Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press.

Please also consider supporting the blog on Patreon.

Follow on Twitter Like on Facebook Subscribe by E-mail RSS Feed

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 US 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 US 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.

There is an enormous amount of money at stake (in addition to people's health) if we can get drugs at their free market price. We will spend more than $450 billion this year on prescription drugs that would likely sell for less than $80 billion in a free market. The difference of $370 billion is almost 2.0 percent of GDP. It is more than five times the entire food stamp budget.

We will need to have alternative mechanisms for financing the research and development of new drugs and having these costs shared internationally. But it is not difficult to develop mechanisms that are more efficient than the anachronistic patent monopoly system. If Trump's trade war ends pushing us in this direction, the whole world will have won.

Add a comment

As a long-term columnist at the NYT, Thomas Friedman apparently never feels the need to know anything about the topics on which he writes. This explains his sarcastic speculation that Putin could be a CIA agent since he has done so much to hurt Russia.

For all his authoritarian tendencies, it is likely that most Russians think primarily about Putin's impact on the economy, just as is typically the case among voters in the United States. On that front, Putin has a very good record.

According to data from the I.M.F. Russia's economy had plunged in the 1990s under the Yeltsin presidency. When Putin took over in 1998, per capita income in the country had shrunk by more than 40 percent from its 1990 level. This is a far sharper downturn than the United States saw in the Great Depression. Since Putin took power its per capita income has risen by more than 115 percent, an average annual growth rate of more than 3.9 percent.

While this growth has been very unequal, that was also the case even as Russia's economy was collapsing under Yeltsin. The typical Russian has done hugely better in the last two decades under Putin than they did in the period when Yeltsin was in power.

For this reason, there are probably few Russians who would have sympathy for Friedman's speculation about Putin's ties to the CIA. The same would not be the case for Boris Yeltsin.

Add a comment

Jeff Stein's Wonkblog piece might have misled readers about the complexity of New York's new employer-side payroll tax as a workaround for Republican tax bill's limit on the deduction for state and local taxes. The piece told readers:

"'Employers can’t just slash salaries willy-nilly, even if there’s a good argument for it being to the employees’ benefit,' wrote Jared Walczak of the Tax Foundation, a right-leaning think tank. 'It might be an option for small groups of highly-compensated employees — think hedge funds and consultancies — but it’s a tough sell for a larger operation with a more diverse workforce.'"

While the logic is that an employer-side payroll tax reduces wages by a roughly equal amount, the one put forward by Governor Cuomo is unlikely to result in anyone getting a pay cut. The tax is phased in at a rate of 1 percent in 2018, and then 2 percent in both 2019 and 2020. Wages are rising an average of 2.5 percent annually. This is an average for all workers, the pay for workers who stay at the same employer is rising by more than 3.0 percent annually.

This means that workers at employers paying the tax are likely to see smaller wage gains rather than actual cuts. The Cuomo administration was quite conscious of this issue in designing the tax. (I had some discussions with Cuomo's staff on the tax plan.)

While this plan has been described as too complicated it is much simpler than the Flexible Savings Account (FSA), which have proven very popular with employees. These accounts require lots of bookkeeping and also put workers at risk of losing unspent money. By contrast, the employer-side payroll tax is simply a one-time adjustment to workers' pay.

It also allows for much larger potential savings than an FSA. A person earning $200,000 a year can save more than $3,000 a year on their taxes if their employer takes advantage of the employer-side payroll tax option. This is about four times as much as the maximum they can save on an FSA.

Add a comment

I realize it would be too much to ask that people who write on economics for major news outlets have any clue about how the economy works. I say that seriously; I have been commenting on economic reporting for more than two decades. Being a writer on economics is not like being a custodian or bus driver where you have to meet certain standards. The right family or friends can get you the job and there is virtually no risk of losing it as a result of inadequate performance.

But Roger Lowenstein performs a valuable service for us in the Washington Post this morning when he unambiguously equates the value of the stock market with the country’s economic well-being. It seems that Mr. Lowenstein is unhappy that Donald Trump’s recent tariff proposals sent the market plummeting. The piece is titled, “when the president tanks your stock portfolio.” It holds up Trump’s tariff plans as a uniquely irresponsible act because of its impact on stock prices.

Okay, let’s step back for a moment and ask what the stock market is supposed to be telling us. The stock market is not a measure of economic well-being even in principle. It is ostensibly a measure of the value of future corporate profits, nothing more.

Suppose the successful teacher strike in West Virginia spills over into strikes in other states, as now appears likely. Suppose this increased labor militancy spills over to the private sector and organized workers are able to gain back some of the money lost to capital in the last dozen years. That would not be good news for Mr. Lowenstein’s stock portfolio, but it would certainly be good news for the vast majority of the people in the country.

But this is the result of private actors, Lowenstein is upset about a president’s action’s tanking the stock market. Well, let’s give another one that would likely have an even larger negative impact on Mr. Lowenstein’s stock portfolio.

Suppose the next president announces that she will raise the corporate income tax rate back to 35 percent from its current 21 percent level. Any bets on what this does to stock prices?

Add a comment

A Washington Post article on the possibility that Donald Trump will have to disclose his finances may have misled readers. The piece told readers:

"Company officials argue it would have been impractical to untangle and sell all of Trump’s real estate holdings, and that doing so might have created additional conflicts of interest."

It neglected to point out that this assertion by Trump's employees is a lie. It is easy to design schemes under which Trump could disassociate himself from his business without creating conflicts of interest.

As I pointed out shortly after the election, this could be accomplished through a three-step process.

1) Donald Trump arranges to hire three auditors from an independent accounting firm. Each one does an independent assessment of Trump's holdings and assigns it a value.

2) The middle assessment becomes a benchmark. Donald Trump buys an insurance policy that will guarantee him that he will get this amount of money when all assets are sold. If the total take is less than the benchmark, he collects on the insurance policy. Any money received in excess of the benchmark goes to a charity of Trump's choosing (not the Trump Foundation).

3) All the proceeds from the sales are placed in a blind trust.

This would be a very straightforward process. We know that Trump has a hard time finding competent people to work for him, but the rest of us would have little difficulty solving his conflict of interest problem.

Add a comment

Greg Ip gave us another rendition of this old scare story in a Wall Street Journal column. The argument is that the interest paid on US government debt will soon impose an enormous burden on the federal government, choking off spending on important government programs.

The key part of this story is that interest rates will jump at some point in the not too distant future. While this is in fact what the Congressional Budget Office predicts, it is also what it has been predicting even since the Great Recession, and consistently been shown wrong.

The key question is, why would interest rates rise? There are two stories where we see interest rates rise. One is that we start to see an uptick in the inflation rate. In that case, long-term rates would almost certainly rise since investors would have the option of getting a better return just by holding physical commodities. Of course, the Fed would almost certainly raise interest rates in response to higher inflation, which would more directly cause interest rates to rise. One point about higher inflation that is worth noting is that it reduces the real value of the debt.

The other reason interest rates could rise is that the Fed raises rates even in the absence of higher inflation. In that case, the Fed as a matter of policy would be increasing our interest burden. (Selling off its assets also has the same effect, since the interest on the assets held by the Fed is refunded to the Treasury.)

Arguably, the Fed's rate increases in the last year and a half have not been justified by higher inflation, as the inflation rate remains well below the Fed's target. It is striking that none of the deficit hawks, including the Committee for a Responsible Federal Budget, which is cited in this piece, have ever expressed concern about the higher debt service burden resulting from these interest rate hikes.

Add a comment

After all, the economy generates 200,000 jobs a month on net (more than five million gross), so what difference could it make if one million doctors and dentists were displaced through trade. If the idea that losing one million very high paying jobs wouldn't be any big deal seems strange to you, then you don't really understand how economists talk about trade.

Of course, the actual column, by Donald Boudreaux, an economics professor at George Mason University, wasn't talking about doctors and dentists. These occupations are highly protected. It is very difficult for foreign-trained professionals, even those in countries with comparable standards, to practice in the United States. Unlike steelworkers and textile workers, doctors and dentists have enough political power to get politicians to support their protection and to get the "free trade" media outlets to pretend they don't notice.

But the best part of the story is the economists. Folks like Boudreaux would argue that doctors and dentists are just being silly and don't understand trade if they think it could hurt them. This is the argument that he and other economists make about the massive loss of manufacturing jobs due to trade in the last two decades. The issue, of course, goes beyond even the job loss, since reduced demand leads to downward pressure on the wages of those who still have jobs. This has been a major source of increased inequality, as manufacturing has historically been a source of relatively high-paying jobs for workers without college degrees. (To be clear, I want free trade in doctors and dentists, but it would reduce their pay and our health care costs.)

Trade can also lead to a major shortfall in demand when we get large trade deficits, as was the case in the last decade. This was a major source of the famed "secular stagnation" that even many mainstream economists acknowledged during the Great Recession. If we had a trade deficit of 1.0 percent of GDP instead of the deficit of 3.0 percent of GDP we had during most of the recession and recovery (or 6.0 percent in 2005–2006), then the economy would have been much closer to full employment. But hey, that was no big deal, only silly people worry about trade.

And yes, free traders should be furious about government granted patent and copyright monopolies. Making them longer and stronger is a central goal of current trade deals. These are extremely costly forms of protectionism, equivalent to tariffs of many thousand percent.

But you don't hear much about patents and copyrights as protectionism because Pfizer and Microsoft have lots of power. Also, the people who write about trade and control major news outlets are far more likely to have family and friends who benefit from these forms of protection than to be close to the steelworkers and textile workers who lost jobs and/or pay due to international competition. 

Add a comment

This theme appears endlessly in news articles and columns criticizing Donald Trump's tariffs. It really makes zero sense. It is easy to see that Pfizer and Microsoft benefit from having China honor their patents and copyrights, but how exactly are the rest of us supposed to benefit from paying more money for prescription drugs and software?

It would be nice if the people writing this stuff could take a moment to think about what they are writing. Some of us don't think it is a good idea for all the money to go to Bill Gates and the people that Bill Gates and others like him pay to worry about inequality.

Add a comment

That was not a typo. The Justice Department and Federal Trade Commission intervened on Uber's side in a case involving a regulation passed by Seattle's city council which would allow Uber drivers to negotiate collectively. The issue is that Uber insists its drivers are independent contractors, not employees. This means that they don't have the rights guaranteed by employees under the National Labor Relations Act to bargain collectively with their employer.

Seattle's city council sought to work around this problem by effectively acting as an intermediary between Uber and its "independent contractors" in the city. The city argued that as a municipal government, it would be exempt from the anti-trust laws that prevent businesses from coordinating prices.

The position of the Trump administration is very interesting in this case because it is arguing that Seattle is in fact illegally coordinating prices among independent contractors. Uber quite explicitly coordinates the prices charged by its "independent contractors," not just setting overall fee schedules, but adjusting fares by the minute in response to changes in collective demand.

This seems like a yet another instance where the government has felt it necessary to intervene in the market to defend the rich. As we all know, the rich can't be expected to survive in a free market without help from the government.

Add a comment

The NYT had a strange column today carrying the headline, "The orphans of China's economic miracle." The piece talks about the tens of millions of children who were left behind in the countryside when their parents left to find better-paying jobs elsewhere in the country.

The reason why the column is strange is that it might leave readers with the impression that China is an exception among developing countries in having large numbers of migrant workers who leave their children behind in the care of friends or relatives. In fact, China is actually quite typical this way.

For decades, millions of people have left Mexico, El Salvador, and other Latin American countries to come to the United States in search of better job opportunities. Often these people left family members behind.

What distinguishes the situation in China from the situation in these countries is that the rapid improvement in living standards in China makes it less likely the next generation of Chinese workers will find themselves in the same situation. While there were already large numbers of immigrants from Mexico in the 1940s, there would still be large numbers today, if the US government were not taking strong measures to block immigration. By contrast, the flow of workers from the countryside to the cities in China is likely to slow markedly in the next two decades.  

Add a comment

That is in effect what Steven Hill argues in his NYT column today. While the column makes many useful points about Uber's impact on the environment and its treatment of its drivers, the underlying issue is that Uber is hugely subsidizing its rides, causing it to lose $4.5 billion in 2017. Hill proposes that the government either require Uber to raise its fees or that it impose a tax to offset the loss.

While the idea of leveling the playing field is appealing, it is worth asking why a company has a business model that involves losing massive amounts of money. The logic is presumably that Uber expects to drive out competition so that at some point in the future it can jack up its prices and make large profits. Back in the old days, we had something called "anti-trust" policy which would prevent something like this.

If the government treated the anti-trust laws seriously (they are still there), instead of seeking campaign contributions from the biggest violators (e.g. Facebook and Google), Uber's strategy would make zero sense. The company would be losing large amounts of money today, with the prospect of losing even more in the future as its money-losing business model continued to expand. As we know, investors aren't always too sharp, but most aren't willing to throw their money down the toilet forever. (There is a similar story with Amazon, which is barely profitable on the whole and loses money in most of its lines of business.)

The Uber huge loss model only makes sense in a context where people don't think anti-trust law will be enforced. If we had an administration in Washington that made it very clear that it would not tolerate Uber taking advantage of its market position to jack up prices, the company would likely have to change its practices very quickly or end up in bankruptcy.

Add a comment

Several press accounts have fingered John Williams, currently president of the San Francisco Federal Reserve Bank, to be the next president of the New York Fed. There are several reasons why this should be upsetting.

First, while the NY Fed had committed itself to an open process in selecting its new president, the turn to Williams seems to have taken place in the dark of night. He had not been mentioned as being one of the people in contention until just the last week.

It is also upsetting to see yet another white male picked for one of the top positions at the Fed so recently after Jerome Powell replaced Janet Yellen as chair. The president of the New York Fed, unlike the other Fed presidents, has a vote at every meeting. The New York bank president sits aside the chair and the vice-chair as one of the three most important members of the Fed’s Open Market Committee, which sets monetary policy.

The labor and community coalition Fed Up (with which I work) had submitted a diverse list of potential candidates to be considered for this position. The list included current and former Fed bank presidents and governors, members of the President’s Council of Economic Advisers, and heads of government statistical agencies. It appears that almost none of these people were even considered for the position.

An open process would have involved a public listing of names of people who were being considered and then a short list of finalists. This would have provided an opportunity for interested parties to assess the individuals’ qualifications and views. That is not what we saw here.

The selection of Williams specifically raises serious concerns about both his views on monetary policy and his responsibilities as one of the country’s most important financial regulators. Williams has repeatedly indicated a desire to raise interest rates and slow job growth, even when the economy was still far from full employment.

For example, in May of 2015, he said the economy was “nearing full employment” when the unemployment rate was still 5.5 percent. He said the same thing the following year when the unemployment rate was 4.7 percent. Last fall he complained that, “[...]we’ve not only reached the full employment mark, we’ve exceeded it.”

While Williams has thankfully modified his views as the unemployment rate has dropped without leading to inflation (in 2012, he put the floor for non-inflation unemployment at 6.5 percent), he has been all too willing to sacrifice jobs out of fears of inflation that proved to be unfounded. Had he been able to get the Fed to act based on his views, the unemployment rate today would almost certainly be considerably higher than its current 4.1 percent level.

This would mean that millions of today’s workers would be without jobs, with the losers being disproportionately blacks, Hispanics, and other relatively disadvantaged groups. In addition, the tightening of the labor market has allowed of tens of millions of workers at the middle and bottom end of the wage distribution to see real wage gains for the first time since the 1990s boom.

In addition to his problematic views on monetary policy, there are also grounds for being concerned about his effectiveness as a regulator. The New York Fed has responsibility for overseeing the Wall Street banks. Its failure to take this responsibility seriously was a major factor in the build-up to the financial crisis. (Timothy Geithner, who had been New York Fed bank president during the build-up of the housing bubble, famously once commented in subsequent congressional testimony that he had never been a regulator. A statement that was unfortunately close to being true.)

Add a comment

Neil Irwin had an interesting piece arguing that Trump is fighting the last battle on trade in worrying about imports of steel and aluminum. His main point, that the millions of jobs we lost in manufacturing to trade in the last decade are not coming back, is largely correct. But there are a few points worth adding.

First, it would be worth having a little honesty about the impact of trade on the country’s workers. It is standard wisdom in political circles to say that trade really wasn’t what caused job loss in manufacturing, the real cause of job loss was productivity growth. This is true, but only in a way that is incredibly misleading.

Suppose a factory that was the major employer in a small city burned down, leaving all the workers unemployed. An economist can truthfully say that the major cause of the loss of manufacturing jobs in the city was productivity growth since over the last five decades the city almost certainly lost more manufacturing jobs from productivity growth than due to fire. At the same time, the people who are newly out of work are 100 percent right in blaming the fire.

This pretty well describes how many economists have been talking about the impact of trade in the last decade. Manufacturing has been falling as a share of total employment since the 1970s, but the total number of jobs in manufacturing had changed little, apart from cyclical ups and downs, until our trade deficit exploded in the last decade. (The sharp rise in the trade deficit actually began in 1997, but its impact was offset by the late 1990s boom.) In December of 1970, there were 17,300,000 jobs in manufacturing. In December of 2000 there 17,180,000, a drop of just 120,000. By comparison, in December of 2007, before the start of the Great Recession, manufacturing employment was down to 13,750,000, a drop of 3,430,000 jobs in just seven years.

This was overwhelmingly due to the rise in the trade deficit, which peaked at almost 6.0 percent of GDP in 2005 and 2006. We were seeing productivity growth in manufacturing during this whole time, so that was not something that was new in the years 2000 to 2007. What was new was the large trade deficit. The manufacturing job loss also had a secondary impact on communities across the Rust Belt where it was a major employer.

Add a comment

The Washington Post might have confused some readers in a piece on how many highly paid professionals are looking to form new S corporations to game the new tax law. Most people who own S corporations will get a 20 percent tax savings on the income they get from these corporations.

At one point the piece told readers:

"Millions of American businesses pay taxes through the individual tax code, known in tax parlance as 'pass-through' businesses. [These are S corporations.] They’ve historically done that so they could pay taxes below the 35 percent corporate tax rate, which was reduced to 21 percent in the December tax law."

This is incorrect. If the businesses were chartered as normal corporations, they would pay the 35 percent corporate tax rate. Then the money paid out to their owner or owners as dividends or as realized capital gains would be taxed as individual income, with a top rate of 20 percent.

Until the change in the tax law, many owners of S corporations were in the top 39.6 percent bracket, so they actually faced a tax rate on their income from S corporations that was higher than the 35 percent corporate tax rate. The advantage of the S-corporation was that it allowed the owners of corporations to escape the corporate income tax, not the lower tax rate. 

The separate corporate tax rate was justified by the fact that the government gives corporations special benefits, most importantly limited liability. It was always a voluntary tax in the sense that anyone who did not feel the benefits of corporate status were worth the tax could just form a partnership instead of a corporation. However, the tax law has been changed over the years so that people can now form an S-corporation to get the benefits of corporate status, without having to pay the corporate income tax.

Add a comment

It said this clearly in a front page article. The piece tells readers how Republicans are falling in line behind Trump's agenda. After noting that the new budget passed by Congress will lead to a deficit of more than $1 trillion in 2019, the article comments:

"It was another example of how Trump seems to have overtaken his party’s previously understood values, from a willingness to flout free-trade principles and fiscal austerity to a seeming abdication of America’s role as a global voice for democratic values."

Since this is an economics blog, I'll leave it to others to speculate how anyone might have understood a party that led the invasion of Iraq under a false pretext to be a global voice for democratic values. I'll instead focus on the Republican Party's alleged commitment to "free trade and fiscal austerity."

I may have missed it, but I never heard a single prominent Republican propose any measure that would reduce the protectionist rules that limit the number of foreign doctors, allowing our doctors to earn twice as much on average as their counterparts in other wealthy countries. This difference in doctors pay costs us $100 billion annually or approximately $800 per household. There is ten times as much money at stake with doctors alone as with the steel tariffs that have gotten so much attention. Protection for other professionals could easily double this number.

No one committed to free trade could find this protectionism acceptable. The "free trade" Republicans have generally supported has been about removing barriers that protect less highly educated workers, putting downward pressure on their pay. That implies a commitment to redistributing income upward (one shared by the Washington Post), not free trade.

The Republican trade agenda also involves making patent and copyright monopolies longer and stronger and spreading these rules internationally. These are incredibly costly forms of protectionism. In the case of prescription drugs alone, patents and related protections add more than $370 billion (almost 2.0 percent of GDP) to what we pay for prescription drugs each year.

The commitment to fiscal austerity is equally absurd. The deficit exploded in the Reagan years due to his tax cuts and increases in military spending. It also exploded under George W. Bush due to his tax cuts and wars. Why on earth would anyone think that the Republican Party had a commitment to fiscal austerity?

So, the take away from this piece is the Washington Post wants its readers to believe that the Republicans had been committed to free trade and fiscal austerity before Trump. That might be true in Washington Postland, where NAFTA caused Mexico's GDP to quadruple, but not in the real world.

 

Addendum:

An earlier version had an incorrect number for the per household cost of excess payments to doctors. Thanks to Robert Salzberg for calling my attention to the error.

Add a comment

If anyone took the rationale for the Republican tax cuts seriously, the key measure is investment. The promise was that lower corporate tax rates would provide a huge incentive for investment, causing the capital stock to increase by roughly one-third over its baseline growth path within a decade.

As I have pointed out, the early numbers were not good. Capital goods orders fell in both December and January. The National Federation of Independent Businesses reports no notable uptick in the investment plans of its members.

The new numbers from the Commerce Department today look a bit better. Overall capital goods orders were up 4.5 percent in February from January levels. If we pull out erratic aircraft orders there was still an increase of 1.8 percent. That's a pretty good one month jump, but it follows declines in the last two months that totaled 0.9 percent. That leaves growth of 0.9 percent in the last three months or 0.3 percent a month.

The increase over the last year is 7.4 percent. That is roughly the same as the rate of growth before the tax cut. In other words, we're pretty much on the baseline path, with no obvious tax cut induced jump.

This may not be a great story for tax cut proponents, but at least investment is now moving in the right direction.  

Add a comment

Paul Krugman used his column this morning to go after Donald Trump for rushing blindly into a trade war. While I agree with Krugman's basic points, Trump does not seem to know what he is doing and therefore this is not likely to end well, I would disagree with Paul on a few points.

First, Krugman makes the point that the Commerce Department's measure of our trade deficit with China is overstated because it counts the full value of exports from China as coming from China, even though most of the value added may come from elsewhere. This could mean, for example, we count the full value of an iPhone exported from China as a Chinese export, even though the vast majority of the price is attributable to components made elsewhere.

Krugman is clearly right on this but ignores the flip side. When we import goods from Japan, Korea, Germany and other countries, some of the price will reflect the value of parts that were manufactured in China. My guess is the amount of foreign value added in our imports from China is probably larger the amount of Chinese value added in our imports from third countries, but the latter is clearly not zero.

If we want to do an honest accounting to determine our true trade deficit with China, we have to look at both sides of this issue. It is interesting to note the lack of interest in this value-added issue when it comes to our trade with Canada.

Add a comment

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 an 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 percents, 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.

Book3 4096 image001

Source: Bureau of Economic Analysis.

Since drugs are almost invariably cheap to manufacture, we would likely be spending less than $80 billion a year in the absence of patent and related protections, implying a cost of protectionism of more than $370 billion, and this is just from drug patents. Adding in costs in medical equipment, software, and other areas would likely more than double and quite possibly triple this amount.

The supporters of this protectionism argue that we need patent and copyright monopolies to provide an incentive for innovation and creative work. However, there are two major flaws in this argument.

First, while these monopolies are one way to finance research, they are not the only way. There are other mechanisms, such as direct government funding (we already spend more than $30 billion a year on biomedical research through the National Institutes of Health). Given the enormous cost associated with this protectionism, it would be reasonable to be debating the relative merits of alternatives. (See also Chapter 5 of Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.)

The other point is even simpler. We have been making patent and copyright protection stronger and longer for the last four decades. We know that this shifts more money from the rest of us to those who benefit from these protections. Even if we decide that these mechanisms are the best way to finance innovation and creative work, it does not mean that making them stronger and longer is always justified.

We should be asking the question of how much additional innovation or creative work do we get for an increment to strengthen and lengthen. This debate never takes place.

This creates the absurd situation where we put in place policies that are designed to transfer money from the rest of us to people like Bill Gates and then we wonder why we have so much income inequality. And the best part of the story is that some of the big gainers from these protections will even finance research as to why we have so much inequality, as long as it doesn't ask questions about patent and copyright protection.

Add a comment

No, they are not endorsing his tariffs on steel and aluminum, but the paper is very concerned that Trump is not effectively protecting US intellectual property claims. The Post ran a piece that made it appear that a lack of protection for these claims should be a major concern for the public, as opposed to just the corporations that stand to lose profits.

The ostensible issue is that China allegedly doesn't respect US claims to intellectual property in a variety of areas. The piece tells readers:

"Trade secret theft — most from China — costs the U.S. economy $225 billion to $600 billion annually, a blue-ribbon commission on intellectual property concluded last year."

By contrast, it argues that Trump's proposed tariffs on China's electronic goods are misdirected:

"If Trump opts for a 25 percent tariff on all Chinese electronics, the cost to the U.S. economy over 10 years would total $332 billion, according to the nonprofit [corporate backed] Information Technology and Innovation Foundation."

...

"China’s treatment of foreign intellectual property may have been only an irritant when it manufactured low-tech products such as toys or clothing and assembled electronics for export. As Beijing covets global leadership in advanced technology, its industrial policies have grown into a threat to American economic and military pre-eminence."

In contrast to the $332 billion ten-year cost to the US economy that the Information Technology and Innovation Foundation (ITIF) calculated for Trump's tariffs, the cost of the intellectual property protections over this period would run well into the trillions of dollars. In the case of prescription drugs alone, the United States will spend more than $450 billion for drugs which would almost certainly cost less than $80 billion in a free market. The difference of $370 billion a year is more than the ten-year total cost of tariffs on electronics calculated by ITIF.

Add a comment

Not deliberately of course, but the NYT had this great piece on how the junk food industry is trying to limit required warnings on junk food as part a renegotiated NAFTA. The issue is that our trading partners are looking to take measures to discourage people from eating foods that are high in sugar, fat, and salt. Several cities and states are considering similar measures. The junk food industry is looking to block such measures by getting a ban included in the new NAFTA.

If you're wondering what this has to do with free trade, the answer is nothing. However, it is a beautiful example of an industry working to use a trade agreement to subvert the democratic process to advance its interests in a trade deal. If the junk food industry gets its way, the resulting pact will then be blessed as a "free trade" deal. The Washington Post and all the other beacons of the establishment will the proclaim their support for the new NAFTA and denounce opponents as Neanderthal protectionists.

Many of us have long been making the point that recent trade deals like the Trans-Pacific Partnership have little to do with trade and are more about locking in place a business-friendly structure of regulation. But it took the clumsy ineptitude of the Trump Administration to remove any veneer. Thank you, President Trump. 

 

Thanks to Robert Salzberg for corrections from an earlier version.

Add a comment

Yes, things could really nasty. In discussing the ways in which China might retaliate against tariffs, the Post told readers:

"China is also the largest foreign holder of U.S. government debt. It holds $1.17 trillion of U.S. Treasury securities, down about $33.5 billion since last August. The U.S. government faces huge borrowing needs, not only to finance new deficits but also to refinance past securities now coming due, so a drop in China’s appetite for that debt could nudge interest rates up in the United States."

The purchasing of US government bonds by China's central bank was the main tool through which it propped up the dollar against the yuan. The high-valued dollar makes Chinese goods cheaper relative to US goods, allowing it to run a large trade surplus with the United States.

If China were to sell some of the US bonds it holds, it would raise the value of the yuan, making US goods and services relatively more competitive. This is supposedly what both the Bush and Obama administrations wanted China to do. (I said "supposedly" because this was their public position. I don't know what happened in their private discussions.)

It is also worth noting that it appears Trump's major complaint is that he wants more protectionism in the form of stronger patent and copyright protections in China. If he succeeds in this effort, it will mean higher prices for consumers in both the United States and China. For some reason, the Post is not as concerned about the impact of these potential price increases as it is about the impact of higher steel and aluminum prices.

Add a comment