Economic
Reporting Review
October 29, 2001
By Dean Baker, co-Director of the Center
for Economic and Policy Research
OUTSTANDING STORIES OF THE WEEK
HHS's Varying Costs for Cipro Criticized
Shankar Vedantum
Washington Post, October 26, 2001, page A18
This article reports on criticism of HHS for agreeing to pay
95 cents for 100 million tablets of Cipro which will be uses as a
treatment for Anthrax. By contrast, it is able to purchase the same
drug for 43 cents a pill in a program that provides medical care for
poor children.
Harvey Pitt's S.E.C.: From Guard Dog to Friendly Puppy?
Floyd Norris
New York Times, October 26, 2001, page C1
This article examines the apparent willingness of Harvey Pitt,
the new Chairman of the S.E.C. to tolerate questionable accounting
practices.
Drug Patents
U.S. Says Bayer Will Cut Cost of Its Anthrax Drug
Keith Bradsher and Edmund L. Andrews
New York Times, October 24, 2001, page B7
This article reports on agreement between the Department of
Health and Human Services and Bayer A.G., under which Bayer would
provide 100 million of tablets of Cipro, a drug used to treat
Anthrax, at 95 cents each. Bayer had originally intended to charge
the government $1.83 per tablet, but agreed to a lower price when HHS
raised the possibility of turning to generic manufacturers.
At one point the article comments that, "Bayer charges $4.67 a
tablet in wholesale transactions with pharmacies, so today's deal
with the government could hurt its overall revenue." There is
virtually no possibility that this deal will hurt Bayer's revenue.
The drugs sold to the government will only be used to treat Anthrax,
they should not affect at all the demand for Cipro for other uses.
While Bayer may charge $4.67 per tablet for Cipro, the actual
production cost is a tiny fraction of this price. Indian generic
manufacturers are able to profitably sell a high quality generic
version of Cipro for just 3 cents a tablet. This means that if Bayer
is just one third as efficient as the Indian manufacturer, it could
profitably sell Cipro for less than 10 cents a tablet. The additional
85 cents a tablet it will get from the government is pure profit,
making Bayer a big winner from this crisis.
The Economy
Fear of Recession Tips Hand of Cautious Firms
Steven Pearlstein
Washington Post, October 22, 2001, page A1
This article examines how the prospect of a recession is
affecting firms' investment decisions. At one point the article
comments that, "with Washington set to deliver a heavy dose of
economic stimulus in the form of tax cuts, government spending and
still more cuts in interest rates, most [economists] expect a strong
rebound in the second half of 2002." The article provides no
estimates of the size of the anticipated stimulus relative to the
severity of the downturn, which would allow a reader to assess the
accuracy of the view attributed to most economists.
Over the last year, the Post has consistently relied on
experts who made predictions that have proven to be far too
optimistic. These experts originally predicted a short inventory
correction when the economy first began to slow last fall. At that
time, they anticipated that the economy would resume strong growth in
the second quarter of 2001, and they ruled out the possibility of a
recession. Subsequent news articles put the projected date of the
upturn as the third quarter or fourth quarter, as the prediction of a
second quarter upturn proved to be wrong. Now that virtually all
economists recognize the economy is in a recession, it might be
appropriate for the Post to offer readers the views of a wider range
of economists.
The article concludes with a section headed "consumers hold
sway," which argues that households' consumption decisions will be
the primary determinant of the timing and the strength of the upturn.
At this point, the ratio of consumer debt to disposable income is far
above the previous record high set in 1990. Families are also
recovering from the loss of trillions of dollars of wealth due to the
collapse of the stock market bubble. Given this situation, consumer
demand may not be the most likely source of expenditures to spur an
upturn.
Social Security Benefits to Increase 2.6%
John M. Berry
Washington Post, October 20, 2001, page E1
Jump in Price of Gasoline Put Inflation A Bit Higher
Associated Press
New York Times, October 20, 2001, page C3
These articles report on several pieces of economic news from
the previous day. Both articles mention in passing that the Commerce
Department reported that the U.S. trade deficit had declined by more
than $2 billion in August from July.
This news was given very little attention by either newspaper.
The United States has been running a current account deficit of more
than $400 billion a year, primarily because of its large trade
deficit. A current account deficit affects the economy in
approximately the same way as a budget deficit of the same size.
While the possibility that the nation may run budget deficits 5 or 10
years in the future has often been given large amounts of attention in
these papers, the current reality --that the nation is running very
large current account deficits -- has been given very little
attention.
The current account deficits that the economy is presently
experiencing have far more economic impact, and a far larger effect
on future living standards, than the possible future budget deficits
than have been discussed in recent news articles. There are no
economic grounds on which the media's attention to budget deficits
and neglect of current account deficits can be justified.
Oil Drilling in the Arctic
War Effort Pushes 'Green' Issues Aside
Eric Pianin
Washington Post, October 21, 2001, page A5
This article examines the treatment of environmental issues in
the wake of the September 11th attacks. It refers to the House vote
in favor of oil drilling in the Arctic National Wildlife Refuge and
asserts that "much of the House support for the plan stemmed from the
desire to create new jobs during an economic downturn." There will be
a long lead time between when drilling is approved and any
significant amount of work begins to take place in the Arctic Refuge.
Unless members of Congress are anticipating a very long recession,
this measure would not create jobs during a downturn.
The article also notes that Senator Frank Murkowski and others
have argued that the drilling "is essential to the nation's long-term
energy security." While the article points out that it will take
nearly a decade before the area generates any oil, it is also
important to note that high levels of production are only projected
to be sustainable for 10-15 years. After this period, the oil will
have been drained out of the Refuge, denying the nation a resource
that could have been used in the event of a national emergency. For
this reason, drilling in Refuge will actually diminish the nation's
long-term energy security.
The Euro
Euro Anxiety Rises as Economies Fall
William Drozdiak
Washington Post, October 25, 2001, page E1
The nations that adopted the Euro agreed to certain conditions
governing their fiscal policy. This article reports on ways in which
this agreement has limited their ability to cope with an economic
downturn. The article describes this pact as the result of
"meticulous, three-year preparations for full adoption of the euro."
It then asserts that it "may have failed to take into account the
consequences of a sharp global downturn."
Recessions have always been part of the workings of a
capitalist economy. If the euro pact "failed to take into account the
consequences of a sharp global downturn," then it would be more
accurate to describe the planning as "incompetent," not
"meticulous."
Markets and Protectionism
European Converts to Laissez Faire See the Rush to Intervene as Heresy
Alan Cowell with Edmund L. Andrews
New York Times, October 25, 2001, page C1
Greenspan Says Protectionism Is Hardly an Antidote to Terror
Richard W. Stevenson
New York Times, October 25, 2001, page C6
Airport Security Companies Talk of Lawsuits if U.S. Takes Over Their
Duties
Richard A. Oppel Jr.
New York Times, October 25, 2001, page B7
These articles all set up contrasts between government
intervention and the market in misleading ways. The article by Cowell
and Andrews refers to a supposed commitment to the market in the
United States that is being called into question by measures like the
airline bailout. While those who have prospered under current
economic arrangements do try to claim that this is just a market
outcome, this is not true. The government regularly intervenes in the
economy in ways that lead to an upward redistribution of income.
For example, patent and copyright protection are two very
costly forms of protectionism, which lead to an enormous upward
redistribution of income. As another example, the government gives
control of broadcast frequencies to television networks and arrests
anyone who attempts to compete on the same frequencies. It also gives
out airline landing and takeoff slots (a valuable commodity) at
minimal charge to the airlines. Those who benefit from these types of
government intervention want these arrangements to be viewed as
"laissez faire" so that they do not become subject to political
debate. These deliberate government interventions are often portrayed
as natural outcomes of the market.
The article by Stevenson refers to Greenspan's oblique
expression of support for fast track trade authority. The comments by
Greenspan are doubly ironic. His decision to prop up the market in
1987 can be viewed as a form of protectionism that led to a massive
upward redistribution of wealth, by creating the basis for the stock
bubble of the late nineties. On the other hand, a major focus of the
new trade agreements that are likely to be negotiated is the
extension of patent and copyright protections -- the most costly and
economically distorting form of protectionism -- to developing
nations.
The article by Oppel discusses the possibility that airport
security firms will sue the government over their lost future
business, if the government takes over security responsibilities at
airports. The article indicates that they would claim this amounts to
a "taking" for which they should be compensated. Earlier the article
notes that, "the three biggest American screening companies were
acquired by European concerns betting [emphasis added] that the
introduction of long-delayed federal rules to improve security
oversight would lead to bigger contracts."
These security companies had no intention of giving back the
gains if they had won their "bet," and the government had passed
regulations that increased the value of their business. In a market
economy they would receive no compensation if they now lose their
bet. The "takings" philosophy presented in the article is not a
consistent view of the market. In a market economy they would receive
no compensation if they now lose their bet.
Population Growth in Europe
Europe Wary of Wider Doors for Immigrants
Suzanne Daley
New York Times, October 20, 2001, page A3
This article discusses attitudes towards immigration in
Europe. At one point it asserts that "with a low birth rate and an
aging population, Europe seemed to have recognized that it needed
immigrants if it was to grow and prosper." The article concludes with
a quote stating that "Europe needs an influx of immigrants, otherwise
there will be all kinds of consequences, including our pension
systems will go bust."
The article presents no evidence to support these assertions.
Other things equal, a smaller labor force implies a higher ratio of
capital to labor, which means that each worker will be more
productive. If a low birth rate leads to a labor shortage, then this
would simply mean that the least productive jobs -- for example
parking valets at restaurants or the checkout position for the late
shifts in convenience stores -- will go unfilled. There is no obvious
economic damage as a result of this, and it means that workers will
have higher pay for each hour that they work. In the context of the
environmental constraints that Europe faces, including meeting its
obligations under the Kyoto agreement, a stagnant or declining
population may be an asset.
There is no reason whatsoever that Europe's pension systems
would "go bust," as claimed in the last quote. Europeans have been
enjoying longer lives as a result of increasing affluence and
improvements in medical technology. In the past, they have been
willing to pay for the resulting longer retirements with higher tax
rates. The article presents no evidence that European attitudes on
this issue will be different in the future than they have been in the
past. Since workers in most European countries have experienced
consistent wage gains, there is no plausible scenario in which tax
increases needed to support pension systems would depress after-tax
real wage growth to the level experienced by U.S. workers in the last
two decades.
In standard economic theory, it is only the after-tax wage
that matters to workers. Since European workers can reasonably expect
more rapid after-tax wage increases than those received by workers in
the United States, even if they pay higher taxes for their pensions,
it is not clear why any prospective tax increases should be viewed as
serious problems.
Stock Market
Cashing In and Missing Out?
Carol Vincent
Washington Post, October 21, 2001, page H2
This article discusses investment strategies in the wake of
the stock market's recent downturn. At one point it presents the
comment of one stock analyst, who referred to people who have been
selling their stock, as making the mistake of "selling low." The
current price-to-earnings ratios in the stock market (measured
against pre-recession earnings levels) are still close to 25 to 1,
nearly 70 percent higher than their historic average. The article
gives no reason why a market that is 70 percent over-priced by
historic levels should be viewed as "low."
Economic Stimulus
Vote Set On Tax Aid For Firms
John M. Berry
Washington Post, October 24, 2001, page E1
Lawmakers' Votes On Economic Legislation Will Test talk of
Bipartisanship
Richard W. Stevenson
New York Times, October 24, 2001, page A12
These articles discuss the various stimulus proposals being
put forward in the Congress. At one point the Times article comments:
"Republicans say helping companies via tax cuts will avert layoffs,
bolster stock prices and encourage investment. Democrats say
providing money to individuals will not only help the people who need
it most but will also stimulate demand for goods and services."
The vast majority of readers have neither the time nor
expertise to evaluate the merits of these positions. It would have
been helpful to readers if the article had included some analysis of
these positions from economists or policy analysts.
By contrast, the Post article includes an economist's
assessment of one of the Republicans tax cut proposals -- a
retroactive repeal of the alternative minimum tax for business. The
economist noted that the evidence indicates that this tax cut will
have very little impact on investment.