Economic Reporting Review
By Dean Baker
October 27, 2003
OUTSTANDING STORIES OF THE WEEK
Workers Feel Pinch of Rising Health Costs
Milt Freudenheim
New York Times, October 22, 2003, page c1
http://www.nytimes.com/2003/10/22/business/22CARE.html
This article reports on trends in health insurance premiums. It shows not only that firms are being forced to pay higher premiums, but also that an increasing portion of health care costs are being passed onto workers in the form of deductibles, co-pays, or being required to directly bear a portion of the cost of the premium.
Pension Math Proves Elastic In Court Case Over Pilots
Mary Williams Walsh
New York Times, October 21, 2003, page C1
http://www.nytimes.com/2003/10/21/business/21PENS.html
This article reports on US Airways using a non-standard method to calculate
the size of its liability to its pilots' pension fund. This method leads to a
much lower estimate of the outstanding liabilities of the fund, which would mean
that the airline would have to pay less money to the Pension Benefit Guarantee
Board to take over the fund. The airline had use a different method - showing
much higher liability - when it sought concessions from its workers.
German Welfare State Policies
German Parliament Votes to Cut Welfare Benefits and Taxes
Richard Bernstein
New York Times, October 18, 2003, page A5
http://query.nytimes.com/gst/abstract.html?res=F70916F6395A0C7B8DDDA90994DB404482
This article reports on the German Parliament's approval of a bill that would cut back some of the government's protections for workers. The article asserts that by cutting back social welfare benefits and taxes and making it easier for employers to fire workers, the bill will "restore Germany's status as Europe's most important economic engine."
The article does not indicate how it determined that the bill will have this
effect. There are many countries that have gone much farther towards weakening
their welfare state supports - for example, New Zealand - with little obvious
benefit, while other countries, like Sweden, Ireland, and Denmark, have
maintained strong welfare states and experienced healthy growth. A close
examination of the data shows no systematic relationship between the generosity
of a country's welfare state and its unemployment rate (see "Labor Market
Institutions and Unemployment: A Critical Analysis of Cross-Country
Evidence," [http://www.newschool.edu/cepa/papers/archive/cepa200217.pdf]).
Unemployment Targets
Despite Public Fears, Quick Fed Rate Hike Unlikely
John M. Berry
Washington Post, October 23, page E1
http://www.washingtonpost.com/wp-dyn/articles/A2710-2003Oct22.html
This article discusses the possibility that the Federal Reserve Board will raise interest rates in the near future. At one point it makes reference to the concept of the non-accelerating inflation rate of unemployment (NAIRU), a level of unemployment at which the inflation rate is neither rising nor falling. The article notes that "many economists believe that it is in the neighborhood of 5 percent."
It is worth noting that in the early nineties, the vast majority of
economists believed that the NAIRU was close to 6 percent. The economy's
performance in the second half of the decade proved that these economists were
wrong. There was much better empirical support for claiming that there was a 6
percent NAIRU in the early nineties than there is for arguing that the NAIRU is
5 percent today.
The Economy
Jobless Claims at Lowest Level Since April
Bloomberg News
New York Times, October 24, 2003, page C2
http://www.nytimes.com/2003/10/24/business/24ECON.html
This article reports on the Labor Department's report that there had been
386,000 new jobless claims filed in the prior week, compared to 390,000 claims
in the week before. This report is presented as evidence of an improving
economy. It is worth noting that the number of claims originally reported for
two weeks ago was 384,000; the figure was revised up to 390,000 in the most
recent data.
European Regulation of Intellectual Property
Europe's Antipiracy Proposal Draws Criticism
Paul Meller
New York Times, October 20, 2003, page C2
http://nytimes.com/2003/10/20/business/worldbusiness/20lobby.html
This article reports on the debate in Europe over increasing the penalties for violations of patent and copyright laws. At one point the article asserts that the European Commission estimates that Europe lost $9.3 billion in economic output annually, between 1998 and 2001.
It is difficult to see how such an estimate can be accurate. At a point in time, ignoring patent and copyright protection can only increase economic output. In a free market, items such as prescription drugs or computer software would be transferred at a small fraction of their patent-protected or copyright-protected price. This leads to economic gains for consumers and the economy as a whole. While this could be offset by the reduced incentive to innovate, this latter effect would only be felt after a period of time, since the benefits of innovation (or costs due to reduced innovation) would only be felt with a considerable lag. It would have been helpful if this article included some economic analysis on this issue.
In addition to including no assessment of the gains from eliminating patent
and copyright protection, the discussion confuses two different issues. At one
point it describes unauthorized copies of patented and copyrighted goods as
"counterfeits." The term counterfeit is more accurately ascribed to a
good that is trademarked. A counterfeit item trades on the reputation of the
good that is being counterfeited (e.g. a high quality article of clothing). In
principle, it leads to economic harm both to the consumer, who is getting an
inferior product, and to the manufacturer of the good being counterfeited, since
its efforts to establish a good reputation for its products are undermined by
the circulation of counterfeit goods. In this way, counterfeit goods
unambiguously lead to economic harm. By contrast, unauthorized copies of
patented and copyrighted goods lead to short-term gains, which may be offset by
long-term loses.
Prescription Drugs
U.S. Prescription Drug System Under Attack
Gilbert M. Gaul and Mary Pat Flaherty
Washington Post, October 19, page A1
http://www.washingtonpost.com/wp-dyn/articles/A44908-2003Oct18.html
This is the first segment of a very informative five-part series that examined problems with the prescription drug system in the United States. None of these segments discussed the extent to which these problems are attributable to the patent system, even though this is clearly a major factor in many instances.
By granting a single firm a monopoly on the sale of a drug, patents have the effect of raising drug prices far above the cost of production. As a result of patent protection, drugs routinely sell for 300 to 400 percent above the cost of production, and in some cases, more than 1000 percent above the cost of production. As economic theory predicts, this market distortion leads to the production of unauthorized versions of drugs. Since this production is illegal and therefore unregulated, these unauthorized drugs will be of uncertain quality, and can jeopardize the health of patients. A series of this length should have included some discussion of the economics of patents and the associated problems.
Cheaper Drugs From Canada: Another Political Hot Potato
Gardiner Harris
New York Times, October 23, 2003, page C1
http://www.nytimes.com/2003/10/23/business/worldbusiness/23DRUG.html
This article discusses the dispute over allowing the importation of relatively low cost prescription drugs from Canada. At one point it reports concerns expressed about the safety of drugs imported from Canada. It then cites the governor of Illinois' assertion that Canadian drugs are safe.
It would have been helpful to point out that there is no real dispute about the overall safety of drugs in Canada. Virtually all health experts agree that Canada's drug regulation is comparable to the U.S. The only possible safety issues arise in connection with the import supply chain. If the U.S. government did not raise any legal obstacles, then it would be a simple matter to construct a reliable supply chain connecting reputable drug wholesalers in Canada with distributors in the U.S. Any safety problems associated with importing drugs from Canada are attributable to the legal obstacles to importation that the U.S. government has put in place, not to the quality of Canada's drug regulation.
Compromise Calls for U.S. to Guarantee Medicare Drug Benefit
Robert Pear
New York Times, October 21, 2003, page A18
http://www.nytimes.com/2003/10/21/politics/21MEDI.html
Congress Strikes A Tentative Deal On Drug Benefits
Robert Pear
New York Times, October 23, 2003, page A1
http://www.nytimes.com/2003/10/23/politics/23MEDI.html
Democrats Say G.O.P. Endangers Medicare Drug Accord
Robert Pear
New York Times, October 24, 2003, page A20
http://www.nytimes.com/2003/10/24/politics/24MEDI.html
These articles report on the efforts to reconcile the House and Senate versions of a Medicare drug benefit. All three articles assert that the Republicans want to place the traditional Medicare program in direct competition with private sector plans. Actually, Medicare is already in direct competition with private sector plans. Private insurers compete with Medicare for beneficiaries based on the quality of the service they offer. Republicans are trying to change the nature of this competition. Under their proposal, the government payment for the traditional plan would be tied to the costs charged by private sector plans. This means that if private insurers attracted relatively healthy patients, with low health care costs, and set their premiums accordingly, then the payment for beneficiaries remaining in the traditional Medicare system would be slashed. If these beneficiaries wanted to stay in the traditional system then they would have to pay the difference between the cost of the system and the government's payment themselves. Such a scenario would likely force all but the sickest patients into private plans, and eventually destroy the existing system by making it too costly.
The October 24th article attributes the differences between Republicans and
Democrats on this issue to different views of "the role of government and
the private sector in delivering health care to the elderly." It is not
clear that views on the government and private sector play any role in this
dispute. The Republican proposal should offer an opportunity for increased
profits for private insurers, a powerful political backer of Republicans. It
also creates a situation in which it will be possible to cut back Medicare
payments, which could allow for larger tax breaks to wealthy people, another
important political constituency of the Republican party. The Democrats have
historically gained support from older voters, so it is understandable that they
would seek to protect the quality of Medicare. While politicians often justify
their actions by appealing to political philosophy, that doesn't mean that their
positions were actually guided by philosophical considerations.
China
Chinese President to Consider Revaluing His Nation's Currency
Jane Perlez
New York Times, October 20, 2003, page A7
http://query.nytimes.com/gst/abstract.html?res=F3071EF63B5A0C738EDDA90994DB404482
This article reports on the Bush Administration's efforts to persuade China
to revalue its currency. The article quotes Kenneth S. Courtis, a vice chairman
of Goldman Sachs, Asia; "the idea of China revaluing its currency as a
panacea to U.S. trade problems is about as loony as the tariffs on steel last
year." It is worth noting that the only way that the U.S. trade deficit can
be substantially reduced (apart from a severe recession in the U.S.) is by a
change in the relative prices of U.S. produced goods and foreign produced goods.
The only plausible ways to bring about such a change in relative prices is
through currency adjustments (like the revaluation of China's currency) or
through protection.
Immigrant Labor
Wal-Mart Raids By U.S. Aimed At Illegal Aliens
Steven Greenhouse
New York Times, October 24, 2003, page A1
http://www.nytimes.com/2003/10/24/national/24IMMI.html
This article reports on a series of nation-wide raids at Wal-Mart stores, which found several hundred undocumented workers who were hired by contractors at these stores to do janitorial work. At one point the article comments that illegal aliens "often take the low- end, low-paying jobs shunned by not just American workers, but also legal immigrants."
No job is inherently low-end and low-paying. Jobs can become low-end and
low-paying, if it is possible to find workers who are willing to do them for low
pay and accept bad working conditions. In a tighter labor market, these jobs
could provide a living wage for workers and their families, as they do in other
wealthy countries.
Trade
Asian Leaders Find China A More Cordial Neighbor
Jane Perlez
New York Times, October 18, 2003, page A1
http://www.thailabour.org/news/03101803.html
2 Top Democrats Decide to Bypass Iowa's Caucuses
Adam Nagourney
New York Times, October 20, 2003, page A1
http://www.nytimes.com/2003/10/20/politics/campaigns/20IOWA.html?hp
Farmers and Labor Press Global Trade as a Campaign Issue
Elizabeth Becker
New York Times, October 21, 2003, page A21
http://www.nytimes.com/2003/10/21/national/21TRAD.html
These articles all include discussions of trade issues. Both describe recent trade pacts as "free trade" agreements. This is inaccurate. In some cases these agreements increased protectionism, specifically by strengthening copyright and patent protection.
It is also worth pointing out that recent trade agreements have been
primarily focused on reducing barriers in ways that put less skilled workers in
direct competition with low wage labor in developing countries. Most proponents
of these agreements have not tried to lower barriers that protect highly
educated workers, such as the restrictions on the entry of foreign medical
residents into the United States. Given the actual nature of these trade
agreements, it would be more accurate, and take up less space, to simply
describe them as "trade" agreements, rather than "free
trade" agreements.
India
Sizzling Economy Revitalizes India
Amy Waldman
New York Times, October 20, 2003, page A1
http://pub18.ezboard.com/fbalkansfrm21.showMessage?topicID=22.topic
This article discusses the current economic situation in India. At one point it asserts that India's per capita GDP is $480 per year. This figure is based on converting India's GDP into dollars at the current exchange rate. The more meaningful measure of per capita GDP is based on purchasing power parity, which gives an indication of what the average person can afford to purchase. According to the World Bank, by this measure India's per capita GDP is approximately $2,500 a year.