Author Archive

Alternative to Mankiw’s view on tax incentives and work: maybe Europeans want more free time

September 16, 2021 4 comments

from Dean Baker

Greg Mankiw warned New York Times readers about the dangers of adopting the Biden agenda and moving more towards a European-style welfare state. In his piece, titled “Can America Afford to be a Major Welfare State,” Mankiw noted:

“Compared with the United States, G.D.P. per person in 2019 was 14 percent lower in Germany, 24 percent lower in France and 26 percent lower in the United Kingdom.

“Economists disagree about why European nations are less prosperous than the United States. But a leading hypothesis, advanced by Edward Prescott, a Nobel laureate, in 2003, is that Europeans work less than Americans because they face higher taxes to finance a more generous social safety net.”

While Prescott and Mankiw attribute the gap in annual work hours between Europe and the United States to the disincentive created by higher European taxes, there is an alternative explanation: Europeans workers may just want to have more leisure time and they have the political power to impose their will.

Supporting this view is the fact that the European welfare states all mandate far more paid time off than the United States. Germany mandates that workers get 20 days a year of paid vacation, in addition to 13 paid holidays. The Netherlands also mandates 20 days of paid vacation, in addition to 9 paid holidays. Demark mandates 25 days of paid vacation and 9 paid holidays. These countries also all mandate paid sick leave and paid family leave. Read more…

The $26 an Hour Minimum Wage

August 24, 2021 9 comments

from Dean Baker

That may sound pretty crazy, but that’s roughly what the minimum wage in the United States would be today if it had kept pace with productivity growth since its value peaked in 1968. And, having the minimum wage track productivity growth is not a crazy idea. The national minimum wage did in fact keep pace with productivity growth for the first 30 years after a national minimum wage first came into existence in 1938.

Dean Aug 2021

Furthermore, a minimum wage that grew in step with the rapid rises in productivity in these decades did not lead to mass unemployment. The year-round average for the unemployment rate in 1968 was 3.6 percent, a lower average than for any year in the last half century. 

Read more…

Life at the bottom in Joe Biden’s America – 2 charts

August 16, 2021 3 comments

from Dean Baker

With the economy facing substantial bottlenecks, and the continuing spread of the pandemic, it is worth taking a quick look at how lower paid workers have been faring. Nominal wages have been rising rapidly for workers at the bottom of the pay ladder in recent months. This has allowed workers in the lowest paying jobs to see substantial increases in real wages, in spite of the uptick in inflation the last few months.

Here’s the picture in retail for production and non-supervisory workers. Note that real wages were actually somewhat lower in 2018 than they had been in 2002. (These numbers are 1982-1984 dollars, so multiply by about 2.6 to get current dollars.) They did rise in 2018 and 2019, due to a tightening of the labor market, as well as minimum wage hikes at the state and local  level. The impact of the pandemic and the recovery has been a big net positive. Real wages in the sector are roughly 4.6 percent higher than the level of two years ago, a 2.3 percent annual real wage gain. Read more…

The delta variant is scary, but it won’t sink the economy

July 27, 2021 10 comments

from Dean Baker

In recent days, major fear has been evident in financial markets and elsewhere that the delta variant of the coronavirus will spread widely and be a considerable impediment to continued economic growth: On Monday, the Dow tumbled 700 points, for example.

At least based on trends we’ve seen so far, these fears appear to be unfounded.

It is highly unlikely that the delta variant will lead to shutdowns of major sectors of the economy, of the sort we saw last spring and summer. The basic story is that in the states where the variant is causing the most infections and deaths, governors and other public officials are resistant to taking steps to contain the pandemic, especially if they carry an economic cost. So most economic enterprises will continue to do business, if not always at full capacity.

These states may face a public-health crisis but probably not an economic one. Meanwhile, the states where political leaders have been more responsive to public health concerns have far higher vaccination rates, and therefore the delta variant is not likely to pose a major health threat. Businesses therefore will continue to operate at a brisk pace.

We should expect this strong growth to continue (although the 7.6 percent rate is higher than we can expect to be sustained). The increased spread of the pandemic due to delta variant may shave a few tenths of a percentage point off our growth path, but it will not reverse it.

Before looking at the economics more closely, it is worth getting some perspective on the health risk posed by the delta variant, because public health and economics intersect. I am an economist, not an epidemiologist — and much is still subject to debate among the epidemiological experts — but it seems clear that a vaccinated population faces relatively little risk, even from delta.

Read more…

Patent monopolies, corruption, and the new Alzheimer’s drug

July 21, 2021 1 comment

from Dean Baker

It seems that no one in policy circles believes that people respond to incentives. How else can we explain this lengthy piece in the New York Times on the process by which the Food and Drug Administration (FDA) approved Aduhelm, a drug for treating Alzheimer’s disease.

The piece details how the clinical trials designed to determine its effectiveness were aborted, since it did not appear to be helping patients. Nonetheless, the FDA worked close with Biogen, the drug’s manufacturer, to find evidence that it might be effective in slowing cognitive decline. The FDA ended up approving the drug over the unanimous objection of its advisory panel. (There was one abstention.)

Incredibly, the piece never once mentions the role of government-granted patent monopolies in this outcome. Biogen was very anxious to get the drug approved because it intends to take advantage of this monopoly and charge $56,000 for a year’s treatment. Read more…

The drug companies are killing people

July 19, 2021 5 comments

from Dean Baker

I get to say this about the drug companies, now that President Biden has said that Facebook is killing people because it was allowing people to use its system to spread lies about the vaccines. There is actually a better case against the drug companies.

After all, they are using their government-granted patent monopolies, and their control over technical information about the production of vaccines, to limit the supply of vaccines available to the world. As a result, most of the population in the developing world is not yet vaccinated. And, unlike the followers of Donald Trump, people in developing countries are not vaccinated because they can’t get vaccines.

The TRIPS Waiver Charade

The central item in the story about speeding vaccine distribution in the developing world is the proposal put forward at the WTO last October (yes, that would be nine months ago), by India and South Africa, to suspend patents and other intellectual property rules related to vaccines, tests, and treatments for the duration of the pandemic. Since that time, the rich countries have been engaged in a massive filibuster, continually delaying any WTO action on the measure, presumably with the hope that it will become largely irrelevant at some point.

The Biden administration breathed new life into the proposal when it endorsed suspending patent rights, albeit just for vaccines. Read more…

Job growth under Biden and Trump

July 5, 2021 2 comments

from Dean Baker

Baker-job growth

Yes, it is that time of month again. As I always say, this sort of comparison is silly, since there are so many factors determining job growth that have nothing to do with the person in the White House. But, we all know that Trump and the Republicans would be touting this to the sky if the shoe were on the other foot.

So, here’s the latest, the economy has created more than 3 million jobs in the first five months of the Biden administration. It lost almost 2.9 million jobs in the four years of the Trump administration. Biden has now created more jobs than Trump lost.

Trains and population density: U.S. and Europe

July 3, 2021 5 comments

from Dean Baker

There are lots of silly comments that pass for great wisdom in elite circles. Steve Rattner gave us one of my favorites in his NYT column warning President Biden against putting too much money into reviving our system of train travel.

Rattner tells us:

“America is not Europe, with its dense population centers clustered reasonably close together.”

This is of course true, but in a totally trivial sense. The density of our population per mile of land is much lower than in Europe, especially if we include Alaska. But this is completely beside the point when it comes to trains. The issue is not building passenger lines from New York to Fairbanks, it’s about connecting cities that actually are reasonably close to together.

For example, Chicago is 790 miles from New York. By contrast, Berlin is 670 miles from Paris. If we stretch the trip to Warsaw the distance is over 1000 miles. And, we have many major cities in the Midwest that are closer to New York than Chicago, such as Cleveland, Detroit, and Cincinnati.

In short, if we think about the issue seriously, the difference in population density between the U.S. and Europe should not affect the feasibility of train service in the United States. As a practical matter, we have found it very difficult to build high speed rail for a variety of reasons that Rattner notes. We must address these problems if we are going to have viable passenger train service, but density is simply not the issue.

When we keep giving money to rich people, why are we surprised by inequality?

June 29, 2021 4 comments

from Dean Baker

I know I harp a lot on all the ways we structure the market to redistribute income upward, but that’s because we keep digging in deeper on these policies, and almost no one else talks about it. I get that it’s cool to talk about all sorts of tax and transfer schemes to redistribute some of the money we give to the rich and super-rich. But, I’m one of those old-fashion sorts who thinks it’s simpler just not to give them all the money in the first place. So, now that you have been warned, here again is my short list of ways to not give so much money to rich people.

Patent and Copyright Monopolies

The immediate issue that prompts this tirade was a request by President Biden for another $6.5 billion  (0.15 percent of the budget) in 2022 to support research into diseases like cancer, diabetes, and Alzheimer’s. I’m not upset at all that the federal government is spending more money on research in these areas.

In fact, I think more federal funding of research into these and other areas of biomedical research is great. The problem is that we can be all but certain that all the breakthroughs that may be realized as a result of this spending will result in patent monopolies that will be very profitable for the companies that are awarded them. Read more…

The Bitcoin transactions tax

June 24, 2021 1 comment

from Dean Baker

Like most economists, I have always been a Bitcoin skeptic. The question has always been what purpose does it serve?

The idea that it would be a useful alternative currency is laughable on its face. How can you have a currency that wildly fluctuates year to year and even hour to hour?  Imagine if you had a wage or rent contract written in Bitcoin. Both your pay and your rent would have more than tripled over the last year, likely leaving you unemployed and unable to pay your unaffordable rent. Economists often exaggerate the problem of inflation, but having currency that has large and unpredictable increases and decreases in value is a real problem.

So, Bitcoin may not be very useful as a currency, but maybe we can just treat as an outlet for harmless speculation, like baseball cards or non-fungible tokens. Well, it turns out that Bitcoin is not entirely useless. It is the currency of choice for those engaging in illegal activities like dealing drugs and gun-running, and of course extorting companies with ransomware. (Its value for this purpose took a major hit when the FBI was able to retrieve much of the money paid by Colonial Pipeline to the hackers who infiltrated its system. Apparently, Bitcoin transactions are not as untraceable as advertised.)

But Bitcoin cannot be dismissed as just fun and illegal games, it turns out it is also a major contributor to global warming. Bitcoin mining, the process by which new bitcoins are brought into existence, uses up an enormous amount of electricity. According to an analysis by researchers at Cambridge, Bitcoin mining uses more energy in a year than the country of Argentina. Read more…

Biden, China, and the New Cold War

June 18, 2021 24 comments

from Dean Baker

After Donald Trump’s clown shows, it was nice to have a U.S. president who at least takes world issues seriously while representing the country at the various summits over the last week. But that is a low bar. While we want adults in positions of responsibility, we have to ask where those adults want to take us. It is not clear that we should all eagerly follow the path that President Biden seems to be outlining with regard to China.

Unfortunately, people in the United States (including reporter-type people) tend to have little knowledge of history. Many have no first-hand knowledge of the Cold War with the Soviet Union and have not done much reading to make up for this deficiency. In fact, they also don’t seem to have much knowledge of the Iraq War, which is probably the better place to start here. Read more…

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…