There ain’t no libertarians, just politicians who want to give all the money to the rich

from Dean Baker

David Wallace-Wells had a column discussing the trip by Javier Milei, Argentina’s new president, to the World Economic Forum (WEF) in Davos, Switzerland. The WEF is an annual gathering of many of the world’s richest people, where they also invite politicians, academics, and others who they think may amuse them. According to Wallace-Wells, Mr. Milei definitely fits into that category.

The piece talked about how Milei calls himself as an anarchist, with the government just doing basic functions, like defending the country and running the criminal justice system. Otherwise, Milei would eliminate any role for government, if he had his choice.

It is humorous to hear politicians make declarations like this. As a practical matter, almost all of these self-described anarchists would have a very large role for the government. What they want to do is to write the rules in ways that sends income upwards and then just pretend it is the natural order of things.

Patent and Copyright Monopolies

The best place to go to start ripping off the phony face of these “anarchists” is with government-granted patent and copyright monopolies. These monopolies, which make folks like Bill Gates incredibly rich, are not part of any natural order. They are explicit government policies designed to promote innovation and creative work.

It is possible to argue for these government-granted monopolies as good policy, but that doesn’t change the fact that they are government policies. It is just a lie to say that you don’t want the government intervening in the market and then support these monopolies.

In a free market, drugs are cheap, government-granted patent monopolies make them expensive

from Dean Baker

This simple point was left out of a Washington Post article on the legal battle surrounding the Biden Administration’s efforts to negotiate lower prices for drugs purchased by Medicare. This point is important because the drug companies are definitely not trying to get the government out of the market, as the industry claims.

The industry is effectively insisting that the government is obligated to give it an unrestricted monopoly for the period of its patent duration. Also, since patent monopolies provide enormous incentives for corruption (they are equivalent to tariffs of many thousand percent, or even tens of thousands percent), drug companies often find ways to game the system and extend effective protection beyond the original patent life.

Anyhow, portraying this as a situation where the industry wants the free market and the Biden administration wants government intervention is 180 degrees at odds with reality. The industry wants very strong government intervention so that it can make big profits.

It’s also worth noting that the amount of money at stake here is potentially enormous. We will spend well over $600 billion this year on drugs. These drugs would likely cost less than $100 billion in a free market. The difference of $500 billion is more than eight times as large as President Biden’s requested funding for Ukraine.

Is “greedflation” over?

from Dean Baker

Peter Coy used his column yesterday to beg President Biden not to use the term “greedflation” to explain the runup in inflation since the pandemic. I am sympathetic to much of his argument, most importantly, the idea that corporations suddenly turned greedy is a bit far out.

As Coy notes, corporations are always greedy. The real question is whether something unusual was going on with corporate profits in the pandemic. There clearly was an increase in profit margins in the pandemic. This was largely due to real shortages created by supply chain problems worldwide.

We can say this with a high degree of certainty because inflation was a worldwide story. This means that the idea that it was due to Biden’s “excessive” stimulus is silly.

While the U.S. is a huge part of the world economy, higher demand here could at most only explain a small fraction of the inflation in countries like the U.K. and Germany. The fact that their inflation has been similar to U.S. inflation since the pandemic, undermines the idea that Biden’s recovery package was the main factor in the U.S. inflation surge.

I have made this argument before and been told that people don’t care about inflation in the U.K. and Germany, they care about inflation here. That’s fine, but as an economist I’m trying to explain causation.

Any fool can look out over the horizon and see the earth is flat, the curvature of the planet is not generally visible in our range of vision. But we know the earth is in fact round, and no serious person is going to insist it is flat.

Similarly, we know inflation was a worldwide phenomenon due to the pandemic. If people want to yell at Biden over it, that is their right, but let’s not pretend that complaint is based in reality.

But let’s get back to “greedflation,” or “sellers’ inflation” the term used by Isabella Weber, the most prominent academic proponent of this view. There can be little doubt that there was a big shift to profits in the pandemic. Here’s the picture on the profit share of corporate income.

Do you want to subsidize rich people’s political contributions?

from Dean Baker

In prior decades we in the US used to try to restrict the ability of the rich and very rich to buy elections. We have limits on campaign contributions to candidates and political parties. Until the Supreme Court’s 2009 decision in Citizens United case, corporations were prohibited altogether from contributing to politicians and political campaigns.

This is no longer the case. The rich have found ways to largely circumvent campaign funding restrictions with independent campaign committees. And corporations can support whatever candidates or causes they want.

But the problem of money is even worse than it seems. Not only do the rich get to spend as much as they want to advance their interests, they can actually get taxpayer subsidies for pushing their political agenda. Through a loophole in the tax code, they can donate an asset, like shares of stock, that has appreciated in value, and not ever pay tax on the capital gain.

The great economy Trump left Biden

from Dean Baker

We have been seeing numerous stories in the media about how people support Donald Trump because he did such a great job with the economy. Obviously, people can believe whatever they want about the world, but it is worth reminding people what the world actually looked like when Trump left office (kicking and screaming) and Biden stepped into the White House.

Trump’s Legacy: Mass Unemployment

The economy had largely shut down in the spring of 2020 because of the pandemic. It was still very far from fully reopening at the point of the transition.

In January of 2021, the unemployment rate was 6.4 percent, up from 3.5 percent before the pandemic hit at the start of the year. A more striking figure than the unemployment rate was the employment rate, the percentage of the population that was working. This had fallen from 61.1 percent to 57.4 percent, a level that was lower than the low point of the Great Recession.

The number of people employed in January of 2021 was nearly 8 million people below what it had been before the pandemic. We see the same story if we look at the measure of jobs in the Bureau of Labor Statistics establishment survey. The number of jobs was down by more than 9.4 million from the pre-pandemic level.

We were also not on a clear path toward regaining these jobs rapidly. The economy actually lost 268,000 jobs in December of 2020. The average rate of job creation in the last three months of the Trump administration was just 163,000.

What the World Looked Like When Donald Trump Left Office

When it comes to prescription drugs, the Washington Post can’t even conceive of free trade

from Dean Baker

Like many self-imagined “free-traders,” the Washington Post editorial board cannot even conceive of free trade when it comes to prescription drugs. They demonstrated this fact yet again in discussing ways to deal with the high price of effective weight-loss drugs like Wegovy. These drugs carry price tags of more than $1,000 a month, making them costly for insurers, governments, or individuals who have to pick up the tab themselves.

The Post throws out a couple of ideas that could allow for a lower price, but never considers the fact that these drugs would be cheap without the government-granted patent monopolies that prevent generic manufacturers from entering the market. The monopolies are of course to provide an incentive to undertake the research, but there are other mechanisms for providing incentives, like paying people.

We did this when we wanted Moderna to develop a Covid vaccine, paying the company almost a billion dollars to develop and then test the vaccine. In the standard for our government, we then gave Moderna control over the vaccine, creating at least five Moderna billionaires. (Tell me again how conservatives want less government.) If we adopted the policy of only paying for research once, we would have both had the vaccine and low prices, since it likely could be manufactured and distributed for around $4 or $5 a shot.

Will China’s demographic crisis look like Japan and Korea’s?

from Dean Baker

The New York Times seems to really love telling readers that China is facing a demographic crisis because its population is falling. It is not clear why the NYT thinks this amounts to a crisis for China, since many other countries have declining populations without experiencing any obvious crisis.

The most obvious examples are two of China’s neighbors, Japan and Korea, both of which are seeing modest drops in population. In both countries, per capita income is continuing to rise, in spite of a shrinking workforce. In fact, in South Korea, per capita income has risen at a 2.0 percent annual rate in the last four years, a faster pace than in the United States.

This growth figure actually understates improvements in living standards, since a smaller population also means less congestion and less pollution, factors that are not picked up in GDP. It is not clear why China should be worried if it experiences a similar decline in population.

Fighting billionaires’ control of the media, individual news vouchers

from Dean Baker

Mark Twain famously quipped that everyone always talks about the weather, but no one ever does anything about it. (This was before global warming.) In the same vein, it is common for people to rant about billionaires, like Rupert Murdoch and Elon Musk, controlling major media outlets and using them to advance their political whims. But, no one seems to do anything about it.

There is a reason for inaction. For the foreseeable future, it is hard to envision a political scenario in which the ability of the rich and very rich to own and control major news outlets will be restricted. That means that if the goal is to prevent Elon Musk from owning Twitter (or “X,” as he now calls it), then we will likely be able to do little more than rant. (That is not entirely true.)

However, we can go the other way. We may not be able to stop the rich from owning major media outlets, but we can give a voice to everyone else. This can be done through a system of individual vouchers, where the government gives each person a sum, say $50, to support the news outlet of their choice.

One $50 voucher will not go far but thousands and millions of vouchers can support a lot of people doing journalism. The billionaires and the news outlets they control may still have more money, but there will be outlets they don’t control that will have the resources they need to do serious reporting that has a major impact.

If anyone doubts this point, just look at the work done by ProPublica or the Intercept in recent years. These two non-profit news outlets have broken story after story that were largely ignored by the major newspapers and television chains. (There are also many other great non-profit news organizations.)

The big three’s CEOs are ripping off their companies

from Dean Baker

Robert Reich posted a table that tells us a huge amount about the U.S. economy.

CEO pay of the largest carmakers in the world

Honda: $2.3M

Nissan $4.5M

Toyota: $6.7M

BMW: $5.6M

Mercedes: $7.5M

Porsche: $7.9M

Ford: $21M

Stellantis: $25M

GM: $29M

The reason this table is so informative is that the performance of these foreign automakers would certainly stand up well in comparison to the U.S. Big Three. (In fairness, Stellantis is largely a European company, headquartered in Amsterdam. But, its CEO gets U.S.-style pay.) So, the question is, why do U.S. companies have to pay so much more to get good help at the top?

A high national debt can be bad news, sort of like a high stock market

from Dean Baker

The media have been giving considerable attention to the national debt in the last year or so. They have some cause, it has been rising rapidly, and more importantly, the interest burden of the debt has increased sharply since the Fed began raising rates last year. But, if we want to be serious, rather than just write scary headlines, we have to ask why the debt is a problem.

The first concern to dispel is the idea that the country somehow has to pay off its debt. Our national debt is in dollars, which the government prints. Unless something truly bizarre happens, we will always be able to print the dollars needed to pay interest and principal on government bonds.

We could have some story that if our economy collapses people could lose confidence in our debt. That is true, but a bit nuts. If our economy collapses, we should be worried about our economy collapsing, the debt is really beside the point.

The more serious issue is that rising interest payments will be a burden. This is a real issue, but there are several important qualifications. First, in spite of the large debt, even relative to the size of the economy, interest payments relative to GDP are not especially high. Currently, interest payments relative to GDP were just hitting 2.8 percent last quarter. They are still below the 4.4 percent share reached in the early 1990s. And, for history fans, this burden did not prevent the 1990s from being a period of general prosperity.

Crypto and finance are waste and a drag on the economy

from Dean Baker

As everyone learns in Econ 101, and immediately forgets, the purpose of the financial sector is to facilitate transactions and allocate capital. This seems like a simple and obvious point, but you would never know it in most discussions of the financial sector.

The point here is that we need finance for these purposes. We don’t need finance to develop elaborate betting games and complex financial instruments. Financial instruments are only useful when they serve the purpose of better facilitating transactions or improving the allocation of capital.

In this context, an efficient financial sector is a small financial sector. We want to use as few resources as possible to serve its function, just as we want to use as few resources as possible in the trucking industry.

Like finance, transporting goods is hugely important to the economy. But if the number of people and the amount of capital involved in the trucking industry doubled relative to the size of the economy, it would look like we had a very inefficient trucking industry, unless there was some obvious benefit, like radically reduced waste.

For some reason, finance is never talked about this way. That comes to mind in reading this NYT piece on the $700 million spent on legal fees in the bankruptcy cases of major crypto companies. Of course, $700 million is not huge relative to the size of the economy, but it is a lot of money to most of us. It’s equivalent to more than 320,000 food stamp person years, to take something people like to complain about.

Anyhow, when we see this $700 million figure for legal fees, it is worth asking exactly how crypto is helping to facilitate transactions or better allocating capital. Are we more quickly able to pay our monthly bills if we use crypto rather than a credit card with automatic withdrawals from our bank account?

Is crypto better allocating capital? Are there innovative startups that are getting capital with Bitcoin that could not raise money through the traditional financial system?

Job loss from going green is nothing like the loss of manufacturing jobs due to trade

from Dean Baker

The United States suffered from a massive loss of manufacturing jobs in the 00s. This has come to be known as the “China Shock,” since it was associated with a flood of imports, especially from China, and a rapid rise in the U.S. trade deficit.

In the decade from December of 1999 to December of 2009, the economy lost more than 5.8 million manufacturing jobs, or more than one in three of the manufacturing jobs at the start of the decade. The vast majority of this job loss took place before the start of the Great Recession in December of 2007.

This sort of job loss was not typical for the manufacturing sector. While it lost jobs in the 1990s also, the drop was just 601,000, a bit more than one tenth as much as in the next decade. Since 2009, the manufacturing sector has actually been adding jobs, so the plunge in jobs in the manufacturing sector in the first decade of this century really was an anomaly. 

U.S. manufacturing jobs and trade: A tale of two graphs

from Dean Baker

The first decade of this century was pretty awful for U.S. manufacturing workers. In December of 1999 we had 17.3 million manufacturing jobs. This number had fallen to 11.5 million by December of 2009. This amounted to a loss of 5.8 million jobs, or one-third of all the manufacturing jobs that had existed at the start of the decade. That looks like a pretty big deal.

It’s also worth pointing out that most of these jobs were lost before the onset of the Great Recession. We had lost almost 4 million jobs by December of 2007, the official start date of the Great Recession. The obvious culprit here is the explosion in U.S. trade deficit that we saw in this decade. If we’re buying more goods from other countries, in general, that means we are producing fewer goods here.

It’s also worth noting that even the manufacturing job loss that resulted from Great Recession may have a substantial trade component. Manufacturing is always highly cyclical. We lose manufacturing jobs in a downturn, but get them back when the economy recovers. That didn’t happen with the recovery from the Great Recession.

The Chinese need to stay poor because the United States has done so much to destroy the planet

from Dean Baker

That line is effectively the conventional wisdom among people in policy circles. If that seems absurd, then you need to think more about how many politicians and intellectual types are approaching climate change.

Just this week, John Kerry, President Biden’s climate envoy, was in China. He was asking the Chinese government to move more quickly in reducing its greenhouse gas emissions. President Xi told Kerry that China was not going to move forward its current target, which is to start reducing emissions by 2030.

I know from Twitter that many people think that Kerry’s request was reasonable and that Xi is jeopardizing the planet with his refusal to move forward China’s schedule for emission reductions. This is in spite of the fact that China is by far the world leader in wind energy, solar energy, and electric cars and that all three are growing at double-digit annual rates.

The basic complaint is that China must start reducing its emissions now because of the crisis facing the planet. To my Twitter friends, the problem is that China is the world’s biggest emitter of greenhouse gas. It doesn’t matter that it has four times the population of the U.S. and emits less than half as much on a per person basis. Nor does it matter that its economy is growing rapidly as it tries to catch up to the living standards enjoyed in the United States and other wealthy countries.

This complaint against China hinges on two sorts of arguments that would be dismissed as nonsense if they were used against the United States.

• Population size doesn’t matter. We care about how much China is emitting on the whole, not per person.
• Levels don’t matter, we only care about rates of change.

US Government to consider alternatives to patent monopoly financing of drug development

from Dean Baker

In some really big news that is likely to get almost no media attention, Senator Bernie Sanders, the chair of the Senate HELP Committee, negotiated a deal with Bill Cassidy, the ranking Republican, on a package of amendments to the reauthorization of the nation’s pandemic preparedness law. While there are a number of items in the deal, a really big one is funding for a study to be done by the National Academies of Sciences, Engineering, and Medicine (NASEM) to consider alternatives to patent monopoly financing of the development of prescription drugs.

This is potentially huge, since our current system is a disaster. No one ever said it was a great idea to finance research by charging tens of thousands of dollars for life-saving drugs, when these drugs would sell for a few hundred dollars in a free market without patent protection. We just ended up here. The study outlined in this bill should mean that we will get a serious evaluation of the current route for financing research relative to alternatives.

As I have argued endlessly, the current patent monopoly system is just an incredibly bad way to finance the development of new drugs, vaccines, and other health-related products. There are many different reasons for this view.

Lower prices

Without patent monopolies and related protections, such as test data exclusivity or non-disclosure agreements, drugs would almost invariably be cheap. It is rare that it is expensive to manufacture and distribute a drug. In this free market world, most drugs would sell for a few dollars a prescription, or in some cases, ten or twenty dollars. We would not have drugs selling for hundreds or even thousands of dollars per prescription. 

Weekend read – Mixed progress in the fight against inequality and for democracy

from Dean Baker

I have a birthday coming up, so it seems a good time to assess progress, or lack thereof, on the various issues that I have worked on over the decades. There is some big progress in at least a couple of areas, but not much to boast about in the others.

I’ll start with the success stories.

The Benefits of a Tight Labor Market

The big one, where I feel we really have made huge progress, is the battle for full employment. It might seem like ancient history, but a quarter century ago the absolute standard wisdom in the economics profession was that we could not get unemployment rates below 6.0 percent without ever accelerating inflation. To argue otherwise was to invite ridicule.

The reality repeatedly contradicted the theory. We sustained an unemployment rate of 4.0 percent in 2000, with only a very modest increase in the inflation rate. The recession caused by the collapse of the stock bubble drove the unemployment rate back up in 2001 and 2002, but we eventually did start to see it fall again, eventually reaching levels around 4.5 percent in 2007.

Unfortunately, this drop in unemployment was driven by a housing bubble, the collapse of which gave us the worst downturn since the Great Depression. The timid response to the recession by the Obama administration and the Republican Congress gave us a weak recovery. However, by the end of 2017, the unemployment rate was again approaching 4.0 percent.

The myth of the “Free Market”

from Dean Baker

The media are really going overboard in telling us the days of the free market are over with Biden’s new economic policies. President Biden has quite explicitly implemented policies intended to reshape the direction of the economy, pushing clean energy and more domestic production of advanced semiconductors and other products. He also has reinvigorated anti-trust policy, which was largely shelved by his predecessors.

But the idea that the policies of the last four decades were somehow a matter of just leaving things to the market is a grotesque lie that no person remotely familiar with economic policy should be repeating.

The Finance Industry Cesspool

I will reverse the usual course of my diatribe here and start with the financial sector. Suppose back in 2008-09 we let the market work its magic when Citigroup, Bank of America, and other financial giants were effectively bankrupted by their own greed and stupidity. We would have a radically downsized financial sector, with many fewer people earning seven and eight-figure salaries at banks. (No, we would not have had a Second Great Depression. Keynes taught us how to prevent a depression: spend money.)

We would also have a much smaller financial sector if we taxed sales of stocks, bonds, and derivatives like we taxed sales of clothes, cars, and furniture. It is the power of the financial industry, not the free market, that tells us that these financial transactions should be exempted from the sales taxes that apply to just about everything else we buy.

New York Times headlines article “Public Tired of ‘Neo-Liberal’ Policies Designed to Make Rich Richer”

from Dean Baker

Of course, the New York Times did not headline a piece this way, but that would have been a more accurate headline of an article it ran last weekend discussing a turn away from “neo-liberal” policies. As I pointed out in a quick Twitter thread, that piece misrepresented a set of policies that have the effect of redistributing income upward as “free market” policies.

This is wrong in a way that is very convenient for the proponents of these policies. The massive upward redistribution of income in the last four decades is not really a debatable point. However, as a political matter, it is far more salable to say that this upward redistribution was the result of the forces of technology and globalization than of policies designed to make the rich richer.

While it should be obvious that the policies of this period were not “free market” (the free market doesn’t give us government-granted patent and copyright monopolies), it seems totally obligatory in media outlets to insist that they are. This was the case in prior decades when publications like the New York Times and Washington Post were pushing these policies, and it apparently is still standard policy when governments seem to be moving away from these policies.

Will Biden’s industrial policy create a lot more Moderna billionaires?

from Dean Baker

People routinely tout Biden’s efforts to bring back manufacturing jobs as a way to rebuild the middle class and reduce inequality. Whatever the motives, there is not much reason to believe that it will have this effect.

When the United States opened up its market to freer trade in manufactured goods, through trade deals like NAFTA and admitting China to the WTO, manufacturing workers had a substantial pay premium over workers in the rest of the private sector. This was largely because manufacturing was much more highly unionized than other parts of the private sector.

However, this is no longer true. In 2022, 7.8 percent of manufacturing workers were unionized, compared to 6.0 percent for the private sector as a whole. As a result, the pay premium for workers in manufacturing has largely disappeared.

This means that there is little reason to believe that manufacturing jobs will be good-paying jobs, unless they are unionized. While the Biden administration has tried to push measures that increase the probability that the jobs created by his policies will be union jobs, it is not clear that they will be effective. In that case, the manufacturing jobs created producing semiconductors or clean energy may be little better than other jobs that workers might have taken.

The other side of this picture is that the owners of the companies getting the subsidies, in addition to well-placed high-end workers, are likely to put lots of money in their pocket as a result of Biden’s policies. Moderna provides an excellent example of what can happen.

AI, job loss, and productivity growth

from Dean Baker

Fear the rich, not AI

It is really painful to see the regular flow of pieces debating whether AI will lead to mass unemployment. Invariably, these pieces are written as though the author has taken an oath that they have no knowledge of economics whatsoever.

The NYT gave us the latest example on Sunday, in a piece debating how many jobs will be affected by AI. As the piece itself indicates, it is not clear what “affected by AI” even means.

What percent of jobs were affected by computers? The answer would probably be pretty close to 100 percent, if by “affected” we mean in some way changed. If by affected, we mean eliminated, then we clearly are talking about a much smaller number.

Thinking of AI like we did about computers is likely a good place to start. First of all, we should remember that there were predictions of massive layoffs and unemployment from computers and robots for decades. This did not happen.

In fact, we have a measure of the extent to which computers, robots, and other technology are displacing workers. It’s called “productivity growth,” and the Labor Department gives us data on it every quarter.

Productivity is the measure of the value of output that a worker can produce an hour. We expect this to increase through time as we get better equipment and software, we learn how to do things better, and workers get more educated.

For the last two centuries, productivity growth has been a normal feature of the U.S. economy, and in fact, most normally functioning economies around the world. This is the basis for rising living standards through time. It is the reason that we can feed our whole population, and still export food, even with just around 1.0 percent of the workforce in agriculture, as opposed to more than 50 percent in the 19^th century.

The big question is the rate at which productivity grows. Productivity growth has actually been pretty slow in recent years. It averaged just 1.3 percent annually since 2006. By contrast, it averaged close to 3.0 percent in the quarter century from 1947 to 1973.

Rather than being a period of mass unemployment and declining living standards, the rapid productivity growth in that period was associated with widespread improvements in living standards. We went from depression era living standards in 1947 to a prosperous middle-class society by the end, as ordinary workers were able to afford to buy houses and cars, and send their kids to college.