February 02, 2007
Economic Reporting Review (2005)
December 19, 2005
Outstanding Stories of the Week
Federal Loans to Homeowners Along Gulf Lag
Leslie Eaton and Ron Nixon
New York Times, December 15, 2005, Page A1
This article reports on the high rejection rate for low-interest government loans among victims of Hurricane Katrina. The article includes a careful analysis of the rejection rates by neighborhood, showing that the rejection rate is far higher in predominantly African American neighborhoods than in neighborhoods that are wealthier and mostly white.
Trade
Elections Could Tilt Latin America Further to the Left
Juan Forero
New York Times, December 10, 2005, Page A3
This article reports on the growing popularity of leftwing political candidates in Latin America. At several points the article contrasts these candidates with more conservative politicians who it s describes as supporting "free trade" or unfettered trade."
This is not accurate. The conservative politicians cited in the article all support many types of protectionist barriers. In fact, in some areas, most notably patent and copyright protection, the conservative candidates are stronger supporters of protectionism than their leftwing counterparts. The most accurate way to distinguish the conservative from the leftwing candidates is that the conservatives support the U.S. government's trade agenda in the region, while the leftwing candidates largely oppose it.
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No Sign of Progress on Farm Issue as World Trade Meeting Opens
Keith Bradsher
New York Times, December 14, 2005, Page C1
This article discusses the progress of negotiations on agricultural barriers at the W.T.O. meetings in Hong Kong. At one point the article reports on the Efforts by West African countries to get the United States to reduce its subsidies on cotton production.
In principle, the elimination or reduction of U.S. cotton subsidies will lower the prices received by U.S. farmers, thereby reducing U.S. production. This should in principle lead to higher world prices for cotton, which should benefit cotton producers in West Africa and elsewhere.
However, it is important to note that the United States is now running a trade deficit that is close to 7.0 percent of GDP, a level that all economists recognize as unsustainable. The mechanism for correcting a trade deficit is a fall in the value of the dollar relative to other currencies. When the dollar falls, the price of U.S. exports, like cotton, will become cheaper in world markets.
Since it is virtually certain that the dollar will fall substantially against other currencies in the near future, the price of U.S. cotton exports is virtually certain to decline. This means that any benefits that cotton exporters in West Africa and elsewhere might get from a reduction in U.S. cotton subsidies would be temporary. When the dollar adjusts to a sustainable level they will face world prices comparable to those they face today. If these countries make economic plans based on the assumption that cotton prices will be much higher in the future if the U.S. eliminates its subsidies, then they are likely to suffer severe hardships when world cotton prices fall due to a decline in the value of the dollar.
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Vows of New Aid to the Poor Leave the Poor Unimpressed
Keith Bradsher
New York Times, December 15, 2005, Page C3
This article reports pledges by rich countries to increase their aid to developing countries. At one point it reports that the Bush administration is proposing to increase its annual appropriation for trade adjustment assistance from $1.3 billion $2.7 billion by 2010. The projected aid level is equal to 0.09 percent of projected spending in 2010. Polling data regularly show that the public hugely overestimates the importance of foreign aid in the budget. For this reason it would be especially helpful to express aid amounts in terms that would be meaningful to most readers.
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Trade Gap Ballooned In October
Paul Blustein
Washington Post, December 15, 2005, Page D1
This article reports on the release by the Commerce Department of data showing that the trade deficit for October was $68.9 billion, a new record. The U.S. trade deficit is now approaching 7 percent of GDP, more than the double its peak level in the eighties.
At one point the article quotes an economist's assertion that the U.S. will be dependent on foreign capital as long as it is running a large trade deficit. Actually, the causation runs in the opposite direction. Large inflows of foreign capital sustain the over-valuation of the dollar. This over-valuation of the dollar makes imported goods cheaper than they would otherwise be, leading to more imports, and makes our exports more expensive to people living in foreign countries. If the inflows of foreign capital were reduced, the dollar would decline, and the trade deficit would fall back towards a sustainable level. There is no other plausible mechanism to bring down the trade deficit.
The trade deficit will have a large impact on future living standards, since it increases the portion of national output that will be paid to foreigners in the future. In fact, the impact of the current trade deficit on living standards will be much larger than the impact of the federal budget deficit. For this reason, the news that the trade deficit was unexpectedly large in October should have been given more prominence in the paper.
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U.S. Joins Informal Talks on Warming
Juliet Eilperin
Washington Post, December 10, 2005, Page A1
This article reports on the negotiations in Montreal over plans to reduce greenhouse gas emissions. At one point, the article reports that the Bush administration is opposed to mandated limits on greenhouse gas emissions. It asserts that it instead believes that "market forces" are the best way to address the problem.
It would have been helpful if the article indicated what the Bush administration meant by this statement. There is no obvious way that market forces, as the market is currently constituted, would lead to a reduction in greenhouse gas emissions. As it stands, the statement attributable to the Bush administration is equivalent to saying that it opposes taxes to pay for U.S. defense, but instead would rely on market forces. Just as market forces would not lead the public to pay for defense in any obvious way, there is no obvious way in which market forces would lead to a reduction in greenhouse gas emissions.
At one point the article describes the American Council for Capital Formation as "free-market." It can more accurately be described as pro-business.
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In Mexico, Junkyard Dogfight for Presidency
Sylvia Moreno
Washington Post, December 10, 2005, Page A13
This article reports on the campaign for Mexico's presidency. At one point it refers to President Fox's plans for tax, labor and energy law reforms. It asserts that "experts say" these reforms are essential for bringing economic growth.
It would have been helpful if the article identified the experts to whom it refers. Not all experts hold the same view on this issue and there is no obvious reason that the experts on one side of this debate should be given anonymity.
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Congress Seeks To Reconcile Divergent Bills
Jonathan Weisman
Washington Post, December 10, 2005, Page A5
This article reports on the status of two major tax and spending bills being considered by Congress. At one point the article quotes House Speaker Dennis Hastert on the need to keep a tax cut for dividends and capital gains, "more people are working today than ever before."
This statement is almost always true. Except when it is in a recession, the economy grows and adds jobs. Saying the economy has more jobs today than ever before is comparable to saying that an eight year-old boy is taller than he has ever been before. Presumably, if Mr. Hastert thought he could make a better case for the health of the economy he would have not made such a trivial claim.
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Senate Leader Predicts No Action This Year on Relief From the Alternative Minimum Tax
Carl Hulse
Published online with the title "Cut in Minimum Tax Not Likely, Lawmaker Says"
New York Times, December 14, 2005, Page A31
This article reports on congressional efforts to adjust the alternative minimum tax (AMT) so that it does not affect a large number of middle-income taxpayers. This article, along with many other articles, report on these adjustments as being very costly.
In fact, Congress approved the Bush tax cuts with at least the implicit understanding that these adjustments would take place. (No one advertised that they intended to exclude many middle income taxpayers from the benefit of these tax cuts, which would be the implication of not adjusting the AMT.) The reality is that Congress deliberately concealed the true cost of these tax cuts by not including the necessary adjustments in the AMT in the cost of the bill. What the public is seeing at the moment is really Congress grappling with the full cost of its tax cuts rather than an effort to find a way to pay for adjustments in the AMT.
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Russia and Intellectual Property
U.S. Hopeful About Russia's Tougher Stance on Software Piracy
Peter Finn
Washington Post, December 11, 2005, Page A26
This article discusses Russia's plans to be stricter in its enforcement of foreign patent and copyrights on software. The article reports the assertion of the International Intellectual Property Association that Russia's non-enforcement of copyrights is costing the software and entertainment industries $1.7 billion annually in lost royalties.
Russia's GDP is currently about $500 billion. This means that the lost royalties claimed by the entertainment industry are equal to approximate 0.3 percent of Russia's GDP, the equivalent of $40 billion a year in the United States. If Russia were forced to increase payments to foreigners by this amount, it would have a substantial negative effect on its economy.
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House to Take Up Stricter Immigration Measure
Jonathan Weisman
Washington Post, December 11, 2005, Page A8
This article reports on the progress in Congress of legislation restricting immigration. At one point it reports the view of Ken Mehlman, the Republican Party chairman that enforcement must begin at the border. In fact, most analyses have found that most undocumented immigrants working in the United States entered the country legally, and then overstayed their visas.
The article also reports complaints that immigrants impose a drain on government budgets by using public schools and hospitals, but not paying taxes. In fact, many undocumented workers pay taxes from which they do not benefit. Most importantly, many provide false Social Security numbers, which means that they pay taxes to the government, but will never receive any benefit. Several studies have shown that on net, the taxes paid by these workers exceed the benefits they receive, although there are some state and local governments where the cost of services provided to illegal immigrants exceeds the taxes collected.
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Drugs and the Developing World
Trade Talks Now Expected to Focus on Exports of Poorest Nations
Keith Bradsher
New York Times, December 12, 2005, Page C1
This article reports on the status of the W.T.O. talks in Hong Kong. At one point the article refers to an agreement under which developing countries would be able to import generic versions of brand drugs from rich countries. The article reports that the agreement would "allow greater access to generic drugs."
It is not clear that this agreement increases the ability of developing countries to obtain generic drugs. Previously, the TRIPS rules allowed general compulsory licensing of brand drugs. The new agreement appears to restrict compulsory licensing to cases of health emergencies, with the rich country governments (which also are the base of the drug companies) apparently being allowed to decide whether a specific situation poses a health emergency. The rules for these compulsory licenses are also sufficiently complicated that no country has applied for one during the two years that they were in effect on a temporary basis. For these reasons, the agreement may actually be restricting access to generic drugs compared to pre-existing rules.
December 12, 2005
In This Issue:
- Outstanding Stories of the Week
Agricultural Subsidies
- Greenspan
• Climate Change
• Medicare Prescription Drug Benefit
- Japan
• Health Care Costs
• November Employment Report
- Immigration
- Germany
You can sign up to receive ERR and other CEPR e-newsletters at the CEPR E-newsletter Signup Page. You can find the latest ERR at the Economic Reporting Review Main Page.
Outstanding Stories of the Week
Journal Questions Data in Vioxx Study
David Brown
Washington Post, December 9, 2005, Page B2
Medical Journal Criticizes Merck Over Vioxx
Alex Berenson
New York Times, December 9, 2005, Page B1
These articles report on an editorial in the New England Journal of Medicine that criticizes Merck for concealing evidence that its drug Vioxx may be harmful to people with heart conditions. Economic theory predicts that government- granted patent monopolies would lead to exactly this sort of corruption.
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Sometimes a Bumper Crop Is Too Much of a Good Thing
Alexei Barrioneuvo and Keith Bradsher
New York Times, December 8, 2005, Page C1
This article reports on how increased agricultural productivity in rich countries has led to overproduction which creates downward pressure on prices and how rich country governments have in turn subsidized their farmers to keep them in business. The article reports that this overproduction hurts agricultural producers in developing countries by lowering world prices, and implies that the policies are therefore bad for developing countries.
According to research from the World Bank and elsewhere, rich country subsidies on agricultural products are a net benefit to developing countries. According to these models, rich country subsides lower the prices that developing country consumers must pay for food and other products (e.g. clothes made from cotton). This frees up money that they can spend on other products, allowing for both higher living standards and higher growth.
While standard economic models indicate that certain agricultural interests in developing countries would benefit from higher world prices for agricultural products, as would politically connected grain traders in the rich countries, these models unambiguously show that the developing world as a whole would lose from the removal of rich country subsidies.
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Greenspan Points to Danger Of Rising Budget Deficits
Heather Thompson
New York Times, December 3, 2005, Page B3
This article reports on a speech by Federal Reserve Board chairman Alan Greenspan. The article reports that Greenspan claimed that the Social Security program will begin to face stress in 2008 when the first of the baby boomers retire. It then notes that Greenspan suggested raising the retirement age, commenting that a commission in Britain suggested raising their retirement age from 64 to 67.
It is worth noting that the Social Security program has long been prepared for the retirement of the baby boom cohort. It has been running large surpluses for the last twenty years, accumulating more than $1.7 trillion in government bonds to help defray the cost of the baby boomers retirement. According to the most recent projections from the Congressional Budget Office, the program will be able to pay all benefits through the year 2052 with no changes whatsoever. The baby boom cohort will be between the ages of 88 and 106 when Social Security is first projected to face a shortfall. Presumably Mr. Greenspan is aware of these facts since he chaired the commission that designed this path for the program. It is also worth noting that the retirement age for Social Security is already rising to 67, so if Mr. Greenspan wants to raise the retirement age, then it would be to a higher age than in the proposal put forward in Britain.
The article also quotes Greenspan as saying that "we do not as yet have a firm grasp of the implications of cross-border financial imbalances," referring to the $700 billion plus annual current account deficits that the United States is now running. Actually economists understand very well the implications of large current account deficits. They are very similar to large budget deficits. While a country is running a large current account deficit it is enjoying a better standard of living as a result of the deficit – just like a family borrowing $1,000 a month on its credit card.
However, a country cannot run a large current account deficit indefinitely, just as a typical family cannot borrow an additional $1,000 a month on its credit cards indefinitely (unless it has a rapidly rising income). When the foreign creditors, in this case largely the central banks of Japan and China, decide it is no longer in their interest to continue to lend money, then the United States must reduce its current account deficit. This is accomplished through a fall in the value of the dollar, which makes imports more expensive in the United States and makes U.S. exports cheaper to foreigners.
This process will lead to a substantial jump in the inflation rate, since imports (and some exported products) will become more expensive to U.S. consumers. For example, if the dollar falls by 30 percent on average, then it would be reasonable to expect roughly half this change to be passed on in higher import prices, which means that they would rise by an average of 15 percent. Since imports account for 16 percent of GDP, this would translate into an increase in the inflation rate of approximately 2.4 percentage points. If the Fed responds to the rise in inflation by raising interest rates sharply, this could also result in a severe recession.
The basic tools for this sort of analysis can be found in any standard macroeconomics textbook. For this reason it is very strange that Mr. Greenspan would say that the implications of a current account imbalance are not understood.
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On Climate Change, a Change of Thinking
Andrew C. Revkin
New York Times, December 4, 2005, Section 4, Page 3
This article discusses the status of the Kyoto agreement, which will impose restrictions on the emission of greenhouse gases in the signatory developed countries (not the U.S.) for the years 2008-12. At one point it asserts that the "United States" says that emissions targets would stunt economic growth and therefore should not be considered. This is the position of the Bush administration, not the United States.
Opinion polls consistently show that large numbers of people in the United States support restrictions on greenhouse gas emissions. This has been translated in legal restrictions into California and other states.
It is also worth noting that the fact that a policy might cost jobs does not mean that it will not be pursued. Standard economic models show that the military expenditures associated with the Iraq war have cost approximately the same number of jobs as a Kyoto type agreement on greenhouse gas emissions, yet potential job loss has not even been raised as an issue in the context of the war.
At one point, in discussing the prospects of curbing greenhouse gas emissions, the article notes the importance of carbon-based fuels to the world economy and then asserts that "economic growth is inconceivable without it [carbon- based fuels]." This assertion has little to do with reducing greenhouse gas emissions. If SUVs were replaced with compact cars (even ones with standard engines) it would result in an enormous reduction in greenhouse gas emissions. Similarly, if buildings used more efficient insulation it would substantially reduce emissions associated with heating and cooling.
There is enormous potential for such reductions in energy use, even in the absence of any breakthroughs in alternative forms of energy. Reductions of this sort are the basis for most policy discussion on restricting greenhouse gas emissions. Virtually all the participants in the debate recognize that the economy will still depend on forms of energy that emit greenhouse gases for the foreseeable future.
The article also notes the refusal of developing countries, most notably China and India, to agree to any restrictions on their emissions. Since these countries emit far smaller amounts of greenhouse gas on a per capita basis than rich countries, it is absurd to believe that they would agree to any restrictions without compensation. For that reason, those who actually want to include these countries in a global process of restricting greenhouse gas emissions support paying them for slowing the growth in their emissions (e.g. see "Cleaning Up the Kyoto Protocol: Emission Permit Trading Would Allow Developing Nations to Reap Profit from Green Policy").
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Medicare Prescription Drug Benefit
Republicans Find They Have to Sell Medicare Drug Benefit
Robin Toner and Robert Pear
New York Times, December 5, 2005, Page A1
This article reports on Republican efforts to convince seniors that the Medicare prescription drug benefit that they passed will actually help them. In discussing the design of the bill, which prohibits Medicare from negotiating with drug companies over prices, the article asserts that the Republicans were motivated by their ideological beliefs. While this is possible, it is also possible that they were motivated in part by their desire to serve the pharmaceutical and insurance industries, both of which are important backers of Republican politicians. While the stated reason for the design of the benefit may have been ideological, politicians sometimes are not entirely honest about the motives for their actions.
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New Optimism About the Japanese Economy After a Bleak Decade
Martin Fackler
New York Times, December 7, 2005, Page C1
This article reports on recent economic data from Japan that indicates the economy is again growing at a healthy pace, after almost 15 years of stagnation. In citing the benefits to the world from more rapid growth in Japan the article asserts that more rapid growth could allow Japan to invest more overseas. Actually, the opposite is true. If Japan grows more rapidly, it will have a smaller trade surplus (other things equal) and therefore have less money to invest overseas.
At one point the article notes that Japan's projected growth of 2.4 percent is still well below the 3.6 percent growth projected for the United States in 2005. It is important to note that Japan's population is virtually stagnant, while the U.S. population is growing at the rate of 1.0 percent annually. This means that per capita GDP growth, the measure most often used by economists to examine changes well-being, is virtually the same between the two countries at the moment.
The article also reports as a continuing negative feature of Japan's economy that prices are still falling. There is no obvious problem associated with falling prices. In the U.S. economy, prices in many sectors, such as clothes and computers, have been falling for decades. If the aggregate price level is falling, it simply means that the sectors with falling prices outweigh the sectors with rising prices. There is no obvious harm to the economy as a result of the balance shifting in this way.
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Employer-Backed Health Care Is Here to Stay For Lack of a Better Choice
Reed Abelson
New York Times, December 5, 2005, Page C11
This article discusses the future of the employer-based health care system in the United States. At one point it asserts that there are no plausible alternatives, because "corporate executives and many others are leery of a government solution."
Corporate executives comprise a tiny portion or the electorate. If the media reported on alternative options for health care – and the fact that the United States pays more than twice as much per person as the average for other rich countries, and gets worse outcomes – it is possible that the leeriness of corporate executives would not impose a veto on health care reform.
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Growth in Jobs Overcame Slump In November
Nell Henderson and Michael A. Fletcher
Washington Post, December 3, 2005, Page D1
This article reports on data from the Labor Department's November employment report. At one point, the article notes that nominal wage growth appears to have accelerated, with the average hourly wage rising by 3.2 percent over the last year, which it reports as the highest growth rate since 2003. Using year over year growth understates the extent of the acceleration, since wages had been growing at just a 2.5 percent annual rate in the first half of this year. In the last quarter wages have risen at a 3.5 percent annual rate, which indicates a sharp recent acceleration which is consistent with the recent tightening in the labor market, coupled with workers' efforts to compensate for sharply higher energy prices.
The November data also showed a jump in the unemployment rate among African American teens of 5.9 percentage points to 39.2 percent, the highest rate since May of 1994. These numbers are highly erratic and most of this jump may be reversed in the December data, but it is worth noting a reported change of this magnitude.
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Most Mexican Immigrants in New Study Gave Up Jobs to Take Their Chances in U.S.
Nina Bernstein
New York Times, December 7, 2005, Page A26
This article reports on a new study that shows that most of the Mexicans who immigrated to the United States in search of employment had jobs in Mexico, but were looking to get higher wages. At one point the article quotes a representative of the National Restaurant Association as saying that restaurants are unable to find domestic workers "regardless of what wage is offered."
It does not seem plausible that U.S. born workers would be unwilling to work in restaurants if they were paid $15 an hour. Clearly, this spokesman means that the members of his association were unable to get workers at a wage that is below the market clearing level. This is the way markets are supposed to work.
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The New Berlin Wall
Peter Schneider
New York Times, December 4, 2005, Magazine, Page 66
This article discusses the extent to which people of non-European ancestry have been integrated into German society. At one point the article asserts that "4.8 million people, roughly 12 percent of the work force" are unemployed in Germany. This figure includes people who are involuntary working part-time. These people would be counted as employed in the United States. Using the U.S. definition, there would be approximately 3.6 million unemployed workers in Germany, approximately 9 percent of the labor force.
December 5, 2005
Outstanding Stories of the Week
Drugmakers Win Exemption in House Budget-Cutting Bill
Jonathan Weisman
Washington Post, November 30, 2005, Page A8
This article reports on a provision that was slipped into a large budget bill, which will require state Medicaid programs to pay for a brand drug for depression rather than generics which are far cheaper and generally considered to be every bit as effective. The main beneficiary of this provision is the pharmaceutical company Eli Lilly, which managed to have the provision inserted with very little attention prior to the bill's passage.
Pension Funds Putting Billions in Hedge Funds
Riva D. Atlas and Mary Williams Walsh
New York Times, November 27, 2005, Section 3, Page 1
This article reports on the growing tendency of pensions to invest in hedge funds in the hope of raising their returns. The article points out that hedge funds are largely unregulated, although defined benefit pension plans are guaranteed by the government, which means that the government will ultimately be liable if these investments turn out badly.
Gimme an RX! Cheerleaders Pep Up Drug Sales
Stephanie Saul
New York Times, November 29, 2005, Page A1
This article reports on the growing tendency of drug companies to hire former cheerleaders to market their drugs to doctors. The article reports that the drug companies like to have attractive sales representatives to better promote their drugs.
Trade
A Warning Of Trade Suits Over Farming
Alexei Barrionuevo
New York Times, November 30, 2005, Page C1
This article discusses the possibility that there could be more lawsuits brought before the W.T.O. on trade, if there is no agreement on the reduction of agricultural subsidies and tariff barriers at the Hong Kong W.T.O. meetings. The article refers to efforts to eliminate rich country agricultural subsidies as part of an effort to promote development in poor countries. It also asserts that the current round of W.T.O. negotiations is "meant to lift the world's poor nations out of poverty by giving their farmers better access to developed world markets."
In fact, research from the World Bank and elsewhere shows that the removal of rich country subsidies will be a net loss to the developing world. If the rich countries removed all their export subsidies on agricultural products it would mean that developing countries would be paying more for these products. In standard trade models, like those used by the World Bank and IMF, this leads to slower growth. The costs might be especially high to developing countries that are large net importers of agricultural goods.
Research from the World Bank and elsewhere does show that the removal of rich country import barriers on agricultural products can be beneficial to developing countries, but the impact is modest, with a plausible agreement almost certainly producing an eventual gain (after 10 years) of less than 0.3 percent of GDP, the equivalent of 2 weeks of growth in China. The most obvious gainers from a reduction in agricultural trade barriers would be politically connected grain traders, like Archer Daniels Midland.
In this respect, the article notes that the Hong Kong round has been dubbed the "development round" of the W.T.O., and implies that this in fact indicates that promoting development is the main purpose of the trade talks. If the main goal of the negotiators was to advance the interests of major corporations, it would certainly never be publicly acknowledged. The fact that politicians chose to say they were motivated by promoting development does not mean that these politicians necessarily are motivated by promoting development.
China
U.S. Avoids Calling China A Currency Manipulator
Paul Blustein
Washington Post, November 29, 2005, Page D1
U.S. Declines A Chance To Criticize Yuan Policy
Edmund L. Andrews
New York Times, November 29, 2005, Page C1
This article reports on the decision by the Bush administration not to identify China as a country that manipulates its currency in a semi-annual report from the Treasury Department. At one point the Times article notes the Bush administration's opposition to legislation that would impose steep tariffs on imports from China. The article reports that the administration claims the measure would "jeopardize trade and hurt consumers."
This is presumably the intention of the measure. The proponents of the bill are quite explicit in their desire to reduce imports from China. They hope to do this by raising the price of these imports, which means that consumers would pay more for the goods they buy. (A rise in the value of the Chinese currency would have the same effect.) While the rise in prices might be unpleasant for consumers, it is inevitable, since virtually all economists recognize that the country cannot continue to borrow to finance a large trade deficit indefinitely, just as the government cannot sustain a large budget deficit indefinitely.
It would have been useful to note that the Bush administration is opposing the bill precisely because of its intended effects.
The Times article comments that a higher value of the Chinese yuan may not "offset China's huge cost advantage in cheap labor." The higher value of the yuan would not be expected to fully offset the difference in labor costs; however, it would make the differences smaller, thereby reducing the outflow of production and jobs to China, and possibly even allowing U.S. producers to regain lost markets in some items.
At one point the Post article quotes Timothy Adams, the undersecretary of the Treasury for International Affairs, as saying that the Bush administration would "oppose any kind of protectionist legislation." This is not true. The Bush administration has supported many types of protectionist legislation. It has actively promoted expansion of copyright and patent protection. It has also been content to leave in place laws that protect highly paid professionals like doctors and lawyers from international competition.
Immigration
Bush Pushes Guest-Worker Program
Michael A. Fletcher and Darryl Fears
Washington Post, November 29, 2005, Page A2
President Renews Effort to Overhaul Immigration Policy
Richard W. Stevenson
New York Times, November 29, 2005, Page A16
These articles discuss President Bush's plan to change rules for immigrants entering the country to work. At one point the Times article describes the two competing views on immigration as being those of employers who complain about not being able to find citizens or legal immigrants to fill jobs and conservatives who complain about immigrants who break the laws and use welfare.
It is also important to note that some people are concerned that immigrants drive down wages in certain segments of the economy, for example in the sectors where employers refuse to offer wages high enough to attract citizens or legal immigrants. This concern explains the regulations that doctors imposed in 1997 to limit the extent they were forced to compete with foreign-born doctors. Farm workers, custodians, and other workers in less-skilled occupations have less political power so they are less able to structure immigration laws in ways that protect their wages.
The Post article describes the jobs taken by immigrants as "jobs that go unwanted by Americans." It is important to note that they are only unwanted because of the low wage that employers are offering. There are a large number of citizens who are willing to work as custodians at a wage of $20 an hour. The problem is that employers want to pay below a market-clearing wage.
German Unemployment
In Guarded Tones, European Bank Raises Rates for First Time in 5 Years
Mark Landler
New York Times, December 2, 2005, Page C3
This article reports on the decision of the European Central Bank to raise its short-term interest rate. At one point the article refers to the unemployment in Germany, reporting that it just slipped below 11.0 percent.
This figure refers to Germany's official measure of unemployment, which counts part-time workers as being unemployed. Using the OECD's standardized unemployment rate, which is virtually identical to the U.S. method of measuring unemployment, Germany's unemployment rate is approximately 9.0 percent. Unemployment is still disproportionately high in the areas that were formerly East Germany. In the area that was formerly West Germany, the unemployment rate is close to 7.0 percent, using the standardized measure of unemployment.
Welfare Restructuring
House Bill Raises Welfare Work Requirement
Jonathan Weisman
Washington Post, November 27, 2005, Page A10
This article reports on a provision of the budget bill approved by the House which would substantially increase the amount of work required each week from parents receiving welfare benefits. At one point the article points out that to meet the increased need caused by the work requirement, the bill includes $500 million in additional funding for childcare over the next five years.
This amount is equal to $100 million a year, approximately 0.004 percent of federal spending over the period. This is enough to pay an average of approximately $30 per year towards childcare for each of the 3 million children currently receiving welfare benefits.
Global Warming
World Leaders to Discuss Strategy for Climate Control
Juliet Eilperin
Washington Post, November 27, 2005, Page A10
This articles reports on efforts to develop a long-range worldwide strategy for reducing greenhouse gas emissions. At one point the article notes that many state governments and private corporations are moving ahead with plans to reduce emissions, even though the federal government has not made any binding commitments. In this vein, it cites the Johnson & Johnson corporation, which it claims has reduced emissions by 3.1 percent since 1990, even though its sales have expanded by a factor of 4.
It is not clear what this reduction means. The company may have been able to achieve these reductions simply contracting out for its manufactured products. If this is the case, then the reductions would be absolutely meaningless from an environmental standpoint. It would have been useful if the article had made some independent effort to verify the company's assertion, instead of just reporting it as fact.
Housing Sales
Upbeat Signs Hold Cautions For the Future
Vikas Bajaj
New York Times, November 30, 2005, Page A1
This informative article examines several recent releases of economic data that suggest that the U.S. economy is growing at rapid pace. At one point it notes an extraordinary 13 percent jump in new homes sales in October as evidence that housing market may still be strong.
It is worth noting that virtually of this gain was accounted for by a 46.9 percent jump in new home sales reported in the west. There was a similar sharp jump in monthly sales reported in the west in July. That rise was followed by a sharp fall in August that completely reversed the prior month's increase. Sales in the region fell further in September.
This pattern suggests that there is a problem in the reporting of data from the region since it is implausible that sales would actually rise and fall by such large amounts in a single month. Therefore the large reported rise in new home sales in October is probably attributable to measurement error rather than an actual surge in home buying.
November 28, 2005
In This Issue:
- Outstanding Stories of the Week
The Trade Deficit
Tax Breaks for Artists
Tax Cuts
Wages in the Auto Industry
Immigrants and the US Labor Market
Germany
Copyrights
State Budgets
European Interest RatesYou can sign up to receive ERR and other CEPR e-newsletters at the CEPR Listserve Signup Page. You can find the latest ERR at the Economic Reporting Review Main Page.
Republicans in House Pass $50 Billion in Budget Cuts
Jonathan Weisman
Washington Post, November 19, 2005, Page A6
This article reports on the budget package pushed through by House Republicans. It examines the likely impact of the proposed budget cuts both on the overall budget deficit and on the people who will be affected by them.
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U.S. Trade Deficit Hangs In a Delicate Imbalance
Paul Blustein
Washington Post, November 19, 2005, Page A1
This article discusses the dynamics of the U.S. trade deficit. The article attributes the trade deficit to the low savings rate in the United States, but reports that it is sustained because are foreigners are willing to lend money to the United States to support the imbalance.
This argument reverses the chain of causation. The fact that people in the United States buy foreign goods rather than domestically produced goods is a result of the fact that foreigners are investing in the United States and thereby raising the value of the dollar. The higher value of the dollar makes imports relatively less expensive than domestically produced goods, thereby causing people to buy more imports, which translates into a large trade deficit.
If there were not a large inflow of foreign capital raising the value of the dollar, there is no way that a low savings rate by itself would lead to a trade deficit. According to standard economic theory, in the absence of an inflow of foreign capital, a low savings rate would generally lead to a rise in interest rates. This would in turn lead to a reduction in investment spending and purchases of new cars and homes. The trade balance would be little affected by a fall in the domestic savings rate, unless an inflow of foreign capital raised the value of the dollar.
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Senate Bill Lets Artists Claim Price for Gifts
Robin Pogrebin
New York Times, November 23, 2005, Page
This article reports on a bill approved by the Senate which would allow artists, writers, and musicians to get tax deductions for the full market value of work that they donate to museums or other non-profit institutions. It is important to note that this bill effectively applies a lower tax rate to these workers than other workers. Most workers must pay taxes on their entire income.
The artists, writers, or musicians who benefit from this bill would be able to deduct the full value of their work from their taxable income, even though they have never paid tax on the value of the work they created. This would be equivalent to allowing automobile mechanics to deduct the full value of a repair job done for a charitable organization from their taxable income, without ever claiming any income from the job. (They currently cannot do this.) It may desirable to implement a policy that both further subsidizes charities, and favors creative and artistic workers, but it is important that the public understand the nature of the subsidies that it is providing.
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Congress Rushes to Tie Up Loose Ends Before Break
Carl Hulse
New York Times, November 19, 2005, Page A11
This article reports on the progress of several tax and spending bills that Congress is trying to complete before the end of the year. At one point the article quotes House Speaker Dennis Hastert on the desirability of approving the extension of a tax break that applies a lower tax rate for dividends and capital gain income than on wage income. According to the article, Hastert said that a lower tax rate is necessary in order to "continue to create jobs."
It is worth noting that the rate of job creation since this tax break was put into effect in 2003 has been fairly weak compared with the job growth of the nineties. Furthermore, most of the jobs created in the last two years have been due to consumption growth. This tax break is supposedly designed to boost investment. Investment growth has actually been fairly weak for this point of a recovery.
Wages in the Auto Industry
Planned Closings Stun GM Employees
Amy Joyce
Washington Post, November 22, 2005, Page D1
G.M. Set To Drop 5,000 More Jobs And Shut Plants
Micheline Maynard
New York Times, November 22, 2005, Page A1
These articles report on General Motors plans to close several more plants and trim its workforce by 30,000 workers over the next 3 years. Both articles report that General Motors pays it workers an average of more $60 an hour in total compensation.
It is inaccurate to present this figure as compensation for individual workers, since many of the costs that General Motors includes in this calculation do not go to employed workers, but instead are compensation to workers who have been laid off. As a chart on the Post article shows, only $27.50 of this cost is attributable to wages. If the rest of the $65 figure usually cited were actually benefits accrued directly by the worker, it would imply that General Motors was spending more than $70,000 per year on the health care and pension of each of its workers. This is clearly an implausible figure.
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Immigrants and the US Labor Market
Shortage of Immigrant Workers Alarms Growers in the West
Sonya Geis
Washington Post, November 22, 2005, Page A3
This article reports on the complaints by farm owners in the West and several politicians, that there is a "shortage" of immigrant workers. At one point, it quotes Larry Nelson, the mayor of Yuma, California, that "there are more jobs in America than we have workers."
In a market economy this situation is resolved by a rise in the price of the good or factor of production (in this case labor). The problem in this situation is that the growers apparently are unwilling to pay the market-clearing wage. It is natural that employers would like to get workers at lower wages, just as they would like to get materials at lower prices. What is extraordinary is that these growers apparently believe that the government should intervene to keep wages from rising. That should have been the focus of this article.
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Germany Passes Torch to New Generation
Richard Bernstein
New York Times, November 22, 2005, Page A3
Merkel , at Last, Takes Germany's Helm
Shannon Smiley
Washington Post, November 23, 2005, Page A14
Merkel Takes Office in Germany and Announces Coalition Cabinet
Richard Bernstein
New York Times, November 23, 2005, Page A3
These articles discuss the economic situation in Germany as a new government takes power. Both the Post article and the November 23rd Times article report that Germany's unemployment rate is over 10 percent. This figure refers to the official German government measure of unemployment. Unlike the U.S. measure, the German measure counts workers who are involuntarily working part-time as being unemployed. The standardized unemployment measure used by the OECD (which is virtually identical to the U.S. measure) shows that Germany's unemployment rate is 9.3 percent. In the area that was formerly West Germany, it is slightly over 7.0 percent.
The November 23rd Times article describes the German economy as being in a crisis, and in need of reform. The article does not provide the basis for this assessment. Unlike the United States, Germany's economy is sufficiently competitive that it is running a trade surplus with the rest of the world. By contrast, the United States is running a large trade deficit that almost all economist recognize to be unsustainable. At least by this very visible measure, the United States economy can be more accurately described to be in a crisis than the Germany economy.
At one point the November 22rd Times article describes the key decision facing the German public as "how much of the country's elaborate welfare system to give up for the sake of competitiveness." It is not clear that reducing the size of Germany's welfare state will increase its competitiveness. Countries with more extensive welfare states, most notably the Scandinavian countries, have healthy economies and low unemployment rates. There are also many industrialized countries with weaker welfare states, such as Italy and Greece, whose economies are performing poorly. Therefore, there is little reason to believe that reductions in the size of Germany's welfare state will necessarily lead to improved economic performance.
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Putting the Napster Genie Back in the Bottle
Saul Hansell
New York Times, November 20, 2005, Section 3, Page 1
This article reports on the current business plans of Shawn Fanning, the inventor of Napster, for a paid peer-to-peer file sharing network. It would have been useful to include some economic analysis in this article. The article reports on the enormous effort and expense that the entertainment industry is incurring to ensure that copyrighted material is not freely transferred. It would be far more efficient to develop an alternative mechanism to support music production and then allow all material to be transferred freely at its marginal cost, which is zero with the Internet (e.g. see "The Artistic Freedom Voucher: An Internet Age Alternative to Copyright" [https://www.cepr.net/publications/ip_2003_11.pdf]).
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States' Coffers Swelling Again After Struggles
John M. Broder
New York Times, November 25, 2005, Page A1
This article reports on higher than projected growth in state revenue, which is leading to a substantial improvement in their budget situations. The article gives several examples of improved budget numbers by reporting the sizes of surpluses or the decline in deficits.
Since very few readers are likely to be familiar with the size of these state budgets, would be far more helpful to report the numbers as percentages. For example, it reports that California's projected surplus increased from $1.3 billion to $5.2 billion. This shift is equal to approximately 4.5 percent of California's budget. The article reports that New York State's budget situation has improved from a projected deficit $4.2 billion to a surplus of $1 billion. This shift is equal to approximately 5.2 percent of the state's budget.
It is worth noting that much of this gain is likely attributable to income taxes on capital gains. These tax collections are highly erratic, since they depend on stock market fluctuations. One of the reasons that many states faced serious budget shortfalls earlier in the decade was that they assumed that the tax revenue based on the extraordinary capital gains incurred during the stock market bubble would persist. When the bubble burst, this important source of tax revenue disappeared.
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Rate Rise Is Opposed In Europe
Mark Landler
New York Times, November 25, 2005, Page C1
This article reports on opposition among business leaders to an interest rate hike by the European Central Bank (ECB). It would have been useful if the article had also presented the views of other segments of society, most obviously labor unions. Many labor unions in Europe have long been critical of the restrictive monetary policy of the ECB, arguing that it is a major cause of high European unemployment. It would be appropriate to occasionally present their views, especially since unions represent a very large segment of the population in the euro zone nations.
November 21, 2005
In This Issue:
• Outstanding Stories of the Week
• Greenspan and Trade
• Medicare Prescription Drug Benefit
• Medical Devices
• Tax Cuts and Budget Deficits
• Mexico
• Brazil
• The Budget
• Delphi Labor Costs
• Germany
You can sign up to receive ERR and other CEPR e-newsletters at the CEPR Listserve Signup Page. You can find the latest ERR at the Economic Reporting Review Main Page.
Outstanding Stories of the Week
A Harvest of Hunger In Parched Malawi
Craig Timberg
Washington Post, November 13, 2005, Page A23
This article reports on the failure of Malawi's agricultural development following its liberalization in the last 15 years. According to the article, Malawi followed the advice of the World Bank and other international development agencies and dismantled a state-run farm agency that was responsible for maintaining the irrigation system and providing other aid to farmers. The article reports that this led to a sharp falloff in agricultural output, leading to famine conditions, since no effective private sector systems replaced the state-run system.
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An Industrial Town Stares Change in the Face
Sholnn Freeman
Washington Post, November 12, 2005, Page A1
This informative article examines the likely impact on the workers at Delphi auto part factory in Lockport New York, if the factory closes due to Delphi's financial problems.
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Oohs and Ahs At Delphi's Circus
Gretchen Morgenson
New York Times, November 13, 2005, Section 3, Page 1
This article reports on the ways in which Delphi's top executives have managed to secure themselves healthy bonuses even as the company defaults on debts to its creditors and its employees' pension and health care funds.
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Buy a Home, and Drag Society Down
Eduardo Porter
New York Times, November 13, 2005, Section 4, Page 3
This article assesses the net social benefits of higher homeownership. It points out that homeownership is often associated positive social benefits, but it can also have negative effects. For example it can make it more difficult for workers to move to follow employment opportunities. The net effect of increased homeownership rates on society may not necessarily be positive.
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Greenspan Says Policy Has Little Effect on Trade Gap
Nell Henderson
Washington Post, November 15, 2005, Page D6
This article reports on a speech by Federal Reserve Board chairman Alan Greenspan in which he addressed a variety of policy questions. At one point, the article quotes Greenspan as saying that the current account balance is not affected by the exchange rate. If this quote is accurate, it would be a remarkable statement from the head of a central bank.
Virtually all economists would agree that the decision to buy imported or domestically produced goods is primarily determined by their relative prices. If imports are cheaper, then consumers are more likely to buy imported goods. The exchange rate directly affects the price of imported goods. Most studies show that roughly half of any changes in the value of the dollar are passed on the price of imported goods. This means that if the dollar fell by 20 percent, then the price of imported goods in the United States would rise by approximately 10 percent. There would be a similar change in the price of goods exported from the United States, so that U.S. exports would be cheaper for people living in other countries.
For this reason, economists generally believe that a fall in the dollar will lead people in the United States to purchase fewer imported goods and will cause foreigners to buy more goods exported from the United States. In his speech, Mr. Greenspan was apparently differing with this conventional view of trade and the economy, since the conventional view certainly implies that the exchange rate has a very direct impact on the current account balance. In fact, the conventional view suggests that the exchange rate is by far the most important single determinant of the current account balance. If Mr. Greenspan has an alternative view of the economy, it would be very interested to have its logic explained in more detail.
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Medicare Prescription Drug Benefit
Confusion Is Rife About Drug Plan As Sign-Up Nears
Robert Pear
New York Times, November 13, 2005, Page A1
This article reports on the difficulty that many Medicare beneficiaries are facing in trying to navigate the various insurance plans through which they can take advantage of the new prescription drug benefit. At one point the article asserts that President Bush and the Republicans in Congress insisted on offering the plan through private insurers (instead of just attaching it to the existing Medicare program) because "they firmly believe that competition among private plans will hold down costs."
While President Bush and many Republicans in Congress claim that this is their belief, politicians sometimes say things that are not true. There is a large body of evidence, including numerous studies of the record of private insurers in Medicare, which indicates that private insurers will raise the cost of the prescription drug benefit, not lower it. This is especially likely to be the case since Medicare would have had enormous bargaining power with pharmaceutical companies, if approached them as the buyer for all seniors covered under the plan.
It is worth noting that the insurance industry has contributed heavily to Republican politicians, as has the prescription drug industry. It is possible that the campaign contributions from these industries played as much role in shaping the prescription drug bill as the philosophical beliefs of Republican politicians.
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To Fight Rising Costs, Hospitals Seek Allies in the Operating Room
Reed Abelson
New York Times, November 18, 2005, Page B1
This informative article reports on efforts by hospitals to reduce costs by providing incentives to doctors to save money on medical devices by providing them with a portion of the savings from using less expensive devices. It would have been helpful to include a discussion of the role of patents in inflating the prices of these devices.
As is the case with prescription drugs, most medical devices are relatively cheap to produce. They are expensive because the medical supply industry is granted patent monopolies on their inventions. This allows them to charge high prices and gives them an incentive to use aggressive and misleading marketing tactics. If an alternative mechanism for supporting innovation was used (e.g. direct public funding, which already supports much medical research), and devices were sold in a competitive market, prices would fall dramatically, and the incentive for abusive marketing practices would be eliminated.
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Director of the Congressional Budget Office to Leave
David E. Rosenbaum
New York Times, November 15, 2005, Page A23
This article reports on the announcement that Douglas Holtz-Eakin will be leaving his position as the director of the Congressional Budget Office (CBO). At one point the article reports that Mr. Holtz-Eakin angered Republicans because he "rejected demands that budget forecasts take account of strengthened economic activity from tax cuts without analyzing the drag caused by increased spending."
Actually, Mr. Holtz-Eakin produced projections under a wide variety of tax and spending assumptions. The main source of the Republicans' anger with Mr. Holtz-Eakin appeared to be that he insisted on using projections on the potential stimulus from tax cuts that were consistent with existing economic research. Many proponents of tax cuts have tired to argue that such tax cuts would lead to enough growth so as to be self-financing. The projections done by the CBO under Mr. Holtz-Eakin's direction showed that, at best, only a small portion of the lost tax revenue would be recouped through additional growth. In some scenarios, the larger budget deficits actually resulted in slower growth, compounding the impact of the tax cuts on the budget.
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Name Calling Erodes Ties Between Fox and Chavez
James C. McKinley Jr.
New York Times, November 15, 2005, Page A6
This article reports on a dispute between Mexican President Vincente Fox and Venezuelan President Hugo Chavez over the merits of trade pacts with the United States. The article repeatedly asserts that the dispute is over "free trade." In fact, the pacts in question (NAFTA and the proposed FTAA) are not free trade agreements. They leave many barriers in place, and actually expand protection in some areas, most notably in the case of patent and copyright protection.
At one point the article refers to Mr. Fox's assertion that NAFTA had been indispensable in improving living standards in Mexico. Actually, there has been very little improvement in living standards in Mexico in the post NAFTA period. Per capita GDP has grown at a rate of just over 1.0 percent annually. By contrast, it grew at a .3.4 percent annual rate in the years from 1960 to 1980. While it is possible that Mexico's economy would have performed even more poorly without NAFTA, its growth record in the last decade is very weak for a developing country.
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Unfolding Scandal Nears Finance Official in Brazil
Paulo Prada
New York Times, November 15, 2005, Page C2
This article discusses evidence tying Brazil's finance minister, Antonio Palocci, to a political scandal. At one point, the article refers to the policies pursued by Mr. Palocci and asserts that many economists believe that they have provided the basis for sustained growth.
It is worth noting that Brazil's economic record to date under Mr. Palocci's policies has not been very good. The country had almost no growth in 2003. It grew at a respectable 5.0 percent rate in 2004. It is projected to grow at little more than a 3.0 percent rate in 2005. This leaves an average per capita growth rate (population growth is approximately 1.0 percent a year) of less than 2.0 percent annually. By contrast, Brazil had a per capita growth rate of more than 4.0 percent annually from 1960 to 1980.
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Battle Is Drawn in G.O.P. Over How Conservative to Be
Edmund L. Andrews and Carl Hulse
New York Times, November 12, 2005, Page A12
This article reports on divisions among Republicans on several tax and spending measures. It would be helpful to readers if the items at issue were placed in some context, instead of just being reported as dollar amounts.
For example, the $50 billion in proposed cuts to entitlement spending over the next five years is equal to approximately 0.4 percent of projected spending over this period. The article reports that the proposed repeal of the estate tax would cost the government approximately $90 billion in annual revenue. This amount is equal to approximately 3.0 percent of projected spending.
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Foreign Aid Chief Pledges Reforms
Celia W. Dugger
New York Times, November 13, 2005, Page A11
This article reports on bureaucratic obstacles that have prevented most of the $2.5 billion appropriated for President Bush's Millennium Challenge from being spent over the last two years. The money appropriated for this foreign aid program is equal to approximately 0.005 percent of federal spending over the last two years.
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Delphi Unions Balk at Plan To Eliminate 18,000 Jobs
Jeremy W. Peters
New York Times, November 17, 2005, Page C3
This article reports on negotiations between Delphi, the bankrupt auto parts manufacturer, and its unions. At one point the article reports Delphi's claim that their labor costs are $65 an hour. It is important to note that this figure is not the compensation received by an average Delphi worker for an hour of work. This is a figure that averages all of Delphi's labor costs, including payments to laid off workers, by the number of hours worked by its current workforce. The actual compensation to its current work force is substantially lower.
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Deal Reached On German Government
Geir Moulson
Washington Post, November 12, 2005, Page A19
This article reports on an agreement between Germany's two major parties over an economic agenda for the country's new government. The article asserts that Germany's unemployment rate is 11 percent.
While this is the official government figure, this counts workers who have part-time jobs as being unemployed. According to the OECD's standardized measure of unemployment, which is essentially the same as the measure used in the United States, Germany's unemployment rate is currently 9.3 percent. The area that was formerly East Germany continues to have much higher unemployment than the rest of the country. The unemployment rate in the area that was formerly West Germany would be about 7.3 percent, using the U.S. measure of unemployment.
