Economic Reporting Review
By Dean Baker
October 7, 2002

OUTSTANDING STORIES OF THE WEEK

HIV Drugs For Africa Diverted to Europe
Washington Post Staff Writer
Washington Post, October 3, 2002, Page A10
http://www.washingtonpost.com/wp-dyn/articles/A35216-2002Oct2.html

This article reports on a shipment of drugs to treat HIV victims in Africa, which was sold instead in Europe. While these drugs were intended to be sold at discount prices, wholesalers diverted them to Europe where they could be sold at their patent protected price. This sort of black market is a predictable outcome of the large difference between the competitive market price and the patent protected price for prescription drugs.

Are CEOs Worth Their Salaries?
Washington Post Staff Writer
Washington Post, October 2, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A29673-2002Oct1.html

This article examines the institutional factors that have led to the explosion in CEO pay, and considers whether CEO performance typically warrants such levels of compensation.

In Trenches of a War on Unyielding Poverty
John W. Fountain
New York Times, September 29, 2002, Page A1
http://query.nytimes.com/search/abstract?res=F40817FF3F5C0C7A8EDDA00894DA404482

This article examines the economic and social situation in Pembroke Township, Illinois, a community with one of the highest poverty rates in the country.


The Economy

Markets Fall for 5th Week
Steven Pearlstein and Martha McNeil Hamilton
Washington Post, September 28, 2002, Page A1
http://www.washingtonpost.com/wp-dyn/articles/A13595-2002Sep27.html

U.S. Says Japan Must Make Bolder Economic Changes
Edmund L. Andrews
New York Times, September 29, 2002, Page A11
http://query.nytimes.com/search/abstract?res=F70A11FF3F5C0C7A8EDDA00894DA404482

These articles discuss the state of the U.S. economy. The Post article discusses it in the context of another drop in the stock market, while the Times article discusses the U.S. economy in the context of the prospects for the world economy. Both articles note that most forecasters anticipate that the U.S. economy will continue to grow at a modest rate, instead of sinking back into a recession. It is worth noting that the vast majority of economists failed to foresee the recession in 2001. They confidently predicted that the slowdown that began at the end of 2000 would be quickly reversed. Therefore, it is reasonable to view their current predictions with a degree of skepticism.

While both articles note several potential sources of trouble for the U.S. economy, neither mentions the housing bubble. If housing prices fall back in line with the overall rate price level, as they have always done in the past, it will eliminate more than $2 trillion in paper wealth and considerably worsen the recession. The collapse of the housing bubble will also jeopardize the survival of Fannie Mae and Freddie Mac and numerous other financial institutions.


Japan

Japan May Try Again to Save Banking System
Paul Blustein
Washington Post, September 28, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A13385-2002Sep27.html

In Japan, A Sign Of Change
Washington Post Foreign Service
Washington Post, October 1, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A24811-2002Sep30.html

These articles discuss the prospects of banking reform in Japan. Both articles refer to the need for "pain" in carrying through such reform. This pain is that of the workers who might lose their jobs if businesses are allowed to fail. The second article explains that this is necessary because such failures would allow banks to lend their capital to new businesses that would create jobs and move the economy forward.

This statement implies that Japan is currently suffering from a shortage of capital, with new firms unable to raise money because so much is being diverted to existing firms who waste it. The interest rate on corporate bonds in Japan is just 1.13 percent. This compares to a 6.32 percent interest rate in the United States, more than 5 percentage points above the rate in Japan. The difference in the real rates are smaller, since inflation in the United States is close to 2.0 percent, while Japan has deflation of approximately 1 percent annually. However, the real interest rate on corporate borrowing is still considerably lower in Japan than in the United States, which suggests that the survival of inefficient businesses is not preventing new ones from gaining capital.

In fact, given the severity of Japan's slump, the "pain" sought by these articles could further weaken its economy. If firms laid off large numbers of workers, demand would fall further, giving firms less incentive to undertake new investments.


Germany

For Germans, A Recession Is a Pretty Smooth Ride
Mark Landler
New York Times, September 29, 2002, Section 4 page 4
http://query.nytimes.com/search/abstract?res=F40F16FB3D5C0C7A8EDDA00894DA404482

This article examines how Germans are coping with slow growth and relatively high unemployment. At one point it asserts that few economists think that the economy can grow at a healthy rate unless German companies are given more freedom to hire and fire workers and unemployment benefits are cut back enough to force chronically jobless people to look for work.

This assertion is not true. Many economists, including those at the IMF, believe that Germany's growth rate can be increased if the European Central Bank (ECB) would just lower interest rates in the same manner as the Fed has in the United States. Currently, the short-term interest rate set by the ECB is 3.25 percent, compared to the 1.75 percent rate set by the Fed. The inflation rates are virtually identical in the two regions.

It is also worth noting that there are countries with generous employment benefits and/or strong employment protection laws, such as Ireland, Sweden, and Austria, that have lower unemployment rates than the United States. The evidence that cutting back these forms of worker protection will reduce the unemployment rate is very weak.


The Labor Market in the United States

Out of a Job and No Longer Looking
David Leonhardt
New York Times, September 29, 2002, Section 4 page 1
http://query.nytimes.com/search/abstract?res=F30E12FC3C5C0C7A8EDDA00894DA404482

This article reports on a new study, which shows that the percentage of prime age males (age 25-54) who were not working in the late nineties was approximately the same as in the late eighties, even though the official unemployment rate was more than a full percentage point lower in the late nineties. The reason for the difference is that many more workers had dropped out of the labor force by the late nineties.

The research cited in the article attributes the rise in the number of workers outside of the labor force to a sharp decline in the demand for less-skilled labor. This claim appears to contradict the fact that immigration increased significantly in the nineties, with approximately 1.3 million people entering the country each year (compared to about 900,000 in the eighties). The vast majority of these immigrants worked in less-skilled jobs, which indicates that there was a high demand for this labor.

It is worth noting that a large percentage of the increase in the portion of prime age males who are not working or looking for work can be explained by the aging of the baby boomers. As the baby boomers age they are increasingly likely to be disabled and drop out of the labor force. Just 2.1 percent of men receive disability at the age of 35 (approximately the median age of the baby boomers at the cyclical peak in 1989) compared to 4.2 percent at age 45 (approximately the median age of baby boomers ate the cyclical peak in 2000). This aging can explain much of the increase in the size of the disability roles and reduction in labor force participation noted in the article.


Trade and Developing Nations

Rich Nations Criticized for Barriers to Trade
Edmund L. Andrews
New York Times, September 30, 2002, Page A7
http://query.nytimes.com/search/abstract?res=F30F12FE3E5C0C738FDDA00894DA404482

This article discusses criticisms of trade barriers in industrialized nations, which are presented as obstacles to growth in developing nations. The discussion seriously misrepresents the importance of these barriers. For example, it presents a statement from World Bank president James Wolfensohn, that the rich nations squander "$1 billion a day on farm subsidies that often have devastating effects on farmers in America and Africa." The United States currently spends about $20 billion a year on farm subsidies, while Europe spends approximately $50 billion. This figure comes to $70 billion annually, or $192 million per day; slightly less than $200 billion dollars per day for the economies that comprise 70 percent of the industrialized world.

The article notes the claim by Oxfam that agricultural barriers in the rich nations lower output in Burkina Faso, Mali, and Benin by approximately 1.0 percent. This implies that these nations would see a rise in their per capita GDP from approximately $600 per year to approximately $606 per year, if the rich nations eliminated their protectionist barriers. Recent research from the World Bank indicates that poor nations stand to lose much more from the imposition of new protectionist barriers, such as the copyright and patent laws required under the TRIPS agreement, than they can possibly hope to gain from the elimination of trade barriers by rich nations.

At one point, the article refers to the world-wide glut depressing the price of many commodities, such as coffee. It is worth noting that one of the reasons for this glut is the decision of the IMF and World Bank to encourage developing nations to grow export crops, such as coffee, instead of focusing on domestic food production. The predictable result of many countries simultaneously increasing their coffee production was a glut of coffee and plunging coffee prices.


Russia

Russia Takes Stock of a Nation's Transformation
Steven Lee Myers
New York Times, September 29, 2002, Page A3
http://query.nytimes.com/search/abstract?res=F10E1FF83C5C0C7A8EDDA00894DA404482

This article discusses the first census to be conducted in Russia since the break-up of the Soviet Union. At one point the article notes that most experts are predicting that the census will show a decline in population. The article then lists a series of factors that has contributed to this decline. It neglects to mention the collapse of the Russian economy that followed in the wake of its transition from a centrally planned economy. According to data from the World Bank, GDP in Russia declined by close to half in the nineties, pushing much of the population into poverty. This economic collapse, coupled with the collapse of the Soviet era health care system, contributed to a sharp rise in mortality rates and therefore a decline in Russia's population.


Greenspan and the Fed

Oh So Quietly, Fed Ponders What Follows Greenspan
Richard W. Stevenson
New York Times, October 3, 2002, Page C1
http://www.nytimes.com/2002/10/03/business/03FED.html

This article discusses the prospects for the Federal Reserve Board after Alan Greenspan retires as chairman. The article implicitly assumes that Mr. Greenspan has been enormously successful, and that the Fed will have difficulty matching his performance in the future. This assumption is dubious. Mr. Greenspan's failure to take actions to counteract the stock market bubble was one of the most massive failures ever by a central banker. The nation is paying an enormous cost for this error. Hundreds of billions of dollars were mis-invested and businesses and many households are currently struggling to cope with the massive loss of assets due to the collapse of the bubble. 

The article also discusses a proposal for the Fed to target inflation rates as policy rule in a post-Greenspan era. It would have been appropriate to note the track record of the European Central Bank (ECB), which has followed an inflation target rule. Most economists believe that this policy has raised European unemployment, and even the IMF has urged the ECB to relax its policy.


Egypt and Intellectual Property Claims

Seeking Investment, Egypt Tries Patent Law
Abeer Allam
New York Times, October 4, 2002, Page W1
http://www.nytimes.com/2002/10/04/business/worldbusiness/04EGYP.html

This article discusses efforts by the Egyptian government to strengthen patent and copyright protections in the hope of increasing foreign investment. The article does not include any discussion of the economic losses that will result from increasing these protections. The numbers printed in the article imply that the direct transfers from strengthening copyright enforcement alone would be on the order of $100 million annually. This would be equivalent to a loss of $10 billion a year in the United States. Research suggests that the efficiency loss associated with increased copyright protection would be close to twice this size. The impact of increased patent protection would raise the cost even further.


Air Travel Taxes in Canada

Sky's the Limit for Canada's Air Taxes
Bernard Simon
New York Times, October 1, 2002, Page W1
http://www.nytimes.com/2002/10/01/business/worldbusiness/01AIR.html

This article reports on the various fees that Canada assesses airlines. It points out that in the case of short flights, these fees can account for more than half of the ticket price. While the article includes comments from representatives of airlines, who imply that this is unfair, it does not include any economic analysis.

Many costs associated with servicing the airlines are independent of the distance traveled. For example, a plane takes up the same space on a runway and has the same security requirements, regardless of how far it travels. If paying these costs makes short air trips uneconomical, then it is appropriate that people use other forms of transportation, rather than get subsidies for their air travel.


The Dollar

Does the Law of Gravity Apply to the Dollar?
Edmund L. Andrews
New York Times, September 29, 2002, Section 3 page 4
http://query.nytimes.com/search/abstract?res=F3081EFA345D0C7A8EDDA00894DA404482

This article reports on the prospect that the dollar will fall in the near future. At one point it suggests that the dollar may fall "because they [investors] no longer believe that the United States can grow faster than the rest of the world." There is no direct link between an economy's growth rate and the attractiveness of its financial assets. Currently, many foreigners are buying up U.S. government bonds, even though the interest rates in these bonds are lower than the interest rates on European government bonds. The return on these bonds is not affected at all by the growth rate of the U.S. economy. In fact, if the U.S. economy began to grow more rapidly, interest rates would probably rise and these investors would experience large losses on their U.S. bonds.

The article relies on C. Fred Bergsten as its main source for assessing the prospects of the "dollar bubble." It would be helpful to present the views on this issue of an economist who was not surprised by the collapse of the stock market bubble.

It quotes Mr. Bergsten as saying that the dollar is not likely to collapse because the "economic fundamentals" of the United States are strong. He also asserted that the decline in the dollar in the first half of the year did not have an "adverse effect on inflation." The fundamentals to which Mr. Bergsten refers are not made clear in the article. The high levels of consumer indebtedness and the bubble in the housing market are two fundamental features of the economy which do not suggest future strength. It is also worth noting that the decline in the dollar in the first half of the year led to a reversal in the movement of non-oil import prices. They began to rise modestly, after falling at more than a 2.0 percent annual rate over the prior two years. Presumably a larger fall in the dollar would lead to a larger rise in import prices.