Economic Reporting Review
June 14, 1999
By Dean Baker
Employment | Social Security | Medicare | Japan | Outstanding Stories
Employment
"Suburban Firms Brace For Shortage"
Peter Behr
Washington Post, June 5, 1999, page E1
This article reports on the relatively tight labor market in the Washington suburbs. The tight
labor market is presented as a problem in this article, because job growth is "the handle that
cranks the region's economic growth." With fewer people left unemployed, then the pace of
job growth must slow, and therefore the pace of economic growth must also slow.
Most workers probably have the exact opposite perspective. Workers typically value
economic growth because it generates jobs, and ideally creates tight labor markets in which
workers can experience significant wage gains, as appears to be happening at present. It is
likely that most workers would rather see a tight labor market and relatively slow economic
growth than rapid economic growth in a time of high unemployment.
"Unemployment Falls Again, But Job Growth Is Moderating"
Sylvia Nasar
New York Times, June 5, 1999, page B1
This informative article analyzes the data in the Labor Department's employment report for
May. At one point the article suggests that manufacturing employment is likely to increase in
coming months, because manufacturers have a growing backlog of new orders. This comment
presumably refers to the Census Department's data on new orders, as well as various surveys
done by private groups.
It is important to recognize that the orders measured by these surveys will not necessarily be
filled by domestic production. For example, if a car parts manufacturer gets a new order from
General Motors, but intends to fill it from production in a subsidiary in Mexico, the new order
would be treated in these surveys in exactly the same way as if they intended to meet the order
with parts made in Ohio. In a period where the trade deficit is rapidly growing, and U.S.
manufacturers are increasing directly producing abroad, or outsourcing to foreign producers,
data on new orders may not be a good measure of future employment in factories located in
the United States.
[Top]
Social Security
"Struggling House Speaker Plans a New Tack for Spending Bills"
Tim Weiner
New York Times, June 5, 1999, page A1
"Congressional GOP Searching for Right Direction on Budget"
Eric Pianin
Washington Post, June 6, 1999, page A6
"Speaker to Lay Down Law to Fractious House GOP"
Eric Pianin and Juliet Eilperin
Washington Post, June 8, 1999, page A1
These articles discuss efforts by the Republican leadership to develop a new strategy for
dealing with the year 2000 budget. All three articles refer to efforts to avoid "dipping into" the
Social Security trust fund.
As long as the trust fund is credited with the amount of surplus revenue that Social Security is
accumulating, there is no way that Congress can "dip into" the trust fund. The trust fund has a
claim on future government revenue just Ross Perot, Chase Manhattan or any other holder of
government bonds, regardless of how much money Congress chooses to spend next year. See
ERR, 5/31/99.
"Kasich Markets Social Security Changes"
Amy Goldstein
Washington Post, June 10, 1999, page A8
This short piece discusses a proposal by Rep. John Kasich to cut Social Security by indexing
future benefit levels to prices rather than wages. This plan would lead to a benefit cut of nearly
25 percent by 2030. The article characterizes the Kasich proposal as "a plan to for salvaging
Social Security."
This characterization is wrong. According to the Trustees projections, all its scheduled benefits
through 2034 with absolutely no changes whatsoever. After that date, it will be able to pay
between 70-75 percent of scheduled benefits through the rest of the 75-year planning horizon.
It is not clear that a program in such solid financial condition can be considered in need of
"salvaging."
Furthermore, since the Kasich proposal would provide lower benefits to all future beneficiaries
than what they would receive if nothing were done to the program, it is wrong to say that his
plan would salvage Social Security.
The article also comments that Kasich's plan would allow workers to use private investments
"to reap higher returns." No economist has been able to demonstrate, given current stock
prices and the Social Security Trustees' projections of slow profit growth, how it will be
possible to get significantly higher returns in private investments than on government bonds. If
the Trustees' projections for profit growth are correct, any additional returns that could be
gained by investing in stock will probably not be large enough to cover the administrative costs
of private accounts.
"Gloom and Doom on the Campaign Trail"
George Hager
Washington Post, June 8, 1999, page E1
This article discusses the economic views of Lawrence B. Lindsey, the top economic advisor
to George W. Bush's presidential campaign. According to the article, Lindsey believes that the
stock market is experiencing a bubble which is likely to burst and send stock prices tumbling.
Acting on this view, the article notes that Lindsey has taken his own money out of the stock
market and placed it in safer assets.
The article also points out that Lindsey is an advocate of partially replacing Social Security with
individual stock market accounts. Workers will be dependent on the returns from these
accounts to make up for lower Social Security benefits. The article does not explore the
contradiction between believing that the stock market is not safe enough for one's personal
investments, but safe enough to for workers in general to depend on for their retirement.
"2 Parties Find Way to Explore Social Security"
Richard W. Stevenson
New York Times, June 11, 1999, page A24
This article reports on plans for a meeting between Democratic and Republican members of
Congress to discuss the possibility of a bipartisan plan for dealing with Social Security. The
article describes the problem as ensuring that Social Security "can weather the retirement of the
baby boomers."
Actually, Social Security is already projected to be able to weather most of the retirement
years of the baby boomers. By 2034, when the trust fund is currently projected to be depleted,
the youngest baby boomers will already be 70 and the oldest will be 88.
[Top]
Medicare
"A Political Remedy for Medicare Could Become Economic Poison"
Michael M. Weinstein
New York Times, June 10, 1999, page C2
"U.S. Warns H.M.O.'s on Recruiting of Medicare Clients"
Robert Pear
New York Times, June 11, 1999, page A20
The first of these articles discusses the implications of President Clinton's proposal to add
prescription drug coverage to Medicare. The second article reports on efforts by the
government to discourage insurers from "cherry picking" among Medicare clients, a process
where the insurers attempt to enroll only the most healthy patients.
The first article argues that Medicare badly needs reforming. It argues that the reform path
which makes the most economic sense involves increased competition, where H.M.O.'s would
compete for patients with different packages of premiums and services, and the government
would make a set contribution for each enrollee based on the average market premiums. It
then argues that, although this path makes the most sense from an economic standpoint, it is not
likely to be adopted for political reasons.
The second article points out ways in which insurers are able to cherry pick their clients. For
example, by advertising at sports clubs and dance halls, they are likely to sign up only the
healthiest of the elderly.
The most effective way for an insurer to make a profit through Medicare is by controlling the
type of people who it ensures. In 1995, the least costly half of all Medicare beneficiaries cost
the system an average of less than $335. By contrast, the most costly 5.0 percent of
beneficiaries cost an average of more than $45,000 each. In that year, the average cost for all
beneficiaries was $5,230. If an insurer receives the average payment, and can manage to sign
up an individual among the low cost half of beneficiaries, it will earn a profit for the year of
nearly $5,000 on that person. By contrast, if it gets stuck with a person among the sickest 5.0
percent, it will lose $40,000.
While the government attempts to regulate the process of cherry picking, it is extremely difficult
for it do so effectively. As the article points out, even when an insurer is caught, it can only be
fined up to $100,000. This fine is less than the losses associated with insuring three high cost
patients. Since private insurers are likely to be far more effective in cherry picking than
government regulators will be preventing the practice, more competition in the Medicare
market is likely to lead to more cherry picking, with the government left to pick up the costs of
the sickest Medicare beneficiaries.
In fact, insofar as politics are preventing a solution that makes economic sense, it is to the
problem of health care costs more generally. Over the next ten years, per person health care
costs are actually projected to rise more rapidly in the private sector than in Medicare.
According to projections from the Health Care Financing Administration, in 2007, annual per
person health care costs will be $139 higher than at present, in inflation adjusted dollars. This is
an increase expenditure of $555 per year for an average family of four.
The United States is the only industrialized nation in which health care costs are rising this rate.
It also is the only industrialized country without some form of national health care insurance.
The political power of groups like the insurance and pharmaceutical industries and the
American Medical Association have been effective in preventing any health care solution that
would restrain the growth of costs, and ensure health care coverage to the entire population.
[Top]
Japan
"Japanese Economy Suddenly Surges"
Sandra Sugawara
Washington Post, June 11, 1999, page E1
"Japan Grows 1.9%, to Economists' Disbelief "
Stephanie Strom
New York Times, June 11, 1999, page C11
These article report on data showing that Japan's economy grew at a 7.8 percent annual rate in
the first quarter of 1999. The Times article includes two references to groups who view
economic growth in Japan as bad news, since it will relieve pressure to make structural
changes that they view as necessary. Previous articles in both papers have repeatedly argued
that fundamental economic change in Japan is necessary to restore growth (e.g. see "Japan
Cuts Key Interest Rate; Economists Are Skeptical," by Sandra Sugawara, Washington Post,
2/13/99, page E3; "Japan Lowers Key Rate, but (Surprise) Bond Yields Go Higher," by
Sheryl WuDunn, New York Times, 2/13/99, page B1; and "Excess Capacity Slowing Japan's
Recovery," by Sandra Sugawara, Washington Post, 12/25/98, page B9.)
However, many prominent economists, such as MIT professor Paul Krugman (see "Japan's
Trap," 5/98) have argued that it is only necessary to stimulate demand through expansionary
fiscal and monetary policy. If the economy is beginning to again experience solid growth, this
would be evidence that the people who believed in the necessity of major structural changes
were wrong.
The Post article notes warnings since the Asian financial crisis, from "U.S. officials," that
Japan's economic recovery is critical to the global economic growth. It is worth noting that
Japan proposed a bailout fund, which would have helped boost the East Asian economies, at
the onset of the crisis in 1997. The United States worked to prevent the creation of this fund
and insisted that the bailout be handled exclusively by the I.M.F. (see "East Asian Fund
Summit Stresses Trade, Leaving Bailouts to IMF," by Paul Bluestein, Washington Post,
11/27/97, page B11).
[Top]
Outstanding Stories of the Week
"As Welfare Rolls Shrink, Cities Shoulder Bigger Load"
Robert Pear
New York Times, June 6, 1999, Section 1 page 22
This article discusses a report from the Brookings Institute which shows that welfare recipients
are increasingly concentrated in inner city areas. According to the study, many welfare
recipients in rural areas and suburbs have been able to find jobs as a result of the strong
economy; however, many inner city areas have still seen only limited benefits from the
economy's growth.
"More Wealth, More Stately Mansions"
Louis Uchitelle
New York Times, June 6, 1999, Section 3 page 5
This article notes a boom in the construction of luxury homes and relates it to the enormous
upward redistribution of income and wealth which has taken place over the last two decades.
"When the Verdict Is Just a Fantasy"
William Glaberson
New York Times, June 6, 1999, Section 4 page 1
"Some Plaintiffs Losing Out in Texas' War on Lawsuits"
William Glaberson
New York Times, June 5, 1999, page A1
These article examine recent efforts to change tort law to make it far more difficult for plaintiffs
to collect significant damages when suing corporations over product liability, workplace safety
or related issues.
The first article focuses on several stories that have been widely circulated by public relations
firms employed by corporations seeking changes in tort law. These stories purport to show
ridiculous jury awards to plaintiffs. The article points out that these stories are largely or wholly
fabrications.
The second article focuses on the reduction in successful lawsuits in Texas, where the
corporate lobby has succeeded in making the laws far less favorable to plaintiffs.
"Has the Global Fever Broken?"
Gretchen Morgenson
New York Times, June 10, 1999, page C1
This article examines recent movements in financial markets to assess whether they have fully
recovered from the financial crisis that originated in East Asia in the summer of 1997. It notes
that, while the risk premiums on many bonds have fallen from their peaks, they are still
considerably higher than they were prior to the crisis. This implies that there is still some
uneasiness in financial markets.
[Top]
Dean Baker is a senior research fellow at the Preamble Center and at the Century Foundation.
Recent articles can be found on the websites of the New York Times and Washington Post.
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