Economic Reporting Review By Dean Baker November 10, 2003

Economic Reporting Review
By Dean Baker
November 10, 2003

OUTSTANDING STORIES OF THE WEEK

Illegally in U.S., and Never a Day Off at Wal-Mart
Steven Greenhouse
New York Times, November 5, 2003, A1
http://www.nytimes.com/2003/11/05/national/05WALM.html

This article examines the situation of undocumented foreign workers at Wal-Mart. It looks at both the economics from the standpoint of Wal-Mart, as well as the experience of the workers who come to the United States for these jobs.

Beneath the Smiles, A Churning Anxiety
Louis Uchitelle
New York Times, November 2, 2003, Section 3 page 4
http://query.nytimes.com/gst/abstract.html?res=F40E1EF739540C718CDDA80994DB404482

This article examines the patterns of job churning that is becoming increasingly common in the U.S. economy. It notes that large numbers of workers fear losing their job because they believe that a new job is likely to pay them less and provide worse health care and pension benefits.

China's Factories Aim to Fill Garages Around the World
Keith Bradsher
New York Times, November 2, 2003, Page A4
http://query.nytimes.com/gst/abstract.html?res=F30916FF3B540C718CDDA80994DB404482

This article reports on the recent growth of the Chinese automobile industry and the potential obstacles to its future development.

The Economy

For Democrats, Economy's Surge Poses Challenge
David Leonhardt
New York Times, November 2, 2003, page A1
http://query.nytimes.com/gst/abstract.html?res=FB0813FE3B540C718CDDA80994DB404482

This article discusses the possibility, based on recent economic data, that the economy will be growing at a healthy pace and will be an asset for President Bush in his 2004 re-election campaign. It is not clear that the most recent data indicate that this situation is likely.

The economy did grow at an extraordinary rate in the third quarter, driven by tax rebate checks, lower tax withholding schedules, and a record pace of mortgage refinancing. However, the tax rebates were a one-time event and the surge of mortgage refinancing has fallen back to approximately one-third of its peak level. The most recent data on consumption spending in September suggests that the stimulus from these factors is already fading.

In fact, if personal income grows in the fourth quarter at the same rate it did in September (which is equal to its growth rate over the last year), and the savings rate out of disposable income is equal to its rate in the third quarter (3.3 percent), then consumption will actually fall at a 1.1 percent annual rate in he fourth quarter. If the other components of GDP move at the same pace in the fourth quarter as they did in the third quarter, this would lead to a growth rate of just 1.4 percent for the quarter. A growth rate of 1.4 percent would almost certainly be too slow to generate job growth, and would likely be associated with a rising unemployment rate. In short, unless there is an upturn in growth due to factors that are not currently apparent, there is little prospect that the economy will be on a healthy growth path by November of next year.

This article includes a chart showing the annual rise in the home price index over the last quarter century. It would be more informative if this chart were adjusted for inflation so that the increases were shown in real terms.

Russia

Russian Premier Steps Into Fray On Jailed Tycoon
Erin E. Arvedlund and Sabrina Tavernise
New York Times, November 1, 2003, page A1
http://query.nytimes.com/gst/abstract.html?res=F4061FFD38540C728CDDA80994DB404482

This article reports on Russian President Vladimir V. Putin's comments on the prosecution of Russia's wealthiest businessman. At one point the article describes a conflict in ruling circles between officials tied to the security agencies and "a free-market faction." It is not clear that this is an accurate description of this faction.

Russia's business elite acquired their wealth through political connections, which allowed them to purchase privatized state assets at below market prices. This fact is widely acknowledged, including in this article. The political faction described as "a free-market faction" is most clearly identified as being loyal to this wealthy group of business people. It is not clear what political philosophy these people hold or that their philosophy is determining their political behavior. It would be more accurate to simply describe this faction as being tied to Russia's business elite.

Medicare

White House Backs Limits on Spending for Medicare
Robert Pear
New York Times, November 4, 2003, page A16
http://www.nytimes.com/2003/11/04/politics/04MEDI.html

This article reports on the progress of a House-Senate conference committee in designing a package that will restructure Medicare. At one point the article compares current spending on Medicare from general revenue to its projected level for 2012. The article reports that spending is projected to more than double over this period. It would have been more informative to express the growth in spending as a share of GDP. General revenue spending on Medicare as a share of GDP is expected to be approximately 1.1 percent of GDP in 2012, compared to approximately 0.8 percent of GDP now. These projections imply an increase of spending on Medicare of approximately 0.3 percentage points of GDP over the course of a decade. By comparison, spending on the military has increased by more than a full percentage point of GDP between 2001 and 2003.

It is also worth noting that the cost-control measure discussed in this article will likely lead to sharp increases in Medicare spending for most beneficiaries. As a result of this provision, most Medicare beneficiaries will likely end up paying more money for their health care even with a Medicare drug benefit, than they would if the program were left intact and no drug benefit were added.

These proposed changes in Medicare will have a large impact on the well-being of future retirees. Given the potential importance of these proposals in people's lives, they should have been the main item in this article.

Democrats Assail GOP on Drug Bill
Helen Dewar
Washington Post, November 5, page A4
http://www.washingtonpost.com/wp-dyn/articles/A493-2003Nov4.html

Hill Negotiators Rethink Reimported Drugs
Amy Goldstein and Helen Dewar
Washington Post, November 6, page A2
http://www.washingtonpost.com/wp-dyn/articles/A5926-2003Nov5.html

These articles report on the progress of a House-Senate conference committee in designing a Medicare prescription drug benefit. While both articles mention some of the key issues that separate Democrats and Republicans on the bill, neither presents any analysis that would allow readers to get a clear sense of what is at issue. For example, the November 5th article reports that Republicans claim that their proposal for restructuring competition between private health care plans and the traditional Medicare program is essential for preserving Medicare, while Democrats claim that it will raise premiums. The article provides no basis for assessing the validity of these competing claims.

It is also worth noting that the most recent projections from the Medicare trustees show that the program will be fully solvent for the next twenty-five years with no changes whatsoever. The discussion in these articles wrongly implies that the program faces an imminent financial crisis.

Productivity Growth and Jobs

Greenspan Buoyant on Jobs Outlook
John M. Berry
Washington Post, November 7, page E1
http://www.washingtonpost.com/wp-dyn/articles/A7936-2003Nov6.html

Greenspan Hints at End to Low Rates
Edmund L. Andrews
New York Times, November 7, 2003, C1
http://www.nytimes.com/2003/11/07/business/07econ.html

These articles report on a speech by Alan Greenspan, in which he discussed the economy's future prospects. Both articles note the rapid pace of recent productivity growth, and indicate that this growth will impede job growth. It is important to note that the rate of productivity growth in this recovery is not very different from its growth in prior recoveries. Productivity growth has averaged 5.4 percent over the last eight quarters, compared to 3.9 percent in the previous five recoveries. The current rate of productivity growth is only slightly higher than the 5.1 percent rate during the years from 1961 to 1963. In four of the last five recoveries (the early nineties recovery was the exception), the economy was rapidly generating jobs, in spite of strong productivity growth. This was due to the fact that the economy grew more rapidly in prior recoveries, 4.6 percent on average, compared to 3.4 percent in the current recovery. The explanation for job loss in this recovery is weak economic growth, not strong productivity growth.

The Post article includes an extensive discussion of Alan Greenspan's assessment of the economy's prospects. It is worth noting that his past evaluations have proven to be badly mistaken. Mr. Greenspan missed the stock bubble, missed both the onset of the recession and the prolonged weakness that would follow, and he failed to recognize the impact that the collapse of the stock bubble would have on the federal budget when he supported President Bush's tax cuts in early 2001.

Japan

Bank of Japan Sees 2.5% Growth in 2004
Ken Belson
New York Times, November 1, 2003, page B3
http://query.nytimes.com/gst/abstract.html?res=F20911FC38540C728CDDA80994DB404482

This article reports on Japan's growth prospects for next year. At one point it notes that Japan's central bank indicated its intention to keep interest rates near zero, even though it is projecting moderate growth for next year. The article comments that "typically, central bankers begin considering how to raise interest rates when their economies are recovering." Actually, central banks usually claim that they raise interest rates when they are concerned that rapid economic growth and low unemployment will lead to rising inflation. Japan's central bank is currently concerned about the prospect of continuing deflation. There would be little reason for it to be raising interest rates in the current circumstances.

European Pension Systems

Europeans Face a Bleaker Old Age
Keith B. Richburg
Washington Post, November 7, page A25
http://www.washingtonpost.com/wp-dyn/articles/A9897-2003Nov6.html

This article discusses the prospects for Europe's pension systems. The article notes that the ratio of retirees to workers is projected to rise in European countries due to the fact that people are living longer, and declining birth rates, which have led to slow growth in the working age population. It would have been helpful to note that this pattern has been in place for the whole post-war period. The projected rate of increase in the costs of the pension systems in Europe over the next forty years is not very different from the rate of increase experienced over the last forty years.

The article also includes a comparison with the United States, which it claims is better situated to deal with its aging population, due to higher immigration rates and birth rates. Actually, the aging of the population is projected to place a much greater burden on the U.S. budget than on the budget of European nations. This is due to the fact that the health costs are growing far more rapidly in the United States than Europe. Most health care costs for the elderly are paid by the government through Medicare and Medicaid. The prospect of rapidly rising health care costs, coupled with an aging population, will be more of a drain on the U.S. budget than the aging of the population is projected to be on European budgets.

It is also worth noting that Europeans, on average, do not face a bleaker old age, as the headline asserts. Due to rising productivity, retirement pensions are likely to be substantially higher in twenty or thirty years -- even after adjusting for inflation -- than they are today, even if there are some reductions in benefit formulas.

Restrictions on Digital Technology

FCC Approves First Digital Anti-Piracy Measure
Jonathan Krim and Frank Ahrens
Washington Post, November 5, page E1
http://www.washingtonpost.com/wp-dyn/articles/A1197-2003Nov4.html

F.C.C. Acts Against Pirating of TV Broadcasts
Stephen Labaton
New York Times, November 5, 2003, page C1
http://www.nytimes.com/2003/11/05/business/media/05flag.html

These articles report on the Federal Communications Commission's approval of plan to include a digital lock that will restrict the reproduction of digital broadcasts. It would have been helpful to include some economic analysis of the costs to consumers of this restriction on the use of technology.

The use of the term "piracy" in both headlines is inappropriate. The proposed locks will prevent all forms of copying, some of which may be defined as "piracy" under current law, but some of which would be consistent with fair use. It would have been more accurate to simply report that the measures would prevent copying.

Drug Patents

Cholesterol Study Offers Hope for Bold Therapy
Gina Kolata
New York Times, November 5, 2003, page A19
http://www.nytimes.com/2003/11/05/health/05CHOL.html

This article reports on the development of a new method for treating heart disease. At one point the article reports that an alternative promising course had not been pursued because the key elements were already in the public domain and therefore not subject to patent protection: "a second, but obvious choice, would be to give people H.D.L., infusing it into their veins. But there was a problem. The idea of giving ordinary H.D.L. was in the public domain and not protected by patent and so companies were not interested."

This statement, if true, implies that potentially productive paths of drug research are routinely neglected because the results may not be patentable. Few people are aware of this type of inefficiency associated with patent-supported drug research. This issue is at least as newsworthy as the medical breakthrough that is the subject of the article.