Beat the Press

Dean Baker's commentary on economic reporting


The Minimum Wage and Doctors’ Pay

Since there have been some interesting comments on two separate posts from last week, I thought I would pull them together. To get up to speed, NPR ran a piece last week which decried (slight exaggeration) the low pay of doctors. I also commented on the failure of reporting on a minimum wage hike to note the extensive research showing that modest increases in the minimum wage (like the ones being debated) have no significant effect on employment.

The responses have raised issues about the appropriate wages for doctors and people who work at the type of jobs that get the minimum wage. The point that I wanted to make is that these two are linked. The wages of people working at low paying jobs are a cost to doctors, and doctors’ pay is a cost to those earning low wages.

The logic of this is simple. While some wage increases may be absorbed in lower profits, and may also be offset by higher productivity, at least some part of any wage increase will be reflected in the prices of the goods or services that worker produces. This means that, other things equal, if we want minimum wage earners to get more money, then we want doctors to get less. Alternatively, if we join NPR in the drive to raise doctors’ pay, then we want minimum wage workers to get less. This is basic economics/accounting; I doubt that any economist anywhere on the political spectrum would dispute this logic.

To me, the main economic story of the last 3 decades has been that those in high paying professions (e.g. doctors, lawyers, dentists, accountants, economists etc.) have managed to drive up their wages by sustaining and increasing barriers against competition (both foreign and domestic), while less-skilled workers, like autoworkers, textile workers, dishwashers, and custodians have been deliberately placed in direct competition with low-paid workers in the developing world.

The wages in these latter categories have generally been flat or declined over this period, while workers in most of the high-paid professions have seen substantial pay increases (e.g. the OECD reports that the real wages of doctors in the United States increased by 55 percent from 1964-1995 [sorry, it’s not free data, so I can’t link to it]). If this pattern is to be reversed, then the wage increases for workers at the middle and bottom will have to come at least partly at the expense of the real wages of high-end workers, just as the wage gains of high-end workers have come partly at the expense of those at the middle and bottom over the last three decades.

This is all accounting; one can debate the merits of specific policies to reverse the upward redistribution of income, but there really is not much room to debate the accounting. (My favored policy is free trade in professional services, so that doctors, lawyers, accountants and economists can enjoy international competition in the same way as autoworkers, textile workers and dishwashers, see chapter 1 of The Conservative Nanny State.)


NPR’s Sob Story for Struggling Doctors

NPR did a piece this morning on doctors' pay that leaves you wondering why they get taxpayers dollars. The basic point was that doctors, especially primary care physicians, are struggling. The news hook was a new survey that showed that doctors’ net (after malpractice) pay is not keeping pace with inflation.

The survey showed that average net compensation for all physicians in 2003 was just over $220,000 a year (in 2006 dollars). This is down by 7.1 percent (adjusted for inflation) from the 1995 level. Of course there are big differences by specialty. (The decline in pay is partly explained by a 4.1 percent shortening of the average workweek.) While the survey found that surgeons average almost $300,000 a year, primary care physicians average just $160,000 a year.

The NPR story chose to focus on the latter, highlighting the difficulties of making ends meet. However, instead of finding a typical primary care physician, NPR found a doctor who claims to be making just $50,000 a year, less than one third of the average.

The doctor in the story sounded like an impressive person. According to the piece, she specialized in caring for pregnant women in the inner city. It sounds like hard work for very modest pay. According to the piece, she is being forced to change jobs (taking a position at Georgetown University) because she still has $300,000 in loans from medical school hanging over her head.

This is a good human interest story, but it has nothing to do with the pay of doctors. Why on earth would NPR talk to a primary care physician, who apparently earns less than one-third the average for primary care physicians, to find out about the financial difficulties facing primary care physicians? This would be like talking to an autoworker getting $7.00 an hour to find out about the situation facing the typical UAW autoworker who earns close to $20 an hour. Competent reporters do not do this.

The gist of this story was that we should be paying doctors more. If doctors get more, the custodian getting $7.00 an hour gets less. That’s the way the economy works, one person's income is another person's cost. Maybe there is a case to be made that the average physician can’t make ends meet on $220,000 a year, and the government should intervene to raise their wages. But that case must be made based on the situation of the typical doctor, not some hardworking dedicated physician who works for one-third of the average wage.

Reporting Nonsense on the Minimum Wage

Suppose that the senators who support a quick withdrawal from Iraq got in the habit of saying that the United States should get out of Iraq because losing 100 U.S. soldiers a day is an unacceptable price for the occupation. Would the media simple report this claim without comment? Or, would they point out that these senators apparently don’t realize that the fatality rate is approximately 2 per day?

My guess is that every story that noted the claim that 100 soldiers a day are being killed would correct this assertion based on an authoritative source on the causality count. The media would probably also run numerous stories that reported on the fact that the proponents of a hasty withdrawal have no idea what they are talking about. This would be good journalism.

The question is why it is not applied to the debate over the minimum wage. Reporters routinely quote claims from politicians opposed to raising the minimum to the effect that it would lead to a large loss of jobs and will slow economic growth. Well, we have evidence on this one. Economists have done numerous studies of the impact of modest increases of the minimum wage, like the one currently being debated. Berkeley economist David Card and Princeton economist Alan Krueger have done some of the most famous studies, but many other economists have approached the topic from different angles (including my colleague at CEPR John Schmitt [sorry, not available on-line]), and nearly all of them have found that the minimum wage has little or no effect on employment.

If talking to experts in the economics profession is too difficult for the country’s top reporters, perhaps some simple arithmetic would be sufficient. The minimum wage bill currently being pushed by Senator Kennedy would raise the minimum wage to $7.25 by 2009. By comparison, the minimum wage was almost $8.00 an hour (in 2006 dollars) in the late sixties. This means that if Kennedy’s bill were approved, the real value of the minimum wage in 2009 would still be more than 10 percent lower than it was in the late sixties, even though productivity will have increased by more than 120 percent over this period.

For those not old enough to remember, the late sixties was one of the most prosperous economic periods in U.S. history. The economy grew rapidly, wages grew rapidly, and the unemployment rate eventually fell to 3.0 percent. Clearly, the minimum wage could not have done too much damage.

The idea that the minimum wage hike being debated would have a substantial impact on employment and growth is absurd on its face. The media has the obligation to point this out – if they don’t, maybe opponents of the Iraq war should start saying that the fatality rate of 100 a day is unacceptable.


Dollars Down the Drain

The Washington Post reported on former Treasury Secretary, and soon to be former Harvard President, Larry Summers' suggestion that the foreign central banks of developing countries begin to unload some of their huge dollar holdings. As someone who has been writing on this issue for almost five years (see here, here, and here), I am glad to see that it is now getting attention from some prominent economists.

Unfortunately, the article (and perhaps Summers) confuses cause and effect. The article implies that the central banks acquire these huge holdings because of their countries' vast trade surpluses with the United States. It suggests that the banks buy up dollar reserves because they don’t know what else to do with their money.

While there be some holdings due to simple confusion of this sort, this is probably the least important factor in the huge build-up of reserves. Part of the reason is that developing countries do not want to end up in financial crises where they can then be subject to the dictates of the I.M.F., as happened when Summers was running the show at the Treasury Department in the nineties.

However, the main reason is that foreign central banks are consciously trying to maintain the high value of the dollar relative to their currencies in order to sustain their large trade surpluses with the United States. How else could China sustain its under-valued exchange rate, if it did not buy up dollars? In other words, the cause and effect runs in the opposite direction from what is indicated in this article. Foreign central banks have decided to keep their currency under-valued against the dollar, which requires massive purchases of dollars.

This strategy can be an effective way to boost exports, but presumably there are better ways to stimulate demand over the long-term. In any case, it is important to recognize that it is the high value of the dollar that causes the trade deficit, a fact that is largely obscured by the discussion in this article.


Rich Countries Provide $300 Billion Annually in Subsidies to the Pharmaceutical Industry

You won’t see this headline in the newspapers. You should ask why. Newspapers have repeatedly reported on the hundreds of billions of dollars that the rich countries give to the agricultural industry. (See the Financial Times for the latest example.) While the wording of the headlines, and often the articles themselves, would lead readers to believe that this money is being paid directly from rich country governments to farmers, the vast majority of this money takes the form of higher prices that result from trade barriers of various types.

To those who might say that it doesn’t matter whether the money comes from government coffers or through higher prices to consumers, I will point out that this is not how the media generally treat the issue. The media have never run a story about the hundreds of billions of dollars in government subsidies to the pharmaceutical industry. These subsidies take the form of patent protection – government granted monopolies that raise the price of patent protected drugs by several hundred percent above the free market price. We can also talk about the hundreds of billions of dollars in subsidies to the software and entertainment industry through copyright protection. These subsidies serve a purpose – they provide incentives for innovation and creative work – but that doesn’t change the fact that they are subsidies.

Another type of subsidy that the media don’t discuss is the high wages of doctors, lawyers, economists, and journalists, which are artificially inflated by restrictions on foreign competition. This subsidy would also run into the hundreds of billions annually.

So I applaud the media’s vigilance in calling attention to the market distortions created by protectionism in agriculture. I am just curious as to why they are so oblivious to protectionism in other sectors of the economy.


From the Times Europe Bashing Desk

The NYT had a piece this morning reporting on how Europe is heavily dependent on coal, despite its "green image." While the article had much useful information, it never mentioned the fact that Europe emits approximately 50 percent as much greenhouse gas per capita as the United States. In the numerate world, this is an important piece of information.

At one point the article discusses how much Europe will have to reduce its emissions if it is to compensate for growing emissions in China and India "to say nothing of the United States." As far as I know, none of the people running European countries are morons, nor are the environmentalists who promoted the Kyoto agreement. If China, India, and the United States do nothing to contain their emissions of greenhouse gases, then whatever Europe does or does not do will be completely irrelevant. There would be absolutely no point in Europe absorbing substantial economic costs in a futile attempt to stop global warming.

The proponents of the Kyoto agreement assume that at some point China, India, and the United States can be persuaded/coerced to reign in their emissions. If this does not happen, few, if any, will insist that Europe continue to try to reduce emissions even when they know it cannot have any qualitative impact on global warming.


Do the Washington Post Editors Know How Markets Work?

The Post has a piece this morning about the non-enforcement of laws against hiring undocumented workers. The article includes several statements, including one from Homeland Security Secretary Michael Chertoff, to the effect that native born citizens will not do the jobs that are filled by undocumented workers. Believers in markets would say that if wages rose, then plenty of native-born citizens would be willing to fill the jobs.

Interestingly, meat processing is one of the industries discussed in the article. Thirty years ago, this was an industry with relatively high-paying (albeit extremely unpleasant) jobs. It was also relatively highly unionized. Plenty of native born citizens wanted these jobs.

The Times had a much more insightful piece on the same topic. It reports on the growing use of undocumented workers as custodians and how this has been associated with a decline of wages in the occupation.


Wasting Public Funds on Destroying the Planet

It is remarkable that ostensibly intelligent people can be made to fear the possibility that Europe and Japan will be less crowded places in the years ahead. The Financial Times has an article that reports on a warning from “top fertility experts” over “Europe’s chaotic response to its demographic crisis.”

It is hard to find the evidence for the crisis in the story. The article reports that health care spending as share of GDP is projected to rise from a Europe-wide average of 6 percent at present to 8 percent by 2050. Since the U.S. currently spends 15 percent of its GDP on health care, it is difficult to get too concerned about this prospect.

The article gives the usual hype about the rise in dependency ratios – there will be fewer workers for every dependent. Those who have mastered arithmetic know that the projected increases in productivity swamp the impact of rising dependency ratios on living standards. For example, if productivity growth averages a very modest 1.5 percent annually, by 2050, before-tax wages will be nearly twice what they are today. This means that even if taxes increased by 15 percentage points over this period, workers would have far higher after-tax incomes in 2050 than they do today.

The best way to deal with Europe’s “demographic crisis” would be to teach arithmetic to the top fertility experts and the reporters who cover their press statements.

Interesting News On China

The New York Times reported on Saturday that China’s central bank is adopting a more contractionary monetary policy in order to slow its economy and reduce inflation. If China's central bank is concerned that inflation is getting out of control, then it would be an ideal time for the country to begin to raise the value of its currency against the dollar.

This would have two beneficial effects from the bank’s standpoint. First, a more valuable Chinese currency will make Chinese exports more expensive. This will slow China’s export growth, and thereby help to slow its economy. The other effect is that a higher valued currency will make imports cheaper. Lower priced imports will help to alleviate domestic inflation by making cheap goods available as inputs into production, and also by allowing workers to consume more without pay increases.

A higher valued Chinese currency will be a mixed story for the United States. On the one hand, it will make U.S. goods more competitive, both in the United States and elsewhere in the world. (I will preempt an inevitable comment. If China goes this route, other countries will also raise the value of their currency against the dollar, as they have done in the past. So we will not just be shifting the place of origin of U.S. imports.) This will be a step towards a more sustainable trade deficit.

The bad side of the story is that higher import prices will add more fuel to inflation. Higher prices goods from China and elsewhere will be yet another factor pushing the inflation rate higher in the months ahead, if China goes this route.

Strong Words on the Fed

“The Fed chairman may be appointed by the president and confirmed by the Senate, but his real bosses are on Wall Street.” This isn’t the ranting of some crazed radical; it is a line from a column in the Washington Post’s Outlook section, by Richard Yamarone, an investment analyst.

While I probably never would have phrased it so bluntly, I think that Mr. Yamarone is largely correct. It is worth reflecting on this one. The interests of Wall Street investors are not necessarily the same as the interests of the public as a whole. For example, big wage increases, that come out of corporate profits, would be very welcome news to the vast majority of the population, since they depend on wages for the bulk of their income. Needless to say, lower profits are not welcome news on Wall Street.

The fact that we have an arm of the federal government that answers to the special interests on Wall Street, rather than the larger public, should be cause for concern in a democracy.