Economic Reporting Review: Baker

http://www.cepr.net/Economic_Reporting_Review/2004_11_01.htm

Economic Reporting Review by Dean Baker November 1, 2004

Outstanding Stories of the Week

In Africa, Free Schools Feed a Different Hunger Celia W. Dugger New York Times, October 24, 2004, Page A1 http://err.c.topica.com/maacOBaabbkhUbnpH4ybaeQBpp/

This article reports on the explosion in primary school enrollment across sub-Saharan Africa as a result of the decision by most governments to end fees. As the article notes, the ending of primary school fees was largely the result of pressure by non-governmental organizations on the World Bank. Until recently, the World Bank had often made the charging of fees for primary school enrollment a condition for issuing loans to developing countries.

Air Superiority at $258 Million a Pop Tim Weiner New York Times, October 27, 2004, Page C1 http://err.c.topica.com/maacOBaabbkhVbnpH4ybaeQBpp/

This article discusses the procurement of a new generation of fighter planes by the Pentagon. According to the article, the Pentagon will pay $258 million for the plane. The plane was designed using state of the art technology. It was thought that this technology was necessary to defend against Soviet weaponry, which caused the price to be much higher than was originally anticipated.

Is It the Economy? Jonathan Weisman Washington Post, October 29, 2004, Page E1 http://err.c.topica.com/maacOBaabbkhWbnpH4ybaeQBpp/

This article examines the accuracy of econometric models designed to predict the outcome of the presidential election based on the performance of the economy. The most commonly cited models predict that President Bush should win re-election by more than ten percentage points. Polling data over the last month indicates that this is very

unlikely.

Economics and Ideology

Behind Candidatesí Domestic Plans, an Ideological Gulf David E. Rosenbaum and Robin Toner New York Times, October 24, 2004, Page A27 http://err.c.topica.com/maacOBaabbkhXbnpH4ybaeQBpp/

This article discusses President Bush and Senator Kerry's positions on a range of domestic issues. The article explicitly asserts that their differences on these issues are rooted in ideological differences.

This is not clear. Both President Bush and Senator Kerry are

politicians, not political philosophers. It is reasonable to assume, unless evidence is presented otherwise, that they take positions in order to increase their probability of getting elected. Politicians generally find it useful to claim to believe the positions they espouse, but that does not mean that their political positions necessarily reflect their personal views.

For example, the article notes President Bushís support for tax cuts, and asserts that tax cuts are ìreflecting his belief thatÖ. ëitís not the governmentís money, itís your money.íî Itís not clear what President Bush meant by this comment, but it is incoherent on its face. (There is no politician that explicitly advocates taxing people unnecessarily. Nor does any politician explicitly advocate not collecting enough money to pay for the programs they view as necessary.) While President Bushís support for tax cuts may actually be attributable to some ideology, it may also be attributable to a desire to please the wealthy individuals who contribute large amounts of money to his campaign.

Similarly, President Bushís support for Social Security privatization (another issue discussed in this article) may be more easily

explained by his desire to please the financial industry, which could earn hundreds of billions in fees and commissions from privatization, than any ideological belief in the superiority of government-mandated savings accounts to the traditional Social Security program.

Bush Uses Market Incentives; Kerry Focuses on Rules Juliet Eilperin Washington Post, October 26, 2004, Page A5 http://err.c.topica.com/maacOBaabbkhYbnpH4ybaeQBpp/

This article compares President Bush and Senator Kerry's approaches to environmental regulation. It claims that the main difference is between their willingness to rely on market mechanisms as opposed to government regulations to bring about environmental goals, but it presents no evidence to support this position.

The evidence in the article is that Senator Kerry has a greater commitment toward reducing environmental damage than President Bush. For example, Senator Kerry has been supportive of a Kyoto-type agreement, which would lead a reduction in greenhouse gas emissions. He has explicitly supported market-based mechanisms, such as marketable emission permits, to bring about this goal.

By contrast, President Bush has quite explicitly said that he does not view the reduction in greenhouse gas emissions as a high priority and believes that the resulting economic costs would exceed the environmental benefits. In this case, as in the others mentioned in the article, there is no difference whatsoever between the candidates in their willingness to use market mechanisms for environmental ends. Rather the difference is over which environment goals they want to pursue.

The Bush Philosophy: Resolute, No Matter What Richard W. Stevenson New York Times, October 26, 2004, Page E4 http://err.c.topica.com/maacOBaabbkhZbnpH4ybaeQBpp/

This article discusses President Bushís approach to governance. At one point it asserts, ìhe has sought to bring market forces to bear on social welfare programs to hold down the growth in their costs.î The article does not give any examples of when President Bush has used market forces in this way.

The most prominent example of when he sought to increase private sector involvement in social welfare programs was when he increased the subsidies to private health insurers in order to make them better able to compete with the traditional Medicare program. While these subsidies may lead to more private sector involvement in Medicare, according to the Office of Management and Budget these subsidies raised the cost of the Medicare program by approximately $100 billion over the next decade, so presumably his motivation was not lowering costs.

Social Security

Kerry Vows fight for Equal Pay for Women and a $7 Wage David M. Halbfinger New York Times, October 23, 2004, Page A13 http://err.c.topica.com/maacOBaabbkh0bnpH4ybaeQBpp/

This article reports on a campaign rally in which Senator Kerry pointed out several issues where his positions would prove especially beneficial to working women. At one point the article presents a criticism from the Bush campaign that Kerry had supported higher taxes on Social Security (as well as other items), and therefore could not claim to have been helping women. The increase in taxes on Social Security that Kerry supported applied to the wealthiest 20 percent of

beneficiaries. These beneficiaries are disproportionately men or married couples.

The article also quotes Senator Kerry's attack that Bush ìraided the Social Security trust fund to pay for the tax breaks for the

wealthiest Americans.î Under the law, spending the trust fund on tax cuts or anything else does not have any impact on Social Security. The government is obligated to repay the bonds held by the Social Security trust fund, just as it is obligated to repay any other government bond.

Bush, Kerry Are Vague on Social Security Jonathan Weisman Washington Post, October 23, 2004, Page A6 http://err.c.topica.com/maacOBaabbkh1bnpH4ybaeQBpp/

This article discusses the candidatesí positions on Social Security. At one point it comments that Kerry ìhas failed to detail how he would Ö tackle the looming crises in Social Security and Medicare.î While projected increases in health care costs are projected to lead to shortfall in the Medicare program by 2018, the most recent projections from the Social security trustees show that the program will be fully solvent until 2042 with no changes whatsoever. An independent analysis by the Congressional Budget Office projected that the program would be fully solvent until 2052.

According to these projections, the program is more financially sound that at any point in it first four decades of existence. If the current situation can be described as a ìlooming crisisî then Social Security also faced a looming crisis from 1937 until 1983.

Final Ads Continue Trend of Negativity Howard Kurtz Washington Post, October 26, 2004, Page A8 http://err.c.topica.com/maacOBaabbkh2bnpH4ybaeQBpp/

This article reviews the final ads put out by the presidential campaigns before the election. The article notes that an ad by President Bush says that he will ìstrengthen and protect Social Security.î The President has indicated that he intends to divert a portion of the Social Security tax into individual accounts and to reduce Social Security benefits for future retirees to cover this expense. Since the point of the article is to assess the accuracy of these ads, it would have been appropriate to call attention to the fact that President Bush actually does not intend to preserve Social Security in its traditional form, and that his proposed diversion of funds and benefit reduction would not generally be seen as "strengthening and protecting" Social Security benefits.

All Those Promises: Do They Really Matter? Elisabeth Bumiller New York Times, October 26, 2004, Page E1 http://err.c.topica.com/maacOBaabbkh3bnpH4ybaeQBpp/

This article includes a comment from historian Robert Dallek, dismissing the credibility of John Kerry's claim that President Bush will privatize Social Security. Since the President has explicitly said that he will divert a portion of Social Security taxes into individual accounts and reduce payments for future retirees to pay for it, it is not clear why this historian does not view Mr. Kerry's charge as being credible.

Health Care

Momentum Builds for U.S. Role In Paying Highest Health Costs

Milt Freudenheim and Robert Pear New York Times, October 23, 2004, Page A1 http://err.c.topica.com/maacOBaabbkh4bnpH4ybaeQBpp/

This article discusses proposals to have the government pick up the cost of paying for the sickest patients, including the one put forward by Democratic Presidential nominee John Kerry. The article includes comments by several health care experts, but it does not mention the most obvious criticism of such proposals: the problem of cost shifting.

A large portion of health care costs take the form of fixed costs that are largely independent of utilization. For example, one of the main reasons that a hospital room is so expensive is that the hospital tries to average the cost of much of its medical equipment over the number of patients who will be staying in the hospital. If the federal government were to adopt a policy of paying the bulk of the costs of the more expensive patients, then it would provide a powerful incentive for hospitals and other health care providers to shift much of their expenses to these patients.

This could mean, for example, that hospitals would reduce the cost charged for a hospital room, but increase the fees charged for procedures (e.g. open heart surgery) that the sickest patients are likely to receive. In this way, they would increase the expense to the

government but reduce the cost to patients or private insurers. It is not clear that the government will be able to prevent this sort of cost shifting.

Panel Reviews New Vaccine That Could Be Controversial Gardiner Harris New York Times, October 27, 2004, Page A12 http://err.c.topica.com/maacOBaabbkh5bnpH4ybaeQBpp/

This article reports on the development of a new vaccine that can prevent a form of meningitis that is often fatal. The article points out that the vaccine is very expensive, and the probability or getting infected by this strain of meningitis is very small. As a result, it is questionable whether the government or private insurers should pay for the vaccine to be administered to the general population.

It would have been helpful if the article had indicated why the vaccine is expensive. Few drugs (or vaccines) are actually expensive to produce and administer. Usually, they command a high price because the government grants the manufacturer a patent monopoly, which allows firms to charge prices during the life of the patent that are far above costs. If the reason for the high cost of this vaccine is simply the high price charged by the manufacturer because it holds a patent monopoly on the vaccine, rather than high production costs, it suggests a very different problem. In this case, the cost of vaccinating people is very low, once the vaccine is invented. The problem is that patents are a very inefficient mechanism to finance drug research, and are

obstructing the provision of health care.

Trade

Where They Stand, What Theyíve Done New York Times, October 26, 2004, Page A8 Not available on nytimes.com

This article gives a summary of President Bush and Senator Kerry's positions on a number of major issues. At one point it asserts that President Bush supports liberalized trade. This is inaccurate. While President Bush does support liberalized trade in some areas, for example manufactured goods, he opposes liberalizing trade in other areas, such as physician and lawyersí services, and supports increased protectionism in other areas, such as patent and copyright protection. In general, President Bush supports liberalized trade when its primary effect is to reduce the wages of less-educated workers. He supports protection when it has the effect of increasing corporate profits and/or the wages and salaries of more educated professionals. _____________________________________________________________________________________

Dean Baker (www.cepr.net/dbbio.htm) is the Co-Director of the Center for Economic and Policy Research.