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Economic Reporting Review

July 5, 1999

By Dean Baker

Medicare | Social Security | Debt | Egypt | Canada | Outstanding Stories


"Clinton Drops Key Medicare Change"
Amy Goldstein and Eric Pianin
Washington Post, June 26, 1999, page A1

"President Shifts Focus to Home"
John F. Harris and Charles Babington
Washington Post, June 26, 1999, page A1

"Clinton Planning To Cut Long-Term Cost of Medicare"
Robert Pear
New York Times, June 27, 1999, Section 1 page 1

These articles all discuss President Clinton's plans for restructuring Medicare and including coverage for prescriptions under the program. All three articles refer to a need to restructure Medicare in some manner. The first Post article asserts that Medicare "is widely considered to offer an outmoded package of benefits." The second Post article refers to Medicare as "financially ailing."

These are questionable claims. According to the most recent report from the Medicare Trustees, without any changes whatsoever, Medicare will be able to meet all its projected payments for the next 15 years.

During this period, the Health Care Financing Administration is projecting that per person costs in the Medicare program will grow at a slower rate than private sector health care. The projections in the 1999 Medicare Trustees Report show per person costs rising at the rate of 0.6 percent annually above the overall rate of inflation. By contrast, the most recent projections for private health care spending show per person costs increasing at 2.9 percent above the overall rate of inflation ( ).

In other words, the projected increase in the cost of health care provided by the private sector would impose a greater burden on the public than any tax burden associated with the projected growth in Medicare costs. This suggests that reform efforts might be better directed if they focused on containing costs in the private health care system, rather than just Medicare.

As people live longer lives, and a larger segment of the population is covered by Medicare, the program's costs will inevitably rise. However, this is a very gradual process, and there is no reason to believe that a nation that is growing richer every year will not be able to meet this expense. According to the Trustees' projections, the tax increase that would be needed to meet all projected Medicare expenditures over the next 50 years is less than 2 percent of the projected growth in wages over this period.

The first Post article notes that Clinton has apparently dropped a plan to means test Medicare, which it estimates would have saved $3 billion-$10 billion over the next five years. It then comments that the White House must find some alternative way to make up this money. The means testing proposed by the White House would have applied only to a very small portion of elderly at the top end of the income distribution. The estimates in the Post suggest savings that amount to between 0.36 percent and 1.2 percent of projected Medicare expenditures over the next five years. Savings of this magnitude would make very little difference in the solvency of the program.

Imposing a means test of the sort suggested by the Clinton administration would only make sense as a cost-cutting policy if the intent was to gradually lower the income thresholds, so that eventually the means test was affecting large numbers of middle-income retirees. This is the reason that many supporters of Medicare have vigorously opposed any means testing of benefits.

"Clinton Lays Out Plan to Overhaul Medicare System"
Robert Pear
New York Times, June 30, 1999, page A1

This article reports on President Clinton's new Medicare plan. It identifies his proposal to give beneficiaries a share of the cost savings associated with switching to an H.M.O. as a major reform of the program. According to chart included in the article, this proposal is estimated as saving $8 billion over the next 10 years. This is less than 0.5 percent of the amount that Medicare is projected to spend over this period.

See also "Outstanding Stories of the Week."

Social Security

"Clinton To Unveil Plan to Shore Up Social Security"
Richard W. Stevenson with Adam Clymer
New York Times, June 28, 1999, page A1

"Budget Surplus Forecast Grows By $1 Trillion"
Eric Pianin and John F. Harris
Washington Post, June 29, 1999, page A1

"Republicans Raise Stakes For a Tax Cut: $1 Trillion"
Richard W. Stevenson
New York Times, June 30, 1999, page A11

These articles discuss President Clinton's latest proposal to place more general revenue in the Social Security trust fund. The first two articles report on his plans to establish a "lockbox," whereby surplus revenue from Social Security taxes could not be used for anything other than debt reduction. It is worth noting that finances of Social Security are not affected at all by what is done with this surplus revenue. The Social Security trust fund will have accumulated the same amount of government bonds regardless of how the government spends (or doesn't spend) the money it borrows from it. (See ERR, 5/31/99).

At one point, in commenting on demands for increased federal spending, the first Times article asserts that "hardly anyone wants to keep defense spending level." The article does not provide any evidence to support this view. Recent polling data has not identified increased military spending as a high priority of the public.

The second Times article asserts Social Security "will face insolvency in coming decades as the baby boom generation retires." According to the latest projections from the Social Security trustees, the program will be fully solvent until 2034, with no changes whatsoever. At that point, all of the baby boom generation will have reached normal retirement age, with the youngest baby boomers being 70. The real problem facing Social Security is not the baby boom generation, but simply the fact that people are projected to live longer lives.


"Clinton Outlines Plan For Surplus; G.O.P. Suspicious"
Richard W. Stevenson
New York Times, June 29, 1999, page A1

"Rubin, Placid Before Brickbats and Bouquets"
Paul Blustein
Washington Post, July 2, 1999, page E1

The Times article discusses President Clinton's latest budget proposals. The Post article comments on Treasury Secretary Rubin's accomplishments as he leaves his position. The articles display very different attitudes towards different types of debt.

The Times article declares that paying off the entire debt of the federal government would be a "far-reaching accomplishment." In standard economic theory, there are no obvious negative consequences associated with moderate amounts of government debt, such as the current ratio of federal debt to GDP. In fact, it is probably desirable to keep a significant amount of federal debt outstanding since it provides a completely safe asset for banks, pension funds and individuals to hold.

The buying and selling of federal debt is also the mechanism used by the Federal Reserve Board to control the money supply. It is not clear how it will accomplish this task in the absence of government debt.

It is also worth noting that money (currency) is also a form of federal debt. If the federal debt literally went to zero, then there would be no money in circulation. This could make it more difficult to run the economy.

At one point the Times article notes President Clinton's proposal to buy corporate stocks and bonds for the Social Security trust fund. It contrasts these "tangible assets" with the government bonds currently held by the trust fund, which it characterizes as "paper promises from the Treasury."

Actually, corporate bonds and stock certificates also exist on paper. They are not in any obvious way more tangible than government bonds. While corporations have on occasion defaulted on their bonds, and stocks can drop in value and even become worthless, the federal government has never defaulted on its debt. In this sense, its "paper promises" may be seen as possessing at least as much value as the paper promises from corporations.

The Post article, in reflecting on Rubin's accomplishments, notes the wisdom of his view that it is better to have a strong dollar, because it keeps inflation low, than a weak dollar that maintains the competitiveness of U.S. exports.

The impact of a strong dollar on inflation--when accompanied by a large rise in the trade deficit, as it has been--is inevitably temporary. The United States has seen a huge increase in its trade deficit over the last two years to levels that cannot be sustained indefinitely.

The reason that these deficits are unsustainable is that they are leading to a rapid run-up in foreign indebtedness. The foreign debt of the United States is more than $1.5 trillion, and is rising at a rate of more than $250 billion annually. At some point the trade deficit will have to be reduced to keep the foreign debt within reasonable bounds.

Bringing the trade deficit down will require a fall in the dollar, which will mean an increase in the price of imported goods and some amount of inflation in the United States. In this sense, the decision to have a high dollar might reduce inflation for the present, but it will worsen it in the future.


"Mubarak's Method"
Howard Schneider
Washington Post, June 27, 1999, page A23

This article presents an assessment of the President Hosni Mubarak's rule on the eve of a scheduled visit to the United States. At one point, the article asserts that "the economic basics have improved significantly since Sadat's time."

It then presents a number of measures, several of which have nothing to do with economic basics. For example, it notes that Egypt exports electricity, has a class of entrepreneurs who are "overhauling formerly state-owned companies and cutting deals in the region," and "allows competition among private cellular phone providers."

The most standard measure used to measure economic performance is the rate of per capita GDP growth. This has been a respectable 2.8 percent annually in the Mubarak years, according to World Bank data. However, this is down from the 3.6 percent annual growth rate that Egypt had in the 20 years prior to Mubarak coming to power.

The article later comments that in several situations, Mubarak has opted to promote stability at the expense of economic growth. One of the examples it gives is Mubarak's decision not to provide patent protection for pharmaceuticals against generic substitutes, because of his concern over the impact of higher drug prices.

Actually, providing patent protection, like any other form of trade restriction, would almost certainly work to impede growth, particularly in the case of Egypt. While Egypt does have domestic drug manufacturers that can produce generic equivalents to patented drugs, it is extremely unlikely that these would be able to conduct enough pharmaceutical research to gain any significant number of drug patents.

Therefore, the primary impact of enforcing patent protection in Egypt would be to force Egypt's citizens to pay more for their drugs, with the additional money going to foreign pharmaceutical companies, at the expense of domestic manufacturers. It is difficult to see how this would promote growth in Egypt.


"10 Years Later, Canada Sharply Split on Trade Pact"
Steven Pearlstein
Washington Post, June 29, 1999, page A1

This article discusses Canadian views towards the free trade agreement with United States that it implemented 10 years ago. The article quotes several business people who see the trade agreement as having been a disaster, due to the business they have and the workers who have lost their jobs.

It then goes on to assert that "the numbers, however, tell a positive story." The evidence that it presents to support this assertion is that productivity has increased most in industries that were newly opened up to competition by the trade agreement.

This is dubious evidence. In some industries, output shrank by 10 percent to 30 percent as a result of new competition from the United States. This shrinkage by itself will have a large positive impact on productivity numbers by removing the least productive firms.

For example, if an industry loses firms that account for 20 percent of all output, these firms will tend to be less productive than the industry average. If these firms are 20 percent less productive than average, average productivity in the industry will rise by 5 percent simply because these firms have shut down.

The real test of whether this change has been good for the economy is whether these workers find more productive employment in other sectors. The evidence suggests that this has not been the case. Canada's unemployment rate has been far higher in the 10 years since the trade agreement than in the prior decade. Its overall rate of productivity growth has also slowed since the agreement.

According to data from the Conference Board, GDP per hour worked grew at a 1.9 percent annual rate between 1973 and 1987. From 1987 to 1995 it grew at just a 0.7 percent annual rate. Data from the Bureau of Labor Statistics document a similar slowdown in overall productivity growth. In short, the numbers don't in any obvious way tell a positive story about the impact of the trade agreement.

The article also includes a chart which shows a slowing rate of growth of unit labor costs in Canada. The growth rate of unit labor costs is identified in this chart as "a common measure of efficiency." This is inaccurate. Unit labor costs can slow either because firms are becoming more efficient or because wages are growing more slowly. In the latter case, which appears to be the main factor behind the slowdown in Canada, the movement in unit labor costs is primarily giving information about changes in distribution between capital and labor, not about the efficiency of Canadian firms.

Outstanding Stories of the Week

"Income Level Is Key in Evaluating Effects of Medicare Proposal"
David S. Hilzenrath
Washington Post, June 30, 1999, page A11

This article presents an assessment of the new Medicare drug benefit proposed by President Clinton. It points out which groups are likely to be the biggest gainers under the plan.

"H.M.O.'s Will Raise Medicare Premium Or Trim Benefit"
Robert Pear
New York Times, July 2, 1999, page A1

This article reports on plans by HMOs to raise their premiums for Medicare beneficiaries or to drop services in many areas. The article discusses the difficulty of setting the correct compensation for Medicare beneficiaries covered by HMOs, since HMOs have the ability to "cherry pick" among their customers, signing up only healthy people.

According to data from the Health Care Financing Administration, 5 percent of beneficiaries account for half of all Medicare expenditures. If H.M.O.'s can limit the portion of this relatively sick population that they cover, they can profit enormously. The difficulty the government faces in setting compensation levels is determining the extent to which a particular H.M.O. has been able to cherry pick, as oppose to serve a representative sample of the Medicare population. This problem has not been noted in most other coverage of this issue (e.g. "Elderly to Face Hikes in HMO Fees" by Amy Goldstein and David S. Hilzenrath, Washington Post, 7/2/99, page A1).

"The New Language of American Labor"
Sam Howe Verhover
New York Times, June 26, 1999, page A8

"A Union March on Alabama"
Robyn Meredith
New York Times, June 29, 1999, page C1

These articles discuss the situations facing unions at two major employers, a meatpacking factory in eastern Washington and a new Mercedes factory in Alabama. They present careful accounts of the factors that favor or detract from effective organizing.

"Digital Music Standard Raises Host of Questions"
Matt Richtel
New York Times, June 30, 1999, page C1

This article discusses the efforts of recording industry companies to establish a standard for downloading music off the Internet which will allow them to preserve their copyright protection. It is a good account of the sort of inefficiencies associated with this type of restriction on commerce.

"Reviving the Economics of Fear"
Louis Uchitelle
New York Times, July 2, 1999, page C1

This article discusses a shift in economic views among many mainstream economists. Since the '70s, most have not believed that a prolonged shortfall in demand, such as occurred during the Great Depression, was ever likely to occur again. The article reports on how recent events in Japan have gotten many prominent economists to take this possibility seriously and to begin discussing it in their textbooks and their courses.


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

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

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