Economic Reporting Review
By Dean Baker
March 24, 2003

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OUTSTANDING STORIES OF THE WEEK

U.S. Brands Abroad Are Feeling Global Tension
John Tagliabue
New York Times, March 15, 2003, Page B3
http://www.nytimes.com/2003/03/15/business/15YANK.htm

This article reports on the difficulties that U.S. companies selling retail items are facing as a result of growing anti-American sentiment in much of the world. Corporations such as McDonalds and
Coca-Cola are worried about informal boycotts of their products and vandalism or violence directed against their distributors in many countries around the world.


Health Care

Health Insurance Back as Key Issue
Ceci Connolly and Amy Goldstein
Washington Post, March 16, 2003, Page A5
http://www.washingtonpost.com/wp-dyn/articles/A30115-2003Mar15.html

This article discusses new interest in plans to extend health insurance coverage to the uninsured. At one point the article notes differences in approaches to extending coverage and asserts that these differences are attributable to "philosophical differences," with some people advocating plans that rely more on the government and others supporting plans that rely more on individuals and markets.

It is not clear that the differences discussed in the article have anything to do with philosophy. There is a large body of evidence that indicates that a universal insurance plan, similar to the one in Canada or the one that Medicare provides for people over age 65, is the most efficient way of providing health care. This is a result of savings on administrative costs and the elimination of wasteful or harmful forms of competition, such as when insurance companies try to avoid insuring unhealthy people. Proponents of such a system may have no special philosophy about the government's role in providing health insurance, but would simply prefer to see it done at the lowest cost.

In contrast, the systems of tax credits for buying insurance, cited as an alternative, have the potential of providing large profits to the insurance industry. The insurance industry is a powerful special interest group and is a large source of campaign contributions for both political parties. It is possible that proponents of plans that provide subsidies for buying insurance (which is an interference in the market) are motivated more by the desire to please a powerful interest group than by philosophy. The article presents no evidence that philosophy is their primary motivation.

At one point, the article asserts that the debate over health care in the early nineties "was dominated largely by liberal advocates who promoted the idea of a 'single-payer' system of government-run insurance." This is not true. While a single-payer bill did have the largest number of co-sponsors of any reform bill in Congress, major media outlets such as National Public Radio, the New York Times, and the Washington Post gave almost no coverage to single-payer proposals. As a result, the public was, and remains, almost completely uninformed about the vast body of evidence showing that such a system would lead to large savings compared to the current system or to other suggested reform options.


Medicare and Social Security

Medicare Finances Slip, Report Says
Amy Goldstein
Washington Post, March 18, 2003, Page A3
http://www.washingtonpost.com/wp-dyn/articles/A42373-2003Mar17.html

This article reports on the projections in the new Medicare and Social Security Trustees' Reports. At one point the article asserts that, "both programs will confront crippling financial strains in coming decades, because longevity is increasing and the 77 million- strong baby boom generation will begin to retire in eight years."

It would have been equally accurate to make this statement at any point in these programs' existence, since longevity has always been increasing. As a result, it was necessary to raise Social Security taxes in every decade from the forties to the eighties, and Medicare taxes in every decade since it was created in 1966.

Both programs have are actually well-prepared for the retirement of the baby boom generation. They are currently running large surpluses that will help defray the costs of the baby boomers' retirement (which begins in six years, not eight as stated in the article). In the case of Medicare, the program is projected to be fully solvent until 2028 with no changes whatsoever. Social Security is projected to be fully solvent until 2042, at which point the youngest baby boomers will be 78 years old and the oldest will be 96.


Oil Drilling in the Arctic Refuge

Senators Reject Call For Drilling In Alaska
Helen Dewar
Washington Post, March 20, 2003, Page A3
http://www.washingtonpost.com/wp-dyn/articles/A57397-2003Mar19.html

This article reports on a Senate vote against allowing oil drilling in the Arctic National Wildlife Refuge. In reporting on the debate, the article gives projections of the amount of oil that could potentially be drilled from the Refuge. It would have been more helpful to report the amount relative to the size of the world and domestic oil markets. If Congress authorized drilling when its production came on line in about ten years, the Refuge would increase world oil supplies by approximately 1.0 percent and would be sufficient to meet approximately 5 percent of U.S. oil needs for 15 to 20 years.


Bankruptcy Reforms

House Votes To Make It Harder to Seek Bankruptcy
Carl Hulse
New York Times, March 20, 2003, Page A24
http://www.nytimes.com/2003/03/20/politics/20BANK.html

This article reports on the passage of a bill in the House that will make it harder for people to discharge their debts after declaring bankruptcy. While it gives some of the arguments raised by opponents of the bill, it left out two important ones. By requiring people to repay a larger share of their prior debts, many parents will likely be less able to meet child support obligations. (In law, child support payments take priority over other obligations. But people only have a single pool of money - if more goes to repay debts, there is less available to pay child support.) Also, large debt repayments can be seen as similar to a high tax burden: they provide a strong disincentive to work, or an incentive to work off the books.


Trade

Bush May Use Trade Pacts for Iraq Leverage
Paul Blustein
Washington Post, March 15, 2003, Page A16
http://www.washingtonpost.com/wp-dyn/articles/A27523-2003Mar14.html

This article discusses the Bush administration's plans to use economic pressure to get more support for its plans to attack Iraq. The article twice refers to the trade agreement that the United States negotiated with Chile as a "free-trade" agreement. This is inaccurate. The agreement actually increases protectionism in some areas, most importantly by requiring that Chile apply U.S.-type patent and copyright protections to items produced by U.S. corporations.

At one point the article asserts that the Bush administration "prided itself on avoiding the use of economic pressure" to gain support for a war against Iraq. This assertion contradicts numerous press accounts of promises of aid for nations supporting the U.S. position and punitive steps against nations opposing the U.S. (e.g. "Congress Questions Cost of War-Related Aid," by Dan Morgan, Washington Post, March 17, 2003, Page A2).

Bush's Strong Arm Can Club Allies Too
Dana Milbank and Jim Vanderhei
Washington Post, March 21, 2003, Page A6
http://www.washingtonpost.com/wp-dyn/articles/A2713-2003Mar21.html

This informative article examines ways in which the Bush administration has pressured its political allies when they have staked out positions that differed with those of the administration. At one point it refers to a difference over a "free-trade vote." Since trade agreements at issue involve increasing some forms of protectionism, it would have been more accurate to simply use the term "trade vote."


Life Expectancy

Life Expectancy in U.S. Reaches a Record High
Rob Stein
Washington Post, March 15, 2003, Page A12
http://www.washingtonpost.com/wp-dyn/articles/A27239-2003Mar14.html

This article reports on new data on health and longevity released by Centers for Disease Control and Prevention. In most years life expectancy increases, so the headline reporting that life expectancy hit a record in 2001 could have been written about the new data in most years.


Housing Bubble

The Market Says 'Sell,' But the Heart Says 'Stay'
Maureen Milford
New York Times, March 18, 2003, Page E10
http://www.nytimes.com/2003/03/18/business/retirement/18MILF.html

This article discusses the merits of selling a home in the current real estate market. At one point it comments that, "historically, home prices have risen quickly but declined slowly, if at all." The experience of the past seven years differs from prior years in that housing prices have risen by 32 percentage points more than the overall rate of inflation. There has never been a comparable run-up in housing prices. Therefore it is inappropriate to make assumptions about the future path in housing prices based on the experience following past increases, just as it was in appropriate to make assumptions about future stock returns at the peak of the bubble based on the experience after more modest stock price run-ups.


China

Government Projects Put China to Work, and in Debt
Peter S. Goodman
Washington Post, March 15, 2003, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A27349-2003Mar14.html

This article reports on the large-scale public works projects that are being put in place across China. The article reports that these projects have helped to sustain employment, but that they are leading to government budget deficits. The article includes an assertion that implies that the current deficit levels cannot be sustained.

According to the article, China's current government debt is equal to approximately 150 percent of GDP, including the un-payable debt of state-run enterprises. The article asserts that the government is currently running a deficit equal to 3 percent of GDP. If China's economy can grow at the rate of 7 percent annually, the rate currently projected by the World Bank and a rate somewhat lower than its recent growth rate, then its debt to GDP ratio will be down to 104 percent in ten years, if it continues to run deficits equal to 3 percent of GDP. In 20 years, the debt to GDP ratio will have fallen to 75 percent. If the growth is accompanied by a modest 2 percent inflation rate, then the debt to GDP ratio will be under 80 percent in ten years and under 60 percent in twenty years.


Finland

Finland's Close Race Isn't a Cliffhanger
Lizette Alvarez
New York Times, March 16, 2003, Page A8
http://query.nytimes.com/gst/abstract.html?res=F50C1EFB345A0C758DDDAA0894DB40448\2

This article reports on the national elections taking place in Finland. At one point it discusses Finland's generous welfare state and asserts that "one undesirable offshoot of this generosity is that there is little incentive for the unemployed to work at low-wage jobs and little incentive for employers to create jobs." The article does not indicate why it views it as desirable that people work at low- wage jobs. One of the main reasons why many societies do provide generous unemployment benefits is precisely so that workers are not forced to accept low paying and undesirable jobs. This is the intention of the policy, not an unexpected outcome.

It is worth noting that the other three Nordic countries (Denmark, Norway, and Sweden) all have welfare states with tax rates and benefits that are comparable to those in Finland, yet all three have unemployment rates that are lower than those in the United States. Therefore, the explanation for relatively high unemployment in Finland must be something other than the incentive structure that the welfare state has created for workers and employers.


Germany

Schroder Offers Plan for Ending Germany's Economic Slump
Richard Bernstein
New York Times, March 15, 2003, Page A4
http://query.nytimes.com/gst/abstract.html?res=F00B1FFD355A0C768DDDAA0894DB40448\2

Germans Balk at the Price of Economic Change
Richard Bernstein
New York Times, March 19, 2003, Page A4
http://www.nytimes.com/2003/03/19/international/europe/19LETT.html

These articles report on Germany's current economic situation and the prospects of policies aimed at weakening its welfare state. Both articles report that Germany's unemployment rate is over 11 percent. The United States Bureau of Labor Statistics reports that Germany's unemployment rate is 8.9 percent, using the U.S. measure of unemployment. Since the unemployment rate in former East Germany is far higher than the national average, the unemployment rate in former West Germany is close to 6.5 percent, not very much higher than the U.S. unemployment rate.

At one point, the first article comments that "many in this country have come to see [the German welfare state] as a rigid, antiquated, sometimes even ridiculous obstacle to growth." The article provides no evidence that many Germans hold this view. It is worth noting that none of the major parties in the elections last fall ran on a platform promising major changes in the welfare state.

In discussing Germany's slow recent growth, neither article ever mentions the European Central Bank (ECB). The ECB has maintained a very restrictive monetary policy even as Europe's economy has been at the edge of a recession. Over the last two years, the ECB has consistently held its short-term interest rate between 1.25 and 1.5 percentage points higher than the rate set by the Federal Reserve Board for the United States. Virtually all economists believe that the U.S. economy would have experienced slower growth if the Fed had kept interest rates higher. Similarly, standard economic theory would imply that the high interest rate policy of the ECB has been an important factor impeding economic growth in Germany.

The March 19th article, which attributes Germany's large welfare state and slow economic growth to cultural factors, contrasts Germany's reverence for philosophers that favor pro-state or collectivist ideas with neighboring Austria's respect for such advocates of the market as Friedrich Hayek. It is worth noting that Austria has a welfare state that by most measures is as comprehensive as the one in Germany, with strong labor unions and substantial worker protections against layoffs or firing.