Economic Reporting Review By Dean Baker September 8

Economic Reporting Review
By Dean Baker
September 8, 2003

OUTSTANDING STORIES OF THE WEEK

Rising Demands for Testing Push Limits of Its Accuracy Diana B. Henriques New York Times, September 2, 2003, page A1 http://www.nytimes.com/2003/09/02/education/02EXAM.html This article reports on instances in which errors in standardized tests or their grading have led to inaccurate reporting on students' progress. The article points out that such problems are likely to increase as the demand for standardized tests increases in coming years. Africans Outdo U.S. Patients in Following AIDS Therapy Donald G. McNeil Jr. New York Times, September 3, 2003, page A1 http://www.nytimes.com/2003/09/03/health/03IMMU.html This article reports on a series of studies indicating that Africans patients follow instructions for taking AIDS drugs more closely than do U.S. patients. This is noteworthy, because many opponents of the widespread use of antiretroviral drugs argued that Africans would lack the ability to follow complex drug regimens. Industry Fights to Put Imprint on Drug Bill Sheryl Gay Stolberg and Gardiner Harris New York Times, September 5, 2003, page A1 http://www.nytimes.com/2003/09/05/business/05MEDI.html This article reveals the ways in which the pharmaceutical industry came to play a central role in the design of the Medicare drug benefit bills approved by the House and Senate in June. ___________________________ Federal Reserve Board Policy Fed Officials Acknowledge Analyst, Investor Confusion John M. Berry Washington Post, August 30, 2003, page A8 http://www.washingtonpost.com/wp-dyn/articles/A5377-2003Aug30.html Greenspan Argues Against Strict Rules for Fed Edmund L. Andrews New York Times, August 30, 2003, page B1 http://query.nytimes.com/gst/abstract.html?res=F7071EFE3C5C0C738FDDA10894DB40448\2 These articles report on a speech that Alan Greenspan gave at the Federal Reserve Board's annual conference at Jackson Hole, Wyoming. At one point the Times article discusses Mr. Greenspan's departures from orthodox monetary policy. It comments that "the most important was his conviction in the mid-1990's that American productivity was climbing much faster than official statistics indicated and that the Fed could allow the economy to grow faster than usual without aggravating inflation." This view attributed to Mr. Greenspan in this statement -- that the supposed undercounting of productivity growth would allow the economy to grow faster than it otherwise could -- is incoherent. Productivity growth is defined as the rate of growth of output per hour. There has been little controversy in recent years over the measurement of hours. Therefore if productivity growth had been understated, then it is because official statistics have understated the growth in output. However, if the rate of growth of output was being understated in official statistics, then the economy was already growing faster than was generally recognized. Unless the error in measuring productivity growth was on the hours side, which no one has claimed, then an understatement in the measured rate of productivity growth cannot be a basis for allowing the economy to grow more rapidly. This statement also misrepresents the prevailing view at the time about the economy's limits. Economists did not believe that there was a limit to the rate at which the economy could grow, rather they believed that there was a floor below which the unemployment rate should not be allowed to fall. This floor is known as the "non- accelerating inflation rate of unemployment" or NAIRU. At the time, the vast majority of economists placed the NAIRU in a range between 5.8 percent and 6.4 percent. They felt that the Federal Reserve Board should raise interest rates to slow the economy, and thereby keep the unemployment rate from falling, if the unemployment rate threatened to fall below this range. According to this view, the alternative would be an accelerating rate of inflation for as long as the unemployment rate remained below the NAIRU. Mr. Greenspan's break with this orthodoxy occurred when he lowered interest rates in the summer of 1995 -- when the unemployment rate was 5.6 percent -- thereby allowing the economy to grow more rapidly and for the unemployment rate to fall further. At the time, there was no evidence of rising inflation, so Mr. Greenspan was prepared to ignore prevailing views about the NAIRU. The unemployment rate continued to fall for the rest of the decade, averaging just 4.0 percent in 2000, but there was never any substantial uptick in the core rate of inflation. At one point the Post article discusses deflation, which it asserts "is dangerous because it can make it more difficult for borrowers to repay debts and it depresses the value of assets such as stocks and real estate." Actually, any fall in the rate of inflation makes it more difficult for borrowers to repay their debts. For example, if a business contracted to borrow money at an 8 percent interest rate, with the expectation that the inflation rate would be 4 percent, it would be hurt if it turned out that the inflation rate was only 2 percent. If the economy goes from an inflation rate of 1 percent to a deflation rate of 1 percent, the effect on borrowers is the same as the 2 percentage point drop from 4 percent to 2 percent. There is also nothing obviously harmful about a decline in stock and real estate prices. If they fall in exact proportion to all other prices, then there is no distributional effect of the price decline. If they fall more rapidly than other prices -- which is not a necessary result of deflation -- then there would be a redistribution of wealth from people with large amounts of stock and real estate to people without such assets. While this is bad news for people with lots of stock and real estate, it is not necessarily bad for the economy as a whole. The Economy Consumer Spending Up In July Steven Gray Washington Post, August 30, 2003, page E1 http://www.washingtonpost.com/wp-dyn/articles/A2193-2003Aug29.html This article reports on the Commerce Department's release of data for consumer spending in July. At one point it reports that economists are now predicting that the economy will create 1 million jobs in 2004; it then presents the view of an economist who it describes as more pessimistic. If the economy creates 1 million jobs in 2004, this may not even be enough to keep the unemployment rate from rising, since the labor force increases at the rate of approximately 100,000 per month. From 1996 to 2000, the economy created more than 3 million jobs a year. Optimism Among Workers New York Times, September 2, 2003, page C1 http://www.nytimes.com/2003/09/03/jobs/02JOB-CHART.html This chart purportedly shows the number of workers re-entering the labor market each month after being out of it for at least five years. The chart shows that the number of workers in this category is rising, which it claims is a sign of optimism over job prospects. Actually, the chart seems to suggest the opposite. The number of re-entrants has been rising since the unemployment rate first began to turn up in 2001. It fell, along with the unemployment rate, from 1994 to 2000. It seems that the chart is better as a measure of the number of people who have left the labor market for long periods of time than as a measure of workers' sentiment about job prospects. China China Is Resisting Pressure to Relax Rate for Currency Peter S. Goodman Washington Post, September 1, 2003, page A1 http://www.washingtonpost.com/wp-dyn/articles/A8606-2003Aug31.html This article examines the possibility that China will allow the value of its currency to rise and the potential implications of an increase in its value. It notes that China has developed a booming export business based in part on the low value of its currency. It correctly notes that its export sector would be weakened if there were a substantial increase in the value of China's currency. It is worth noting that China is effectively subsidizing its exports by intervening in currency markets to depress the price of its currency. As an alternative, instead of paying consumers in the United States and other countries to buy its goods, China could use this money to generate demand inside of China. This could take the form of either increased government spending on items like health care, education and infrastructure, or tax cuts. Insofar as China simply needs a source of demand to sustain its economy, this can be found as easily internally as externally. The article also includes a comment from Larry Lang, chairman of the department of finance at the Chinese University of Hong Kong, saying that the United States cannot hope to compete in manufacturing with developing nations. The comment implied that the U.S. will rely on China and other countries to produce its manufactured goods. It is worth noting that the United States is already borrowing almost $550 billion a year to support its trade deficit. At the current rate of borrowing, the net indebtedness of the United States will exceed the value of the stock market by 2018 and the combined value of the stock market and housing stock by 2032. If the country loses even more of its manufacturing capacity, these dates will be hit even sooner. While the article presented Mr. Lang's view as a serious position, it is not clear how the United States would be able to pay for its manufacturing imports once it runs out of assets to sell. China Seen Ready To Conciliate U.S. On Trade and Jobs Joseph Kahn New York Times, September 2, 2003, page A1 http://www.nytimes.com/2003/09/02/business/02CHIN.html This article reports on negotiations between the U.S. and China over a number of economic issues. The article reports that the Chinese government made concessions on several issues, including a willingness to allow its currency to float higher. It also reports that China agreed to increase its purchase of U.S. Treasury bonds. China's purchase of treasury bonds would go in direct contradiction of its promise to let its currency float higher. When China's central bank buys more U.S. government bonds, it is increasing the demand for the dollar and thereby placing upward pressure on its price. At that same time, it is putting downward pressure on the value of its own currency, since it must sell Chinese yuan to acquire the dollars needed to buy U.S. bonds. This is exactly what a country does when it wants to lower the value of its currency. Drug Patents Pact on Drugs Stalls Again In Trade Talks Elizabeth Becker New York Times, August 30, 2003, page B3 Pact on Drugs Stalls Again In Trade Talks Poor Nations Can Purchase Cheap Drugs Under Accord Elizabeth Becker New York Times, August 31, 2003, page A6 http://www.wapd.org/bbs/msgs/100.html These articles report on the effort to craft an agreement at the World Trade Organization (WTO) on the conditions under which developing nations may use compulsory licenses to gain lower cost access to patented drugs. Both articles imply that the talks were intended to increase the access of developing nations to medicines. In fact, they were intended to limit the conditions under which compulsory licenses could be issues. The original provisions of the TRIPs section of the 1994 Uruguay round WTO agreements allow for the general use of compulsory licensing. Rich nations, led by the United States, have since sought to weaken this language to narrow the conditions under which nations may use compulsory licensing and other mechanisms to reduce the cost of drugs. At one point the second article refers to a balancing of "moral and political" arguments to allow for low cost drugs in developing countries versus "commercial considerations." There are also strong economic arguments for allowing low cost drugs. According to research from the World Bank, the losses to developing nations from imposing U.S.-style patent and copyright protections will exceed the potential gains from the removal of trade barriers and subsidies in rich countries. The World Bank's research suggests that poor countries stand to gain more economically from limiting patent and copyright protection, than from the liberalization of trade in agriculture or textiles in rich countries. Medicare Drug Benefit Selling Their Take on Medicare Plans Amy Goldstein Washington Post, August 31, 2003, page A4 http://www.washingtonpost.com/wp-dyn/articles/A4830-2003Aug30.html This article reports on the debate over the differing Medicare drug packages approved by the House and Senate earlier in the summer. The article describes the House bill as "more conservative." The basis for this assessment is not clear, and it is unlikely that this characterization conveys any useful information to readers. Some Successful Models Ignored As Congress Works on Drug Bill Robert Pear and Walt Bogdanich New York Times, September 4, 2003, page A1 http://www.nytimes.com/2003/09/04/business/04MEDI.html This informative article examines alternative methods of designing a Medicare prescription drug benefit, which were not pursued by Congress. The article did not include a discussion of alternative methods of financing research. If the government did not use patent monopolies as the main mechanism to support drug research, drug prices would fall 70 to 80 percent. This would make prescription drugs a relatively minor expense for most people. Health Care Insurance Lieberman Proposes Insurance To Cover Everyone to Age 25 Michael Janofsky New York Times, September 3, 2003, page A13 http://www.nytimes.com/2003/09/03/politics/campaigns/03LIEB.html This article reports on a proposal by Senator Joe Lieberman to extend health insurance coverage to all people under age 25. At one point it contrasts this proposal to the health care plans put forward by the other candidates for the Democratic presidential nomination. It reports that Dennis Kucinch, Carol Moseley Braun and Rev. Al Sharpton "have taken the most expensive approach to health care, proposing government-run single-payer plans." This is inaccurate. According to numerous studies and comparisons with existing health care systems in other nations, their approach is the least expensive. Their plan would both achieve large administrative savings and put mechanisms in place to contain costs. While this plan would cost more tax dollars than the other proposals, several analyses have shown that this cost would be more than offset by savings to the private sector. It would also be helpful to refer to the plan as "universal Medicare," the same term used by the candidates. It is unlikely that many readers have a clear idea of what it means to have a single payer system. Trade Bush Defends Tax Cuts and Announces Jobs Post David E. Sanger New York Times, September 2, 2003, page A1 http://www.nytimes.com/2003/09/02/politics/02BUSH.html This article reports on President Bush's speech to a group of workers at a Labor Day picnic. At one point it refers to President Clinton's commitment to "free trade." It also refers to "free-trade agreements." President Clinton was not committed to free trade, nor has the United States been pursuing free trade agreements. While a main purpose of trade policy has been to reduce barriers in the trade of manufactured goods -- thereby placing manufacturing workers in direct competition with low paid workers in developing countries, the United States has not pursued free trade generally. For example, recent trade agreements have done virtually nothing to reduce the professional and licensing barriers that limit the ability of foreign doctors and lawyers to compete with U.S. born or trained doctors and lawyers. These trade agreements have also sought to increase some types of protectionism, most notable patent and copyright protection. It is therefore inaccurate to refer to "free trade" as a goal of U.S. trade policy. Mexico Fox Admits Failing to Achieve 'Historic' Changes for Mexicans Ginger Thompson New York Times, September 2, 2003, page A1 http://www.nytimes.com/2003/09/02/international/americas/02MEXI.html This article reports on Mexican President Vincente Fox's state of the union address. At one point it notes briefly that Mexico's GDP growth has averaged 1 percent annually during Mr. Fox's term in office. It attributes this weak growth to international conditions. In per capita terms, this translates into a decline of approximately 1 percent annually. This is a dismal record for a developing nation. By contrast, Mexico's per capita GDP grew at more than a 4.0 percent annual rate between 1960 and 1980. The fact that the difficulties are attributable to the international economy is little excuse. Mexico consciously pursued policies over the last two decades that tied it more closely to the international economy. Since 1980, per capita GDP growth has averaged less than 1.0 percent annually.