Economic Reporting Review
By Dean Baker
September 30, 2002

OUTSTANDING STORIES OF THE WEEK

Some Retirees Look Abroad for Prescription Drugs
Randi Hutter Epstein
New York Times, September 24, 2002, Page D5
http://www.nytimes.com/2002/09/24/health/24PAY.html

This article examines the ways in which retirees are coping with higher drug prices. It reports that many are now buying drugs from foreign countries, either by traveling there and bringing the drugs back or through mail order purchases.

In a Broker's Notes, Trouble for Salomon
Gretchen Morgenson
New York Times, September 22, 2002, Section 3 page 1
http://query.nytimes.com/search/abstract?res=F7061EF735540C718EDDA00894DA404482

This article reports on a broker's notes, which indicate that shares of IPOs were awarded to WorldCom executives, in exchange for contracts from WorldCom for banking services.

Teachers Dig Deeper to Fill Gap in Supplies
Abby Goodnough
New York Times, September 21, 2002, Page A1
http://query.nytimes.com/search/abstract?res=FA0C1EFA34540C728EDDA00894DA404482

This article examines the extent to which teachers are now expected to buy school supplies for classrooms with their own money. According to the article, these expenditures average close to $500 a year nationwide.


The Economy

Economists Weigh the Uncertainties Arising From War With Iraq
John M. Berry
Washington Post, September 21, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A46041-2002Sep20.html

This article assesses the current state of the economy and possible impact of a war with Iraq. At one point the article asserts that "the economy is in better shape now than it was in mid-1990, when it was already flirting with recession." It is worth noting that in mid-1990, it was not generally recognized that the economy was flirting with recession. For example, Federal Reserve Board transcripts showed that in July of 1990, Alan Greenspan said that he thought the economy should remain healthy for the rest of the year. (The recession is now dated as having begun in June of 1990.)

The article goes on to note that in 1990, "inflation was a problem, interest rates were fairly high, federal budget deficits were spiraling out of control and numerous financial institutions were near broke," implying that the current situation is better by comparison. This narrow set of measures does not give a good view of the state of the economy. The fact that the U.S. economy is recovering from the collapse of an enormous bubble in the stock market and is likely to experience a collapse of the bubble in the housing market in the near future has far more impact on the economy than the measures noted in the article. Record levels of consumer debt and current account deficits approaching $500 billion a year also pose enormous problems for the economy.

The claim that the federal budget deficit was out of control in 1990 is wrong. The budget deficit had been 2.8 percent of GDP in 1989, before rising to 3.9 percent of GDP in 1990, primarily as a result of the recession. The deficit that was in place prior to the onset of the recession could have been sustained indefinitely - therefore it was not "out of control" in the normal meaning of the term.


Biggest Hurdle: Uncertainty
Richard W. Stevenson and David Leonhardt
New York Times, September 22, 2002, Section 3 page 1
http://query.nytimes.com/search/abstract?res=F20710F735540C718EDDA00894DA404482

This article assesses the economy's current prospects. At one point it cites an economist's claim that nominal wages have been "rising at annual rate of 4.0 percent." Actually wages have been rising at a 3.1 percent rate over the last year. According to the Bureau of Labor Statistics, the average hourly wage rose from $14.38 in August of 2001 to $14.82 in August of 2002.


Poverty Up, Income Down
Steven Pearlstein
Washington Post, September 24, 2002
http://www.washingtonpost.com/wp-dyn/articles/A59613-2002Sep24.html

This article reports on new data on family income from the Census Bureau. It notes that the median family income fell by 2.2 percent in 2001, a decline that it characterizes as "broad if not particularly steep." This is the largest drop in median family income since 1981, and one of the largest declines in the last fifty years.

The article includes a quote from an economist at the Economic Policy Institute, which it describes as "union-backed." It is inaccurate to identify the Economic Policy Institute as "union-backed." Most of its funding comes from foundations, and only about 20 percent comes from unions. It is also worth noting that research institutions are rarely identified as "corporate backed," even when most of their money comes from corporations.


Trade

IMF's 'Consensus' Policies Fraying
Paul Blustein
Washington Post, September 26, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A2944-2002Sep25.html

This article reports on the general loss of confidence in the economic strategies put forward by the IMF and World Bank. At one point it comments that "in some ways, the consensus on the benefits of free trade is stronger than ever; many African governments, and the aid group Oxfam, have taken up the rallying cry that the most pressing need for developing countries is to secure unfettered access for their products in rich countries markets."

Most economic studies show that such unfettered access would offer very limited gains to developing nations. For example, a recent study by the World Bank showed that the removal of all of the rich nations' barriers to merchandise exports from developing nations would raise the per capita income of the latter by 0.6 percent, after the full effects were felt in about 15 years. This implies that a country that would have a per capita income of $1000 in 2015 if rich nation trade barriers remain in place, could expect a per capita GDP of $1006 if the trade barriers are removed.

Recent research from the World Bank indicates that new barriers being imposed through the TRIPS portion of WTO, in the form of patent and copyright protection in developing nations, are likely to cost developing nations a larger amount than the benefits they could receive from the removal of import barriers in rich nations.


Airline Industry Losses

Airlines Put Hands Out - Again
Keith L. Alexander and Sara Kehaulani Goo
Washington Post, September 21, 2002, Page E1
http://www.washingtonpost.com/wp-dyn/articles/A46311-2002Sep20.html

This article reports on efforts by the airlines to get another round of subsidies from the federal government. The industry claims that these subsidies are justified because they are needed to cover the cost of security measures required by the government since September 11th.

It would have been appropriate to present the views of an economist on this issue. In principle, the measures being required by the government are needed to ensure the security of both airline passengers and individuals on the ground, who could be harmed by a hijacked plane. Since these risks are the result of flying, it is appropriate that those who choose to fly pay the expense. There is no obvious economic reason that the general public should be forced to subsidize airline passengers who impose risks on themselves and others. If forcing passengers to bear these costs leads fewer people to fly, then this is an economically efficient outcome.


Brazil

As His Country Stumbles, The Practical 'Lula' Soars
Anthony Faiola
Washington Post, September 22, 2002, Page A16
http://www.washingtonpost.com/wp-dyn/articles/A49796-2002Sep21.html

Markets in Brazil Plunge On Worries Over Election
Tony Smith
New York Times, September 24, 2002, Page W1
http://www.nytimes.com/2002/09/24/business/worldbusiness/24BRAZ.html

These articles report on the state of the presidential election race in Brazil. At one point the Post asserts that comments by Luiz Inacio (Lula) da Silva, the leading candidate, "have terrified foreign investors, who are fleeing Brazil as its bonds and currency slide into a tailspin." It is important to note that the policies of the current president, Fernando Henrique Cardoso, have led to an explosion of Brazil's debt. It rose from 29 percent of GDP when he took office in 1994, to more than 62 percent of GDP at present, an increase of 33 percentage points. By comparison, the debt to GDP ratio rose by 20.6 percentage points during the large U.S. debt build-up under Reagan administration. It is very questionable whether Brazil could sustain the debt levels built up under the Cardoso administration regardless of what policies it pursued. It is likely that investors are responding to this concern more than to fear over the policies that Lula might pursue, if he is elected.

The first article also includes several assertions that the United States is trying to push Brazil to support "free trade." This is not true. The United States has pushed trade policies that both reduce and increase barriers. The primary example of the latter is the TRIPS agreement, which imposes U.S. style copyright and patent protection in developing nations. This has been especially important in Brazil, since it has a relatively advanced pharmaceutical industry. In January of 2001 the Clinton administration challenged, in the WTO, Brazil's laws dealing with the manufacture and import of generic AIDS drugs. (The Brazilian government stood firm, and Washington dropped its case in June).

The Times article reports that Lula "has pledged fiscal austerity and sound macroeconomic policies." It would have been appropriate to note that this would be a sharp departure from the policies of the current government in Brazil.

Germany

Germans Vote in a Tight Election in Which Bush, Hitler and Israel
Became Key Issues
Steven Erlanger
New York Times, September 22, 2002, Page A14
http://query.nytimes.com/search/abstract?res=F10911FB3D5D0C718EDDA00894DA404482

Again, Bavaria's Favorite Is Germany's Runner-Up
Mark Landler
New York Times, September 23, 2002, page A8
http://query.nytimes.com/search/abstract?res=F10C16FF3F5D0C708EDDA00894DA404482

These articles discuss the elections in Germany. At one point the article by Erlanger refers to "Germany's deep economic problems." The article never indicates what problems it refers to, or presents any evidence for the existence of such problems.

The most obvious problem afflicting Germany's economy is the tight monetary policy being pursued by the European Central Bank (ECB). The ECB has maintained its short-term interest at 3.25 percent, even though the inflation rate in the euro zone is already lower than that in the United States. By contrast, the Fed has lowered its short-term interest rate to 1.75 percent. If the Fed had pursued policies similar to those of the ECB, the unemployment rate in the United States would certainly be considerably higher and output would be lower. Getting the ECB to reverse these policies is a question of asserting political control over the bank.

At one point the article by Landler contrasts the 5.9 percent unemployment rate in Bavaria with the national unemployment rate of 9.9 percent. This comparison is somewhat misleading, since the national average is pushed up by an unemployment rate in former East Germany of close to 20 percent. The unemployment rate in the other states of former West Germany averages close to 8 percent.

It is also worth noting that unemployment is measured differently in Germany than in the United States. If the U.S. method were used, the unemployment rate for all Germany would be close to 8.0 percent, and the unemployment rate for former West Germany would be approximately 6.0 percent, almost the same as the rate in the United States.


German Outcome Casts Renewed Chill Over Economy
Mark Landler
New York Times, September 23, 2002, page A8
http://www.nytimes.com/2002/09/24/international/europe/24FRAN.html

This article discusses Germany's economic prospects in the aftermath of its election. At one point it asserts that investors are concerned that Schroder "would be unable to revive Europe's largest economy or carry out needed reforms." The article indicates that these "needed reforms" are reductions in unemployment benefits and less protection for workers against firing.

While some economists do believe that Germany should move in this direction, there are also many economists who do not believe that such changes are necessary to reduce unemployment. There are examples of countries with generous unemployment benefits and/or strong worker employment protections that have very low unemployment rates, such as Austria, Ireland, Denmark, and Sweden. All of these nations have unemployment rates that are lower than in the United States. It is also worth noting that there is no statistically significant correlation between either the generosity of unemployment benefits or the strength of employment protections and unemployment rates. The article should have presented the full range of perspectives on this issue.

The article also asserts that it would be a "humiliation" if Germany's budget deficit rose above the 3.0 percent of GDP limit set in the stability pact for the countries in the euro zone. It isn't clear why the government would be humiliated by this. It is reasonable to believe that it would be more humiliated if it pursued policies that weakened its economy further and hurt the unemployed, such as cutting benefits at a time when the economy was already on the brink of a recession.

The article concludes by commenting that the European Central Bank (ECB) is not likely to help Germany's economy by lowering interest rates because the ECB "cares about more than Germany's torpid economy." The ECB could reasonably be concerned about the whole euro zone's torpid economy which, like Germany's, is barely growing. While the Federal Reserve Board has lowered its short-term interest rate to 1.75 percent, the ECB has maintained its interest rate at 3.25 percent. Given this refusal to lower interest rates, it is not surprising that Germany and the rest of the euro zone are experiencing very slow growth, just as the United States would be if the Fed pursued policies similar to those of the ECB. Even the IMF has criticized the ECB for this contractionary policy at a time when the whole world economy is on the brink of recession. The article should have noted the dispute over the ECB's monetary policy.


Farm Labor Disputes in California

Farm Worker Pacts Stir Calif. Conflict
Rene Sanchez
Washington Post, September 23, 2002, Page A3
http://www.washingtonpost.com/wp-dyn/articles/A53171-2002Sep22.html

This article discusses a bill before California's governor Grey Davis, which would set up a mandatory mediation process in management-labor disputes, when bargaining has come to an impasse. The article presents an argument against the bill by farmers, that higher wages could force some of them out of business and lead to less employment.

While higher wages may force the more inefficient farmers out of business, the land would still be there and would presumably still be used for farming. Unless a different crop proved more economical, it is likely that the new owner of the farm land would hire approximately the same number of workers as the prior owner.

The article also reports the farmers' argument that the state can already sanction farmers who refuse to bargain in good faith. It is rare for management to be found guilty of refusing to bargain in good faith, since this generally means little more than agreeing to meet. Even if management is found guilty, the usual sanction is that management is instructed to bargain in good faith.


Copyrights

Free Software, at Least to a Certain Point
Amy Harmon
New York Times, September 23, 2002, page C4 http://query.nytimes.com/search/abstract?res=FB0916FC3C5D0C708EDDA00894DA404482

This article reports on a meeting of the Free Software Foundation, a group committed to free software. The article appears to be mocking the group. For example, it comments at one point that: "it seems the foundation, whose purpose is to donate software code to the greater go d, needs money."

This organization raises a very serious issue with important economic implications. It argues that software should not be copyrighted -- that it should be possible to transfer it freely, and that developers should be allowed to alter software freely in order to improve it.  There is considerable evidence, most notably the development of GNU/Linux (a full operating system) as free software, that this is a better method for developing software than copyright supported development. 

In the era of the Internet, there are also enormous difficulties in protecting copyright, since digital material can be so easily transferred (see "Copyright Hurdles Confront Selling of Music on the Internet," by Amy Harmon, New York Times, September 23, 2002, page C1, http://query.nytimes.com/search/abstract?res=FB0D13FD3C5D0C708EDDA00894DA404482  he enforcement of copyright can lead to extraordinarily intrusive measures, such as monitoring individuals' computers via the web, or inspecting dorm rooms for unauthorized copies of copyrighted material. The Free Software Foundation argues that there are more efficient ways than copyrights to support the creative process of developing software. It would have been appropriate to present the views of someone familiar with the economics of copyrights in this article.


Russia

Waiter, Forget the Boar. I'd Rather Have Oxygen.
Sabrina Tavernise New York Times, 
September 24, 2002, Page A4 http://www.nytimes.com/2002/09/24/international/europe/24MOSC.html 

This article discusses the growing health consciousness of Russia's elite. At one point it notes in passing that "life expectancy [in Russia] fell dramatically over the 1990's, in part because of rampant alcoholism." It would have been worth noting that the collapse of Russia's economy in its transition to capitalism was another important factor. According to data from the World Bank, Russia's economy contracted by approximately 50 percent in the nineties. The resulting poverty undoubtedly was the major factor behind the plunge in life expectancy and probably contributed to the rise in alcoholism as well.