Economic Reporting Review
June 11, 2001

By Dean Baker, co-Director of the Center for Economic and Policy Research

OUTSTANDING STORIES OF THE WEEK

"3 Fake Drugs Are Found in Pharmacies," by Melody Petersen in the New
York Times, June 5, 2001, page C1.

This article reports on the discovery of counterfeit versions of three
patented drugs appearing on pharmacy shelves. The drugs involved all
sold for very high prices -- in one case a twelve week supply cost
$21,000. This sort of counterfeiting is exactly the result that
economists would predict when the government confers a monopoly for
essential drugs through patent protection.


GLOBAL WARMING

"Kyoto Alternative to Rely on Voluntary Cuts," by Eric Pianin in the
Washington Post, June 2, 2001, page A6.

This article discusses President Bush's agenda for future negotiations
on climate change. At one point the article refers to proposals that
President Clinton had put forward. It asserts: "European negotiators
rejected a number of approaches being considered by the Bush
administration - including carbon sequestration and emission credit
swapping -- when the Clinton administration first proposed them in
late 1999."

It is worth noting that the European nations did not reject these
proposals outright, but rather the specific form in which the Clinton
administration proposed them. For example, they rejected the Clinton
administration's proposal on carbon sequestration because it
effectively raised the ceilings that the administration had committed
itself to two years earlier at Kyoto.


THE EMPLOYMENT REPORT

"Joblessness Falls, But So Does Job Count," by John M. Berry in the
Washington Post, June 2, 2001, page E1.

This article reports on the Labor Department's release of the
employment report for May. It quotes or cites three sources, all of
whom are analysts working for financial firms. These analysts are
often strongly predisposed toward slower growth and higher
unemployment, as compared with the interests of the general public,
since creditors -- such as banks, are primarily worried about
inflation. It would therefore have been appropriate to use a more
diverse range of sources for the article.

At one point the article notes that the data showed a 0.3 percentage
point drop in the unemployment rate among Hispanics. It is also worth
noting that the data showed a 0.9 percentage point drop in the labor
force participation rate for Hispanics. While the monthly data for
Hispanics is erratic because of the small sample size, the decline
reported in their labor force participation suggests a deterioration
in the labor market for Hispanics in May.

"Economy Remained Weak in May As Employers Continued Job Cuts," by
David Leonhardt in the New York Times, June 2, 2001, page A1.

This article reports on the Labor Department's release of employment
data for the month of May. At one point the article reports that "the
decline of 19,000 jobs, compared with an average drop of 60,000 jobs
in March and April, did indicate that corporate cost-cutting was not
accelerating." While these numbers are accurate (the economy lost an
average of 61,500 jobs in March and April), it is worth noting that
the economy only lost jobs in April. The Labor Department did
originally report that jobs had fallen in March, but this data was
revised upward so that job growth is now reported at 59,000 for March.


MEDICARE

"Medicare Shift Toward H.M.O.'s Is Planned," by Robert Pear in the New
York Times, June 5, 2001, page A17.

This article reports on plans by Thomas Scully, the administrator of
the Health Care Financing Administration, to significantly increase
the percentage of Medicare beneficiaries who are enrolled in HMOs.
According to the article, Mr. Scully hopes to have 30 percent of
beneficiaries enrolled in HMOs by 2005.

While the article points out that in the last three years, HMOs have
dropped more than one quarter of the Medicare beneficiaries who have
enrolled (ostensibly because they were losing money), it would have
been appropriate to also mention that HMOs have increased the cost of
the program to taxpayers. According to a recent study by the General
Accounting Office ("Medicare+Choice: Payments Exceed Cost of
Fee-for-Service Benefits, Adding Billions to Spending," August, 2000),
the cost of providing services through HMOs was approximately 13
percent higher than the traditional Medicare program. This experience
suggests that Mr. Scully's plan will significantly increase the cost
of the Medicare program. It is also worth noting that, even though
they had higher per-person payments than the traditional program, the
HMOs still contended that they were losing money. This implies that
HMOs are considerably less efficient than the public sector in
providing health care to the elderly.


TRADE

"Myanmar Tests Resolve of I.L.O. on Enforcing Standards," by Elizabeth
Olson in the New York Times, June 5, 2001, page W1.

This article examines the reluctance of nations to impose trade
sanctions against Burma, even though the International Labor
Organization has condemned the use of forced labor there. The article
begins by asserting that "nearly all governments agree smooth,
seamless international trade is good." This is not true. The United
States, along with many other industrialized nations, has worked hard
to try to impose copyright and patent monopolies throughout the world.
These forms of protection prevent the operation of competitive
international markets in the items subject to protection.

It is also worth noting that the United States government has also
openly taken steps to prevent competition from foreign doctors from
driving down the wages of doctors in the United States (see "Caught in
the Middle," by Lena H. Sun, Washington Post, March 19, 1996, Health
Section, page 10; "A.M.A. and Colleges Assert There is a Surfeit of
Doctors," by Robert Pear, New York Times, March 1, 1997, page A7, and
"U.S. to Pay Hospitals Not to Train Doctors, Easing Glut," by
Elisabeth Rosenthal, New York Times, February 15, 1997, page A1). In
this way it has impeded trade in physicians' services, thereby costing
U.S. consumers tens of billions of dollars each year in higher
doctors' fees.


STEEL IMPORTS

"Bush to Seek Protection for U.S. Steel Firms," by Paul Blustein in
the Washington Post, June 6, 2001, page E1.

"Bush Moves Against Steel Imports; Trade Tensions Are Likely to Rise,"
by
Joseph Kahn in the New York Times, June 6, 2001, page A1.

These articles report on the decision by the Bush administration to
initiate a trade case before the International Trade Commission on
behalf of the steel industry. Both articles repeatedly refer to this
step as "protectionist." It is worth noting that the dollar has risen
in value by 20-30 percent against other major currencies since 1996.
This increase in the dollar's value was in part a result of a
deliberate "high dollar" policy of the Clinton administration. The
high dollar policy has the same effect on the steel industry (as well
as all other domestic industries) as the United States government
providing a 20-30 percent subsidy for all steel imports.

As a result of the high dollar policy, the United States is running a
current account deficit of approximately $450 billion annually. All
economists recognize that a current account deficit of this magnitude
cannot be sustained. At some point, the dollar will have to decline,
which will reduce the deficit by raising the price of imports and
reducing the price of U.S. exports to foreigners. However, as the long
as the dollar is kept at an inflated level, the United States will
have access to cheap imports.

The Post article also refers at points to the Bush administration's
plans for a "free-trade" agreement for the western hemisphere. While
the administration uses the term "free-trade" in the name of the
proposed pact, it is not an accurate description. Some of the
provisions in the pact being negotiated would likely involve more
protectionism, such as increased enforcement of copyrights and
patents. It would be more appropriate to refer to the pact in a
neutral manner, as simply a "trade agreement" -- or more accurately, a
"commercial agreement," since (as was the case with NAFTA) the more
significant chapters of the agreement are likely to be those dealing
with investment.


THE IMF

"Major Changes Signaled at IMF," by Paul Blustein in the Washington
Post, June 8, 2001, page E10.

This article discusses the individuals who were selected to fill
several of the top level positions at the IMF. At one point, it
discusses the views of Anne Krueger, who was selected to be the first
deputy managing director. The article notes Krueger's generally
conservative views and then adds that "she has also taken a dim view
of efforts to write off the debt of poor countries."

It is worth noting that many conservative economists strongly support
such write-offs. The Meltzer Commission, which was headed by Robert
Meltzer, one of the nation's most prominent conservative economists,
endorsed writing off 100 percent of this debt, which it viewed as
unpayable in any case.

At one point the article refers to IMF interventions in Russia, Asia,
Latin America, and elsewhere as "rescue plans." While IMF officials
may characterize their actions as "rescues," it is questionable
whether they have really helped the countries in question, as many
economists have argued. For example, the main effect of the IMF's
intervention in Russia and Brazil in 1998 was to saddle these
countries with expensive loans in order to prop up an overvalued
currency. In both cases the currencies subsequently collapsed, and the
economies responded with higher real growth. Many economists,
including Harvard Professor Jeffrey Sachs and Joseph Stiglitz, the
former Chief Economist of the World Bank, have argued that the Fund's
intervention in the East Asian financial crises did not stabilize the
economies of the region, and the conditions attached to its loans
(including 80 percent interest rates in Indonesia) probably worsened
the crisis.


ENERGY CRISIS IN BRAZIL

"Energy Crisis in Brazil Is Bringing Dimmer Lights and Altered Lives,"
by Larry Rohter in the New York Times, June 6, 2001, page A1.

This article reports on the electricity shortages facing Brazil, which
has led to power rationing and blackouts. It is worth noting that the
current crisis is at least in part attributable to Brazil's decision
to deregulate and privatize its electricity system. As was the case in
California, when Brazil moved to deregulate, there was no mechanism in
place to ensure that there would be an adequate supply of electricity.
It is also worth noting that Brazil is eliminating public funding for
constructing new power plants in order to meet budget targets set by
the IMF.


PRODUCTIVITY GROWTH

"Productivity Declines 1.2%; Its Largest Drop Since 1993," by Michael
Brick in the New York Times, June 6, 2001, page C2.

This article discusses the revised data for productivity growth in the
first quarter, which showed a drop in productivity of 1.2 percent. At
several points the article seems to confuse productivity growth with
levels, for example asserting that: "after the boom of the late
1990's, which was fueled by investments in technology to help make
productivity more efficient, this measure of output of American
workers was bound to decline, economists said."

While most economists had anticipated that the rapid productivity
growth of the late nineties would not be maintained, they expected to
see a slower rate of growth, not an actual decline in productivity
levels. While the measured level of productivity can decline for a
quarter or two, as a result of cyclical factors, it is unusual for
productivity levels to actually fall over any significant period of
time. Falling productivity would imply that workers are producing
fewer goods and services per hour. Unless workers are forgetting how
to do things, or capital is being pulled out of the production process
(e.g. computers and machinery are being destroyed), it is difficult to
see why productivity would actually decline through time.

The real question is simply the rate at which productivity grows
through time. The sharp decline in the growth reported for the first
quarter suggests that economists who believed that information
technologies had placed the economy on a permanently higher
productivity growth path, such as Federal Reserve Board Chairman Alan
Greenspan, may have exaggerated their impact. However, since quarterly
data is very erratic, it will be necessary to have several more
quarters of data in order to better assess the situation.


THE BUDGET

"Budget Fight Brews Over Popular Programs," by Dan Morgan in the
Washington Post, June 8, 2001, page A17.

"Even as President Signs Tax Cut Measure, Democrats and G.O.P. Talk of
Revisions," by David E. Rosenbaum in the New York Times, June 8, 2001,
page A1.

These articles assess the prospects for the budget over the next
decade in the wake of the new tax cut signed by President Bush. At one
point the Times article notes that most of the tax cut is scheduled to
be eliminated in 2011, but then asserts that few people expect that
this will happen because "it would mean a sudden huge tax increase
that could have disastrous economic consequences."

Actually, the tax increase that would go into effect in 2011 under
this scenario would not be much larger, relative to the economy, than
the tax increase that was put in place in 1994 by President Clinton's
tax increase. Since most of the increase would be borne by upper
income taxpayers (the main beneficiaries of the tax cuts) who save
much of their income, and they would know of the increase years in
advance, standard economic theory would predict that there would be
relatively little effect from the rise in taxes in 2011. (According to
standard theory, households try to even their consumption out over a
lifetime. While poorer families typically spend nearly all their
income, richer households typically save substantial amounts. This
means that the families who anticipate a tax increase in 2011 would be
saving more in prior years, so that they don't have to cut their
consumption drastically in order to pay a higher tax bill in 2011.)

This article also lists several reasons that the surpluses may be less
than projected. It should have included the likelihood that revenue
from capital gains taxes will be less than projected. The
Congressional Budget Office projects that the government will collect
more than $100 billion annually in capital gains taxes over the next
decade. This assumes that the price to earnings ratios in the stock
market will rise from levels that are already near historical peaks.
Very few economists believe that this is plausible.

At one point, the Post article reports warnings from Democrats that it
may be necessary for the Federal government to dip into the Medicare
surplus in 2003 and 2004 to pay its bills. It is worth noting that
this would have no effect whatsoever on the finances of the Medicare
program. By dipping into the Medicare surplus, the article means that
the government will not be paying down an amount of publicly held debt
equal to the combined surpluses of the Medicare and Social Security
funds. Both the Medicare and Social Security trust funds will have the
exact same amount of assets in government bonds, regardless of whether
the federal government pays down its debt in any given year.


CONSUMER DEBT

"A Wall St. Bear is Now Less Gloomy on Economy," by Reuters in the New
York Times, June 8, 2001, page C2.

This article discusses the views of Stephen Roach, a prominent stock
market analysis. It also includes a brief discussion of several new
economic releases, including a report on consumer borrowing in April.
The report showed that borrowing increased at a 10.7 percent annual
rate for the month.

This news deserved more attention. Borrowing has been increasing very
rapidly this year, even though income has slowed to a crawl, and debt
levels are already at record highs. This indicates that people are
borrowing against their credit cards in an unsustainable manner.
Unless the economy picks up sharply in the near future, this borrowing
is likely to lead to a large wave of bankruptcies and a major
reduction in consumer spending, which could set off a severe
recession.