Economic Reporting Review
By Dean Baker
July 8, 2002

OUTSTANDING STORIES OF THE WEEK

Antidepressants Lift Clouds, But Lose 'Miracle Drug' Label
Reported by Erica Goods, Melody Petersen, and Andrew Pollack and written by Ms. Goode
New York Times, June 30, 2002, Page A1
http://www.nytimes.com/2002/06/30/national/30DEPR.html

This article examines the current views within the medical profession towards anti-depressant drugs. It notes that many of the most important anti-depressant drugs of the last decade, such as Prozac, are now coming off patent. It reports on the efforts of drug companies to find ways to replace this revenue, which have included discovering new psychological diseases for which these drugs are supposed to be a treatment.


Trying to Catch WorldCom's Mirage
Seth Schiesel
New York Times, June 30, 2002, Section 3, Page 1
http://www.nytimes.com/2002/06/30/business/yourmoney/30TELE.html

This article discusses the situation of the executives at WorldCom's major competitors, AT&T and Sprint, who faced serious pressure at their jobs, because they were unable to match WorldCom's profit numbers for the last two years. These profit figures have now been shown to have been faked.


Migrants to Chinese Boom Town Find Hard Lives
Elisabeth Rosenthal
New York Times, July 2, 2002, Page A3
http://www.nytimes.com/2002/07/02/international/asia/02MIGR.html

This article examines the plight of Chinese peasants who migrate from the countryside to cities in search of jobs. As tens of millions are displaced from agriculture, this exodus is growing.


Productivity and Output in Europe

Capitalizing on the Euro
Paul Blustein
Washington Post, July 4, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A21880-2002Jul3.html

This article discusses the state of Europe's economy since the adoption of the euro, with a special focus on Greece. At one point the article asserts that, "with violent European currency fluctuations a fast-receding memory, the continent's economy has stabilized to an extent undreamed of during much of the past few decades."

There is no obvious meaning that can be attached to this claim about increased economic stability in Europe. The euro-zone nations enjoyed modest growth, that generally ranged between 2.0-3.0 percent, for the 15 years preceding the creation of the euro, with the exception of a mild recession in the early nineties. The only obvious way in which economic stability has been increased for most of the euro zone nations, has been the elimination of currency fluctuations between the euro zone nations. This outcome is definitional, given the existence of a single currency.

The article at several points inaccurately presents the recent path of productivity growth in euro zone nations, most prominently with a chart that shows productivity declining over the last six years. The article and the chart refer to productivity per person employed. Productivity is usually measured as output per worker hour. According to data from the OECD, this measure has continued to increase at the rate of 1.0-2.0 percent annually over the last six years. The growth in output per hour has not always translated into output per worker, since workers have taken a large portion of the gains of higher productivity growth in the form of shorter work weeks or work years. Work weeks of 35-37 hours are standard in the euro zone nations, as is five to six weeks a year of paid vacation.

Had the chart featured the standard measure of productivity, most of the gap in the level of productivity between the U.S. and euro zone nations would be eliminated.

According to the Bureau of Labor Statistics, many of the euro zone nations, including France, Belgium, the Netherlands, and the area that was formerly West Germany, enjoy higher levels of productivity than the United States.

The article also includes repeated assertions that laws that restrict the ability of firms to fire workers slow economic growth and lower productivity. The evidence on this issue is not conclusive, as shown in part by the fact that many nations with strong worker protection laws have higher levels of productivity than the United States.

In describing worker protections across Europe, the article reports that Germany protects workers from layoffs, "while providing enormous benefits to the unemployed." According to data from the OECD, unemployment benefits make up 37 percent of the average worker's wage. This replacement rate is far below the median among OECD nations.

In assessing the benefits of the Euro to Greece, the article asserts that "until a few years ago, the Greek economy was plagued by stagnation, instability, and inflation," and refers to "the country's economic growth creeping along at an average annual rate of less than 1 percent since 1980." According to data from the World Bank, GDP growth in Greece averaged 2.0 percent annually from 1980 until the euro was created in 1999. 

At one point the article claims the euro proponents expected that the creation of the euro would largely eliminate price differences between countries, since these differences would be more transparent to consumers. It is unlikely that the difficulty of the calculation needed to convert currencies would have allowed large price differences to persist. Most Europeans learn the arithmetic necessary to make this calculation before the age of ten. It can be done on any hand calculator in a fraction of a second. It is implausible that converting currencies would have prevented Europeans from making cross border price comparisons on major purchases, such as cars, as this article suggests. 


Privatization in Bolivia

As Bolivians Vote, Populism Is on the Rise
Juan Forero
New York Times, June 30, 2002, Page A8
http://www.nytimes.com/2002/06/30/international/americas/30BOLI.html

This article discusses the then upcoming presidential elections in Bolivia. It notes a general rise in populist sentiment among the population. It reports that one of the leading candidates promises "to fight coca eradication efforts and to nationalize industries." The article then asserts that "political analysts see such proposals as potentially damaging to Bolivia, which in the 1980's was among the first South American countries to embrace privatization."

The article does not identify any of the political analysts who hold this view. It is not clear why analysts would necessarily view re-nationalization of key industries to be so damaging. England recently renationalized its railroad tracks, after the private sector proved incapable of managing them profitably. The conservative French government indicated that it is considering the re-nationalization of the nation's major phone company. Both economic theory and historical experience indicate that some industries – those in which there are aspects of monopoly – can be better operated by the public sector than the private sector. In the case of England and France, the governments have recognized that some of the industries recently privatized can be better managed by the public sector. There is no obvious reason that political analysts should be concerned if Bolivia followed the path of England and France, and also tried to reverse prior mistakes.


Stock Returns

Stocks vs. Bonds: A Risk Scorecard
Abby Schultz
New York Times, June 30, 2002, Section 3, Page 10
http://www.nytimes.com/2002/06/30/business/yourmoney/30RISK.html

This article contrasts the risks associated with holding stocks and bonds. It never considers the current price-to-earnings ratio in its assessment. By this logic, an investor should have been as willing to buy stock on Japan's exchange when the Nikkei index was at 39,000 in 1989, as when it was hovering near 10,000 last year. This would be comparable to saying that a piece of rental property is every bit as good of an investment when it sells for $4 million, as when it sells for $1 million.


Brazil

Mexico and Brazil Sign Bilateral Trade Pact
Tony Smith
New York Times, July 4, 2002, Page W1
http://www.nytimes.com/2002/07/04/business/worldbusiness/04TRAD.html

This article reports on a new trade pact between Brazil and Mexico. At one point it refers to recent declines in Brazil's currency and stock market. Noting the strong standing of a left-wing presidential candidate in recent polls, it attributes these declines to fears that "a left-wing victory will be followed by repudiation of the country's foreign debts and a full blown economic meltdown." According to the World Bank, Brazil's debt service is already consuming 90 percent of its export earnings. It is possible that it will have to repudiate its foreign debt regardless of the outcome of the election. It is likely that investors are aware of this fact.

Doctor Shortages

Las Vegas Trauma Center Closes as Doctors Quit
William Booth
Washington Post, July 4, 2002, Page A2
http://www.washingtonpost.com/wp-dyn/articles/A21744-2002Jul3.html

This article reports on the coordinated resignation of doctors from an emergency unit in Las Vegas over the high cost of malpractice insurance. While this situation seems to describe a doctors' shortage – doctors are unwilling to work at the prevailing wage, net of malpractice insurance fees – none of the sources in the article discuss the issue in these terms. When shortages have appeared in a wide range of other occupations (e.g. nurses, teachers, agricultural workers, or lifeguards), news articles have routinely presented the shortage as evidence of the need for more immigrant workers in these areas (e.g. see "Short of People, Iowa Seeks To Be Ellis Island of Midwest," by Pam Belluck, New York Times, August 28, 2000, page A1; and "Pool Management Firm Goes Overseas to Find Summer Help," by Dana Hedgpeth, Washington Post, July 21, 2001, Page E1). It is worth noting that this article never raises increased immigration of doctors as a solution to the problem of a shortage of doctors.


Prescription Drug Benefits for Seniors

Air of Inevitability
Robert Pear
New York Times, June 29, 2002, Page A12
http://query.nytimes.com/search/abstract?res=F00916FD3B5A0C7B8EDDAF0894DA404
482

This article provides an overview on the prospects for a prescription drug benefit. The article includes a chart that shows the projected cost to the government of Republican and Democratic proposals. It shows these costs as being $320 billion over the next decade with the Republican program and $400-$500 billion in the case of Democratic program. It would have been helpful to include the Congressional Budget Office's projection that prescription drugs will cost seniors $1,773 billion over the next decade.

The article includes an assertion that a drug benefit for senior citizens "seems inconsistent with the conservative Republican philosophy of limited government." It is questionable to characterize Republicans as being supporters of limited government, especially with reference to prescription drugs. The only reason that drug prices are high is because of government intervention in the form of the monopoly it enforces for private companies through patent protection. If drugs were sold in a competitive market, prices would drop 70 to 80 percent, and it is unlikely that the cost to seniors would even be a political issue.



Vehicle Emission Restrictions

At the Front On Pollution
Danny Hakim
New York Times, July 3, 2002, Page A1
http://www.nytimes.com/2002/07/03/business/03EMIT.html

This article reports on a bill that passed California's legislature, which would require automobile manufacturers to reduce the emissions of greenhouse gases on vehicles sold in California. At one point it discusses a series of technical changes that have been proposed as ways to reduce emissions. It comments that the "Big Three (auto companies) view such technologies as prohibitively expensive."

Industries routinely claim that any regulation will be prohibitively expensive, even if the expected costs are relatively minor. They will generally oppose any measure that will reduce their profits, and their arguments are likely to be far more effective politically if they can say the costs are large, even if they know that they are actually quite modest. Therefore, it would be more accurate to report that the Big Three "claim" that these technologies are expensive, rather than asserting that this is in fact what they believe.


Trade

U.S. Moves to Calm EU Fears About Steel
Paul Blustein
Washington Post, July 4, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A21796-2002Jul3.html

This article reports on a decision by the Bush administration to reduce the categories of goods subject to steel tariffs as a concession to European nations. At one point the article refers to complaints from foreign governments that the tariffs violate "global free-trade rules." There is no obvious reason to include the term "free" in this sentence.



Argentina

Argentine President Sets Early Elections
Anthony Faiola
Washington Post, July 3, 2002, Page A16
http://www.washingtonpost.com/wp-dyn/articles/A16177-2002Jul2.html

Hounded on All Sides, Argentine Leader Moves Presidential Election
Forward
Larry Rohter
New York Times, July 3, 2002, Page A9
http://www.nytimes.com/2002/07/03/international/americas/03ARGE.html

These articles report on the decision by Argentina's president, Eduardo Duhalde, to call for early elections. At one point the Post article comments that "although Duhalde came to power with anti-foreign bluster, he became a pragmatist who has desperately tried to appease the IMF." Politicians often make broad rhetorical statements, but it is unusual for these to be referred to as "bluster." There were legitimate grounds for Duhalde to blame the direction that Argentina had received from foreign sources, notably the I.M.F. and World Bank, for its economic plight. For example, if Argentina had not privatized its Social Security system, at the urging of the World Bank, its budget would have been in balance in 2001 (see "The Role of Social Security Privatization in Argentina's Economic Crisis," by Dean Baker and Mark Weisbrot, Center for Economic and Policy Research [http://www.cepr.net/argentina_and_ss_privatization.htm]).

The Times article notes that there is little immediate prospect that Argentina's economy will resume growing, "in spite of his [Duhalde's] claim tonight that his country 'is very close to an accord' with the I.M.F. and other creditors." The I.M.F. has insisted on extreme austerity measures in these negotiations, even though Argentina is in the middle of a severe recession. It would be expected that such measures would lead to further contraction in Argentina's economy, just as a large tax increase last year would have worsened the recession in the United States. Therefore, it should not be surprising that Argentina does not appear to be on the edge of experiencing strong growth even though it may reach an agreement with the I.M.F.


World Bank Grants and Loans

Donors to Boost World Bank Funding for Aid to Poor
Paul Blustein
Washington Post, July 3, 2002, Page A13
http://www.washingtonpost.com/wp-dyn/articles/A16142-2002Jul2.html

This article discusses an agreement between the major industrial nations on an increase in funding for the World Bank. The countries also reached an agreement on the portion of aid to developing nations that would be dispensed in grants rather than loans. The article reports that Britain and other donors objected to switching from loans to grants because the switch "would hurt poor countries in the long-run by undermining the IDA's [the World Bank's International Development Association] financial health." It goes on to explain that the IDA relies on the repayment of loans for a large portion of its budget.

While the switch from loans that must be repaid to grants that are not repaid may reduce the funds available to the IDA, it cannot logically affect the amount of money available to poor nations. Since the repayments are themselves coming from poor nations, there is no additional money available to poor nations, on net, if poor nations repay loans than if they don't. (See World Bank Grants Would Reduce Poor Country Debt Without Cost to the U.S., http://www.cepr.net/IMF/grants_loans.htm).