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Economic Reporting Review

April 5, 1999

By Dean Baker

"Prognosis Better For Medicare, Social Security"
Amy Goldstein
Washington Post, March 31, 1999, page A1

"Longer Solvency for Medicare and Social Security"
David E. Rosenbaum
New York Times, March 31, 1999, page A19

"No Comfort in New Solvency Figures"
Michael M. Weinstein
New York Times, April 1, 1999, page A22

These articles discuss the newly released Social Security and/or Medicare Trustees Reports. All three articles note the improvement in this year's reports compared to the Trustees Reports from the prior two years, with the projected date of the depletion of both trust funds being pushed further into the future.

The first two articles state that the improved state of these programs is largely attributable to the recent strength of the economy. Actually, the strong growth of the last few years has had very little impact on the projections for these programs. By far the largest factor in extending the projected date of the depletion of the Social Security fund to 2034 (it had been 2029 in the 1997 Trustees Report) has been changes in the consumer price index (CPI).

Since Social Security benefits are indexed to the CPI, the lower rate of inflation that will be recorded by the new CPI is projected to save the program a considerable amount of money over the 75-year planning period. The growth rate that is projected over the planning period has actually been revised downward over the last three years, when the numbers are corrected for changes in measurement.

The main reason that the date of the depletion of the Medicare fund was pushed back from 2008 to 2015 was a reduction in the projected rate of growth of health care costs. In the last several years Medicare costs have been consistently coming in below projections; this has led the Medicare trustees to adjust their long-term projections of cost growth downward.

Both of these articles emphasize the problems that these programs will face paying for the retirement of the baby boomers. The Social Security program is already projected to remain solvent beyond the life expectancy of most baby boomers. Its real problem is that the generations following the baby boomers are projected to live longer lives and therefore spend a larger portion of their lives in retirement. The biggest problem facing Medicare is the rapid projected growth in health care costs. This growth in health care costs would create enormous problems for the program and the economy even if the large baby boom cohort didn't exist.

The first articles express disappointment that the new Trustees Reports, by reducing the apparent need for any changes in these programs, make it less likely that changes will occur. For example, the Post article noted that the reports "could have the paradoxical effect of slowing the momentum for change." The Times article states that "economists of all persuasions generally agree that the sooner the necessary changes are made to shore up Social Security and Medicare, the less abrupt and painful those changes will seem to taxpayers and retirees."

Economists who are familiar with programs agree that the projected health care cost increases, which are the main source of the problem for the Medicare program, will have a devastating effect on future living standards if they are not addressed, regardless of what happens to Medicare. The tax increases that would be needed to sustain the Medicare program are relatively small by comparison.

The fact that real wages have actually been declining in recent years also leads many economists to believe that it may not be desirable to have a Social Security fix in the near future. It might be more reasonable to allow workers to experience some positive wage gains for a period of time and to see what the projections look like 10 or 15 years down the road. Since the necessary fixes are no larger than the tax increases in each of the prior four decades, the projections provide little basis for the sense of urgency conveyed in this article.

The second Times article discusses the projected costs for Social Security and Medicare from the standpoint that taxes can never be raised. For example, it asserts that "by 2030, retirement benefits will account for more than two-thirds of the budget." This assertion would only be true if the projections for both Medicare and Social Security prove accurate and the Congress chooses not to raise any taxes whatsoever over the next 30 years. There has not even been a 10-year stretch in the post-war period where Congress did not raise taxes, it seems implausible that 30 years would pass without a tax increase.

This article includes other dire scenarios, involving massive cuts in other government programs, all based on this peculiar premise. The article also implicitly endorses two proposals as necessary cost-cutting measures, raising the age of Medicare eligibility and means-testing Medicare and Social Security (limiting benefits for the better-off elderly). These policies are widely rejected by economists as inefficient and unworkable

Raising the eligibility age for Medicare is generally viewed as highly undesirable because older workers already have great difficulty getting health care coverage in the years just before Medicare eligibility. Raising the age of eligibility would save Medicare some money but it would create an enormous population of older uninsured workers. This problem was the reason Medicare was initially established.

Means-testing may appear attractive, but economists recognize that it would be extremely difficult to administer. Less than 20 percent of elderly households have incomes above $32,000 per year, so a means test would have to be set at a relatively low level if it is to save any significant amount of money. A means test for Medicare would also provide a very large incentive to hide assets, for example by passing along stock holdings to children. This sort of game-playing is already commonplace with Medicaid, which pays for nursing home care for the indigent elderly.

There is considerable evidence to show that the public sector is more efficient in performing the tasks for which Social Security and Medicare were established. Unless one has an ideological dislike of government, there seems no reason why the size of government should not simply expand as the need for its services increase. The alternative position is that the private sector should be favored, even though it costs more, simply to avoid the expansion of government.

"The Beef Over Bananas"
Paul Blustein
Washington Post, March 28, 1999, page H1

This article discusses the current trade dispute between the United States and the European Union, which originated in U.S. objections to the E.U. reserving a portion of its banana market for several former Caribbean colonies. The article notes the prospect to this could lead to a series of retaliatory tariffs and raises the possibility that it could ultimately develop into "the tit-for-tat protectionism that helped plunge the world into the Great Depression." The world was plunged into the Great Depression by financial collapses in the United States and elsewhere, such as the 1929 stock market crash in the United States. In the course of the resulting economic downturn most nations, including the United States, created stiff trade barriers to protect domestic industry. It can be argued that these barriers made the Depression worse, but since the crash preceded the trade barriers, protectionism cannot possibly be blamed for plunging the world into the Great Depression.

The article also at several points characterizes the trading regime favored by the Clinton administration as "the free-trade system." This is an inaccurate characterization, since it has actively sought to increase many protectionist barriers, most importantly by extending U.S.-style laws on intellectual property claims (patents and copyrights) to developing nations. Patents and copyrights, by artificially raising the prices of pharmaceuticals, compact discs, videocassettes and other protected items, create economic distortions that are orders of magnitude larger than those created by the trade barriers discussed in the article.

"Russia Optimistic IMF Will Renew Loan Critical to Its Economy"
David Hoffman
Washington Post, March 29, 1999, page A20

"Primakov Says IMF Will Resume Lending to Russia"
David Hoffman
Washington Post, March 30, 1999, page A8

"I.M.F. Relents on Aid to Russia, but U.S. Talks Tougher"
David E. Sanger
New York Times, March 30, 1999, page A6

These articles discuss the negotiations between Russia and the IMF over a new loan. The first article asserts that for Russia such a loan "is critical to preventing a new economic collapse." The article does not indicate how it has reached this assessment, which also appears in the headline. No one who is quoted or cited in the article says anything that would suggest that a new IMF loan would carry so much importance for Russia. Since a new loan would be used almost entirely (perhaps entirely) to meet interest payments on prior debt to the IMF, it is not obvious that it will help Russia's economy at all.

In fact, arguably the loan is far more critical to the IMF. The IMF almost never allows a nation to default on its debt. (A few rogue states such as North Korea, Libya and Iraq are the exceptions.) It will almost always try to reach some sort of accommodation with a debtor so that it can continue to have influence over its economic policies. The IMF would probably consider it a very bad precedent if Russia did not a reach an accommodation, and instead pursued its own economic policies.

The view that the loan was more critical to the IMF than to Russia seems to be borne out by the information in articles published on March 30. These articles indicate that the IMF was dissatisfied with the Russian government's economic policies, but nonetheless it is planning to renew loans to Russia. According to these articles, the IMF will loan Russia just enough money to repay its earlier loans. This will give Russia no additional capital to support its economy, although it will increase its indebtedness to the IMF.

The March 30 Post article notes that the last IMF loan to Russia in the summer of 1998 appears to have been largely siphoned off into the bank accounts of various well-connected individuals. It does not mention that the current government was not in power at the time. When the last loan from the IMF was granted, the Russian government at the time was controlled by economic reformers closely allied with the U.S.

Outstanding Stories of the Week

"Market Grows For U.S. Cars From Canada"
Keith Bradsher
New York Times, March 27, 1999, page B1

This article reports on an increasing trend for importers to buy new U.S.-made cars in Canada and resell them in the United States. Most of the cars purchased are low mileage mini-vans or sports utility vehicles. By tolerating this practice, the major U.S. auto manufacturers are able to evade the mileage standards that apply to the fleet of cars they sell in the United States.

"Corporate Profits Are Tasty, But Artificially Flavored"
Louis Uchitelle
New York Times, March 28, 1999, Section 3 page 4

This article notes the increasing belief among corporate analysts that profits are being overstated in order to maintain high stock prices. It also explains several of the common methods used by CEOs to prop up profits.

"Makeshift Pharmacies Are Dispensing Death"
Don Terry
New York Times, March 29, 1999, page A19

This article reports on the spread of underground pharmacies in southern California. These pharmacies dispense drugs and other remedies to the largely uninsured immigrant populations of southern California. The spread of a black market in drugs is exactly what economic theory predicts would happen as a result of the state-sanctioned monopoly that patents give to pharmaceutical companies, since patents raise the price of drugs by tens or even hundreds of times the price they would sell for in a free market.

Many drugs sell for between $50-$200 per prescription; in the absence of patent protection these drugs would usually sell for $2-$3 per prescription, since generally they are very cheap to produce. The gap between the patented price and the free market price creates a large opening for underground pharmacies to sell unauthorized and unregulated versions of the same medicine. As health care in general, and prescription drugs in particular, gets more expensive, underground pharmacies are likely to spread.

"Fed Maintains Steady Stance In Rate Policy"
Louis Uchitelle
New York Times, March 31, 1999, page C1

This article discusses the current economic situation and the factors that appear to be preventing any acceleration in inflation even as the unemployment rate remains near its lowest level for the last 30 years.

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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