Robert Samuelson devoted his column this morning to discussing the fate of Fannie Mae and Freddie Mac (F&F). He notes that both are still effectively owned by the government even though almost everyone agreed years ago that they should be wound down and eliminated.

The complaint against leaving F&F public is that it leaves the government exposed to the sort of liabilities that led us to spend more than $180 billion bailing out F&F in 2008–2009. This badly misunderstands the dynamics of housing finance.

First, on the money used to bail out F&F, we ended up making a profit using the standard accounting that the media employs for bank bailouts. The government collected more money from F&F than it loaned it. This is of course a silly criterion, since the government is among the world's lowest cost borrowers, so it can generally make money by lending at interest rates between its cost of borrowing and the cost of borrowing for the businesses to which it is lending money. (This is the story of how the Export-Import Bank is profitable.)

The issue here is that the government is allocating capital by making subsidized loans available to favored companies in the case of the Export-Import Bank or the housing sector in the case of F&F. This has a cost in the form of higher priced capital to other borrowers, even if this does not appear as a budget item. Anyhow, the issue should be less the bailout money than whether F&F helped fuel the housing bubble, and if there is an alternative structure that would make such irrational exuberance less likely.

On the first question, there can be no doubt that F&F contributed to the bubble (they did finance 40 percent of new loans), but they were followers rather than leaders. The worst loans were financed by the investment banks that bundled them into their own mortgage backed securities. The business press derided F&F at the time for losing market share to more nimble private sector competitors. When F&F did start to move more aggressively into the subprime market it was for pursuit of profit (they were privately-held profit-making companies at the time), not because they were trying to serve the public good.

When a columnist uses your blog name in his title, he has to expect a response, right? Egan is unhappy about attacks on reporters and reporting from both the left and right. I am not going to particularly defend the targets of Egan’s criticism, but I will say that people have very good reason to be angry at the media. And here I am referring to elite outlets like the NYT, Washington Post, National Public Radio, not the small town journalists working at “poverty-level wages” who Egan grabs as a cover. (This reminds me of Walmart and McDonald’s touting the small businesses that will be hurt by a higher minimum wage. It’s not the story and everyone knows it.) I will stick to economic reporting, since that is my turf.

First, these news outlets cover economic issues almost entirely from an insider perspective. This means that the news is what people at the White House, the Fed, or the leadership in Congress want to be the news. And, it is overwhelmingly told from their perspective.

This means, for example, that trade deals like the Trans-Pacific Partnership (TPP) are often wrongly described as “free trade” deals. And it is often assumed, sometimes explicitly, that the point of these deals is to increase growth. Of course the deals are not at all “free trade,” since a main purpose of all recent U.S. trade agreements has been to increase patent and copyright protection. These are forms of protectionism. They serve a purpose in providing incentives for innovation and creative work, but they are nonetheless forms of protectionism.

It is simply wrong to describe patents and copyrights as “free trade.” Calling them free trade distracts from a serious discussion of their impact on the economy, inequality, and public health, after all, we are all supposed to support free trade.

Interestingly, the costs of these forms of protectionism are left out of almost every economic model that attempts to estimate the TPP’s impact on economic growth? This cost would almost certainly be a large negative. If patent protection raises the price of a drug fifty-fold (not uncommon) it has the same impact on the market as a 5000 percent tariff. Why do reporters never point this out?

The assumption that these deals are about increasing growth is also unwarranted. The negotiating parties are industry groups like the pharmaceutical industry, the financial industry, and the entertainment industry. These groups are interested in promoting profits for their industries not economic growth. Why is this so hard for reporters to acknowledge?

Jake Johnston
NACLA, November 12, 2015

November 12, 2015

Thomas Friedman, who once said that Germany would demand Greeks work like Germans as a condition of bailout funds (Greeks now work many more hours on average), allowed his column to stray into economics again today. Not surprisingly, he gets some of the big things wrong.

He starts by going after Donald Trump. While Trump has said many things on economic issues that bear little relationship to reality, Friedman attacks him on one that does. Friedman recounts an interview in which Trump said that he would provide universal health care insurance. Trump is then asked how he will pay for it. Friedman presents Trump's answer along with his own comment:

"'The government’s gonna pay for it. But we’re going to save so much money on the other side. But for the most [part] it’s going to be a private plan and people are going to be able to go out and negotiate great plans with lots of different competition with lots of competitors, with great companies — and they can have their doctors, they can have plans, they can have everything.'

"I just love that last line: 'They can have their doctors, they can have plans, they can have everything!'"

The irony of Friedman's comment is that Trump's claim is not far from being true, if the United States were to adopt a more efficient health care system. The United States pays more than twice as much per person for its health care as other wealthy countries, with little obvious benefit in terms of outcomes.

The World Bank put U.S. annual per person spending at $9,150 in the years 2006–2010. By comparison, Canada spends $5,700, Germany spends $5,000, and the United Kingdom spends $3,600. This enormous gap suggests that the United States could cover the uninsured and pay for it by eliminating the waste in its system.

Dean Baker
PBS Newshour, November 9, 2015

I was impressed to see the strong reaction to my blog post comparing the productivity of the research done by the Drugs for Neglected Diseases Initiative (DNDI) and research by the pharmaceutical industry supported by patent monopolies. Commentators here and elsewhere insisted that such comparisons were “idiocy” and possibly even dangerous. Many insisted that my explicit assertion that this was not an apples to apples comparison was inadequate, even though I noted important differences in the $2.6 billion in costs attributed to the pharmaceutical industry to develop a new drug with the expenses incurred by DNDI in developing new treatments.

Apparently, in their view making any comparison between the efficiency of the research done by the pharmaceutical industry and other biomedical research is inappropriate. It is understandable that people who profit from the current system of patent monopoly supported drug research might hold that view, but the rest of us who pay for this research in the form of artificially high drug prices must ask these sorts of questions.

First, of course the research supported by government granted patent monopolies and the research done by DNDI is qualitatively different. The drug industry is looking for patentable products from which it can profit; DNDI is doing research that is directly intended to have the greatest possible impact on public health. The question is, on a per dollar basis, which route is a more effective way to promote public health.

Improving public health is the point of biomedical research, not developing new drugs as several commentators seem to believe. The question is whether it is better to spend $2.6 billion developing a drug based on a new chemical entity through patent supported research or to spend this money in areas like developing new treatments with existing drugs, promoting better diets and exercise, or developing new drugs through alternative financing mechanisms.

The comparison between the $2.6 billion estimate of the industry’s cost for developing a new drug and the output from DNDI is informative on this topic, although far from conclusive. (If anyone has any research demonstrating the superior efficiency of patent monopoly financed drug research, I would appreciate the references.)

In fact, the comparison is overly generous to the industry since we pay four or five dollars in higher drug prices for every dollar we get of patent financed research. We are on a path to spend more than $400 billion this year on prescription drugs. If these drugs were sold in a free market without patents or other protections the cost would almost certainly be less than one-fifth this amount. In some cases, the gap in costs between the patent-protected price and the free market price is more than one hundred to one. Sovaldi sells in the United States for $84,000 per treatment. A generic version is available in Bangladesh for less than $1,000. Drugs are almost always cheap to manufacture and distribute, it is patent monopolies that make them expensive.

The latest jobs report from the Bureau of Labor Statistics shows that the unemployment rate fell to 5.0 percent last month. This is the same rate as from the beginning of the recession in December 2007, and is also the CBO’s estimate of the long-term natural rate of unemployment.

There’s good reason to think that the unemployment rate is overstating the strength of today’s economy. This is because people only count as unemployed if they have actively searched for work within the past four weeks. If workers become discouraged over their job prospects and stop looking for work, the unemployment rate falls. A better measure of the labor market wouldn’t show the economy gaining strength due to the fact that workers were becoming depressed with their job prospects.

One way of correcting for this problem is to ask what the unemployment rate would be if people hadn’t given up the search for work. Normally, we’d expect people to not be working if they are older and retired or young and in school. However, there’s little reason to think that people aged 25 to 54 should have suddenly stopped searching for work for any reason other than discouragement over job prospects.

November 9, 2015

Dean Baker
Truthout, November 9, 2015