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There is no political constituency for free trade, it’s just a term used to justify screwing workers

April 29, 2022 2 comments

from Dean Baker

It is amazing how frequently policy types talk about “free trade” as though it is actually a policy anyone is interested in promoting. The reality is that what passes for free trade is a policy of removing barriers to allow low cost manufactured goods to enter the United States without restrictions. This puts downward pressure on the pay of manufacturing workers. Since manufacturing had historically been a source of high paying jobs for workers without college degrees (it is no longer), the loss of these jobs out downward pressure on the pay of non-college educated workers more generally.

A policy of genuine free trade would mean eliminating barriers that limit trade in physicians’ services as well as the services of highly paid professionals more generally. It would also mean weakening or eliminating patent and copyright monopolies, which can raise the price of protected items by many thousand percent above the free market price.

There is no political constituency for removing these protectionist barriers, as can be clearly seen by the fact that no major political figure is advocating this path. Instead, there is a strong political constituency, which includes many self-described liberals, for a trade policy designed to reduce the pay of non-college educated workers.

It is politically more salable to describe this policy as “free trade,” but it is a lie. Reporters should not describe it that way if they are trying to be objective.

Two routes to lower inflation

April 27, 2022 2 comments

from Dean Baker  

Inflation has stayed higher longer than I expected. I got that one wrong. I am happy to acknowledge my mistake, but I also want to know the reason why. This is not a question of finding excuses, I want to know why the economy is acting differently than I thought it would.

The most obvious reason is the supply chain disruptions that led to the original jump in prices have lasted longer and been more far-reaching than I expected. Part of this is due to the persistence of the pandemic, with the delta and omicron strains disrupting economies around the world.

The other major source of disruption is Russia’s invasion of Ukraine. This has blocked the supply of many items manufactured in Ukraine, but more importantly, the war reduces its ability to grow and sell wheat and other crops on world markets. There is also the risk of losing Russia’s oil and gas, which propelled oil prices to levels not seen in more than a decade.[1]

The idea that inflation would spike under such circumstances should not be surprising. As has been widely noted, the jump in inflation was worldwide, not just in the United States. The increase in the inflation rate was comparable in the European Union and the United Kingdom, so it obviously was not just a story of excessive stimulus in the United States. The break-even inflation rate on German 10-year government bonds are now essentially the same as in the United States, indicating that investors expect inflation in the two countries to be roughly the same over this period.

The logic here should not be hard to understand. The normal delivery of goods and services was disrupted by the pandemic. Since overall demand did not drop to anywhere near the same extent (due to various stimulus measures), we had shortages of many items, leading to sharp increases in prices.

Read more…

Corruption in drug patents: take away the money

April 18, 2022 3 comments

from Dean Baker

The New York Times had an editorial about the corruption of the patent system in recent decades. It noted that the patent office is clearly not following the legal standards for issuing a patent, including that the item being patented is a genuine innovation and that it works. Among other things, it pointed out that Theranos had been issued dozens of patents for a technique that clearly did not work.

As the editorial notes, the worst patent abuses occur with prescription drugs. Drug companies routinely garner dozens of dubious patents for their leading sellers, making it extremely expensive for potential generic competitors to enter the market.  The piece points out that the twelve drugs that get the most money from Medicare have an average of more than fifty patents each.

The piece suggests some useful reforms, but it misses the fundamental problem. When patents can be worth enormous sums of money, companies will find ways to abuse the system.

We need to understand the basic principle here. Patents are a government intervention in the free market, they impose a monopoly in a particular market. Read more…

Paul Krugman, China, mRNA vaccines, and right-wing populism

April 11, 2022 3 comments

from Dean Baker  

It is our policy on technology that drives inequality, it is not the technology.

I rarely disagree with Paul Krugman’s columns, but every now and then he does say something that I have to issue with. In a column last month, Krugman complained about the enormous costs associated with China’s zero COVID-19 policy. He tied it to its reliance on old-fashioned Chinese vaccines that used dead virus material, instead of using the mRNA vaccines developed by researchers in the United States and Europe.

There are good grounds for criticizing China’s zero COVID-19 policy. It may have been reasonable in the early days of the pandemic when we had neither vaccines nor effective treatment. However, the massive lockdowns required, which also literally threaten lives (people can’t get necessary medications and medical care), are hard to justify in the current situation.

But Krugman, and others (several people, who I respect, have picked up this line on Twitter), error in tying the zero COVID-19 policy to China’s rejection of mRNA vaccines. In fact, with the omicron variant currently hitting China, the dead virus vaccines are actually quite effective in preventing serious illness and death.

Read more…

Recession fears: real and imagined

April 3, 2022 2 comments

from Dean Baker

There is a story of a football coach who ran running plays near the end of a game, when he clearly should have been passing. Apparently, he had seen data showing that teams that win, on average, run on a certain number of plays. His team was below this number, so he decided that he had to have more runs if his team was going to win.

This is a classic case of confusing correlation with causation. (For those not familiar with football, when a team is ahead, it generally uses running plays to take lots of time off the clock. They run because they are winning, they don’t win because they run.) This distinction is important when considering various predictions for a recession in the current environment.

There are many features of an economy that we commonly see before a recession. For example, we typically see higher prices for oil, wheat, and other commodities before a recession. We also often see an inverted yield curve, where the interest rate on short-term Treasury debt (e.g., 90-day or 2-year notes) exceed the interest rate on 10-year Treasury bonds.

We are currently seeing a serious run-up in many commodity prices. It’s very plausible that we will see an inverted yield curve in the next year or so. The question is whether this means we should be expecting a recession in the near future? Read more…

We don’t need a Cold War with China

March 21, 2022 1 comment

from Dean Baker

There has been much press around President Biden’s demands that China not support Russia in its invasion of Ukraine. The implication of these demands is that the United States has the ability to punish China economically in a way that imposes more pain on China than on us. That may be true for now, but it’s not clear it will be true much longer, and it may not even prove to be true at present.

It is common to refer to China as the world’s second largest economy, after the United States. However, using a purchasing power parity measure, China’s GDP actually passed US GDP in 2016. The IMF projects that it will be more than one third larger by 2026, the last year of its projection period.

Source: IMF

The purchasing power parity measure, in contrast to the more commonly cited exchange rate measure, applies a common set of prices for all the goods and services produced in both economies. Read more…

As the Fed prepares to raise rates, the inflation hawks are running wild

March 16, 2022 Leave a comment

from Dean Baker

With bad news on oil prices, and a new wave of COVID-19 shutdowns in China, the inflation hawks are getting really excited. After all, higher oil prices and further supply disruptions are sure to add to the inflation the economy is already seeing. I guess they were right with their warnings.

Okay, let’s get back to Planet Earth. The large stimulus package that President Biden pushed through last year undoubtedly added to inflation in the economy, but it also quickly got the economy back to something close to full employment. If we had not had a big package, maybe the inflation rate would be a couple points lower, but the unemployment rate might be closer to 5.8 percent, rather than the 3.8 percent reported for February.

The point that many of us keep making is that most of the inflation we have seen over the last year was due to the reopening from the pandemic, not the stimulus package. A simple picture makes this point well. Inflation jumped pretty much everywhere across the OECD.

The rise in the United States was somewhat higher than average, but not hugely so. And countries like Spain and Belgium, which did not have huge stimulus packages, actually have higher rates of inflation.

So, what about the current issue with surging oil prices and new supply disruptions in China? Read more…

Reducing oil prices without ruining the environment: pay people not to drive

March 2, 2022 1 comment

from Dean Baker

From my Twitter feed it seems that Sarah Palin has been resurrected. All sorts of centrist-liberal types are yelling “drill baby, drill!” as a response to Russia’s invasion of Ukraine. They have been pushing for ignoring environmental regulations and even directly subsidizing fracking.

While that is no doubt music to the ears of the fossil fuel industry, this is going backwards about as quickly as we can in our effort to reduce greenhouse gas emissions. There is an alternative route, we can pay people not to drive. That one might seem a little silly, but it beats paying people to wreck the environment.

The way this could work is that ask people to submit a form to the IRS indicating how many miles they drove last year. We also have them submit a picture of their odometer reading as of today. They send in another photograph at the end of the year. Then they are entitled to a payment of 20 cents for each mile that they reduce their driving this year compared to last year. (We adjust the calendar so that it is for a 12-month period.)

If someone drove 15,000 miles last year and can reduce their driving to 10,000 miles this year, we would Read more…

Reducing oil prices without ruining the environment: pay people not to drive

February 24, 2022 2 comments

from Dean Baker

From my Twitter feed it seems that Sarah Palin has been resurrected. All sorts of centrist-liberal types are yelling “drill baby, drill!” as a response to Russia’s invasion of Ukraine. They have been pushing for ignoring environmental regulations and even directly subsidizing fracking.

While that is no doubt music to the ears of the fossil fuel industry, this is going backwards about as quickly as we can in our effort to reduce greenhouse gas emissions. There is an alternative route, we can pay people not to drive. That one might seem a little silly, but it beats paying people to wreck the environment.

The way this could work is that ask people to submit a form to the IRS indicating how many miles they drove last year. We also have them submit a picture of their odometer reading as of today. They send in another photograph at the end of the year. Then they are entitled to a payment of 20 cents for each mile that they reduce their driving this year compared to last year. (We adjust the calendar so that it is for a 12-month period.) Read more…

Ross Douthat and the Great Resignation

February 21, 2022 1 comment

from Dean Baker

The General Picture: Policy Was Structured to Redistribute Upward

I don’t agree with much about Ross Douthat’s politics, but he often makes some interesting points. He did so in his latest column on the Canadian “truckers” protest against vaccine mandates. Douthat argues that support for the protest stems from resentment by people who do various types of manual labor against the professional class. His point is that the latter have largely been setting the rules in ways that disadvantage the group of people who rely on manual labor for their living.

Unfortunately, it seems that no one other than Douthat is given the opportunity by major news outlets to argue that policy, rather than inevitable processes like globalization or technology, is responsible for the relative deterioration in the situation of people who do manual labor. To be clear, there are prominent columnists like, Paul Krugman at the NYT and E.J. Dionne at the WaPo, who argue for welfare state policies to reverse this deterioration, but you won’t see any pieces saying that the deterioration itself was the result of deliberate policy.

This absence is striking, given how the major news outlets are perfectly comfortable giving large amounts of space to pieces based on little evidence, or that sometimes even fly in the face of the evidence that does exist. The NYT gave us an example of this with the Sunday magazine’s cover piece proclaiming “The Age of Anti-Ambition.” Read more…

The big lie of the elites

February 11, 2022 3 comments

from Dean Baker

We all know about the Trumpers’ big lie: somehow millions of votes were stolen from their hero, but the liberals were so smart in their steal that Trump’s team can’t produce any evidence. That one rightly draws contempt from anyone not in the cult, but what about the big lie that the vast majority of intellectuals seem to accept?

Regular readers know what I am talking about. The big lie is that the massive rise in inequality over the last four decades was somehow the result of the natural workings of the market. The standard position among policy types is that the rise in inequality was simply the result of the development of technology and the process of globalization.

We saw this view on full display in a generally interesting column in today’s NYT by Thomas Edsall. The piece looks at the growth in support for Trump, and right-wing populism more generally, among non-college educated white workers. It cites a number of academics who identify this development as a result of being left behind by economic developments, while Blacks and other minorities are perceived as having increased opportunities.

The key point, that is repeatedly misrepresented in this piece, is that the harm to the working-class in the last four decades was the result of deliberate policy, not something that just happened. For example, the first quote from an academic tells readers: Read more…

More thoughts on the Great Inflation Debate

February 1, 2022 4 comments

from Dean Baker

With inflation remaining stubbornly high for longer than I, and many others, expected, I want to take another stab at the argument of the inflation hawks. As a jumping off point, I will use the argument put forward by Larry Summers and Jason Furman, probably the two most prominent and coherent economists arguing that we have underestimated the risks of persistently high inflation.[1]

There are three main components to the Summers-Furman (SF) argument. (Their arguments are not identical, so I’m being a bit unfair to both in trying to mash them together.)  The first is that the Biden administration provided excessive stimulus to the economy with the American Recovery Act (ARA) passed by Congress last February. They argue that demand for goods and services far exceeded the economy’s ability to supply them, leading to a sharp uptick in the rate of inflation.

Second, the SF position is that this jump in inflation has unmoored inflationary expectations. While households and businesses had long come to expect low and stable inflation, the surge in inflation we saw in the last year has changed people’s expectations. Just to be clear, this is more Summers’s concern than Furman’s. Also, he views this as a serious risk, but not a necessary outcome from the current situation.

If expectations become unmoored, inflation will be self-perpetuating. Workers will demand higher wages in the expectation that inflation will remain high. Employers who share this expectation will be prepared to pay higher wages, which they will then pass on in higher prices. This will lead to a wage-price spiral like what we saw in the 1970s.

The third key component of the SF argument is that we continue to operate the economy above its potential, adding to inflationary pressures. To prevent further acceleration of inflation we will need to reduce demand in the economy, either with aggressive interest rate hikes from the Fed or contractionary fiscal policy, or some combination.

I’ll take each of these in turn.

Read more…

Are used car prices bankrupting workers?

January 25, 2022 Leave a comment

from Dean Baker

The news media have been constantly hyping inflation in recent months. While everyone has been seeing the huge rise in gas prices over the last year (that’s what happens when the world reopens after a pandemic), used car prices have risen almost as rapidly. From December 2020 to December 2021 they rose 37.3 percent. This accounted for 1.03 percentage points of the 7.0 percent overall inflation in the last year.

We know the story of these price increases. A fire in a semiconductor plant in Japan has created a worldwide shortage of semiconductors, which has slowed car production. With people unable to get new cars, they are bidding up the price of used cars.

But beyond the specifics, there is an interesting accounting issue (oxymoron?) here. The Consumer Price Index (CPI), which is our most used measure of inflation, uses a different methodology for used cars than the Personal Consumption Expenditure (PCE) deflator calculated by the Commerce Department. Read more…

The continuing phony debate on “free trade”

January 13, 2022 5 comments

from Dean Baker

The national debate on free trade is one where honesty has no place. The purpose of our trade agreements, which were not free trade, was to reduce the pay of manufacturing workers, and non-college educated workers more generally, to the benefit of more highly educated workers and corporations. This was the predicted (by standard economics) and actual result.

We made our manufacturing workers compete with low-paid workers in China and elsewhere in the developing world. This led to a massive loss of manufacturing jobs as the trade deficit exploded. The hit to workers in manufacturing was so large that the historic wage premium in the industry has largely disappeared.

While the massive upward redistribution of income from our trade deals was sold on the principle of “free trade,” it has nothing to do with actual free trade. Our trade deals did almost nothing to make it easier for foreign-trained professionals, like doctors and dentists, to work in the United States. As a result, our doctors and dentists earn roughly twice as much as their counterparts in other wealthy countries.

For some reason (please guess) this fact literally never enters in discussions of free trade. Read more…

A Better World

January 10, 2022 5 comments

from Dean Baker

Okay, I’m a bit slow for a New Year’s piece, but what the hell, we can always use a bit of optimism. Anyhow, I thought I would spout a few things about what the world might look like if we didn’t rig the market to give all the money to rich people. Not much new here for regular readers, I just thought I would spell it on paper, since it is a nice backdrop for many of our battles.

Before I go through my favorite unriggings, let me start by making a general point, which some people may miss. I focus much of my writing on ways that we rig the market to give money to the Bill Gates and Moderna billionaires of the world.

The idea of restructuring the market, so that these people do not get so rich, is not just a question of punishing the wealthy. When we give these people more money, in excess of what they contribute to the economy (we have to pay people something to develop mRNA vaccines, just not as much as we did), then we are generating more demand in the economy. This has the same effect on the economy as an increase in government spending.

To take my favorite example, if because of patent and related monopolies, we pay drug companies $400 billion a year more than is needed to have the drugs manufactured and distributed, this has the same effect on the economy as if we wrote $400 billion in checks ($3,300 per household) and sent them around to everyone. This policy (the writing of large checks) would run the risk of creating inflation if the economy is near its capacity.

The same is true of sending all this money to drug companies. While many people in the pharmaceutical industry earn normal salaries, higher-up employees can earn millions of dollars, or even tens of millions of dollars, a year. And those lucky enough to be at the top of the big winners, like Moderna, can score billions.

When these people spend this money on their second, third, or fourth homes, on their yachts, or their space trips, it pulls resources away from other areas. Read more…

Repealing Section 230: Giving Mark Zuckerberg what he wants?

January 5, 2022 5 comments

from Dean Baker

I have been engaging on Twitter recently on my ideas on repealing Section 230. Not surprisingly, I provoked a considerable response. While much of it was angry ad hominems, some of it involved thoughtful comments, especially those from Jeff Koseff and Mike Masnick, the latter of whom took the time to write a full column responding to my proposals on repeal.

I will directly respond to Mike’s column, but first I should probably outline again what I am proposing. I somewhat foolishly assumed that people had read my earlier pieces, and probably even more foolishly assumed anyone remembered them. So, I will first give the highlights of how I would like to see the law restructured and then respond to some of the points made by Mike and others.

Narrowing the Scope of 230

To my view, the best way to limit the power of a Mark Zuckerberg or Jack Dorsey to shape our political debates and influence elections is to downsize Facebook and Twitter, and possibly other sites, that can grow so large as to have an outsize influence on American politics. Restructuring the protection provided by Section 230 can be a way to accomplish this goal. Read more…

Getting ready for the next pandemic: Can we get patent monopolies on the table?

December 21, 2021 3 comments

from Dean Baker

From the way our policy types talk about patents, or refuse to talk about them, they must think that the constitution guarantees life, liberty, and people getting incredibly rich from patents. Even as this pandemic has been needlessly prolonged by patent restrictions on the spread of technology for vaccines, tests, and treatments, resulting in millions of preventable deaths, we are still seeing no real debate as to whether we want to rely on these monopolies as a primary mechanism for financing medical innovation in the future.

At the most basic level, we need an explicit recognition that patent monopolies are just one possible mechanism for financing research. This should have always been obvious, but the pandemic should have hit us over the head with this simple but important fact.

The bulk of the research developing mRNA technology was done on the government’s dime. When it came to developing the Moderna vaccine, the government put up almost a billion dollars for the research and clinical testing. It also provided the company with insurance against failure, with a large advance purchase agreement that would have required it to buy hundreds of millions of doses even if it was not the best available vaccine.

Read more…

Will we see deflation in the next 12 months in the USA?

December 13, 2021 Leave a comment

from Dean Baker

I’m not worried at this point about a deflationary spiral, but I see what, to my view, is a plausible scenario where the CPI actually goes negative in the next twelve months. I go through the categories and my predictions component by component below, but there are four main items driving the story that I’ll mention here.

First, I assume a sharp reversal in new and used car prices. The 11.1 percent increase in the former and 31.4 percent increase in the latter, have added 1.5 percentage points to the inflation rate over the last year. This run-up is due to the well-known shortage of semi-conductors. It seems that manufacturers are overcoming this shortage and getting up to normal production levels. This may lead to a situation where they are not only meeting normal demand, but actually could be overproducing and needed to markdown prices.  

Read more…

Yes folks, Omicron can be blamed on patent monopolies

December 4, 2021 2 comments

from Dean Baker

The development of the new variant, which was first discovered in South Africa, can be attributed to our failure to open-source our vaccines and freely transfer technology, contrary to claims from the pharmaceutical industry and its political allies. Their big talking point is that South Africa currently has more vaccines than it can effectively use at the moment.

This claim ignores two important points. The first is that we really don’t know where this strain originated. It was first identified in South Africa in part because its screening system happened to catch it. South Africa then did the responsible thing and reported to the world that it had uncovered a new variant.

This doesn’t mean that the Omicron variant originated in South Africa. It has been identified in samples taken in the Netherlands several days before its discovery in South Africa. The variant was also identified in a sample in Nigeria that was taken in October. Since we are not sure where it originated at this point, it’s not clear that South Africa’s current ability to deliver vaccines has much relevance to the development of the omicron variant.

But a second point is even more important. The development of variants depends on the extent of the spread of the virus. The more people who get COVID-19, the more opportunity the virus has to mutate. Read more…

In fighting COVID-19, intellectual property, not antitrust, is the real problem

November 30, 2021 2 comments

from Dean Baker

Former New York Times reporter Donald McNeil had an interesting Medium piece on how antitrust law could be impeding the development of effective treatments for COVID-19. McNeil argued that COVID-19 treatments that were developed by Pfizer and Merck, and are now in the final stages of testing, may work best when taken together.

He argues that this may be the case because the drugs use two fundamentally different mechanisms for attacking the virus. By using the two in combination, we would be maximizing the likelihood that at least one would be effective. This has been the approach followed with effective H.I.V. drugs, as well as Hepatitis C treatments.

McNeil argues that the reason combinations are not pursued is because of antitrust laws. If, instead of competing with their different drugs, two giant drug manufacturers, like Pfizer and Merck, were to collaborate to produce the best possible treatment for COVID-19, they would be risking an antitrust action from the government or competing drug companies. McNeil recommends waiving antitrust rules when lifesaving medications are involved.

While that would clearly be desirable in this case, it is worth stepping back a minute. Let’s imagine Read more…

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