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Has Anyone at the NYT Heard of Drug Patents? Print
Sunday, 02 January 2011 09:20

It seems not from this article on how drug companies are now giving out coupons to cover part of the patients' co-payment for expensive brand drugs. The logic is simple: the patent monopoly allows the company to sell the drug for a price that could be several hundred times its cost of production. This gives it an enormous incentive to try to get patients to use their drug and for doctors to prescribe it. This means that it can be very profitable to give out coupons that get around the co-payment which insurers charge as a disincentive to use expensive drugs.

This is the sort of gaming that economic theory predicts would result from government intervention in the market, like a patent monopoly. If this sort of behavior occurred in response to a government intervention intended to help low and moderate income people, like for example rent controls, the coverage would likely include comments from economists ridiculing such ill-advised interventions in the market. However, this piece includes no discussion whatsoever of the fact that the resources wasted in this gaming, and the possible negative health outcomes from people using less than optimal drugs, are entirely the result of patent monopolies. None of this would be occurring if drug research was financed through other mechanisms and drugs sold at their free market price, which would typically be less than $10 per prescription.

 
NYT Warns that Southern Europe Suffers from a Disastrous Shortage and Surplus of Labor Print
Saturday, 01 January 2011 22:28

The NYT can't quite decide whether the southern European countries (Spain, Portugal, Italy and Greece) suffer from too many or too few workers, but it is anxious to tell readers that the situation is disastrous. The article begins by telling the story of a young Italian lawyer who can't find a job commenting that:

"the most highly educated generation in the history of the Mediterranean hits one of its worst job markets."

This is the story of too many workers and too few jobs. It sounds and is really bad.

But then the NYT flipped 180 degrees and decided that the real problem is the opposite, too few workers:

"experts warn of a looming demographic disaster in Southern Europe, which has among the lowest birth rates in the Western world. With pensioners living longer and young people entering the work force later — and paying less in taxes because their salaries are so low — it is only a matter of time before state coffers run dry."

Okay, is the problem too many workers with too few jobs or too few workers, with too much demand? Either one of these stories is possible, but both are not, or at least not at the same time.

To help clarify matters, the NYT gives us this quote from Boston University Economist Lawrence Kotlikoff:

"If these [low] fertility rates continue through time, you won’t have Italians, Spanish, Greeks, Portuguese or Russians, ... I imagine the Chinese will just move into Southern Europe.”

According to Professor Kotlikoff, there should be a huge shortage of young workers, which would drive up wages, and plunging demand for homes, which will make housing cheap. This sounds like a great story for young people in southern Europe, as long as they are not prejudiced against the Chinese.

But then we get back to the labor surplus story:

"'This is the best-educated generation in Spanish history, and they are entering a job market in which they are underutilized,' said Ignacio Fernández Toxo, the leader of the Comisiones Obreras, one of Spain’s two largest labor unions. 'It is a tragedy for the country.'”

Then we shift back to a simultaneous surplus and shortage of labor with another quote from Professor Kotlikoff:

"For Dr. Kotlikoff, the solution is simple: 'We have to change the labor laws. Not gradually, but quickly.'” But the piece then complains that changes are coming slowly:

"New austerity measures in Spain, where the unemployment rate is 20 percent, the highest in the European Union, are further narrowing the employment window. Spain has pledged to raise its retirement age to 67 from 65, but incrementally over the next 20 years.

"'Now people are being sent into early retirement at age 55,' said Sara Sanfulgencio, 28, who has a master’s degree in marketing but is unemployed and living in Madrid with her mother, who owns a children’s shoe store."

Okay, so if the retirement age were instantly raised to 67, as this article is advocating, how is this supposed to create more jobs for young people like Ms. Sanfulgencio? In a context of an economy operating well below full employment it would seem her job prospects are improved by reducing the competition from older workers, which means keeping the retirement age low.

In short, the NYT clearly does not like the economic policies in southern Europe and it is anxious to tell readers that they are disastrous, it is just not sure why.

One important item missing from this picture is the European Central Bank (ECB). It could be buying up large amounts of public debt from Spain and other European countries both to boost demand and to alleviate their debt burden. (The interest on debt held by the ECB could be refunded back to European governments, thereby imposing no burden on their taxpayers.) This could help to increase employment. Also, if it leads to a modest increase in the inflation rate from its current new zero level, it would alleviate debt burdens and help to facilitate the necessary process of real wage adjustments between countries. 

It is also worth noting that the current downturn is the result of the incompetence of the ECB which opted to ignore the growth of dangerous housing bubbles in Spain, Ireland and elsewhere. Remarkably, no one at the ECB lost their job or probably even missed a promotion as a result of this disastrous policy failure.

 
Public Pension Problems: No One Told the NYT About the Financial Crisis Print
Saturday, 01 January 2011 22:22

The NYT apparently has not learned about the financial crisis that followed in the wake of the collapse of the housing bubble. That is the only possible conclusion that readers can take away from an article about anger at public sector workers that failed to note that the plunge in the stock market in 2008-2009 was the major cause of the shortfalls in public sector pensions. 

Certainly if the reporters and/or editors at the NYT had known about the financial crisis and the stock market plunge it would have been featured prominently in this piece.

 
Contrary to the NYT's Assertion, Japan Does Not "Face a Looming Demographic Squeeze" Print
Saturday, 01 January 2011 12:25

For some reason the NYT wants to scare its readers about Japan's economic situation, warning that the country faces a "demographic squeeze" because its population is declining. Simple arithmetic shows that this is nonsense.

The article tells readers that the share of the population over 65 is projected to rise from 25 percent in 2010 to 40 percent in 2050. Given that roughly 20 percent of the population is under age 20, this implies that the current ratio of people ages 20-65 to people over age 65 is approximately 2.2 to 1. Assuming the under 20 portion falls to 15 percent of the population by 2050, in that year the ratio will be 1.4 to 1.

If productivity growth averages just 1.5 percent annually (it has been averaging more than 2.0 percent in the U.S. over the last 15 years), then output per worker will be more than 80 percent higher in 2050 than it is today. If the average retiree currently consumes 70 percent as much as a prime age worker, then this increase in productivity would allow retirees in 2050 to enjoy a 50 percent rise in living standards above current levels, while still leaving workers almost 30 percent better off.

The situation will be even better insofar as more workers are pulled into the labor force. As this article notes, because of weak demand, many younger workers cannot find jobs. If Japan were facing a "demographic squeeze" then young workers will have no problem finding jobs since there will be a shortage of workers. Also, because of the longevity and relative good health of many older Japanese, it is likely that many people will opt to continue working past age 65.

The decline in population is in fact a benefit in many respects for Japan. It is a very crowded island with expensive land prices. A falling population will reduce the pressure on land making housing more affordable. It will also reduce congestion in cities. In addition, the decline in population will make it easier for Japan to meet commitments for reducing greenhouse gas emissions, if countries are ever held responsible for the contributions to global warming.

 
If Congress Was Not Dominated by Protectionists Medicare Costs Would be Easily Manageable Print
Friday, 31 December 2010 15:10

USA Today ran a piece warning of the projected rise in Medicare costs associated with the baby boom cohorts turning 65, the age of eligibility. While the article told readers that the projected increase in Medicare costs will eventually exceed the program's revenues, it would have been worth mentioning that Medicare would be easily affordable if the U.S. did not pay more than twice as much per person for health care as other countries.

There are simple ways in which the United States could benefit from the lower cost of health care in other countries but the protectionists in Congress refuse to consider such options. Unfortunately this article relied exclusively on protectionists as sources.

 
Ryan Avent at the Economist Still Has Not Heard of the Housing Bubble Print
Friday, 31 December 2010 08:37

It would be such a great thing if the people who made and wrote about economic policy learned third grade arithmetic. Then they would be able to recognize little things like $8 trillion housing bubbles before they reach such enormous sizes where their collapse can wreck the economy.

The latest person flaunting his ignorance in this area is the usually sensible Ryan Avent who tells us that, "I find the arguments for another big drop in national prices to be rather implausible."

Avent gets many things wrong in making his case. Among the biggest is his assertion that price to rent ratios are about normal. In fact rents are roughly at the same level they were at in the mid-90s in real terms, while real house prices are still close to 30 percent above their mid-90s level. This basic measure suggests that prices still have considerable room to fall.

Avent's effort to explain the price decline reported in recent months' data on short-term economic fluctuations makes no sense. House prices have never responded in any significant way to short-term economic conditions. House prices have never fallen in the past because of 3-4 months of weak job growth or soared because of a similar run of strong job reports. In other words there is zero reason to believe that house prices would be moved in any noticeable way by 1-2 good or bad quarters.

If you look at the Case-Shiller data there is a very simple story. The first time buyers credit supported the market first and foremost by pushing up prices in the bottom tier. This support disappeared when the credit disappeared. Prices in the bottom tier have been plummeting in the few months of post-credit data that we have available. In the four available months since June, prices in the bottom tier fell by 6.4 percent in Seattle, 8.0 percent in Portland, 12.5 percent in Minneapolis, and 23.0 percent in Atlanta.

The logic is that the credit most immediately affects the bottom tier. (This is where first time buyers mostly buy.) It will soon feed over into the higher end homes, since the people buying these homes are selling homes in the bottom tier.

In terms of the fundamentals, the basic story is that we continue to have a record supply of vacant units. It was an astounding failure of the economics profession that almost no one in a prominent position was able to see an enormous and dangerous development like the housing bubble. It shows the incredible lack of controls within the profession that no one seems to have paid any career consequence for this failure.

As economic theory would predict,  when there are no negative consequences for poor performance, we see more of it. That appears to be the case as the people who write and talk about the economy still don't seem to have a clue about the housing bubble and its impact on the economy.

 
People Were Not Signing Home Sales Contracts in November 2009 to Get the Tax Credit Print
Thursday, 30 December 2010 18:02

The NYT told readers that the November 2010 index for pending home sales was:

"5 percent lower than November 2009 when buyers were scrambling to close purchases to qualify for the first federal tax credit."

Actually, the credit that expired in November of 2009 was based on completed sales. It typically takes 6-8 weeks from when a home is put under contract until the sale is completed. As a result, no one who signed a contract in November of 2009 could have reasonably expected to complete the sale in time to qualify for the tax credit. The actual surge in contracts was in September and October. Pending homes sales in November of 2009 were 18 percent below the October level.

 
Robert Samuelson's Social Security Demagoguery at the Washington Post Print
Monday, 27 December 2010 08:42

Robert Samuelson is once again calling for cuts to Social Security and Medicare, ostensibly in the name of generational fairness. Samuelson makes the now common argument that a hugely disproportionate share of government spending goes to these programs that primarily serve the elderly. Of course, using Samuelson logic we should also complain that a hugely disproportionate share of government expenditures go the very wealthy.

The reason that the wealthy get a disproportionate share of government expenditures is that they bought government bonds which pay interest. The reason that the elderly get a disproportionate share of government benefits is that they paid Social Security taxes and Medicare taxes that were intended to support these programs.

Samuelson goes on to complain that Social Security has become a "middle-age retirement system," citing Eugene Steuerle of the Urban Institute. Samuelson apparently is not familiar with data on life expectancy that shows that workers in the bottom half of the wage distribution have seen relatively small gains in longevity over the last three decades. He is apparently also unfamiliar with Steurele's calculations on the rate of return that retirees get on their Social Security benefits. For many middle income retirees in the baby boom cohorts it will be less than 1.0 percent and in some cases less than zero, according to Steuerle.

What is remarkable about Samuelson's piece is that there is absolutely zero effort to consider any real issues of generational equity in a piece that is ostensibly devoted to the topic. For example, there is no discussion of the fact that the current generation of near retirees experienced an unprecedented period of wage stagnation over their working lifetime. The median hourly wage in 2010 is less than 10 percent higher than it was in 1973. 

By contrast, the Social Security trustees project that average hourly wages will rise by more than 40 percent over the next three decades. While it is possible that income inequality will continue to increase so that these gains again go overwhelmingly to the top, there is no precedent in U.S. history for the level of inequality that this would imply.

It is also striking that Samuelson never mentions health care costs in discussing the enormous burden created by Social Security and Medicare. If per person health care costs were the same in the United States as in any of the countries that enjoy longer life expectancies, we would be facing huge long-run budget surpluses, not deficits. In other words, the problem is not that our benefits are too generous but rather that we pay too much for them.

There are simple mechanisms that would help to restrain health care costs in the United States. For example, supporters of the free market would suggest allowing retirees to buy into the more efficient health care systems elsewhere, with the U.S. government, the host government, and the beneficiaries dividing the savings.

We could also develop more efficient mechanisms for financing prescription drug research. This could save hundreds of billions of dollars a year on prescription drug costs, in addition to eliminating the incentive for drug companies to lie about the safety and effectiveness of their drugs.

However, raising these issues involves confronting powerful interest groups like insurance companies, drug companies, and the doctors lobbies. Robert Samuelson and the rest of the crew at the Washington Post (a.k.a. Fox on 15th) doesn't like to get these folks angry, they would rather just beat up the elderly.

 
The Superstar Effect: It Ain't Just Technology Print
Sunday, 26 December 2010 05:06

The NYT has a lengthy piece that notes the sharp rise in inequality in the last three decades due to the "superstar effect." This is attributed in part to the fact that technology allows a top athlete or entertainer to be seen by far more people in 2010 than in 1960.

It is important to recognize that it was not technology alone that allowed superstars to profit from this change. The U.S. government has gone to great lengths to strengthen the reach and enforcement of copyright law, in many cases leading to serious restrictions on individual behavior. For example, it was briefly illegal to sell digital recorders because they were not encoded to protect copyrighted material.

This fact it is important because it means that policy decisions, not just technology, was central to the rise in inequality. This is also the case with the soaring pay of top corporate executives. This is attributed to their growing responsibilities as the size of the largest corporations increases. However, companies in Europe and Japan expanded as well without a corresponding increase in CEO pay. This suggests that the difference in compensation is more likely attributable to differences in laws and norms surrounding corporate governance than any increase in the value of effective leadership to corporate profitability.

 
Public Employee Pensions: Does the Worst Case Provide the Best Guidance for the Future? Print
Friday, 24 December 2010 08:39

How many state or local jurisdictions have lost 40 percent of their population in the last four decades and have their top elected officials convicted of corruption? While this may fit the bill in some places, it is not typical for the country as a whole. Populations are continuing to rise in most areas and the number of elected officials who are convicted for corruption is still a relatively small minority. 

This might lead one to wonder why both the New York Times and Wall Street Journal were so anxious to tell readers that the city of Prichard, Alabama foretells the future for their public employee pension plans. The city has stopped making pension payments to 40 retired workers who have earned them.

According to the articles, it appears that the pension funds have long been drained, at least partly through corruption. Due to its depressed economy the city is now finding it difficult to make ends meet.

It is worth noting that the pension obligations do not appear to be quite the crushing burdens implied in these articles. The NYT reports that the average pension is $12,000 a year. This means that if the full payment were made out of current tax revenue it would imply a tax of approximately $18 per capita on the town's 27,000 residents. This is less than 0.14 of the city's per capita income.

 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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