We can do better with a thousand years

Review of Power and Progress, by Daron Acemoglu and Simon Johnson

from Dean Baker

When I saw that two of the country’s most prominent economists wrote a book on “our 1000-year struggle over technology and prosperity,” I expected a lot. I was disappointed. To be clear, there is much here to like and I’m sure that most readers will get much from it, as I did. But, the book fails to follow through adequately on the key point in its analysis, which is that the gains from technology are a matter of struggle, not an outcome given by the technology itself.

I’ll start with the positives. The book gives a cursory, but useful, account of the major developments in technology going back more than a thousand years. Some of their discussion deals with the origins of agriculture, an innovation that goes back many thousands of years. However, most of the book does describe events in the promised thousand-year horizon.

It points out that there were important technological innovations in the Middle Ages, which did allow for very modest gains in productivity and living standards across much of Europe until the 13^th or 14^th century. At that point, the rate of increase accelerated, although it was still much slower than in later centuries.

One of the points it makes, which was underappreciated (at least by me), was the extent to which the gains in this period were siphoned off by the church.

The “Which way is up?” problem in economics

from Dean Baker

Economics famously suffers from a “which way is up?” problem. The issue is whether an economy is suffering from too much demand or too little demand. On its face, that seems like it should be a very simple question, but in fact it can be complicated and people often get it wrong, with very serious consequences.

The Great Depression was the classic too little demand story. We had millions of people out of work through the decade of the 1930s because there was not enough demand in the economy. With the benefit of hindsight, or a good Keynesian understanding of the economy, this demand problem is very clear, but it did not seem that way to many people living at the time.

Most immediately, people saw families who didn’t have food, adequate clothing, or housing. That looks a lot like a problem of having too little of the things that are necessary to meet society’s needs.

But the reality was the opposite. We know this for certain because once the government spent lots of money, the economy was able to meet these needs and considerably more.

Unfortunately, it took World War II to provide the political will to get the government to spend the money needed to get the economy back to full employment. But, if we had the political will to spend the money, we could have ended the depression in 1931 instead of 1941. The key point was the need to spend lots of money, it didn’t have to be spending on a war. (This is why all the talk of a Second Great Depression around the 2008-09 financial crisis is so silly. We know how to spend money. That’s all we need to do to avoid a Second Great Depression.)

Google AI expert warns of massive uptick in productivity growth: No problems with Social Security

from Dean Baker

We have long known that people in policy debates have difficulty with arithmetic and basic logic. We got yet another example today in the New York Times.

The NYT profiled Geoffrey Hinton, who recently resigned as head of AI technology at Google. The piece identified him as “the godfather of AI.” The piece reports on Hinton’s concerns about the risks of AI, one of which is its implications for the job market.

“He is also worried that A.I. technologies will in time upend the job market. Today, chatbots like ChatGPT tend to complement human workers, but they could replace paralegals, personal assistants, translators and others who handle rote tasks. ‘It takes away the drudge work,’ he said. ‘It might take away more than that.’”

The implication of this paragraph is that AI will lead to a massive uptick in productivity growth. That would be great news from the standpoint of the economic problems that have been featured prominently in public debates in recent years.

Most immediately, soaring productivity would hugely reduce the risks of inflation. Costs would plummet as fewer workers would be needed in large sectors of the economy, which presumably would mean downward pressure on prices as well. (Prices have generally followed costs. Most of the upward redistribution of the last four decades has been within the wage distribution, not from labor to capital.)

A massive surge in productivity would also mean that we don’t have to worry at all about the Social Security “crisis.”

David Brooks’ celebration of American capitalism

from Dean Baker

Last week, David Brooks had a column that was quite literally a celebration of American capitalism. He makes a number of points showing the U.S. doing better than other wealthy countries over the last three decades. While his numbers are not exactly wrong, they are somewhat misleading. (I see Paul Krugman beat me to the punch, so I’ll try not to be completely redundant.)

Brooks points to the faster GDP growth in the United States than in other wealthy countries. As Krugman notes, much of this gap is due to the fact that they have older populations; the differences are much smaller if we look at GDP per working-age person.

However, a big part of the story is also that they have opted to take much of the benefit of productivity growth in the form of more leisure time. In France, the length of the average work year was reduced by 9.1 percent between 1990 and 2021. In Germany, the decline was 13.8 percent. In Japan, average hours fell by 20.9 percent. In the United States, the length of the average work year fell by just 2.3 percent. On this score, there is not much to brag about here.

Brooks also cites data showing that the U.S. has seen more rapid productivity growth than other rich countries over the last three decades. This is true (austerity, which is more widely practiced in the EU than in the U.S., is a great way to kill growth), but it is worth mentioning some complicating factors in these comparisons.

China is bigger, get over it

from Dean Baker 

It is standard for politicians, reporters, and columnists to refer to the United States as the world’s largest economy and China as the second largest. I suppose this assertion is good for these people’s egos, but it happens not to be true. Measuring by purchasing power parity, China’s economy passed the U.S. in 2014, and it is now roughly 25 percent larger.[1] The I.M.F. projects that China’s economy will be nearly 40 percent larger by 2028, the last year in its projections.

Source: International Monetary Fund.

The measure that the America boosters use is an exchange rate measure, which takes each country’s GDP in its own currency and then converts the currency into dollars at the current exchange rate. By this measure, the U.S. economy is still more than one-third larger than China’s economy.

Quick thoughts on AI and intellectual property

from Dean Baker

There has been a lot of concern in recent days about the impact of AI on people’s intellectual property. The latest AI programs screen millions of documents, songs, pictures, and videos posted to the web and freely grab any portion that seems to fit the commands given the program. As it stands, the creators of the material are not compensated, even if a large portion of their work appears in the AI product.

This raises serious questions about how AI will affect the future of intellectual property. To my mind, we should keep the focus on three distinct points:

• Creative workers need to be compensated for their work;
• Copyright monopolies may not be the best route, especially in a world with AI;
• There are alternative mechanisms that we already use and which could be expanded.

Compensating Creative Workers

Starting with the first point, we have long recognized that a market that does not have some explicit mechanism for subsidizing creative work, will under produce creative work. People write, sing, paint, and do other creative work because they enjoy it, but we cannot expect to get as much of these products as society wants, if we don’t pay people to do them. A musician or writer who has to spend eight hours a day bussing tables to pay the rent is not going to be able to devote themselves fully to developing their talents in these areas.

For this reason, we have long recognized the need for mechanisms to support creative work.

The Silicon Valley bank bailout: The purpose of government is to make the rich richer

from Dean Baker

There is a standard tale of politics where conservatives want to leave things to the market, whereas the left want a big role for government. The right likes to tell this story because it advantages them politically, since most people tend to have a positive view of the market. The left likes to tell it because they are not very good at politics and have an aversion to serious thinking.

The Silicon Valley Bank (SVB) bailout is yet another great example of how the right is just fine with government intervention, as long as the purpose is making the rich richer. Left to the market, the outcome in this case was clear. The FDIC guaranteed accounts up to $250k. This meant that the government’s insurance program would ensure that everyone got the first $250,000 in their account returned in full.

The amounts above $250,000 were not insured. This is both a matter of law and a matter of paying for what you get. The FDIC charges a fee on the first $250,000 in an account based on the size and strength of the bank. This fee ranges from 0.015 percent to 0.40 percent annually, depending on the size and riskiness of the bank. Most people would not see the insurance fee directly, because it is charged to bank, but we can be sure that the bank passes this cost on to its depositors.

However, these fees only apply to the first $250,000 in an account. This means that people who had more than $250,000 in an account were not paying for insurance. Nonetheless, when they needed insurance from the government, they got it, even though they didn’t pay for it.

As we are now hearing, in many cases this handout ran into the tens of millions, or even billions, of dollars, almost all of it going to the very richest people in the country.

SVB was Donald Trump’s bailout

from Dean Baker

There are two key points that people should recognize about the decision to guarantee all the deposits at Silicon Valley Bank (SVB):

• It was a bailout
• Donald Trump was the person responsible.

The first point is straightforward. We gave a government guarantee of great value to people who had not paid for it.

We will get a lot of silly game playing on this issue, just like we did back in 2008-09. The game players will tell us that this guarantee didn’t cost the government a penny, which will very likely end up being true. But that doesn’t mean we didn’t give the bank’s large depositors something of great value.

If the government offers to guarantee a loan, it makes it far more likely that the beneficiary will be able to get the loan and that they will pay a lower interest rate for this loan. In this case, the people who held large uninsured deposits at SVB apparently decided that it was better, for whatever reason, to expose themselves to the risk by keeping these deposits at SVB, rather than adjusting their finances in a way that would have kept their money better protected.

The answer to the Silicon Valley bank bailout: Federal Reserve Banking

from Dean Baker

Word from the grapevine is that the risk of contagion may cause the Fed or the FDIC to engineer some sort of bailout of uninsured deposits, where they get paid back in full, instead of being forced to accept a partial loss on deposits over $250k. That would be unfortunate, since the people who run these companies that have large deposits are supposed to be brilliant whizzes, who should be able to understand things like FDIC deposit insurance limits.

Their incessant whining, that losing 10-20 percent of their deposits, would shut down Silicon Valley and the country’s tech sector, made for good laughs. However, the risk of a nationwide series of bank runs is a high price to pay to teach these people about the limits on deposit insurance.

We know that the view of most of our policy elites (the politicians who make policy, their staff, and the people who write about it in major news outlets) is that the purpose of government is to make the rich richer. But, there are alternative ways to structure the financial system for people who care about fairness and efficiency.

The most obvious solution would be to have the Federal Reserve Board give every person and corporation in the country a digital bank account.

The future of vehicle prices

from Dean Baker

On a lazy Friday afternoon, a person’s thoughts naturally turn to car price indexes. There is actually a reason that I became interested in this topic. I noticed that in the January Consumer Price Index, the new vehicle index rose 0.2 percent. The December measure was revised up due to new seasonal adjustment factors so that what had been reported as a 0.1 percent decline last month is now reported as a 0.6 percent increase.

I was inclined to think this was an aberration and that we would see the downward trend that had previously been apparent in the data reappear in another month or two. However, I noticed that the Manheim index for used vehicle prices showed a sharp uptick for January and the first half of February. This was after a full year in which declining prices were reversing much of the pandemic run-up. Perhaps my expectation that vehicle prices, both new and used, would soon look like they were back on their pre-pandemic path was wrong.

Vehicle prices are a big deal in the CPI. Together the new and used vehicle components comprise just under 7.0 percent of the overall index and 8.8 percent of the core index. As a result, it will have a big impact on our inflation measures if vehicle prices are on a downward path, as it seemed when we got the December CPI.

I thought I would look at a bit of history and pull in the index for imported vehicles. (This is not entirely apples to apples since the import index includes car parts.) Here’s the picture.

Weekend read – Ending the cesspool in pharmaceuticals by taking away patent monopolies

from Dean Baker

Outlawing items such as marijuana or alcohol invariably leads to black markets and corruption. Since there is much money to be made by selling these products in violation of the law, many people will follow the money and break the law. They will also corrupt the legal system in the process, making payments to people in law enforcement and elsewhere in the legal system.

The old line from economists on this problem is to take the money out, by making marijuana and alcohol legal. If people can buy these items in a free market, then no one is going to have any big incentive to make payoffs to police officers or judges, there would be no reason.

We should think the same way about the pharmaceutical industry and patent monopolies. Patent monopolies and related protections allow pharmaceutical companies to sell drugs at prices that are typically several thousand percent above their free market price. In this context, economic theory predicts they will bend or break the law to extend and expand their protection as widely as possible.

The latest example of this story of corruption was a front-page New York Times piece on the arthritis drug Humira. Humira is an extraordinarily effective arthritis drug taken by tens of thousands of people in the United States. Its main patent was due to expire in 2016, which would have in principle opened the door to generic competition.

At the time, Humira was being sold at $50,000, for a year’s treatment.

Debt, deficits, secular stagnation and the which way is up problem in economics

from Dean Baker

The economy can have a problem of too much demand, leading to serious inflationary pressures. It can also have a problem of too little demand, leading to slow growth and unemployment. But can it have both at the same time?

Apparently, the leading lights in economic policy circles seem to think so. As I noted a few days ago, back in the 1990s and 00s economists were almost universally warning of the bad effects of an aging population. The issue was that we would have too many retirees and too few workers to support them.

This meant a problem of excess demand. Since much of the money to support retirees comes from government programs for the elderly, like Social Security and Medicare, this meant we would see this show up as large government budget deficits, unless we had big tax increases to reduce demand.

In recent years, this view had largely been replaced with concerns over secular stagnation. This is a story where an aging population implies a slow-growing or shrinking labor force. This reduces the need for investment spending. The reduction in investment spending, coupled with other factors increasing saving, gives what Larry Summers referred to as a “savings glut.” This is a story of too little demand.

Okay, so it’s January of 2023, the Republicans are threatening to blow up the economy by not raising the debt ceiling, do we have a problem of too much demand or too little demand? Which way is up?

Why debate markets vs. government when we let the right rig the market?

from Dean Baker

I was happy to see this segment of Ezra Klein’s show (hosted by Rogé Karma) which featured an interview with Columbia University Law Professor Katharina Pistor. Pistor is the author of The Code of Capital: How the Law Creates Wealth and Inequality.

I’ve not yet read the book, but got the gist from the interview. Pistor is arguing that we have structured the market in ways that generate enormous inequality. In the interview, she presents several ways in which the law has been written that facilitate the accumulation of wealth by a small group of people. These include rules on property in land, intellectual property, and the creation of corporations as distinct entities with an existence independent of their owners.

Pistor’s point is that the way these rules are structured is not set in stone. They can be written differently so that they don’t lead to so much inequality.[1] Having written several books and endless blogposts in this vein, Pistor’s interview almost made my day. (There is also the video version.) 

Contrary to what the NYT tells you, the problem in an aging society is distribution

from Dean Baker

The New York Times had a major article reporting on how many people in South Korea, Hong Kong, and Japan are being forced to work well into their seventies because they lack sufficient income to retire. The piece presents this as a problem of aging societies, which will soon hit the United States and other rich countries with declining birth rates and limited immigration.

While the plight of the older workers discussed in the article is a real problem, the cause is not the aging of the population. The reason these people don’t have adequate income to retire is a political decision about the distribution of income.

If the issue was simply that too few people were working in these aging societies, we should expect to see slower per capita growth than in countries where aging is less of a problem. That is not the case. The figure below shows real per capita income in these three countries from 2014, along with projections to 2027, as well as France, which has maintained a relatively high birth rate.

Holiday read – Industrial policy is not a remedy for income inequality

from Dean Baker

The idea of industrial policy has taken on almost a mystical quality for many progressives. The idea is that it is somehow new and different from what we had been doing, and if we had been doing industrial policy for the last half-century, everything would be better.

This has led to widespread applause on the left for aspects of President Biden’s agenda that can be considered industrial policy, like the CHIPS Act, the Inflation Reduction Act (IRA), and the infrastructure package approved last year. While these bills have considerable merit, they miss the boat in reducing income inequality in important ways.

First, the idea that we had not been doing industrial policy before Biden, in the sense of favoring specific sectors, is wrong. We have been dishing out more than $50 billion a year to support biomedical research through the National Institutes of Health and other government agencies. If that isn’t supporting our pharmaceutical industry, what would be?

We also have a whole set of structures in place — most obviously Fannie Mae and Freddie Mac, but also many other financial institutions — as well as tax policies to support home ownership. We also support the (bloated) financial sector through tax policy, deposit insurance, and all but explicit too-big-to-fail guarantees.

We don’t need government-granted patent monopolies to finance drug development

from Dean Baker

I was having an exchange with an old friend on Mastodon (yes, I’m there now @deanbaker13@econtwitter.net), in which I was arguing that the best way to get alternatives to the current patent system was to have examples of successful drugs developed without relying on patent monopolies. Of course, there are great historical examples, like the development of insulin as a treatment for diabetes or the polio vaccine, but it would be good to have one from the current century.

The most obvious example, that really deserves a hell of a lot more attention than it is getting, is the Covid vaccine developed by Peter Hotez and Maria Elena Botazzi at the Center for Vaccine Development at Texas Children’s Hospital. This vaccine was developed using grants in the single digit millions. Unlike the mRNA vaccines developed by Pfizer and Moderna, it uses a long-established technology. It is also completely open-sourced; the technology is fully public and there are no patents or other restrictions preventing its manufacture anywhere in the world.

OMG, a right-wing jerk can buy Twitter! Media concentration matters

from Dean Baker

It’s more than a bit bizarre that until Elon Musk bought Twitter, most policy types apparently did not see a risk that huge platforms like Facebook and Twitter could be controlled by people with a clear political agenda. While just about everyone had some complaints about the moderation of these and other commonly used platforms, they clearly were not pushing Fox News-style nonsense.

With Elon Musk in charge, that may no longer be true. Musk has indicated his fondness for racists and anti-Semites, and made it clear that they are welcome on his new toy. He also is apparently good with right-wing kooks making up stories about everything from Paul Pelosi to Covid vaccines. (Remember, with Section 230 protection, Musk cannot be sued for defaming individuals and companies by mass-marketing lies, only the originators face any legal liability.)

If the hate and lies aren’t enough to make Twitter unattractive to the reality-based community, the right-wing crazies are putting together their lists of people to be purged. We don’t know who they will come up with, and what qualifies in their mind for banishment. We also don’t know whether the self-proclaimed free-speech absolutist Elon Musk will go along, but there certainly is a risk that Musk will want to keep his friends happy.

In that case, Twitter may go the way of Truth Social and Parlor, which would be unfortunate, but probably better than having a massive social media platform subject to Elon Musk’s whims. But we should still be asking how we can get in a situation where one right-wing jerk can have so much power?

The Problem of Media Concentration Is Not New

The Musk problem is hardly new. After all, Rupert Murdoch has been broadcasting his imaginary world to the country for decades, highlighting pressing national issues like the War on Christmas and President Obama’s tan suit.

But the problem goes well beyond Murdoch. Media outlets are owned and controlled by rich people and/or large corporations. 

Sam Bankman-Fried’s truly effective philanthropy: teaching

from Dean Baker

We should all recognize that Sam Bankman-Fried is much smarter than the rest of us. After all, outwardly he looks to be one of the biggest frauds of all time. By the age of 30 he amassed a fortune that dwarfs that of your average billionaire. He did it by running a crypto Ponzi-scheme. While claiming to be using his wealth to support philanthropies that were carefully selected to maximize human welfare, he was actually living a high life-style with his friends.

Now that the Ponzi has collapsed, the investors who trusted him look to be out of luck. And, of course there is no money for the philanthropies that he supported, many of which will are now struggling because they won’t get contributions they had been counting on.

That all looks pretty reprehensible, but maybe that’s the point. See, Sam Bankman-Fried was so committed to his philosophy of effective philanthropy that he was prepared to make himself appear to be the epitome of a despicable human being, and spend many years in prison, all to teach us that finance is a wasteful cesspool that needs to be reined in for the good of humanity. And, the place to start is his particular corner of the cesspool: crypto.

Philanthropy verse Reform: How Best to Save Humanity 

The pandemic treaty, crypto, and inequality

from Dean Baker

The World Health Organization is in the early phases of putting together an international agreement for dealing with pandemics. The goal is to ensure both that the world is prepared to fend off future pandemics by developing effective vaccines, tests, and treatments; and that these products are widely accessible, including in low-income countries that don’t have large amounts of money available for public health expenditures.

While the drafting of the agreement is still in its early phases, the shape of the main conflicts is already clear. The public health advocates, who want to ensure widespread access to these products, are trying to limit the extent to which patent monopolies and other protections price them out of the reach of developing countries. On the other side, the pharmaceutical industry wants these protections to be as long and as strong as possible, in order to maximize their profits. As Pfizer and Moderna know well, pandemics can be great for business.

The shape of this battle is hardly new. We saw the same story not just in the Covid pandemic, but also in the AIDS pandemic in the 1990s, when millions of people needlessly died in Sub-Saharan Africa because the U.S. and European pharmaceutical industries tried to block the widespread distribution of AIDS drugs.

Although the battle lines are familiar, one disturbing feature is the continuing failure of those concerned about inequality to take part in this debate. In the United States, we have plenty of groups and individuals who will spend endless hours fighting over clauses in the tax code that may give a few hundred million dollars to the rich. This is generally a good fight, but it is hard to understand the lack of interest in the structuring of a pandemic treaty that could mean hundreds of billions of dollars going to the rich.

CRYPTO MELTDOWN is a great time to eliminate waste in bloated financial sector

from Dean Baker

I remember talking to a progressive group a bit more than a decade ago, arguing for the merits of a financial transactions tax (FTT). After I laid out the case, someone asked me if we had lost the opportunity to push for an FTT, now that the financial crisis was over. I assured the person that we could count on the financial sector to give us more scandals that would create opportunities for reform.

Shortly thereafter, we were rewarded with the trading scandal from the aptly named investment company, MF Global. It seems that FTX has given us yet another great case study in greed and corruption in the financial sector.

The financial sector was and is a happy home for those seeking big bucks, and who don’t mind bending or breaking the rules to fill their pockets. Corporate America is not in general known as a center of virtue, but in most other sectors there is at least a product by which a company can be evaluated. Does the auto industry produce cars that are safe and drive well, does the airline industry get people to their destinations on time?

These are metrics that can be applied in a reasonably straightforward way. But what does the financial sector do? In fact, there are metrics, but they are not as straightforward, and we literally never see the business press applying them to the sector.