Economic Reporting Review
By Dean Baker
September 29, 2003
OUTSTANDING STORIES OF THE WEEK
For Bush's Iraq Request, Tough Comparisons Loom
Jonathan Weisman and Juliet Eilperin
Washington Post, September 23, page A4
http://www.washingtonpost.com/wp-dyn/articles/A49354-2003Sep22.html
This article assesses the likely costs of occupation and rebuilding Iraq over
the next decade. It notes that these costs could easily exceed $400 billion. The
article concludes by quoting an analyst's statement that the projected costs are
approximately 10 times the costs of reconstruction in Bosnia. The analyst notes
that this is not surprising, since Iraq is approximately 10 times the size of
Bosnia. It is worth noting that such discussions were almost completely absent
from the Times and Post, as well as other major media outlets, in the debate
preceding the war.
Trade and Protectionism
Ex-Senator Announces for Presidency
Jennifer Lee
New York Times, September 23, 2003, page A27
http://www.nytimes.com/2003/09/23/politics/campaigns/23BRAU.html
Kerry Attacks Rival Dean Over Protectionism
David M. Halbfinger
New York Times, September 23, 2003, page A27
http://www.nytimes.com/2003/09/23/politics/campaigns/23KERR.html
Democratic Hopefuls Cool on Free Trade
Jim VandeHei
Washington Post, September 24, 2003, page A6
http://www.washingtonpost.com/wp-dyn/articles/A54931-2003Sep23.html
These articles discuss trade issues in the context of the presidential campaign. All three articles repeatedly use the term "free trade" in reference to recent and prospective trade agreements. A main goal of these trade agreements has been to reduce barriers to trade in manufactured goods, in order to place manufacturing workers in the United States in direct competition with low paid workers in Mexico, Malaysia, China and elsewhere. The predictable effect of such agreements is to lower the wages of manufacturing workers in the United States and other workers with similar skills.
However, these trade agreements have done little or nothing to reduce trade barriers in highly paid professions, such as medicine, law, and accounting. These barriers (primarily professional and licensing restrictions) make it difficult for qualified foreign professionals to compete with their U.S. counterparts (see "Professional Protectionists: The Gains From Free Trade in Highly Paid Professional Services." [http://www.cepr.net/professional_protectionists.htm]). Recent trade agreements have also increased some forms of protection, most notably patent and copyright protection. It would be appropriate to note that the politicians identified as supporters of free trade in these articles, only support free trade in items produced by less skilled workers - not as a general principle.
The article by VandeHei includes a quote from Massachusetts Senator John Kerry, in which he warned about candidates (Howard Dean and Dick Gephardt) who want to "retreat from the global economy" and "build a fence high enough to keep out foreign competition." It would have been appropriate to point out that Senator Kerry is a strong proponent of such fences (e.g. he has not opposed restrictions that prevent U.S. consumers from buying drugs at lower prices in Canada and elsewhere, nor has he opposed the professional barriers that protect the salaries of doctors and lawyers); he is only opposed to trade barriers that limit the importation of manufactured goods.
The barriers supported by Kerry and others are much larger and have much more economic consequence than the trade barriers that have been debated in the context of manufactured goods. Drug patents raise the price of drugs by an average of 300 to 400 percent above the free market price, costing consumers more than $100 billion a year. Similarly, professional restrictions have raised the wages of physicians in the United States to more than twice the average of other rich nations, costing consumers more than $70 billion annually. By comparison, the steel tariffs recently imposed by the Bush administration added no more than 30 percent to the price of steel, and cost the country less than $300 million, according to a study by the International Trade Commission.
The article by VandeHei also includes results from polling questions about the merits of international trade or globalization as an indication of public attitudes towards recent trade agreements. Since none of the candidates have indicated opposition to international trade or globalization - as compared to a change in the rules - it is not clear that these polling results have any bearing on the issues discussed in the article.
The article by Lee also includes a brief discussion of former Senator Carol
Mosley Braun's support for a single-payer (universal Medicare) type health care
system The article comments that such a system is favored by "nonprofit
advocacy groups." While this is true, single payer systems are also favored
by large numbers of health care professionals - this fact might have been more
informative to readers trying to get some appreciation of the merits of such a
system. The article could have also noted that countries with single payer
systems, on average, pay less than half as much per person for health care as
the United States, yet have better health outcomes.
The Dollar
Gambling With the Dollar
Jonathan Weisman
Washington Post, September 24, 2003, page E1
http://www.washingtonpost.com/wp-dyn/articles/A54874-2003Sep23.html
This article discussed the problems associated with trying to bring the value of the dollar down to a more sustainable level. At one point it raises the possibility that this effort could lead to higher interest rates, because a lower dollar will lead investors to demand a risk premium in exchange for holding dollar denominated assets.
Actually, a lower dollar should be associated with less risk premium, since the risk is associated with the probability that the dollar will decline. Once it has already fallen, there is less of a concern that it will continue to fall further. This is best illustrated by the recent economic crisis in Argentina. In the fall of 2001, real interest rates in Argentina rose above 20 percent, because investors came to believe that the country would have to devalue its currency. Interest rates fell significantly after Argentina devalued its currency, because investors were less concerned about a further decline.
Similarly, it should be apparent to any investor that the current value of
the dollar is unsustainable, due to the size of the U.S. current account
deficit. This means that at some point the currency will decline. To offset the
risk that this decline will occur while they are holding the dollar, it is
reasonable to expect that investors will demand a risk premium. However, once
the dollar actually does decline significantly against other currencies, there
would be less reason to demand this currency-related risk premium.
The Euro
Euro Facing a Major Test
Keith B. Richburg
Washington Post, September 24, 2003, page E1
http://www.washingtonpost.com/wp-dyn/articles/A55420-2003Sep23.html
This article examines some of the problems facing the euro zone countries. Among the items on this list is "Germany's high-priced labor." Since most people get most of their income through their wages, this means that Germans enjoy high living standards. Economists usually do not view high living standards as a problem. If Germany had a huge trade deficit, as the United States does at present, then it would be reasonable to argue its current levels of consumption are not sustainable; but in fact Germany's trade is close to balanced.
It is also worth noting that this article never mentions the contractionary
monetary policy being followed by the European Central Bank (ECB) as one of the
problems facing the euro. Economists across the world, including even the IMF,
have complained about the ECB's monetary policy, arguing that it has slowed
growth and kept unemployment rates unnecessarily high. By curtailing growth, the
ECB's monetary policy has also increased the government budget deficits of the
euro zone countries. The size of these deficits is one of the main themes of
this article.
Copyright in the Internet Age
Students Shall Not Download, Yeah, Sure.
Kate Zernike
New York Times, September 20, 2003, page A6
http://query.nytimes.com/search/abstract?res=F5061EF73B5E0C738EDDA00894DB404482
This article discussed efforts by colleges to keep students from downloading copyrighted music off of the Internet. The article includes some discussion of the moral issues involved and at one point compares unauthorized downloading of copyrighted material to plagiarism.
This comparison is inappropriate, since unauthorized copying does not require
any falsification. While it is against the law in some cases, it is comparable
to buying prescription drugs in Canada at low prices, or purchasing U.S.-made
blue jeans on the black market in the former Soviet Union. Such actions can have
harmful economic effects due to the inefficiency of the laws created by the
state. There is no obvious moral issue involved, except insofar as one sees a
general moral imperative to obey all laws.
The Energy Bill
Energy Bill's Tax Breaks Weighed on Hill
Dan Morgan
Washington Post, September 21, page A4
http://www.washingtonpost.com/wp-dyn/articles/A40377-2003Sep20.html
This article reports on the Congressional debate over a new energy bill. The article comments at one point that the tax breaks in the bill "could add as much as $19 billion to the federal budget deficit in the next decade." It later compares this figure to the $8 billion requested by the Bush administration. The $19 billion in tax credits is equal to less than 0.07 percent of projected spending over the next decade. The $11 billion difference between the amounts being considered by Congress and the Bush administration's request is equal to less than 0.04 percent of projected spending.
At one point the article presents the argument of an oil industry lobbyist
for a special $3 a barrel subsidy that would kick in if the price of oil falls
below $18 a barrel. The article does not present any argument against this
subsidy. In addition to providing government money to an industry for no obvious
reason, this subsidy would encourage oil firms to drain U.S. reserves at times
when oil is plentiful, as evidenced by its low price. This means that the U.S.
will have less domestic oil available if at some future date oil becomes scarce.
A policy aimed at energy independence (an ostensible goal of this energy bill)
should have the opposite set of incentives.
Germany
Clinging to Conservatism In the Land of Lederhosen
Mark Landler
New York Times, September 21, 2003, page A14
http://query.nytimes.com/search/abstract?res=FA0912F83A5E0C728EDDA00894DB404482
This article discussed the election campaign in Bavaria. At one point it
comments that Bavaria's unemployment rate is well below the average across
Germany, which it asserts is 10.4 percent. While this is the figure using the
German measure of unemployment, using the OECD measure (which is comparable to
the U.S. measure), Germany's unemployment rate would be just over 9.0 percent.
Furthermore, the areas that were formerly East Germany still have unemployment
rates close 18 percent. The unemployment rate in former West Germany would be
close to 7.0 percent, using the OECD measure.
Social Security in Italy
Older, But Not Better, In Italy
Daniel Williams
Washington Post, September 21, page A26
http://www.washingtonpost.com/wp-dyn/articles/A40492-2003Sep20.html
This article discusses the Italian government's plans to raise the age at which people qualify for retirement pensions. It describes Italy as having a demographic problem, under which too few young people are entering the labor market to support the large population of retirees. However, the article also notes the large amount of unemployment in Italy among older workers who are unable to find jobs. The extent of unemployment in Italy, which is close to 10 percent, suggests that it is not suffering as a result of having too few young workers. In fact, given its current economic situation, it is likely that if it had more young workers, then it simply would have more unemployment, not a better balanced public pension system.
The main problem - which is never discussed in this article - appears to be inadequate demand. This is not surprising, since Italy's monetary policy is controlled by the European Central Bank (ECB). Virtually all economists agree that the U.S. economy would be far weaker at present, if Alan Greenspan had followed the same contractionary path as the ECB.
At one point the article includes the observation that "the more money
spent on pensions, the less is available for other social service outlays, not
to mention defense and infrastructure." While this is true, news articles
rarely inform readers of such obvious trade-offs when discussing other items,
such as defense spending or tax cuts.
Europe
Yen Surges On Statement By Ministers
Ken Belson
New York Times, September 27, 2003, page W1
http://www.nytimes.com/2003/09/23/business/worldbusiness/23yen.html
This article discusses the implications of a rise in Japan's currency for the Japanese and world economy. At one point it asserts that "Europe must dig out of an even bigger hole than the United States," noting that Europe's economy is barely growing at present.
It is not clear that Europe faces bigger problems than the United States right now. If the European Central Bank adopted the same sort of expansionary monetary policy as Alan Greenspan has pursued at the Federal Reserve Board, it would likely provide a significant boost to Europe's economy. Such a policy switch is prevented only by the politics surrounding monetary policy in Europe.
In contrast, the U.S. economy faces the prospect of a collapse of its housing bubble in the near future, which is likely to lead to a second dip to the recession. It must also cope with the adjustment process that will be needed to bring the current account deficit down to a manageable size. Presently, the current account deficit exceeds 5.0 percent of GDP. Deficits of this magnitude cannot be maintained for long.