Economic Reporting Review: July 31, 2000

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July 31, 2000: Social Security, Medicare and the Election; Senate China Vote

By Dean Baker

"Gore Reaches Out to Unions"
Ben White
Washington Post, July 22, 2000, Page A5

"Gore, With Gusto, Attacks Bush on Budget"
James Dao
New York Times, July 22, 2000, page A9

These articles discuss Vice President Al Gore's criticisms of Gov. George W. Bush's tax cuts and his plans to privatize a portion of Social Security. The Post article quotes Gore as criticizing Bush for expecting the Social Security trust fund to borrow to meet its obligations. The Times article refers to criticisms that Bush's tax cuts will not leave enough money to support programs like Medicare and Social Security.

It is worth noting the potential problems referred to by Gore would not arise until long after the winner of this year's election has left office. Medicare is projected to be fully solvent until 2022, at least 13 years after the winner of this election will have left office. Social Security is projected to be fully solvent until 2037, at least 28 years after the winner of this year's election will have left office. If these programs still appear to be headed towards shortfalls, there will be plenty of time to address the problem in later years.

The additional money that is projected to be needed to keep these programs solvent indefinitely is relatively small compared to such demands as the military build-up in the Carter-Reagan years. Since it is virtually certain that the nation will be far wealthier in 2020 or 2030 than it is today, it would have little difficulty providing whatever additional revenue might be needed to support these programs. The tax and spending decisions made in the next few years can only have a minimal impact on the future health of Social Security and Medicare.

"House Passes Social Security Tax Cut Bill"
Eric Pianin and Helen Dewar
Washington Post, July 28, 2000, Page A1

"House Passes Bill to Reduce Benefits Tax Passed in '93"
Richard W. Stevenson
New York Times, July 28, 2000, page A18

These articles report on the House of Representatives' passage of a bill that would repeal a 1993 law that increased the portion of Social Security benefits subject to taxation. As a result of the new bill, no one would pay taxes on more than 50 percent of their Social Security benefit. The 1993 bill had raised the maximum taxable amount to 85 percent.

While both articles note that only single individuals with incomes above $34,000 and couples with incomes above $44,000 would be affected, neither article points out that the 85 percent taxable level is phased in. This is important, because individuals or couples who are just over these income cutoffs, for example a couple earning $50,000 a year, would only have the 85 percent rule apply to a small portion of their Social Security benefits, not their entire check. For this reason, the proposed tax cut makes very little difference to individuals who are near the cutoffs. (In the case of a couple earning $50,000, the net tax savings would be less than $150.) Only retirees who are far above these cutoffs will see a significant tax reduction if this bill becomes law.

"Political Battle Lines Are Clearly Drawn in Fight Over Medicare Coverage"
Robin Toner
New York Times, July 24, 2000, page A12

This article discusses the state of the political debate over the future of Medicare. The article repeatedly mentions plans to increase the role of HMOs in the Medicare system as a means to control costs. The experience thus far suggests that this will not be an effective approach, since HMOs are apparently unable to compete with the traditional fee-for-service program.

Although HMOs have been receiving at least as much per patient (on a risk-adjusted basis) as the government pays for the traditional program, they have frequently complained that they are unable to make a profit. As a result, more than one in four of the Medicare beneficiaries who have enrolled in HMOs have already been dropped (see "Estimate of Ousters by HMOs Is Raised, " by Robert Pear, New York Times , 7/25/00; "More HMOs Exit Medicare and Add to Patient Turmoil," by Robert Pear, New York Times, 6/3/00; and ERR, 6/12/00). This history suggests that HMOs are not likely to be an effective way to control Medicare costs.

POVERTY

"House Backs Incentives Aimed at Poor Regions"
Juliet Eilperin
Washington Post, July 26, 2000, Page A1

This front-page article reports on a bill approved by the House of Representatives providing tax incentives, low-interest loans and other assistance to low-income areas. According to the article, the projected cost of this program over ten years will be $21 billion; this is less than 0.1 percent of projected federal revenue over this period. By contrast, the revenue lost in a single year from a fully phased-in repeal of the estate tax is estimated at $50 billion. This means that the money at stake in the debate over the estate tax is more than 20 times as much as will be devoted to this program. It would have been helpful to readers if the relatively small size of this program was made more apparent.

HOUSING

"Greenspan Says Rates Hinge on Future Data"
Richard W. Stevenson
New York Times, July 26, 2000, page C1

This article reports on Federal Reserve Board Chairman Alan Greenspan's testimony before the House Banking Committee. At one point, the article notes a question from a representative about the troubles that potential homebuyers face due to high mortgage rates and soaring real estate prices. Greenspan is quoted as saying in response: "I wish I could say to you I have a program which will either knock $100,000 off every home or raise incomes by some specific amount…. The world is not the way we'd always like it to be."

Earlier the article referred to testimony in which Greenspan said that he did not consider it the Federal Reserve Board's responsibility to keep stock prices in line, even though he had thought that stocks were becoming over-valued. One of the main reasons that housing prices have risen rapidly in many areas has been the enormous amount of wealth created in the stock market. Currently the ratio of stock prices to corporate earnings is more than twice its historic average, creating $10 trillion in additional wealth. Some of this money has been spent on housing, raising the price of houses.

Greenspan's decision not to try to correct the over-valuation of the stock market has the effect of transferring wealth from people who don't own stock to people who do. It has made it considerably more difficult for tens of millions of families who own little or no stock to become homeowners.

CHINA TRADE

"Gore Fails to Cash In on Prosperity"
David S. Broder and Dan Balz
Washington Post, July 23, 2000, Page A1

This article examines how economic issues are affecting the election prospects of Vice President Al Gore and other Democratic candidates. At one point it discusses the prospects of Rep. Deborah Ann Stabenow, who is running for the Senate in Michigan. The article asserts that "to protect her union base, Stabenow voted against giving China permanent normal trade status."

The article does not indicate how it has knowledge of Rep. Stabenow's motivations. While concerns over the political implications of her vote undoubtedly played a role, usually reporters are reluctant to ascribe such motivations to politicians. For example, it is unlikely that reporters would assert that a representative had voted in favor of granting China permanent normal trade status "in order to garner more corporate campaign contributions."

"Senate Takes Up China Trade Bill"
Helen Dewar and Matthew Vita
Washington Post, July 27, 2000, Page A4

This article reports on the progress in the Senate of a bill that would extend permanent normal trading relations (PNTR) to China. At one point, the article includes an assertion from U.S. trade representative Charlene Barshefsky, that the passage of PNTR "is essential if the U.S. is to benefit from China's accession to the WTO."

This was actually one of the issues that was in dispute when the measure was being debated by the House of Representatives (ERR, 5/29/00). Some legal experts claim that existing trade agreements already bind China to extend to the United States the trade concessions that it made to other nations as a condition of joining the WTO. Barshefsky's comment should not have been presented without noting that her view is not universally accepted.

THIRD WORLD HEALTHCARE

"G-8 Leaders Call For Solutions to Rich-Poor Divide"
Doug Struck
Washington Post, July 23, 2000, Page A17

This article reports on the outcome of the meeting of the G-8 nations in Okinawa, Japan. At one point the article mentions a commitment from the G-8 nations to "increase the money they spend to combat infectious diseases in developing nations." It is worth noting that the enforcement of patent protection in developing nations, in accordance with the TRIPS agreement, will almost certainly more than offset any money that may come out of this commitment.

Patent protection typically raises the price of drugs by several hundred or even several thousand percent above the free market price. For example, AIDS drugs that might sell for $100-$200 per year in the absence of patent protection sell instead for $10,000-$16,000 a year when subject to patent protection. It is unlikely that the G-8 nations will commit enough money to offset these sort of price increases attributable to patent protection.

RUSSIA

"Russia's Powerful Regional Chiefs Yield Meekly to Putin"
Michael Wines
New York Times, July 27, 2000, page A3

This article reports on a series of measures that Russian President Vladimir Putin pushed through the upper house of Russia's parliament. According to the article, the purpose of these measures was to concentrate power in the central government in Moscow and to eliminate waste and corruption.

One of the measures passed by the Parliament lowers the top income tax rate from 35 percent to a flat 13 percent rate. Many nations, including the United States, have marginal tax rates above 35 percent, so there is no obvious reason that a tax rate on high income people in Russia would have been uncollectable. The main impact of the reduction in the tax rate would appear to be to lower taxes for the wealthiest segment of the population.

Similarly, the article refers to a 4 percent tax on business revenue as "much-derided," later noting that it applies to "profitable and unprofitable business alike." This sort of tax would be similar to the value-added taxes applied in many industrialized countries. In a country like Russia, with a weakly developed taxing authority, it may be desirable to tax corporate revenue instead of profit. Revenue is much more easily measured than profit, so a tax on the former can be more readily collected. The article does not identify any of the people who supposedly derided the tax.

It is worth noting that the Times (and the Post) consistently reported on measures taken by Boris Yeltsin and his administration as being intended to reduce corruption. The Yeltsin era is now almost universally regarded as having been a period of massive corruption that extended to the very top leadership, including Yeltsin himself. The failure of the reporters at these papers to detect this corruption until long after the fact is grounds for skepticism over the current portrayal of Putin as a reformer.

PERU

"Tensions Build for Inauguration in Peru"
Clifford Krauss
New York Times, July 28, 2000, page A8

This article reports on the political situation in Peru as President Alberto K. Fujimori is about to be inaugurated for a third term. At one point the article notes that Fujimori is adopting more populist positions to gain public support. It then asserts that "he also has broken with his usual free-market policies, through new laws that remove tax benefits for foreign mining companies that reinvest profits in the country." While a law that provides special tax benefits to business might be characterized as "pro-business," it is a departure from free-market policies.

OUTSTANDING STORIES OF THE WEEK

"How Companies Stall Generics and Keep Themselves Healthy"
Sheryl Gay Stolberg and Jeff Gerth
New York Times, July 23, 2000, Section 1 page 1

This article examines the tactics that pharmaceutical companies use to keep generic drugs from competing with their brand drugs. As the article points out, the monopoly provided by patent protection can often generate hundreds of millions a year in profits for a drug manufacturer from a single drug. These monopoly profits provide an enormous incentive for corporations to use the legal and political system to prevent competition when a patent expires. In a case discussed in the article, one company actually paid the manufacturer of a generic equivalent $4.5 million a month not to market its drug.

"Renewed Corporate Wanderlust Puts a Quiet Brake on Salaries"
Louis Uchitelle
New York Times, July 24, 2000, page A1

This article examines the increasing ability of corporations to move all segments of their operations to locations where they can find lower-cost labor. It shows how many corporations have used this strategy to keep down wages even in a period of relatively low unemployment.

"Driver Says He Was Paid to Stage Violence to Tar Teamsters"
Steven Greenhouse
New York Times, July 25, 2000, page A21

This article reports on statements by a driver for Overnite Transportation who claims that the company paid him to damage its property so that it could blame the Teamsters union, which is currently on strike against Overnite. The driver also claimed that the company paid him to make false accusations against Teamster supporters so that the company could fire them. While it is common for companies to engage in illegal tactics in labor disputes, it is rare that these tactics receive much attention from the media.

"A 'Petri Dish' in the Pacific"
Juliet Eilperin
Washington Post, July 26, 2000, Page A10

This article reports on how a group of conservative businesspeople have used their money and connections to ensure that U.S. government regulations are not applied to the Mariana Islands. The islands were seized during World War II and continue to be held as a U.S. territory. The article points out that as a result of intensive lobbying efforts, U.S. labor and safety standards are not currently being applied to the islands.

"Economic Scene: The Internet Carries Profound Implications for Providers of Information"
Hal R. Varian
New York Times, July 27, 2000, page C2

This analysis discusses some of the long-term implications of the Internet for the idea of copyright. It points out that digital technology makes it almost impossible to enforce copyrights, and allows for instant and costless distribution of recorded audio or video material. The article then suggests possible alternative methods for supporting the creation of this material

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.