Economic Reporting Review
By Dean Baker
March 3, 2003

OUTSTANDING STORIES OF THE WEEK

Papers Indicate That Bayer Knew Of Dangers of Its Cholesterol Drug
Melody Petersen and Alex Berenson
New York Times, February 22, 2003, Page A1

This article reports on the discovery of internal documents of the Bayer Company showing that it was aware of dangers of its new anti- cholesterol drug, even as the company was bringing it to market.

For Argentines, A Sweet Resolve
Jon Jeter
Washington Post, February 24, 2003, Page A15

This article reports on how cooperative businesses have managed to thrive in Argentina in the wake of its economic collapse. In several cases, bankrupt firms have been taken over by the workers, and have managed to survive through the steep downturn of the last 15 months.

The President's Tax Cut and Its Unspoken Numbers
David E. Rosenbaum
New York Times, February 25, 2003, Page A23

This article examines some of President Bush's claims about who will benefit from his proposed tax cuts. It shows that many of the claims, while technically true, seem deliberately misleading. They imply that the benefits will be broadly shared, when in fact the vast majority of the population will get little or nothing from these tax cuts.

China Serves As Dump Site For Computers
Peter S. Goodman
Washington Post, February 24, 2003, Page A1

This article examines China's use as a dumping ground for obsolete computers and other industrial waste. The article points out that dumping is largely unregulated and often results in communities being exposed to hazardous materials.


Interest Rates

History Isn't Quite Repeating On Rates
Daniel Altman
New York Times, February 23, 2003, Section 3 page 4

This article discusses the fact that long-term interest rates have not fallen as much following this recession as they did in the 1990-91 recession and there is now a larger divergence between long-term rates and short-term rates. It attributes this situation to concerns about the deficit and the war with Iraq.

There are two other factors that also likely explain the failure of long-term rates to fall further. When an investor holds a bond, she risks a capital loss if interest rates rise, since the price of the bond is inversely related to the interest rate. The long-term interest rate is already at very low levels in nominal terms, with the ten-year rate under 4.0 percent. By contrast, the ten-year rate hit a low of just under 6.0 percent coming out of the last recession. If the interest rate rises one percentage point, from 4.0 percent to 5.0 percent, the price of the bond will fall by 25 percent. This is a very large loss, which is not offset to any significant extent by the higher interest payments that the investor gains from holding a long-term bond instead of holding money in a short-term account.

By contrast, when the interest rate is 6.0 percent, a one percentage point rise in the interest rate would lead to a loss of 16.7 percent of a bond's value. This is a substantially smaller risk than investors currently face when they hold long-term bonds. The large risk associated with holding long-term bonds at very low interest rates is the problem of the "liquidity trap" identified by Keynes in the thirties. It is undoubtedly one of the key reasons that long-term interest rates are not falling further.

The other key reason not mentioned in this article is the over-valuation of the dollar. The high value of the dollar is leading the United States to borrow from abroad at a rate of more than $500 billion a year. This pace of foreign borrowing cannot continue for long, just as budget deficits of this magnitude could not be sustained for long. The dollar will have to fall by 20 to 30 percent against other major currencies in order to reduce this imbalance. Investors who recognize this fact will demand a premium to lend money in dollars rather then euros or other currencies that will rise in value against the dollar. Given the likelihood of a sharply falling dollar, it is actually surprising that long-term interest rates are not higher in the United States. Investors who have held U.S. bonds at current interest rates have substantially lost out compared with the option of holding euro-denominated bonds, due to the decline in
the dollar over the last two years.


Medicare and Medicaid

Bush Proposes Major Changes in Health Plans
Robin Toner and Robert Pear
New York Times, February 24, 2003, Page A1

This article examines President Bush's plans for restructuring Medicare and Medicaid. It repeatedly asserts that the dispute between President Bush and his opponents is one of philosophy, with President Bush favoring a larger role for the market and his proponents favoring a larger role for the government.

It is not clear that this is the basis of the dispute. President Bush's plans would force Medicare and Medicaid beneficiaries to be far more dependent on private insurers. Potentially, the reforms could mean very large profits for the insurance industry, which is a powerful interest group and a major contributor to the Republican party. It is entirely possible that the desire to aid the insurance industry is a more important motivation for President Bush's proposals than his philosophy. The article certainly presents no evidence to support its contention that philosophy is the main motivation.

At this point, there also is considerable evidence that bringing private insurers into a program like Medicare leads to higher costs and worse health outcomes. For example, the General Accounting Office completed a study a few years ago showing that having Medicare beneficiaries in HMO's was more expensive than keeping them in the traditional Medicare program. It is entirely possible that opponents of President Bush's plan are more concerned about the prospects of raising costs and worsening service than any philosophical commitments concerning the role of government.

The article is accompanied by a graph that shows the current and projected future costs of Medicare, Medicaid, and Social Security. The chart hugely overstates the numbers. For example, it shows Social Security currently costing $1.2 trillion in 2003 and rising to more than $2.0 trillion in 2013. According to the Congressional Budget Office (which is listed as the source for the chart), Social Security spending in 2003 is projected to be $474 billion, and it is projected to rise to $807 billion in 2013.


Europe

Western Investment Provides A Bonanza for East Europe
Alan Cowell
New York Times, February 22, 2003, Page A6

This article reports on investment patterns by western firms in Eastern Europe. It asserts that firms are anxious to invest in Eastern Europe rather than Western Europe, because the East European countries are seen as, "hungrier and more ready for innovation than those in the West." It also asserts that Eastern Europe is a more attractive target for investment because it is growing more rapidly.

It is not clear what hunger for innovation means, nor is there any obvious reason why a firm would want to invest in a country that is growing rapidly. The markets of Eastern European countries are very small and will continue to be very small, even if they grow rapidly for many years. Furthermore, these markets can be served from anywhere in the region, since these countries will be entering the European Union in the next few years.

The obvious benefit to investing in Eastern Europe is that the wages are much lower than in Western Europe. This is the same reason that foreign auto manufacturers put their new U.S. factories in Alabama and Mississippi. Since these manufacturers intend to sell their cars throughout the United States, they have probably never even considered the growth rate in these states – except as a possible negative factor, since rapid growth could lead to upward pressure on wages in the future.


Environmental Policy

On Environmental Rules, Bush Sees a Balance, Critics a Threat
Douglas Jehl
New York Times, February 23, 2003, Page A1

This article discusses the Bush Administration's environmental policies. At several points it asserts that the administration's policies are motivated by philosophical considerations. While it is possible that philosophical considerations play a role in determining policy, it is also possible that the powerful commercial interests who stand to gain are the main forces guiding policy, and that the philosophical claims are a mere cover.

For example, the article twice asserts that President Bush is opposed to the Kyoto agreement because he believes that the economic damage would be too great. Standard economic models predict that the economic costs from his military build-up would be comparable to the costs associated with complying with the Kyoto agreement. There is no evidence that he has given these economic costs any consideration in pushing ahead with his military plans; therefore it seems implausible that concern about the overall economic impact of the Kyoto agreement is the basis of President Bush's opposition. It seems more plausible that the potential lost profits of special interest groups with close ties to the administration – such as the automobile, oil, and coal industries – were the major factor that led him to abandon the Kyoto agreement.


Population in Russia

Russians Feel Abortion's Complications
Sharon LaFraniere
Washington Post, February 22, 2003, Page A16

This article discusses the long-term effect of the birth control policies of the Soviet Union. With most forms of birth control difficult to obtain, abortion became a leading method of birth control. As a result of complications, many women were left infertile after abortions.

The article discusses this situation in the context of projections that Russia will experience a sharp decline in population over the next fifteen years. The prospect of a declining population is presented as a serious problem for Russia, but there is no obvious reason that it would be. A falling population relieves pressure on land and resources and reduces congestion. A country can prosper with a falling population at least as easily as it can with an increasing population.


Venezuela Oil

Venezuela's Lifeblood Ebbs Even as It Flows
Juan Forero
New York Times, February 26, 2003, Page C1

This article discusses the Venezuelan government's plans for the reorganization of PDVSA, its state-owned oil company. The article repeatedly refers to the PDVSA in positive terms, at one point describing it as "highly regarded."

The article does not indicate the basis for this assessment. The standard measure of a business's performance is its return to shareholders which, in this case, is the government of Venezuela. By this measure, PDVSA has performed quite poorly, consistently producing less revenue (often less than half as much), than the state owned oil industry in Mexico – in spite of the fact that Mexico produces less oil. PDVSA has some of the highest expenses, relative to revenue, of any oil company in the world. It has also made large investments, such as the purchase of CITGO in the United States, that have produced very small returns. By standard measures of economic performance, there seems little basis for praising PDVSA.


The Budget

Fiscal 2003: The Final Cut: A Look At the Inner Workings of Government
Washington Post, February 26, 2003, Page A21

This article reports on some of the last minute additions to and deletions from the 2003 budget. It includes a list of pork barrel items that were added to the main budget bill. It reports the spending in dollar amounts. It would have been more informative to report the pork barrel spending measured as a share of total discretionary spending or the total budget. All the listed items together are equal to 0.00055 percent of discretionary spending. They are equal to approximately 0.00018 percent of the total budget.

Democrats Denounce White House on Cost of War
Mike Allen and Jonathan Weisman
Washington Post, February 27, 2003, Page A12

This article discusses projections for the cost of a war against Iraq and the budget deficit. It notes that the cost of the war could push the deficit for 2003 to $400 billon, which it describes as a record. The only meaningful way to measure the deficit is as a percentage of GDP. The economic impact of a $400 billion budget depends on the size of the economy, just as the impact of a personal debt cannot be evaluated apart from the person's income. (Bill Gates borrowing $1 million is not a problem, while for most families this debt would be crushing.) The record peace-time deficit measured as a share of GDP was 6.0 percent in 1983. The 2003 deficit would be equal to approximately 3.7 percent of GDP, if it hits $400 billion.

It is also worth noting that the article only refers to the unified budget deficit, which includes the Social Security surplus. It is often claimed that politicians have sought to use the Social Security surplus to hide the true size of the deficit. The Congressional Budget Office and all other budget agencies print the size of the deficit excluding the Social Security surplus. The projected 2003 Social Security surplus is $162 billion, which means that the on-budget deficit (which excludes the Social Security surplus) could hit $562 billion (5.3 percent of GDP) in the event of a war with Iraq. For some purposes the on-budget deficit is considered the more appropriate measure of the deficit, and in such cases (including the discussion in this article) it is the one that reporters should focus on.


Minimum Wage Laws

Santa Fe Wrangles Over Broad `Living Wage' Bill
Lee Hockstader
Washington Post, February 26, 2003, Page A3

This article discusses the debate in Santa Fe, New Mexico over a bill raising the minimum wage paid by many businesses to $10.50 an hour by 2007. At one point the article asserts that the debate over the bill "is as much philosophical as economic," claiming that the bill affronts many business owners' ideas of capitalism.

While the opponents of the bill understandably present their argument as one of principle, rather than simply self-interest, the article presents no evidence that this is in fact the case. Most small business owners have been happy to benefit from special tax breaks, exemptions from health and safety rules, and, in some cases, mandated price breaks for electricity and other items. There has never been organized resistance from small businesses for these sorts of interventions in the market. This suggests that their concern over the proposed minimum wage increase stems from its impact on their profits rather than from any philosophical objection to government intervention.


Job Growth

Employers to Delay Hiring, Survey Shows
Associated Press
Washington Post, February 24, 2003, Page A12

This article reports on the findings of a survey of employers on their hiring plans. It reports that the survey indicates that the job market will show improvement in the second quarter. The survey showed figures last year for the second quarter of 2002 that were almost identical to its current measure. In that year, employers reduced employment by 71,000 compared with the first quarter. This indicates that the survey's findings are consistent with a weakening labor market rather than an improving one.