Economic Reporting Review
October 1, 2001

By Dean Baker, co-Director of the Center for Economic and Policy Research

OUTSTANDING STORIES OF THE WEEK

H.M.O.'s Plan to Drop Medicare, Calling Fees Too Low
Robert Pear
New York Times, September 22, 2001, page A8

This article discusses the decision by several major H.M.O.'s to drop
475,000 Medicare beneficiaries from their plans. The H.M.O.'s claim
they are not able to make a profit with the fees paid by Medicare. The
article notes the findings of several studies, which show that
Medicare already pays the H.M.O.'s more money to care for
beneficiaries than it would cost to serve them through the traditional
fee-for-service Medicare plan.

Dazed Companies Sit on Their Wallets
Louis Uchitelle
New York Times, September 23, 2001, Section 3 page 1

This article examines corporate investment plans in the wake of the
September 11th attack. It reports that a wide variety of businesses
have put their investment plans on hold, until they have a clearer
sense of the economy's direction.

Amtrak: The Boost That Began Sept. 11 May Not Be Temporary
Don Phillips
Washington Post, September 23, 2001, page H1

This article reports on the upsurge in traffic on Amtrak following the
attacks of September 11th. It notes that the increased traffic may
prove permanent, if airline security precautions add a significant
amount of time to air travel.

Unions at Airlines Assail Management For Denying Benefits
Steven Greenhouse
New York Times, September 26, 2001, page C1

This article reports on American Airlines plans to use a clause in its
labor contracts to avoid paying severance benefits to laid off
workers. According to the article, the airline is taking advantage of
a clause that allows it to avoid payments during national emergencies.


The Recession

Layoffs Push Jobless Claims to 9-Year High
Bloomberg News
New York Times, September 28, 2001, page C4

This article reports on the sharp upturn in jobless claims filed in
the prior week. At one point it reports that, according to analysts,
"the attacks most likely pushed the economy into its first recession
in a decade." There is a large body of economic data, including
declining payrolls, plunging investment, and falling construction
spending, that indicates the economy was already in a recession before
the September 11th attack. This attack will clearly have a negative
impact on the economy, but it did not cause the recession.


Interest Rates

Bond Market Recuperating
John M. Berry
Washington Post, September 28, 2001, Page E1

Since September 11, short-term interest rates have fallen by almost a
percentage point, while long-term rates have remained virtually
unchanged. Analysts cited in this article explain this divergence by
the fact that the recent events are likely to lower the size of
federal budget surpluses in future years, thereby putting upward
pressure on interest rates.

An alternative explanation is that bond traders recognize that the
U.S. current account deficit of $450 billion a year is unsustainable.
The only way that this can be corrected is through a sharp decline in
the value of the dollar. A fall in the dollar will, in turn, increase
the rate of inflation. Higher inflation is likely to push interest
rates upward. Because bond traders anticipate this sequence of events,
they are unwilling to accept lower interest rates on long-term bonds.


Japan

New Kind of Settler Finding a Way in Japan
Howard W. French
New York Times, September 23, 2001, Section 1 page 17

This article examines the prospects for immigrants settling in Japan
as the nation faces a declining population in coming decades. The
article asserts that Japan's government "realizes that Japan must
attract people from elsewhere in dramatically increased numbers." The
article presents no evidence that the government realizes a need for
dramatically increased immigration, nor is it evident that this claim
is true.

The article does refer to a United Nations study that finds that Japan
will need 600,000 immigrants a year to "stabilize its population and
prevent wrenching labor and fiscal crises." There is no obvious reason
that Japan should want to stabilize its population. The country is
currently very densely populated, so a declining population would
relieve housing shortages and reduce congestion and pollution. As the
labor force declines, the less productive jobs would go unfilled. This
poses no obvious problem, especially if there are large inefficiencies
in the current economic system, as advocates of structural reform have
maintained.

A declining population also should not lead to fiscal crises.
According to standard economic theory, workers care about the
after-tax wage. A smaller labor force, other things equal, will raise
before-tax pay, because it will raise the capital-to-labor ratio, and
therefore productivity per worker hour. While a smaller labor force
may result in a higher tax rate, under most plausible assumptions,
workers would still earn a higher after-tax wage. Therefore standard
economic theory would predict that the tax burdens would be more
easily manageable with a smaller labor force than with a larger one.

Japan Will Set Up Fund to Purchase Bad Loans From Banks
James Brooke
New York Times, September 22, 2001, page C2

This article reports on the Japanese government's decision to
establish a fund to support banks that are writing off bad loans. At
one point it notes that the government has limited the insured value
of bank accounts to $75,000, and then adds that "about half of the
4,300 households included in a recent survey said they had shifted
their deposits to a bank they regarded as more creditworthy."

If people had reported their behavior accurately, it is unlikely that
the deposit limit was a major factor. Fewer than 20 percent of
households in the United States have total financial assets, including
stocks, bonds, mutual funds and savings accounts that exceed $75,000.
If more than half of Japanese households (presumably some families
didn't have to move their accounts because they already were in safe
banks) had bank accounts in excess of $75,000, it would imply that
they are far richer than the typical American family.


Trade Policy

The Prospect of a War Without a Wartime Boom
Richard W. Stevenson
New York Times, September 23, 2001, Section 4 page 4

This article examines the economy's prospects as the Bush
Administration wages a war against terrorism. At one point the article
describes the U.S. as having a form of capitalism in which "goods,
money, and people move freely." While the US has relatively low
tariffs and non-tariff barriers on most manufactured goods, and money
can be moved relatively freely across our borders, as compared with
other countries, we have enormously costly and economically distorting
restrictions on a whole range of goods and services, most notably
patent and copyright protection, which has been getting more
restrictive in recent years.

At the same time that U.S. trade policy has sought to remove barriers
to trade in manufactured goods -- thereby bringing downward pressure
on the wages of manufacturing workers -- it has also had the goal of
increasing barriers to trade in other items, through the extension of
patent and copyright protection to developing nations. These forms of
protectionism have also been extended domestically, as new items have
been made patentable, such as life forms, and copyrights have been
applied to Internet commerce. The enforcement of the latter form of
protectionism actually led to a Russian computer programmer being
jailed for presenting a paper at a conference, because the paper
explained how to evade digital locks on copyrighted material.

Similarly, the freeing of flows of people has primarily applied to
those who do less skilled labor. The Clinton Administration actually
tightened restrictions on foreign doctors entering the country, due to
complaints from doctors that the flow of immigrants was lowering their
wages (e.g. "A.M.A. and Colleges Assert There is a Surfeit of
Doctors," by Robert Pear, New York Times, March 1, 1997, page A7 and
"U.S. to Pay Hospitals Not to Train Doctors, Easing Glut," by
Elisabeth Rosenthal, New York Times, February 15, 1997, page A1).
Workers in other professions also benefit from licensing rules and
other formal and informal barriers to foreign competition.


Senate Backs Free-Trade Agreement With Jordan
Paul Blustein
Washington Post, September 25, 2001, Page E12

Senate Approves Bill to Lift Barriers to Trade With Jordan
Richard W. Stevenson
New York Times, September 25, 2001, page C1

Both of these articles refer to the US-Jordan agreement as promoting
freer trade. Although the pact lowers some trade barriers, it also
raises some; most obviously it significantly strengthens rules that
govern copyright and patent protection in Jordan. The rules required
under the trade agreement may raise the price that Jordanians pay for
prescription drugs and other items by several hundred percent.


Stock Prices

Wall St. Ends Worst Week in 68 Years
Steven Pearlstein
Washington Post, September 22, 2001, Page A1

Confidence, in the Economy and the U.S., Is the Long-Term Issue
Floyd Norris
New York Times, September 22, 2001, page C1

Investors Seek a Refuge, and Experts Do, Too
Danny Hakim
New York Times, September 23, 2001, Section 3 page 1

These articles discuss the stock market's prospects in the wake of the
plunge in prices the prior week. The Post article includes a comment
that attributes the decline to "a rational re-pricing of stocks by
investors to reflect the lowered earnings over the next 18 months and
the higher level of risk associated with holding stocks."

Insofar as the plunge in stock prices was attributable to lower
earnings over an 18-month period, it cannot be viewed as rational.
After-tax earnings had been approximately $600 billion annually. If
the attack reduced this figure by 30 percent for 18 months (almost
certainly an overstatement of the actual impact), it would imply a
total profit loss of $270 billion. The article estimates that stocks
lost $1.4 trillion in value the prior week.

At points, both Times articles report on the market's movements after
previous sharp drops, suggesting that this could be a guide to its
future movement. This reasoning implies that the market's movement is
independent of its current level. The stock market had reached record
high price-to-earnings ratios, when it hit its peak values last year.
Even with the recent slump, price to earnings ratios in the market are
still more than 30 percent above their historic average. The articles
present no reason for believing that the stock market should maintain
much higher price-to-earnings ratios in the future than it had in the
past. (A higher price-to-earnings ratio in the future implies that the
returns on stocks will be much lower in the future than they had been
in the past.)

The Times article by Norris also includes the assertion that "the
mid-1970's were also the last time that the future of the United
States seemed bleak to many people." The unemployment rate in the
United States crossed 10 percent in the 1981-82 recession, by far its
highest level in the post-war era. The real wage for a typical worker
has been virtually flat over the last twenty years. These economic
realities may have made the future seem bleak to many people.


H.M.O.'s and Medicare

More HMOs Quit Medicare Plan
Susan Okie
Washington Post, September 22, 2001, Page A25

This article reports on the decision of several major insurers to drop
more than 500,000 Medicare beneficiaries from their H.M.O. coverage.
It presents the complaints of an industry lobbyist, as well as an
industry spokesperson, that the Medicare payments are insufficient.
The article also includes the comments from a Congressman who is
sympathetic to the health care industry and wants to increase the
payments that this industry gets from the government.

The article does not point out that Medicare already pays the H.M.O.'s
more money to care for beneficiaries than the cost of keeping them in
the traditional fee for service Medicare plan (see "H.M.O.'s Plan to
Drop Medicare, Calling Fees Too Low," by Robert Pear, New York Times,
September 22, 2001, page A8).


Agriculture Subsidies

Agriculture Secretary Says Wartime Budget Leaves $171 Billion Farm
Bill in Doubt
Elizabeth Becker
New York Times, September 27, 2001, page A14

This article examines the prospects for a bill that re-authorizes farm
subsidies. The article reports that the proposal would cost $171
billion, but does not indicate the time period over which this money
would be spend (ten years). The spending figure would be more
meaningful to most readers if it were expressed as share of total
projected federal spending over this period (approximately 0.7
percent) or as a share of projected discretionary spending
(approximately 2.2 percent).