448\2

These articles discuss the release of February employment data, which showed a large decline in the number of jobs. Both articles refer to the severe weather in February as one of the main factors leading to the downturn. The impact of the bad weather actually should have been rather limited. The reference week for the employment report ran from Sunday, February 9th through Saturday, February 16th. The major snowstorm for the month did not hit the East Coast until the evening of the 16th; therefore it should not have affected the number of jobs for the period during which the survey was being conducted.

The Times article includes a comparison of the number of discouraged workers (people who are not searching for jobs because they are discouraged over their job prospects) in February with the number in March of 1966. These data are not seasonally adjusted, so this sort of comparison is not meaningful.

The experts who are cited in the post article are associated (in order) with Stone and McCarthy (a financial markets research firm), Wells Fargo Banks, J.P. Morgan Chase Securities, John Hancock Financial Services, and Deutsche Bank Securities. It would have been useful to include the views of an expert who was not associated with the financial industry, since these firms can have a direct interest in a slow-growing low inflation economy with a weak labor market -- an interest which differs from most of the rest of the public.


Prescription Drugs

Legal Action Is Threatened Against Importers of Drugs
Robert Pear
New York Times, March 13, 2003, page C2
http://www.nytimes.com/2003/03/13/business/13FDA.html

This article reports on the Food and Drug Administration's plans to punish people who purchase prescription drugs outside of the United States. It would be helpful to include some economic analysis of the impact of this proposal in an article of this type.

Unrestricted patent monopolies raise drug prices in the United States far above the prices paid elsewhere. As a result, U.S. consumers pay about $60 billion a year more than if they could purchase drugs at the prices they are available for in a country like Canada. The additional cost is equivalent to a tax of this amount. The impact of high U.S. drug prices on economic growth is far larger than the predicted impact of policies like the proposed Bush tax cut, or even large increases/reductions in the budget deficit.


Terrorism Insurance

Insurance For Terrorism Still a Rarity
Joseph B. Treaster
New York Times, March 8, 2003, page B1
http://www.nytimes.com/2003/03/08/business/08INSU.html

This article reports on the fact that very few businesses have purchased insurance against terrorism. The article appears to assume that it is desirable for firms to have terrorism insurance. This is not necessarily the case. In the past, the probability that most firms would suffer losses due to terrorism have been extremely small. The price of insurance is a cost to firms, and to the economy as a whole, since resources (labor and capital) are used in issuing and administering terrorism insurance. This article should have included a discussion of the size of the administrative costs in terrorism insurance.


Germany

On a Sickbed, Is Germany Too Weak For a Cure?
Mark Landler
New York Times, March 9, 2003, Section 3, page 4
http://www.nytimes.com/2003/03/09/business/yourmoney/09VIEW.html

This article presents an assessment of the state of Germany's economy. The article presents the case that Germany "seems to be the undisputed 'sick man of Europe.'" The evidence presented in the article does not support this case.

For example, the article refers to Germany's "calcified labor market" and "chronic unemployment." The unemployment rate in the part of the country that was formerly West Germany is approximately 6.5 percent, not very much higher than the 5.8 percent rate in the United States. Since the European Central Bank has consistently maintained interests 1.25 to 1.5 percentage points higher than the rates set by the Federal Reserve Board (the ECB just lowered its main interest rate by 0.25 percentage points to 2.5 percent), it appears that in former West Germany the labor market is performing better than it is in the United States.

At one point, the article refers to Germany's "bloated health care system." According to data from the OECD, Germany spends less than 60 percent as much per person on health care as the United States, and it has better outcomes measured by criteria such as life expectancy and infant mortality rates. The article also refers to Germany's "eroding productivity." Germany has continued to experience productivity growth over the last decade. There are no projections that show its productivity declining.


Medical Malpractice Insurance

House Votes to Cap Damages For Medical Malpractice
Juliet Eilperin
Washington Post, March 14, 2003, page A4
http://www.washingtonpost.com/wp-dyn/articles/A22889-2003Mar13.html

House Backs Limit on Malpractice Awards
Sheryl Gay Stolberg
New York Times, March 14, 2003, A23
http://www.nytimes.com/2003/03/14/politics/14MED.html

These articles report on a House vote approving a bill that would limit malpractice awards for pain and suffering to $250,000. The articles present several arguments on both sides of the issue. Neither article mentions the effectiveness of large awards as a sanction against the practice of bad medicine.

In many states, physician licensing boards have been very lax in taking steps against incompetent doctors. Large legal settlements provide an alternative mechanism of sanctioning incompetent doctors and hopefully keeping them from practicing and harming more patients. This is an important rationale for not capping jury awards and should have been mentioned in these articles.


Trade

Chile Feels the Weight of Its Security Council Seat
Larry Rohter
New York Times, March 11, 2003, page A8
http://www.nytimes.com/2003/03/11/international/americas/11CHIL.html

This article reports on U.S. efforts to pressure Chile to support its position on a war with Iraq at the Security Council. At one point it raises the possibility that the Bush administration will not carry through with getting Congressional approval for a recently negotiated trade agreement. It refers to this pact as a "free trade" agreement. Actually parts of this agreement increase protectionist barriers, most importantly by increasing copyright and patent protections. Therefore, it would be more accurate to simply refer to the pact as a "trade" agreement.