Economic Reporting Review November 17

Economic Reporting Review
By Dean Baker
November 17, 2003

OUTSTANDING STORIES OF THE WEEK

Failed Pensions: A Painful Lesson in Assumptions
Mary Williams Walsh
New York Times, November 12, 2003, page A1
http://www.nytimes.com/2003/11/12/business/12PENS.html

This article reports on how several pension funds have run into serious shortfalls as a result of making overly optimistic projections about the rate of return they could expect on their assets.

The Secret Life of a Retirement Account
Lynnley Browning and David Cay Johnston
New York Times, November 11, 2003, page C1
http://www.nytimes.com/2003/11/11/business/11tax.html

This article reports on a type of retirement account established by Grant Thornton, a major accounting firm, which would allow wealthy individuals to avoid ever paying taxes on their money.

States Pay for Jobs, but it Doesn't Always Pay Off
Louis Uchitelle
New York Times, November 10, 2003, page A1
http://query.nytimes.com/gst/abstract.html?res=F60B15FB3A5D0C738DDDA80994DB404482

This article examines state incentives to attract businesses and the impact that such incentives have on job creation. It points out that the number of jobs created is often much less than originally promised It focuses specifically on an airplane maintenance facility for which the state of Indiana provided $320 million in subsidies. The facility is currently empty.

The Economy

Bloom Is on the Economy
Floyd Norris
New York Times, November 8, 2003, page B1
http://query.nytimes.com/gst/abstract.html?res=F50F1EFE385D0C7B8CDDA80994DB404482

This article assesses the strength of the economy based on the data in the October employment report and other recent data. At one point the article cites the recent upturn in employment in the temporary help sector as evidence that job growth will likely accelerate.

While employment in this sector is generally a good indicator of the future strength of the labor market, it does occasionally diverge sharply from overall employment trends. For example, from October 1995 to January 1996 employment in the temporary help sector fell by 29,000. In the three months following January 1996, the economy added 855,000 jobs. By contrast, the economy added 73,000 jobs in the temporary help sector from January to April of 2002. It lost 211,000 jobs in the following three months.

Job Growth is Greatest Since Recession Ended
John M. Berry
Washington Post, November 8, page A1
http://www.washingtonpost.com/wp-dyn/articles/A13982-2003Nov7.html

This article reports on the release of the October employment report. At one point the article cites comments from Gregory Mankiw, President Bush's top economic advisor, in which he noted that employment as measured by the household survey rose by more than 500,000 over the last three months. The monthly employment data in the household survey is extremely erratic. Most economists view the data from the establishment survey as being far more reliable, which is why it is usually the focus of discussion.

This article also cites at some length Federal Reserve Board Chairman Alan Greenspan's optimistic assessment of the economy's prospects. It would have been appropriate to note that he had badly misjudged the economy's prospects in the past, most notably having completely failed to foresee the downturn in 2001.

Bush Promotes Retraining Programs
Dana Milbank
Washington Post, November 8, page A10
http://www.washingtonpost.com/wp-dyn/articles/A13971-2003Nov7.html

This article reports on a speech that President Bush gave in North Carolina in which he touted the shift from a manufacturing economy to a high tech economy, "As our society, particularly North Carolina's economy, shifts from textiles to biotechnology, the pay gets better." This actually has not proven to be true. The shift away from manufacturing has actually been associated with declining real wages for most workers.

Despite Jobs Spurt, Executives Remain Cautious About Adding Workers and Plants
Edmund L. Andrews
New York Times, November 9, 2003, Section 3, page 1
http://query.nytimes.com/gst/abstract.html?res=F60C14FC3B5D0C7A8CDDA80994DB404482

This article discusses attitudes among business executives towards increased hiring. At one point it presents the assessment of Ben Bernacke, a member of the Federal Reserve's Board of Governors, that the rapid pace of productivity growth has been the main obstacle to job growth in this recovery. In fact, productivity growth is always rapid in recoveries. In past recoveries rapid productivity growth did not prevent job growth because it was also associated with rapid economic growth. The 3.4 percent rate of economic growth in this recovery is the second slowest (after the 90-91 recession) rate of growth for any recovery in the post-war period. Relatively slow economic growth, not rapid productivity growth, is the cause of the continued weakness in job growth.

This article also asserts that with the natural growth of the labor force, "the economy needs to add about 150,000 jobs a month before unemployment will drop much below its current level of 6.0 percent." Actually, with the natural growth of the labor force, it will take approximately 150,000 jobs per month just to keep the unemployment rate constant. It will take substantially more rapid job growth to bring the unemployment rate down.

AIDS Drug Prices

Clinton Urges China to Act Fast on AIDS
Jim Yardley
New York Times, November 11, 2003, A11
http://www.nytimes.com/2003/11/11/international/asia/11CHIN.html

This article reports a speech by former President Bill Clinton on the problem of AIDS in the developing world. The article reports that he referred to the high price of AIDS drugs in the developing world as "an international scandal." It would have been useful to mention that when Clinton was president, he pushed through the Uruguay Round agreement of the WTO. This agreement included the trade related aspects of intellectual property (TRIPS) provisions, which imposed U.S.-type patent protections in the developing world. This extension of patent protection is one of the main reasons why AIDS drug prices are high in the developing world. The Clinton administration also initiated an action at the WTO against a Brazilian law aimed at increasing domestic production of generic AIDS medicines. Brazil has had one of the most successful treatment program in the world of people with HIV/AIDS.

European Growth

Growth is Back for French, Germans, and Dutch
Mark Landler
New York Times, November 14, 2003, W1
http://www.nytimes.com/2003/11/14/business/worldbusiness/14euro.html

This article reports on new data which shows that the economies of France, Germany, and the Netherlands are growing again. At one point the article presents comments from N. Gregory Mankiw, President Bush's economic advisor, in which he claims that there is no reason that European countries should not be growing as fast as the United States. Actually, there are two obvious reasons that their economic growth -- as measured by GDP -- would not be as fast. There have had lower birth rates, and therefore lower labor market growth, and Europeans have consciously decided to take a portion of their productivity gains in the form of shorter workweeks and longer vacations. Economists have no basis for arguing that people should prefer more work and higher income to more leisure.

Mr. Mankiw is also quoted as saying that Europe has taken steps to deregulate its labor markets (e.g. reduce unemployment benefits and cut back employment protections) and that these measures will lead to more growth. There is actually very little evidence for this view (see "Labor Market Protections and Unemployment: Does the IMF Have a Case? [http://www.cepr.net/IMF_unemployment.htm]).

The most obvious cause of high European unemployment and slow growth is the contractionary monetary policy pursued by the European Central Bank (ECB). It has left its short-term interest at 2.0 percent compared to the 1.0 percent set by the Fed, even though its inflation rate is comparable and its unemployment rate is higher. The contractionary effect of ECB monetary policy is not discussed in this article.

Trade

U.S. Loses Appeal On Steel Tariffs
Paul Blustein and Jonathan Weisman
Washington Post, November 11, page A1
http://www.washingtonpost.com/wp-dyn/articles/A24182-2003Nov10.html

No One Policy U.S. Trade Positions Shift According to Geography
Paul Blustein
Washington Post, November 14, page E1
http://www.washingtonpost.com/wp-dyn/articles/A38222-2003Nov13.html

These articles discuss various trade issues, including the Bush administration's possible response to a ruling that the steel tariffs it imposed last year violate WTO rules. Both articles include references to the status of the Bush administration and/or the United States as "a champion of free trade."

It is not clear why anyone would view the United States as a champion of free trade. This perception is certainly at odds with reality. The United States has consistently been the most vigorous proponent of extending copyright and patent protection, which are probably the two most costly forms of protection confronting the world economy at present. The United States also has extensive licensing and professional restrictions, which severely limit the ability of qualified foreign professionals, such as doctors and lawyers, from practicing in the United States (see "Professional Protectionists: The Gains From Free Trade in the Highly Paid Professions," [http://www.cepr.net/professional_protectionists.htm]).

For Bush, A Janus-Like View of Trade
Elizabeth Becker
New York Times, November 12, 2003, C1
http://www.nytimes.com/2003/11/12/business/12trade.html

This article examines President Bush's positions on trade. At one point it reports that the complaints of critics that Bush's policies "look like those of a protectionist rather than a free trader." President Bush is a protectionist; he openly supports increasing copyright and patent protection. He also has expressed no interest in reducing professional restrictions that limit the ability of foreign-educated professionals from competing in the U.S. market. The article wrongly portrays a distinction between "free-trade" policies and protectionist policies based entirely on attitudes toward trade in merchandise.

At one point the article describes President Bush as "the leader of a nation that has profited substantially from global trade." It would have been equally accurate to identify Mr. Bush as the leader of a country that has seen a substantial increase in inequality due to trade.

Medicare

Issue of Competition Causes Widest Split Over Medicare
Robert Pear
New York Times, November 10, 2003, A4
http://query.nytimes.com/gst/abstract.html?res=F70A1FFD3A5D0C738DDDA80994DB404482

House Republicans Offers Compromise in Hope of Ending Stalemate on Medicare
Robert Pear
New York Times, November 12, 2003, A16
http://www.nytimes.com/2003/11/12/politics/12MEDI.html

Offer Slows House-Senate Medicare Talks
Amy Goldstein
Washington Post, November 13, page A16
http://www.washingtonpost.com/wp-dyn/articles/A33883-2003Nov12.html

Tentative Medicare Pact Offers Drug Benefits to the Elderly
Robert Pear
New York Times, November 13, 2003, A18
http://www.nytimes.com/2003/11/13/politics/13MEDI.html

These articles report on the debate over competing proposals for a Medicare prescription drug benefit. It would be extremely difficult for readers to understand the key issues in this dispute based on the material presented in these articles. The articles include repeated assertions that one of the key issues is over whether the traditional Medicare program will be placed in direct competition with private plans. This is not true. The traditional Medicare program already competes directly with private plans; the issue in this debate is how competition would be structured and the nature of the guarantee that Medicare provides to its beneficiaries.

At present, private plans can try to win over beneficiaries by offering a more desirable package of benefits than the traditional plan. If they in fact are more efficient, then this should be a relatively simple task. For each beneficiary that signs up with a private plan, the plan receives an amount from the government that is approximately equal to what is paid to the traditional plan. (This amount is adjusted downward by approximately 1 percent, since the people who sign up for private plans are healthier on average, and therefore less costly to serve, than the beneficiaries who stay in the public plan.) The evidence to date is that private plans are less efficient than the traditional plan. This has been shown by several studies, which find that the cost to Medicare of treating people in private plans is higher than in the traditional plan. It is also demonstrated by the fact that enrollment in private plans has been declining.

The Republican proposals are designed to change the current structure of competition in two important ways. First, they will not guarantee that the payments to private plans are adequately risk-adjusted. This means that private plans would be able to offer packages that attract healthy, low-cost beneficiaries, pulling them away from the traditional plan. The pool of beneficiaries left in the traditional plan would then become on average less healthy and more costly to treat.

The second important feature of the Republican proposal is that it no longer guarantees beneficiaries the level of service provided by the traditional plan. Currently, beneficiaries can stay in the traditional plan or opt for a private plan, if they think that it provides better service. Under the Republican proposal, beneficiaries would be provided with a voucher based on the cost of private plans. They would then have to pay extra money to buy into the traditional plan, if they chose its level of services. It is possible that this additional premium could be several thousand dollars annually. This is a substantial reduction in the guarantee currently provided to beneficiaries.

These articles should have focused on the change in the nature of the competition that would result from the Republican proposal as well as the change in the nature of the benefit guaranteed to seniors. It would have been almost impossible for readers to understand what was at issue in this dispute based on the material presented in these articles.

At several points these articles include assertions to the effect that Republicans "believe" that increasing the role of private plans in Medicare will lower costs by increasing efficiency. As noted above, the evidence shows that private plans raise costs. While it is possible that Republicans believe that private plans are more efficient, in spite of the evidence to the contrary, it is also possible that they are not acting based on their beliefs.

The insurance industry is a powerful political backer of the Republican party. It is possible that the Republicans are promoting plans in Medicare in order to serve the interests of the insurance industry, rather than to promote efficiency in Medicare. If this is the case, they are more likely to justify their actions by making false claims about the benefits to Medicare, than to admit their true intentions. Since none of the articles indicate any special insight into the true intentions of the politicians in this dispute, it would be more appropriate to simply report what they say, rather than what they "believe."