Economic Reporting Review: June 5, 2000

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June 5, 2000:

China Trade Aftermath; Drug Prices; Asian Recovery

By Dean Baker

"For Many, China Trade Bill Isn't About Exports"
John Burgess
Washington Post, May 27, 2000, page E1

This article reports on the fact that "many business leaders and economists" believe that the main impact of granting China permanent normal trading relations (PNTR) will not be on U.S. exports to China. Rather, according to the article, these experts view the main impact as being on U.S. investment and production in China. This was exactly the argument made by many of those opposed to granting PNTR to China. The debate on this issue would have been better informed if the Post had chosen to run this piece before the vote.

The article goes on to note that some jobs may be lost to China as a result of the passage of PNTR, but then comments, "For the most part they would be low-skilled, low-paid ones." In fact, U.S. manufacturers are already producing a wide-range of goods in China, including auto and airplane parts. The jobs in these industries pay significantly more than the median and often involve a considerable amount of skill. There are a wide variety of relatively well-paying jobs that will be at risk as a result of competition from goods made in China.

While it is true that the very best-paying jobs, those held by professionals with advanced degrees, probably are not endangered, such jobs account for a small portion of the nation's employment. The majority of workers are either employed at jobs that are directly threatened by trade with China, or likely to experience downward pressure on their wages as a result of the jobs lost by other workers.

"House Vote on China Trade: The Politics Was Local"
Adam Clymer
New York Times, May 27, 2000, page A3

This article examines the political considerations that influenced the vote on PNTR. In outlining the various political positions on this issue, it sets out an "internationalist" stance that supports bills like PNTR, United Nations financing, arms control and "comparable issues." It then notes that very few members of Congress consistently supported this "internationalist" position.

While the article views this as an inconsistency in the positions held by members of Congress, an alternative possibility is that the position described by the article as "internationalist" is itself inconsistent. It is entirely plausible that a member of Congress could oppose PNTR for China because of a real concern over human rights in China or genuine opposition to the path of globalization implied by PNTR. This would be an "internationalist" position by the normal usage of the term, even if the article would not characterize it as such.

At one point the article notes that the labor opposition to PNTR suffered from "the label of 'protectionism.'" This claim is certainly true, since "protectionist" carries a negative connotation among the nation's policy elite. The Times and Post regularly labeled labor's position as "protectionist" in news stories that discussed the debate over PNTR.

It is worth noting that the concerns of those opposed to PNTR were in no obvious way more protectionist than the concerns of PNTR proponents. Most notably, the agreement under which China was granted PNTR required China to provide greater protection for U.S. patents and copyrights. Although copyright and patent protection generally raise the price of products by several hundred or even several thousand percent above the free market price, support for these measures is not labeled as "protectionist" in the Times or Post.

SENIOR CITIZENS

"Seniors' Shift Toward GOP Sounds Democrats' Alarm"
Thomas B. Edsall
Washington Post, May 30, 2000, page A7

This article examines political attitudes among senior citizens. It wrongly presents an image of the elderly as an affluent group. According to data from the Social Security Administration, the median income for an a couple over age 62 in 1998 was $30,200. The median income for an elderly person living alone was $12,000. By comparison, the median income for all families (including the elderly) in 1998 was $46,737.

PRESCRIPTION DRUGS

"Health Insurance Provides Buffer to Rising Drug Prices for Most Americans"
David E. Rosenbaum
New York Times, June 1, 2000, page A17

This analysis examines the extent to which health insurance coverage has shielded people from the full cost of prescription drugs. It argues that because only one quarter of the cost of prescription drugs are paid for directly out of pocket, most people are not terribly concerned about prescription drug prices. It comments on legislation to control prices: "In most instances, this seems to be a case of politicians seizing an issue and drumming up support rather than responding to demands from their constituents."

There are three serious problems with the logic in this analysis. First, it assumes that individuals either fail to recognize the rise in the price of their health care insurance, or to note the factors that are responsible. While this may be the case for younger families who typically have their insurance paid by an employer, if they have insurance at all, this is less likely to be true for the elderly who buy supplemental insurance policies. These policies pay for services not provided by Medicare, most importantly prescription drugs. The price of these "Medigap" policies has been rising sharply in recent years, driven largely by the price of prescription drugs.

Second, even in cases where patients have insurance, they are often unable to get the drug of their choice. Increasingly, insurance policies restrict patients to using generics, or to pay the cost themselves. In many cases patients may be convinced (possibly wrongly) that the branded drug is better, but find that they must use the generic drug because the branded version is too expensive.

The third problem with the article's logic is its willingness to dismiss the quarter of the public under age 65 who lack health insurance as a small group. In other circumstances, much smaller groups have been the focus of serious attention by the media and politicians. For example, dozens of stories have appeared on the elimination of the Social Security earnings test for people between the ages of 65 and 70 (e.g. see " Seniors' Shift Toward GOP Sounds Democrats' Alarm, by Thomas B. Edsall, Washington Post, 5/30/00, page A7; ERR, 3/13/00 and 3/27/00). This earnings test affected less than 10 percent of the people within this narrow age group. The number of people without health insurance is more than 40 times as large as the number affected by the Social Security earnings test.

The article also includes a comment from MIT economics professor Ernst R. Berndt in which he claimed it wasn't clear that Americans pay more for drugs than people in other nations. Berndt pointed out that in the United States drugs account for 10.3 percent of health care expenditures, compared to 13.8 percent in Canada and 16.7 percent in Britain. Berndt then asked, "Why is it, if pharmaceutical prices are highest in the U.S., their cost share is so low?"

RUSSIA

"A Factory's Turnaround Reflects a Glimmer in Russia's Economy"
Michael Wines
New York Times, June 2, 2000, page A1

This article reports on evidence that Russia's economy is rebounding from its 1998 financial crisis. The article includes numerous comments that imply that the financial crisis of that year was a disastrous event to hit a previously healthy economy, referring to it as "the crash of 1998, the meltdown that wiped out Russia's middle class."

This view is contradicted by almost every measure of Russia's economic progress in the '90s, including a chart that accompanies the article. The chart shows that Russia's economy contracted by approximately 40 percent between 1990 and 1996. It then stabilized, before dropping another 2-3 percent as a result of the 1998 financial crisis. Compared to the economic collapse earlier in the decade, the 1998 financial crisis was a minor blip from which the Russian economy has now fully recovered.

The article includes several other assertions that are wrong or misleading. For example, it asserts that "exports are driving the recovery, accounting for $8 of every $10 of growth in the gross domestic product." The growth of exports by itself is meaningless; the relevant economic measure is net exports, the difference between exports and imports. If exports alone counted in GDP, it would imply that the United States would have a higher GDP if it exported to Mexico all the parts needed to assembly a car, and then imported the finished car, than if it just produced the car in the United States. Net exports in Russia have been growing rapidly, but they are not quite as important to Russia's growth as the article claims.

The article also suggests that the increased competitiveness of Russian goods was an accidental outcome of the collapse of the ruble. In fact, this was an expected result of the devaluation of the currency, and one of the reasons why many economists advocated devaluation prior to financial crisis. In the summer of 1998, the IMF insisted that Russia not devalue, and instead forced it to spend tens of billions of dollars of foreign exchange trying to prop up the ruble. The news reporting in the Times and Post generally accepted the IMF position asserting that a devaluation of the ruble would have disastrous consequences for Russia. (See ERR, 4/19/99). The evidence discussed in this article indicates that the IMF was wrong.

EAST ASIA

"Asian Region Rides a Wave of Growth Linked to Exports"
Mark Landler
New York Times, May 27, 2000, page A1

This article reports on the rapid growth that many East Asian economies are now experiencing. The article notes that many people had criticized the policies that the IMF had prescribed for the region in the wake of its financial crisis in 1997. It then asserts that the region's "stronger-than-anticipated rebound has largely silenced those complaints." The article then goes on to note the concerns of some economists that because of the strong rebound, these countries have not pursued "reform" to the extent that they should.

The evidence presented in the article, that East Asian economies are growing rapidly in spite of the fact that they have not followed the IMF's recommendations for "reform," supports the position of the IMF's critics, not the proponents of IMF policies. While the IMF has been criticized for a variety of reasons, a key complaint is that the IMF was arrogant to suggest that it knew the best economic path for these nations to follow.

South Korea, and to a lesser extent Thailand and Malaysia, achieved remarkable economic growth and improvements in the living standards of their population over the last four decades. According to data from the United Nations, their per capita growth rates in the period from 1960 to 1995 were 7.0, 5.2 and 4.2 percent, respectively. By contrast, nations such as Brazil and Mexico which have followed the IMF's advice over the last decade, have had per capita GDP growth of approximately 1.0 percent annually. While the economic system in these East Asian nations has routinely been denounced as "crony capitalism," no nation that has followed the IMF-designed growth path has ever achieved anywhere near as much success.

The IMF contended that the top priority for the East Asian nations as they attempted to recover from their financial crisis should be to dismantle the system that had proven so successful over the prior four decades. The impressive growth rates achieved by these nations, which has largely been accomplished without accepting the IMF's advice, demonstrates that the IMF was wrong.

"Japan's Employers Are Giving Bonuses for Having Babies"
Calvin Sims
New York Times, May 30, 2000, page A1

This article discusses the incentives that some companies in Japan are giving their workers to have more children. At one point the article claims that Japan's low birthrates "pose many long-term problems." It is not obvious that Japan's low birth rates will pose any problem for the nation at all. Japan is a very densely populated country in which land is extremely expensive. If the nation's population declines it will reduce the crowding to some extent, and thereby improve living standards.

OUTSTANDING STORIES OF THE WEEK

"Even at Higher Price, Gasoline Is Still a Bargain"
Glenn Kessler
Washington Post, May 27, 2000, page E1

This article examines the recent increase in the price of gasoline and places it in a historical context. The article notes that after adjusting for inflation, gasoline prices are still near their lowest points on record in spite of the recent price rise. The article also points out that people in the United States pay far less for gasoline that consumers in other industrialized nations.

"Rules and Restrictions Apply"
Howard Kurtz
Washington Post, May 29, 2000, page C1

This article reveals an effort by United Airlines and US Airways to shape the news reporting on their proposed merger. The airlines had offered to give the New York Times, Washington Post and Wall Street Journal exclusive details of the merger arrangements, with the condition that they not include any comments from outside analysts in their initial stories. All three papers accepted the deal.

"Medical Reporting on Drugs Is Faulted"
Susan Okie
Washington Post, June 1, 2000, page A8

This article reports on a new study published in the New England Journal of Medicine that examined news reporting on new drugs. The study found that the coverage systematically overstated the benefits of new drugs and downplayed potential risks. Also, reporters often cited experts without noting that they were receiving funding from the drug manufacturer.

"Welfare Reform's Progress Is Stalled"
Amy Goldstein
Washington Post, June 1, 2000, page A1

This article examines the progress of welfare reform in Indiana. It notes the number of people on welfare is no longer declining. It also points out that most of those who have left the welfare roles in the state in the last four years are still living below the poverty line, even if they are working.

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.