Economic Reporting Review
November 5, 2001

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

OUTSTANDING STORIES OF THE WEEK

An Economic Stimulus Bill With Corporations in Mind
Gretchen Morgenson
New York Times, October 27, 2001, page C1

This article examines the details of the stimulus package
passed by the House of Representatives. It includes an assessment of
the breakdown of the gains from the proposed tax cuts and examines
the extent to which they are likely to actually stimulate the
economy.

State Budgets Facing a Fall in Revenue
Kevin Sack
New York Times, November 2, 2001, page A13

This article reports on projected shortfalls in state revenue,
which are likely to force large budget cuts in the current fiscal
year.


Markets and the Government

Reconciling the Demands of War and the Market
Richard W. Stevenson
New York Times, October 28, 2001, page B10

This article examines the ways in which the public has come to
look to the government to ensure its physical safety and economic
security in the weeks since the September 11th attacks. It contrasts
this turn to the government with what it characterizes as a previous
reliance on market forces. It also asserts that the Republican party
had been associated with the view that the powers of the government
should be rolled back in favor of the market.

While this is how the Republicans have characterized their
position, the characterization is inaccurate. The Republicans were
enthusiastic proponents of the extension of government intervention
in many areas -- they focused their opposition to the government on
areas in which government involvement tended to favor middle- income
and poor people.

For example, the Republicans were enthusiastic supporters of
the TRIPS agreement, which extended government granted patent
monopolies throughout the developing world. This very extensive,
costly, and elaborate form of government intervention has raised the
prices of pharmaceuticals and other products by several hundred
percent over the competitive market price. The Republicans were also
prominent supporters of the lengthening of copyright terms
(retroactively), adding to the government-enforced monopoly of
copyright holders. In addition, Republicans have supported
legislation that allows for people to be jailed for writing or
discussing software codes that can be used to reproduce copyrighted
material.

The Republicans have also supported having the government
grant monopolies over broadcast frequencies to the major television
and radio networks. They supported a lower tax rate for capital gains
than for wage income, instead of a uniform tax rate that treated all
types of income the same. (The uniform treatment of income was a
major goal of the 1986 tax reform bill.) As a result of the lower tax
rate on capital gains, many high income individuals, who earn the
vast majority of capital gains, pay a lower tax rate than ordinary
workers. Republicans have also supported regulations that limited the
number of foreign doctors who can enter the country, as a way of
maintaining the income of doctors.

There are numerous other ways in which the Republican party
has supported government intervention in the economy. For political
purposes, they generally try to portray these interventions as the
natural outcome of the market, but this is not an accurate
description.


Drug Patents

Offers of Free and Discounted Medicine May Help Industry Prevent New
Regulations
Keith Bradsher with Melody Petersen
New York Times, October 27, 2001, page B8

This article reports on efforts by the pharmaceutical industry
to try to improve its public image. At one point the article refers
to efforts by the United States to tighten rules on drug patents in
developing nations. It notes that these efforts have been opposed by
activists who worry that granting patent monopolies will make many
life-saving drugs unaffordable to people in developing nations.

It is worth noting that efforts to impose patent (and
copyright) protection on developing nations have also been opposed by
many prominent trade and development economists, such as Jagdeesh
Baghwati at Columbia University, one of the world's most respected
trade economists, and David Dollar, one of the World Bank's top
economists. These economists have criticized efforts to apply patent
and copyright protection to developing nations, arguing that they
transfer tens of billions of dollars from poor nations to rich
nations and interfere with efforts to expand trade.


Industry Seeks U.S. Contracts To Develop Antibiotics
Keith Bradsher
New York Times, October 31, 2001, page B10

This article reports on efforts by drug companies to secure
government contracts to develop vaccines and new antibiotics against
bio-terrorism related diseases. While the article includes criticism
from one economist, that this approach is inefficient, it does not
discuss who would hold the patents that result from contracted
research.

This issue is central. If the industry is allowed to hold the
patent, then the government would in effect be paying for the
research twice, once in the initial contract and a second time when
it is forced to pay the monopoly price that would result from patent
protection. In this scenario, the plan would certainly be
inefficient; but without knowing the status of patents produced by
this research, it is impossible to access the efficiency of the
proposal.


Amid Trade Agenda Talks, Sharpened Focus on Rich-Poor Dispute
Joseph Kahn
New York Times, November 1, 2001, page C1

This article discusses some of the differences between rich
and poor nations that will be addressed at the W.T.O. meetings next
week. At one point it asserts that "Brazil and India are leading a
coalition that wants trade rules rewritten to make it clear that
nations can violate patents and save money" on essential medicines.

The extent of patent protection provided under existing W.T.O.
rules has not been established -- it is a hotly debated topic among
legal experts -- so it is not clear that these nations want to
violate patents. The wording on patents and licensing being demanded
by these nations actually offers much more extensive patent
protection than Canada's laws did prior to the U.S.-Canada trade
agreement.


The Economy

Confidence of Consumers Is Up a Bit, Survey Shows
Reuters
New York Times, October 27, 2001, page C3

This article discusses the release of two new reports about
the state of the economy. The headline of the piece highlights the
fact that the University of Michigan's consumer confidence showed a
small increase in October. This increase is of questionable
significance since it was driven completely by the expectations
index. This index, which shows consumers expectations concerning the
state of the economy six months in the future, is extremely volatile,
and bears little relationship to current spending. The current
conditions index, which is much more closely related to current
spending, fell slightly in October.

The other major release for the day was a report showing a 1.4
percent drop in new home sales in September, which followed a 2.9
percent drop in August. This drop in housing sales was accompanied by
a 5.1 percent drop in the price of the median home. This followed
price drops of 1.8 percent and 2.9 percent in August and July,
respectively. The drop in housing sales and prices is a far more
important piece of news than the small rise in the consumer
confidence index, and should have been noted in the headline.


Consumer Confidence Drops to 7-Year Low
John M. Berry
Washington Post, October 31, 2001, page E1

Confidence In Economy Is at Its Lowest Since 1994
Reuters
New York Times, October 31, 2001, page C4

These articles report on a sharp decline in the index of
consumer confidence published by the Conference Board of New York.
The Times article notes that index fell to 85.5, which is the lowest
level since 1994, but then compares it with the readings of below 50
from the early nineties, and the 80.0 level, which it quotes an
economist describing as a "recession line."

The level of consumer confidence that might correspond to a
recession will be determined in part by how important consumption
spending is to the economy. The U.S. economy was primary driven by a
consumption boom in the last five years, as savings rates fell to
record lows. Undoubtedly, high levels of consumer confidence
contributed to the willingness to spend. If the savings rate rose
back to its 1994 level of 6.1 percent, it would imply a reduction in
consumption of approximately $375 billion a year, measured against
the 2000 savings rate. This sort of falloff in consumption would
almost certainly lead to very severe recession.

The Post article notes that the sharp decline in the
Conference Board index conflicted with a small increase in the
University of Michigan's consumer confidence index, which was
released the previous Friday. It comments that this conflict was
"confusing to many analysts." It is not clear why it would be. The
increase in the Michigan index was small and was driven entirely by
the erratic future expectations component. The University of
Michigan's current conditions index also fell, so there is little
real conflict between the two measures of consumers' attitudes.


Bush Advisors Say Congress Must Act Now on Economy
Richard W. Stevenson
New York Times, October 31, 2001, page A12

This article reports on President Bush's push to have Congress
approve a stimulus package. At one point it comments that "most
economists are forecasting that the economy will bounce back by the
middle of next year." It is worth noting that the vast majority of
economists did not see the downturn coming and did not see the
downturn turning into a recession, even after the economy started to
slow. In September of 2000, the average GDP growth forecast of the
Blue Chip to 50 forecasters for 2001 was 3.5 percent. Even among the
most pessimistic 10 in the group, the average growth forecast was 2.6
percent. At this point, it is likely that GDP growth for 2001 will
end up being negative. Given the track record of mainstream
economists, it would be appropriate to use a wider range of
forecasters as sources.


Confusing Contrasts in the Financial Picture
Steven Pearlstein
Washington Post, October 28, 2001, page H1

This informative article examines the economy's growth
prospects for the near future. At one point it states the current
account deficit -- the country's foreign borrowing -- is $350 billion
a year. According to the Commerce Department, the current account
deficit in 2000 was $440 billion.

At the side of the article there is a bar that mentions
economic statistics that are moving upward. (There is also a bar
mentioning statistics going downward.) One of the items on this list
is housing prices. This is questionable, since the price of the
median new home has fallen by nearly 10 percent in the last three
months, while the price of the average new home has fallen by 8
percent over the same period.

Economy Shrinks for the First Time Since 1993
John M. Berry
Washington Post, November 1, 2001, page A1

Plan for More G.I.'s on the Ground, Economic Slump, Anthrax Unease
Clyde Haberman
New York Times, November 1, 2001, page B1

These articles discuss the Commerce Department's release of
data on 3rd quarter GDP. Both articles imply that if the economy is
in a recession, it is because of the September 11th attacks.

The Times article makes this claim explicitly: "an accepted
view among experts was that terrorism pushed an already-tottering
economy over the brink." The Post article raises questions as to
whether the economy is even in a recession, including its subhead
"analysts divided on whether the country is in recession."

There was a large amount of economic data that indicated the
U.S. economy had already fallen into a recession prior to September
11th. Employment had been falling since March. Exports had been
dropping since the third quarter of 2000 (although imports were
falling more rapidly). Investment had been dropping at a double-digit
rate since the second quarter and the growth in consumption spending
and housing had virtually come to a halt. The Federal Reserve Board's
September 19th Beige Book (which relied on data compiled prior to
September 10th) showed the economy declining in nearly every sector
in every region of the nation. This is even more striking since this
negative picture covered the time period in which nearly $40 billion
in tax rebate checks were being mailed out to taxpayers.

While the September 11th attacks have made the economic
situation far worse, there is little doubt that the nation was headed
for a recession already, primarily because of the collapse of the
stock market bubble. When the National Bureau of Economic Research
eventually dates this recession, it is likely that it will put its
beginning point in the summer or even spring -- well before September
11th (see "Numbers Prove U.S. Economy Has Retreated," New York Times,
11-1-01; A1).

It is not clear that there is any significant group of
economists that still question whether the U.S. economy has entered a
recession, as claimed by the Post article. Given the sharp falloff at
the end of the third quarter -- due to the attack -- there would have
to be an extraordinary bounce back in this quarter to prevent the
economy from having two consecutive quarters of negative growth (the
standard definition of a recession). The article presents no evidence
that an end of the year growth surge is to be expected.



Interest Rates

Treasury To Stop 30-Year Bond Sales
John M. Berry
Washington Post, November 1, 2001, page E1

U.S. Will End Regular Sale Of Long Bond
Jonathan Fuerbringer
New York Times, November 1, 2001, page C1

These articles report on the Treasury Department's decision to
stop issuing thirty year bonds. Both articles note that this led to a
sharp rise in the price of these bonds --and therefore a sharp
decline in the interest rate paid on thirty-year bonds. The articles
assert that this drop in interest rates should also lower interest
rates on mortgages.

Actually, the link between interest rates on government bonds
and other interest rates, such as home mortgages, is not very tight.
As the government has started paying down its debt, interest rates
have fallen more sharply on government debt than on other types of
debt, since lenders are willing to pay a premium (in the form of
accepting a lower interest rates) in order to have the security of
holding government debt.

In the late eighties the difference between the interest rate
on a thirty-year mortgage and a thirty-year bond averaged 1.3
percentage points. Currently, it averages 2.3 percentage points. It
is likely that much of the further decline in interest rates on
government debt will just be absorbed in a higher scarcity premium,
rather than being passed on in the form of lower interests on
mortgages.