Author Archive

What’s the difference between a waitress and a private equity partner? (their tax ate)

June 13, 2021 4 comments

from Dean Baker

If the waitress works in an upscale restaurant and earns a decent living, there is a good chance that she is paying a higher tax rate than a private equity partner. The reason is that private equity (PE) partners get most of their pay in the form of “carried interest.” This is money that is paid to them as a share of the returns on the money they manage. Since private equity partners are rich and powerful, their carried interest payments are taxed at the capital gains tax rate of 20 percent, instead of the 37 percent top tax rate that people earning millions a year would be paying.

The ostensible rationale for allowing PE partners to pay a lower tax rate on their carried interest is that these payments involve risk. If the funds don’t meet some threshold rate of return, then they don’t earn any money.

The New York Times had a major piece on tax avoidance and evasion by private equity partners, which gave this rationale. However, the piece neglected to point out that millions of workers take this sort of risk, since they get paid, in large part, on commission. This list would include realtors, car salespeople, and waiters and waitresses. In all of these cases, the money earned as a commission is taxed as normal income. It is only PE partners, or hedge fund and venture capital partners, that get to pay a lower tax rate.

The tax savings for PE partners are substantial. For a PE partner earning $10 million a year, the savings between the current 37 percent top marginal rate and the 20 percent capital gains rate would be roughly $1.7 million a year. That comes to more than 1,100 food stamp person years.

How does bloated CEO pay maximize shareholder value? One of the great mysteries of the world

June 12, 2021 1 comment

from Dean Baker

There is plenty of evidence at this point that CEO pay bears little relationship to returns to shareholders. Yet, it is an article of faith in policy circles, especially progressive policy circles, that companies are being run to maximize returns to shareholders.

This is why I loved this story. According to the NYT, Chad Richison, the CEO of Paycom, had a pay package that was worth $211 million. When it came up for vote of shareholders in a say-on-pay ballot, it was voted down. The article tells readers:

“Shareholders opposing the compensation won a say-on-pay vote at the company, and a majority also withheld votes from a director on the board’s compensation committee. Under Paycom’s governance guidelines, the director had to tender his resignation. The board’s nominating and corporate governance committee did not accept it, however, instead reaffirming his appointment, according to a company filing.”

So we have a story where the shareholders explicitly rejected a CEO pay package and voted to remove the director most responsible for the pay package. But their votes on both are ignored and the director stays on the job and the CEO keeps the cash.

Can someone explain how this is maximizing shareholder value?

Patent monopolies and inequality: When we give rich people money, why does inequality surprise us?

June 7, 2021 7 comments

from Dean Baker

In recent weeks there have been several articles noting the enormous wealth that a small number of people have made off of the vaccines and treatments developed to control the pandemic. Many see this as an unfortunate outcome of our efforts to contain the pandemic. In that view, containing the pandemic is an immensely important goal, if some people get incredibly rich as result, it’s a price well worth paying. After all, maybe we can even tax back some of their wealth after the fact.

The infuriating part of this story is that it is so obviously not true. But, just as followers of Donald Trump are prepared to believe any crazy story he tells about the stolen election, our intellectual types are willing to accept the idea that the only way we could have gotten vaccines as quickly as we did was by granting a small number of companies and individuals patent monopolies. And, just as no amount of evidence can dissuade Trumpers from believing their guy actually won the election, it is not possible to get most people involved in policy debates to consider the possibility that we don’t need patent monopolies to finance the development of drugs or vaccines.

This is especially disturbing in the case of the current crop of vaccines developed in the United States and Europe. The development of mRNA technology was done overwhelming on the public dime. This is hardly a secret. In fact, the NIH owns one of the key patents that Moderna used in the development of its vaccine. Read more…

China’s demographic crisis

June 3, 2021 1 comment

from Dean Baker

Both the Post and NYT had pieces today on how China is encouraging families to have more babies in order to counter an alleged demographic crisis. The basic story, which has been repeated many times in the U.S., is that China will be seeing a decline in the ratio of workers to retirees since families have had relatively few children over the last four decades. This is supposed to be really bad news, in fact, a crisis.

In response, China’s government is apparently taking steps to encourage families to have more children. This follows several decades in which it had the opposite policy in place, encouraging families to have just one child.

The crisis story is a bit hard to understand for those of us familiar with arithmetic. Every wealthy country has seen a sharp reduction in the ratio of working-age people to retirees. That is something that happens when better living standards and improved health care allow people to live longer. Also, when countries have gotten wealthier, people have chosen to have fewer children.

This rise in the ratio of retirees to the working-age population has not prevented both working-age people and retirees from enjoying higher living standards. This isn’t magic, productivity rises through time as technology improves and workers become better educated. This means that each worker can produce more output in the hours they work.

The graph below Read more…

Debts, deficits, and patent monopolies

May 28, 2021 10 comments

from Dean Baker

Yes, it is spring. The flowers are blooming, the birds are singing, and the deficit hawks are whining. The proximate cause is President Biden’s new budget, which will push the ratio of government debt to GDP to its highest level ever.

The question is whether this should bother anyone who has a life? The projections show that the debt to GDP ratio will rise to 117 percent of GDP in 2031. If that sounds scary, consider that Greece’s debt to GDP ratio is over 180 percent. And, the bond vigilantes don’t seem to be too bothered by this. The interest rate on long-term Greek debt is 0.8 percent, compared to the 1.6 percent on U.S. Treasury bonds.

Of course if we really want to go big we can look at Japan, where the debt to GDP ratio is approaching 250 percent of GDP. It is paying 0.08 percent interest on its long-term debt.

But let’s get to the issue at hand, how patent monopolies are like government debt. Read more…

Vaccinating the world: if we had grown ups in charge

from Dean Baker

People in policy debates are not supposed to question the desirability of patent monopolies as a mechanism for financing the development of new drugs and vaccines. After all, why ask a question that could jeopardize the profits of some of the world’s largest corporations? But, since I live out in Southern Utah, far away from the great centers of policy debate, I thought I would ask the question in reference to vaccines against Covid.

To be specific, suppose that instead of funneling money into drug companies to subsidize the patent monopoly financed system, we instead use this money, and added more to it, for the purpose of fully prefunding the development of vaccines. The condition of accepting funding is that all the work would be fully open-source.

This means that all the findings would be posted on the web, so that researchers around the world could build on them. It also means that any patents would be in the public domain so that any manufacturers, anywhere in the world, could produce the vaccines developed through this system, if they had the necessary expertise. The requirement for openness would also apply to the results of clinical trials, so it would be possible for researchers to know which vaccines were most effective for specific demographic groups and against which variants of the virus. Read more…

Population growth and the which way is up problem in economics

May 19, 2021 27 comments

from Dean Baker

Paul Krugman’s column today commented on the recent data showing continuing low fertility rates, which is likely to mean a stagnant or declining working age population in future years. Krugman points out that this is no big deal; Japan and Europe have been living with declining working age populations and have managed just fine.

But he does point out that a declining working age population is likely to lead to lower rates of investment and therefore creates a risk of “secular stagnation,” a sustained period of inadequate demand in the economy. To counter this problem, Krugman recommends large-scale public investment programs along the lines proposed by President Biden but considerably larger.

All this seems very much on the mark, but it is worth contrasting this with the concerns raised by the deficit hawks for the last four decades. Their concern was always that when the baby boomers retired they would still be consuming things, but there would not be enough workers to produce the goods. This was a story of too much demand and too little supply. That is a story of inflation.

In other words, the concern that the deficit hawks have been raising forever is the complete opposite of the problem that the economy is likely to face as the economy ages. Instead of having too much demand, it looks like we will have too little demand. We will actually need the government to run large deficits to keep the economy close to full employment.

Not only were the deficit hawks wrong about the magnitude of the problem, but they were also wrong about the direction. As the old saying goes, “economists are not very good at economics.”

Biden’s big step on TRIPS: Getting the world vaccinated

May 17, 2021 1 comment

from Dean Baker

President Biden made a huge step yesterday when his trade representative, Katherine Tai, announced that the United States would be supporting a resolution at the World Trade Organization (WTO), to suspend intellectual property rules on vaccines for the duration of the pandemic. This resolution had been introduced by India and South Africa back in October.

The United States had previously been leading wealthy countries in opposition to the resolution. With Biden now reversing the position of the Trump administration, the resolution is likely to be approved.

However, the approval is not necessarily a foregone conclusion. In reversing the U.S. position, Biden went against a major lobbying campaign by the pharmaceutical industry.  Many European countries also have large pharmaceutical companies. They are being every bit as vigorous in lobbying their own countries’ governments to get them to maintain their opposition to the resolution.

Since everything at the WTO has to be unanimous, a single country can block action on the resolution. Nonetheless, it is unlikely that any of the European countries, or even a small group of them, would want to be seen standing in the way of getting the world vaccinated as quickly as possible. Read more…

Biden proposes progress, Republicans scream “socialism”

May 13, 2021 3 comments

from Dean Baker

Almost 70 years ago, President Eisenhower pushed bipartisan legislation that created the interstate highway system. Earlier leaders made universal access to education, starting with kindergarten and running through high school, standard throughout the United States. The Republican Party of today would have one word for these policies: socialism.

Social and economic progress in the United States has always depended on a smart mix of public policies and private incentives. Following World War II, the enormous growth surge that largely created the middle class, depended on the federal highway system that allowed for modern suburbs and the speedy transportation of goods around the country.

The growth surge also depended on a well-educated workforce that was advanced by universal access to high school, and the huge growth in college education that resulted from the GI Bill of Rights and low-cost government student loans.  Read more…

The Neanderthal protectionists at the Washington Post don’t care about getting the world vaccinated

May 11, 2021 3 comments

from Dean Baker

You can’t get a graduate education (or undergrad) in economics without hearing a thousand times that protectionism is bad. When you get to actually deal with policy issues, you discover that only protectionism that benefits ordinary workers is bad, protectionism that benefits high-end workers and corporate profits is sacred.

This is exactly the point of the Washington Post editorial condemning efforts to suspend patent monopolies and other protections of intellectual products on pandemic-related vaccines, treatments, and tests.  To make its case the Post does some name-calling and double-talk.

In the name-calling category, we are told the idea of a free people’s vaccine is “is more slogan than solution.” A little later it appears as a “chimera.” We get it, the Post doesn’t like it.

On the double-talk front, the Post tells us: Read more…

More projection from the right: CEPR is not well-funded

May 8, 2021 3 comments

from Dean Baker

I was happy to see the New York Post take note of the work of the Revolving Door Project (RDP) at the Center for Economic and Policy Research. RDP has been very aggressive in vetting potential appointees in the Biden administration. It tries to prevent people with clear conflicts of interest from getting top-level jobs.

The immediate basis for the Post’s ire was the fact that Alex Oh was forced to step down from a top position at the Securities and Exchange Commission (SEC). Before getting the position at the SEC, Oh had worked at a major corporate law firm where she represented several of the country’s largest companies. One of these was Exxon-Mobil, which she defended in a suit claiming that claimed it was responsible for rape, torture, and murder committed by the Indonesian military in the vicinity of one of the company’s oil drilling operations. A judge in the case considered Oh’s conduct sufficiently egregious that he asked her to produce evidence that she should not be subject to sanctions. (Those interested in a fuller account of RDP’s case against Oh can read it here.) Read more…

Financial transactions taxes: The perfect way to pay for Biden’s infrastructure package

May 3, 2021 4 comments

from Dean Baker

There has been a lot of silliness around President Biden’s proposed infrastructure packages and the extent to which they are affordable for the country. First and foremost, there has been tremendous confusion about the size of the package. This is because the media have engaged in a feast of really big numbers, where they give us the size of the package with no context whatsoever, leaving their audience almost completely ignorant about the actual cost.

We have been told endlessly about Biden’s “massive” or “huge” proposal to spend $4 trillion. At this point, many people probably think that Biden actually proposed a “huge infrastructure” package, with “huge” or “massive,” being part of proposal’s title.

While it would be helpful if media outlets could leave these adjectives to the opinion section, the bigger sin is using a very big number, that means almost nothing to its audience, without providing any context. In fact, much of the reporting doesn’t even bother to tell people that this spending is projected to take place over eight years, not one to two years, as was the case with Biden’s recovery package.

Over an eight-year period, Biden’s proposed spending averages $500 billion annually. This Read more…

Putting the debt in context

April 18, 2021 6 comments

from Dean Baker

President Joe Biden’s recovery and jobs plans have led to considerable alarm over the resulting increases in the deficit and debt. Most of these concerns are misplaced.

The issue of whether a deficit is too large depends entirely on whether it causes us to push the economy too far, leading to inflation. The deficit for last year was $3.1 trillion, which was equal to 15.2% of GDP. This was by far the largest deficit, relative to the size of the economy, since World War II.

Yet, the inflation rate actually slowed in 2020, as the pandemic related shutdowns created an enormous gap in demand in the economy. It would be difficult to find any major sector of the economy that was operating near its capacity last year, and therefore raising prices.

The question going forward is whether President Biden’s spending proposals, coupled with his tax increases, are likely to push the economy so far that it will not be able to meet the demand created. That is not impossible, but it does seem unlikely. We have not seen a serious problem with demand generated inflation in more than four decades. Read more…

Patents and the pandemic: Can we learn anything?

April 12, 2021 2 comments

from Dean Baker

I realize that I may seem obsessed with the topic of patents (and copyrights), but it really is a big deal, and few people seem to appreciate the issue in its larger economic context. I have written about the inefficiency and corruption associated with these monopolies for decades, but if there was ever a time when public attention should be focused on reforming the system, it is now.

With the pandemic costing millions of lives around the world, and costing our economies trillions in lost output, we really should be asking whether the current system serves us well in producing vaccines, tests, and treatments. Incredibly, public debate is so dominated by the pharmaceutical industry and its allies, we are primarily seeing celebration of the system’s dubious claims to success, rather than discussions of the way in which system was and is failing us in addressing the pandemic. We also should be discussing the lessons for possible alternatives.

Starting with the failures, while we should all be glad that we now have several effective vaccines, which a large percentage of the U.S. population has now received, the fact is that only a small portion of the world’s population has been vaccinated. In Latin America less than one percent of the population has been vaccinated and in Sub Saharan Africa the figure is less than one percent.

The enormous gap in vaccination rates is important not only because of the unfairness of the world’s poor being left behind, but because of the risk the situation poses to the whole world. Read more…

A vaccine summit: Taking the pandemic seriously

April 10, 2021 2 comments

from Dean Baker

You might think that, after a year in which have seen millions of deaths and tens of millions of infections, and trillions of dollars in economic losses, our leaders would take the pandemic seriously. But apparently, that is too much to ask.

To my view, taking the pandemic seriously means doing everything we can to get the whole world vaccinated as quickly as possible. This is not just an issue of being concerned for the poor people in the developing world, who are being left behind in the vaccination race, it is a recognition of the reality that viruses mutate.

We already know about several mutations that are more contagious than the original coronavirus and are at least somewhat more resistant to some of the vaccines that have been developed. If the pandemic is allowed to spread largely unchecked through the developing world for another year or two, then it is virtually certain that we will see many more mutations. Some of these may be even more contagious and deadly, and most importantly, more vaccine-resistant. Read more…

Free trade and free taxes: How our intellectuals help the rich

April 2, 2021 3 comments

from Dean Baker

Since I came to Washington in 1992, I have been working alongside friends in the policy community, labor movement, and community organizations in fighting against a series of trade pacts. NAFTA was the immediate issue in 1992, but a couple of years later we had the Uruguay Round of the GATT that created the WTO. At the end of the Clinton administration, we had China’s admission to the WTO and then various other smaller pacts.

Those of us who opposed these deals (which were not really about free trade), argued that they would put downward pressure on the wages of manufacturing workers, by putting these workers in direct competition with low-paid workers in the developing world. This mattered in a big way because manufacturing had historically been a source of comparatively good-paying jobs for workers without college degrees. Therefore, using trade to depress the wages of manufacturing workers would lead to downward pressure on the pay of non-college educated workers more generally, thereby increasing inequality. Read more…

Quick, how much is $2 trillion?

March 31, 2021 2 comments

from Dean Baker

Okay, it is more money than even Bill Gates, Elon Musk, and Jeff Bezos have, put together. That probably still doesn’t give people too much information, since most people don’t have much familiarity with these folks fortunes. But it might be helpful if the media made some effort to put the proposed spending in President Biden’s infrastructure package in a context that would make it meaningful.

The spending is supposed to take place over eight years, which means that it would be equal to just over 0.8 percent of projected GDP over this period. At $250 billion a year, it comes to about $750 per person each year over this period. It is less than 40 percent of what we are projected to spend on prescription drugs over this period and less than half of the higher prices that we will be paying as a result of government-granted patent and related monopolies. (For some reason, the money transferred to the drug companies and other beneficiaries of these government-granted monopolies never gets called “big government.”)

Anyhow, instead of reporting $2 trillion as some big scary number, often not even telling people the time period involved, it would be helpful if news outlets tried to put the number in contexts that would make it meaningful to their readers. We get that reporting big numbers is a cool fraternity ritual among budget reporters, but making these numbers meaningful is actually supposed to be their job.

More on open-source versus patent monopoly financing of drug development

March 29, 2021 1 comment

from Dean Baker

It is often said that intellectuals have a hard time dealing with new ideas. Unfortunately, for purposes of public debate, open-source government funding of drug development is a new idea, and people in policy positions seem to be having a very hard time understanding it. So, I will try to write this post in a way that even a policy wonk can figure it out.

The basic idea of government-funded research should not be hard to grasp since the government already funds a large share of biomedical research. The National Institutes of Health gets over $40 billion a year in federal funding, with the Biomedical Advanced Research and Development Agency (BARDA) and other government agencies getting several billion more. This puts the government’s total spending in the $45 to $50 billion range, compared to a bit over $90 billion from the industry.[1] So the idea that the government would fund research really should not be that strange.

Most of the public funding does go to more basic research, but there are plenty of instances where the government has actually funded the development of new drugs and also done clinical testing. But under the current system, most of the later stage funding does come from the industry and is funded through patent monopoly pricing. Relying on open-source government-funded research for later-stage development and testing would be a major change.

The Outlines of a System of Government-Funded Research  Read more…

New York Times debates when it will tell readers that China has the world’s largest economy

March 26, 2021 2 comments

from Dean Baker

That seems to be the implication of a David Sanger piece commenting on the state of U.S. relations with Russia and China. At one point Sanger notes that China is a rising economic power:

“Economists debate when the Chinese will have the world’s largest gross domestic product — perhaps toward the end of this decade”

Actually, China already has the world’s largest economy using purchasing power parity measures of GDP, which is what most economists view as the best basis of comparison.

Here is what that well-known source of Chinese propaganda, the CIA World Factbook, has to say on the topic.

“From 2013 to 2017, China had one of the fastest growing economies in the world, averaging slightly more than 7% real growth per year. Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in 2017 stood as the largest economy in the world, surpassing the US in 2014 for the first time in modern history. China became the world’s largest exporter in 2010, and the largest trading nation in 2013. Still, China’s per capita income is below the world average.”

Since China has four times as many people as the United States, it is still much poorer on a per person basis, but its economy is already considerably larger than the U.S. economy and is likely to be close to twice as large as the U.S. economy by the end of the decade.

It matters for inequality if top executives are ripping off their companies

March 9, 2021 Leave a comment

from Dean Baker

As can be easily shown the bulk of the upward redistribution from the 1970s was not due to a shift from wages to profits, it was due to an upward redistribution among wage earners. Instead of money going to ordinary workers, it was going to those at the top end of the wage distribution, such as doctors and dentists, STEM workers, and especially to Wall Street trader types and top corporate management. If we want to reverse this upward redistribution then we have to take back the money from those who got it.

If top management actually earned their pay, in the sense of increasing profits for the companies they worked for, then there would be at least some sort of trade-off. Reducing their pay would mean a corresponding loss in profit for these companies. It still might be desirable to see top executives pocket less money, but shareholders would be unhappy in this story since they will have less profits as a result.

But if CEOs and other top management are not increasing profits in a way that is commensurate with their pay, their excess pay is a direct drain on the companies that employ them. From the standpoint of the shareholders, it is no more desirable to pay a CEO $20 million, if someone just as effective can be hired for $2 million, than to pay an extra $18 million for rent, utilities, or any other input. It is money thrown in the garbage. Read more…