Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press.

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The Wall Street Journal noted that this recovery is about to pass the average duration for post-war recoveries with no recession clouds on the horizon. The piece also noted the weakness of the recovery and that the unemployment rate is higher now than at the same point in any prior post-war recovery. This weakness is treated as a source of mystery.

Of course arithmetic fans have no difficulty explaining the weakness. In the last business cycle the economy was being driven by the housing bubble. This led to record rates of housing construction (measured as a share of GDP) and record consumption, with the savings rate falling to near zero. Now that the bubble has burst housing has fallen to below normal levels due to the overbuilding of the bubble years and consumption is closer to normal levels, albeit still unusually high relative to income.

What did anyone think could fill the resulting gap in demand? The government sector could do it, but the balanced budget cultists will not let the government run large deficits. Investment is not going to spike to record highs in a weak economy. The trade deficit could close to fill the demand gap, but that would require a sharp fall in the dollar which we have not seen.

In short there is nothing surprising about the weakness of this recovery. The only aspect that is surprising is that economists seem surprised.

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I'm just trying to help out National Public Radio. In their top of the hour news segment on Morning Edition (no link) they referred to the possibility that the Sherpas who place the ropes and assist climbers may collectively decide not to work to demand more compensation for the families of the Sherpas who died last week in an avalanche. The NYT correctly described this action as a possible strike, but NPR called it a "boycott."

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That is undoubtedly what many readers of the NYT's editorial on new trade agreements will be asking. The editorial made many useful points about the administration's approach to trade, notably criticizing the privileged role that business interests are playing in the negotiations. However it never raised the issue of the barriers that protect doctors and to a lesser extent other professionals from international competition.

Over the last quarter century, U.S. trade policy has been quite explicitly focused on putting U.S. manufacturing workers in direct competition with low-paid workers in Mexico, China, and elsewhere. The predicted and actual effect of trade in these circumstances is to reduce the wages of U.S. manufacturing workers. Furthermore, by reducing the number of jobs and lowering wages in a major sector of the U.S. economy, trade has put downward pressure on the wages of less-educated workers (those without college degrees) more generally.

There is nothing inevitable about this process, it is deliberate policy, not "globalization" as an abstract force. We can use trade agreements to open our economy to foreign doctors. Our doctors get paid more than twice as much as the average for doctors in other wealthy countries. The pay gap with doctors in developing countries is even larger.

There are hundreds of thousands of smart kids in countries like Mexico, India, and China who would be happy to train to U.S. standards and work as doctors in the United States for half the pay our doctors receive. Anyone who really believed in free trade, and not just using trade to redistribute income upward, should be arguing that trade agreements focus on eliminating the barriers that prevent foreign doctors from coming to the United States in the same way that they have focused on eliminating the barriers to importing manufactured goods.

To facilitate foreign investment and the importing of manufactured goods, past trade agreements did not just remove tariffs and quotas. In the case of deals like NAFTA, they totally rewrote countries' rules on investment, taxes, and regulation. Similar efforts will be needed to establish free trade for physicians. This will mean writing clear standards that foreign doctors can train to meet anywhere in the world. It would also mean that they have the opportunity to test to meet U.S. standards in their home countries (by U.S. certified testers). Those who met U.S. standards would then have the same right to practice wherever they want in the United States just like any doctor who grew up in New York or Los Angeles.

And, to ensure that this arrangement will benefit the developing countries as well, we should implement a tax structure on the earnings of foreign doctors with the money rebated to the home countries so that they can train two or three doctors for every one that comes to the United States. (Please read the last sentence as many times as necessary to understand it, in order to avoid writing silly comments about how this will hurt the quality of health care in developing countries.)

The potential savings to patients from bringing our doctors' wages down to world levels could exceed $1 trillion over the next decade. There is no excuse not to pursue this path except the power of the medical profession. It is unfortunate the NYT would not even mention the issue in an otherwise thoughtful editorial.

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The Washington Post decided to highlight the fact that a review of Illinois Medicaid documents going back to 1970 found that less than 0.01 percent of the programs spending were payments made for people who are already dead. This information was the basis of a major page 3 AP story in the Sunday paper. 

The article actually never informed readers how large the improper payments were as a share of the program's budget. Instead it told readers that $12 million in such payments had been made, $7 million of which were already recovered. If the article had been competently reported, the real story would be that Illinois' Medicaid program seems to be fairly well run in this respect. (It did include a statement from the director of the state program saying that these overpayments involved less than one tenth of one percent of their caseloads and an ever smaller share of the budget. It would have been more useful if the article directly provided this information to readers rather than leaving this as an assertion by an interested party.)

Any time large amounts of money are being spent there will be mistakes. Private companies make improper payments all the time. A real newspaper would have tried to assess the size of these mistaken payments relative to the size of the program and compared them to improper payments by other large organizations. Apparently Jeff Bezos has no interest in trying to inform the readers of his newspaper, he would rather use the news section to try to convince readers that the government is run by hopeless incompetents. 

 

Note: The fact that the piece was from AP was added after the original post.

 

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Joe Nocera had an interesting column, based on a book by Lawrence Goldstone, that discussed how disputes over the Wright brothers' patents held up the development of the airplane. Unfortunately Nocera concludes the piece with a quote from Goldstone:

"That is, of course, the irony of the patent system. Without patent protection, a competitor can simply replicate an invention and undercut the inventor’s price — which necessarily includes all the time and expense of research and development — so the incentive to experiment and create is severely inhibited. But if innovators such as Glenn Curtiss [the Wright brothers' main competitor] cannot build on the progress of others without paying exorbitantly for the privilege, the incentive to continue to experiment and create is similarly inhibited."

In fact, patents are not the only mechanism for supporting innovation. The federal government spends $30 billion a year financing bio-medical research through the National Institutes of Health. It also funds research in other areas. Most of this research is directed towards more basic science, but it nonetheless has led to many important innovations. If funding were targeted for developing marketable products (possibly through private contractors) there is no reason for believing it would not be successful.

Given the enormous inefficiencies associated with patent financed research, we should be discussing alternatives. It is unfortunate that Nocera's article implies there are no alternatives to patent financed research.

 

Note: Thanks to Peter for calling this column to my attention. I also see from comments below that Lawrence Goldstone has explicitly argued that we need to pursue alternatives mechanisms to patents for financing innovation. This is encouraging.

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In an article on the likely political implications of the Affordable Care Act (ACA) in the November election, the NYT wrongly implied that the beneficiaries are a relatively small segment of the population. It told readers:

"Democrats could ultimately see some political benefit from the law.  But in this midterm election, they are confronting a vexing reality: Many of those helped by the health care law — notably young people and minorities — are the least likely to cast votes that could preserve it, even though millions have gained health insurance and millions more will benefit from some of its popular provisions."

Actually, virtually the entire pre-Medicare age population stands to benefit from the ACA. Millions of insured people lose their insurance every year, typically because they lose their job. These people will now be able to get insurance through the exchanges, in most cases at prices far below what they would have paid in the individual market previously. In this way, the ACA is effectively giving the insured population security in their insurance that they did not previously have.This is especially important in cases where the reason people lost their job was due to bad health.

This is a huge benefit that is being extended to tens of millions of people who will be voting in November. Due to poor coverage of the impact of the law, it is likely that most of these people do not recognize the extent to which the ACA provides them with security in their insurance coverage.

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It is remarkable that no country has outlawed economics as a dangerous occupation on a par with drug dealing or murder for hire. The damage done to the world over the last seven years based on policies designed by economists has been incredible.

Floyd Norris documents this fact in a nice piece comparing the change in employment rates (the percentage of the population employed) in rich countries since 2007. The only two countries with higher employment to population ratios today than at the start of the downturn are Germany and Japan. Both countries have broken with the economic orthodoxy in important ways.

In Germany, the government has adopted policies that encourage employers to keep workers on the payroll by cutting back hours rather than laying them off. As a result, their unemployment rate is almost three percentage points below its pre-recession level even though its growth has actually been somewhat slower than in the United States.

Japan has adopted a policy of aggressive deficit spending even though its debt to GDP ratio is already more than twice that of the United States. It also has deliberately targeted a higher rate of inflation as a way of lowering real interest rates and reducing debt burden. As a result, it has created a number of jobs that would be the equivalent of more than 4 million in the United States.

In short, ignoring the economic orthodoxy works. Listening to orthodox economists brings destruction to the economy and devastates peoples' lives.  

 

Addendum:

The increase in the employment rates of prime age women in Germany and Japan, 4.0 percentage points and 3.6 percentage points, is especially impressive. This compares to a drop of 3.1 percentage points in the United States.

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The Republicans apparently think they got a powerful piece of ammunition from the Congressional Budget Office this week when it came out with an estimate that President Obama's minimum wage proposal would cost employers $15 billion a year. Under the "really big number" approach to public policy, many Republicans think they can scare people with a number that is much more money that almost anyone will see in their lifetime.

Fortunately at least some folks in the media recognize that their job is to inform rather than scare readers. The AP story on the report pointed out that the $15 billion represented roughly one third of one penny of every dollar paid out in wages. Are you scared yet?

Those looking for useful comparisons of the costs imposed by the higher minimum wage may also want to compare it to the savings we have seen from slower health care cost growth. Back in 2008 the Centers for Medicare and Medicaid Services projected that we would be spending $3,313 billion on health care in 2014. Their most recent numbers show us spending $3093 billion in 2014. This amounts to a savings of $220 billion, or more than 14 times as much as CBO projects the higher minimum wage will cost employers.

We can argue over the extent to which the Obama administration deserves credit for lower cost growth. But, there is no doubt that the savings on health care, which have largely passed on unnoticed, are a hugely bigger deal than any costs to employers due to a higher minimum wage.

Of course just because this money is not a big deal to employers doesn't mean it is not a big deal to minimum wage workers. It will make a big difference in the living standards of the families of minimum wage workers, 70 percent of whom live in families with incomes of less than $60,000 a year.

 

Note: Numbers corrected, thanks to Robert Salzberg.

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The NYT again obsessed about the number of young people signing up for the exchanges, telling readers they "tend to be healthier." Yes, everyone knows they tend to be healthier, which is why they pay on average a third of the premium of the oldest age band (55-64). As the Kaiser Foundation showed, a skewing by age would have little consequence since the difference in premiums largely reflects the difference in average costs. What will matter for the success of the exchanges is if there is a skewing by health conditions with less healthy people of all ages being disproportionately likely to enroll.

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Yet again the NYT has given us a piece talking about trade-offs between the cost and quality of health care. The piece reports that some doctors may not discuss certain treatments with patients because they consider these treatments too expensive. Unfortunately, the piece never discussed the role of patent monopolies in making these treatments expensive.

The point is simple but incredibly important. In some cases, for example open-heart surgery, a medical procedure may genuinely involve a substantial use of resources. In this case, it involves many hours of the time of highly-trained medical specialists. (The pay of these specialists is inflated by supply restrictions, but that is another question.) In such cases there can be an issue of whether some treatments are worth the economic cost. For example, should an otherwise healthy 90-year-old get open heart surgery when we know their life expectancy is just 2-3 years even assuming a successful operation.

However there is a very different story at issue in the cases discussed in this article. These cases all refer to the choice of drugs. The drugs that are very expensive do not necessarily involve a greater cost to the economy than the cheaper alternatives. They are expensive because the companies that sell them have patent monopolies or other protections that allow them to sell drugs at prices that are far above their free market price.

This distinction is important because if there are tough choices here it is only because government policy had created them. If all drugs were sold at their free market price, without patent protection, then the difference in costs would in almost all cases be trivial and doctors need not have any reservations about recommending the one they considered best based on their understanding of the evidence.

Of course patent monopolies serve a purpose in providing an incentive to drug companies to undertake research, but there are alternative mechanisms such as the $30 billion in annual direct public funding provided through the National Institutes of Health. Direct funding would not only eliminate the problems associated with figuring out how and whether to pay for expensive patent protected drugs, it would also likely lead to a much more efficient process and better medicine.

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