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Economic Reporting Review

March 22, 1999

By Dean Baker

"Schroeder Faces Obstacles on the Road to 'New Center'"
William Drozdiak
Washington Post, March 13, 1999, page A15

"German Stock Market Soars As Leftists Fiscal Chief Quits"
Edmund L. Andrews
New York Times, March 13, 1999, page A6

"Aide Who Resigned Tosses a Barb at Schroder"
Edmund L. Andrews
New York Times, March 15, 1999, page A10

These articles report on the situation faced by the German government in the wake of the resignation of Oskar Lafontaine as Finance Minister and leader of the ruling Social Democratic Party. All three articles speak of Lafontaine and/or his views in disparaging terms.

For example, the first Times article refers to him as "the bombastic Mr. Lafontaine" and describes his calls for the European central bank to lower interest rates as "blustery demands." The Post article repeatedly characterized the views held by Lafontaine as "traditional" and contrasts them with conservative pro-business views, which are described as "modern."

It is unusual for newspapers to use their news columns to characterize a high-ranking official in such a derogatory way, even if the description were accurate. For example, there are few newspaper articles that would refer to a prominent elected official in the United States or an allied nation as "mendacious," regardless of the extent of their record of deception.

It is worth noting that the economic perspective expressed in Lafontaine's "blustery demands" was shared by many of the world's most prominent economists, who also believe that the European central bank's monetary policy has been too restrictive. (See "An Economists' Manifesto on Unemployment in the European Union," BNL Quarterly Review, #206, 9/98.)

It also is not clear how pro-business views can be described as modern, while support of the welfare state is viewed as traditional. The welfare state came into existence in most nations in the wake of more laissez-faire capitalist policies. To be historically accurate, the pro-business views are clearly more traditional than support of the welfare state.

The second Times article also characterizes Lafontaine's program as involving "huge new burdens" on business in the form of higher taxes. While his program did involve higher taxes, it is not obvious that these burdens were "huge." The higher taxes that German business would have faced as result of Lafontaine's program were less than one quarter of the increase in profits that German businesses have been able to gain over the last two decades as a result of redistributing income from workers to capital. If the taxes were huge, then the redistribution from workers to business owners was more than four times as "huge."

The Post article asserts that the resignation of Lafontaine will allow Prime Minister Schroder to "carry out the kind of pro-business policies for which he was elected." According to the article, the goal of such policies is to "restructuring Germany's bloated welfare state and reduce labor costs [wages and benefits] to make business more competitive." This assertion misrepresents the nature of the election. Neither the Social Democrats nor the Christian Democrats, the main conservative opposition party, ran on a platform that called for cutting back the welfare state and reducing wages and benefits. (See "Rivals Have Found Little to Fight Over in German Election," by Edmund L. Andrews, New York Times, 9/26/98, page A1.) In spite of the apparent lack of political support for this position in Germany, the Post article characterizes it as "pragmatic."

The basic realities of Germany's economic situation are also misrepresented in these articles. For example, the Post article implies that Germany lacks international competitiveness. Germany continues to have a balance of trade surplus of more than 1.0 percent of GDP, in contrast to the U.S. which has a balance of trade deficit of more than 2.0 percent of GDP. The article never indicates how it measures competitiveness, but by this market measure, Germany's economy is far more competitive than the U.S. economy. The Post article also asserts that German economy "fell into recession during the fourth quarter of last year." While recent data indicates that Germany's economy had negative growth in the fourth quarter, a recession is defined as two consecutive quarters of negative growth. This has not yet happened.

The second Times article at one point asserts that "Social Democrats were trounced in local elections [in the state of Hesse] several weeks ago." Actually, the Social Democrats picked up a small number of votes in these elections compared with their previous showing. However, the Social Democrats' coalition narrowly lost its majority because its partner, the Greens, suffered significant losses (See "Schroder's New Politics Tripped Up by Hesse Voters," by Roger Cohen, New York Times, 2/8/99, page A3.)

"Medicine Costs Spur Battle on Medicare"
Amy Goldstein
Washington Post, March 14, 1999, page A1

"Medicare Panel in Policy Deadlock"
Amy Goldstein
Washington Post, March 16, 1999, page A1

"Medicare Panel Fails to Agree on Recommendations"
Amy Goldstein and John R. Harris
Washington Post, March 17, 1999, page A2

"Medicare Panel, Sharply Divided, Submits No Plan"
Robert Pear
New York Times, March 17, 1999, page A1

"Changing Medicare"
Robert Pear
New York Times, March 18, 1999, page A20

These articles discuss the debate within a panel designed to make recommendations for the future Medicare, as the panel completed its work unable to reach agreement. The panel was jointly appointed by the president and Congress.

These articles present a very misleading picture of the problems facing the Medicare system. First, several of them discuss the system as though it is facing a serious crisis where it will be unable to pay benefits for the elderly. For example, the first Post article prefaces a comment with the statement "with Medicare poised to go broke in about a decade." The first Times article comments that the commission failed to "endorse any recommendations to avert a crisis in the program."

The Medicare program faces no funding shortfall whatsoever for the next 10 years. Even when its trust fund is projected to be depleted in 2008, the program is still projected to be able to cover more than 85 percent of benefits. Furthermore, the amount of additional revenue that would be needed to make up the projected shortfall in that year is relatively small, less than 2.6 percent of the federal revenue projected for that year.

It is also worth noting that this projection assumes that there will be no increase in the Medicare tax. The last Medicare tax increase was in place in 1994. By 2008, 14 years will have passed. Since the program was created in 1966, there has never been a 14-year period in which the Medicare tax was not increased, as longer life spans and increased health care costs have continually increased the cost of the program.

These articles also neglect to point out that the main reason for the financing problem facing Medicare is the projected rise in health care costs. In fact, these articles suggest that the problems facing Medicare are due to the way in which the program structured. For example, the March 16 Post article asserts that Medicare is "widely regarded as antiquated," while the March 17 Post article states that the system is "widely considered to be antiquated."

According to the Health Care Financing Administration, an average family of four will spending $3,500 a year (in today's dollars) more on medical care in 2008 than this year. The impact of this projected increase in health care costs vastly exceeds the additional tax revenues that may be needed to meet Medicare's projected deficit in 2008 or subsequent years. If nothing is done to curb the rate of increase in the price of medical care, it is going to have a devastating impact on the living standards of most families. It is worth noting that the Health Care Financing Administration projects that the average annual rate of increase in health care costs of the next decade will be more rapid in the private sector (7.3 percent) than in Medicare (6.7 percent).

None of these articles discusses the main problem associated with opening Medicare up for market competition, the solution to the funding problem being most actively considered by the panel. Five percent of Medicare's beneficiaries account for more than half the program's costs. Private insurers will be able to treat Medicare patients quite profitably, as long as they can avoid covering this relatively unhealthy group. No one has yet been able to devise a system whereby the government can require that private insurers pick up their fair share of expenses for the sicker segment of the population. Unless government bureaucrats can accomplish this feat, the proposed Medicare reform will neither save the program money, not necessarily insure health care coverage for people who need it most.

It is also worth noting that the price of prescription drugs in particular have been rising far more rapidly than the overall rate of inflation. This suggests that the existing system of supporting pharmaceutical research may not be cost efficient. (See "Outstanding Stories of the Week," below.)

"By a Wide Margin, The House Votes Steel Import Curbs"
Alison Mitchell
New York Times, March 18, 1999, page A1

"A Long-Shot House Vote to Limit Steel Imports"
Leslie Wayne
New York Times, March 19, 1999, page C3

"Politics and Pop Mix in Film Piracy Protest in Hong Kong"
Mark Landler
New York Times, March 18, 1999, page C4

The first two articles discuss the House of Representatives approval of a bill that would restrict imports of steel. The third article discusses a protest in Hong Kong against the sale of unauthorized copies of movies and music. The first two articles refer to the measure passed by the House as an example of "protectionism," and contrast it with President Clinton's "free trade" policies.

One of the major goals of President Clinton's trade agenda has been to have U.S.-style patent and copyright laws enforced throughout the world. Patents and copyrights are forms of protectionism, in the sense that they require state interference in the market. For example, as a result of copyright protectionism, the government does not allow individuals to sell copies of videocassettes, unless they have first gotten permission from the copyright holder.

There is a rationale for the protection provided by copyrights and patents: The monopoly profits they allow provides an incentive to undertake the intellectual and artistic work. But all trade tariffs and quotas have some rationale (e.g. protecting jobs): this doesn't change the fact that they are still protectionist. Copyrights and patents are clearly not the only, and not necessarily the best, way to support intellectual and artistic work.

It is also worth noting that protectionism in the form of patents or copyrights imposes a far higher cost on consumers than most other types of protectionism. The second article quotes a person who claims that he can buy 10 bootleg video compact discs for $12 dollars. By comparison, a single video compact disc sold under copyright may cost more than $15, suggesting a premium of more than 1000 percent. By comparison, it is rare for tariffs or quotas to add more than 20 percent to the price of a product. It is striking that protectionism designed to preserve jobs of blue-collar workers consistently is discussed in such a negative context in the media, while protectionism that supports the profits of the pharmaceutical and entertainment industry passes virtually unnoticed.

"In House Testimony, Rubin Admits Loans to Russia May Have Been Used Improperly"
David E. Sanger
New York Times, March 19, 1999, page A10

This article discusses Treasury Secretary Robert Rubin's testimony before a House subcommittee, in which he said that some International Monetary Fund loans to Russia may have been used improperly. The article then goes on to note that Russia's current Prime Minister, Yevgeny Primakov, is trying to obtain new loans from the IMF. The article also includes comments from IMF officials and Rubin suggesting that the current Russian government is not competent. The article neglects to mention that the alleged misuse of funds took place prior to Primakov taking office. At the time the earlier loans were granted, Russia's government was controlled by the "reformers" favored by the IMF and Secretary Rubin. Primakov, who was a high official in the Gorbachev years, came to power as a result of the disastrous economic situation created by seven years of IMF-backed reforms.

Outstanding Stories of the Week

"New and Old Drugs Are Found Equal"
Erica Goode
New York Times, March 19, 1999, page A1

"New Profits in Old Bottles"
David J. Morrow
New York Times, March 19, 1999, page C1

The first of these articles reports on a new study by the Agency for Health Care Policy and Research, which found that the new generation of anti-depressant drugs is no more effective than older anti-depressants. The second article reports on a new trend in pharmaceutical research, in which drug companies seek new uses for existing drugs. According to the article, this research generally costs much less than researching new substances and often allows for the extension of patent rights.

Both of these articles demonstrate ways in which the current system of pharmaceutical research is wasteful. The new generation of anti-depressants have been heavily marketed by the pharmaceutical industry, and as a result are widely prescribed. These drugs generally cost several times as much as older anti-depressants, because they are still subject to patent protection. If these drugs are on average no more effective than the older drugs, then billions, or even tens of billions, of dollars have been wasted on their purchase.

The second article notes that the profit margins on drugs with second uses is typically 85 percent, as opposed to the 80 percent profit margin on new substances.

Dean Baker is a senior research fellow at the Preamble Center.

Recent articles can be found on the websites of the New York Times and Washington Post.

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