Economic Reporting Review
By Dean Baker
November 25, 2002
OUTSTANDING STORIES OF THE WEEK
Madison Ave. Has Growing Role in the Business of Drug Research
Melody Petersen
New York Times, November 22, 2002, page A1
http://www.commondreams.org/headlines02/1122-04.htm
This article reports on how ways in which the pharmaceutical industry has
managed to produce medical research that helps to promote its drugs. This
includes paying researchers to write articles touting the benefits of their
drugs. In some cases, these articles are ghost written by the company's writers,
with researchers accepting a fee to put their names on the article. These sorts
of abuses are exactly what economic theory predicts would occur when the
government grants a patent monopoly.
Another Cloud on the Horizon for Lucent Retirees
Mary Williams Walsh
New York Times, November 20, 2002, page C1
http://www.nytimes.com/2002/11/20/technology/20LUCE.html?
This article reports on the impact that Lucent's financial collapse is having on
its retired workers. The article indicates that it will probably cut back or
eliminate the medical insurance that it had promised retired workers. In
addition to having been hit hard by the downturn in the tech sector, its pension
fund lost value with the rest of the stock market.
Election Gives Drug Industry New Influence
Robert Pear and Richard A. Oppel Jr.
New York Times, November 21, 2002, page A1
http://truthout.com/docs_02/11.22B.drug.ind.gop.htm
This article reports on how the pharmaceutical industry has managed to enhance
its influence in the next session of Congress by supporting Republicans in close
races. It also discusses the likely impact that its influence will have on
several important areas of legislation.
Social Security
Administration Considers Action on Social Security
Amy Goldstein
Washington Post, November 17, 2002, Page A5
http://www.washingtonpost.com/wp-dyn/articles/A64312-2002Nov16.html
This article discusses the probability that the Bush Administration will seek to
restructure Social Security in the next session of Congress. At one point it
asserts that "the system ... is expected to face enormous strains starting
next decade as Americans live longer and the large baby boomer generations
starts to retire."
This is not true. The retirement of the baby boomers has been long anticipated.
To help deal with the costs, the program has been building up a large surplus,
which is currently more than $1.3 trillion. According to the most recent Social
Security trustees report, the program will be able to pay all benefits until the
year 2041 with no changes whatsoever (table V1.E9). The projections also show
that Social Security will always be able to pay a higher benefit, in today's
dollars, than that received by current retirees, even if no changes are ever
made.
While this means that it is now possible for Social Security to go nearly forty
years without any tax increases, it was necessary to raise Social Security taxes
in every decade from the forties to the eighties. By this standard, the program
faces less strain than it did at any point in its first five decades of
existence.
It is also important to note that the Social Security trustees projections
assume that productivity will grow at a rate of just 1.6 percent annually. By
contrast, many experts, such as Federal Reserve Board Chairman Alan Greenspan,
now believe that the long-term rate of productivity growth is between 2.0 and
2.75 percent. If Mr. Greenspan's assumptions about productivity growth were used
in the projections, the program would be able to pay full benefits for fifty
years, or longer, with no changes whatsoever.
The Budget Deficit
Who's Afraid of the Deficit? Cassandras Are Out of Style
Edmund L. Andrews
New York Times, November 19, 2002, page C1
http://www.nytimes.com/2002/11/19/business/19DEFI.html
This article discusses current attitudes towards the federal budget deficit. It
notes that few people consider the size of the current deficit to be a serious
problem, but that there is considerable concern about the long-term future. It
asserts that, "the Congressional Budget Office has repeatedly warned that
if nothing is changed, the government will spend as much on Social Security,
Medicaid and Medicare by 2030 as it does for the entire budget today."
In its baseline scenario, the Congressional Budget Office predicts that spending
on these programs will rise from 7.6 percent of GDP in 2000 to13.9 percent of
GDP in 2030 ("A 125-Year Picture of the Federal Government's Share of the
Economy, 1950-2075," table 2 [http://www.cbo.gov/showdoc.cfm?index=3521&sequence=0]).
Total government spending is currently 19.6 percent of GDP. The projected 6.3
percentage point increase in spending on these programs is not very different
from the 5.7 percentage point increase in the thirty years from 1950 to 1980.
The economy and living standards both grew very rapidly during this earlier
period, in spite of the increasing share of GDP going to support Social
Security, Medicare, and Medicaid.
It is also worth noting that only about half of this projected increase in
spending is due to the aging of the baby boomers, which is the described as the
cause of the problem. The other half is attributable to rising health care
costs, which will inflict harm on both the private and pubic sector. The burden
of rising health care costs is not discussed in this article.
At one point the article refers to a statement by Federal Reserve Board Chairman
Alan Greenspan, that the government faces $10 trillion in "contingent
liabilities" from Social Security and other programs. This number does not
indicate a time frame, and is therefore likely to be misunderstood by readers If
the time frame is long enough, then this figure is a trivial sum. For example,
the Social Security trustees project that in 2075 annual GDP will be more than
$350 trillion. This figure should have been expressed as a percentage of future
income -- for example Social Security's unfunded liabilities are equal to 0.72
percent of future income.
One of the main sources for this article, (including the source for the only
graph) is the Concord Coalition, a Washington lobbying group that seeks to
reduce spending on entitlement programs like Social Security and Medicare. It is
worth noting that in the past, the Concord Coalition has repeatedly issued
documents that grossly exaggerated the size of future deficits. For example, in
December of 1996, as the budget deficit was disappearing, the Concord Coalition
issued a report titled "In the Eye of the Deficit Hurricane," which
warned that deficits would begin rising and approach $300 billion by the year
2001. In fact, the government began running surpluses in the years from 1998 to
2001. The 2001 surplus was $127.1 billion. It might have been appropriate to
draw on a source with a better record of making projections, and that is more
reliable generally, than the Concord Coalition.
The Current Account Deficit
Inflation Stays Muted
Compiled from wire service stories
Washington Post, November 20, 2002, Page E2
http://www.washingtonpost.com/wp-dyn/articles/A12648-2002Nov19.html
Trade Deficit a Bit Lower; Consumer Prices Up 0.3%
Reuters
New York Times, November 20, 2002, page C2
http://www.nytimes.com/2002/11/20/business/20ECON.html
These articles include a brief discussion of new trade data released by the
Commerce Department. This data showed that the trade deficit had hit a new
record in August.
The United States is presently running a current account deficit of $520 billion
a year. This has approximately the same effect on the economy as a budget
deficit of the same magnitude. While both papers have frequently devoted front
page stories to the much smaller budget deficit, they have almost completely
ignored the current account deficit. Both of these stories are from wire service
accounts and appear on the inside of the business section. The trade data is
only mentioned in the last sentence of the Post piece, which is a one-paragraph
article in its "Business in Brief" section.
Trade
U.S., Singapore Near Pact on Trade
Paul Blustein
Washington Post, November 20, 2002, Page E3
http://www.washingtonpost.com/wp-dyn/articles/A12238-2002Nov19.html
Singapore And U.S. Near A Trade Deal
Edmund L. Andrews
New York Times, November 20, 2002, page C1
http://www.nytimes.com/2002/11/20/business/worldbusiness/20TRAD.html
These articles report on the prospects for a trade pact between Singapore and
the United States, which is nearing completion. Both articles refer to it as a
"free-trade" pact. This is inaccurate, since some provisions, most
notably the ones governing drug patents, will actually increase protectionism.
It would be more accurate to simply refer to the agreement as a
"trade" pact.
Brazil
As Inflation Creeps Up, Brazilians Grow More Nervous
Tony Smith
New York Times, November 19, 2002, page W1
http://www.nytimes.com/2002/11/19/business/worldbusiness/19BRAZ.html
This article discusses the modest rise in Brazil's inflation rate that has
resulted from the plunge in the value of its currency over the last year. At one
point the article notes that inflation could be used to ease "the country's
fiscal constraints, at least cosmetically."
Inflation really does ease the country's fiscal constraints -- every bit as much
as a tax increase would. Inflation allows the country to pay back its debt in
currency that is worth less than the currency it borrowed. It has the same
effect as taxing bondholders on the interest they receive. There is nothing
cosmetic about this process and there is no obvious reason to treat it as a less
real way to address the nation's budget problems than a cut in spending or an
increase in taxes.
Germany
Schroder's Tax Surprise Angers Many Germans
Mark Landler
New York Times, November 17, 2002, page A3
http://www.nytimes.com/2002/11/17/international/europe/17GERM.html?
This article reports on a set of tax increases implemented by German Chancellor
Gerhard Schroder. The taxes were intended to bring Germany into compliance with
the deficit ceiling of 3.0 percent GDP that applies to the countries in the euro
zone. According to the article, the tax increases may explain why Schroder
"has suffered one of the most precipitous declines in popularity of any
postwar chancellor."
Later the article comments that the tax increases have not been accompanied by
"efforts to reform Germany's hidebound labor market, or overhaul its
outmoded health care and pension systems. These steps, the critics say, require
unusual political courage. " The article does not indicate how it has
determined that Germany's health care and pension systems are outmoded. Its
health care system costs approximately 60 percent as much as the one in the
United States, and leads to better outcomes in the form of longer life
expectancies and lower infant mortality rates, so it does not appear to be
outmoded by standard economic criteria.
The reform of the labor market, to which the article refers, presumably means
measures that make it easier to fire workers, reduce union power, and cut
unemployment benefits. Economic research on this issue provides little evidence
to support the view that such changes will lead to a significant improvement in
Germany's economy. There are many nations with similar labor market protections,
such as Ireland, Sweden, and Denmark, whose economies have performed quite well
in recent years, and which enjoy lower unemployment rates than does the United
States.
It also seems peculiar to imply that Mr. Schroder lacks political courage in an
article that is devoted to the anger prompted by his decision to raise taxes.
Clearly, Mr. Schroder has been willing to take substantial political risks to
institute certain economic measures.
At one point the article reports that Germany's unemployment rate is close to 10
percent. Using the standardized unemployment rate calculated by the OECD, which
is virtually identical to the U.S. measure, the unemployment rate in Germany is
closer to 8 percent. In the areas of the country that comprise former West
Germany, the unemployment rate is still close to 6 percent by this measure,
almost the same as the unemployment rate in the United States.
Senior Prescription Drug Plan
Medicare Drug Plan Likely to Move
Ceci Connolly
Washington Post, November 16, 2002, Page A8
http://www.washingtonpost.com/wp-dyn/articles/A61788-2002Nov15.html
This article examines the probability that a prescription drug benefit for
seniors will be approved by the new Congress. The article notes the Republicans'
success in co-opting the Democrats on this issue by putting forward their own
plan.
The Republican plan would provide far less savings to a much smaller share of
Medicare beneficiaries than the plans put forward by the Democrats. However, it
would be almost impossible for most seniors to be aware of this fact, because
news outlets, like the Post and Times, have given almost no attention to the
content of the plans. The coverage of this issue has focused almost exclusively
on the politics surrounding a prescription drug benefit -- as does this article.
The public has been forced to rely largely on campaign ads, as well as ads
purchased by the pharmaceutical industry, to learn about the actual proposals
being put forward. As a result, it has been relatively easy for Republicans to
co-opt Democrats on this issue, since few people would know the differences
between their proposals.
Health Care
Democrats in Search of a Leader
Dan Balz
Washington Post, November 17, 2002, Page A5
http://www.washingtonpost.com/wp-dyn/articles/A64310-2002Nov16.html
This article discusses the race for the 2004 Democratic presidential nomination.
At one point it notes former Vice-President Al Gore's decision to support a
single-payer type health care system, saying that he believes such a system
"is the best way to solve the problem of 40 million Americans without
health insurance." Mr. Gore indicated that he felt a single-payer system
was the best way to deal with the nation's health care problems generally. This
list of problems includes health insurance premiums that have been rising at
double-digit rates, not just the presence of a large uninsured population.
Lawyers Salaries and Law School Tuition
Big Debts Keep Law Grads Out of Low-Paying Public Service Jobs
James V. Grimaldi
Washington Post, November 18, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A64811-2002Nov16.html
This article reports on the increase in law school tuition in recent years and
its effect on graduates' choice of careers. The article notes the large and
growing discrepancy between the salaries lawyers receive in private practice and
the salaries paid by the government sector or at public interest groups.
According to the article, the real median starting salary of lawyers in private
practice has risen by more 40 percent in the last decade, to $90,000 in 2001.
The only policy proposal discussed in the article, which would allow law school
graduates to repay their loans without going into public practice, is a program
for loan forgiveness paid by the government. This ignores the dynamics of this
market. The higher salaries for lawyers in private practice are the driving
force behind rising
tuition, since law schools realize that they can now charge students higher
tuition.
It would have been appropriate to note this fact and also mention possible ways
to reduce lawyers' salaries. For example, trade agreements could focus on
standardizing legal rules and eliminating obstacles to either transferring work
overseas to having foreign educated lawyers practice in the United States. Given
the salaries earned by lawyers, the potential gains to consumers and the economy
from the reduction of trade barriers in this sector are many times larger than
the gains from other trade agreements currently being negotiated.