Weighing Welfare States

 

Dean Baker is co-director of the Center for Economic and Policy Research.

Outstanding Stories of the Week

Option Pie: Overeating Is a Health Hazard
by Gretchen Morgenson
The New York Times, April 4, 2004

This article reports on a new study which shows that large option grants for top executives do not lead to higher returns to shareholders. The study found that option grants were associated with somewhat lower returns in the short term (one to three years) and had no effect on returns in the longer term.

Altering of Worker Time Cards Spurs Growing Number of Suits
by Steven Greenhouse
The New York Times, April 4, 2004

This article reports on evidence that the employers are increasingly altering their workers' time records in order to avoid paying them for the full amount of time they worked, and in particular to avoid paying overtime.

Kerry's Budget Plans

Kerry Targets Budget Deficit
by Jim VandeHei and Jonathan Weisman
The Washington Post, April 8, 2004

Kerry Says His Economic Plan Calls for Federal Spending Caps and Clinton-Era Rules
by Katharine Q. Seelye
The New York Times, April 8, 2004

These articles discuss a speech by Sen. Kerry describing his economic agenda, if he is elected president. Both articles note that Kerry pledged to hold increases in most discretionary programs to the overall rate of inflation. It would have been helpful to point out that restricting spending growth to the rate of inflation would imply that most programs will be cut relative to the needs that they are meant to serve, because the economy and the population are growing. For example, the number of children in school is growing by close to 1.0 percent annually. If federal spending for education only increases at the rate of inflation, then real (inflation adjusted) spending per student would be cut at the rate of approximately 1.0 percent annually. The plan put forward by Sen. Kerry would imply a real cut in per student federal education spending of close to 8.0 percent after two terms of a Kerry administration.

At one point the Post article comments that Kerry's plan "avoided some of the most difficult choices in his budget framework," pointing out that the plan "does not spell out ways to cut or contain the costs of entitlement programs, such as Medicare or Social Security." It is not clear why Kerry would propose plans for cutting these programs, especially Social Security, since the program is projected to be able to pay all scheduled benefits for the next 38 years with no changes whatsoever. According to the most recent Social Security trustees' report, the program is currently in sounder financial shape than it has been through most of its existence. Given its financial strength, there is no obvious economic reason for cutting the Social Security program.

This article also refers to a proposal by Sen. Kerry to raise $17 billion by extending "Superfund" environmental clean-up requirements. It would have been helpful to readers to know the number of years over which this $17 billion would be saved. The Times article reports that Kerry asserted that the years of the Clinton presidency was "the most prosperous era in American history." Kerry's assertion is wrong. There is no commonly used measure of economic well-being that would show this to be the case, as the quarter century following World War II was far more prosperous. GDP growth averaged 4.0 percent annually from 1947 to 1969, compared to 3.4 percent from 1993 to 2001. Productivity growth averaged 2.7 percent over this period, compared to 1.9 percent annually from 1993 to 2001. Median family income grew at an average rate of 3.0 percent annually from 1947 to 1967, compared to just 1.8 percent annually during the Clinton years. In addition, the average unemployment rate from 1948 to 1969 was 4.7 percent, compared to 5.2 percent in the Clinton years. It would have been helpful to point out Kerry's gaffe mistake to readers.

The article also notes the switch from large projected surpluses at the end of the Clinton administration to large projected deficits in the Bush years. While most of this shift is due to the Bush administration's tax cuts and to increases in military spending, close to a third of the shift is attributable to the fact that the original projections were erroneous. The 2000 projections effectively assumed that the stock market bubble would continue to expand indefinitely, and therefore that the high levels of capital gains tax revenue from the late '90s would continue. These projections also did not take into account of the impact of the recession, which was an inevitable result of the collapse of the stock bubble.

Kerry Tries to Portray Bush As Borrow-and-Spend Leader
by Katharine Q. Seelye
The New York Times, April 5, 2004

This article reports a speech by John Kerry in which he laid out his key budget proposals. The article reports that Kerry's advisors criticized Bush's fiscal policies and claimed that they would jeopardize the government's ability to pay for Medicare and Social Security.

Social Security, as well as most of the Medicare program, are actually financed by separate taxes. Under the law, the funding for these programs is not affected at all by the overall budget deficit. The ability to pay for these programs would only be affected if the government defaulted on the government bonds held by these programs, which they rely upon to pay benefits in the future. The United States government has never defaulted on its debt in the past and it is questionable whether defaulting would be politically acceptable at any point in the future.

The article also includes a reference to President Bush's plans for "slowing the growth in spending." Mr. Bush's budget actually calls for keeping spending increases to less than the rate of inflation for large segments of the budget. This amounts to a real cut in spending, since it will not be possible to maintain the same level of government services under Mr. Bush's proposals.

The Australian Dollar

Australia Feeling Nervous as Its Dollar Soars
by Karen Middleton
The New York Times, April 8, 2004

This article reports on the recent rise in the value of the Australian dollar. While the article discusses many of the economic effects of this rise, it does not mention Australia's foreign debt. Currently, Australia has a net foreign debt equal to almost 40 percent of its GDP. At present, Australia is borrowing an amount equal to 5 percent of its GDP. Given its current level of indebtedness, it is not clear that foreign creditors will be willing to continue to lend this substantial amounts of money to Australia for much longer. This point should have been included in the discussion.

Medicare Prescription Drug Benefit

New Drug Law's Cost Impact Debated
by Ceci Connolly
The Washington Post, April 9, 2004

This article reports on the debate over whether the federal government should directly negotiate drug prices with pharmaceutical companies or whether it should leave negotiations to private insurance companies, as required in the new law providing a Medicare drug benefit. At one point the article cites opponents of government price negotiations as being concerned about a government monopoly buyer setting prices. It then counters this point, saying that "the other side [supporters of government negotiations] counters that Medicare recipients, expected to consume $1.6 trillion worth of medication over the next decade, would be a major player but not a monopoly in a marketplace estimated at $4.6 trillion."

It would have been useful to point out that the only reason that drug prices are high is that the government gives the industry a patent monopoly, preventing private sector competition. Without these monopolies, drug prices would likely decline by 80 percent, or more. It is the drug industry that favors government monopolies (awarded to them). Proponents of government price negotiations want to limit the ability of the industry to exploit this monopoly, while the industry wants an unlimited monopoly.

European Labor Market Protections

European Economic Liberalization: Often Forecast but Never Done
by Floyd Norris
The New York Times, April 9, 2004

This article discusses the progress of economic restructuring proposes, which are intended to weaken the welfare state in Europe. The article concludes by asserting that these plans "strike economists as necessary." Actually, many economists do not view these proposals as necessary, since there is very little evidence that they lead to improved economic outcomes. Many of the countries in Europe that enjoy the lowest unemployment rates, such Denmark, Ireland, Norway and Sweden, have very strong welfare state protections. By contrast, some of the countries with the highest unemployment rates, such as Spain and Italy, have relatively weak systems of social protections (see "Labor Market Protection and Unemployment: Does the IMF Have a Case?").

The article implies that Europe is facing a crisis because it has slower growth than the United States, and includes a chart comparing growth rates. The more relevant measure for economic well-being is per capita GDP growth. This would show a much more even picture, since Europe's population is growing at a rate that is about one percentage point less than the rate of growth in the United States.

It is also worth noting that Europe currently is running a substantial current account surplus, which means that it will have increased wealth to draw upon as its population ages. By contrast, the United States is running a current account deficit equal to approximately 5.3 percent of its GDP. This means that it is selling off its capital stock to foreigners, leaving it with fewer resources too draw upon in the future.

At one point the article implies that Germany's economy is currently suffering because its leaders have proposed to cut pension benefits in the future, but have not yet been able to implement these cuts due to political opposition. The article then notes that this situation has lead to weak consumer spending. Economic theory predicts that pension cuts would lead to increased saving and therefore reduced consumer spending. Presumably, proponents of pension cuts desire reduced consumer spending, since that is the expected result of their policy.

Germans Protest Cutbacks in Welfare Benefits
by John Burgess
The Washington Post, April 4, 2004

This article reports on a massive protest in Berlin, and other major cities, against government plans to cut back Germany's welfare state. While the article reports the contention of German Chancellor Gerhard Schroeder, and other proponents of reform, that cutbacks in the welfare state are necessary, it does not cite any of the economists who question this assessment, nor does it present any evidence on the topic.

Pell Grants

Kerry Cites Growing Deficit In Scaling Back Proposals
by Katherine Q. Seelye and Neil A. Lewis
The New York Times, April 7, 2004

This article reports on campaign speeches by Sen. John Kerry and President Bush. In his speech, President Bush proposed a new program that would provide Pell grants for low-income students to study math and science and in college. According to the article, Mr. Bush said that the money for this program would come from limiting students enrolled in four-year colleges to eight years of Pell grant support, while students enrolled in two-year colleges would be limited to four years of support. According to the numbers in the article, the proposed program would cost approximately $100 million, an amount equal to approximately 1 percent of current spending under the Pell grant program. It seems unlikely that 1 percent of the spending in this program goes to students who have been enrolled in an four-year program for more than eight years or a two-year program for more than four years. In other words, it will almost certainly not be possible to finance President Bush's new program through the mechanism described in the article.

Japan

Luxury Electronics Power Japan's Recovery
by Anthony Faiola
The Washington Post, April 6, 2004

This article reports on Japan's apparent economic rebound. The article notes that the country has experienced a recent export boom based largely on increased sales to China. It then quotes a Japanese business executive warning that Japan must limit its dependence on China because "the Japanese economy is still far bigger." Actually, the Chinese economy is far bigger when it is measured on a purchasing power parity basis. On a purchasing power parity basis, China's economy is equal to about $6 trillion annually. By comparison, Japan's GDP is close to $4 trillion.

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Published: Apr 13 2004