January 19, 2007
Economic Reporting Review 2006
For ten years, Dean Baker’s Economic Reporting Review provided a weekly analysis of business and economic articles in the New York Times and Washington Post. The final ERR was published in April 2006. You can now read Dean Baker’s commentary on his blog Beat the Press.
Reflections on Economic Reporting: Seven Years of the Economic Reporting Review
Dean Baker’s presentation to the reporting staff of Cox News Service, Washington, DC. June 9, 2003
Letter to ERR Readers
April 3, 2006
Dear ERR Readers,
This is the last issue of the Economic Reporting Review. I am happy to report that the New York Times and Washington Post were kind enough to provide a record number of outstanding articles for the occasion. (Alternatively, I may have just gotten soft.)
Anyhow, we will be carrying through with our plans for a blog, starting next Monday, April 10th. We will send out a notice for the blog, with its URL next Monday. In a similar vein, my new book, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer, will be coming soon to a website near you.
I hope that people have found ERR useful over the years and that the blog will prove at least as useful in the future.
Dean Baker
2006
Outstanding Stories of the Week
Retraining Laid-Off Workers, But for What?
Louis Uchitelle
New York Times, March 26, 2006, Section 3, Page 1
This article examines the success of retraining programs for workers who have lost their jobs by focusing on the experiences of airplane mechanics who had been employed at a United Airlines maintenance facility in Indianapolis. The article reports that the vast majority of these workers were eventually forced to accept jobs that paid far less than ones they previously held, a typical experience for workers who lose their jobs.
Fund Manager, It’s Time To Pick a Side
Gretchen Morgenson
New York Times, March 26, 2006, Section 3, Page 1
This article reports on efforts by a new foundation to try to pressure investment funds to use their power to reign in the pay of top executives.
Inherit the Wind; There’s Little Else Left
Eduardo Porter
New York Times, March 26, 2006, Section 4, Page 1
This article examines the sizes and distribution of estates in recent years. It points out that the vast majority of estates are relatively small, implying that most baby boomers will not be significantly aided in retirement from inheritances from their parents.
Vague Law and Hard Lobbying Add Up to Billions for Big Oil
Edmund L. Andrews
New York Times, March 27, 2006, Page A1
This article reports the sequence of events that allowed major oil companies to reduce their royalty payments on federal oil leases by tens of billions of dollars.
Immigration Divides Allies
Jonathan Weisman
Washington Post, March 31, 2006, Page A1
This article examines the differences among liberals on immigration policy. It presents the views of several economists of the impact of current immigration policy on the wages of less-educated workers.
Shocks Seen in New Math for Pensions
Mary Williams Walsh
New York Times, March 31, 2006, Page C1
This article examines the impact that a new set of accounting rules being considered by the Financial Accounting Standards Board would have on corporate net worth.
A Benefit for Insurers
Milt Freudenheim
New York Times, March 31, 2006, Page C1
This article examines the possibility that a major goal behind the design of the new Medicare drug was to get beneficiaries out of the traditional Medicare program and to enroll with private insurers instead. As the article notes, any substantial shift out of the traditional program is likely to raise costs for the government, since private insurers charge an average of 15 percent more to cover a beneficiary.
Globalization and Protectionism
In Motor City, Anger Yields to Pragmatism
Dale Russakoff
Washington Post, March 26, 2006, Page A1
This informative article reports on the mood among General Motors auto workers as they consider the company’s new buyout proposal. The article repeatedly asserts that the loss of high paying jobs in the auto industry is an inevitable outcome of globalization.
Actually, the loss of these jobs was the result of policy decisions that were intended to place U.S. manufacturing workers into direct competition with manufacturing workers with low wage workers in the developing world. U.S. trade policy could have instead focused on placing doctors, lawyers, and other highly paid professionals into international competition, but these groups have more political power than auto workers and the majority of the labor force that has lost income as a result of trade policy.
With an Eye on Politics, Edwards Makes Poverty His Cause
Erik Eckholm
New York Times, March 26, 2006, Page A19
This article reports on a conference on poverty sponsored by a foundation started by former Senator John Edwards. The article discusses Edwards’ concerns about the loss of relatively good paying jobs in manufacturing, but then adds that he has “shied away from calls for protectionism.” Actually, Mr. Edwards has been willing to accept protectionist measures that maintain high wages for doctors, lawyers and other highly paid professionals. He has only been opposed to protectionist measures that would benefit less skilled workers.
For the French, Joie de Vivre Fades Into Fear
Molly Moore
Washington Post, March 25, 2006, Page A1
This article examines attitudes in France in the context of the mass protests against a new law making it easier to fire young workers. The article implies that France is losing out in international competition. Actually, France is doing quite well in international competition, at least relative to the United States. The United States is currently running a trade deficit that exceeds 7 percent of GDP, meaning that it buys far more from the rest of the world, than the rest of the world wants to buy from the United States. By comparison, France’s trade deficit is a relatively modest 1.7 percent of GDP.
In discussing France’s weak economy it also would have been appropriate to mention the contractionary monetary policies being pursued by the European Central Bank. Virtually all economists agree that the United States would have slower growth and higher unemployment if the Federal Reserve Board had pursued similarly restrictive policies.
Home Sales
Biggest Drop in 9 Years for New-Home Sales
Reuters
New York Times, March 25, 2006, Page B3
This article reports on the Commerce Department’s release of data showing a 10.5 percent in decline in new home sales in February. It is worth noting that this decline is almost certainly exaggerated due to an error in reporting.
The biggest factor in the February decline was a reported 29.4 percent drop in home sales in the west. This one-month decline is too large to be plausible, barring extraordinary weather events. In fact, the decline repeats a pattern that has been visible in this data since July of last year. The west has shown a large jump in new home sales reported for the first month of each of last three quarters. The increases in July, October, and January were 27.5 percent, 25.4 percent, and 6.6 percent, respectively. In each case, the next two months showed much lower sales. The one-month declines in August, November, and now February were 19.5 percent, 21.2 percent, and 29.4 percent, respectively.
Clearly, there is a problem with these data, as reports of new home sales in the west are being clustered in the first month of the quarter. While new home sales data do clearly show a substantial downward trend in homes sales over the last half year, the February decline was almost certainly not as steep as this report indicates.
Immigration
Help Wanted as Immigration Faces Overhaul
S. Mitra Kalita and Krissah Williams
Washington Post, March 27, 2006, Page A1
This article reports how employers view proposed restrictions on immigration. It reports that many employers have difficulty obtaining native workers or legal immigrants at the wages they offer. It then notes that if they paid higher wages then this would likely be passed on in the form of higher prices, which would anger consumers.
It is worth noting that consumers would also benefit if professionals like doctors and lawyers could be brought into the United States to work for wages that are far lower than what these professionals usually receive. The inflow of large numbers of immigrants into a limited sector of the labor market, allows the rest of the population to benefit at the expense of the workers with U.S. citizenship who might otherwise hold these jobs.
At one point the article discusses the types of jobs that are largely filled by immigrants and the wages they pay. It lists construction in this category, with an average wage of $17 an hour. It is important to note that there are large variations in wages in the construction industry. Craftsmen like plumbers and electricians can earn more than $30 an hour. On the other hand, laborers may only get $7-$8 an hour at many construction sites.
German Demographic Crisis
A Quiz for Would-Be Citizens Tests Germans’ Attitudes
Richard Bernstein
New York Times, March 29, 2006, Page A4
This article discusses a proposed test that immigrants would have to take in order to become German citizens. At one point the article reports on the low number of births in Germany last year (680,000-690,000 according to the article, which is equal to approximately 0.9 percent of the country’s population). It then describes this low birth rate as a “demographic crisis.”
The article provides no explanation as to why this poses a crisis. As a densely populated country, it would seem that most Germans would greatly benefit from a reduction in the country’s population. There would be less pollution and congestion and a larger share of the population could afford to live in desirable locations, for example on land near rivers or the ocean.
Since Germany has a relatively high unemployment rate, a lower rate of labor force growth should also help to reduce the unemployment rate over time and eventually help to put upward pressure on wages. The article does not indicate what negative effects would result from a low birth rate.
The Budget
Joshua Brewster Bolten: Longtime Ally, Now a Top Aide
Elisabeth Bumiller
New York Times, March 29, 2006, Page A16
This article discusses Joshua Bolten’s record as head of the Office of Management and Budget. At one point it asserts that over the last three years Bolten has “presided over the biggest budget deficits in the history of the United States.”
This is only true when measuring the deficit in nominal dollars. Economists recognize this as a meaningless measure, since a bigger economy can obviously support a larger deficit. The relevant measure is the size of the deficit relative to the size of the economy. The deficit on unified budget (which does not include the money borrowed from Social Security) was 3.5 percent, 3.6 percent, and 2.6 percent of GDP over the last three years. This is far lower than the deficits in the years 1983-85, when the ratio of the deficit to GDP was 6.0 percent, 4.8 percent, and 5.1 percent. It is also lower than the deficits in the years 1991-93 which were 4.5 percent, 4.7 percent, and 3.9 percent of GDP.
The on-budget deficits, which include the money borrowed from Social Security, were considerably higher at 5.0 percent, 4.9 percent and 4.0 percent of GDP. But these were still considerably lower than the on-budget deficits in the early eighties and early nineties.
French Labor Laws
Protests in France Over Youth Labor Law Turns Violent
Elaine Sciolino and Craig S. Smith
New York Times, March 29, 2006, Page A12
This article reports on the protests over a new French labor law that would make it easier to fire young workers. At one point the article asserts that France has a social welfare system “that the country cannot afford.”
The article does not explain how it determined that France cannot afford its social welfare system. There are countries, such as Denmark, Austria, and Sweden that have more generous welfare systems by many measures, yet have managed to sustain healthy growth and low unemployment. Also, unlike the United States, France is not building up foreign debt at an unsustainable rate. It is not apparent that France’s welfare state is unaffordable.
Fashion and Copyrights
O.K., Knockoffs, This Is War
Eric Wilson
New York Times, March 30, 2006, Page E1
This article reports on the efforts of some fashion designers to secure themselves copyright protection for their designs. Their intention is to make it illegal for other clothes manufacturers to imitate their designs without permission.
While the article points out the difficulty in determining which designs are original (all fashion involves some degree of copying from prior fashions) and enforcement, it never discusses the economic costs of the proposed copyrights. According to the article, a designer trench coat costs $1,565, while a knock-off version of the same trench coat cost $159. This implies that copyright protection in this case would raise the price of the coat by 900 percent.
This is an extremely costly form of protection. Trade negotiators and trade reporters have spent enormous amounts of time on protectionist measures for textiles and agricultural products which rarely raise the price of goods in the United States by more than 20-30 percent. Given the much larger costs associated with extending copyright protection to fashion designs, it would have been appropriate to include some economic analysis of this issue.
Trade
A Stickier Trade Gap
Daniel Altman
New York Times, March 26, 2006, Section 3, Page 4
This article discusses the United States trade deficit, which hit a record 7.0 percent of GDP in 2005 and appears likely to be even higher this year. In examining the possibility of reducing the deficit to a manageable level, the article holds up the example of the period from 1987 to 1991, when the deficit shrank from 3.0 percent of GDP in 1987 to almost zero in 1991. The article asserts that the United States managed to “dodge the bullet” during this period, but it is worth noting that U.S. economy fell into a recession in 1990, with the unemployment rate rising by almost 3 full percentage points at its high point. This was one of the factors that helped reduce the size of the deficit in 1991.
The article also asserts that a drop in the value of the dollar against currencies with floating exchange rates is likely to provide little help because most of the U.S. trade deficit is with countries like China, that fix their currency against the dollar. Actually, the impact of a decline in the dollar on the trade deficit depends on the volume of trade with a country, not the size of the deficit with the country.
For example, the United States currently imports approximately $300 billion a year from the European Union and exports approximately $180 billion. A sharp enough decline in the dollar against European currencies could in principle reduce imports by $100 billion (30 percent) and increase exports by $70 billion (40 percent) leading to a $170 billion reduction in the total trade deficit. If there was a similar shift from deficit to surplus with Canada, Japan, and other countries with floating exchange rates, the United States could largely eliminate its deficit, even if China and other countries with fixed exchange rates did not increase the value of their currency.
As a practical matter, the European Union and the other countries with floating exchange rates are likely to limit the decline in their currencies in order to preserve their export markets in the United States. However, it is not necessary for the dollar to decline in value against the currencies of the countries with whom the United States has a deficit in order to eliminate the trade deficit.
March 27, 2006
Outstanding Stories of the Week
Multiple Layers Of Contractors Drive Up Cost of Katrina Cleanup
Joby Warrick
Washington Post, March 20, 2006, Page A1
This article exposes some of the inefficiencies with the contracting system that the federal government put in place to deal with the clean-up from Hurricane Katrina. There was very limited accountability in many of the contracts. As a result much of the money appears to have been wasted.
Old Options Produce New Hangover
Gretchen Morgenson
New York Times, March 19, 2006, Section 3, Page1
This article reports on the effect that option grants from the late nineties are having on shareholder equity at several major tech companies. As a result of the large number of options that are coming due, corporations like Intel, Dell, and Texas Instruments have been forced to use much of their profits in recent years to buy back shares. They do this because the large number of new shares issued to fill the options would otherwise dilute the value of the stock. Investors should have anticipated the impact of these buybacks, but the weak performance of these stocks indicates that they probably did not.
The Budget
Politics Drives Money Binge
Carl Hulse
New York Times, March 18, 2006, Page A1
This article examines the Senate’s approval of a 2007 budget resolution. The article asserts that the new budget constituted a “binge” and a “splurge,” but it provides almost no evidence for supporting these assertions. On careful examination, it appears that the article defines “budget-busting” or “padding” as any spending that exceeds the amount proposed by President Bush in his 2007 budget. It would have been helpful to readers if the article had stated clearly its definition of waste, since there are many policy analysts who disagree with this definition.
The article also provides almost no context to examine the real nature of the budget problem. For example, it notes that the government debt is projected to rise to almost $9 trillion next year and the deficit is projected to be close to $350 billion. The $9 trillion figure will be close to 69 percent of GDP. This is a higher debt to GDP ratio than at any point since the mid-fifties. It exceeds the peaks reached in the mid nineties. (The debt to GDP ratio had been falling from the end of WWII until 1981.)
A $350 billion deficit is equal to approximately 2.7 percent of GDP. A deficit of this size can actually be sustained forever, given current growth projections. However, this figure does not include the money borrowed from Social Security and the government employees’ retirement funds. Including this borrowing would raise the debt to approximately $600 billion or 4.6 percent of GDP.
It would have also been appropriate to discuss the role of rising health care costs in deficit projections. Virtually all budget analysts agree that if health care costs drive up Medicare and Medicaid spending as projected, the deficit will be unmanageable in the not very distant future. Due to the strength of powerful political interests, like the pharmaceutical industry, the insurance industry, and the American Medical Association, politicians are scared to discuss proposals to contain health care costs. It would have been appropriate to include some discussion of this issue in this sort of analysis of budget politics.
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The Fed
Bernanke Challenges Interest Rate Speculation
Nell Henderson
Washington Post, March 21, 2006, Page D3
Global View Is Backed By Fed Chief
Eduardo Porter
New York Times, March 21, 2006, Page C1
These articles discuss a speech by Federal Reserve Board Chairman Benjamin Bernanke. Both articles note that Mr. Bernanke referred to his view that there is now a world-wide savings glut.
This is a striking statement from a chairman of the Fed (he has said it before). It implies that he believes that there is a world-wide problem of insufficient demand, comparable to what the world experienced during the great depression. Most economic theory now assumes that a shortage of demand cannot be a sustained problem. It holds that there can be demand shortfalls for brief periods during a recession, but the market is self-correcting and will soon bounce back towards full employment.
Many of the standard arguments derived from economic theory do not apply if the economy experiences sustained periods of underemployment. For example, there is no reason to assume that the country as a whole will benefit from reducing barriers to trade, if increased imports can simply result in higher unemployment. Similarly, there is no benefit to reducing the budget deficit during a period of underemployment. Since there is already a glut of savings, a lower deficit would simply imply reduced demand and higher unemployment.
Both articles refer to Mr. Bernanke’s comments about the decision of foreign central banks to buy U.S. Treasury bonds, and how this decision is keeping down long-term interest rates. Presumably the largest actors in these markets, the Chinese and Japanese central banks, are keeping U.S. interest rates down as a matter of conscious policy, most likely to boost the U.S. economy and thereby stimulate demand for their exports. The hundreds of billions of dollars of bonds that they have been purchasing are a big enough share of this market to affect rates, and these central bankers must recognize that fact.
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Trade
Schooling China in the American Way
Peter S. Goodman
Washington Post, March 23, 2006, Page D1
This article reports on a visit by several senators to China in which they expressed their concerns over China’s trade policies. The article reports that they complained about China’s undervalued currency, which they argued gave it an unfair advantage. It reports that they also complained about China’s failure to respect U.S. copyrights and patents. It is worth noting that copyrights and patents are state-granted monopolies that obstruct free trade and lead to large losses in output.
The subtitle of the article is “senators preach free trade and speech to lukewarm hosts.” If the article had more clearly identified the contradictory nature of the senators’ complaints, the lukewarm reception would have been more understandable.
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Pensions and Stock Returns
Major Changes Raise Concerns on Pension Bill
Mary Williams Walsh
New York Times, March 19, 2006, Page A1
This article discusses a proposal for restructuring rules for defined-benefit pension plans that is being considered by Congress. At one point it discusses rules on assumptions about rates of return. It is worth noting that one of the main reasons that so many pension plans are now severely under-funded is that they made overly optimistic assumptions about returns during the stock market bubble.
The methodology used by pension funds in the late nineties effectively assumed that the stock bubble would persist and grow ever larger. As a result, many companies claimed that their pensions were fully funded and made no contributions for several years. Pension fund managers still do not want to tie their stock return projections to price-to-earnings ratios and projected profit growth. This creates the possibility of making the same mistake that they did in the late nineties.
Youth Is Wasted on the Generation Y Investor
Paul J. Lim
New York Times, March 19, 2006, Section 3, Page3
This article reports on the investment patterns of young investors. The article claims that they are investing too small a share of their retirement accounts in equities, which it attributes to their ignorance. It reaches this conclusion by looking at the historic gap between the returns on equities and bonds.
This argument is obviously incorrect because historically high price-to-earnings ratios have been far lower than at present. On average, the price-to-earnings ratio has been approximately 15 to 1. Currently it is over 20 to 1. Given the widely accepted projections of profit growth and current price-to-earnings ratios, the expected returns on equities will be far lower than they were historically.
This is especially likely to be the case if most stockholders hold the same views on stock returns as the investment advisor cited in this article. In this case, they will be unwilling to hold stock for the returns implied by the current price-to-earnings ratio. That means that as soon as stockholders recognize that they cannot possibly get the returns they presently expect, they will dump their stock until the price-to-earnings ratio falls back toward its historic level. In that case, young investors are very wise to keep their equity holdings to a minimum and stay out of the market until prices fall to a sustainable level.
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Globalization and Job Security
Delicate Balance of Power
Peter S. Goodman
Washington Post, March 21, 2006, Page D1
Opponents of New French Labor Law Step Up Protests
Craig S. Smith
New York Times, March 21, 2006, Page A9
These articles discuss efforts to weaken protections for workers in Italy and France. At one point, the article refers to efforts to insulate workers from the “inevitable forces of globalization.” The article does not indicate what forces it views as inevitable or why.
As a factual matter, trade agreements have been designed to put some workers into international competition, while explicitly protecting other workers. For the most part, more educated workers like doctors, lawyers, economists and journalists have been largely protected from globalization, while trade agreements have been designed to directly place manufacturing workers in competition with low wage workers in the developing world. This is done by removing barriers to investment and trade that could make it difficult to ship cars, clothes, or other manufactured products from the developing world to the wealthy countries.
It would have been possible to also craft rules that facilitated a flow of doctors, lawyers, economists, and journalists from the developing countries to the wealthy countries. For example, trade agreements could have prohibited any restrictions that prevented newspapers from hiring journalists from the developing world at whatever wage they were willing to work. While free trade in these professional services would have led to enormous economic gains for both rich and poor countries, professionals are such a powerful lobby in rich countries that they have been able to largely preserve their protection from international competition.
At one point the article on France warns that it will become increasingly important to change French labor laws as the ratio of workers to retirees falls. Actually, France is currently suffering from a problem of high unemployment, implying that it has too many workers. If more of these workers retire, then presumably the problem of high unemployment will become less severe, as workers become more scarce.
French Premier Considers Easing Job Law
Craig S. Smith
New York Times, March 22, 2006, Page A8
This article reports on the dispute in France over a new law that makes it easier to fire workers under age 26. At one point the article asserts that this dispute is part of “long struggle to break the strangle-hold of its rigid social-welfare system, which economists say has kept growth sluggish and unemployment high for decades.”
Not at all economists attribute France’s economic problems to its welfare state. There are other countries, such as Denmark and Ireland, that have welfare states that are comparable in their level of generosity, yet have enjoyed low unemployment rates and healthy growth.
Some economists attribute poor growth in France in part to the restrictive monetary policies that have been pursued by the European Central Bank. Virtually all economists would agree that the United States would have experienced slower growth and have higher unemployment if the Federal Reserve Board had pursued similar policies.
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Auto Worker’s Wages
Buyouts Only a Partial Solution For Delphi
Dina ElBoghdady
Washington Post, March 23, 2006, Page D1
This article reports on the impact that an agreement with the United Auto Workers, providing for the buying out of workers’ contracts, will have on the future of the Delphi Corporation, the country’s largest parts supplier. At one point the article reports that Delphi workers receive an average of $75 an hour in wages and benefits.
This figure is clearly a gross exaggeration of the actual compensation received by Delphi’s workers. The average wage for Delphi workers is less than $30 an hour, according to statements by the company. This would mean that an average worker receives more than $45 an hour in benefits, or more than $90,000 a year. While Delphi’s pension and health care benefits are generous, it is implausible that they pay even half this much to workers each year.
Most likely the $75 an hour figure represents some calculation of total labor costs for each hour worked, where total labor costs include payments to laid-off and retired workers. While this may be a useful figure for Delphi’s accounting, it is misleading when presented as compensation actually received by workers.
March 20, 2006
Outstanding Stories of the Week
In Korea, Bureaucrats Lead the Technology Charge
Martin Fackler
New York Times, March 16, 2006, Page C1
This article discusses South Korea’s industrial policy. As the article notes, South Korea’s government has pursued a policy of selecting key technologies and using tax incentives, low cost credit, and other mechanisms to promote them. As a result, the country is now ahead of the United States in some areas, for example in having near universal access to broadband Internet. This is especially striking, since South Korea was as poor as Sub-Saharan Africa fifty years ago.
Mortgage Payments Lag in Katrina Zone
Kirsten Downeyfe
Washington Post, March 15, 2006, Page A5
This article reports on the record mortgage delinquency rates in Mississippi and Louisiana, indicating the difficulty these states are having in recovering from Hurricane Katrina. The delinquency rate at the end of the 4th quarter was 12 percent in Louisiana and 8 percent in Mississippi. It had been near 1.5 percent in both states prior to the storm.
Medicare Drug Benefit
Medicare Drug Benefit Works, Bush Says
Michael Fletcher
Washington Post, March 15, 2006, Page A4
This article reports on a speech by President Bush in which he touted the success of his Medicare drug benefit. The article reports that President Bush claimed that 26 million people had signed up for the benefit. This is not accurate. The vast majority of these 26 million people were automatically placed into the program either by being transferred from Medicaid or by being previously enrolled in a private or government plan that is now getting a subsidy through the program. Only about 3 million of the 20 million eligible Medicare beneficiaries, who were not previously covered by a drug plan, have actually signed up for the program.
February Employment Report
U.S. Added 243,000 Jobs in February
Neil Irwin
Washington Post, March 11, 2006, Page D1
This article reports on the Labor Department’s release of data on employment in February. At one point the article notes that the data showed a drop in the length of the average workweek of 0.1 hour. It then quotes an economist saying that this is evidence of a shift of employment to sectors with shorter workweeks.
It is worth noting that data on hours is highly erratic. It is very likely that this drop of 0.1 hours (which may largely reflect rounding), will be reversed in next month’s data. It is also worth noting that a major snowstorm hit the northeast during the reference period for the February employment report. Many businesses in the area were forced to shut their doors for several days until the transportation system was again functional. These closings would have depressed average weekly hours nationwide. The storm may also have led to somewhat slower employment growth, since businesses would not have made intended hires on the days when they were closed.
Inflation Rate Flattened in February
Nell Henderson
Washington Post, March 17, 2006, Page D3
This article reports on the Labor Department’s release of inflation data for February. At one point the article asserts that wages are not keeping pace with inflation, because the average weekly wage declined after adjusting for inflation. Since the measurement of hours is very erratic and was likely depressed in February due to the snowstorms in the Northeast, it is more appropriate to look at hourly wages. The average hourly wage rose by 0.2 percent, after adjusting for inflation. Wage growth has been outpacing the overall rate of inflation for the last half year.
European Unemployment
French Students Hit Streets To Protest New Labor Law
Molly Moore
Washington Post, March 17, 2006, Page A13
This article reports on protests by French students over a new labor law that would make it much easier for employers to fire workers under age 26. At one point the article asserts that “many economists” blame restrictions on firing for France’s weak economy. Actually, most of the research on this topic indicates that restrictions on firing have little or no impact on unemployment.
Many economists (including the I.M.F.) have pointed to the contractionary policies of the European Central Bank as an important cause of France’s economic weakness. It would have been appropriate to mention this in a discussion of France’s high unemployment rate.
Latin America
Bachelet Sworn In As Chiles’s President
Monte Reel
Washington Post, March 12, 2006, Page A12
This article reports on the inauguration of Michelle Bachelet, Chile’s first female President. At one point it discusses the politics of Hugo Chavez and Evo Morales, the presidents of Venezuela and Bolivia, respectively. The article asserts that they are turning away from international capitalism.
It would probably be more accurate to say that they are turning way from the United States and the path of capitalist development that it has promoted. This is not surprising since the United States will be much less important to the world economy in the future than it has been in the past. Its import market will shrink by 300-400 billion euros (the dollar will decline in value, so it is necessary to use a different currency for the unit of measurement) over the next decade. By contrast, China’s import market is likely to grow by at least as much over this period. In addition, China is now the world’s largest exporter of capital, while the United States is a huge borrower of capital. Given this reality, a country that wanted to stay tied into international capitalism would be expected to turn to China and away from the United States, as many countries in Latin America have been doing.
It is also worth noting that the development policies advocated by the United States have had disastrous results in Latin America. Per capita GDP growth has been just over 10 percent over the last 25 years, compared to more than 80 percent in the years from 1960 to 1980. Given this record, it would not be surprising that countries would look to follow a different development path.
Colombians Cast Ballots In Key Election for Congress
Reuters
New York Times, March 13, 2006, Page A11
This article reports on parliamentary elections in Columbia. At several points it describes a trade pact with the United States as a “free trade” agreement. This is inaccurate, since the agreement actually increases some trade barriers, most importantly by increasing patent and copyright protections.
The article also asserts that the pact is “seen by economists as important for Columbia’s future competitiveness.” The article does not identify any economists who hold this view. Many economists have pointed out that the United States is likely to have a rapidly declining import market in the next decade, as its trade deficit contracts to a sustainable level. It is not clear how much Columbia’s economy can benefit from increased access to a shrinking market.
Drug Prices
Cancer Drug’s Big Price Rise Disturbs Doctors and Patients
Alex Berenson
New York Times, March 12, 2006, Page A1
This article reports on large price increases in several older drugs. The main example is a cancer drug, nitrogen mustard, the price of which recently increased by close to 500 percent. The article notes comparable price increases in several drugs. In each case, the price rise was associated with the sale of the rights of the drug to a new company.
In the case of nitrogen mustard, and possibly the other drugs as well, the patent has expired. It would have been interesting to know why generic producers are not entering a market that would seem to have enormous opportunities for profit. The earlier producer of these drugs was obviously making a profit at the prior market price, so this would suggest that a generic producer could undercut the current rights holder by 80 percent and still make a large profit.
The Budget
Budget Restraint Emerges as G.O.P. Theme for 2008
Adam Nagourney
New York Times, March 13, 2006, Page A18
This article discusses efforts by likely contenders for the 2008 Republican presidential nomination to portray themselves as fiscal conservatives. At one point the article asserts that Medicare, Medicaid and Social Security “have become a drain on the federal treasury.”
This is not true. Social Security is financed by a designated payroll tax. According to the Congressional Budget Office, the income from this tax, together with the interest on the government bonds purchased with prior surpluses, exceeds Social Security’s annual benefit payments by $180 billion. This means that Social Security is a huge net contributor to the treasury.
It also would have been helpful to note that the main reason that Medicare and Medicaid costs are rising so rapidly is that health care costs in the United States are rapidly outpacing the overall rate of inflation. It is striking that political figures who are apparently concerned about the cost of government spending on health care do not want to discuss the cost of health care in the United States.
Republicans on Hill Resist Spending Cuts
Jonathan Weisman
Washington Post, March 14, 2006, Page A8
This article discusses the opposition of congressional Republicans to the spending cuts that President has proposed in his 2007 budget. The article ends with a quote from Robert Reischauer, the former director of the Congressional Budget Office, that the country is trying to manage a 21st century government on a 1950s revenue base.
Actually, the mismatch is somewhat worse than described by Mr. Reischauer. In the 1950s, revenue from non-payroll taxes (Social Security and Medicare) averaged more than 14.0 percent of GDP. At present, non-payroll tax revenue is less than 11.0 percent of GDP. Since the payroll tax revenue is designated for Social Security and Medicare, this means that the rest of the government is supported by far less tax revenue in 2006 than it was in the fifties.
Despite Dire Predictions, Money Measures Always Talk
Carl Hulse
New York Times, March 16, 2006, Page A16
This article reports on congressional votes on various budget measures. At one point it discusses the vote on a $92 billion bill that provides supplemental funding for the wars in Iraq and Afghanistan and the hurricane clean-up in New Orleans. The article reports that conservatives were angry because the Republican leadership did not give them the opportunity to vote to meet this cost out of “idle money,” so instead the spending will add to the deficit.
There is no budget category for “idle money.” If the conservatives wanted to pay for this spending without adding to the deficit, then they must have been proposing substantial cuts in government programs. It would have been helpful to identify for readers the programs that these conservatives wanted to cut.
Senate Votes $2.8 Trillion Budget, Breaking Limit
Carl Hulse
New York Times, March 17, 2006, Page A1
This article reports on the Senate’s approval of a new debt ceiling. While the article reports the size of the debt ceiling as nearly $9 trillion, it would have been more informative to readers if it reported its size relative to the size of the economy. The new debt ceiling is just under 69 percent of current GDP. This pushes the debt to GDP ratio above the peaks reached in the mid-nineties (it had been falling consistently until 1981) to ratios last seen in the mid-fifties.
Japan
Conspicuous Consumption Shapes New Tokyo Skyline
Anthony Faiola
Washington Post, March 11, 2006, Page A12
This article discusses evidence of growing inequality in Japan. At one point the article presents on the distribution of earnings which must actually be data on the distribution of wealth. The article reports that in 2002, the richest 20 percent of Japanese families “earned 50.4 percent of the nation’s wealth,” while the poorest 20 percent “earned” just 0.3 percent. The statement must refer to wealth rather than earnings, since it would be impossible for the poorest 20 percent to survive if their earnings were only 0.3 percent of national income. This distribution compared to 44.3 percent of the country’s wealth held by the richest 20 percent and 2.7 percent by the poorest in 1987.
It would also be helpful if the measure of wealth were clearly defined. For example, financial wealth (e.g. stocks, bonds, bank deposits) tends to be more highly concentrated than total wealth, which includes housing wealth. In either case, these data suggest that wealth is far more equally distributed in Japan than in the United States. In the United States in 2001, the top 20 percent of families held 84.4 percent of the country’s wealth. The net worth of the bottom 20 percent was negative, as they owed an amount that exceeded their assets.
The Oil Industry
A Senate Panel Interrogates Wary Oil Executives
Jad Mouawad
New York Times, March 15, 2006, Page C4
This article reports on the testimony of the top executives of the country’s six largest oil companies before the Senate Judiciary Committee. At one point the article refers to the $14.5 billion in tax breaks to energy companies that were included in an energy bill passed last year. It is worth noting that these tax breaks (not all of which would go to the oil industry) cover a ten year period. The five largest oil companies had combined profits of $100 billion last year, according to the article.
March 13, 2006 Issue
Outstanding Stories of the Week
The Search for Illegal Immigrants Stops at the Workplace
Eduardo Porter
New York Times, March 5, 2006, Section 3, Page 3
This article examines the government’s efforts to restrict the ability of undocumented workers to get jobs in the United States. It reports that enforcement of immigration laws at the workplace has virtually stopped in the last four years, with very warnings being given to employers who have not properly verified the immigration status of their workers.
Wal-Mart Enlists Bloggers in Its Public Relations Campaign
Michael Barbaro
New York Times, March 10, 2006, Page C1
This article reports on Wal-Mart’s use of bloggers to disseminate its press releases as part of its effort to counter its negative public image for paying low wages and other practices. Several bloggers have posted large portions of these releases verbatim, without attributing the material toWal-Mart.
“Silent Tort Reform” Is Over-Riding States’ Power
Steven Labaton
New York Times, March 10, 2006, Page C5
This article reports on a number of measures pushed through by the Bush administration which sharply limit states’ ability to regulate business. It is striking that a Republican administration that has touted states rights in many realms has worked so vigilantly to contain them in the context of setting consumer and safety standards for their citizens.
Housing Bubble
Hoping for Best In Home Sales, 2 Sides Sit Tight
Vikas Bajaj and David Leonhardt
New York Times, March 4, 2006, Page A1
This article reports on the drop off in home sales in many of the hottest markets around the country. It reports that sellers have been reluctant to accept lower prices, while buyers are hopeful that prices will go lower. It would have been useful if it had examined some of the fundamentals in the market that affect the price. For example, the rate of homebuilding is determined primarily by the price. If prices stay high, then builders will continue to build homes at approximately the same rate (@ 2 million units a year). This exceeds the 1.4 million rate of household formation by close to 50 percent. It is difficult to see rate of building would not lead to an oversupply. At present, there is considerable evidence of oversupply in the nation’s housing stock. The nationwide rental vacancy rate is at a record high.
While the article notes that house prices have had an extraordinary run-up in recent years (in fact an unprecedented increase), it should also have examined the pattern in the rental market. Rents increased only modestly in real terms earlier in the cycle and have actually been falling (after adjusting for inflation) in the last couple of years. Ignoring the ratio of home prices to rents in examining the housing market would be comparable to ignoring price to earnings ratios in examining prospects for the stock market.
It is also worth noting that over a longer term, inflation is virtually certain to rise because foreign investors and central banks are unlikely to lend the United States $750 billion a year at very low interest rates indefinitely. When they reduce their lending, the dollar will fall, sending import prices and inflation higher. This will almost certainly lead to higher interest rates, which will almost certainly have a substantial negative effect on the U.S. housing market.
The Trade Deficit and Foreign Investment
As Trade Deficit Grows, So Do Tensions With China
Keith Bradsher
New York Times, March 10, 2006, Page C1
This article discusses the growing trade deficit with China. At one point it asserts that the W.T.O. makes it very difficult for the United States to take any steps to reduce this deficit. Actually, W.T.O. rules prevent the United States for setting a sharply higher exchange rate for the Chinese currency against the dollar. This would make U.S. goods far more competitive against Chinese goods.
At one point the article asserts that “economists” don’t believe that raising the value of the Chinese currency relative to the dollar will reduce the trade deficit. It asserts that a higher value of the Chinese currency will simply shift imports to other countries. It then asserts that the cause of the U.S. trade deficit is insufficient savings in the United States.
While some economists hold this view, many economists believe that if the Chinese currency rose against the dollar, many other countries that compete with China for the U.S. market would also allow the value of their currencies to rise against the dollar. This is exactly what happened last summer when the Chinese central bank slightly increased the value of its currency against the dollar.
It is also worth noting that the economists who believe that the high U.S. trade deficit is attributable to low U.S. savings, and not the over-valuation of the dollar, believe that GDP and employment in the United States are too high. Low savings can in principle lead to a higher trade deficit by raising interest rates, and thereby pushing up the value of the dollar, but if economists don’t think that the value of the dollar is the problem, then the only other link between low savings and the trade deficit is through the impact on demand and GDP growth. When people spend more money, they buy more of everything, including more imports. If there were a substantial fall in demand in the U.S. economy, then imports would also decline. With imports at less than 20 percent of GDP, even a 10 percent decline in output from more savings and less spending (@$1.3 trillion) would reduce the annual trade deficit by less than $250 billion. It would take an even larger decline in demand (and rise in savings) to bring the trade deficit down to a sustainable level without a reduction in the value of the dollar.
Trade Deficit Reaches Another High
Marty Crutsinger, Associated Press
Washington Post, March 10, 2006, Page D5
This article reports on the Commerce Departments release of data showing a record trade deficit in January. In the long-run, the trade deficit affects the economy in approximately the same way as the budget deficit. It implies that the country will have lower living standards in the future because it will be necessary to pay large sums in interest and dividends to foreigners who own large quantities of U.S. financial assets.
The most recent data indicates that the trade deficit is running at an annual rate of approximately $800 billion. The trade deficit is more than twice the size of the unified budget deficit and more than $200 billion larger than the “on-budget” deficit, which adds in the money borrowed from the Social Security trust fund. Since the Post gives great prominence to news on the budget deficit, given the greater impact of the trade deficit, this news deserved more attention than a wire service story on page 5 of the business section.
Mideast Investment Up in U.S.
Paul Blustein
Washington Post, March 7, 2006, Page A1
This article reports on the growth of investment in the United States by countries in the Middle East. At one point it reports that the reason that the United States is getting more foreign investment is because it needs foreign investment to finance the trade deficit.
Actually, the causation runs in the other direction. There is no investor who places money in the United States because the United States is running a trade deficit. This would in fact be a very good reason not to place money in the United States, since it means that at some point the value of the dollar is likely to fall and therefore dollar denominated investments in the United States will be worth less.
The causation runs in the opposite direction. The decision by foreign investors to put money in the United States raises the value of the dollar above the level it would be at in the absence of foreign investment. This raises the price of U.S. exports to other countries, causing foreigners to buy less U.S. exports. The higher dollar make imports cheaper, which causes people in the United States to buy more imports. As a result of lower exports and higher imports the trade becomes larger.
Globalization
Bush, in High-Tech Center, Urges Americans to Welcome Competition From India
Elisabeth Bumiller
New York Times, March 4, 2006, Page A5
This article reports on President Bush’s visit to India. At one point it quotes President Bush as defending outsourcing by saying that this is “the reality of the global economy.” It would have been appropriate to point out that the specific pattern of international competition is the reality of the global economy only because of government policy, just like the U.S. occupation of Iraq is a reality because of U.S. military policy.
The United States government has designed trade policy to put some workers (primarily manufacturing workers) into competition with workers in developing countries. It has maintained or increased protections for many high-paid occupations like doctors, lawyers, journalists and economists. While proponents of this path for trade policy might prefer that it appear to be the outcome of an inevitable process of globalization, it would have been useful to point out that this is not the case.
Vermont
Vermont Losing Prized Resource As Young Depart
Pam Belluck
New York Times, March 4, 2006, Page A1
This article reports on the trend among young people to move out of the state of Vermont. It describes this as creating a worker shortage, reporting that dairy farmers are employing undocumented workers to milk their cows.
Actually, this situation can be viewed as quite desirable. This means that workers have their choice of jobs and presumably are seeing rising real wages and improving working conditions. While the article quotes Vermont’s governor as saying “the cows have to be milked,” this is not true. It appears as though dairy farming is no longer competitive in Vermont due to higher wages. This is the normal process of economic development; less productive segments of the economy die off. Apparently, the governor wants to try to protect dairy farm owners by providing special arrangements whereby they can hire workers at below market wages.
Brazil
Brazil’s Lula Gets No Break at Carnival
Monte Reel
Washington Post, March 6, 2006, Page A9
This article discusses the prospects for re-election ofBrazil’s president, Luiz Inacio Lula da Silva. At one point the article comments that “even though 3.5 million jobs have been created, the gross domestic product has risen 2.3 percent and the trade deficit has shifted to a surplus in the past four years, people seem reluctant to give Lula credit.”
Actually, the job and economic growth described in this sentence are very poor. To keep the unemployment rate constant, Brazil’s economy would have to create about 1.8 million jobs annually, or 5.4 million over the last three years. Brazil’s economic growth has actually been better than the passage asserts. It has averaged approximately 2.3 percent annually over the last three years, which is presumably what the article intended to say. However, this is still extremely poor growth for a developing country. This translates into per capita GDP growth of approximately 1.0 percent annually. In the years between 1960 and 1980, Brazil had per capita GDP growth of 4.6 percent. This economic record could easily explain why Brazil’s population is not happy with Lula’s performance.
It is also worth noting that the switch from a trade deficit to a trade surplus does produce benefits in the long-run, but in the short-run it is associated with a lower standard of living, other things equal. Running a trade deficit effectively allows a country to live beyond its means, just like borrowing on a credit card. The growing trade deficit has been one of the key factors improving living standards for many people in the United States over the past decade. While large trade deficits are not sustainable, they can give the illusion of prosperity while they last.
Wireless Internet Access
Hey Neighbor, Stop Piggybacking on My Wireless
Michael Marriott
New York Times, March 5, 2006, Page A1
This article discusses the difficulty that wireless Internet users have in preventing other from taking advantage of their networks. It would have been useful to include some economic analysis of this problem. Wireless Internet service has many of the characteristics of public goods like street lights. The fact that additional people have access to the service has little impact on the ability of the network owner to use their system. Also, it is difficult to exclude other people from benefiting from a wireless network.
This is a strong argument for providing Internet wireless service as public good paid for with tax dollars, as some cities have done. This would eliminate the waste associated with trying to exclude people from using the service who have not paid for it.
Immigration
Illegal Workers’ Presence Growing
S. Mitra Kalita
Washington Post, March 8, 2006, Page A16
This article discusses the findings of a new study by the Pew Hispanic Center which showed a large increase in the number of undocumented workers over the last year. At one point the article presents comments from representatives of the U.S. Chamber of Commerce, the National Restaurant Association and the “Essential Worker Immigration Coalition.” All three spokespeople complained that businesses cannot find the workers they need and argued that they therefore must hire undocumented workers.
It would have been helpful to include comments from someone with a different perspective. In a market economy, the way that firms get workers is by offering hiring wages. Since real wages for most workers, especially those at the bottom of the wage distribution, have been stagnant or falling in recent years, it doesn’t appear that there have been notable shortages of workers. Furthermore, if firms cannot afford to pay the prevailing wage, and therefore cannot attract workers, then this is evidence that they are inefficient. In a market economy, less efficient firms are supposed to be driven out of business. This is one of the main mechanisms through which the economy’s productivity increases, as workers go from less productive firms to more productive firms.
It would have been helpful to include some information on the Essential Worker Immigration Coalition, such as its main funding sources. Most readers are probably not familiar with the organization.
March 6, 2006 Issue
Outstanding Stories of the Week
U.S. Easing Fines For Mine Owners On Safety Flaws
Ian Urbina and Andrew W. Lehren
New York Times, March 2, 2006, Page A1
This article reports on evidence showing that the Bush administration had sharply reduced the size of fines imposed on mining companies for safety violations. In the case of small mines, the fines were reduced to a trivial level.
For Thirsty Farmers, Old Friends At Interior Dept.
Timothy Egan
New York Times, March 3, 2006, Page A1
This article reports on the fact that several former employees of trade associations for California farmers are now in positions at the Interior Department where they assign rights to water.
Internal Turmoil At Device Maker As Inquirer Grew
Barry Meier
New York Times, February 28, 2006, Page C1
This article reports on the discontent among workers at Guidant, one of the country’s largest makers of medical devices, over the company’s decision to withhold evidence of problems with a heart device.
Two Tiers, Slipping Into One
Louis Uchitelle
New York Times, February 26, 2006, Section 3, Page1
This article examines the diminishing premium that workers in manufacturing receive compared to workers with comparable skills in other industries. The article reports on how firms have been able to force manufacturing workers to accept large concessions in wage and benefits, ostensibly due to threat of foreign competition.
Canadian Health Care
As Canada’s Slow-Motion Public Health System Falters, Private Medical Care Is Surging
Clifford Krause
New York Times, February 26, 2006, Page A10
This article reports on the growing role of private health care providers in Canada. The article describes Canada’s health care system as being in crisis. For example, at one point it describes Canada’s health care costs as “exploding.” It is worth noting that Canada’s health care costs are not rising as rapidly as health care costs in the United States.
According to data from the OECD, Canada spends less than 60 percent as much per person as the United States (in 2001, Canada’s per capita spending was $2,792 compared to $4,887 in the United States). Life expectancy for people in Canada is also more than two years longer than for people in the United States (79 years compared to 76.7 years). It would have been useful to include this information in article assessing the state of Canada’s health care system.
The Times has printed a number of articles over the last decade that warn of a crisis in Canada’s health care system (e.g. “”Full Hospitals Make Canadians Wait and Look South,” January 16, 2000, Section 1 page 3; and “A Crossroads in Canadian Health Care,” May 9, 2000, page D8 ). None of these articles note either that Canadians spend far less on health care than do people in the United States or that they enjoy better health care outcomes.
Protectionism
Nations Rebuild Barriers to Deals
Heather Timmons
New York Times, February 28, 2006, Page C1
This article discusses the growing tendency of governments to block or place conditions on corporate takeovers. At one point the article quotes an economist who sees the restrictions on takeovers as a form of protectionism. He is quoted as saying that “protectionism remains the major threat to global growth.”
It is worth noting that many forms of protectionism have persisted in the world economy, even as trade deals have removed some barriers, and in some cases have even been extended. For example, the United States has greater protection for doctors at present than it did a decade ago. While protection for doctors and other professionals is almost never discussed in the context of trade, in economic theory, protection that raises the cost of doctors and other professionals to people in the United States (and prevents foreign professionals from being able to sell their services in the United States) is every bit as harmful as protection that restricts imports of clothes or agricultural products.
House Sales
New Homes Sold Slower In January; Prices Rose
Vikas Bajaj
New York Times, February 28, 2006, Page C1
This article reports on data from the Commerce Department on new homes sales in January. The article reports that house sales fell by 5.0 percent from December, and that the inventory of unsold homes was 20 percent higher than its year ago level.
It is worth noting that the data showed a sharp rise in home sales in the west. This follows a pattern that has been present since July, where the west showed a big jump in new home sales in the first month of the quarter and then fell back for the next two months. In July, sales in the west region jump by 27.5 percent from June. In the next two months sales averaged less than they did in June. Sales then jumped 25.4 percent in October. They then fell back to a level that was just equal to their September level over the next two months.
The January data showed sales in the west increasing by 11.3 percent from December level. If this quarter shows the same pattern as the prior two quarters and the January gain in fact reflects a reporting error, then the drop in January sales was considerably more than reported. If sales in the west just held steady, then it would imply a nationwide drop of 7.9 percent in home sales in January.
Food Safety Warnings
Bill Would Standardize Warnings on Food, Drink
Marc Kaufman
Washington Post, March 1, 2006, Page A11
Bill May Undo States’ Rules On Safe Food
Marian Burros
New York Times, March 1, 2006, Page A14
These articles report on a bill in Congress that would standardize warnings on food products and would prohibit states from imposing stricter warning requirements. It is worth noting that the bill is primarily being supported by the Republicans in Congress, a fact that is pointed out in the Post article but not in the Times article.
This is striking, because Republicans usually argue for leaving issues to the states wherever possible. In this case, there is no obvious reason (and none are presented in either article) why a state would not be allowed to impose a stricter labeling requirement if its citizens or their representatives chose to do so. Turning over the power to Congress in such situations may benefit companies in the food industry who want to avoid stricter regulations, but there is no obvious reason why the decision on applying stronger standards cannot be left to individual states.
India
Executives See U.S. Link as Crucial in India’s Growth
Saritha Rai
New York Time, March 3, 2006, Page C13
This article reports on the prospect for trade between India and the United States. The headline does not reflect any information reported in the article. It is also unclear how it possibly could. Business executives are concerned about their corporations’ profit, not India’s economic growth. While they may make assertions that trade with the United States is crucial for India’s growth, there is little reason to believe that such assertions reflect their actual views of India’s economy.
At one point the article notes the large percentage of young people in India. It implies that this will mean that India will be a much bigger market for U.S. goods in the future. This does not necessarily follow. The market for U.S. exports will grow less rapidly by having more poor people, than by having poor people get richer. The rate at which India grows, which will depend far more on productivity growth than on population growth, will determine the growth of its import market. In fact, by putting stress on its infrastructure and environment, more rapid population growth may slow economic growth.
New Orleans Shipping Industry
Debating a Shipping Shortcut That Turned Against New Orleans
John Schwartz
New York Times, March 3, 2006, Page A14
This article discusses proposals for filling in a shipping canal that was partly responsible for the flooding of New Orleans. It reports on the businesses that would be harmed by this decision and then implies that the government would have an obligation to compensate the businesses that would be hurt by the shutting of the canal.
It is not clear why the government would have such an obligation. Businesses benefit all the time from government actions that improve infrastructure or in other ways improve their business climate. In such cases, businesses do not reimburse the government for the benefits they have received. It is therefore not clear why the government should reimburse them when its actions cause losses. Intelligent business people presumably understand the existence of such risks and take them into account in their business decisions.
Stock Returns
Why Do Stocks Pay So Much More Than Bonds?
Daniel Altman
New York Times, February 26, 2006, Section 3, Page 4
This article discusses the debate among economists over the reason for the equity premium – the gap between the return on stock and bonds. The article notes that this gap appears to have narrowed in the last few years. It then quotes an economist as saying that the smaller gap will be associated with more investment.
Thus far, there is little evidence of this increase. In 2005, the investment share of GDP was just 10.6 percent. This is far below the levels of prior decades. For example, in the years from 1987 to 1989 investment averaged 11.1 percent of GDP. It averaged 12.2 percent of GDP in the years from 1977 to 1979. The falloff in investment in recent years is even larger than these numbers indicate because there has been a large increase in car leasing over this period. A car that is purchased by a dealer and leased out is counted as investment, while a car that is bought directly by a consumer is counted as consumption. The growth in car leasing has inflated the investment data by an amount approximately equal to 0.7 percentage points of GDP between the late eighties and 2005.
There also is no theoretical reason to believe that a lower equity premium will necessarily lead to more investment. Firms finance investment by both issuing bonds and selling stocks. If the equity premium has declined it means that it can effectively raise money more cheaply by issuing stock, but it will cost firms relatively more to raise money by selling bonds. The net effect of this change on investment can go in either direction and is likely to be very small in any case.
Bolivia
U.S. Lists Its Pluses and Minuses in Fighting Narcotics Worldwide
Joel Brinkley
New York Times, March 2, 2006, Page A13
This article reports on the Bush administration’s annual assessment of the progress it is making in combating the production of illegal narcotics around the world. At one point the article notes that Evo Morales, the new president of Bolivia, has said that he will not prevent the cultivation of coca, but will combat drug trafficking. The article describes this position as “paradoxical.”
There is nothing obviously paradoxical about this position. Coca leaves are used in Bolivia to make tea and for other legal uses. There is nothing inconsistent about allowing the production of coca leaves for these purposes, while still trying to prohibit its use to make cocaine.
Medicare
Medicare Says It Will Pay, But Patients Say ‘No Thanks’
Gina Kolata
New York Times, March 3, 2006, Page C1
This article discusses Medicare’s decision that it would only pay for an expensive new medical procedure if patients agreed to take part in a clinical trial to determine its effectiveness. It reports that the procedure was expected to cost Medicare $10 billion. The article does not present the time frame over which this expense was projected to be incurred. This provides readers with no basis for assessing its potential importance.
Trade
Scramble to Back Port Deal: Making of Political Disaster
Anne E. Kornblut
New York Times, February 25, 2006, Page A10
U.S. and Colombia Reach Trade Deal After 2 Years of Talks
Juan Forero
New York Times, February 28, 2006, Page C4
An Industrial Park in North Korea Nears a Growth Spurt
James Brooke
New York Times, February 28, 2006, Page C5
Central American Trade Deal Is Being Delayed by Partners
Elisabeth Malkin
New York Times, March 2, 2006, Page C10
These articles refer to trade agreements between the United States and other countries. All three articles refer to these deals as “free trade” agreements. This is not accurate. All of these trade agreements will include provisions that will increase protectionism, most importantly provisions for increased protection for patents and copyrights. It would be more accurate to describe these pacts as simply “trade” agreements.
Februrary 27, 2006
Outstanding Stories of the Week
Chad’s Oil Riches, Meant for Poor, Are Diverted Lydia Polgreen and Celia W. Dugger
New York Times, February 18, 2006, Page A1
This article discusses the impact that Chad’s oil wealth has had on the country. The government had signed an agreement with the World Bank, in exchange for a loan to build an oil pipeline, requiring proceeds from oil sales to go directly toward alleviating poverty. The article reports that most of this money appears to have been stolen and that there is little evidence of oil money having improved the situation of the poor in Chad. This is exactly what critics of the agreement claimed would happen at the time it was signed.
For Minorities, Signs of Trouble In Foreclosures
Vikas Bajaj and Ron Nixon
New York Times, February 22, 2006, Page A1
This article reports on the high foreclosure rate for minorities in several major cities. It notes that government policies, along with some private non-profits, have actively promoted homeownership among minorities, but many recent homebuyers have been forced to give up their homes.
Alternatives to Imported Oil
Bush Urges Funding for Alternative Energy
Jim VandeHei
Washington Post, February 21, 2006, Page A1
In Visits to 3 States, Bush Pushes Alternative Energy
Elisabeth Bumiller
New York Times, February 21, 2006, Page A1
These articles report on speeches by President Bush in which he emphasized the importance of reducing the country’s dependence on foreign oil. It would have been helpful if the articles had devoted some space to assessing what President Bush is actually doing to reduce the country’s dependence on foreign oil, instead of simply telling readers what he said. (The Post article actually told readers what the President believes, noting “his belief that the nation is ‘addicted to foreign oil’” although it did not indicate how it gained insight into the President’s beliefs.)
Virtually all analysts agree that any large-scale switch away from oil as a primary energy source will require massive investments in research and substantial subsidies for alternative fuels and possibly increased restrictions on the use of oil, such as higher mileage standards for automobiles. President Bush’s budget actually cuts funding for research into alternative energy sources. He has also proposed no important new regulatory measures that might have a substantial impact on the country’s use of oil. (One modest measure would be tax credits to promote pay-by-the-mile insurance policies, which would provide almost as much disincentive to driving as a $2 a gallon gas tax, without increasing average insurance costs at all [see “Energy Insurance”]
Bush Admits to ‘Mixed Signals’ Regarding Laboratory on Renewable Energy
Elisabeth Bumiller
New York Times, February 22, 2006, Page A12
This article discusses the apparent contradiction between President Bush’s recent speeches emphasizing the importance of moving away from dependence on foreign oil and his budget request that cuts funding for the country’s primary laboratory for researching renewable energy. It would have been helpful to readers to put the lab’s $179 million (before cuts) annual budget in some context.
This level of spending is approximately 0.007 percent of total federal spending. It is equal to approximately 0.3 percent of what the United States is spending at present on the war in Iraq, the cost of the war for a day.
Canadian Health Care
Ruling Has Canada Planting Seeds of Private Health Care
Clifford Krauss
New York Times, February 20, 2006, Page A4
This article reports on plans by the Canadian government to allow the public to obtain some types of health care services from private providers. The article notes that there are waiting lists for some types of non-essential medical procedures in Canada. It implies that Canada’s health care system is facing a serious crisis.
It would have been useful to readers to point out that, according to data from the OECD, Canada spends approximately half as much per person on health care as the United States. Its population also enjoys substantially longer life expectancies than do people in the United States.
Medicare Drug Plan
Millions Not Joining Medicare Drug Plan
Ceci Connolly
Washington Post, February 21, 2006, Page A1
This informative article reports on the low enrollment in the new Medicare drug program by low income seniors. Under the provisions of the 2003 law, these people are entitled to substantial subsidies when buying a drug insurance plan covered by the program. According to the article, many seniors are still not signing up because they find the system too complicated.
It is worth noting that it was possible to design a simple benefit that would have been managed by the Medicare system and added on to the existing Medicare program. The Republicans in Congress instead opted to design a system where the benefit would only be offered by private insurers. The law explicitly prohibits Medicare from offering its own plan.
The Fed and the Housing Bubble
Fed Suggests Its Future Decisions May Be Less Predictable
Associated Press
New York Times, February 22, 2006, Page C3
This article reports on the release of minutes from the January meeting of the Federal Reserve Board’s open market committee. At one point the article reports on the committee’s assessment of the nation’s housing market. It reports that the committee expects that the market will slow from its rapid growth of the last 8 years, but that the committee anticipates that the slowdown would be gradual rather than a sudden crash.
On this topic, it is worth noting that Alan Greenspan made a conscious decision not to warn of the dangers of a stock market crash because he thought it would be inappropriate for the Fed to intervene in financial markets in this way. If the open market committee’s members continue to share Mr. Greenspan’s views, then they would not publicly warn of a crash in the housing market even if they anticipated one. This would mean that we really cannot know their true assessment of the housing market regardless of what they say at this point.
Germany
Selling Well Everywhere But Home
Mark Landler
New York Times, February 23, 2006, Page C1
This article discusses the slow growth of consumer demand in Germany in the context of a toy company’s sales. The article reports that German firms have been successful in boosting exports, but that domestic demand growth remains relatively weak.
It is worth noting that the weakness in demand is at least in part attributable to policies that have been promoted by the OECD, the IMF and many prominent economists. They have argued that Germany’s social security system is too generous and that benefits for retirees should be cut back. According to standard economic theory, if workers expect that their retirement benefits will be reduced, then they will cut back their consumption and increase their savings, as German workers have apparently done. Presumably the economists who advocated cutbacks in retirement benefits understood the implications of this policy and intended this outcome.
At one point the article asserts that Germany’s unemployment rate is 12 percent. This figure is the official German measure of unemployment which includes people who are working less than 15 hours per week, but desire full-time employment. In the United States these workers would be counted as employed. The article does include a chart of German unemployment which shows the OECD standardized measure of unemployment, which is virtually identical to the U.S. measure. This chart shows the German unemployment rate to be approximately 9.5 percent.
German unemployment is concentrated in former East Germany, as large problems from the transition remain. In the area that was formerly West Germany the unemployment rate by the OECD measure is a bit over 7.0 percent. While this is a high unemployment rate, it is not a level that implies a serious job crisis.
Trade
U.S. Sees Emirates as Both Ally and, Since 9/11, a Foe
David S. Cloud
New York Times, February 23, 2006, Page A17
This article discusses the relationship between the United States government and the government of Abu Dhabi. At one point the article quotes a former U.S. ambassador to the United Arab Emirates as saying that Abu Dhabi has been at the forefront in pushing “free trade” in the Middle East.
It would have been helpful to note that the United States government does not support free trade. It supports strong protection for doctors, lawyers and other highly paid professionals in order to ensure high wages for these occupations. It also supports extending copyright and patent protections for a wide variety of items. The ambassador obviously meant that Abu Dhabi supports the U.S. trade agenda, not free trade.
China
China Addresses Plight of Farmers
Edward Coy
Washington Post, January 23, 2006, Page A11
This article discusses new proposal by the Chinese government which it claims are intended to improve the quality of life in the countryside. At one point the article reports on the gap in income in urban and rural areas, reporting that per capita income of farmers in 2005 was $402.80, while per capita income of city dwellers was $1,292.
It is important to note that these figures are based on currency conversion calculations that take China’s income in Chinese currency and convert it into dollars at the official exchange rate. Economists more typically use purchasing power parity measures of GDP that assume goods and services in all countries sell at the same price. By this measure, China had a per capita GDP in 2005 of close to $6,000. Assuming that the ratios are correct, then the per capita income of people in the countryside would be somewhat under $4,000, while the per capita income of people in the cities would be close to $11,000.
U.S. Port Management
A Ship Already Sailed
Simon Romero and Heather Timmons
New York Times, February 24, 2006, Page C1
This article discusses the current state of the port management business. It reports that all of the biggest firms in the industry are foreign-owned. It lists high labor costs as one of the reasons that U.S. firms have fallen behind.
It is not clear how high labor costs could have been an important factor in determining which firms manage a port. Only ports in the United States can be used to bring goods into the United States, so the high labor costs in U.S. ports cannot explain a shift to foreign management. Top executives at U.S. corporations are paid considerably more than top executives in foreign corporations, which would have placed U.S. owned companies at a disadvantage, but the article does not appear to be referring to executive compensation in its discussion of labor costs.
Brazilian Debt
Brazil Will Buy Back Bonds Issued During Financial Crisis
Paulo Prada
New York Times, February 24, 2006, Page C4
This article reports on plans by the Brazilian government to buy back bonds that it issued in the early nineties and replace them with dollar-denominated bonds that will be offered at lower interest rates. At one point it asserts that it is easy for Brazil to do this now, because the dollar has fallen against the Brazilian currency.
Actually the current value of the dollar against Brazil’s currency does not matter in this decision. Brazil’s government cares about the future direction of the dollar. By issuing debt denominated in dollars, they presumably expect that the dollar will fall further in the future, which means that it will be cheaper for Brazil’s government to repay the money it is borrowing.
Dollarization
The Case for Fewer but Stronger Currencies
Daniel Gross
New York Times, February 20, 2006, Page A19
This article discusses the potential benefits and losses to developing countries when they give up their own currency and adopt the dollar as their national currency. It would have been worth noting that the dollar is virtually certain to fall by 30-40 percent against other major currencies over the next decade because the United States is running an unsustainable trade deficit. This means that any country that switched to the dollar would be virtually guaranteeing itself higher inflation at some point in the not too distant future, as the price of imported goods would rise in response to the dollar’s loss of value. This would have more impact on most developing countries than the United States, because imports generally comprise a larger share of their economy.
February 13, 2006
Outstanding Stories of the Week
Rising Prices Lift All Bonuses
Gretchen Morgenson
New York Times, February 5, 2006, Section 3, Page 1
Available to Times Select readers only
This article reports on the surge in compensation for the top executives at major oil companies. Rising oil prices have led to rising profits and therefore higher compensation.
Benefits Go The Way of Pensions
Eduardo Porter and Mary Williams Walsh
New York Times, February 9, 2006, Page C1
This article discusses the cuts in retiree health care coverage by large employers.
Generic Drugs Hit Backlog At FDA
Marc Kaufman
Washington Post, February 4, 2006, Page A1
This article reports on a growing backlog in the testing of generic drugs by the FDA. The backlog has slowed the rate at which generic drugs can be brought on the market. The article reports that FDA is apparently unconcerned by this backlog. It is worth noting that if generic drugs are not available, then the manufacturers of brand drugs can enjoy higher profits, since they effectively gain longer patent protection.
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The Budget: Politics and Ideology
Rival Visions Led to Rocky Start for Drug Benefit
Robin Toner
New York Times, February 6, 2006, Page A1
In Budget, Bush Holds Fast to a Policy of Tax Cutting
Robin Toner
New York Times, February 7, 2006, Page A14
These articles discuss the motivations behind the structure of the Medicare prescription drug bill and President Bush’s 2007 budget. Both articles assert that ideology has the main motivation in each case.
The article provides no evidence for this assertion. The actors involved are all politicians, not political philosophers. The Republicans in Congress received substantial amounts of campaign contributions and political support from the pharmaceutical industry and the insurance industry, two constituencies that gained enormously in the bill at the expense of taxpayers and Medicare beneficiaries. The article claims that the Republicans were motivated by a belief in the free market.
In the case of the tax cuts in President Bush’s budget, a small group of wealthy taxpayers will be the primary beneficiaries. The lost revenue from these cuts will require cuts in areas of the budget that serve tens of millions of people. The article claims that President Bush is motivated by the belief that tax cuts spur the economy.
It is extremely rare for politicians to ever publicly announce that they are acting to serve the goals of special interests at the expense of the larger public, even if this is in fact the explanation for their actions. In such circumstances they generally ascribe their motives to some larger principle that can be construed to further the public interest. However, there is no reason to believe that this larger principle explains their actions, since politicians are often not truthful. This article should not have asserted that the rationales given by politicians for their actions were actually the basis for their actions, without any evidence to support this claim.
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Bush Urges Study of Math and Science
Elisabeth Bumiller
New York Times, February 4, 2006, Page A8
This article discusses President Bush’s plans to improve the quality of math and science education in the United States. The article concludes with a quote from President Bush in which he holds out that the alternative to improving math and science skills is to “retreat” and “become protectionist.”
It would have been appropriate to point out that President Bush is actually an ardent protectionist. He has done absolutely nothing to reduce the barriers that protect highly educated professionals in areas like medicine and law from foreign competition. If he were committed to free trade he would have worked to standardize professional education and licensing requirements in these areas so that highly skilled foreign professionals would be able to compete on equal footing for jobs in these areas.
The potential gains from free trade in these areas are far larger than the potential gains from the trade agreements that President Bush has focused on. For example, doctors in the United States earn an average of more than $200,000 a year (after paying their malpractice fees). By comparison, doctors in Europe earn an average of approximately $100,000 a year. This suggests that the consumers could save approximately $70 billion a year (@$700 per family) just by freeing up trade in doctors services. The total gains from freeing trade in highly skilled professions would run in the hundreds of billions.
President Bush is evidently content with the protectionist barriers that sustain the high incomes for highly skilled professionals. He apparently only objects to protectionist measures that might benefit workers lower down on the wage distribution. It would have been appropriate to note this fact, given Mr. Bush’s implicit assertion that he views protectionism as bad.
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Bush to Propose Curbing Growth In Medicare Costs
Robert Pear
New York Times, February 4, 2006, Page A1
This article discusses plans by President Bush to cut back spending on Medicare. At one point it refers to “rapid increases in federal spending linked to the aging of the population.” Actually, the aging of the population is relatively minor factor in projections showing rapid increases in spending. The major factor is rising national health care costs. Since the government pays for roughly half of national health care costs (primarily through Medicare and Medicaid), rapidly rising health care costs will impose a large burden on the government, unless the health care system is reformed.
Domestic Spending Squeezed Throughout the Government
Robert Pear
New York Times, February 7, 2006, Page A14
In Calculating the Shortfall, Likely Costs Are Left Out
Edmund L. Andrews
New York Times, February 7, 2006, Page A16
These articles discuss various aspects of President Bush’s proposed budget for 2007. Both articles lump together Social Security, Medicare, and Medicaid as programs whose costs are projected to soar as the population ages. The article by Pear reports that the costs of the three programs are projected to rise by 8 percent in 2007.
Actually, the projected cost of Social Security is projected to rise at a relatively modest pace. The costs of Medicare and Medicaid are projected to rise rapidly, but this is primarily attributable to rapidly rising national health care costs, not the aging of the population. It is misleading to lump Social Security together with these two health care programs, since their costs are being driven by different factors. This is shown clearly in the budget projections for 2007. While the costs of Medicare and Medicaid together are projected to rise by more than 10 percent, the cost of Social Security is projected to grow by just 5 percent, approximately the same as the nominal rate of growth of the economy.
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Jobless Rate Drops To 4.7%
Paul Blustein
Washington Post February 4, 2006, Page D1
This article reports on the Labor Department’s release of employment data for January. At one point the article notes that bond prices fell because of the strength of report, but “later recovered smartly, fueled in part by expectations that the recent increase in yields … will lure investors in increasing numbers.”
Since the increase in yields is due to low bond prices (when bond prices fall, yields rise and vice versa), the article is effectively claiming that bond prices rose because investors believe that at low prices foreign investors will enter the market. If this explanation was true, then bond prices never should have fallen in the first place.
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2007 Budget Favors Defense
Amy Goldstein
Washington Post, February 5, 2006, Page A1
In Bush’s Budget Plan, Shifting Priorities
Robert Pear
New York Times, February 5, 2006, Page A23
These articles report on President Bush’s plans for the 2007 budget. Both articles describe a number of proposed cuts or increases in percentage terms or dollar terms. For example, at one point the Post article refers to Bush’s intention to cut the Medicare budget by $105 billion over the next decade (actually the article refers to the cut as though it is a reduction in annual spending in the year 2006).
It is difficult for most readers to assess the meaning of these proposed changes. It would be helpful if dollar cuts (or increases) were expressed as a percentage of projected spending for the program. Also, percentage changes should be adjusted for inflation so that readers can know whether the proposal will increase or decrease the appropriation in terms of purchasing power. In addition, budget items should be described as a share of the total budget so that readers can determine their significance for total spending and the deficit.
At one point the Post article asserts that spending for Social Security, Medicare, and Medicaid will swell dramatically as the baby boom ages. Actually, only Medicare and Medicaid are projected to experience rapid increases in costs. This is due to the assumption that private sector health care costs will continue to rise rapidly, which will lead to sharp increases in the cost of these programs. This would be the case even if the U.S. population were not aging.
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Many Proposed Cuts Have Met Limited Success in the Past
Amy Goldstein
Washington Post, February 8, 2006, Page A4
This article discusses some of the proposed cuts in President Bush’s budget. At one point the article notes that Democrats focused their criticism in part on Bush’s recommendation to “slow the growth” of Medicare by $36 billion.
There has been a semantic contest between Democrats and Republicans on this point in prior years. Democrats have referred to plans to reduce projected spending in Medicare as “cuts” because focus groups show that cuts are unpopular. Republicans have used the expression “slow the growth” because focus groups show that people are less concerned about the prospect that growth in spending will be slowed.
News reports should try to avoid adopting either side’s terminology and instead focus on the substance of the issue in dispute. In this case, the question is whether the level of services provided to Medicare beneficiaries will deteriorate as a result of this reduction in spending against the baseline projection, or whether health care providers simply would have been forced to accept lower payments. If the reduction in spending actually would lead to reduced services, then it is appropriate to describe them as “cuts” since that is how most people would understand the meaning of the term.
It also would have been useful if the article had put the proposed reduction in spending in context. Medicare spending is expected to be approximately $2.5 trillion over the five year budget period, which means the proposed spending reduction would be approximately 1.5 percent of baseline spending. (It is equal to approximately 0.3 percent of total government spending over this period.) It also would have been helpful to point out that the spending reduction is for a five-year period. The article does not clearly indicate the time-period over which the spending reduction will take place.
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Some Assembly Needed: China as Asia Factory
David Barboza
New York Times, February 9, 2006, Page C1
This article discusses patterns of trade between the United States, China, and other East Asian countries. At one point it lists the winners and losers from U.S. trade with China. It reports that consumers in the United States are winners, because they are able to buy low priced goods.
This is only partially true. The United States is not currently paying for these goods with exports, instead it is borrowing capital from abroad. At some point in the future, it will have to reduce its trade deficit, and pay interest on the money it has borrowed during the years it was running deficits. This is accomplished through a fall in the value of the dollar, which will mean higher import prices. Because the United States is borrowing large amounts of money from abroad, the dollar will have to fall further than would otherwise be the case, in order to cover this interest, which will mean even higher priced imports in the future.
Asserting that consumers are benefiting from cheap imports today, even as the country runs a large trade deficit, is comparable to saying that taxpayers are gaining from recent tax breaks, even though the government is running a large deficit that will impose substantial interest costs in future years. Such a statement presents a misleading analysis of the situation.
February 6, 2006
Outstanding Stories of the Week
Drug Maker’s Efforts to Compete in Lucrative Insulin Market Are Under Scrutiny
Gardiner Harris and Robert Pear
New York Times, January 28, 2006, Page A1
This article reports on evidence that Novo Nordosk, a major Danish pharmaceutical company, had given out kickbacks to pharmacies and engaged in other unethical practices to promote its insulin drugs.
Budget Cuts Pass By a Slim Margin
Jonathan Weisman
Washington Post, February 1, 2006, Page A1
This article reports on the House’s approval of a bill that would cut $40 billion over the next five years from Medicaid, student loans and other social programs. The article notes that the cuts are relatively small both in terms of the total budget and even the affected programs, but they can have a substantial impact on the beneficiaries of the programs since they will allow the states far more discretion in structuring benefits.
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Federal Costs Dropping Under New Medicare Drug Plan
Robert Pear
New York Times, February 3, 2006, Page A20
This article reports on new projections from the Bush administration that show the Medicare prescription drug plan will cost considerably less in 2006 than previously projected. The article reports that this drop is attributable to the intense competition among insurers, but also notes that many people have not signed up for the benefit because of the complexity of the plans.
It would have been useful to provide some breakdown between these two sources of savings. Insofar as competition among insurers has led to lower than expected costs, this would be an indication of the program’s success. On the other hand, the fact that many seniors have found the plan too complicated, and therefore have not signed up, is clear evidence that the program is failing to meet the needs of the population that it was intended to help.
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Productivity Growth and Inflation
Productivity Rose More Slowly in ’05; Wages Rose More Quickly
Associated Press
New York Times, February 3, 2006, Page C3
This article reports on Labor Department data showing that productivity fell in the 4th quarter of 2005. The article goes on to note that productivity growth was slower in 2005 than in 2004 or 2003, but that the 2.7 percent growth rate is still double the average for the slowdown years from 1973-1995.
Actually, if the rate of productivity growth slows, then it implies higher inflation, holding other things equal. Of course, if wage growth slows or there is a shift back from profits to wages, then this can offset the impact of slower productivity growth on inflation. A modest uptick of inflation may not provide any real basis of concern from the standpoint of the economy by itself. However, financial markets have been very sensitive to inflation in recent years. Even a modest rise in the inflation rate may bring an end to the unusually low real interest rates that the economy has experienced over the last four years.
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Health Care, Vexing to Clinton, Is Now at Top of Bush’s Agenda
Robert Pear
New York Times, January 29, 2006, Page A1
This article discusses President Bush’s new health care policy proposals. At several points the article discusses President’s Bush’s motives. For example, it attributes his promotion of health savings accounts his philosophy, which it asserts leads him to believe that “placing more responsibility in the hands of individuals will create market pressure to hold down costs.”
It is very difficult to know politicians’ true motives since the reasons they publicly give for their actions are often not their true motivations. While it is possible that President Bush’s philosophy explains his proposals, it is also possible that he is motivated by a desire to help the insurance and financial industries, who will earn large profits if many people take advantage of his health savings accounts (see “Saving Accounts For Health Costs Attract Wall Street,” New York Times, 1-27-06; A1). He may also be trying to give more tax breaks to upper income taxpayers, since they would benefit disproportionately by health savings accounts. All of these groups have been important political constituencies for President Bush, and it is common for politicians to do favors for their political supporters.
If President Bush believes that the sort of individual choice created by high deductible insurance policies could have a substantial impact on health care costs it would imply that he is not very familiar with the nature of the problem. The vast majority of the country’s health care costs are attributable to a relatively small number of unhealthy people who incur very high expenses. The expenditures that might be discouraged by high deductible policies comprise a small fraction of health care costs. Furthermore, studies have shown that people are as likely to cut back on important preventive care as on unneeded expenses, which could actually result in higher total health care spending.
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The Golden Years: Travels, Hobbies and a New Job, Too
Anna Bernasek
New York Times, January 29, 2006, Section 3, Page 5
This article reports on the sharp rise in employment among older people in the last decade. At one point the article attributes this rise in part to the uncertainty of Social Security benefits, noting that the program faces a shortfall of $4 trillion. It would have been helpful to note that this projected shortfall is over a Social Security’s 75-year planning horizon. The shortfall is equivalent to 0.7 percent of projected GDP over this period.
It is also worth noting that this is the shortfall projected by the Social Security trustees, 4 out 6 of whom are political appointees of President Bush. Their projections are far more pessimistic than those of independent forecasters. The Congressional Budget Office projects that the shortfall over the 75-year planning horizon is equal to just 0.4 percent of GDP. Furthermore, they project that the program can pay full scheduled benefits for the next 46 years with no changes whatsoever. This puts any potential shortfalls far beyond the expected life-spans of the older workers discussed in this article, which means that uncertainties about Social Security should not be affecting their decision to work, unless they have been misinformed about the financial condition of the program.
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Bush Picks 2 Economists For Federal Reserve Board
Paul Blustein
Washington Post, January 28, 2006, Page D1
This article reports on President Bush’s selection of two people to serve as governors of the Federal Reserve Board. At one point the article asserts that “a consensus in recent years has formed in the economics profession that the best way to sustain growth is keep inflation in check.”
This is not true. Benjamin Bernanke, the incoming chairman of the Federal Reserve Board has argued quite explicitly that it was very important for the Federal Reserve Board to run very expansionary monetary policies in the wake of the stock market crash in order to sustain growth. Alan Greenspan and the other members of the Fed’s Open Market Committee endorsed this view as well. All of these people understood that this expansionary monetary policy carried with it some risk of higher inflation, but they were prepared to take this risk because they thought it was important to give the economy a boost with low interest rates.
While virtually all economists might agree that low inflation is better than high inflation, there are large differences within the economics profession on the priority given to sustaining low inflation rates and even on the definition of low inflation. (Some economists might consider an inflation rate between 2.0-3.0 percent to be “low,” whereas others would consider this inflation rate to be excessive.)
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Exxon Posts Record Profit
Justin Blum
Washington Post, January 31, 2006, Page D1
At Exxon Mobil, A Record Profit But No Fanfare
Simon Romero and Edmund L. Andrews
New York Times, January 31, 2006, Page A1
These articles discuss the record profits reported by Exxon Mobil and several other major oil companies. At one point both articles refer to the fact (noted by the oil companies) that their profits are not exceptionally large when measured as a percent of their revenue.
This is not a very meaningful measure of profits. When oil prices soar, revenue does as well. This brings down the ratio of profits to revenue. The more relevant measure of profits would be return on investment. The oil companies were prepared to invest and expected to make a normal profit based on oil prices that are less than half of their current level.
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Transition at the Federal Reserve Board
And in This Corner, Fed Choice Is Blip on Some Senators’ Radar
Sheryl Gay Stolberg
New York Times, January 31, 2006, Page A1
This article reports on the small amount of attention that many senators appear to have given to Benjamin Bernanke as they about to vote on him to replace Alan Greenspan as Federal Reserve Board chairman. At one point the article asserts that the major ideological battles on monetary policy have long been resolved.
This is not true. Until 1996, the vast majority of economists believed that the unemployment rate could not fall below 6.0 percent without triggering inflation. Only a small group of progressive economists disputed this view. The subsequent history showed that the progressive economists were right and the bulk of the profession was wrong. This fact has barely been mentioned in the discussion of the Greenspan transition, largely because the economists who were proven wrong continue to be the dominant, if not only, sources for news stories.
There is also an ongoing debate over whether the Fed should intervene to prevent the development of financial bubbles, such as the stock market bubble or the housing bubble. The Fed under Greenspan has taken the position that it is not appropriate for it to intervene, but many economists differ with this position.
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Health Care and Social Security
Bush Warns Against Shrinking Global Role
Peter Baker and Michael A. Fletcher
Washington Post, February 1, 2006, Page A1
This article reports on President Bush’s State of the Union address. At one point it refers to the “spiraling costs” of Social Security, Medicare and Medicaid. It might be accurate to describe the costs of Medicare and Medicaid as “spiraling,” as the rising cost of health care in the United States is projected to lead to large increases in the cost of these programs in coming years. However, projections show only a modest rate of growth in Social Security costs, comparable to what the country has experienced in prior decades.
President Bush lumped these programs together, presumably because he still has aspirations to privatize Social Security, and this agenda will be advanced insofar as he can scare people about the costs of the program. It would have been appropriate to call attention to this fact, since presumably President Bush and his aides are well aware of the fact that Social Security costs are not rising at anywhere near the rate of Medicare and Medicaid costs.
The article also asserts that President Bush “thinks” that his health savings accounts will lower health care costs. There is a large amount of evidence that they will have little effect on health care costs, although they will likely lead to large fees for the financial industry. The accounts will also be another tax break for higher income families. It is possible that President Bush’s main motivation in proposing these accounts is to help these constituencies, both of whom are important political backers. However, he would stand a better chance of advancing this agenda if he claimed that his motivation was to lower health care costs rather than serving powerful interest groups.
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Bush Will Use Address to Focus on Alternative Fuels and Nuclear Plants
Elisabeth Bumiller and David E. Sanger
New York Times, January 31, 2006, Page A18
This article discusses some of the proposals that will be mentioned in President Bush’s State of the Union address. The article asserts that he will focus on promoting alternative energy sources.
It would be helpful if the article offered some information on the size of the President Bush’s proposals. Virtually everyone supports alternative energy in the same way that they support good health, the real question is what sort of resources President Bush is prepared to advance the development of alternative energy.
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Return of Congress; New Test for Bush
Sheryl Gay Stolberg
New York Times, January 29, 2006, Page A19
This article discusses some of the issues that President Bush will be dealing with as Congress comes back into session. At one point it refers to a budget bill, which it describes as including $40 billion in spending cuts. It would have been helpful to note that these projected cuts would take place over a five year period.
