Author Archive

Where Donald Trump and the elites agree on protectionism: patents and copyrights

August 3, 2018 14 comments

from Dean Baker

Policy wonks and pundits have been nearly unanimous in their condemnations of Donald Trump’s trade war and his primary weapon of tariffs. Tariffs are a tax increase on US consumers, raising the price of imports and the domestically produced goods with which they compete.

Retaliation by other countries will reduce US exports, costing jobs in other sectors. This is not likely to lead to good outcomes, especially when the basis for Trump’s complaints is vague, constantly shifting and often at odds with reality.

The one exception is with patents and copyrights. There is widespread agreement with Trump that China, our largest competitor, is stealing “our” intellectual property. They agree that Trump should be prepared to take steps to stop this theft and crackdown on China’s practices.

The so-called theft takes two forms. On the one hand, the complaint is that China does not adequately protect patents and copyrights internally. As a result, massive amounts of software, recorded music and video material, and other copyright protected items are sold without authorization.

The other form of theft is through requirements that companies looking to set up operations in China partner with Chinese firms and thereby share their technology. For example, Boeing is required to partner with Chinese manufacturers in its operations there, which then gives the Chinese manufacturers the ability to be competitors in future years.  Read more…

Why Trump’s tariffs are nearly as unpopular with his voters as Obama’s trade policy was

July 29, 2018 11 comments

from Dean Baker

Donald Trump made his opposition to much of America’s international trade policy a central theme in his presidential campaign, and his position almost certainly played a major role in his victory in key industrial states like Michigan, Ohio, and Pennsylvania. But the public now seems largely opposed to his recent tariffs against our major trading partners.

It is possible to make sense of these seemingly contradictory facts.

First, most people are not policy wonks. They have day jobs and, when they get back from work, they often have family responsibilities, so getting the news means hearing a few tidbits on the television or radio, or possibly skimming an article in a newspaper or online.

This means that the vast majority of people only have the most general understanding of trade and trade policy. In the election of 2016, there was a widely held view that trade policy had hurt many people, which was why both Donald Trump and Hillary Clinton opposed the Trans-Pacific Partnership, the most important trade deal then on the table. (Trump pulled out of the dealshortly after his inauguration.)

People were not wrong to hold a negative view of trade policy: Over the prior four decades, it had put U.S. manufacturing workers in direct competition with their low-paid counterparts in the developing world by reducing tariffs and other barriers that had caused foreign-made products to cost more. The predicted and actual effect of this policy was the loss of millions of manufacturing jobs.  Read more…

Pledging fealty to Trump: Europe pays the price for increasing inequality

July 26, 2018 6 comments

from Dean Baker

At the NATO summit earlier this month, Jens Stoltenberg, the secretary general of NATO, was forced to publicly praise Donald Trump’s leadership. Mr. Stoltenberg is almost certainly a very intelligent hardworking man. That is virtually a prerequisite for a person in his position. By contrast, Donald Trump is the most ignorant ill-prepared person ever to sit in the White House.

Nonetheless, when Stoltenberg noted the increases in military spending by NATO members, Trump asked him why the increases were happening. Stoltenberg meekly responded, “because of your leadership.” (Actually, the increases were part of a deal negotiated with President Obama in 2014.)

Trump obviously loves this game of forcing powerful people to sing his praises. Like Stoltenberg, most don’t seem to feel they have any choice.

But, there is an issue here that goes far beyond Donald Trump’s unpleasant personality. Tens of millions of people cast their votes for Trump in 2016 (although less than a majority and in fact fewer than his main opponent, Hillary Clinton).

This was in large part because they wanted someone in the White House who would insult people like Stoltenberg. They wanted someone who would be a thumb in the eye of the people they viewed as the elite, and Donald Trump certainly fits the bill.  Read more…

Corporations and mainstream media trumpet the “horrors” of higher wages

July 17, 2018 18 comments

from Dean Baker

The media have treated us to an array of stories warning us of the terrible labor shortage facing the country. Some of the pieces have been general, such as this CNBC piece on the labor shortage “reaching a critical point,” or this Wall Street Journal article on wage gains “threatening profits.”

Others have been more industry-specific, such as The Washington Post’s highlighting of the trucker shortage that threatens the “prosperous economy.” Then there is this New York Times piece noting that nursing homes have trouble attracting nursing assistants at the $13.23 an hour average pay for the occupation.

It’s clear that many in the media are terrified by the prospect that as the labor market gets tighter, workers might get a larger share of the pie. Perhaps this should not be surprising when billionaires control major news outlets, but it does mean that economic reporting might be getting pretty far out of line with economic reality.

At the most basic level, if workers did see pay increases at the expense of profits, they would just be getting back some of what they have lost in this century. The after-tax profit share of national income rose by almost three full percentage points between 2000 and 2016. That would correspond to an average loss of almost $3,000 per worker per year.

But even this calculation understates the shift from wages from profits. According to new research by Gabriel Zucman, more than a third of the foreign profits of US corporations are actually profits made in US but shifted overseas to evade taxes.

Factor this profit shift into the calculation and the loss to workers is close to $4,000 per worker per year. And this is before factoring in the corporate tax cut passed last year.  Read more…

Six lies on trade

July 11, 2018 20 comments

from Dean Baker

After 500 days of Donald Trump’s presidency, it is clear that any relationship between his statements and the truth are purely coincidental. He even boasts about his lack of interest in the truth, touting the fact that he had no idea what our trade deficit was with Canada when he confronted Canadian Prime Minister Justin Trudeau over our “$100 billion trade deficit.” (The actual figure is around $20 billion.)

But Donald Trump’s contempt for the truth should not cause the rest of us to become liars also. In fact, it is more important than ever that progressives ground arguments in reality.

This is especially the case with trade, where lying was standard fare long before Donald Trump entered politics. Here are six common lies which deserve major pushback any time they appear.

1. Everyone gains from trade.

This is not even the textbook story. The textbook tells us there are winners and losers. In the standard story, the winners gain more than the losers lose. This means that the winners could compensate the losers so that everyone is better off. In the real world, this compensation never takes place, so the losers just lose.

If this is hard to understand, suppose we arranged for 300,000 highly qualified doctors from other countries to start practicing in the United States. This influx would probably lower our doctors’ pay by around $100,000 a year each to roughly European levels. This would save us close to $100 billion annually ($700 per family) on health care costs. That’s a big gain to the rest of us, but a big loss to US doctors. That’s basically the story of trade, but the competition has been for manufacturing workers.  Read more…

Intellectual property and China: No One is back

July 9, 2018 2 comments

from Dean Baker

I sometimes go under the professional name of “No One” as in “no one saw the financial crisis coming.” I apparently need to use this identification again when it comes to trade war with China.

On Morning Edition today, Jeff Greene interviewed Jonah Goldberg, senior editor at National Review. Mr. Goldberg told Greene how conservatives are free traders so they generally are opposed to Trump’s tariffs. He then suggested that a way out for Trump would be to focus on China’s intellectual property “theft,” since everybody agrees this is a problem.

This is where I come in. I don’t particularly consider the fact that China doesn’t pay Microsoft, Pfizer, and Boeing what they think they are owed to be a problem for people who are not major stockholders in these companies. As a basic proposition, the more money China sends to these companies, the larger its trade surplus in other areas.

More generally, as a basic proposition it is more than a bit bizarre that so many economists can somehow believe both that without patent and copyright monopolies and related protections, there would be no incentive for innovation and that technology causes inequality. If we have a problem with inequality due to “technology,”  it is due to the way in which we assign property rights. Shorter and weaker patents and copyrights means less money to the people on top and more money for everyone else.  Read more…

Businesses can’t find qualified CEOs, don’t know how to raise wages

July 8, 2018 6 comments

from Dean Baker

That’s the implication of this CNBC piece that claims that hiring is down because businesses can’t find qualified workers. If this is really the problem, then the solution, as everyone learns in intro economics, is to raise wages. For some reason, CEOs apparently can’t seem to figure this one out, since wage growth remains very modest in spite of this alleged shortage of qualified workers.

Businesses should be well-positioned to absorb higher wages since their profits have soared over the last two decades. In the years from 1980 to 2000, the beneficiaries of upward redistribution were higher paid workers like CEOs, Wall Street-types, and highly paid professionals like doctors and dentists. Since 2000, there has been a substantial shift from wages to profits, as the after-tax profit share of national income has nearly doubled, as shown below.

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Read more…

Response to “Janus”: Take their intellectual “property”

July 3, 2018 5 comments

from Dean Baker

For the last four decades, the right has been actively working to rig the rules to undermine progressives both politically and economically. They aren’t just interested in winning an election; they want to destroy any basis for progressive change.

This is why they have been so intent on attacking unions. Unlike many centrist Democrats, the right realizes that the labor movement has been at the center of most progressive change in the last century. This is why Reagan made it a priority to weaken labor at the beginning of his administration.

In his first three months in office, he picked a fight with the conservative air traffic controllers’ union (one of the few which supported his election) and set a new trend in which employers fired rather than negotiated with striking workers. He then created a logjam at the National Labor Relations Board that made it virtually useless as a mechanism for protecting workers’ right to organize.

These policies, along with anti-labor, trade and monetary policies, were a punch in the gut of private sector unions. Over the next three decades, the unionization rate in the private sector fell from almost 20 percent to just 7 percent.

Since unionization rates in the public sector were little changed over this period, it was inevitable that the right would turn their focus to this bastion of support for progressive policy change. When Republicans gained control of historically progressive states like Wisconsin and Michigan, they quickly moved to weaken the public sector unions.  Read more…

Trade: It’s about class, not country

June 27, 2018 6 comments

from Dean Baker

There is a fundamental flaw in the way that both Donald Trump and his critics generally talk about trade. They make it an issue of country versus country, raising the question of whether China, Canada and other trading partners are treating the United States fairly as a country.

Trump of course does this more explicitly with his “America First” rhetoric and complaints about other countries cheating us because they run trade surpluses, but his critics also often use similar language. After all, it is common for the adults in the room to make assertions about China’s theft of “our” intellectual property.

Have you had any intellectual property stolen by China?

The economist and policy types who have been pushing the trade agenda of the last four decades often make assertions like “everyone gains from trade.” This is what is known in the economics profession as a “lie.”

No models show that everyone gains from trade. Standard models show that some groups are benefitted by trade and others are hurt. The usual story is that the winners gain more than the losers lose.  Read more…

Innovation and knowledge: Who has more to “steal,” the United States or China?

June 25, 2018 2 comments

from Dean Baker

The Washington Post repeated a standard theme in reporting on Trump’s trade war with China, that our main concern is not the trade deficit but rather China’s alleged theft of our intellectual property. I have written about this issue before, but there is an important aspect that seems to have gone largely unmentioned, China is likely to have more at risk in this story than the United States.

Using the purchasing power parity measure (clearly the appropriate one for this issue), China’s economy is already 20 percent larger than the U.S. economy. In a decade it will be twice the size of the U.S. economy. Given these facts, it is almost certain that China will be spending far more on research and creative work than the United States. This means that it will have far more to lose than the United States if there is no internationally agreed upon mechanism for sharing the cost.

This doesn’t mean stronger and longer copyright protection as our policy makers would insist. That is a great way to redistribute income upward, which has been a major goal of economic policy over the last four decades, but not a very efficient way to support innovation and creative work in the 21st century.  Read more…

When both men and women drop out of the labor force, why do economists only ask about men?

June 21, 2018 3 comments

from Dean Baker

That’s what New York Times readers were wondering when they saw Harvard Economics Professor Greg Mankiw’s column, “Why Aren’t Men Working?” The piece notes the falloff in labor force participation among prime-age men (ages 25 to 54) for the last 70 years and throws out a few possible explanations.

We’ll get to the explanations in a moment, but the biggest problem with explaining the drop in labor force participation among men as a problem with men is that since 2000, there has been a drop in labor force participation among prime-age women also.

In we take the May data, the employment to population ratio (EPOP) for prime-age women stood at 72.4 percent.[1] That is down modestly from a pre-recession peak of 72.8 percent, but the drop against the 2000 peak of 74.5 percent is more than two full percentage points. That is less of a fall than the drop in EPOPs among prime men since 2000 of 3.2 percentage points, but it is a large enough decline that it deserves some explanation. In fact, the drop looks even worse when we look by education and in more narrow age categories.

In a paper last year that compared EPOPs in the first seven months of 2017 with 2000, Brian Dew found there were considerable sharper declines for less-educated women in the age groups from 35 to 44 and 45 to 54, than for men with the same levels of education. The EPOP for women between the ages of 35 and 44 with a high school degree or less fell by 9.7 percentage points. The corresponding drop for men in this age group was just 3.4 percentage points.  Read more…

Will China go nuclear on patent and copyrights?

June 19, 2018 10 comments

from Dean Baker

Since Donald Trump has apparently discovered that the US imports more than it exports from China, we can put tariffs on more goods than China can. This means that China has to look to other measures to counter Trump’s trade war. Most coverage of this issue has neglected to mention China’s strongest alternative measure.

The nuclear option, in this case, would be to stop honoring US patents and copyrights. This would be hugely costly to US corporations, especially if they began to export items, like prescription drugs, to the rest of the world. This would likely violate WTO rules, but I suspect China will care about violating WTO rules as much as Trump does.

Anyhow, given this can mean massive savings on drugs and other items for billions of people and a big hit to shareholders in Apple, Pfizer, Microsoft and other high-flying companies, it would go far towards reversing the upward redistribution of income. Like Trump said, it’s easy to win a trade war.

From trade war to class war: screw Pfizer’s drug patents

June 18, 2018 5 comments

from Dean Baker

Wars always have unpredictable outcomes. It is unlikely that George W. Bush anticipated that the Iraq war would destabilize the Middle East for two decades, and possibly quite a bit longer. World War I resulted in the collapse of four European empires and emergence of the Soviet Union as a world power.

In this vein, we can hope that something positive may emerge from Donald Trump’s ill-conceived trade war. Specifically, it may lead the United States and the world to re-examine the system of patent and copyright monopolies that we have been expanding and extending for the last four decades.

While the Trump administration’s tactics and goals seem to be constantly shifting, the one thing that has won applause from the Washington elite is cracking down on China’s “theft” of our intellectual property. As Washington Post columnist Catherine Rampell aptly framed the issue, when she told readers that stopping China from using intellectual property claimed by US corporations is “our” real concern in dealing with China.

Specifically, China requires foreign companies to transfer technology as a condition of investing in China. There are also complaints that Chinese producers of drugs, software, videos, and recorded music don’t properly compensate US patent and copyright holders.  Read more…

No bubbles on the horizon

June 5, 2018 33 comments

from Dean Baker

Ever since the collapse of the housing bubble in 2007–2008 that gave us the Great Recession, there has been a large doom and gloom crowd anxious to tell us another crash is on the way. Most insist this one will be even worse than the last one. They are wrong.

Both the housing bubble in the last decade and the stock bubble in the 1990s were easy to see. It was also easy to see that their collapse would throw the economy into a recession since both bubbles were driving the economy. We are in a very different place today.

The stock market is high. By any measure, price-to-earnings ratios are far above historic averages, but they are nowhere near as out of line as they were in the 1990s bubble.

The current value of the market is roughly 24 times after-tax corporate profits, based on the first quarter’s data. This compares to the historic average ratio of 15-to-1. But at the peak of the bubble in 2000, the ratio was over 30-to-1.

Furthermore, the higher than normal price-to-earnings ratio can very well be justified by unusually low real interest rates. The interest rate on the 10-year Treasury bond is flirting with 3.0 percent. With a 2.0 percent inflation rate, that translates into a real interest rate of just 1.0 percent.  Read more…

Donald Trump’s big pharma first agenda

May 24, 2018 1 comment

from Dean Baker

After handing huge tax cuts to the country’s richest people and taking away health care insurance for millions, Donald Trump took another giant step toward abandoning his populist agenda last week. Instead of having Medicare negotiate to bring drug prices down, Trump put out a plan that is focused on making foreign countries pay more for drugs.

The most immediate and direct effect of this effort, insofar as it succeeds, will be to increase the profits of the major US drug manufacturers. This is a high priority for all those people who own lots of stock in Pfizer and Merck, but it is not a real goal for the other 99 percent of the country.

It’s true that higher profits could lead to some additional spending on innovation in future years. But just like the claim that the corporate tax cut will lead to a huge flood of investment, good luck trying to find it in the data.

It is also wrong to imagine that the other 99 percent benefit when Pfizer and Merck can get more profits by making our trading partners pay higher prices. First, insofar as foreigners pay Pfizer and Merck more for drugs, they will have less money to buy US car parts or Boeing planes. Other things equal, insofar as Trump’s crusade for higher drug prices succeeds, we can anticipate a larger trade deficit in manufactured goods. This ought to cheer up his supporters in the industrial states.  Read more…

Are we at full employment? taking issue with Paul Krugman

May 22, 2018 4 comments

from Dean Baker

Paul Krugman had an interesting blog post this morning in which he attributed the continuing weakness of wage growth to an increase in monopsony power. I’m a skeptic on this one, since the collapse in wage growth happens to coincide with the Great Recession. The big issue is whether the labor market is again back to its pre-recession level of tightness, when wages were rising considerably more rapidly.

To argue the case that it is, Krugman follows Jason Furman in dismissing the drop in prime age labor force participation as just being part of a longer term trend. This leaves me uncomfortable for a couple of reasons.

First, it would be nice to have an explanation for the trend, instead of just pointing to it and saying “trend.” We have clear explanations for trends like rising incomes through time or increases in life expectancy. What is the explanation for fewer men interested in working through time? Will this decline persist forever?

That brings me to the second reason I am uncomfortable with this story. Insofar as there had been an explanation, it was usually that the skills of less educated men were less valued in the modern economy. We no longer need strong people to move things around, machines do that for us.

There undoubtedly is some truth to this story, except the drop in employment rates (EPOPs) since 2007, and especially since 2000, has been pretty much across the board. EPOPs have fallen for both men and women and at pretty much all education levels. These drops are departures from past trends. (Women’s EPOPs had been rising until the 2001 recession.) A shortage of demand is the most simple explanation for why there would be a sudden drop in EPOPs hitting pretty much every demographic group.  Read more…

Krugman on Drugs

May 13, 2018 4 comments

from Dean Baker

I was glad to see Paul’s short post explaining some of the economics of the U.S. government negotiating drug prices with the drug companies; the route Donald Trump rejected. I thought I would add a few more points.

First, the monopoly profits earned by the drug companies provide a powerful incentive for rent-seeking. This is the standard story that economists always complain about with trade protection, except instead of talking about a tariff that raises the price of the protected item by 10 or 25 percent above the free market price, we’re talking about a government granted monopoly that typically raises the price of a factor of ten or even a hundred compared with the free market price. These markups are equivalent to tariffs of 1000 percent or 10,000 percent.

This not only encourages behavior like the payoff from Novartis to Trump lawyer Michael Cohen, it also gives drug companies an enormous incentive to misrepresent the safety and effectiveness of their drugs. We frequently hear stories of drug companies withholding evidence that their drugs are less effective than claimed or even harmful for some patients. Perhaps the most famous was the case where Merck allegedly withheld evidence that its arthritis drug, Vioxx, increases the risk of heart attack and strokes for people with heart disease. Needless to say, the costs from this sort behavior are enormous.   Read more…

Cheap fun with the stock market, arithmetic and CEO pay

May 8, 2018 1 comment

from Dean Baker

Everyone with a 401(k) has been impressed by the stock market’s run-up in recent years. Even adjusting for inflation, the S&P 500 is more than 20 percent higher than its peak in the 1990 stock bubble. Of course, the economy is nearly 40 percent larger, which makes the run-up somewhat less striking.

Nonetheless, the ratio of stock prices to corporate earnings is at unusually high levels. According to data from Nobel Laureate and economist Robert Shiller, the current ratio of the S&P 500 to corporate earnings is close to 25. That compares to a long-term average of less than 15.

The reason this matters is that as the price-to-earnings ratio rises, the dividend yield falls. Forty years ago, the dividend yield was well over 4.0 percent. It currently is just over 1.8 percent. This means that more of the return from stock depends on a rise in the stock price.

But if stocks rise just in step with the economy and profit growth (this assumes no further rise in profit shares), then capital gains are not going to be offsetting a weak dividend yield. Using the projections from the Congressional Budget Office (CBO), GDP is expected to grow at less than a 2.0 percent annual rate over the next decade. Add in a 1.8 percent dividend yield, and shareholders are looking at a real return of less than 3.8 percent.  Read more…

Facebook: The sorry company

May 5, 2018 46 comments

from Dean Baker

Earlier this month, Facebook CEO Mark Zuckerberg apologized to Congress for allowing improper access to the data of tens of millions of Facebook users. This was just one of a long sequence of apologies that Zuckerberg has made for this and other failures of the social media giant.

Given this track record, it’s probably will not the last apology that Zuckerberg has to make for his company. It is long past time for Congress to take action so that Zuckerberg does not have to keep asking for our forgiveness. There are several simple steps the government can take to help him and his company in this area.

The first is to try to give Zuckerberg some competition. Facebook has an effective monopoly on the sort of social media platform it provides with no competitor having a reach that is even within an order of magnitude of Facebook’s. In fact, when Zuckerberg was asked during his testimony who his competitors were he stumbled blindly and eventually suggested email.

The government can certainly force the company to end its practice of buying up potential competitors. In the last decade Facebook bought up both Instagram and Whatsapp, with the explicit purpose of eliminating potential competition. This is pretty much a textbook violation of anti-trust law in the United States, but the Obama administration chose to look the other way.

In addition to preventing Facebook from buying up potential competitors, the government can also prevent the company from using its near monopoly as a way to ply its way into new markets. This was the initial remedy proposed by the judge when Microsoft lost an antitrust case in the 1990s.  Read more…

Amazon gets into the counterfeiting business

from Dean Baker

Not really. The Guardian has an article that begins by telling readers how Amazon produces a copy of a designer laptop stand and sells it for half the price as the designer stand. While the article correctly refers to the Amazon product a “knockoff,” in other contexts, such as when discussing Chinese copies of US products, these copies are often referred to as “counterfeits.”

This is not just a question of semantics. With a counterfeit, the buyer is being deceived. They pay a higher price because they actually believe that it is produced by the company in question. In the case of a knockoff, or unauthorized copy, the buyer knows that they are not getting the product produced the designer company, but are paying a considerably lower price.

In the case of the knockoff, the customer is benefiting, as is the seller. There could be an issue where the designer’s property rights are being violated, but both of the parties to the exchange are benefiting. By contrast, in the case of a counterfeit item, the buyer is being ripped off. They pay more for the item because it has been misrepresented.