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Economic Reporting Review

January 24, 2000:

Canadian Health Care; the Internet Economy; Trade & Inflation

By Dean Baker

Health Care | Medicare & Social Security | Internet | Trade | Brazil | Outstanding Stories


"Clinton Issues Health Care Plan"
Charles Babington
Washington Post, January 20, 2000, page A1

This article discusses a new health care proposal that President Clinton plans to submit to Congress, which will extend health care coverage to part of the uninsured population. At one point the article refers to the Children's Health Insurance Program, an earlier Clinton initiative, and asserts that this program "was expected to help about half of the nation's 11 million uninsured children; about 2 million have signed up so far."

While the Clinton administration claimed that this program would cover half of the uninsured population, a study by the Congressional Budget Office concluded that the program would only serve about 2 million children, as apparently turned out to be the case. (See "Health Care Bills Don't Meet Goals Budget Aides Say," by Robert Pear, New York Times, 7/2/97, page A1; also ERR, 8/16/99)

"Full Hospitals Make Canadians Wait and Look South"
James Brooke
New York Times, January 16, 2000, Section 1 page 3

Discussing the state of the Canadian health system, this article reports on the overcrowding of many hospitals and the long delays that have become standard for many important medical procedures. It notes that Canada's system of universal health care had been a model for many in the United States, but then adds, "Today, however, few Canadians would recommend their system as a model for export."

According to OECD data, in 1997 (the most recent year for which data is available), Canada spent 9.3 percent of its GDP on health care. The United States spent 14.0 percent. Since the United States is a wealthier country, the discrepancy in dollars spent is even larger: $2095 per person in Canada, compared with $4090 for the United States. Public sector health care spending has actually declined in real terms in Canada since 1990. In the United States it has risen by more than 45 percent.

Since the data also shows that Canada, despite spending less on health, has better health outcomes in terms of life expectancy at birth or life expectancy at age 65, there is reason to believe that the Canadian system may still be superior in many respects to the U.S. system. (See ERR, 12/27/99.).

"Congress, Preoccupied by Elections, Shows Signs That Debt Reduction Will Be Its Main Goal"
Richard W. Stevenson
New York Times, January 20, 2000, page A14

This article assesses the priorities of Congress and President Clinton in this election year. At one point the article comments that "President Clinton is pushing big proposals to improve access to health care, add prescription drug coverage to Medicare and expand the tax credit for the working poor."

It is questionable whether any of these proposals can appropriately be categorized as "big." Measured as a share of projected federal spending over the next ten years, the President's health care plan is approximately 0.5 percent, the prescription drug benefit is approximately 0.7 percent, and the expanded tax credit for the working poor is approximately 0.1 percent. By comparison, the Carter-Reagan military build-up that began in 1978 increased the Pentagon's share of the federal budget by approximately 8.0 percentage points by the time it ended in 1986.

"France Presses the U.N. to Help Poor Nations Get AIDS Drugs"
Barbara Crossette
New York Times, January 16, 2000, Section 1 page 11

This article reports on efforts by the French government to get the United Nations to play a more active role in making AIDS drugs available to people in developing nations. At one point the article notes the concerns of the pharmaceutical companies over the possible erosion of their drug patents. The article states that AIDS drugs were developed "at enormous cost in research and testing."

However much the pharmaceutical industry may be spending on research and testing, according to the Pharmaceutical Manufacturers and Researchers of America (the industry trade group), the industry employs 40 percent more people in marketing than in research and testing.

At one point the article refers to a speech that Vice President Al Gore made at the United Nations Security Council last week, and then adds, "Mr. Gore learned last year how complicated efforts to aid poorer nations can be when negotiations with pharmaceutical companies are involved. He drew protestors to his campaign rallies after he presented the position of American drug companies in talks with South Africa."

Mr. Gore was not attempting to aid poorer nations in these talks with South Africa. He was attempting to impose patent restrictions on the use of AIDS drugs in South Africa. That is the reason his campaign rallies drew protests.

More about health care.



"GOP Rivals Escalate TV Ad War"
Howard Kurtz
Washington Post, January 15, 2000, page A6

"Bush Calls McCain Plan a $40 Billion Tax Hike
Thomas B. Edsall and Dan Balz
Washington Post, January 16, 2000, page A10

"McCain Leads the Way as Republican Rivals Attack Bush"
Richard L. Berke
New York Times, January 16, 2000, Section 1 page 14

"McCain Cites Rich-Poor Gap in Touting Plan"
Dan Balz
Washington Post, January 17, 2000, page A3

"Bush Tax Plan May Spell Trouble Later"
Dan Balz
Washington Post, January 19, 2000, page A4

These articles all refer to the projected depletion of the Social Security and Medicare trust funds. The articles include, without comment, statements that imply the programs are in imminent danger. For example, the Kurtz article repeats a statement in a McCain ad that the candidate would "use the bulk of the surplus to secure Social Security far into the future to keep our promise to the greatest generation."

The "greatest generation" is a term usually applied to the people of the generation that fought in World War II. According to the most recent projections from the Social Security trustees, the program will be able to pay all scheduled benefits until the year 2034, with no changes whatsoever. At this point, the youngest members of the "greatest generation" will be 105 years old.

The Medicare trust fund is also projected to be fully solvent well beyond the constitutional term limit of office for the next president. The adjustments that might be needed to deal with future shortfalls are well within the range of changes implemented in past years. There is no reason, based on existing projections, for claiming that these programs need to be "saved" (See ERR, 1/10/00).

While none of these articles challenge the candidates' misleading comments on Social Security and Medicare, the Berke article does provide this sort of correction on a different topic. The article points out the failure of the Republican candidates to mention the Clinton administration's efforts to open foreign markets to U.S. agricultural products, when they promised to open foreign markets in a public debate.

More about Social Security.



"Spinning a Tax Web and Trying to Catch an Opponent"
Alison Mitchell and Frank Bruni
New York Times, January 19, 2000, page A16

This article reports on the efforts by Texas Governor George W. Bush and Arizona Senator John McCain to gain support for their positions on taxes. At one point the article notes that many governors oppose a national ban of sales taxes on Internet purchases because the shift to online commerce "could" reduce state sales tax revenue.

The shift to online commerce would reduce state sales tax revenue. If a state has two stores, one subject to sales tax and one that is not subject to sales tax, and business switches from the former to the latter, tax revenue will fall. This is exactly the situation with the growth of Internet commerce; there is no plausible basis for questioning this outcome.

"Gigabytes Behind"
William Drozdiak
Washington Post, January 15, 2000, page A1

This article discusses the belief of some political and business leaders in Western Europe that the region has fallen far behind the United States in harnessing new technologies. At two different points, the article asserts that these leaders "acknowledge" that Europe has applied mistaken economic policies by not following the example of the United States. The article does not explain how it has determined the European policies were in fact mistaken, as it implies.

Economists usually view productivity growth as the most important measure of an economy's dynamism and the main determinant of living standards in the long run. According to data from the OECD and the Bureau of Labor Statistics, most European nations have generally experienced more rapid rates of productivity growth than the United States over the last two decades.

One of the metrics used to demonstrate the failure of European policies is the volume of sales over the Internet. The article presents evidence that U.S. Internet sales are three times as large as European sales. It is important to note that U.S. Internet sales receive a large government subsidy, since they are not subject to the state and local sales taxes that apply to goods sold in traditional retail outlets.

According to standard economic theory, this sort of subsidy creates economic inefficiencies since it favors Internet retailers that might be less efficient than traditional competitors. Since Internet buyers are more affluent on average than the population as a whole, this subsidy is also hard to justify on equity grounds. There are few economists who would contend that Europe has pursued the wrong policy by not providing a subsidy that leads to both inefficiency and inequity.



"Trade Deficit Set Record in November"
Joseph Kahn
New York Times, January 21, 2000, page C1

"Trade Deficit Hits a Record $26.5 Billion"
John Burgess
Washington Post, January 21, 2000, page E3

These articles report on the latest trade data from the Commerce Department, which showed that the deficit again hit a record level in November. Much of the discussion in these articles is quite confused. For example, the Times article contrasts the current trade deficit to the high deficit years of the '80s, and claims that "few economists or politicians question the competitiveness of the United States now as they did then. With inflation staying low and the government running a budget surplus, the United States is better equipped today to handle a big deficit than it was 15 years ago."

It is not clear what economists would use as a better measure of competitiveness than the size of the trade deficit, which is a simple market test. If U.S. goods are better at their current price than foreign goods, then the U.S. should be running a trade surplus. The size of the current deficit suggests that the market views U.S. goods as being overpriced.

It is also not clear how low inflation and the budget surplus make the United States better situated to handle a trade deficit at present than in the '80s. The conventional view among economists in the '80s was that the nation's large budget deficits were causing the trade deficit. (They were frequently referred to as the "twin deficits.") Most economists argued that if the United States reduced its budget deficit, the trade deficit would also be eliminated. Clearly this view has been shown to be wrong, as the large budget deficit has been turned into a large surplus, while the trade deficit has soared. But the large budget surplus does not make the United States in any obvious way better situated to pay back its foreign debt in the future.

Both articles include tentative comments suggesting that the large trade deficit could be beneficial because it holds inflation down. There is no doubt that the trade deficit is holding inflation down to some extent. Firms are obviously buying goods abroad because they are cheaper than goods produced here. If they had to pay more for domestically produced goods, then there would be more upward pressure on prices.

However, this benefit is inherently short-term. The United States is borrowing from abroad to support its current trade deficit. Such borrowing cannot be sustained indefinitely. If the trade deficit stays at its current level in relation to the GDP, the nation's foreign debt will have risen to more than 75 percent of the GDP by 2015, the date when the Medicare trust fund is projected to be depleted. The foreign debt will have risen to more than 1.8 times the GDP by 2034, the date when the Social Security trust fund is projected to be depleted.

At some point--probably long before these dates--the borrowing must stop. When that happens, the dollar will decline and the beneficial effects from the current trade deficit will be reversed. Rising import prices will put upward pressure on inflation. The longer this adjustment process takes, the worse the impact will be.

It is worth noting that the Times article reports that U.S. Treasury Secretary Lawrence Summers is urging that Europe and Japan adopt more expansionary monetary policies to foster more rapid growth. While many prominent economists argue that contractionary central bank policy has been a major factor slowing growth and raising unemployment in these countries, most media coverage directly contradicts this view. The vast majority of reporting on the slow growth in these countries has emphasized structural obstacles to growth and almost completely ignored the importance of monetary policy. (See ERR, 7/19/99, 10/11/99, 12/6/99).

"Whistling Past the New Economy"
David E. Sanger
New York Times, January 16, 2000, Section 4 page 1

This article discusses how the presidential candidates are trying to avoid many of the issues associated with regulating the Internet and other aspects of the "new economy." At one point, the article asserts that the candidates are all "free traders."

This is not true; all the candidates have indicated their intentions to protect and extend patent and copyright protection. These are forms of protectionism that create enormous static inefficiencies, since they raise the prices of products such as recorded music, videos or pharmaceuticals by several hundred or even thousand percent. By comparison, other trade barriers rarely raise the price of goods by more than 15-20 percent. While patents and copyrights provide incentives for innovation and creativity that may warrant the costs they impose, they are still impediments to free trade.

It is also worth noting that none of the candidates have taken a stand against restrictions that limit trade in professional services, such as doctors' services. In recent years, the United States has tightened these restrictions in order to protect the income of doctors. (See "AMA and Colleges Assert There is a Surfeit of Doctors," by Robert Pear, New York Times, 3/1/97, page A7; "U.S. to Pay Hospitals Not to Train Doctors, Easing Glut," by Elisabeth Rosenthal, New York Times, 2/15/97, page A1.) While the candidates have favored free trade in goods such as automobiles and apparel, which are produced primarily by less educated workers, they have not been consistent advocates of free trade.

The article also comments that the candidates are "mindful of Mr. Greenspan's message that surging imports keep inflation in check." While this is true in the short run, it is not accurate in the long run. The current trade deficit is associated with massive borrowing from abroad, at present more than $300 billion a year. At some point in the future, the United States will stop borrowing and will have to pay out interest on its past debt. When this occurs, the dollar will have to fall enough so that the U.S. can export more than it imports. This will lead to upward pressure on prices, since the falling dollar will raise the price of imports. In short, the lower inflation resulting from the current trade deficit will be offset by higher inflation at some point in the future when the deficit is reversed.

More about Trade.



"Brazil's Economy Is Better, But Is the Recovery Lasting?"
Simon Romero
New York Times, January 18, 2000, page C4

This article reports on Brazil's economic recovery since devaluing its currency last winter. The article notes evidence of renewed economic strength, much of which, such as a surge in exports, is directly related to Brazil's decision to devalue its currency.

The article does not note that the IMF had strongly opposed Brazil's decision to devalue. It forced the nation to spend tens of billions of dollars to support its currency at an inflated level.

More about Latin America.



"Investing's Longtime Best Bet Is Being Trampled by the Bulls"
Gretchen Morgenson
New York Times, January 15, 2000, page A1

This article reports on the increase in stock turnover in recent years. According to data presented in the article, an average share of stock on the New York stock exchange is now held for slightly over a year, while shares on the Nasdaq are held on average for less than six months.


Dean Baker is an economist and the co-director of the Center for Economics and Policy Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR.

ERR is edited by Jim Naureckas.

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