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(I originally posted this piece on my Patreon page.)

The right would like us to believe that the inequality we see in the United States, and increasingly in other countries, is a natural outcome of market processes. Unfortunately, many on the left seem to largely share this view, with the proviso that they would like the government to alter market outcomes, either with tax and transfer policy, or with interventions like a higher minimum wage.

While redistributive tax and transfer policies are desirable, as is a decent minimum wage, it is an incredible mistake to not recognize that the upward redistribution of the last four decades was brought about by conscious policy, not any sort of natural process of globalization and technology. Not recognizing this fact is an enormous mistake from both the standpoint of policy and politics. 

From the policy standpoint, we give up a huge amount by not examining the policies that have caused before-tax income to be redistributed upward. As a practical matter, it is much easier to prevent all the money from going to the top in the first place than trying to tax it back after the fact.

On the political side, we should never have our argument be that somehow the big problem is that the Bill Gates of the world were too successful. The big problem is that we have badly structured the rules of the market so that we gave Bill Gates too much money. With different rules, he would not be one of the world’s richest people even if he had worked just as hard.

Since we’re on the topic of Bill Gates, patent and copyright rules are a good place to start. For some reason, it is difficult to get people to accept an obvious truth: there is a huge amount of money at stake with these rules. By my calculations, patent and copyright monopolies could well direct more than $1 trillion a year, a sum that is more than 60 percent of after-tax corporate profits.   

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The folks who remain determinedly ignorant about the financial crisis and Great Recession continue to look for another crisis where it isn't. Much of the latest effort focuses on corporate debt. There are four big reasons why corporate debt does not pose anything like the same sort of problem that mortgage debt did during the housing bubble years.

First, many companies took on large amounts of debt for a simple reason, it was very cheap. The debt was not a necessity for them, but the opportunity to borrow for thirty or even fifty years at very low interest rates looked too good to pass up. As a result, many entirely healthy companies have large amounts of long-term debt on which they have very low interest payments. The ratio of corporate debt service payments to after-tax profits is at a relatively low (as in the opposite of high) level.

Second, the crisis mongers apparently missed it, but stock prices are very high right now. This means that most companies have the opportunity to raise more money by selling stock if they feel the need. Of course, the stock market could always plunge by 50 percent, but this one doesn't factor into most crisis mongers' predictions. As long as the market stays high, or even if it falls 20 percent, most companies would be able to sell shares to raise capital if they were facing trouble meeting their debt service payments.

The third reason corporate debt does not pose the same problem as mortgage debt is that even in a bankruptcy, debtors usually collect the bulk of their debt. It's rare for a company facing bankruptcy not to still own valuable assets, such as a profitable subsidiary or land and buildings that can be resold. As a result, debtors might have to accept 70 or 80 cents on a dollar, which is a substantial loss, but far more than zero.

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Mortgage applications have been falling all through the fall, they are now down 22 percent from year-ago levels, with purchase applications down 3 percent. This matters because if people aren't taking out mortgages they are not buying homes. Residential construction has been a drag on GDP in the last three quarters. Also, when people buy a new home they typically buy appliances and other items associated with moving. This means less consumption spending as well.

The decline in refinancing will also affect consumption. Typically people refinance a mortgage to get a lower interest rate, which frees up money for other spending. With interest rates up by a percentage point from pre-tax cut levels, few people can save money by refinancing.

This should be worth a bit of news coverage, but both the NYT and WaPo didn't mention the new or recent data on mortgage applications. To be clear, this is not recession stuff, but with the stimulus from the tax cut fading, and our trading partners showing unexpected weakness, we are likely to see substantially weaker growth in the near future. That should warrant a bit of attention.

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(I wrote this as a column for an outlet that chose not to use it, so I am sharing it here.)

While the Democrats won an impressive victory this month, it is still distressing so that many people were willing to vote for openly racist xenophobic Republicans. Furthermore, Donald Trump’s bizarre stunt of hyping a “caravan” of asylum seekers walking up through Mexico from Central America apparently worked. Millions of people rushed to the polls to vote Republican, thinking that Donald Trump was the only force to protect our country from this invasion.

Apparently, there are tens of millions of people who believe any idiocy that Trump puts out and is then repeated and amplified on Fox News. These people either do not pay attention to other news sources or consider them all to be “FAKE NEWS.”

It is difficult to reach these people through normal channels. They either will not listen at all to arguments from non-believers or they will view them as lies, like global warming, cooked up as part some grand conspiracy to deceive them.

If we can’t reach these people through reasoned argument, we can try a different route. We can try to reach them through their pocketbook.

Suppose we got a progressive millionaire or billionaire to offer “caravan insurance.” For a modest sum, say $300 a year, caravan insurance would compensate people for damage to their property or any physical harm they or their family suffered from any people on the refugee caravan that entered the country.

Given the enormous fear that Trump and his friends at Fox have built up around the caravan, this should sound like a very attractive offer. After all, being protected from an “invasion” for just a few hundred dollars sounds pretty good.

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Austin Frakt had an interesting Upshot piece in the NYT saying that drug spending in the US began to sharply diverge from other countries in the 1990s. This actually is not very clear, since the comparison group dating back to the 1980s is small. I am actually more struck by the explosion in spending in the 1980s, with it nearly doubling as a share of GDP over the course of the decade. Note that drug spending had not been increasing at all as a share of GDP over the prior two decades.

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Source: Bureau of Economic Analysis.

The obvious villain here is the passage of the Bayh-Dole Act in 1980, which allowed private corporations to get patent rights to government-funded research. This undoubtedly led to more investment in research and development, but it also led to a huge increase in spending the difference between the current 2.2 percent of GDP that we spend on drugs and the 0.4 percent we spent in 1980 is equal to $360 billion a year, roughly five times annual spending on food stamps.


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The New York Times ran a very confusing piece on the difficulties that many people in China are facing in getting access to drugs. The piece does not clearly distinguish between the problem of drugs not being legally available because they have not been licensed by China's drug safety agency and drugs being expensive in China due to patent monopolies.

These are very different issues. The first can be readily solved by making the licensing agency more efficient and possibly also relying on approvals by other agencies. (The piece indicates this has recently become the practice.)

The issue of drugs being expensive due to patent monopolies is more complicated. China has to make a decision as to whether it wants to rely on patent monopolies as a mechanism to finance research or whether it instead depends more on a pre-funding mechanism that would allow new drugs to be sold in a free market at generic prices.

This is a huge issue and China's policy in this area will have enormous implications for the rest of the world. If it decides to make new drugs widely available at their free market price, it will be difficult for the US and European companies to charge prices that are often more than 100 times as much, both in their own markets and in the developing world.

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This is a fact that would have been worth mentioning in an NYT piece on how health care may be affected by last Tuesday's elections. Near the end, the article referred to the Trump administration's promotion of short-term insurance policies but only said that they, "do not have to cover pre-existing conditions or provide all the benefits required by the health law."

The important feature of these short-term plans from the standpoint of the Affordable Care Act (ACA) is that they are designed to be appealing to relatively healthy people. By excluding people who are likely to suffer from costly health conditions, they can offer insurance at a lower price. This has the effect of pulling healthier people out of the ACA insurance pools.

This means that the people remaining in the ACA pools will be less healthy on average and therefore have higher costs. That will drive up the price of insurance in the ACA pools, likely pushing more relatively healthy people to buy short-term insurance plans. The end result in this story is that the ACA pools end up being extremely expensive, which makes the prohibition on discrimination over pre-existing conditions pointless.

This is the importance of short-term insurance policies. It should have been mentioned in the piece.

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This post was originally published on my Patreon page.

Several people on my Twitter feed touted the drop in the stock market last month as evidence of the failure of Donald Trump’s economic policy. I responded by pointing out that he was reducing wealth inequality. I was being only half facetious.

I have always been less concerned about wealth than income both because I think wealth is less well-defined and because income is the more important determinant of living standards. In the case of the stock market plunge, the vast majority of the losses go to the richest 10 percent of the population and close to half go to the richest 1 percent, for the simple reason that this is the distribution of stock ownership.

When people decry the rise in inequality in wealth over the last decade, they are basically complaining about the run-up in the stock market. The real value of the stock market has roughly tripled from its recession lows. With the richest one percent holding close to 40 percent of stock wealth and the richest 10 percent holding more than 80 percent, a tripling in the value of the stock market pretty much guarantees a big increase in wealth inequality. If we think this increase is bad, then why would we not think a drop in the stock market is good?

There is a correlation between the stock market and economic growth. The market generally rises when the economy is strong and falls in recessions, but this link is weak. Remember the recession of 1988?

I hope not, because the economy continued to grow at a healthy pace until the summer of 1990. This is in spite of the stock market’s largest one-day drop ever in October of 1987. (It did recovery half of its value by the end of the year.)

In short, the recent plunge in the market tells us little about the future direction of the economy. If we are troubled by wealth inequality then we should be happy, rich people now have substantially less wealth.

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That seems like an obvious question that went unanswered in this NYT piece. It did talk about how this would increase Amazon's bargaining power if it could play off two cities (and Seattle) against each other, but it did not raise the question of the initial commitments. In many of these bidding wars, the winner ends up losing by giving away more in concessions than it could ever hope to get back from the investment generated. It will be surprising if this is not the case here.

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The Washington Post used its lead editorial to demand that the Trump administration do more to protect US intellectual property from China. The highlight of the piece is the accusation that a Chinese state-owned company hired a number of employees from Micron, who brought over files containing Micron's latest DRAM technology.

Assuming this is true, this sort of theft is indeed a problem. The company has now been indicted and it will be interesting to see the response of the Chinese government. However, it is important to note that this sort of taking of technology is not restricted to Chinese companies.

Some people may have heard of a company called "Uber." It hired one of the top people from Waymo, the self-driving car unit of Alphabet. The new hire brought along stolen files containing much of Waymo's latest technology.

While the Post's response to this problem is a call for greater protectionism to put tighter locks on technology, the free market solution would be to work to have more technology in the public domain. This can be done through greater public support for research and shorter patents (see chapter 5 of Rigged [it's free]). If there is less money to be made by stealing other companies' technology, then it is less likely to be done.

While the protectionists at the Post may not understand this point, we all benefit if technology is freely available and can be transferred around the globe at the lowest possible costs. If Chinese producers are then able to produce goods and services at lower costs, then US consumers will benefit, even if the Post's friends may see lower profits.

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