Economic Reporting Review
By Dean Baker
May 12, 2003

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OUTSTANDING STORIES OF THE WEEK

Inside the Nature Conservancy (three articles)

Nonprofit Land Bank Amasses Millions
Joe Stephens and David B. Ottaway
Washington Post, May 4, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A9888-2003May3.html

How a Bid to Save a Species Came to Grief
Joe Stephens and David B. Ottaway
Washington Post, May 5, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A13933-2003May4.html

Nonprofit Sells Scenic Acreage to Allies at a Loss
Joe Stephens and David B. Ottaway
Washington Post, May 6, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A17955-2003May5.html

This investigative series examines the practices of the Nature Conservancy, which is by some measures the nation's largest environmental organization. The series exposes a number of questionable practices that have benefited friends and associates of the Nature Conservancy's top management.

A Respected Face, but Is It News or an Ad?
Melody Petersen
New York Times, May 7, 2003, Page C1
http://www.nytimes.com/2003/05/07/business/media/07DRUG.html

This article reports on plans by drug companies to use several widely respected television news reporters or anchors as spokespeople in ads for their drugs. The drug companies hope that the credibility that these people have gained as news reporters will lend credence to their statements in drug ads. In the days following the publication of this article, several of the reporters who were mentioned in it pulled out of their arrangements with drug companies.

Critics Say Proposal for Medicare and Private Health Plans Could Increase Costs
Robert Pear
New York Times, May 6, 2003, Page A23
http://www.nytimes.com/2003/05/06/politics/06MEDI.html?ex=1367640000&en=ac7ce1411e228f39&ei=5007&partner=USERLAND

This article reports on new evidence from the Medicare Payment Advisory Council, a nonpartisan advisory panel, which shows that private insurers within Medicare have higher costs than the traditional Medicare system.


Job Growth

Jobless Rate Rose To 6% In April
John M. Berry
Washington Post, May 3, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A5858-2003May2.html

Jobless Rate Rose To 6% In April
David Leonhardt
New York Times, May 3, 2003, Page A1
http://www.nytimes.com/2003/05/03/business/03ECON.html?ex=1052539200&en=e5102f26819457b1&ei=5007&partner=USERLAND


These articles discuss the Labor Department's release of jobs data for April. Both articles mention the fact that the Labor Department's survey of households shows an increase in the number of employed people over the last year, while the more widely followed survey of establishments shows a large loss of jobs. 

This discrepancy is in part explained by the Labor Department's re-benchmarking of the household survey to the 2000 Census data. The re-benchmarking both increased the absolute size of the population shown in the household survey and also increased the annual rate of population growth, from approximately 2.1 million people a year prior to the re-benchmarking, to a growth rate of 2.8 million a year since the re-benchmarking. This upward revision in the growth assumption was due to the fact that the household survey substantially understated the rate of population growth in the nineties, primarily because it underestimated immigration during the decade.

The household survey is now effectively assuming that the rapid rate of immigration growth of the nineties is continuing through to the present. This is likely to lead to a substantial overstatement of population growth for two reasons. First, the weak economy of the last two years is unlikely to pull in immigrants in the same way as the strong economy of the late nineties. In fact, there could be a significant flow in the opposite direction, as immigrants who held jobs when the unemployment rate was 4.0 percent lose their jobs and return to their home countries. The other reason why the current immigration rate may be substantially slower than the late nineties rate is the increased scrutiny of immigrants and curtailment of immigrant rights since September 11th. 

The number of employed persons in the household survey is derived from estimates of population, which in turn depend on its assumptions about immigration. If immigration has slowed substantially for the reasons noted here, then the household survey would be overstating the number of jobs in the economy. It is likely that this is an important cause of the discrepancy between the two surveys. If the household survey had incorporated the same assumption about the growth rate of the population as it did prior to the re-benchmarking, approximately half of the discrepancy between the two surveys would disappear.


Gephardt Health Care Plan

Democrats Head to S.C. for First Debate
Dan Balz
Washington Post, May 3, 2003, Page A5 http://www.washingtonpost.com/wp-dyn/articles/A7595-2003May2.html

Democrats Spar on War, Health
Dan Balz
Washington Post, May 4, 2003, Page A4 http://www.washingtonpost.com/wp-dyn/articles/A10831-2003May3.html

These articles discuss the Democratic presidential candidates' stands on various issues in the context of the first full debate between the major candidates. Both articles comment on Representative Richard Gephardt's proposal for universal health care insurance. The first article describes it as "costly," while the second asserts that the cost of the plan would "grow rapidly" after the first year. In neither case does the article include any evidence or provide any basis for its negative characterization of the Gephardt plan.


Copyrights

Software Bullet Is Sought to Kill Musical Piracy
Andrew Ross Sorkin
New York Times, May 4, 2003, Page A1
http://www.nytimes.com/2003/05/04/business/04MUSI.html?ex=1052625600&en=c2df74c95da2cb89&ei=5007&partner=USERLAND

This article discusses efforts by the entertainment industry to develop software that would temporarily or permanently damage computers that were being used to make copies of copyrighted material. The article repeatedly refers to such copying as "piracy." This is inaccurate. The software discussed in this article would damage computers being used to make copies of material even in cases where it could not be described as piracy. For example, a person seeking to copy a CD onto a computer that he is using for travel may find his computer damaged by the software described in this article. This software could also potentially damage computers in countries where the industry's copyrights were not applicable.

It also would have been appropriate to present the views of an economist on this behavior. Economic theory predicts that the rents created by forms of protection, like copyright, will lead to wasteful rent-seeking behavior. However, the deliberate sabotage described in this article is certainly rather extreme. It shows the incredible inefficiency that is associated with copyright enforcement. It would be helpful to include discussions of alternative methods of supporting creative work that are more market-friendly and efficient than copyright protection.


Bush Tax Cut

Bush, Returning From Ranch, Resumes Effort for Tax Cut
David E. Sanger
New York Times, May 6, 2003, Page A22
http://www.nytimes.com/2003/05/06/politics/06BUSH.html?ex=1367640000&en=ac5a514968ab8ef9&ei=5007&partner=USERLAND

Tax Cut Plans Proceed in Congress
David E. Rosenbaum and David Firestone
New York Times, May 7, 2003, Page A24
http://www.nytimes.com/2003/05/07/politics/07TAXE.html?ex=1367726400&en=2e6ea7aba09ab480&ei=5007&partner=USERLAND

As Bush Tax Plan Falters, Conservatives Find a Silver Lining
David Firestone
New York Times, May 8, 2003, Page A25
http://www.nytimes.com/2003/05/08/politics/08TAX.html?ex=1367812800&en=3f9cea5d90e54e1e&ei=5007&partner=USERLAND

These articles discuss the status of Congressional action on President Bush's tax cut proposal. All three articles report that a new variation would lower the tax rate paid on dividends and capital gains to 15 percent. Most taxpayers currently pay a marginal tax rate of 15 percent or less. The reduction in the tax rate discussed in these articles would only apply to the minority of taxpayers who are in the 28 percent, or higher, tax bracket. While this group of taxpayers does get the vast majority of dividends and capital gains, it accounts for less than 40 percent of all taxpayers.

The Rosenbaum and Firestone article asserts that the original Bush tax proposal would eliminate the taxation of dividends. This is not true. Most stockholders own most of their stock in retirement accounts such as 401(k)s. Under this plan, the dividends on stocks held in retirement accounts would still be subject to taxation when the money is withdrawn.


Trade

U.S. Hopes to Bridge Divide With Europe in Trade Talks
Mark Landler
New York Times, May 5, 2003, Page C2
http://www.nytimes.com/2003/05/05/business/worldbusiness/05TRAD.html?ex=1052712000&en=13dba90a3e5c7b2f&ei=5007&partner=USERLAND

Bush Signs Singapore Trade Pact
Elizabeth Becker
New York Times, May 7, 2003, Page C4
http://www.nytimes.com/2003/05/07/business/worldbusiness/07TRAD.html?ex=1367640000&en=0e9ed7b73ba376a0&ei=5007&partner=USERLAND

These articles discuss trade pacts or potential pacts between the U.S. and trading partners. They both repeatedly use the term "free trade" to discuss these pacts. The issues being negotiated do not all deal with freeing trade. In some cases, such as copyright and patent rules, the pacts are aimed at increasing protectionism by strengthening these market barriers. It would be more accurate to simply refer to these negotiations as involving "trade" rather than "free trade."


Prescription Drugs

Claritin's Price Falls, but Drug Costs More
Milt Freudenheim
New York Times, May 8, 2003, Page C1
http://www.nytimes.com/2003/05/08/business/08ALLE.html?ex=1367726400&en=a9afcc81dcfa0108&ei=5007&partner=USERLAND

This informative article examines the effect that making prescription drugs available as over-the-counter drugs has had on the price paid by consumers. At one point, the article reports on disputes between the Food and Drug Administration (FDA) and drug companies over whether a drug should be available on a prescription only, or an over-the-counter basis. The article refers to the industry's objection to being "forced" to distribute its drugs over-the-counter.

Actually, the issue is not whether a manufacturer can be forced to distribute their drugs over the counter, the issue is whether the manufacturer or the FDA can impose the restriction that the drug only be distributed with a doctor's prescription. Requiring a doctor's prescription is a government intervention that limits distribution. The drug industry would like to be able to impose its will on the government, determining when it should restrict the distribution of drugs in this manner. The FDA's position is that it -- rather than a drug company -- should make the judgment as to whether it is necessary to require a doctor's prescription.

Deflation

Fed Is Starting to Fret Over Falling Prices
Daniel Altman
New York Times, May 9, 2003, Page C1
http://www.nytimes.com/2003/05/09/business/09DEFL.html?ex=1367899200&en=a5c3099e28f2ea52&ei=5007&partner=USERLAND

This article discusses the prospect that the United States economy may face a period of deflation and the likely consequences of deflation. At one point it discusses the concept of a "liquidity trap," which it describes as a problem created by the fact that the nominal interest rate cannot fall below zero. This means that the real interest rate may rise, against the Fed's intentions, when prices start falling in a period of deflation.

Actually, the concept of a liquidity trap refers to a different issue. The Federal Reserve Bank most directly controls short-term interest rates through its control of the money supply. However, the long-term interest rate, such as the rate for home mortgages or corporate bonds, has far more impact on the economy. Investors making long-term loans worry not just about the current interest rate, but also future interest rates. Mortgages or bonds are often resold, and the price of these assets is inversely related to the interest rate. In other words, if interest rates rise, the price of a mortgage or bond falls.

When short-term interest rates are very low, reducing them further may have little effect on long-term interest rates, because investors are worried that interest rates will rise in the future - thereby leading to large capital losses. This means that the Fed's efforts to stimulate the economy through further cuts in the interest rate could prove ineffective. This situation is known as a "liquidity trap." Arguably, the United States is already facing such a liquidity trap, as long-term interest rates have not fallen in response to the Fed's last cut in the short-term interest rate.

The article also includes a discussion of the distributional impact of deflation. It reports that deflation benefits creditors and hurts debtors, since it means that loans will be repaid in money that is worth more than the money that was lent. This is true, but the exact same argument applies to any reduction in the rate of inflation. Any long-term interest rate includes some implicit inflation premium. If the rate of inflation falls below the rate that was expected at the time when a loan was issued, it benefits the lender and harms the borrower. A situation in which the inflation rate falls below zero is just one example of the more general issue.

The article compares the prospect of deflation in the United States with the recent experience in Japan. It notes several advantages of the United States, one of them being the strong real estate market in the United States. Actually, there is considerable evidence that the United States, like Japan, is experiencing a real estate bubble. When it collapses, it will exacerbate the economy's problems. In comparing the two countries, it also should have been noted that Japan had a large current account surplus when its bubbles collapsed. The United States has a large current account deficit. This could end up restricting the efforts of the Federal Reserve Board to stimulate the economy.