Economic Reporting Review
By Dean Baker
December 22, 2003
States Try to Limit Drugs in Medicaid, But Makers Resist
Gardiner Harris
New York Times, December 18, 2003, Page A1
http://www.nytimes.com/2003/12/18/business/18DRUG.html
This article discusses the efforts of state Medicaid programs to restrict the drugs for which they pay, and the resistance of drug companies to such efforts. In particular, it focuses on Kentucky’s efforts to restrict the use of Zyprexa, an expensive drug produced by Eli Lilly, which is not clearly more effective than much cheaper alternatives.
Congress to Weigh Easing U.P.S. Role On Pension Funds
Mary Williams Walsh
New York Times, December 16, 2003, Page A6
http://www.nytimes.com/2003/12/16/business/16PENS.html
This article reports on a bill being considered by Congress that would limit the liability of U.P.S. towards a multi-employer pension fund. A recent contract with the Teamsters union (won after a long strike) required that U.P.S. maintain its commitment to the pension fund. The proposed legislation would effectively overturn this aspect of the contract, thereby jeopardizing the pensions of tens of thousands of truck drivers.
At Recovery’s Dawn
David Finkel
Washington Post, December 14, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A62464-2003Dec13.html
This article examines the impact that the economic recovery has had on low-wage workers in rural Michigan. It is part of a series of articles that looked at how ordinary people have been affected by the economy’s recent problems.
And You Thought Pension Funds Were Scary
Gretchen Morgenson
New York Times, December 14, 2003, Section 3 page 1
http://query.nytimes.com/gst/abstract.html?res=F40716FB3E580C778DDDAB0994DB404482
This article reports on the un-funded liabilities that many large companies have accrued in the form of commitments to pay health benefits for retired workers. Unlike pensions, the funds set aside for this purpose are unregulated. In most cases, companies have only set aside a small fraction of the money that will be needed for this purpose.
Pensions
Pension Gap Is Closing, G.M. Reports
Mary Williams Walsh
New York Times, December 13, 2003, Page B1
http://query.nytimes.com/gst/abstract.html?res=FA0B14FF39580C708DDDAB0994DB404482
This article reports on General Motors plans to close the shortfall in its pension fund. The article reports that General Motors is assuming that the assets in its pension will earn an average return of 9 percent annually. It is worth noting that this 9 percent return is considerably higher than the return that could be expected if the fund held nothing but stock.
With the current price to earnings ratio in the market at more than 20 to 1, stock can be expected to provide a nominal return of approximately 7 percent over the next decade. Since most funds hold some amount of bonds or short-term assets, the average return would be considerably lower than the 7 percent return from holding stock alone.
This means that General Motors is either planning to invest its pension funds in assets that are considerably more risky than stocks, and therefore may provide a higher rate of return, or it is simply making up the projected 9 percent return, with no plausible way of attaining it.
The Economy
Hear Them Roar: Let the Boom Begin
Michael Brick
New York Times, December 14, 2003, Section 4 page 7
http://query.nytimes.com/gst/abstract.html?res=F70E10FB38580C778DDDAB0994DB404482
This article examines the current state of the economy. It notes that most people have not benefited much from the recent spurt of economic growth, since job growth has been slow and real wages have actually been falling.
The article asserts that this is not a problem because it claims that a rising tide on Wall Street will “lift all boats.” There is actually no reason to believe that this is true. The stock market is driven by expectation of higher profits (except when it is moving irrationally, as was the case during the recent bubble); if profits come at the expense of wages, then this would not be good news for most of the population. This is exactly what happened in the long stock market rise from the early eighties until the mid-nineties. The typical wage actually fell through most of this period, even though the real value of the stock market more than doubled.
The article also includes an assertion from Bruce Bartlett, an economist in the Reagan administration, that inequality is not a problem because “there’s a great deal of mobility.” It is worth noting that there is less mobility in the United States at present than in prior decades, or in many other wealthy countries.
The article also includes an assertion from an analyst that money leaving the country to buy imports returns as “investments in stock and bond markets in the United States.” Actually, much of the money leaving to buy imports has been used by central banks to buy up dollar reserves. They can dump these reserves at any point, which would lead to a large decline in the dollar. In some cases, there will be no demand for the dollars that leave the country to buy imports, which means that the dollars will end up in international currency markets and immediately push down the value of the dollar.
Health Care
Republicans Shift Focus to Helping the Uninsured
Robert Pear
New York Times, December 15, 2003, Page A22
http://query.nytimes.com/gst/abstract.html?res=F20711F938580C768DDDAB0994DB404482
This article discusses Republican plans for extending health insurance coverage. According to the article, the Republicans are considering bills that will cost from $50 to $80 billion over the next decade, or from $5 to $8 billion a year. There are currently 43.6 million uninsured people in the United States. This figure rose by 2.4 million last year and is likely to continue to rise rapidly due to the fact that insurance premiums have been rising at double-digit rates for the last five years.
The funds the Republicans are proposing would come to about$100 to $160 for every uninsured person. This is approximately 2 to 4 percent of the average cost of health insurance over the next decade. A measure of this size is unlikely to have a substantial impact on the number of the uninsured and may not even be large enough to prevent the number of uninsured from rising. It would have been helpful to readers if the limited potential impact of the Republican proposal were made clearer.
The Trade Deficit
Consumer Confidence Drops, But So Do Wholesale Prices
Reuters
New York Times, December 13, 2003, Page B4
http://query.nytimes.com/gst/abstract.html?res=F00C17FF39580C708DDDAB0994DB404482
This article reports on a series of economic reports released on the previous day. One of the reports was the release of Commerce Department data on the size of the October trade deficit. This report showed the monthly trade deficit hitting a near record of $500 billion at an annual rate.
The long-term effect of a trade deficit of this size is approximately the same as a budget deficit of the same magnitude. The current deficit is causing the United States to sell off its assets to foreigners at an extraordinary rate. If the trade deficit remains constant as a share of GDP, the United States' net foreign debt will exceed the value of the U.S. stock market by 2018 and it will exceed the combined value of the stock market and the housing market by 2032.
Given the importance of the deficit for the future well being of the country, this data deserved more attention than a brief mention in a wire service story in the middle of the business section. By contrast, articles on the budget deficit are regularly featured on the front pages. The October data on the trade deficit were not mentioned at all in the Post.
Venezuela
In Grip of Economic Decline, Venezuela Seeks Stability
Juan Forero
New York Times, December 16, 2003, Page W1
http://www.nytimes.com/2003/12/16/business/worldbusiness/16venezuela.html
This article reports on the current economic situation in Venezuela. At one point the article comments that the Venezuelan economy is “in the throes of its worst year in decades.”
This is not an entirely accurate picture of the situation. Venezuela’s economy went into a sharp slump in the last quarter of 2002 and the first quarter of 2003 primarily as a result of a strike that was centered in Venezuela’s oil industry. However, after the strike collapsed in March, the economy stopped its descent and in recent months has been growing rapidly. According to data from Venezuela’s central bank, the economy was growing at an annual rate of more than 25 percent in the third quarter of 2003. At present, the upswing is continuing, although it is not yet clear whether the recovery will be strong enough to quickly restore the economy to its pre-strike level of output.
Trade
Costa Rica Balks at Approving Central American Trade Pact
Elizabeth Becker
New York Times, December 16, 2003, Page C6
http://www.nytimes.com/2003/12/17/business/worldbusiness/17trade.html
Accord Reached On Free Trade
Jonathan Weisman
Washington Post, December 18, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A9850-2003Dec17.html
A Pact on Central America Trade Zone, Minus One
Elizabeth Becker
New York Times, December 18, 2003, Page C1
http://www.nytimes.com/2003/12/18/business/worldbusiness/18trade.html
These articles report on the progress of negotiations over the trade pact between the United States and Central America. The articles make repeated reference to “free trade” both as a way to describe the pact and also in describing the views of politicians who support a potential trade pact with Central America.
This description is inaccurate. The proposed pact will liberalize some types of trade, but it will also impose increasing protections in other areas, most notably in the case of patents on prescription drugs. The proposed agreement would increase the stringency of patent protection in Central America, pushing drug prices far above their free market level.
While many politicians in the United States support trade agreements that place manufacturing workers in more direct competition with low paid workers in developing countries (e.g. Presidents Clinton and Bush), most of these politicians also support increasing patent and copyright protection. Also, almost none of these politicians have objected to professional restrictions, such as quotas on foreign medical residents, which have the effect of raising the wages of professionals in the United States. It is inaccurate to describe these politicians as proponents of free trade, since they do not in general support free trade.
Competition in Medicare
Breaux Will Not Run for New Term
Helen Dewar
Washington Post, December 16, 2003, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A20172-2003Dec21.html
This article reports on Louisiana Senator John Breaux’s decision not to seek re-election next year. At one point the article notes Mr. Breaux’s efforts to pass the recent Medicare drug bill. It describes this bill in part as an effort “to inject more private-sector competition into Medicare.”
There already is private sector competition in Medicare, however relatively few beneficiaries opt to get their benefits from private insurers; they find that the traditional Medicare program offers a better package of benefits (at a lower cost to the government). The main change in the new legislation is to increase the levels of government subsidies to private insurers, as well as making other changes in the structure of the program, to increase the probability that private insurers will be able to compete successfully with the government-run program.
Iraq Debt
France and Germany Join U.S. In Effort to Reduce Iraq’s Debt
Craig S. Smith
New York Times, December 17, 2003, Page A1
http://www.nytimes.com/2003/12/17/international/europe/17DEBT.html
This article reports on U.S. efforts to reduce Iraq’s foreign debt. At one point it discussed the debt load that is potentially manageable for a developing country. It asserts “according to one widely used benchmark, countries run into trouble when their external debt level exceeds two and a half times their gross domestic product.”
Developing countries typically face real interest rates in excess of 10 percent. If a country had a debt that was two and a half times its GDP, this would mean that it is paying more than 25 percent of its annual GDP as interest on its debt. This would be equal to approximately $2,750 billion a year in the United States. This would be a crushing burden on any country. Given the high interest rates faced by developing countries, debt burdens in excess of 60 percent of GDP generally pose very large problems.