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 highlighting the latest Beat the Press posts.

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Last week I was asked on Twitter why proposals for replacing patent monopoly financing of prescription drugs with direct public financing have gained so little traction. After all, this would mean that drugs would be cheap; no one would have to struggle with paying tens or hundreds of thousands of dollars for drugs that are needed for their health or to save their life. (This is discussed in chapter 5 of Rigged [it’s free].)

Public funding would also eliminate the incentive to misrepresent the safety and effectiveness of drugs in order to maximize sales at the patent monopoly price. Without patent monopolies, the drug companies would not have had the same incentive to push opioids, as well as many other drugs of questionable safety and effectiveness.

The idea of direct funding of biomedical research also should not seem strange to people. We currently spend close to $45 billion a year on research through the National Institutes of Health and other government agencies. The idea of doubling or tripling this funding to replace the roughly $70 billion of patent supported research now done by the pharmaceutical industry, should not appear outlandish, especially since the potential savings from free-market drugs would be close to $400 billion annually (1.9 percent of GDP).

So why is there so little interest in reforming the prescription drug industry along these lines? I can think of two plausible answers. The first is a self-serving one for the elites who dominate policy debates. They don’t like to have questions raised about the basic underpinnings of the distribution of income.

The second is perhaps a more simple proposition. Intellectuals have a hard time dealing with new ideas and paying for innovation outside of the patent system or creative work outside of the copyright system is a new idea that most intellectual types would rather not wrestle with.

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That's what readers of this article on a Democratic proposal which would both increase Social Security benefits and phase in a 1.2 percentage point increase in Social Security taxes (on both workers and employers) over 25 years. The article tells readers:

"Someone making $50,000 now faces an employee-side Social Security payroll tax of $3,100 a year. Under the bill, that tax bill would rise to $3,125 in 2020, which Mr. Larson pitches as an extra 50 cents a week. The tax would continue rising until 2043, when it would hit $3,700. Employers would face the same tax increase. Economists generally think workers bear the cost of both sides of the tax."

Assuming that workers do pay the employers' side of the tax (generally a reasonable assumption) the full tax increase for this worker would be $1,200 a year. However, Social Security projects that real wages will rise at a rate averaging roughly 1.4 percent over this period. This means that if a typical worker got their share of this wage growth, then the worker earning $50,000 a year would be earning almost 38 percent more in 2043, or $69,000 a year in 2043. This projected pay increase of $19,000 a year is more than fifteen times as large as the tax increase being proposed by the Democrats.

It would have been useful to include this projected rise in wages in the piece. It is also worth noting that most workers have not been getting their share of wage growth, as it has instead gone to CEOs and other top executives, Wall Street types, and highly protected professionals, like doctors. The prospect of losing out on their share of wage growth will have far more impact on workers' living standards than the Social Security tax being proposed by the Democrats.

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

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

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

Before getting into the specifics on Europe’s economy, it is important to add a bit of perspective. The European countries have been far better global citizens in this area than the United States. Their per-person emissions are roughly half as much as the United States. Furthermore, many European countries have already taken aggressive measures to promote clean energy and encourage conservation. 

Solar energy accounts for 7.3 percent of Italy’s electric power, 7.9 percent of Germany’s and 4.3 percent for the European Union as a whole. By comparison, the United States gets just 2.3 percent of its electric power from solar energy. There is a similar story with wind energy where the European Union’s installed capacity is more than 70 percent higher than the United States. 

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

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"The idea of guaranteed income is gaining traction, from the presidential debate stage to Silicon Valley, where tech titans such as Mark Zuckerberg and Elon Musk have promoted it as a way to fend off a gloomy future in which automation and climate change eliminate millions of jobs."

This came up as a throwaway line in an article about a trial program for a guaranteed basic income. The problem is that the type of job losses being described here are 180 percent opposite from each other.

Job loss from automation is ostensibly from too much productivity -- we don't need workers. (There is zero evidence for this story, but no one ever said that Mark Zuckerberg or Elon Musk had a clue about the economy.) Job loss attributed to addressing climate change is the result of too little productivity. The story (most get this wrong) is that there is plenty of work for people to do, such as retrofitting buildings and installing solar panels, but that with less energy use, the economy is less productive, and therefore these jobs pay less and workers don't want to do them.

This is all very tangential to the article, but a serious paper should get these points right if it is going to print them.   

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It is widely known that for Washington Post columnists writing on economics, ignorance is an asset. Megan McArdle helps make the case in a piece on Chicago’s pensions that tells readers in its headline:

“Chicago kept saying it would pay for pensions later. Well, it’s later.”

The gist of the piece is that Chicago has seriously underfunded public pensions. This is true. Where McArdle combats reality is in implying that this sort of underfunding is typical for public pensions and also that the same logic applies to the federal budget.

McArdle absolves the current mayor, Lori Lightfoot, of blame (she just took office four months ago), as well as her immediate predecessor, Rahm Emanuel, who served two full terms. Instead she tells us:

“Rather, it’s the fault of generations of politicians before them who promised an ever-richer array of benefits to government workers. Particularly, they liked to raise the retirement benefits. …

“Oh, ho, ho, ho. Pay for the pensions? No, we have to stop; some politician might be reading this, and they could really hurt themselves laughing too hard. The whole point of giving workers pension benefits instead of cash was that you didn’t have to pay for them; you could promise the benefits now and gather up the votes that the grateful workers tossed at your feet, all without costing current taxpayers a single dime.”

There are two big problems with McArdle’s story here. First the story of grossly underfunded pensions is not generally true. Most are reasonably well funded because politicians were not hurting themselves laughing, but rather were responsibly setting aside money for the liabilities facing state and local governments. (This briefing paper from Brookings gives a good assessment of the financial state of public pensions.) The real story is that Chicago, along with some other state and local governments with seriously underfunded pensions, are outliers.

But even in the case of Chicago, McArdle did not get the story right. Its shortfall was not the work of “generations of politicians.” Rather it was the result of a specific event – the stock bubble of the late 1990s.

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These days the business press is full of predictions of recessions. This could get people worried, except that the track record of economists in predicting recessions is basically awful. As much fun as a bunch of scary warnings from economists is, it is best to look at the data.

At the most basic level it is important to recognize that some sectors are very cyclical, meaning they grow rapidly in upturns and fall sharply in recessions, and others tend not to fluctuate very much over the course of a business cycle. The cyclical group is led by housing construction, durable goods consumption (cars and big household appliances), non-residential construction, equipment investment, and inventories. These components of demand tend to plunge in a recession.

On the other hand, we have several components of demand that are mostly unresponsive to the business cycle. Spending on consumer services (largely medical spending and rent) varies little over the course of the business cycle. Spending on consumer services fell just 0.3 percent in 2009 and actually rose through all prior post-war recessions.

The story is similar for investment in intellectual products like software and pharmaceutical research. This component of GDP fell by just 0.5 percent in 2009. While this category of spending did fall slightly in the recession following the late 1990s tech boom, the decline from 2000 to 2001 (the sharpest annual falloff) was just 0.8 percent.

This point about the varying cyclicality of different sectors matters for recession predictions, because the highly cyclical components have shrunk sharply as a share of the economy in the last four decades, as the less cyclical components have grown. 

This is seen most clearly with residential construction, the most cyclical component of GDP. Residential construction peaked at 6.7 percent of GDP during the housing boom before the Great Recession, it was just 3.7 percent of GDP in the most recent quarter. It was 5.7 percent of GDP before the 1980-82 recessions and 4.8 percent of GDP before Fed interest rate hikes began slowing construction in advance of the 1990 recession.

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

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

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

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

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

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

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

That might not prove tenable in the long-run.

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He again used his weekly Washington Post column to tell us this. Somehow, our budget deficits are supposed to be a "high-stakes gamble," although he really has no explanation as to how or why.

The standard economics story on why deficits are supposed to be bad is that they lead to high interest rates, thereby crowding out investment and slowing growth. Alternatively, if the Fed is lax and offsets the impact of the deficit by printing money, then the deficits lead to high inflation.

Fans of data know that neither is the case at present. Long-term interest rates are extraordinarily low, with the 10-year Treasury bond rate hovering near 1.6 percent. It was close to 5.0 percent when we were running budget surpluses under Clinton. Inflation is also low, coming in consistently below the Fed's 2.0 percent target.

So file this one in the "Robert Samuelson doesn't like budget deficits" box, right next to the "Dean Baker doesn't like chocolate ice cream box." Perhaps it is of some passing interest, but not the sort of thing serious people need to worry about.

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

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

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

The blame Brazil story is one where a group of rich boys are sitting around in their mansion eating a huge plate of cookies. Meanwhile, they send the housekeeper from room to make the beds and clean up. After the housekeeper finishes, she sees the last cookie on the plate and begins to reach for it. The rich boys then all yell at her for being greedy for wanting to take the last cookie.

The rich countries' lack of concern for the environment made it cheaper for them to develop. Now poorer countries, who are struggling to develop, are being told that they need to respect the environment for the good of the planet.

In fact, they do need to respect the environment, but we (the rich countries) have to pay them to do it. After all, it is a problem we created. That may not be a politically popular position here, but it is a politically serious one on a world basis and the only plausible way to limit global warming.

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