Economics Reporting Review
Week of March 3 - March 9

Dean Baker is co-director of the Center for Economic and Policy Research.

OUTSTANDING STORIES OF THE WEEK 

"Sales of Painkiller Grew Rapidly, But Success Brought a High Cost," by Barry Meier
and Melody Petersen in the New York Times, March 5, 2001, page A1. 

This article reports on the growing popularity and illegal abuse of the painkiller
OxyContin. The article shows how OxyContin's use was heavily promoted by sales
people from Purdue Pharma, the drug's producer. As a result, it was heavily
prescribed, often for inappropriate uses. This sort of misuse -- as a result of
excessive promotions -- is exactly the outcome that economic theory predicts in the
case of monopoly profits guaranteed through patent protection of drugs. 

"In New Orleans, Recession Could Hurt Past Welfare Recipients," by Peter T. Kilborn in
the New York Times, March 5, 2001, page A11. 

This article examines the situation facing many low wage workers in New Orleans,
who were former welfare recipients. As a result of the 1996 welfare reform law and
the stringency of unemployment compensation rules, many will find themselves with
no support if they lose their jobs in a downturn. 

"Treasury's Tax Cut Data Can Cut 2 Ways," by Glenn Kessler in the Washington Post,
March 9, 2001, page A8. 

This article analyzes new data from the Treasury Department on the distribution of
benefits from President Bush's proposed tax cut. By reconstructing the data in a
slightly different way than the Treasury Department presented it, the article shows
that the data largely confirm other analyses showing that the bulk of the tax cuts
will go the wealthiest families. 

"Free Spending in Flush Times Is Coming Back to Haunt States," by Pam Belluck in the
New York Times, March 9, 2001, page A1. 

This article reports on the extent to which state governments are now facing budget
shortfalls because they had assumed that the economy and tax revenue would
continue to grow rapidly. Now that the growth of tax revenue has slowed, many
states are planning spending cutbacks or considering tax increases. 

"What Were Once Ladders Are Now Chutes," by Floyd Norris in the New York Times,
March 8, 2001, page C1. 

This article examines movement of the stock prices of the companies that made
initial public offerings at the beginning of 2000. While many of these stocks originally
skyrocketed, most are now selling for below their initial offering price.





CONSUMER CONFIDENCE 

"Confidence Said to Be Steadying," by John M. Berry in the Washington Post, March
3, 2001, page E1. 

This article reports on a drop in University of Michigan's consumer confidence index
to 90.6 in February from 94.7 in January. The article includes numerous comments
suggesting that the decline in confidence shown in this measure was actually
evidence of continuing strength in consumer demand. In particular, the article noted
that the measure showing consumers' assessments of current conditions is well
above the overall measure in the index. It is worth noting that the three month
decline in consumers' perceptions of current conditions is the largest since 1991. 


JAPAN 

"As Japan's Economy Sags, Many Favor a Collapse," by Clay Chandler in the
Washington Post, March 9, 2001, page A1. 

This article reports on a comment by Japan's finance minister, that "Japan's public
finances are very near collapse." This article implies that a large segment of the
Japanese population would like to see its economy collapse. It refers to statements
suggesting the desirability of such a collapse by a former government worker and
comments suggesting possible benefits from a collapse by a researcher. But it is
questionable whether such views are widely held among the Japanese population. 

Many prominent economists recommended the same sort of economic collapse for
Russia after the break-up of the Soviet Union. The subsequent collapse turned Russia
into an impoverished nation, with a sharp deterioration in living standards by almost
every measure. Since there are no examples of nations enduring such a collapse and
subsequently benefiting as a result, it is difficult to believe that many Japanese
people would be anxious to engage in this sort of economic experiment. 

The Japanese economic system has managed to achieve extraordinary economic
growth over the last four decades, with per capita GDP growth averaging 4.3
percent. In the last decade, after a collapse of its stock and real estate markets in
1989, GDP growth has slowed. However, even in this period of slow growth the
economy has continued to enjoy productivity growth of more than 2.5 percent
annually, approximately a full percentage point higher than the rate of productivity
growth in the United States over this period. Japanese workers have received the
benefit of this productivity growth in the form of shorter workweeks. Japanese
workers worked approximately 5 percent more hours in a year than U.S. workers in
1989; they now work approximately 5 percent fewer hours. 

At one point the article asserts that Japan has the highest debt in the world at 130
percent of its GDP. Most of this debt is attributable to bookkeeping peculiarities,
which would not be counted as debt elsewhere. Its publicly held debt is
approximately 40 percent of GDP, almost the same as the 39.8 percent figure for the
United States at the end of 1999. It is also worth noting that because interest rates
are far lower in Japan than in the United States, the interest burden from Japan's
debt is much less than in the United States. Much of the debt could be relatively
easily eliminated if the nation had a modest inflation rate of 3.0 percent a year, as
we have in the United States. 

The article also asserts that Japan would have to "achieve Herculean gains in
productivity" in order to maintain its standard of living as its population ages.
Actually, if its economy can just continue its current rate of productivity growth, its
workers will see substantial increases in living standards even if they have to pay
higher taxes to support a larger population of retirees. 


AIDS DRUGS 

"AIDS Drug Battles Deepens in Africa," by Rachel L. Swarns in the New York Times,
March 6, 2001, page A1. 

This article reports on a new proposal by an Indian drug manufacturer to sell generic
versions of AIDS drugs in South Africa. At one point the article refers to the Bush
Administration's agreement not to seek sanctions against South Africa for attempting
to distribute low cost AIDS drugs "even if American patent laws are broken."
American patent laws do not apply in South Africa; therefore they cannot be broken
by the actions of the South African government. 


BRITAIN'S BUDGET PLANS 

"British Budget Shuns Tax Cut for Spending," by T.R. Reid in the Washington Post,
March 8, 2001, page A18. 

This article reports on British Prime Minister Tony Blair's budget proposal for next
year. At several points, including the sub-head, the article refers to a proposal to
increase a family allowance for the parents of young children as a "handout." This
sort of pejorative characterization of a budget item is unusual in a news article. The
family allowance is similar to the child tax credit that is part of President Bush's tax
plan. Few, if any, news reports have referred to this tax credit as a "handout." 


MEDICARE RESTRUCTURING 

"Bush Urges Congress To Revamp Medicare," by Mike Allen in the Washington Post,
March 6, 2001, page A6. 

This article discusses President Bush's plans to restructure the Medicare program. At
one point it discusses the Breaux-Frist plan, a proposal that Bush has indicated could
be a model for his own plan. The article asserts that under this plan "patients would
receive at least the same benefits [as] they do now." The Breaux-Frist plan does not
guarantee that beneficiaries would receive the same standard of care as they do
now. It does stipulate that a health care plan modeled after the existing
fee-for-service Medicare program would remain an option to beneficiaries, but it does
not guarantee that the government would pay the full premium for this plan. Over
time, the premium for purchasing this plan may rise considerably, so that it would be
very costly for beneficiaries to purchase a plan that provides them with the same
benefits as the existing Medicare program. 


TAX CUTS 

"Doing the Math on Bush's Tax Cut," by David E. Rosenbaum in the New York Times,
March 4, 2001, Section 1, page 18. 

"Bush May Veto Excess Spending, Official Says," by Mike Allen in the Washington
Post, March 4, 2001, page A4. 

These articles discuss President Bush's tax cut proposal. Both articles discuss the
issue in ways that are likely to confuse readers. The Times article implies that the
distribution of the tax cut's benefits is difficult to determine and depends on who
does the calculations (the sub-head is: "Who Would Gain Most Depends Mostly on
Who Is Counting"). In fact, there is very little difference between the estimates of
the distribution of the benefits of the proposed tax cuts -- approximately 40 percent
will go to the richest one percent of the population. 

In describing the tax cut, President Bush and his supporters like to emphasize the
percentage reduction in income tax paid by each group, which is slightly less for the
highest income taxpayers than for others, rather than the percentage of benefits
received by each group. They also prefer to only discuss the benefits from the
reduction in income tax rates, without mentioning the benefits from eliminating the
estate tax -- which only benefits high income families. While the supporters and
opponents of the tax cut may differ on the focus of their rhetoric, they differ very
little in their assessment of the distribution of the benefits of the tax cut. 

The Post article reports on a White House chart showing that the richest 1 percent
of families will receive 22.3 percent of the value of the proposed tax cut. It does not
point out that this analysis excludes the impact of eliminating the estate tax. 

"Cutting a Rightward Path," by Robin Toner in the New York Times, March 4, 2001,
Section 4, page 1. 

This article assesses the political situation surrounding President Bush's tax cut
proposal. At one point, it refers to arguments by Democrats that the tax cut could
lead to "hard choices, including returning to deficits or deep cuts in spending." 

It is not clear why running a modest deficit would be viewed as a "hard choice."
While deficits are apparently considered to be a serious political problem at present,
the economic consequences of modest deficits (less than $200 billion a year) are
barely large enough to even be measured. Through most of the last sixty years
politicians have consistently been able to support budgets with deficits, without
suffering significant negative political consequences. The article provides no support
for its implicit contention that deficits will be politically unacceptable in the future. 

It is also worth noting that tax increases are a third option, in addition to deficits or
budget cuts. There has been no ten year period in the post World War II era where
there has not been at least one significant tax increase. The article provides no
reason for believing that the future will be different from the past in this respect. 

In framing the current debate, the article asserts that President Clinton was
"overreaching" from the left in his proposal for national health care insurance in 1993.
While this is one perspective, his failure can also be attributed to the fact that in an
effort to appease a portion of the insurance industry and other powerful lobbies,
Clinton designed a complex plan of questionable feasibility. His plan also would have
put into jeopardy the quality of care received by those already insured. 


STOCK RETURNS 

"A Year Later, Time to Think About Buying Again," by Alex Berenson in the New York
Times, March 4, 2001, Section 3, page 1. 

This article argues that in the wake of the recent decline in the stock market, it is an
appropriate time for investors to once again buy stock. To support this contention it
lists a series of innovations that have had a large impact on people's lives in recent
years, and could have an even larger impact in the future. But the fact that
technology is continuing to move forward has almost no direct relevance to the
merits of holding stock. The 1930s saw the spread of the radio, household appliances
like refrigerators and clothes washers, and the discovery of penicillin; yet the stock
market rose very little over the course of the decade. Similarly, the same set of
innovations are appearing in Japan as in the U.S., yet its stock market is currently
valued at about one third of its 1989 peak. 

The article then informs readers, "if you are an investor with a reasonably long time
horizon -- five years or more -- ... The only way that you will lose money in stocks is
if the market heads into an 'L,' a bottom that lasts for years." Contrary to this
article's assertion, it is very likely that long-term investors will lose money in the
stock market, compared to holding other assets. 

Stock prices can either rise more rapidly than corporate profits, at the same rate as
corporate profits, or less rapidly than corporate profits. Few economists would argue
that over any long period that stock prices would rise more rapidly than corporate
profits, since this would imply constantly rising price-to-earnings ratios. Since the
current price-to-earnings ratios are already near record highs, a further rise would
essentially mean the growth of a bubble. 

The second scenario implies that stock prices would rise as fast corporate profits.
The Congressional Budget Office projects that corporate profits will rise at an
average annual rate of 1.0 percent, after adjusting for inflation. The current dividend
yield is approximately 2.0 percent. Adding the dividend yield to the capital gain gives
a total return of 3.0 percent. This is less than the 3.3 percent yield that investors
can get on inflation-indexed government bonds. It is also below the 4.0 percent real
return currently available on high-grade corporate bonds. Therefore, in this scenario
long-term stockholders would lose relative to holding other investments. 

The third possibility is that stock prices fall enough to restore their historic
relationship to corporate earnings. This would imply a further decline of approximately
40 percent. In this scenario, stockholders would lose a great deal compared to those
who held other investments. 


OIL DRILLING IN THE ARCTIC WILDLIFE REFUGE 

"GOP Senator Predicts Fight Over Arctic Oil," by James Rowley in the Washington
Post, March 4, 2001, page A16. 

This article discusses the debate over drilling for oil in the Arctic National Wildlife
Refuge (ANWR). It characterizes the debate as one between proponents of drilling,
who want to reduce the nation's dependence on foreign oil, and opponents of drilling,
who care more about the environment. 

This is an inaccurate characterization of the positions. If the oil is taken from ANWR
during a period like the last twenty years -- when the United States had basically
unlimited access to supplies of foreign oil -- then the ANWR oil will not have affected
our ability to get oil at all. Once it has been removed from the ground, it ceases to
be a reserve, which could in principle be tapped in the event of a cutoff of foreign
oil. Therefore, it is more accurate to characterize the opponents of drilling in ANWR
as being concerned about the nation's dependence on foreign oil, since they
advocate a policy that will leave a reserve in place. 

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