Author Archive

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

January 24, 2023 1 comment

from Dean Baker

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

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

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

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

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

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

January 18, 2023 3 comments

from Dean Baker

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

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

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

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

January 9, 2023 4 comments

from Dean Baker

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

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

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

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

December 24, 2022 Leave a comment

from Dean Baker

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

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

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

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

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

December 16, 2022 2 comments

from Dean Baker

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

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

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

December 1, 2022 1 comment

from Dean Baker

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

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

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

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

The Problem of Media Concentration Is Not New

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

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

Sam Bankman-Fried’s truly effective philanthropy: teaching

November 26, 2022 3 comments

from Dean Baker

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

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

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

Philanthropy verse Reform: How Best to Save Humanity  Read more…

The pandemic treaty, crypto, and inequality

November 22, 2022 1 comment

from Dean Baker

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

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

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

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

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

November 15, 2022 3 comments

from Dean Baker

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

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

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

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

The market did not cause inequality, no matter how much the New York Times insists

October 5, 2022 5 comments

from Dean Baker

It is a complete article of faith in intellectual circles that the market is responsible for the rise in inequality that we have seen in the United States and elsewhere over the last half-century. Intellectual types literally cannot even consider the alternative that inequality was the result of government policies, not the natural workings of the market.

The standard line is that technology and globalization were responsible for the increasing gap in income between people with college, especially advanced, degrees and non-college-educated workers. This belief that market forces drove inequality and not policy is apparently central to the identity of its beneficiaries, who determine what appears in major news outlets.

In this way, the belief in the market causes of inequality can be similar to the belief among Trumpers that the 2020 election was stolen from Trump. They simply do not even want to see the issue debated.

Spencer Bokat-Lindell: The Latest Perp

My current prompt to make my standard complaint is a column by New York Times columnist Spencer Bokat-Lindell which raises the question, “Is liberal democracy dying?” While the causes of growing inequality are not directly the piece’s topic, the issue comes up at several points.

For example, in discussing the rise of authoritarian sentiments among the masses, he tells readers: Read more…

China is the world’s largest economy: Get over it

September 16, 2022 4 comments

from Dean Baker

It is common for politicians and pundit types to speculate on when or whether China’s economy will pass the US economy as the world’s largest. The latest episode to cross my path was a column by David Wallace in the New York Times.

There is little reason for this sort of speculation. China is already the world’s largest economy, its economy is more than 20 percent larger than the US economy, according to the IMF. Furthermore, it is growing considerably more rapidly (assuming they don’t continue their zero COVID-19 policy forever), so it is projected to be more than a third larger than the US economy by the end of the decade.

Here’s the picture.

Source: International Monetary Fund.

Read more…

Weekend read – The big myth on inequality: it just happened

September 9, 2022 5 comments

from Dean Baker

The standard line in policy circles about the soaring inequality of the last four decades is that it is just an unfortunate outcome of technological change. As a result of technological developments, education is much more highly valued and physical labor has much less value. The drop in relative income for workers without college degrees is unfortunate and provides grounds for lots of hand wringing and bloviating in elite media outlets, but hey, what can you do?

Manufacturing plays a central role in this story since it has historically been the major source of high-paying jobs for workers without college degrees. Manufacturing jobs offered a pay premium of almost 17.0 percent in the 1980s. This had fallen sharply by the start of the last decade and had largely disappeared in more recent years.

This decline in the wage premium has coincided with a plunge in unionization rates in manufacturing. Approximately 20 percent of manufacturing workers were unionized at the start of the 1980s. In 2021 just 7.7 percent of manufacturing workers were in unions, only slightly higher than the average of 6.1 percent in the private sector. Read more…

How to decimate the corporate tax-avoidance industry

August 26, 2022 2 comments

from Dean Baker

The Inflation Reduction Act includes a remarkable innovation. Share buybacks will be taxed at a 1% rate. This is a huge deal, not only because it taxes money that was often escaping taxation at the individual level, but it is a move away from basing the corporate income tax on profits, which can be easily manipulated, to taxing returns to shareholders.

It is time for a major and simple overhaul of the corporate income tax system. The main problem with the current system is that it is focused on the wrong target. Instead of taxing corporate profits, we should be taxing stock returns to investors.

The big issue here is that corporate profits are not a well-defined concept. A thousand issues arise in determining profit, all of which depend to a substantial extent on judgment calls by accountants. Depreciation of capital is the most obvious problem, but there are many others.

What’s Visible, What’s Not

While profits are something that we cannot see, returns to shareholders can be easily seen. This is simply the increase in market capitalization, plus whatever money is paid out in dividends. This information is readily available on dozens of financial websites. Read more…

Inflation: where are we now?

August 22, 2022 1 comment

from Dean Baker

With the United States data we have seen from the last few months, it’s fair to say that no one has a very good idea of where the economy is. At the most basic level, we have seen seven months of incredibly rapid job creation this year; the economy added 3.3 million jobs through July, along with two consecutive quarters of negative growth. We don’t have to join the Trumpers in calling this a recession, to be bothered by seeing two main economic indicators going in opposite directions.

I suspect most economists (I haven’t done a poll) would agree that the negative growth reported for the first two quarters was a statistical fluke. The GDP data are often revised by large amounts, so it would not be surprising if we see a very different picture after comprehensive revisions next year.

In this respect, it is worth noting Gross Domestic Income (GDI) grew at a 1.8 percent annual rate in the first quarter. In principle, GDI should be the same as GDP, since it is just measuring the income side of the GDP equation. While the two measures never measure up exactly, the size of the divergence in the first quarter was extraordinary. This is consistent with the view that GDP for the quarter may be revised upward. (We don’t have GDI data for the second quarter yet.)

Is Inflation Slowing?     

Read more…

The semiconductor bill and the Moderna billionaires

July 27, 2022 Leave a comment

from Dean Baker

It’s pretty funny that we continually debate the causes of inequality when we routinely pass bills that redistribute income upward. The semiconductor bill about to be approved by Congress is the latest episode in this absurd charade.

To be clear, the bill does some good things. It has funding both to subsidize manufacturing capacity for semiconductors in the United States and also for further research in developing better chips in the future. Both of these are positive developments even if the benefits of the former are overstated.

It was common in the pandemic days to tout the supply chain problems as evidence that we needed more manufacturing in the United States in a variety of areas. However, that story ignored several factors.

First, the pandemic knocked out many factories in the United States also, it wasn’t just factories in Thailand and China that closed. Second, some of the problems were associated with shortages of truck drivers and other transportation workers and facilities. We need to transport goods made in the United States also, most people can’t just drive to the local furniture factory to pick up a new living room sofa.

Most importantly, the complaints about foreign sourcing ignores the fact that we saw a massive increase in goods imports, as there was a huge pandemic-induced shift in consumption from services to goods. Real imports of goods increased by more than $270 billion from the fourth quarter of 2019 to the second quarter of 2021. Read more…

Structuring the economy to give money to the rich is inflationary

July 19, 2022 1 comment

from Dean Baker

I just read this NYT column by Bryan Stryker, on how Democrats can win back the working class. I have no idea how its proposals poll, but as an economic matter, they will do little to help the working class.

The big problem with Stryker’s argument is that it assumes that the working class will somehow benefit from having more manufacturing jobs. This would have been true 20-years-ago when noncollege educated workers in manufacturing enjoyed a substantial pay premium over workers employed in other sectors. It is no longer true today.

Due to our trade deals (especially Clinton’s), which cost millions of manufacturing jobs, the sector no longer offers any substantial pay premium over employment in other sectors. At the most basic level, the average hourly earnings of production and nonsupervisory workers in manufacturing is now less than 92.0 percent of the average for the private sector as a whole.[1]

Much of the deterioration in the quality of manufacturing jobs is associated with the decline of unions in the sector. In 1993, 19.2 percent of manufacturing workers were in unions compared to 11.6 percent for the private sector as whole. By 2021 the gap in unionization rates had largely disappeared, with 7.7 percent of manufacturing workers being unionized, compared to 6.1 percent for the private sector as whole. Read more…

Governor Newsom does drugs, or at least insulin

July 15, 2022 Leave a comment

from Dean Baker

California’s Governor, Gavin Newsom, announced plans last week for the state to set up its own manufacturing facility to produce low-cost insulin for California residents. This is a great idea.

Insulin is an old drug that can be produced as a cheap generic, which is the case almost everywhere else in the world. A monthly supply of insulin in Canada costs $12, in Germany $11, and in Italy $10. In the United States, it costs on average around $100, and in many cases, people are paying several hundred dollars a month for their insulin. This is a tremendous burden on people, especially when they are retired or unable to work because of their medical condition.

The reason that drug companies can get away with charging high prices for an old drug is that they have made modifications, for which they hold patent monopolies. While these modifications may be of limited value, they allow the companies to charge patent monopoly prices, if they can convince doctors to prescribe the modified versions for their patients.

Newsom’s proposal will mean that there is a large supply of low-cost generic insulin available. If patients still want to get the latest patent-protected versions (many modifications to insulin are already off-patent), they could still be looking at very high prices, but presumably most people in need of insulin will get the generic version. Read more…

People are not spending down their savings II

June 30, 2022 1 comment

from Dean Baker

Last month I wrote a piece where I managed to mangle a very simple point. While the reported saving rate had fallen in April, it was actually due to people paying more capital gains taxes, not the result of households spending down savings.

The issue here is straightforward. Saving is defined as the portion of disposable income that is not consumed. Savings can fall either because either consumption has increased, or disposable income has fallen.

We are not seeing especially rapid consumption growth in 2022 (real consumption actually fell in May), rather we are seeing weak growth in disposable income, which is defined as personal income, minus tax payments. The story here is not that personal income growth has been weak, but rather that tax payments have soared.

The May data show taxes being paid at an annual rate of $3,123.4 billion (NIPA Table 2.1, Line 26). This is up by 41.6 percent, from the $2,205.1 billion paid in taxes in 2019.

This big jump in tax payments cannot be explained by an increase in tax rates. There have been no major increases in taxes since 2019. Rather, the jump in taxes almost certainly reflects large capital gains tax payments that people are making on stock they have sold in the last year. The huge runup in the stock market means that many people would have substantial amounts of taxable gains. Read more…

Neoliberals do not like a free market, but they want you to think they do

June 26, 2022 2 comments

from Dean Baker   

It was very frustrating to read Noam Scheiber’s profile of Jaz Brisack, the person who led the first successful union organizing drive at a Starbucks. Brisack does sound like a very impressive person and it is good to see her getting the attention her efforts warrant. However, Scheiber ruins the story by repeatedly telling readers that the neoliberals, who have dominated political debate in recent decades, want a free market. Nothing could be further from the truth.

I will start the indictment with their support of intellectual property. Government-granted patent and copyright monopolies transfer many hundred billion dollars annually from the rest of us to the top 10 percent, and especially the top one percent. Bill Gates would still be working for a living if the government didn’t threaten to arrest anyone who made copies of Microsoft software without his permission.

Then we have “free trade.” The neoliberals made it a top priority to make it as easy as possible to bring in cheap manufactured goods from developing countries. This cost millions of manufacturing jobs, and put downward pressure on the pay of noncollege educated workers more generally.

Read more…

Socialism ain’t what it used to be

June 23, 2022 10 comments

from Dean Baker

I was very disappointed with Ezra Klein’s NYT interview with Bhaskar Sunkara, in large part because I have a high opinion of Sunkara, the founder of Jacobin and now the president of The Nation. My main disappointment stems from his non-answer to one of the main questions raised by Klein.

Klein asked why the Democrats, and other liberal/left parties around the world, rely largely on more educated people for their support, while more working-class types have turned to the right. Socialists had historically envisioned socialism as the agenda of the working class, not college-educated professionals.

Sunkara gave an answer that put the blame on the decline in unions, which is undoubtedly a big part of the story. But the answer clearly goes beyond this.

Liberal/left parties around the world in recent decades, have not only often supported policies that weakened unions, but they have also supported policies that directly redistribute money from the traditional working class to people with more education, you know, the ones carrying the flame of socialism.

My favorite example here is Read more…

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