Economic
Reporting Review
November 12, 2001
By Dean Baker, co-Director of the Center
for Economic and Policy Research
OUTSTANDING STORIES OF THE WEEK
A Muscular Lobby Rolls Up Its Sleeves
Leslie Wayne and Melody Petersen
New York Times, November 4, 2001, Section 3 page 1
This article examines how the pharmaceutical industry has managed to
effectively lobby Congress to ensure that its interests would be
protected. The industry has thus far managed to block any measures
that would significantly reduce its profit margins, such as a senior
prescription drug benefit in which the government used its purchasing
power to force down prices, or the purchase of generic Cipro, the
preferred treatment for anthrax.
For South Africa's Poor, A New Power Struggle
Jon Jeter
Washington Post, November 4, 2001, page A1
This article reports how blacks in South Africa are struggling to
cope with the surge in electricity prices and other economic
hardships that have resulted from an I.M.F./World Bank-style
liberalization plan.
Cause, Effect and the Wealth of Nations
Paul Blustein
Washington Post, November 4, 2001, page H1
This article reports on the state of the debate over the extent to
which trade liberalization can foster economic growth in developing
nations. It presents a good summary of the arguments of World Bank
economist David Dollar, one of the leading proponents of this view,
and Dani Rodrik, a Harvard economist who has pointed out some of the
flaws in Dr. Dollar's research.
Slump Stirs Specter of Worldwide Recession
Steven Pearlstein
Washington Post, November 4, 2001, page A1
This article examines the probability of a worldwide recession, which
it indicates is now quite likely.
Rumbles Of Warning As Housing Weakens
Louis Uchitelle
New York Times, November 4, 2001, Section 3 page 4
This article reports on the weakening of the housing market. It notes
that this can lead to falling prices, which may further weaken
consumption, since consumers had been increasing their spending based
on housing wealth.
Drug Patents
Prospects Dim for Medicare Drug Benefit
Robin Toner
New York Times, November 5, 2001, page A12
This article reports on the factors, such as the September 11th
attacks and the disappearance of the budget surplus, which have made
a prescription drug benefit for senior citizens less likely. At one
point the article asserts that the issue "touches on some of the
deepest philosophical divisions between the parties about the role of
government."
This statement implicitly accepts the Republicans' characterization
of themselves as being proponents of small government. This is not
accurate, especially in the case of prescription drugs. The only
reason that prescription drugs are expensive is that the government
grants the industry a patent monopoly. This form of government
intervention raises the price of drugs by several hundred percent
(sometimes several thousand percent) above the free market price. If
the government did not enforce patent monopolies (which Republicans
ardently support), and instead let prices be determined by the
market, seniors would have little difficulty paying for prescription
drugs.
Patents or Poverty? New Debate Over Lack of AIDS Care in Africa
Donald G. McNeil Jr.
New York Times, November 5, 2001, page A6
This informative article reports on a debate over the extent to which
patents currently pose an obstacle to the treatment of AIDS in
sub-Saharan Africa. The article reports the finding of a new study,
which shows that most AIDS drugs are not patented outside of South
Africa. Based on this fact, the study concludes that patents are not
a major obstacle to AIDS treatment in the region.
It is worth noting that South Africa has the largest H.I.V. positive
population in the world. In addition, patents or other claims to
intellectual property may impose obstacles to treatment even when the
drugs are not subject to patent protection in a particular country.
For example, Glaxco SmithKline threatened a lawsuit against Cipla, an
Indian generic manufacturer, claiming that Cipla was violating its
patent rights to an AIDS drug in Ghana, even though Glaxco SmithKline
did not actually have a patent on the drug in Ghana.
It will often be possible for pharmaceutical companies to produce
some basis for contesting a lawsuit. There is a huge asymmetry in the
stakes in any lawsuit between a generic producer and the holder of a
patent. Successfully protecting a patent gives the drug company the
right to a monopoly in the market. If the generic producer wins, they
have the right to sell in a competitive market, like the ones that
exist for pens and matches. Given this asymmetry, the threat of a
lawsuit can often be sufficient to scare away a generic producer,
even if the basis for the lawsuit is completely frivolous. This is
why the developing nations have been insisting on W.T.O. language
that makes it clear that they have the right to license generic
versions of essential drugs.
Copyrights
Networks See Threat in Video Recorder
Laurie J. Flynn
New York Times, November 5, 2001, page C4
This article reports on a lawsuit by the television networks against
the manufacturer of a video recorder. The networks charge that the
recorder makes it too easy for viewers to skip over commercials,
which will ultimately deprive them of revenue.
This is an example of the sort of repressive measures that are
becoming necessary to maintain copyright protections in the wake of
advancing technology. Earlier this year, a computer programmer was
arrested for presenting a paper that showed how it was possible to
break software locks that prevented the copying of videocassettes.
Given the enormous market distortions created by copyright
protection-a form of protection that allows firms to charge large
fees for items that would otherwise be available at no cost-the fact
that repressive measures are needed for its enforcement is not
surprising. This is exactly the outcome that standard economics would
predict in the case of such an extreme form of protectionism. It
would have been appropriate to present the views of an economist in
this article.
Trade
Serious Conflicts Threaten Trade Talks
William Drozdiak and Paul Blustein
Washington Post, November 6, 2001, page A1
This article discusses the issues that are still in dispute between
rich and poor nations as the next round of the W.T.O. begins in
Qatar. At one point the article discusses the importance of the
W.T.O., calling it the guarantor of the modern trading order, "which
most mainstream economists credit with having contributed enormously
to the prosperity of the past half decade."
It is not clear to which mainstream economists the article is
referring. President Clinton's Council of Economic Advisors, who were
very strong supporters of the W.T.O., estimated that the eventual
gains from the last W.T.O. agreement would be equal to 0.5 percent of
GDP. If these gains occur over a ten-year period, it implies that the
treaty added approximately 0.05 percentage points to annual growth in
the second half of the nineties.
The article also implies that developing nations will experience
large gains if the United States cuts its tariffs on textiles and
clothes. The U.S. currently has an unsustainable trade deficit. The
dollar will eventually have to fall by 20 to 30 percent to correct
this deficit. A decline in the dollar of this magnitude would more
than offset the elimination of most tariffs on textiles and clothes,
making imports from developing nations, on net, more expensive than
they are today.
The article discusses the dispute over drug patents between the
United States and developing nations. It notes that developing
countries do not want patent rules to prevent them from buying low
cost generic versions of drugs. It is worth noting that developing
countries are not necessarily asking for any rights that are not
already included in the existing W.T.O. agreement. Many observers,
including Adrian Otten, the Director of Intellectual Property for the
W.T.O., argue that such mandatory licenses are allowed under existing
W.T.O. rules. From this perspective, it is the United States that is
seeking to take away rights and restrict free commerce on behalf of
its pharmaceutical companies; developing nations are not requesting
any special privileges.
Argentina
Argentina Rates Surge as Fears of Debt Default Grow
Anthony Faiola and Paul Blustein
Washington Post, November 3, 2001, page E1
Analysts Worry of Ripple Effect In Argentina's Latest Debt Plan
Jonathan Fuerbringer
New York Times, November 3, 2001, page C1
Experts See Record Default In Argentine Debt Revision
Clifford Krauss
New York Times, November 3, 2001, page A4
These articles discuss reactions to Argentina's plan to substitute
new lower interest bonds for the ones currently being held by
investors. While all three articles provide some background on
Argentina's economy, none of the articles discuss the extent to which
linking the nation's currency to the dollar has been a cause of its
problems. As a result of this link, Argentina's industry became
uncompetitive internationally when its currency rose along with the
dollar in 1997 and 1998. The higher value of its currency made its
exports 20-30 percent more expensive in world markets, and made
imports from other nations 20-30 percent cheaper. In addition, since
few investors thought this high value of the currency could be
maintained, they demanded exorbitant interest rates to compensate for
the likelihood that the currency would fall in value.
While the negative side to the currency link is not discussed,
positive aspects of the link are presented. The Post article
characterized the link as "crucial to ending runaway inflation."
While Argentina did use the link to the dollar as a way to end
hyperinflation, there are other ways to do so that do not have as
many negative consequences. Most of the nations that have recovered
from hyperinflation have not linked their currency to the dollar.
The Krauss article warns that ending the link to the dollar could
"end a long era in which the middle-class grew accustomed to a
comfortable standard of living." The era described is not too
long-the link to the dollar was put in place in 1991 and the economy
fell into recession in 1997-and seems to have ended more than three
years ago. Any prosperity that can be attributed to benefits from the
dollar link proved very short-lived.
At one point the Fuerbringer article lists Argentina's problems and
includes "the need to meet a zero deficit target to comply with terms
for additional aid from the International Monetary Fund." While this
condition does indeed pose a problem, it is worth noting that the
I.M.F. could remove this condition, if it wants to make the recovery
path for Argentina less onerous. Also, given the sort of conditions
being imposed by the I.M.F., it is not clear that Argentina is better
off with more aid from the Fund.
The Economy
Deep Into 'Recession'
Steven Pearlstein
Washington Post, November 3, 2001, page E1
This article examines the progress of the current recession. At one
point it comments that "the stock market typically turns up before
the economy." While this is true, the economy has never entered a
recession with a stock market that was as high relative to corporate
profits as the market is at present. The stock market is still valued
at more than 22 times peak corporate profits. Prior to the nineties,
it had never reached this level in the post-war period. It does not
make sense to expect a stock market upturn at this point unless one
either has a radically different view of the future path of corporate
profits than the Congressional Budget Office and other economic
forecasters, or believes that stockholders are willing to accept very
low returns (less than 4 percent in real terms) on their stock.
Staving Off a Recession When Only Old Scripts Are at Hand in a New
Age
Richard W. Stevenson
New York Times, November 5, 2001, page B6
This article examines the competing stimulus proposals being put
forward by Democrats and Republicans to boost the economy out of
recession. It characterizes both sets of proposals as "fairly
orthodox."
Actually, the Republican proposal departs quite sharply from the
orthodoxy, at least insofar as it is intended as stimulus. It
includes large retroactive tax breaks for corporations, which provide
no incentive for investment whatsoever, and permanent tax breaks in
the future, which gives firms no incentive to move investment
forward. Their plan also moves forward tax cuts for high-income
families. The assumption behind these tax cuts (at least when
President Bush proposed them last year), was that these people would
save most of their tax cut, thereby increasing the money available
for investment. If these families do in fact save most of their tax
cut, it will provide little stimulus to the economy.
The article also attributes the source of the economy's slump to
over-investment by businesses. While there undoubtedly was some
over-investment in certain tech sectors, the larger source of the
economy's ongoing problems is likely to be recovering from
over-consumption. The saving rate fell to nearly zero in 2000 due to
a stock market driven consumption boom (see "The New Economy Goes
Bust: What the Record Shows,"
http://www.cepr.net/new_economy_goes_bust.htm).
When households try
to rebuild their savings in the wake of the market's decline, it will
impose a serious drag on the economy.