Author Archive

When both men and women drop out of the labor force, why do economists only ask about men?

June 21, 2018 2 comments

from Dean Baker

That’s what New York Times readers were wondering when they saw Harvard Economics Professor Greg Mankiw’s column, “Why Aren’t Men Working?” The piece notes the falloff in labor force participation among prime-age men (ages 25 to 54) for the last 70 years and throws out a few possible explanations.

We’ll get to the explanations in a moment, but the biggest problem with explaining the drop in labor force participation among men as a problem with men is that since 2000, there has been a drop in labor force participation among prime-age women also.

In we take the May data, the employment to population ratio (EPOP) for prime-age women stood at 72.4 percent.[1] That is down modestly from a pre-recession peak of 72.8 percent, but the drop against the 2000 peak of 74.5 percent is more than two full percentage points. That is less of a fall than the drop in EPOPs among prime men since 2000 of 3.2 percentage points, but it is a large enough decline that it deserves some explanation. In fact, the drop looks even worse when we look by education and in more narrow age categories.

In a paper last year that compared EPOPs in the first seven months of 2017 with 2000, Brian Dew found there were considerable sharper declines for less-educated women in the age groups from 35 to 44 and 45 to 54, than for men with the same levels of education. The EPOP for women between the ages of 35 and 44 with a high school degree or less fell by 9.7 percentage points. The corresponding drop for men in this age group was just 3.4 percentage points.  Read more…

Will China go nuclear on patent and copyrights?

June 19, 2018 7 comments

from Dean Baker

Since Donald Trump has apparently discovered that the US imports more than it exports from China, we can put tariffs on more goods than China can. This means that China has to look to other measures to counter Trump’s trade war. Most coverage of this issue has neglected to mention China’s strongest alternative measure.

The nuclear option, in this case, would be to stop honoring US patents and copyrights. This would be hugely costly to US corporations, especially if they began to export items, like prescription drugs, to the rest of the world. This would likely violate WTO rules, but I suspect China will care about violating WTO rules as much as Trump does.

Anyhow, given this can mean massive savings on drugs and other items for billions of people and a big hit to shareholders in Apple, Pfizer, Microsoft and other high-flying companies, it would go far towards reversing the upward redistribution of income. Like Trump said, it’s easy to win a trade war.

From trade war to class war: screw Pfizer’s drug patents

June 18, 2018 5 comments

from Dean Baker

Wars always have unpredictable outcomes. It is unlikely that George W. Bush anticipated that the Iraq war would destabilize the Middle East for two decades, and possibly quite a bit longer. World War I resulted in the collapse of four European empires and emergence of the Soviet Union as a world power.

In this vein, we can hope that something positive may emerge from Donald Trump’s ill-conceived trade war. Specifically, it may lead the United States and the world to re-examine the system of patent and copyright monopolies that we have been expanding and extending for the last four decades.

While the Trump administration’s tactics and goals seem to be constantly shifting, the one thing that has won applause from the Washington elite is cracking down on China’s “theft” of our intellectual property. As Washington Post columnist Catherine Rampell aptly framed the issue, when she told readers that stopping China from using intellectual property claimed by US corporations is “our” real concern in dealing with China.

Specifically, China requires foreign companies to transfer technology as a condition of investing in China. There are also complaints that Chinese producers of drugs, software, videos, and recorded music don’t properly compensate US patent and copyright holders.  Read more…

No bubbles on the horizon

June 5, 2018 33 comments

from Dean Baker

Ever since the collapse of the housing bubble in 2007–2008 that gave us the Great Recession, there has been a large doom and gloom crowd anxious to tell us another crash is on the way. Most insist this one will be even worse than the last one. They are wrong.

Both the housing bubble in the last decade and the stock bubble in the 1990s were easy to see. It was also easy to see that their collapse would throw the economy into a recession since both bubbles were driving the economy. We are in a very different place today.

The stock market is high. By any measure, price-to-earnings ratios are far above historic averages, but they are nowhere near as out of line as they were in the 1990s bubble.

The current value of the market is roughly 24 times after-tax corporate profits, based on the first quarter’s data. This compares to the historic average ratio of 15-to-1. But at the peak of the bubble in 2000, the ratio was over 30-to-1.

Furthermore, the higher than normal price-to-earnings ratio can very well be justified by unusually low real interest rates. The interest rate on the 10-year Treasury bond is flirting with 3.0 percent. With a 2.0 percent inflation rate, that translates into a real interest rate of just 1.0 percent.  Read more…

Donald Trump’s big pharma first agenda

May 24, 2018 1 comment

from Dean Baker

After handing huge tax cuts to the country’s richest people and taking away health care insurance for millions, Donald Trump took another giant step toward abandoning his populist agenda last week. Instead of having Medicare negotiate to bring drug prices down, Trump put out a plan that is focused on making foreign countries pay more for drugs.

The most immediate and direct effect of this effort, insofar as it succeeds, will be to increase the profits of the major US drug manufacturers. This is a high priority for all those people who own lots of stock in Pfizer and Merck, but it is not a real goal for the other 99 percent of the country.

It’s true that higher profits could lead to some additional spending on innovation in future years. But just like the claim that the corporate tax cut will lead to a huge flood of investment, good luck trying to find it in the data.

It is also wrong to imagine that the other 99 percent benefit when Pfizer and Merck can get more profits by making our trading partners pay higher prices. First, insofar as foreigners pay Pfizer and Merck more for drugs, they will have less money to buy US car parts or Boeing planes. Other things equal, insofar as Trump’s crusade for higher drug prices succeeds, we can anticipate a larger trade deficit in manufactured goods. This ought to cheer up his supporters in the industrial states.  Read more…

Are we at full employment? taking issue with Paul Krugman

May 22, 2018 4 comments

from Dean Baker

Paul Krugman had an interesting blog post this morning in which he attributed the continuing weakness of wage growth to an increase in monopsony power. I’m a skeptic on this one, since the collapse in wage growth happens to coincide with the Great Recession. The big issue is whether the labor market is again back to its pre-recession level of tightness, when wages were rising considerably more rapidly.

To argue the case that it is, Krugman follows Jason Furman in dismissing the drop in prime age labor force participation as just being part of a longer term trend. This leaves me uncomfortable for a couple of reasons.

First, it would be nice to have an explanation for the trend, instead of just pointing to it and saying “trend.” We have clear explanations for trends like rising incomes through time or increases in life expectancy. What is the explanation for fewer men interested in working through time? Will this decline persist forever?

That brings me to the second reason I am uncomfortable with this story. Insofar as there had been an explanation, it was usually that the skills of less educated men were less valued in the modern economy. We no longer need strong people to move things around, machines do that for us.

There undoubtedly is some truth to this story, except the drop in employment rates (EPOPs) since 2007, and especially since 2000, has been pretty much across the board. EPOPs have fallen for both men and women and at pretty much all education levels. These drops are departures from past trends. (Women’s EPOPs had been rising until the 2001 recession.) A shortage of demand is the most simple explanation for why there would be a sudden drop in EPOPs hitting pretty much every demographic group.  Read more…

Krugman on Drugs

May 13, 2018 4 comments

from Dean Baker

I was glad to see Paul’s short post explaining some of the economics of the U.S. government negotiating drug prices with the drug companies; the route Donald Trump rejected. I thought I would add a few more points.

First, the monopoly profits earned by the drug companies provide a powerful incentive for rent-seeking. This is the standard story that economists always complain about with trade protection, except instead of talking about a tariff that raises the price of the protected item by 10 or 25 percent above the free market price, we’re talking about a government granted monopoly that typically raises the price of a factor of ten or even a hundred compared with the free market price. These markups are equivalent to tariffs of 1000 percent or 10,000 percent.

This not only encourages behavior like the payoff from Novartis to Trump lawyer Michael Cohen, it also gives drug companies an enormous incentive to misrepresent the safety and effectiveness of their drugs. We frequently hear stories of drug companies withholding evidence that their drugs are less effective than claimed or even harmful for some patients. Perhaps the most famous was the case where Merck allegedly withheld evidence that its arthritis drug, Vioxx, increases the risk of heart attack and strokes for people with heart disease. Needless to say, the costs from this sort behavior are enormous.   Read more…

Cheap fun with the stock market, arithmetic and CEO pay

May 8, 2018 1 comment

from Dean Baker

Everyone with a 401(k) has been impressed by the stock market’s run-up in recent years. Even adjusting for inflation, the S&P 500 is more than 20 percent higher than its peak in the 1990 stock bubble. Of course, the economy is nearly 40 percent larger, which makes the run-up somewhat less striking.

Nonetheless, the ratio of stock prices to corporate earnings is at unusually high levels. According to data from Nobel Laureate and economist Robert Shiller, the current ratio of the S&P 500 to corporate earnings is close to 25. That compares to a long-term average of less than 15.

The reason this matters is that as the price-to-earnings ratio rises, the dividend yield falls. Forty years ago, the dividend yield was well over 4.0 percent. It currently is just over 1.8 percent. This means that more of the return from stock depends on a rise in the stock price.

But if stocks rise just in step with the economy and profit growth (this assumes no further rise in profit shares), then capital gains are not going to be offsetting a weak dividend yield. Using the projections from the Congressional Budget Office (CBO), GDP is expected to grow at less than a 2.0 percent annual rate over the next decade. Add in a 1.8 percent dividend yield, and shareholders are looking at a real return of less than 3.8 percent.  Read more…

Facebook: The sorry company

May 5, 2018 46 comments

from Dean Baker

Earlier this month, Facebook CEO Mark Zuckerberg apologized to Congress for allowing improper access to the data of tens of millions of Facebook users. This was just one of a long sequence of apologies that Zuckerberg has made for this and other failures of the social media giant.

Given this track record, it’s probably will not the last apology that Zuckerberg has to make for his company. It is long past time for Congress to take action so that Zuckerberg does not have to keep asking for our forgiveness. There are several simple steps the government can take to help him and his company in this area.

The first is to try to give Zuckerberg some competition. Facebook has an effective monopoly on the sort of social media platform it provides with no competitor having a reach that is even within an order of magnitude of Facebook’s. In fact, when Zuckerberg was asked during his testimony who his competitors were he stumbled blindly and eventually suggested email.

The government can certainly force the company to end its practice of buying up potential competitors. In the last decade Facebook bought up both Instagram and Whatsapp, with the explicit purpose of eliminating potential competition. This is pretty much a textbook violation of anti-trust law in the United States, but the Obama administration chose to look the other way.

In addition to preventing Facebook from buying up potential competitors, the government can also prevent the company from using its near monopoly as a way to ply its way into new markets. This was the initial remedy proposed by the judge when Microsoft lost an antitrust case in the 1990s.  Read more…

Amazon gets into the counterfeiting business

from Dean Baker

Not really. The Guardian has an article that begins by telling readers how Amazon produces a copy of a designer laptop stand and sells it for half the price as the designer stand. While the article correctly refers to the Amazon product a “knockoff,” in other contexts, such as when discussing Chinese copies of US products, these copies are often referred to as “counterfeits.”

This is not just a question of semantics. With a counterfeit, the buyer is being deceived. They pay a higher price because they actually believe that it is produced by the company in question. In the case of a knockoff, or unauthorized copy, the buyer knows that they are not getting the product produced the designer company, but are paying a considerably lower price.

In the case of the knockoff, the customer is benefiting, as is the seller. There could be an issue where the designer’s property rights are being violated, but both of the parties to the exchange are benefiting. By contrast, in the case of a counterfeit item, the buyer is being ripped off. They pay more for the item because it has been misrepresented.

The irresponsibility of fiscal responsibility

April 30, 2018 11 comments

from Dean Baker

It’s official: New York Times columnist David Leonhardt pronounced the Democrats as the party of fiscal responsibility. In contrast to three of the last four Republican presidents who raised deficits with big tax cuts for the rich and increases in military spending, the last Democratic presidents sharply reduced the budget deficit during their term in office.

Leonhardt obviously intends the designation to be praise for the party, but it really shows his confusion about budget deficits and their impact on the economy. Unfortunately, this confusion is widely shared.

Contrary to what Leonhardt seems to think, the economy doesn’t get a gold star for a balanced budget or lower deficit. In fact, lower deficits can inflict devastating damage on the economy by reducing demand, leading to millions of workers needlessly unemployed.

This has a permanent cost as many of the long-term unemployed may lose their attachment to the labor market and never work again. Their children will also pay a big price as children of unemployed parent(s) tend to fare worse in life by a wide variety of measures, especially when unemployment is associated with family breakup, frequent moves, and possible evictions. Also, lower levels of output will mean less investment, making the economy less productive in the future.  Read more…

Harvard teaches us that hedge fund managers get rich even when they mess up

April 21, 2018 3 comments

from Dean Baker

While we all know that it is important for people to get a good education if they want to do well in today’s economy, it remains the case that who you know matters much more than what you know. Harvard has taught us this lesson well with the management of its endowment in recent years.

Businessweek reported that the returns on Harvard’s endowment over the last decade averaged just 4.4 percent annually. This performance trailed both stock index returns and the returns received by other major university endowments. This means that Harvard would have had considerably more money to pay its faculty and staff if it simply bought a Vanguard index fund.

If this were just bad luck, one could be sympathetic, but according to Businessweek, the school paid $242 million to the people who managed its money over the period from 2010 to 2014, an average of $48.4 million annually. While Harvard’s endowment fared poorly, these money managers did very well, with the top-paid managers undoubtedly pocketing paychecks well in excess of $1 million a year (approximately 8,000 food stamp months). In other words, Harvard’s money managers were paid huge sums to lose the school money. Nice work if you can get it.

It is difficult to understand how Harvard, or any university, could pay so much money to lose the school money. Harvard’s money managers surely have good credentials, and probably even good track records with their past performance. How could the university write contracts that allow these people to get huge paychecks that end up costing Harvard money due to their poor investment decisions?  Read more…

China’s “Currency Devaluation Game”

April 17, 2018 2 comments

from Dean Baker

Donald Trump was apparently angry about the value of the Russian ruble and the Chinese yuan against the dollar. He complained in a tweet that both are playing the “Currency Devaluation game” in a tweet yesterday.

Neil Irwin rightly points out that the complaint against Russia is bizarre, both because we don’t have much trade with Russia, but also because the most obvious reason its currency is falling is sanctions pushed by the United States and other western countries. The story with China is a bit more complicated.

China’s currency has actually been rising against the dollar over the last year, with the yuan going from 14.5 cents to 15.9 cents. So the claim that China is devaluing its currency is pretty obviously wrong.

There is however an issue of whether China is still deliberately depressing its currency against the dollar. As Irwin notes, China is no longer buying large amounts of dollars and other reserves, as it did in the last decade. This buying raised the value of the dollar and kept down the value of the yuan.

However China still holds a massive stock of foreign reserves, with its central bank holding more than $3 trillion in reserves and its sovereign wealth fund holding another $1.5 trillion in foreign assets. These huge stocks of assets have the effect of holding down the value of the yuan in the same way that the Fed’s holdings of assets keeps down interest rates.  Read more…

More evidence of the skills shortage in top management

April 13, 2018 9 comments

from Dean Baker

We all know about the skills shortage Harvard has to pay investment managers millions to lose the school a fortune on its endowment, Facebook can’t find a CEO who can avoid compromising its customers’ privacy, and restaurant managers apparently don’t understand that the way to get more workers is to offer higher pay. The NYT gives us yet another article complaining about labor shortages.

The complaint is that restaurants have small profit margins and therefore can’t afford to offer higher pay to their workers. The way markets are supposed to work is that businesses that can’t afford to pay the market wage go out of business. This is why we don’t still have half of our workforce employed in agriculture. Factories and other urban businesses offered workers better paying opportunities. Most farms could not afford to match the pay and therefore folded often with the farm owner themselves moving to new employment.

This is the story that we should expect to see with restaurants if there really is a labor shortage. We should start to see more rapidly rising wages. The restaurants that can’t pay the market wage go under. That may not be pretty, but that’s capitalism. We tell that to unemployed and low paid workers all the time.  Read more…

Why should the poor pay high drug prices?

April 8, 2018 3 comments

from Dean Baker

We have seen a lot of hyperventilating in political circles over Donald Trump’s recently proposed tariffs on steel and aluminum. While these do not seem like well-considered policies, and are likely to do more harm than good even from the narrow standpoint of increasing manufacturing employment, they are not by themselves the horror story being presented.

Steel prices often fluctuate by 20 or 30 percent over the course of a year, as they did in 2016. If tariffs raise the price in the US by 10 percent, that would be unfortunate for downstream industries, but not exactly a catastrophe.

However, more important than the specifics of a steel tariff is the implicit assumption that the country as a whole has an interest in stronger and longer patent and copyright protection. Many pundits have attacked Trump’s focus on steel and manufacturing because they argue, we should be more concerned about protecting US corporations’ patents and copyrights overseas. This doesn’t make sense.  Read more…

Disagreeing with Krugman: Is China stealing knowledge?

April 7, 2018 17 comments

from Dean Baker

I would agree with pretty much all of Paul Krugman’s criticisms of Donald Trump’s trade war with China, but I would strongly disagree with one of his criticisms of China. He tells readers:

“In some ways, China really is a bad actor in the global economy. In particular, it has pretty much thumbed its nose at international rules on intellectual property rights, grabbing foreign technology without proper payment.”

The issue here is who set the rules and what is proper payment.

The problem is that it was largely the United States that has set the rules in this story and it is demanding ever more money for items protected by its patent and copyright monopolies. We do this through our control of trade arrangements, most importantly the WTO where we had the TRIPS provisions inserted as a late entry to the Uruguay Round that was concluded in 1994. These rules were about forcing developing countries to pay more money to companies like Pfizer and Microsoft for everything from drugs and medical equipment to seeds and software. It shouldn’t be surprising that developing countries like China might not like these rules.  Read more…

US wins trade war! China goes generic big time

April 5, 2018 3 comments

from Dean Baker

Donald Trump has proved the skeptics wrong, it seems that the American people stand to be big winners as a result of his trade war. The Chinese government announced a major initiative to promote the manufacture and use of generic drugs.

The reason this is potentially a big deal for the United States is that it could mean that China intends to push the envelope in replacing drugs protected by government-granted patent monopolies with drugs sold at free market prices. While the TRIPs provisions of the WTO do require members to respect patents and copyrights, there are flexibilities, such as compulsory licensing, to allow far more competition that what we see in the United States market.

Countries also have varying rules on what items can be patented. For example, India has far more stringent patent rules than the United States so that many drugs that are protected by patents in the U.S. are sold in a free market in India.

This can matter hugely for people in the United States since if China joins India as a mass producer of high quality generic drugs it will become increasingly difficult for the U.S. drug companies to maintain an island of protected prices in the United States. The gap between the patent protected price for drugs like the Hepatitis C drug Solvaldi and new cancer drugs is often more than 100 to 1 (equivalent to a 10,000 percent tariff) and can be as much as 1000 to 1.   Read more…

High CEO pay: It’s what friends are for

March 30, 2018 11 comments

from Dean Baker

The explosion in the pay of corporate CEOs is well documented. While the heads of major corporations were always well paid, we saw their pay go from 20- to 30-times the pay of ordinary workers in the 1960s and 1970s to 200- or 300-times the pay of ordinary workers in recent years. Paychecks of more than $20 million a year are now standard, and it’s not uncommon to see a top executive haul in more than $40 or $50 million in a single year.

Soaring CEO pay is an important part of the story of the rise in inequality over the last four decades. These people are all in the top 0.01 percent or even 0.001 percent of the income distribution.

The high pay of CEOs lifts the pay for other top executives. If the CEO is getting $25 million a year, it is likely that people directly under her are making salaries of $3 to $5 million, and quite possibly considerably more. If CEOs were earning $2 million, most likely the next  tier of workers would be earning in the neighborhood of $1 million. And, it’s just straight logic that higher pay at the top means less for everyone else.

In addition, the high pay at the top of the corporate ladder gets transmitted to other sectors. It is now common to see university presidents and heads of charities and other nonprofits get pay in excess of $1 million or even $2 million a year. They can truthfully say that they would get far higher pay if they ran comparably sized organizations in the corporate sector.  Read more…

Kudlow’s fossilized beliefs could lead Trump further astray

March 25, 2018 8 comments

from Dean Baker

Last week the Trump administration announced that it was picking Larry Kudlow as the new head of the National Economic Council .Kudlow was a mid-level official in the Reagan administration before moving to Wall Street, but his greatest notoriety came as an economics talk show host for two decades.

Kudlow made no bones about his views on his show. (Full disclosure: I was an occasional guest.)

He began each segment by proclaiming his belief in free markets, free trade and free enterprise.

Kudlow is an ideologue. This could be a serious problem with a president who often shoots from the hip without seriously considering the ramifications of his policies. Rather than trying to get Trump to consider various perspectives, Kudlow may just reinforce Trump in his ill-considered plans.

To take an important but largely overlooked area of policy, Kudlow shares Trump’s view that global warming is a hoax. In Trump World, the myth of global warming was invented by China to get the United States to waste a huge amount of money reducing its greenhouse gas emissions, thereby making its industry less competitive.  Read more…

The United States has not been pushing for open markets

March 24, 2018 5 comments

from Dean Baker

It is striking how the media universally accept the idea that patent and copyright monopolies are somehow free trade. We get that the people who own and control major news outlets like these forms of protection, but it is incredibly dishonest to claim that they are somehow free trade.

We get this story yet again in a NYT piece complaining about China’s “theft” of intellectual property, while telling readers about how Trump’s proposed tariffs show his:

“resolve to turn away from a decades-long move toward open markets and integrated world economies and toward a more starkly protectionist approach that erects barriers around a Fortress America.”

While we are supposed to be alarmed about tariffs of 10 percent and 25 percent on steel and aluminum, patents and copyrights are effectively tariffs of many thousand percent, often raising the price of protected items tenfold or even a hundredfold. The economic impact of increased protectionism of this type has been enormous.

This can be seen clearly in the case of prescription drugs, where spending went from around 0.4 percent of GDP in the 1960s and 1970s to 2.4 percent of GDP ($450 billion) in 2017, as shown below.

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Read more…