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Taxing financial transactions is more strategic than taxing high wealth

October 11, 2019 16 comments

from Dean Baker

Presidential candidate Joe Biden is considering to propose a financial transactions tax as part of his campaign for the Democratic nomination, according to a recent report from The Washington Post. This is big news for those of us who have long advocated such a tax.

Sen. Bernie Sanders has taken the lead on this issue among presidential candidates, including a financial transactions tax — also known as an FTT — as part of his plan for making college tuition free. Several other candidates also support a financial transactions tax, but if the Democratic Party’s leading centrist candidate endorses the tax, it would mark a new degree of acceptance within the mainstream of political debate.

Interestingly, Sen. Elizabeth Warren is not among those supporting a financial transactions tax. This is certainly not due to a reluctance to challenge the interests of the wealthy. Senator Warren has proposed an ambitious wealth tax that would tax wealth above $1 billion at the rate of 3 percent a year. While there are good reasons for wanting to tax the very rich, a financial transactions tax is almost certainly a better economic policy and would have much better political prospects. Read more…

There is no economic justification for drilling in the Arctic Wildlife Refuge

September 30, 2019 1 comment

from Dean Baker

Earlier this month, the U.S. Department of the Interior released its final environmental impact study on plans to drill for oil and gas in the Arctic National Wildlife Refuge (ANWR). While the study noted environmental risks, it gave the go-ahead for drilling in this incredibly sensitive area.

This summer, my small town of Kanab, Utah, agreed to sell water to a frac sand mine and processing plant that would be operating just over 10 miles from Zion National Park. The county planning commission also approved a conditional use permit that would allow the mine to go forward.

What both of these actions have in common is that they are gratuitous acts of environmental destruction. This is not a story of tough trade-offs between the environment and the economy.

Those do exist in the world. It would be great for the environment to cut our fossil fuel consumption by 50 percent tomorrow, but that would devastate the economy, costing many jobs. But neither drilling in the ANWR nor frac sand mining near Zion will provide any great benefit to the economy. Nor would we suffer much, if any, negative economic impact by stopping these plans. They damage treasured landscapes for no good reason. Read more…

Rigged: How globalization and the rules of the modern economy were structured to make the rich richer

September 12, 2019 3 comments

from Dean Baker

Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich RicherThe richest 1% have done extraordinarily well over the last four decades. But income has stagnated for the majority. This was not an accident. It was by design.

My book, Rigged, highlights five areas where US policies were deliberately structured to redistribute income upwards.

  1. IP laws were strengthened, making patent & copyright monopolies longer and stronger

This hugely increased the share of GDP that goes to sectors like pharmaceuticals, medical equipment, computers, and software. And it made stakeholders in these sectors hugely wealthy.

But it was unnecessary. Alternative mechanisms for financing innovation and creative work – such as direct public funding for pharmaceutical research, with new drugs selling as generics – would not have led to the same sort of upward redistribution.v Read more…

Combatting global warming and austerity

September 10, 2019 4 comments

from Dean Baker

In the United States, proposals for a Green New Deal have been getting considerable attention in recent months as activists have pressed both members of Congress and Democratic presidential candidates to support aggressive measures to combat global warming. There clearly is much more that we can and must do in the immediate future to prevent enormous damage to the planet.

However, major initiatives in the United States to combat global warming will almost certainly require some increases in taxes. There is likely some slack in the U.S. economy (perhaps we’ll see more slack as a result of Donald Trump’s misfires in his trade war), but a major push involving hundreds of billions of dollars of additional annual spending (2-3 percent of GDP) will almost certainly necessitate tax increases. This doesn’t mean we shouldn’t move quickly to take steps to save the planet, but these steps will have some cost.

In contrast, most of Europe is in a situation where it could easily make large commitments toward increased spending on clean energy, mass transit, and conservation at essentially no economic cost. In fact, a Green New Deal Agenda in Europe is likely to lead to increased employment and output. The big difference is that Europe is much further from facing constraints on its economy. It has plenty of room to expand output and employment without seeing inflation become a problem.  Read more…

Government-granted patent monopolies are driving up drug prices

September 9, 2019 5 comments

from Dean Baker

Most of the leading Democratic presidential contenders have put forward a plan to reduce drug prices. But for some reason, none of them have embraced the simple idea of not making drugs expensive in the first place. Specifically, none of the contenders have proposed moving away from the current system of financing the research and development of new drugs through government-granted patent monopolies.

The point is a simple one that should be obvious to people in policy debates. Drugs are almost invariably cheap to manufacture. Drugs that sell as generics, with free-market competition, are rarely expensive. The drugs that cost tens or hundreds of thousands of dollars annually are almost always subject to patent monopolies or some related form of government protection.

If all drugs were sold in a free market, individual patients would not have to struggle to pay for the drugs they need and there would be enormous savings to the economy. We will spend roughly $460 billion in 2019 on prescription drugs. In a free market, these drugs would likely sell for less than $80 billion.

The annual savings of $380 billion is almost 1.9 percent of GDP. It is more than five times the annual food stamp budget. In other words, it is a significant savings. Read more…

Austerity-obsessed Europe could combat climate change without raising taxes

September 3, 2019 9 comments

from Dean Baker

In the United States, there has been much attention given to the various proposals for a Green New Deal. While there have been legitimate questions about paying for a large push to reduce greenhouse gas emissions, many accept the need for such measures for the survival of the planet.

However, there has been less attention paid to the failure of European countries to act in this area, in spite of the fact that a substantial program would be virtually costless for Europe. There has been far more attention paid to the politics around Brexit in the United Kingdom than to the important question of how Europe will address global warming.

Just to be clear, the European countries have been far better global citizens in this area than the United States. Their per-person emissions are roughly half as much as the United States. Furthermore, many European countries have already taken aggressive measures to promote clean energy and encourage conservation.

But in the battle to slow global warming, simply doing better than the United States is not good enough. The European Union can and must do more to reduce its greenhouse gas emissions. Read more…

The incentive for pushing opioids: patent monopolies

September 1, 2019 1 comment

from Dean Baker

It’s probably too simple and obvious to be worth mentioning, but it seems none of the news coverage on the suits against opioid manufacturers say that the reason that companies like Purdue Pharma and Johnson & Johnson had so much incentive to push their drugs was that the government gave them patent monopolies that allowed them to sell their products for prices that were far above the free market level. While generic manufacturers also made money on opioids, the largest profits were made the brand manufacturers, who also did the most pushing.

One of the unintended consequences of government granted patent monopolies is that it gives companies incentive to mislead physicians and the general public about the safety and effectiveness of their drugs. The costs from the resulting improper care can be enormous, as we showed in a short paper five years ago.

This should be a strong argument for alternatives to patent financed research, such as the $40 billion in direct public funding that now goes through the National Institutes of Health. Unfortunately, the idea of alternatives to patent-financed pharmaceutical research, which would allow all new drugs to sell at generic prices, saving close to $400 billion annually (1.8 percent of GDP), is too radical for U.S. politicians.

China goes generic!

August 28, 2019 5 comments

from Dean Baker

The New York Times had a piece about a new law in China that reduced penalties for importing drugs that have not been approved by China’s regulatory agency. While it is not clear from the piece how far-reaching this change in the law will be in practice, the potential impact for both China and the world is enormous.

India has continued to be a massive supplier of generic drugs, both to its own people, but also to the rest of the world. Many drugs that are subject to patent protection in the United States are available at free market prices in India. The gap in prices is often more than 100 to 1. (India’s generics vary in quality, but their largest manufacturers are comparable in quality to U.S. manufacturers.)

The United States has been pushing for years to force India to narrow the scope of its generic industry, making its patent system closer to the U.S. system. While there is support for such a change in India, there is also massive opposition to a move that would hugely raise domestic drug prices and cripple one of its leading industries.

If China were to become a large-scale buyer of India’s generic drugs it would provide a large boost to the country’s industry and make it less likely it would give in to U.S. demands. This matters not only for the Chinese and Indian markets, but it raises the prospect where most of the world might be paying a few hundred dollars for drugs for which Pfizer and Merck are charging people in the United States and Europe hundreds of thousands of dollars.

That might not prove tenable in the long-run.

Brazil, the Amazon, and Global Warming: It ain’t quite what the media tell you

August 26, 2019 29 comments

from Dean Baker

Brazil has gotten a huge amount of bad press with the fires in the Amazon with the emphasis on the harm its development policies are doing to efforts to limit global warming. While the policies of Brazil’s right-wing president, Jair Bolsonaro, are disastrous, there is an important part of the story that is being left out of most discussions.

The reason that we are worried about global warming is because rich countries, most importantly the United States, have been spewing huge amounts of greenhouse gases into the atmosphere for well over a century, while destroying the native forests on their lands. They also have paid to have forests in other countries destroyed in order to meet their resource needs.

This is the context in which the destruction of the Amazon is a worldwide problem of enormous proportions. (The Amazon is treasure which should be preserved even if global warming was not a crisis, but that is a different matter.) Read more…

The U.S. economy is not the world’s largest

August 24, 2019 6 comments

from Dean Baker

I know that reality often has little place in our political debates, but is there any way we can the New York Times and other news outlets to stop saying that the U.S. economy is the world’s largest? It happens not to be true.

According to the I.M.F., using purchasing power parity measures, which most economists view as the best measure, China passed the United States in 2015 and is now more than 25 percent larger. Maybe reporters and editors get a kick out of saying that the U.S. is the world’s largest economy, but since it happens not to be true, it would be good if they stopped saying it.

China did not trick the US — Trade negotiators served corporate interests

August 23, 2019 5 comments

from Dean Baker

The New York Times ran an article last week with a headline saying that the 2020 Democratic presidential contenders faced a serious problem: “how to be tougher on trade than Trump.” Serious readers might have struggled with the idea of getting “tough on trade.” After all, trade is a tool, like a screwdriver. Is it possible to get tough on a screwdriver?

While the Times’s headline may be especially egregious, it is characteristic of trade coverage which takes an almost entirely Trumpian view of the topic. The media portray the issue of some countries, most obviously China, benefiting at the expense of the United States. Nothing could be more completely at odds with reality.

China has a huge trade surplus with the United States, about $420 billion (2.1 percent of GDP) as of 2018. However, this doesn’t mean that China is winning at the expense of the United States and because of “stupid” trade negotiators, as Trump puts it.

The U.S. trade deficit with China was not an accident. Both Republican and Democratic administrations signed trade deals that made it easy to manufacture goods in China and other countries, and then export them back to the United States. Read more…

Good news: The stock market is plunging

August 17, 2019 7 comments

from Dean Baker

The stock market enjoys a mythological place not only among mainstream media types, but also among many progressives. For some reason this measure of expected future corporate profits is taken as a measure of economic well-being.

The fact that the media obsesses over the stock market hardly needs to be mentioned. If there is one item about the economy that we can be sure will be repeated every day, it is the movement in the Dow or the S&P 500. And, needless to say, an upward movement is good news and a downward movement is bad news.

But the view that the stock market is telling us something about the well-being of the economy goes far beyond just ill-informed media types. In the lead up to the 2016 election, Justin Wolfers, a University of Michigan economics professor, and a fellow at the Peterson Institute for International Economics, had several New York Times pieces arguing that the wise investors in the stock market recognized that Trump would be bad news for the country. He pointed to sharp declines in the market in response to events making a Trump win more likely.

The Wolfers hypothesis suffered a serious setback in the weeks and months immediately following the election. Read more…

Progressive policies may hurt the stock market. that’s not a bad thing.

August 15, 2019 7 comments

from Dean Baker

Last week, we saw the media terrified over a plunge in the stock market following an escalation of Donald Trump’s trade war with China. There are good reasons to be concerned about Trump’s ill-defined trade war and reality TV tactics, but the plunge in the stock market is not one of them.

While the idea that the stock market is a measure of the health of the economy permeates news reporting and popular understanding, it has no basis in economics. The stock market is a measure of the expectations of future profits of companies that are listed in the exchange. It is only coincidental when it provides information about the health of the economy. It is important that the public understand this distinction as the 2020 election draws closer.

The basic logic here is simple. The price of Microsoft, Boeing or Pfizer stock is not going to rise because workers are getting pay increases or they can take longer vacations. The price of these companies’ stocks will rise if investors believe that events will cause their profits to be higher. That’s the end of the story.

This is why the Trump tax cut was good news for the stock market. Investors were not passing judgment on whether lower corporate tax rates would mean more rapid economic growth. They were betting that if companies paid less money in taxes, there would be more money left for shareholders. Read more…

Yet another New York Times column gets the story on automation and inequality completely wrong

August 13, 2019 16 comments

from Dean Baker

I am a big fan of expanding the welfare state but I am also a big fan of reality-based analysis. For this reason, it’s hard not to be upset over yet another column telling us that the robots are taking all the jobs and that this will lead to massive inequality.

The first part is more than a little annoying just because it is so completely and unambiguously at odds with reality. Productivity growth, which is the measure of the rate at which robots and other technologies are taking jobs, has been extremely slow in recent years. It has averaged just 1.3 percent annually since 2005. That compares to an annual rate of 3.0 percent from 1995 to 2005 and in the long Golden Age from 1947 to 1973.

In addition, all the official projections from places like the Congressional Budget Office and Social Security Administration assume that productivity growth will remain slow. That could prove wrong, but the people projecting a massive pick up of productivity growth are certainly against the tide here.

But the other part of the story is even more annoying. No, technology does not generate inequality. Our policy on technology generates inequality. We have rules (patent and copyright monopolies) that allow people to own technology.

Bill Gates is incredibly rich because the government will arrest anyone who mass produces copies of Microsoft software without his permission. If anyone could freely reproduce Windows and other software, without even sending a thank you note, Bill Gates would still be working for a living. Read more…

Why is Facebook, the world’s largest publisher, immune to publishing laws?

July 30, 2019 5 comments

from Dean Baker

Mark Zuckerberg may not think he needs a new job, but he does. It’s long past time Facebook be classified as a publisher, where it can be held responsible for the content that appears in posts on its system.

The issue here is the special exemption to liability that Facebook and other internet platforms get from Section 230 of the Communications Decency Act of 1996. This law was passed in the early days of the internet and was intended to set up rules for governing communications that paralleled the ones for print and broadcast media. At the time, Congress decided to include Section 230, which protects Facebook and other internet platforms from the same sort of responsibility for content that print or broadcast media face.

To see what is at issue, suppose that a Facebook post becomes widely circulated saying that Donald Trump has stolen $20 million from charity. Imagine in this particular case, it happens not to be true, and Trump can prove this fact.

Because of Section 230, Facebook bears no responsibility for spreading this false accusation. In fact, it is not even obligated to remove the false accusation from its platform, although it would likely choose to do so under the circumstances. If Trump could determine who had initiated the post, he could pursue legal action against them, but Section 230 would protect Facebook from any liability.

By contrast, suppose that a newspaper had printed the same accusation. Read more…

The “aging crisis” is actually just a labor crisis for the wealthy

July 24, 2019 8 comments

from Dean Baker

The New York Times told us last week that China is running out of people. That might seem an odd concern for a country with a population of more than 1.4 billion, but you can read it for yourself:

“Driving this regression in women’s status is a looming aging crisis, and the relaxing of the draconian ‘one-child’ birth restrictions that contributed to the graying population. The Communist Party now wants to try to stimulate a baby boom.”

What exactly is supposed to be China’s “aging crisis?” China has had a low birth rate for the last four decades, as the government consciously tried to slow the country’s population growth. As a result, it does have an aging population and a declining ratio of workers to retirees, but this raises the obvious question, “So what?”

We see endless news articles and columns implying that the prospect of a declining number of workers supporting a growing population of retirees is some sort of crisis. The people making such assertions really need some knowledge of demographics.

The United States and other wealthy countries have been seeing drops in the ratio of workers to retirees for many decades. In the U.S. case, we went from having 5.1 workers for every Social Security retiree in 1960 to just 2.8 workers for each retiree today. Read more…

Trump’s fixation on intellectual property rights serves the rich

July 15, 2019 8 comments

from Dean Baker

Between making threats of actual war with North Korea and Iran, Donald Trump has also gotten us into a trade war with China. Trump’s ostensible reason for this trade war — the large US trade deficit with China — actually did have some basis in reality, but in practice the trade war is straying into turf that is likely to offer few gains for US workers and could actually lead to sizable losses.

A major theme in Trump’s campaign was that China is a world-class currency manipulator that deliberately keeps down the value of its currency to give its products an advantage in international trade. The basic story is true; China did intervene heavily in currency markets to keep the value of its currency from rising against the dollar.

However, it would probably be more appropriate to say that China managed its currency rather than manipulated it. There was nothing hidden or sneaky about China’s intervention; it has an official exchange rate that it acts to maintain.

Read more…

Replace patent monopolies with direct public funding for drug research

July 2, 2019 3 comments

from Dean Baker

It is impressive to see many of the leading Democratic candidates put forward bold progressive proposals. Unfortunately, in the case of prescription drugs, their imagination has been notably weak. While there have been proposals for lowering drug prices, none of them have been willing to attack the fundamental problem: government makes prices high by granting patent monopolies.

This is a simple but incredibly important point that is often lost in the debate. We frequently hear comments about how progressives want the government to intervene in the free market to bring drug prices down through various mechanisms.

That story turns logic on its head. In almost all cases, drugs are cheap to manufacture. It is government-granted patent monopolies or some other form of exclusivity that makes drugs expensive. In a truly free market, drugs are cheap. The restrictions on prices being proposed are simply efforts to limit the extent to which drug companies can exploit the monopolies the government has given them. Read more…

Under Trump, manufacturing job growth slows to a trickle

June 25, 2019 4 comments

from Dean Baker

Donald Trump put manufacturing jobs at the center of his economic platform in 2016. He endlessly harped on the loss of relatively good-paying manufacturing jobs.

He blamed this job loss on “terrible” trade agreements and other countries “manipulating” the value of their currency to get an advantage in trade. He put China at the top of the list of bad actors, promising to declare them a currency manipulator on day one of his administration, which would directly lead to economic sanctions.

While Trump has engaged in considerable bluster in his trade negotiations, they have not led to much of a payoff for U.S. manufacturing workers to date. At the most basic level, instead of shrinking, the trade deficit has gotten larger under Trump.

In 2016, the last year of the Obama administration, the trade deficit was $502 billion. Through the first four months of 2019, the trade deficit was running at almost a $620 billion annual rate, more than $100 billion higher than the deficit Trump inherited.

For all his screaming about currency manipulation, the value of the dollar relative to other currencies has barely changed since Trump took office. Needless to say, Trump did not declare China a currency manipulator on day one of his administration or on any subsequent day. Read more…

Donald Trump’s capricious tariffs open the door to corruption

June 12, 2019 5 comments

from Dean Baker

Donald Trump has repeatedly proclaimed his love for tariffs, even dubbing himself “Tariff Man.” While Trump clearly does not understand how tariffs work, some of the discussion in the media has been off target as well. It’s worth trying to get the basic story straight.

First, it has been widely pointed out that Trump is wrong in thinking that China or other targeted countries are paying tariffs to the U.S. Treasury. To make it simple, a tariff is a tax on imports.

It can be thought of as being like a tax on cigarettes or alcohol. The buyer is the one who most immediately pays the tax on Chinese or other targeted imports. However, the tax will generally not be borne entirely by the consumer.

The seller  in this case, producers in the countries subject to the tax  will typically lower their price to maintain their market share. So, some of the burden of the tariff will be borne by China or other targeted countries. (An important exception is a financial transactions tax, where the financial industry will bear almost the entire burden of the tax.)

It is also important to point out that part of this burden is likely to come through fluctuations in currency prices, an issue that has been almost completely ignored in media reports on tariffs. The classic economics story is that if the U.S. puts a tariff on Chinese or other imports, the value of the dollar will rise relative to the Chinese yuan and other currencies.  Read more…