Beat the Press

Beat the press por Dean Baker

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.

To my knowledge, he hasn’t said anything like that, but Buttigieg did say that he doesn’t accept the “fashionable” view that current deficits are not a problem. When he made this comment, many progressives denounced him for supporting deficit reducing policies that will slow growth and raise unemployment. Since most plans for deficit reduction also involve cuts to social programs (it’s compromise land), this is likely to mean additional hardships for the poor and elderly who are the primary beneficiaries of these programs.

The response of many centrists to these attacks (e.g. here) was to say that Buttigieg was just using campaign rhetoric, he doesn’t really mean it. Guessing what is in any politician’s head is always difficult, but it is especially hard with someone like Buttigieg, with a very short track record and few clear ideological convictions.

But whatever may be in Buttigieg’s head, we can certainly look at his words. He didn’t just indicate he disagreed with a view on deficits that has been largely embraced by the mainstream of the economics profession, he implied that this view was frivolous – a fashion that could change at any time.

This is more than a little annoying for those of us who have spent a lot of time in budget debates, especially in the dozen years since the collapse of the housing bubble gave us the Great Recession. The view that large deficits, like the one the country is now running, are not a problem came about as a result of an analysis of the evidence.

Ever since the collapse of the housing bubble, the economy has suffered from a persistent shortfall in demand. The loss of demand from the collapse of the bubble was enormous. At its peak in 2005, housing investment was 6.7 percent of GDP. In the most recent quarter it was just 3.8 percent of GDP. The difference of 2.9 percentage points of GDP translates into more than $600 billion in lost annual demand.

In addition, there was a falloff in consumption demand associated with the collapse of the housing bubble. The ephemeral wealth created by the housing bubble led to a surge in consumption spending, as people spent based on the newly generated wealth in their homes. At the peak in 2005, households consumed 97.5 percent of their disposable income. When the bubble burst and the housing wealth disappeared, so did the bubble driven consumption. In the most recent quarter, households were consuming just 92.3 percent of their disposable income. The difference in consumption shares translates into more than $800 billion annually of lost demand in today’s economy.

If we add the loss in annual demand from the falloff in housing investment and reduced consumption, it comes to more than $1,400 billion. As we have painfully learned since the Great Recession, there is no easy mechanism to replace this lost demand. The view formerly held by many economists, that the Fed could just lower interest rates and bring the economy back to full employment, has been shown to be clearly wrong. Even with the Fed’s interest rate at zero for seven years, the economy still did not rebound to anything like full employment.

This is the context in which much of the mainstream of the economics profession came to embrace the view that large budget deficits could be sustained for long periods of time. Given a persistent shortfall in demand in the economy (a.k.a. “secular stagnation”), there is no other sector that could provide the boost to growth necessary to bring the economy to full employment.

Rather than being a liability, large deficits are needed to lower the unemployment rate. And, low unemployment rates are especially important to African Americans, Hispanics and other disadvantaged groups in the labor market, since they disproportionately are the job gainers as the labor market tightens. In a tight labor market, employers have no choice but to employ people who would otherwise be the victims of discrimination. With the unemployment rate now well under 4.0 percent, there are accounts of employers even reaching out to people with criminal records who they might otherwise never consider employing.

Tight labor markets also give workers at the middle and bottom of the wage distribution the bargaining power needed to achieve wage gains. After seeing declines in real wages in the years immediately following the Great Recession, workers at the middle and bottom of the wage distribution have been seeing real gains of more than 1.0 percent annually over the last five years.

If we had smaller budget deficits, we would have seen less demand in the economy and less growth. This would have meant fewer jobs, higher unemployment, and less bargaining power for workers. That is the Pete Buttigieg world. He may not know this or he may not care, but we should be clear, this is what his call for lower budget deficits means.

 

The Story of Evil Deficits I

The conventional story of the evils of budget deficits is that they lead to higher interest rates, which then crowd out investment. Less investment (both public and private) is bad news because it means that productivity growth will be slower, leaving us poorer in the future than we would otherwise be.

This story clearly does not fit the current situation. The interest rate on 10-year Treasury bonds is just 1.6 percent. That compares to interest rates of 4.0-5.0 percent back in the late 1990s when we were running budget surpluses. With interest rates at historically low levels for the last decade, it is pretty hard to make the case that the deficit has been crowding out investment.

The conventional story would also hold that large deficits could lead to inflation, if the Fed failed to act by pushing up interest rates. This story also does not fit with the data. The inflation rate, as measured by the Consumer Price Index was 2.5 percent over the last year, but this reflects jumps in energy prices last fall. The inflation rate in the core personal consumption expenditure deflator, the rate targeted by the Federal Reserve Board, has been just 1.6 percent over the last year.

This is well below the Fed’s 2.0 percent target, which is meant to be an average. That means that the Fed would like to see the inflation rate occasionally be somewhat above 2.0 percent in order to balance out the periods of below 2.0 percent inflation. From the Fed’s standpoint, the problem has been that the inflation rate has been too low, not too high.

In short, we are not seeing either of the short-term problems usually attributed to large budget deficits. Interest rates are at historically low levels, so we can’t tell a story about deficits crowding out investment, and inflation has been consistently below its targeted rate, so there is no basis for complaints about the deficits causing inflation. So, if Buttigieg has a story about deficits doing harm to the economy, it is not one of the conventional stories economists tell.

 

The Story of Evil Deficits II

The other story often told about the budget deficit is that it will be a burden on our children, since they will have to pay interest on the debt. The story goes that our current publicly held debt of $16.9 trillion (79.2 percent of GDP) will impose an enormous burden as future generations struggle to pay it off. There are three points to be made on this.

First, these interest payments are an intragenerational issue, not an inter-generational issue. The debt is overwhelmingly held domestically. This means that the interest payments will be made by some of our children to the children of other people. In twenty or thirty years, ordinary workers may be paying taxes to pay the interest on the bonds held by the children of Bill Gates and Jeff Bezos. That could be a problem, but it is one that is easily solved by taxing the children of Bill Gates and Jeff Bezos. This is just saying that inequality can be a problem, which is obviously true, and if Bill Gates and Jeff Bezos’ kids hold lots of government bonds, the interest they get on those bonds could be part of the problem.

The second point is, that in spite of the large debt, the interest burden is relatively low, due to the extraordinarily low interest rates we have seen in recent years. The latest projections from the Congressional Budget Office show that interest payments, net of remittances from the Federal Reserve Board, will be just 1.4 percent of GDP in 2020. This compares to payments of more than 3.0 percent of GDP in the early and mid-1990s. It is pretty hard to get too upset about a burden that is less than half as large as what we faced three decades ago. And, that burden did not prevent the 1990s from being a relatively prosperous decade.

The final reason the debt interest burden argument richly deserves our ridicule is that it is very selective in choosing what burdens to consider and what burdens to ignore. Direct spending is only one mechanism the government uses to pay for things it wants done. It also gives out patent and copyright monopolies. These government-granted monopolies can be thought of as private taxes that the government allows companies to collect from the public in exchange for innovation and creative work.

The amount of money at stake in the rents from patent and copyright monopolies swamps payments of interest on the debt. In the case of prescription drugs alone the rents are going to be in the neighborhood of $400 billion in 2020 (1.8 percent of GDP). If we add in the rents from these monopolies in medical equipment, computer software, recorded music, movies, and video games, we are almost certainly over $1 trillion, or close 5.0 percent of GDP.

It doesn’t make any sense to hyperventilate about an interest burden of 1.3 percent of GDP, while ignoring rents from patent and copyright monopolies that are more than three times as large. If Buttigieg wants to make a big deal about the interest burden from the debt, then it is clearly not due to any objective reality. He is either appealing to prejudices or simply reflecting his own ignorance of budget and economic realities.

 

Yes, People Who Care About Economic Policy Should be Offended by Buttigieg’s Budget Comments

Only Buttigieg knows his actual motives for dismissing the lack of concern about budget deficits as a “fashion.” However, this lack of concern is based on hard data and clear theoretical thinking. Whatever reason Buttigieg has for saying that we should be concerned about budget deficits, those of us who have done our homework have every reason to be angry at Buttigieg, just as serious climate scientists are justified in their anger at the climate denialists.

To my knowledge, he hasn’t said anything like that, but Buttigieg did say that he doesn’t accept the “fashionable” view that current deficits are not a problem. When he made this comment, many progressives denounced him for supporting deficit reducing policies that will slow growth and raise unemployment. Since most plans for deficit reduction also involve cuts to social programs (it’s compromise land), this is likely to mean additional hardships for the poor and elderly who are the primary beneficiaries of these programs.

The response of many centrists to these attacks (e.g. here) was to say that Buttigieg was just using campaign rhetoric, he doesn’t really mean it. Guessing what is in any politician’s head is always difficult, but it is especially hard with someone like Buttigieg, with a very short track record and few clear ideological convictions.

But whatever may be in Buttigieg’s head, we can certainly look at his words. He didn’t just indicate he disagreed with a view on deficits that has been largely embraced by the mainstream of the economics profession, he implied that this view was frivolous – a fashion that could change at any time.

This is more than a little annoying for those of us who have spent a lot of time in budget debates, especially in the dozen years since the collapse of the housing bubble gave us the Great Recession. The view that large deficits, like the one the country is now running, are not a problem came about as a result of an analysis of the evidence.

Ever since the collapse of the housing bubble, the economy has suffered from a persistent shortfall in demand. The loss of demand from the collapse of the bubble was enormous. At its peak in 2005, housing investment was 6.7 percent of GDP. In the most recent quarter it was just 3.8 percent of GDP. The difference of 2.9 percentage points of GDP translates into more than $600 billion in lost annual demand.

In addition, there was a falloff in consumption demand associated with the collapse of the housing bubble. The ephemeral wealth created by the housing bubble led to a surge in consumption spending, as people spent based on the newly generated wealth in their homes. At the peak in 2005, households consumed 97.5 percent of their disposable income. When the bubble burst and the housing wealth disappeared, so did the bubble driven consumption. In the most recent quarter, households were consuming just 92.3 percent of their disposable income. The difference in consumption shares translates into more than $800 billion annually of lost demand in today’s economy.

If we add the loss in annual demand from the falloff in housing investment and reduced consumption, it comes to more than $1,400 billion. As we have painfully learned since the Great Recession, there is no easy mechanism to replace this lost demand. The view formerly held by many economists, that the Fed could just lower interest rates and bring the economy back to full employment, has been shown to be clearly wrong. Even with the Fed’s interest rate at zero for seven years, the economy still did not rebound to anything like full employment.

This is the context in which much of the mainstream of the economics profession came to embrace the view that large budget deficits could be sustained for long periods of time. Given a persistent shortfall in demand in the economy (a.k.a. “secular stagnation”), there is no other sector that could provide the boost to growth necessary to bring the economy to full employment.

Rather than being a liability, large deficits are needed to lower the unemployment rate. And, low unemployment rates are especially important to African Americans, Hispanics and other disadvantaged groups in the labor market, since they disproportionately are the job gainers as the labor market tightens. In a tight labor market, employers have no choice but to employ people who would otherwise be the victims of discrimination. With the unemployment rate now well under 4.0 percent, there are accounts of employers even reaching out to people with criminal records who they might otherwise never consider employing.

Tight labor markets also give workers at the middle and bottom of the wage distribution the bargaining power needed to achieve wage gains. After seeing declines in real wages in the years immediately following the Great Recession, workers at the middle and bottom of the wage distribution have been seeing real gains of more than 1.0 percent annually over the last five years.

If we had smaller budget deficits, we would have seen less demand in the economy and less growth. This would have meant fewer jobs, higher unemployment, and less bargaining power for workers. That is the Pete Buttigieg world. He may not know this or he may not care, but we should be clear, this is what his call for lower budget deficits means.

 

The Story of Evil Deficits I

The conventional story of the evils of budget deficits is that they lead to higher interest rates, which then crowd out investment. Less investment (both public and private) is bad news because it means that productivity growth will be slower, leaving us poorer in the future than we would otherwise be.

This story clearly does not fit the current situation. The interest rate on 10-year Treasury bonds is just 1.6 percent. That compares to interest rates of 4.0-5.0 percent back in the late 1990s when we were running budget surpluses. With interest rates at historically low levels for the last decade, it is pretty hard to make the case that the deficit has been crowding out investment.

The conventional story would also hold that large deficits could lead to inflation, if the Fed failed to act by pushing up interest rates. This story also does not fit with the data. The inflation rate, as measured by the Consumer Price Index was 2.5 percent over the last year, but this reflects jumps in energy prices last fall. The inflation rate in the core personal consumption expenditure deflator, the rate targeted by the Federal Reserve Board, has been just 1.6 percent over the last year.

This is well below the Fed’s 2.0 percent target, which is meant to be an average. That means that the Fed would like to see the inflation rate occasionally be somewhat above 2.0 percent in order to balance out the periods of below 2.0 percent inflation. From the Fed’s standpoint, the problem has been that the inflation rate has been too low, not too high.

In short, we are not seeing either of the short-term problems usually attributed to large budget deficits. Interest rates are at historically low levels, so we can’t tell a story about deficits crowding out investment, and inflation has been consistently below its targeted rate, so there is no basis for complaints about the deficits causing inflation. So, if Buttigieg has a story about deficits doing harm to the economy, it is not one of the conventional stories economists tell.

 

The Story of Evil Deficits II

The other story often told about the budget deficit is that it will be a burden on our children, since they will have to pay interest on the debt. The story goes that our current publicly held debt of $16.9 trillion (79.2 percent of GDP) will impose an enormous burden as future generations struggle to pay it off. There are three points to be made on this.

First, these interest payments are an intragenerational issue, not an inter-generational issue. The debt is overwhelmingly held domestically. This means that the interest payments will be made by some of our children to the children of other people. In twenty or thirty years, ordinary workers may be paying taxes to pay the interest on the bonds held by the children of Bill Gates and Jeff Bezos. That could be a problem, but it is one that is easily solved by taxing the children of Bill Gates and Jeff Bezos. This is just saying that inequality can be a problem, which is obviously true, and if Bill Gates and Jeff Bezos’ kids hold lots of government bonds, the interest they get on those bonds could be part of the problem.

The second point is, that in spite of the large debt, the interest burden is relatively low, due to the extraordinarily low interest rates we have seen in recent years. The latest projections from the Congressional Budget Office show that interest payments, net of remittances from the Federal Reserve Board, will be just 1.4 percent of GDP in 2020. This compares to payments of more than 3.0 percent of GDP in the early and mid-1990s. It is pretty hard to get too upset about a burden that is less than half as large as what we faced three decades ago. And, that burden did not prevent the 1990s from being a relatively prosperous decade.

The final reason the debt interest burden argument richly deserves our ridicule is that it is very selective in choosing what burdens to consider and what burdens to ignore. Direct spending is only one mechanism the government uses to pay for things it wants done. It also gives out patent and copyright monopolies. These government-granted monopolies can be thought of as private taxes that the government allows companies to collect from the public in exchange for innovation and creative work.

The amount of money at stake in the rents from patent and copyright monopolies swamps payments of interest on the debt. In the case of prescription drugs alone the rents are going to be in the neighborhood of $400 billion in 2020 (1.8 percent of GDP). If we add in the rents from these monopolies in medical equipment, computer software, recorded music, movies, and video games, we are almost certainly over $1 trillion, or close 5.0 percent of GDP.

It doesn’t make any sense to hyperventilate about an interest burden of 1.3 percent of GDP, while ignoring rents from patent and copyright monopolies that are more than three times as large. If Buttigieg wants to make a big deal about the interest burden from the debt, then it is clearly not due to any objective reality. He is either appealing to prejudices or simply reflecting his own ignorance of budget and economic realities.

 

Yes, People Who Care About Economic Policy Should be Offended by Buttigieg’s Budget Comments

Only Buttigieg knows his actual motives for dismissing the lack of concern about budget deficits as a “fashion.” However, this lack of concern is based on hard data and clear theoretical thinking. Whatever reason Buttigieg has for saying that we should be concerned about budget deficits, those of us who have done our homework have every reason to be angry at Buttigieg, just as serious climate scientists are justified in their anger at the climate denialists.

The New York Times had an interesting piece about three generations of an African American family, focusing on a man who moved from the South to Chicago in the mid-1950s. He had enjoyed a reasonably comfortable working class life in the city, but one of his daughters moved to the suburbs, because she saw it as a safer place to raise her daughter. The daughter eventually moved to Houston where she had better career prospects. This is given as an example of the outflow of African Americans from the city, which has numbered roughly 200,000 in the last five years.

At two important points the piece includes numbers, that are not adjusted for inflation, and therefore provide the bulk of its readers with no useful information. In one case it tells readers that Mr. White, the central figure in the piece, lost a job in a meat packing factory that paid $13.60 in 1992. Since most readers do not have a good idea of inflation over the last three decades, they likely would not realize that this was a relatively good-paying job. Prices have risen by more than 80 percent since 1992, which means that this job would have paid roughly $25.00 an hour in 2020 dollars.

The other number that likely makes little sense to readers is the $23,500 price that Mr. White, and his wife Velma, paid for their house in 1967. Since prices have risen by more than 580 percent since 1967, this would be equivalent to roughly $160,000 in today’s dollars.

This was obviously a piece that involved considerable time investigating. There is no reason that the reporter, or a staffer at the paper, could not have taken the ten minutes needed to put these numbers in a context that would be meaningful to its readers.

The New York Times had an interesting piece about three generations of an African American family, focusing on a man who moved from the South to Chicago in the mid-1950s. He had enjoyed a reasonably comfortable working class life in the city, but one of his daughters moved to the suburbs, because she saw it as a safer place to raise her daughter. The daughter eventually moved to Houston where she had better career prospects. This is given as an example of the outflow of African Americans from the city, which has numbered roughly 200,000 in the last five years.

At two important points the piece includes numbers, that are not adjusted for inflation, and therefore provide the bulk of its readers with no useful information. In one case it tells readers that Mr. White, the central figure in the piece, lost a job in a meat packing factory that paid $13.60 in 1992. Since most readers do not have a good idea of inflation over the last three decades, they likely would not realize that this was a relatively good-paying job. Prices have risen by more than 80 percent since 1992, which means that this job would have paid roughly $25.00 an hour in 2020 dollars.

The other number that likely makes little sense to readers is the $23,500 price that Mr. White, and his wife Velma, paid for their house in 1967. Since prices have risen by more than 580 percent since 1967, this would be equivalent to roughly $160,000 in today’s dollars.

This was obviously a piece that involved considerable time investigating. There is no reason that the reporter, or a staffer at the paper, could not have taken the ten minutes needed to put these numbers in a context that would be meaningful to its readers.

(This post originally appeared on my Patreon page.) Last month George Soros had a New York Times column arguing that Mark Zuckerberg should not be running Facebook. (Does the NYT reserve space on its opinion page for billionaires?) The gist of Soros’ piece is that Zuckerberg has made a deal with Trump. He will allow all manner of outrageous lies to be spread on Facebook to benefit Trump’s re-election campaign. In exchange, Trump will defend Zuckerberg from efforts to regulate Facebook.

Soros is of course right. Zuckerberg has said that Facebook will not attempt to verify the accuracy of the political ads that it runs. This is a greenlight for any sleazebag to push the most outrageous claims that they want in order to further the election of their favored candidate.

This will almost certainly benefit Donald Trump’s re-election, since the one area where he can legitimately take credit is in pushing outlandish lies. No one has pushed more lies more effectively than Donald Trump. The free rein promised by Zuckerberg is a re-election campaign contribution of enormous value.

While Soros is right on the substance of the issue, he is wrong to focus on the personality of Mark Zuckerberg. It would be good if we had a responsible forward-thinking person, who cared about the future of democracy, running Facebook, but that is not the normal course of things in a capitalist economy.

Businesses are run to make money. And, the bottom line here is that Facebook stands to make much more money spreading outlandish lies that help Trump’s campaign, than screening ads for their veracity. In this context, we should not be surprised that Facebook is taking the lie-spreading route. The problem is not that Zuckerberg is acting like a normal businessperson, the problem is that we made the lie-spreading route profitable.

In this respect it is worth pointing out that we don’t have the same problem with other media outlets. We don’t have to beg CNN, the New York Times, and other major news outlets to not take ads that they know to be false. They won’t do it, perhaps in part out of principle, but also because they could be sued for libel if they spread claims that were false and damaging.

For example, if I wanted to take out an ad asserting that Donald Trump is a rapist (which is likely true), most major news outlets would refuse to run it. Donald Trump could not only sue me for libel, he could also sue any news outlet that carried the ad. If I could not show that the claim was true, the news outlet that published the ad could be forced to pay substantial damages. For this reason, traditional news outlets do try to screen political ads for accuracy, and will not run an ad that they know to be false.

Facebook does not feel the same need to protect against libel because a law passed by Congress exempts it from the same sort of liability faced by traditional media outlets. Section 230 of the 1996 Communications Decency Act, protects Internet intermediaries from the liability rules that apply to traditional media outlets.

The logic that was used to justify this provision is that Internet intermediaries should be treated the same way as common carriers, like a phone company or the mail service. A common carrier does not have control over the content it carries, nor does it profit from specific content, except insofar as it increases demand for its service.

This was arguably an accurate description of Internet intermediaries in the early years of the web. For example, we would not have expected AOL to be responsible for whatever people chose to post in its chatrooms. But the web in general, and Facebook in particular, have evolved hugely in the years since Section 230 was put into law.

Facebook has complete control over content. It allows people to pay to have their posts sent to as many people as they choose. It allows them to target the recipients, based on location, age, education, gender, and any number of other characteristics. It is very hard to see how an outlet like CNN or the NYT can be held responsible for spreading libelous material, but Facebook should be exempt.

Whether or not Section 230 made sense in 1996, it clearly does not in era of Facebook. In effect it gives Facebook, and other Internet outlets, a special privilege that is not available to their broadcast or print competitors.

Of course, Zuckerberg will claim that it is not possible for Facebook to monitor the hundreds of millions of items that get posted every day. But the standard need not be that Facebook prevents libelous material from being posted. Rather, Facebook can be required to remove libelous material after it has been called to its attention. Furthermore, since Facebook’s system allows it to know exactly who has opened a post, it can be required to send a correction to anyone who originally received the libelous material.

Zuckerberg has also argued that they cannot be responsible for preventing false material from being spread through Facebook because they shouldn’t be in the position of determining what is true. Determining truth may seem hard for Zuckerberg, but this is precisely what every traditional media outlet does all the time, both when deciding on editorial content and when making decisions about accepting ads. If Zuckerberg’s team is that much less competent than those at traditional media outlets they can look to hire competent people away from these other outlets.      

There really is nothing terribly complicated about Facebook’s situation, nor any grand questions of freedom of speech and freedom of the press that don’t come up all the time with traditional media. The basic story is that Facebook is now gaming a provision of a quarter-century old law to pretend it is a common carrier when that is clearly not the case.

If Facebook wants to be treated like a common carrier, then it should become one. That would mean not profiting from ads and boosted posts. It would also mean not selling personal information from its users. If it wants to be a common carrier then it can simply allow people to post as they please and not try to profit from content or personal information.

However, this is obviously not Facebook in its current form. Facebook is no more a common carrier than any major media outlet. As such it has to be subject to the same rules as other media outlets. That will require much more spending to police its network for false and libelous information, which will mean that Facebook will be much less profitable and Mark Zuckerberg will be much less rich.

But that is Mr. Zuckerberg’s problem. We should not be in the position of begging Zuckerberg to do the right thing as the CEO of Facebook or hoping that a more socially responsible person takes over the company. The law must be adjusted to take away Facebook’s special status. It is a media outlet and it is long past time that it be treated like one.    

(This post originally appeared on my Patreon page.) Last month George Soros had a New York Times column arguing that Mark Zuckerberg should not be running Facebook. (Does the NYT reserve space on its opinion page for billionaires?) The gist of Soros’ piece is that Zuckerberg has made a deal with Trump. He will allow all manner of outrageous lies to be spread on Facebook to benefit Trump’s re-election campaign. In exchange, Trump will defend Zuckerberg from efforts to regulate Facebook.

Soros is of course right. Zuckerberg has said that Facebook will not attempt to verify the accuracy of the political ads that it runs. This is a greenlight for any sleazebag to push the most outrageous claims that they want in order to further the election of their favored candidate.

This will almost certainly benefit Donald Trump’s re-election, since the one area where he can legitimately take credit is in pushing outlandish lies. No one has pushed more lies more effectively than Donald Trump. The free rein promised by Zuckerberg is a re-election campaign contribution of enormous value.

While Soros is right on the substance of the issue, he is wrong to focus on the personality of Mark Zuckerberg. It would be good if we had a responsible forward-thinking person, who cared about the future of democracy, running Facebook, but that is not the normal course of things in a capitalist economy.

Businesses are run to make money. And, the bottom line here is that Facebook stands to make much more money spreading outlandish lies that help Trump’s campaign, than screening ads for their veracity. In this context, we should not be surprised that Facebook is taking the lie-spreading route. The problem is not that Zuckerberg is acting like a normal businessperson, the problem is that we made the lie-spreading route profitable.

In this respect it is worth pointing out that we don’t have the same problem with other media outlets. We don’t have to beg CNN, the New York Times, and other major news outlets to not take ads that they know to be false. They won’t do it, perhaps in part out of principle, but also because they could be sued for libel if they spread claims that were false and damaging.

For example, if I wanted to take out an ad asserting that Donald Trump is a rapist (which is likely true), most major news outlets would refuse to run it. Donald Trump could not only sue me for libel, he could also sue any news outlet that carried the ad. If I could not show that the claim was true, the news outlet that published the ad could be forced to pay substantial damages. For this reason, traditional news outlets do try to screen political ads for accuracy, and will not run an ad that they know to be false.

Facebook does not feel the same need to protect against libel because a law passed by Congress exempts it from the same sort of liability faced by traditional media outlets. Section 230 of the 1996 Communications Decency Act, protects Internet intermediaries from the liability rules that apply to traditional media outlets.

The logic that was used to justify this provision is that Internet intermediaries should be treated the same way as common carriers, like a phone company or the mail service. A common carrier does not have control over the content it carries, nor does it profit from specific content, except insofar as it increases demand for its service.

This was arguably an accurate description of Internet intermediaries in the early years of the web. For example, we would not have expected AOL to be responsible for whatever people chose to post in its chatrooms. But the web in general, and Facebook in particular, have evolved hugely in the years since Section 230 was put into law.

Facebook has complete control over content. It allows people to pay to have their posts sent to as many people as they choose. It allows them to target the recipients, based on location, age, education, gender, and any number of other characteristics. It is very hard to see how an outlet like CNN or the NYT can be held responsible for spreading libelous material, but Facebook should be exempt.

Whether or not Section 230 made sense in 1996, it clearly does not in era of Facebook. In effect it gives Facebook, and other Internet outlets, a special privilege that is not available to their broadcast or print competitors.

Of course, Zuckerberg will claim that it is not possible for Facebook to monitor the hundreds of millions of items that get posted every day. But the standard need not be that Facebook prevents libelous material from being posted. Rather, Facebook can be required to remove libelous material after it has been called to its attention. Furthermore, since Facebook’s system allows it to know exactly who has opened a post, it can be required to send a correction to anyone who originally received the libelous material.

Zuckerberg has also argued that they cannot be responsible for preventing false material from being spread through Facebook because they shouldn’t be in the position of determining what is true. Determining truth may seem hard for Zuckerberg, but this is precisely what every traditional media outlet does all the time, both when deciding on editorial content and when making decisions about accepting ads. If Zuckerberg’s team is that much less competent than those at traditional media outlets they can look to hire competent people away from these other outlets.      

There really is nothing terribly complicated about Facebook’s situation, nor any grand questions of freedom of speech and freedom of the press that don’t come up all the time with traditional media. The basic story is that Facebook is now gaming a provision of a quarter-century old law to pretend it is a common carrier when that is clearly not the case.

If Facebook wants to be treated like a common carrier, then it should become one. That would mean not profiting from ads and boosted posts. It would also mean not selling personal information from its users. If it wants to be a common carrier then it can simply allow people to post as they please and not try to profit from content or personal information.

However, this is obviously not Facebook in its current form. Facebook is no more a common carrier than any major media outlet. As such it has to be subject to the same rules as other media outlets. That will require much more spending to police its network for false and libelous information, which will mean that Facebook will be much less profitable and Mark Zuckerberg will be much less rich.

But that is Mr. Zuckerberg’s problem. We should not be in the position of begging Zuckerberg to do the right thing as the CEO of Facebook or hoping that a more socially responsible person takes over the company. The law must be adjusted to take away Facebook’s special status. It is a media outlet and it is long past time that it be treated like one.    

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Perhaps 2016 was too far back, but those of us old enough to remember recall Donald Trump making the trade deficit a huge campaign issue. He railed about how the United States was giving away so much money to China, Mexico, and other countries with whom we had trade deficits. He promised that this would end when he was in the White House.

For some reason, the issue of the trade deficit did not enter the Washington Post’s assessment of the extent to which Trump has followed through on his pledge to build “Fortress America.” The piece notes the reduction in immigration, fewer grants of asylum, and progress on building the wall on the border with Mexico, but it makes no mention of trade.

If it had talked about the trade the picture would not look very good for Trump. The trade deficit increased from $518.8 billion in 2016 to $632 billion in 2019. By this measure, Trump seems to be going in the wrong direction.

Even if we look at the trade deficit as a share of GDP, it is still going the wrong way under Trump. It was 2.8 percent of GDP in 2016 compared to 2.9 percent in 2019, after reaching 3.1 percent in 2018.

It is not clear why the trade deficit didn’t get included in the Washington Post’s report card on this topic, but if it did, they would have to give Trump a failing grade by his own standards.

Perhaps 2016 was too far back, but those of us old enough to remember recall Donald Trump making the trade deficit a huge campaign issue. He railed about how the United States was giving away so much money to China, Mexico, and other countries with whom we had trade deficits. He promised that this would end when he was in the White House.

For some reason, the issue of the trade deficit did not enter the Washington Post’s assessment of the extent to which Trump has followed through on his pledge to build “Fortress America.” The piece notes the reduction in immigration, fewer grants of asylum, and progress on building the wall on the border with Mexico, but it makes no mention of trade.

If it had talked about the trade the picture would not look very good for Trump. The trade deficit increased from $518.8 billion in 2016 to $632 billion in 2019. By this measure, Trump seems to be going in the wrong direction.

Even if we look at the trade deficit as a share of GDP, it is still going the wrong way under Trump. It was 2.8 percent of GDP in 2016 compared to 2.9 percent in 2019, after reaching 3.1 percent in 2018.

It is not clear why the trade deficit didn’t get included in the Washington Post’s report card on this topic, but if it did, they would have to give Trump a failing grade by his own standards.

It is often said that intellectuals have a hard time dealing with new ideas. This is perhaps nowhere better demonstrated with the fixation with patent monopolies as the primary mechanism for financing the development of new drugs.

Bloomberg gave us a beautiful example of this narrow mindedness with a column from Max Nisen on the possibility that China may require the compulsory licensing of a patent on a drug developed by Gilead, in order to produce a treatment for the Coronavirus. A compulsory license means that sacrificing the monopoly Gilead had expected, which means it will only get a small fraction of the revenue it might have otherwise anticipated. Nisen is concerned that this lost revenue will reduce expected profit in the future, meaning that companies like Gilead would have much less incentive in developing cures for epidemics like the Coronavirus.

While drug companies do operate to make a profit, the part of the story that Nisen misses is that the profit does not have to be gained through patent monopolies. Suppose that the U.S. and other governments put up research funding, which private corporations like Gilead could bid on based on their expertise and track record. In this case, a condition of the research is that all patents would be in the public domain (the companies were already paid for their work) and all results would be fully public as soon as practical.

If anyone was seriously concerned about combating epidemics like the Coronavirus, this would seem to be the best route to go. We should want researchers all around the world to be sharing results and in other ways cooperating to solve a common problem. Advanced funding would encourage this sort of cooperation as opposed to the patent system, which encourages researchers to squirrel away findings so as not to give an edge to competitors.

That fact, and the other benefits should be obvious to anyone who writes on this issue, but as we know, intellectuals have a hard time dealing with new ideas.  

 

It is often said that intellectuals have a hard time dealing with new ideas. This is perhaps nowhere better demonstrated with the fixation with patent monopolies as the primary mechanism for financing the development of new drugs.

Bloomberg gave us a beautiful example of this narrow mindedness with a column from Max Nisen on the possibility that China may require the compulsory licensing of a patent on a drug developed by Gilead, in order to produce a treatment for the Coronavirus. A compulsory license means that sacrificing the monopoly Gilead had expected, which means it will only get a small fraction of the revenue it might have otherwise anticipated. Nisen is concerned that this lost revenue will reduce expected profit in the future, meaning that companies like Gilead would have much less incentive in developing cures for epidemics like the Coronavirus.

While drug companies do operate to make a profit, the part of the story that Nisen misses is that the profit does not have to be gained through patent monopolies. Suppose that the U.S. and other governments put up research funding, which private corporations like Gilead could bid on based on their expertise and track record. In this case, a condition of the research is that all patents would be in the public domain (the companies were already paid for their work) and all results would be fully public as soon as practical.

If anyone was seriously concerned about combating epidemics like the Coronavirus, this would seem to be the best route to go. We should want researchers all around the world to be sharing results and in other ways cooperating to solve a common problem. Advanced funding would encourage this sort of cooperation as opposed to the patent system, which encourages researchers to squirrel away findings so as not to give an edge to competitors.

That fact, and the other benefits should be obvious to anyone who writes on this issue, but as we know, intellectuals have a hard time dealing with new ideas.  

 

Last week, Antonio Weiss, along with co-author Laura Kawano, released a paper advocating a financial transactions tax (FTT). I have long been an advocate of FTTs, so I’m always glad to see another paper making the case.

However, what made this paper especially noteworthy is Weiss’s background. Weiss had been a top Treasury official under President Obama, and previously a partner at the investment bank, Lazard, so he is not the sort of person who would typically be expected to support a FTT.

Even more striking is the fact that the paper was published by the Hamilton Project at the Brookings Institution. The founder and main funder of the Hamilton Project is Robert Rubin. Rubin has a long career in the financial sector, including top positions at both Goldman Sachs and Citigroup.

Between his jobs at these two Wall Street behemoths, Rubin held top positions in the Clinton administration, serving as both head of the National Economic Council and Treasury Secretary. There is probably no one who has been more visibly associated with the idea of giving the financial sector free rein than Mr. Rubin. For this reason, it is really remarkable that a paper advocating a FTT would come out of the Hamilton Project.

In the last quarter century, we have seen the idea of a FTT go from a concept being pushed by the radical fringe (Bernie Sanders was one of the few sponsors of a House bill in the early 1990s), to an idea very much in the center of the Democratic Party. In fact, all three of the leading contenders for the Democratic presidential nomination have come out in favor of a FTT.
We’re still far from seeing a FTT get enacted — the financial industry would probably kill to protect their profits — but it is now an idea that is treated seriously in mainstream political debates.

Federal Reserve Board Policy

FTTs are not the only area of economic debate where we have seen a large leftward shift over the last quarter century. As I have touted on prior occasions, the Federal Reserve Board has hugely shifted its attitude on the problem of unemployment. Federal Reserve Board Chair Jerome Powell now explicitly talks about the need to push the unemployment rate as low as possible in order to help the most disadvantaged groups in the labor market.

This follows several decades in which the Fed’s leadership was prepared to largely ignore its mandate to promote full employment. Many wanted to make containing inflation the Fed’s only goal.

This change in perspective, which the labor and community backed Fed Up Coalition did much to advance, has made a huge difference in the lives of millions of people. There were many economists, including many in leadership positions at the Fed, who argued that inflation would begin to spiral upward, if the unemployment rate was allowed to fall to 5.0 percent or lower. They advocated raising interest rates to slow the economy and reduce the rate of job creation.

Fortunately, then Chair Janet Yellen and Jerome Powell, her successor, chose to delay and then limit interest rate hikes, allowing the unemployment rate to continue to fall. With the unemployment rate now at 3.5 percent, and absolutely no evidence of increasing inflation, it’s clear that they made the right choice.

Not only has this drop in the unemployment rate allowed millions more to get jobs, it has hugely improved the labor market for African Americans, Hispanics, less-educated workers, and people with criminal records. In 2015, when the overall unemployment was falling to levels that worried inflation hawks, the unemployment rate for African Americans was near 10.0 percent. Today, it is under 6.0 percent. In 2015, the unemployment rate for African American teens was near 30.0 percent. It is now hovering near 20.0 percent. There would be similar stories for other disadvantaged groups.

While we can’t be satisfied with an African American unemployment rate that is near 6.0 percent, or a teen unemployment rate over 20 percent, this is still an enormously better situation than what we were seeing five years ago. This change in policy at the Fed made a huge difference.

Also, it is important to note that tighter labor markets have made a huge difference in the bargaining power for tens of millions of workers. Prior to 2015, wages for most workers had just been keeping pace with inflation. As the labor market tightened, and employers had to compete to find workers, wages for workers at the middle and the bottom of the wage distribution began to outpace inflation by a bit more than 1.0 percent annually.

Those at the bottom did even better due to hikes in the minimum wage in many states and cities. This wage growth is not great, but most workers have done much better over the last five years than would have been the case if the unemployment rate were still above 5.0 percent.

Social Security

Back in the 1990s, the centrist Democratic positon was that Social Security needed to be cut. The Democrats did not want to cut as much as the Republicans, and most opposed the privatization of the program, but arguing that benefit levels should be sustained without cuts was seen as a far out position. As recently as 2012 President Obama was seeking a “grand bargain” with Republicans that would have included a change in the cost of living adjustment that would have reduced benefits for long-lived retirees by more than 9.0 percent.
Here too, there has been an enormous shift in the debate. The centrist position in the Democratic Party is now to increase benefits. The debate is over the size of the increase. For example, Senator Warren is proposing to raise benefits by $200 a month, a positon that would have been seen as outlandish back in the 1990s.

The Minimum Wage

Back in the 1980s, the minimum wage was so out of style that the New York Times once ran an editorial saying that the optimal minimum wage was zero. New research in the early 1990s showed that modest increases in the minimum wage did not lead to measurable job loss.

Since then, there has been much additional research showing that considerably larger increases in the minimum wage also do not lead to job loss. In addition, contrary to what many had previously thought (including me) it was possible to not only have substantial minimum wage hikes at the state level, but even at the local level. As a result of this research, many states and cities are now in the process of moving to a $15 an hour minimum wage even as the national minimum wage remains frozen at $7.25 an hour. In the case of Seattle, the minimum wage at large employers is already $16.39 an hour.

This higher wage makes an enormous difference in people’s lives. A full-time full year worker getting $16.39 an hour will make almost $33,000 a year. That compares to just $20,000 a year if they were working for $10 an hour.

Paid Leave and Severance Pay

Another aspect of the 1990s conventional wisdom was that we wanted to place as few restrictions as possible on employers. This precluded items like mandated family leave and sick pay, which had long been accepted practice in other wealthy countries.

Here too there has been enormous progress at the state and local level, even as the federal government has lagged behind. Many states, including California and New York, now require most employers to provide paid family leave and sick days. Cities have also moved ahead, with many progressive cities requiring paid leave in states without such mandates, or have more generous mandates than the ones set at the state level.

New York City is actually close to moving ahead with a statute that would require two weeks a year of paid vacation for most workers. This would be a first for the mainland of the United States, although Puerto Rico has mandated paid vacation for some time. And, just last month, New Jersey became the first state in the country to require severance pay when companies have mass layoffs of more than fifty workers.

In all of these areas we still have a long way to go to catch up with most European countries, however the point is that we are moving in the right direction. It is certainly reasonable to think that with a Democrat in the White House we would see some of these measures adopted at the national level. But even if there is no action at the national level, it is virtually certain that more state and local governments will adopt leave policies and severance pay requirements, when they see it did not result in economic disasters in their neighbors.

Bigger Changes in the Future?

I write pieces like this every few months or so in part to point out the progress that has been made, but also to convince myself that it is possible to move an economic consensus that often seems oblivious to facts and logic. It can be very depressing at times.

The view that the economy has an autonomous logic, independent of policy choices, is very deep. (See this column by E.J. Dionne, who is very decent person and certainly on the liberal side of the political spectrum.) The right, for obvious reasons, would like us to think that the enormous inequality generated by the market is just a natural outcome. The story goes that we can do some tinkering with tax and transfer policy, but we have to be very careful or we will upset the apple cart and destroy the economy’s ability to operate.

Unfortunately, much of the left seems to largely accept this view, with the difference being that they think we can do larger tinkering without upsetting the apple cart. The idea that we can change the workings of the machine itself, so that the market is not generating large amounts of inequality, seems to be off the table with the left as well.

This is one of the reasons I focus so much on patent and copyright monopolies. It should be pretty obvious that these are not natural outcomes of the market, but tools of the government to accomplish specific public purposes. There is also an enormous amount of money at stake. And, in the case of drugs and medical equipment, people’s lives.

It should be possible to get the mainstream of economists to acknowledge the obvious truth that government-granted patent and copyright monopolies are not the free market. I’m sure that one day an economist will be celebrated for discovering this fact in an important new book.

It should also be possible to get economists to accept that having far more doctors in the U.S, would mean lower pay for doctors (you know, supply and demand) and that paying corrupt and/or incompetent CEOs tens of millions of dollars is not in the interest of shareholders. (Yeah, this is my sales pitch for Rigged [it’s free].)

Anyhow, it is possible to change policy debates. It just isn’t easy and it takes a long time.

Last week, Antonio Weiss, along with co-author Laura Kawano, released a paper advocating a financial transactions tax (FTT). I have long been an advocate of FTTs, so I’m always glad to see another paper making the case.

However, what made this paper especially noteworthy is Weiss’s background. Weiss had been a top Treasury official under President Obama, and previously a partner at the investment bank, Lazard, so he is not the sort of person who would typically be expected to support a FTT.

Even more striking is the fact that the paper was published by the Hamilton Project at the Brookings Institution. The founder and main funder of the Hamilton Project is Robert Rubin. Rubin has a long career in the financial sector, including top positions at both Goldman Sachs and Citigroup.

Between his jobs at these two Wall Street behemoths, Rubin held top positions in the Clinton administration, serving as both head of the National Economic Council and Treasury Secretary. There is probably no one who has been more visibly associated with the idea of giving the financial sector free rein than Mr. Rubin. For this reason, it is really remarkable that a paper advocating a FTT would come out of the Hamilton Project.

In the last quarter century, we have seen the idea of a FTT go from a concept being pushed by the radical fringe (Bernie Sanders was one of the few sponsors of a House bill in the early 1990s), to an idea very much in the center of the Democratic Party. In fact, all three of the leading contenders for the Democratic presidential nomination have come out in favor of a FTT.
We’re still far from seeing a FTT get enacted — the financial industry would probably kill to protect their profits — but it is now an idea that is treated seriously in mainstream political debates.

Federal Reserve Board Policy

FTTs are not the only area of economic debate where we have seen a large leftward shift over the last quarter century. As I have touted on prior occasions, the Federal Reserve Board has hugely shifted its attitude on the problem of unemployment. Federal Reserve Board Chair Jerome Powell now explicitly talks about the need to push the unemployment rate as low as possible in order to help the most disadvantaged groups in the labor market.

This follows several decades in which the Fed’s leadership was prepared to largely ignore its mandate to promote full employment. Many wanted to make containing inflation the Fed’s only goal.

This change in perspective, which the labor and community backed Fed Up Coalition did much to advance, has made a huge difference in the lives of millions of people. There were many economists, including many in leadership positions at the Fed, who argued that inflation would begin to spiral upward, if the unemployment rate was allowed to fall to 5.0 percent or lower. They advocated raising interest rates to slow the economy and reduce the rate of job creation.

Fortunately, then Chair Janet Yellen and Jerome Powell, her successor, chose to delay and then limit interest rate hikes, allowing the unemployment rate to continue to fall. With the unemployment rate now at 3.5 percent, and absolutely no evidence of increasing inflation, it’s clear that they made the right choice.

Not only has this drop in the unemployment rate allowed millions more to get jobs, it has hugely improved the labor market for African Americans, Hispanics, less-educated workers, and people with criminal records. In 2015, when the overall unemployment was falling to levels that worried inflation hawks, the unemployment rate for African Americans was near 10.0 percent. Today, it is under 6.0 percent. In 2015, the unemployment rate for African American teens was near 30.0 percent. It is now hovering near 20.0 percent. There would be similar stories for other disadvantaged groups.

While we can’t be satisfied with an African American unemployment rate that is near 6.0 percent, or a teen unemployment rate over 20 percent, this is still an enormously better situation than what we were seeing five years ago. This change in policy at the Fed made a huge difference.

Also, it is important to note that tighter labor markets have made a huge difference in the bargaining power for tens of millions of workers. Prior to 2015, wages for most workers had just been keeping pace with inflation. As the labor market tightened, and employers had to compete to find workers, wages for workers at the middle and the bottom of the wage distribution began to outpace inflation by a bit more than 1.0 percent annually.

Those at the bottom did even better due to hikes in the minimum wage in many states and cities. This wage growth is not great, but most workers have done much better over the last five years than would have been the case if the unemployment rate were still above 5.0 percent.

Social Security

Back in the 1990s, the centrist Democratic positon was that Social Security needed to be cut. The Democrats did not want to cut as much as the Republicans, and most opposed the privatization of the program, but arguing that benefit levels should be sustained without cuts was seen as a far out position. As recently as 2012 President Obama was seeking a “grand bargain” with Republicans that would have included a change in the cost of living adjustment that would have reduced benefits for long-lived retirees by more than 9.0 percent.
Here too, there has been an enormous shift in the debate. The centrist position in the Democratic Party is now to increase benefits. The debate is over the size of the increase. For example, Senator Warren is proposing to raise benefits by $200 a month, a positon that would have been seen as outlandish back in the 1990s.

The Minimum Wage

Back in the 1980s, the minimum wage was so out of style that the New York Times once ran an editorial saying that the optimal minimum wage was zero. New research in the early 1990s showed that modest increases in the minimum wage did not lead to measurable job loss.

Since then, there has been much additional research showing that considerably larger increases in the minimum wage also do not lead to job loss. In addition, contrary to what many had previously thought (including me) it was possible to not only have substantial minimum wage hikes at the state level, but even at the local level. As a result of this research, many states and cities are now in the process of moving to a $15 an hour minimum wage even as the national minimum wage remains frozen at $7.25 an hour. In the case of Seattle, the minimum wage at large employers is already $16.39 an hour.

This higher wage makes an enormous difference in people’s lives. A full-time full year worker getting $16.39 an hour will make almost $33,000 a year. That compares to just $20,000 a year if they were working for $10 an hour.

Paid Leave and Severance Pay

Another aspect of the 1990s conventional wisdom was that we wanted to place as few restrictions as possible on employers. This precluded items like mandated family leave and sick pay, which had long been accepted practice in other wealthy countries.

Here too there has been enormous progress at the state and local level, even as the federal government has lagged behind. Many states, including California and New York, now require most employers to provide paid family leave and sick days. Cities have also moved ahead, with many progressive cities requiring paid leave in states without such mandates, or have more generous mandates than the ones set at the state level.

New York City is actually close to moving ahead with a statute that would require two weeks a year of paid vacation for most workers. This would be a first for the mainland of the United States, although Puerto Rico has mandated paid vacation for some time. And, just last month, New Jersey became the first state in the country to require severance pay when companies have mass layoffs of more than fifty workers.

In all of these areas we still have a long way to go to catch up with most European countries, however the point is that we are moving in the right direction. It is certainly reasonable to think that with a Democrat in the White House we would see some of these measures adopted at the national level. But even if there is no action at the national level, it is virtually certain that more state and local governments will adopt leave policies and severance pay requirements, when they see it did not result in economic disasters in their neighbors.

Bigger Changes in the Future?

I write pieces like this every few months or so in part to point out the progress that has been made, but also to convince myself that it is possible to move an economic consensus that often seems oblivious to facts and logic. It can be very depressing at times.

The view that the economy has an autonomous logic, independent of policy choices, is very deep. (See this column by E.J. Dionne, who is very decent person and certainly on the liberal side of the political spectrum.) The right, for obvious reasons, would like us to think that the enormous inequality generated by the market is just a natural outcome. The story goes that we can do some tinkering with tax and transfer policy, but we have to be very careful or we will upset the apple cart and destroy the economy’s ability to operate.

Unfortunately, much of the left seems to largely accept this view, with the difference being that they think we can do larger tinkering without upsetting the apple cart. The idea that we can change the workings of the machine itself, so that the market is not generating large amounts of inequality, seems to be off the table with the left as well.

This is one of the reasons I focus so much on patent and copyright monopolies. It should be pretty obvious that these are not natural outcomes of the market, but tools of the government to accomplish specific public purposes. There is also an enormous amount of money at stake. And, in the case of drugs and medical equipment, people’s lives.

It should be possible to get the mainstream of economists to acknowledge the obvious truth that government-granted patent and copyright monopolies are not the free market. I’m sure that one day an economist will be celebrated for discovering this fact in an important new book.

It should also be possible to get economists to accept that having far more doctors in the U.S, would mean lower pay for doctors (you know, supply and demand) and that paying corrupt and/or incompetent CEOs tens of millions of dollars is not in the interest of shareholders. (Yeah, this is my sales pitch for Rigged [it’s free].)

Anyhow, it is possible to change policy debates. It just isn’t easy and it takes a long time.

It is popular for people, especially economist-type people, to claim that technology has been a major driver of the increase in inequality over the last four decades. This view is very convenient for those on the winning side of the inequality divide, since it implies that the growth in inequality was largely an organic process independent of government policy. Inequality might be an unfortunate outcome, but who would be opposed to the advance of technology?

However convenient the technology driving inequality story might be, it falls down on even the most simple examination of its logic. To take an example that has often been used, there is a concern that displacing workers with robots will lead to a transfer of income from workers to the people who own the robots.

While this comment is often treated as presenting the basic problem created by technology, in fact it does the exact opposite. “Owning” the robot is not a technical relationship, it is a legal one, and therefore one that depends on our laws. 

To be more concrete, the income from owning a robot is not the result of owning the physical robot. Robots will generally be relatively cheap to manufacture. So people will not be deriving large incomes from owning the steel and other components of the robot. The reason some people might get very rich from owning robots is because they own patents and copyrights that are needed for the making of the robots. Without these patent and copyright monopolies, robots would be cheap, like washing machines, and there would be no large-scale upward redistribution associated with them.

 

A World Without Patent and Copyright Monopolies

If it is not already obvious, patent and copyright monopolies are instruments of public policy, not acts of god. We can make them stronger and longer if we want, or shorter and weaker, or not have them at all. The treatment of these monopolies in the constitution is a very good starting point for a clear understanding of the issues. 

Patents and copyrights appear as one of the specific powers granted to Congress (Article I, Section 8, Clause 8). The clause states that Congress has the power:

“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

Note that this is explicitly a power granted to Congress that it can either use or not use, like the power to tax or the power to declare war. Patents and copyrights are not guaranteed as individual rights, like the right to free speech or religion. 

Patents and copyrights are also explicitly tied to the public purpose of promoting “the progress of science and the useful arts.” There is 180 degrees at odds with the idea that a person has an inherent right to get a patent or copyright.

Anyhow, let’s imagine that Congress chooses to eliminate patent and copyright monopolies tomorrow. But, we still have all the technologies that exist today, such as computers, smartphones, artificial intelligence and the rest. In this world, there would likely be little demand for people with skills as software engineers, bio-technicians, or skills in other STEM-related areas that are highly valued in the current economy. (We’ll assume no government funded research at the moment.)  

After all, why would a drug company pay large amounts of money to people to develop new drugs if the drugs can be copied and sold by competitors from the day they enter the market? The same would be true of software developers, makers of medical equipment, computer manufacturers, smartphone companies, and any other product where the cost of research and development was a substantial portion of the price of the product. 

The ending of patent and copyright protections would unambiguously send demand for these highly-skilled people through the floor. If we believe in markets, then the plunge in demand should also send the wages of people with college and advanced degrees in science, engineering, and other STEM areas through the floor.

In the same vein, the real wages for people not employed in these sectors should jump. If there are no patents or related protections on prescription drugs, instead of spending close to $500 billion this year, we would likely be spending less than $100 billion. Even the most expensive drugs would likely only sell for hundreds of dollars for a year’s prescription. The savings of $400 billion annually, would come to close to $3,000 per family. We would likely save another $100 to $150 billion a year (roughly, another $1,000 per family) on medical equipment, such as kidney dialysis machines, MRIs, and all sorts of other medical equipment which would now be cheap.

There would be a similar story with items like smart phones and computers. The newest iPhone may sell for $100 or less. The same would be true of high end computers that might sell for well over $1,000 today, due to patent and copyright protections. And, of course all of the television shows, movies, video games, and other copyrighted material, for which people now pay considerable sums, would be available at no cost. 

These savings would hugely increase the real wage of workers without highly specialized skills in the STEM-related areas. We would likely be seeing a story in which typical workers were seeing the benefits of the economy’s gains in productivity, as had been true up until 1979. In this world, we would not have to worry about income going from workers to the people who owned the robots, since there would not be especially large returns to the people who owned the robots, just as the makers of washing machines are not making especially large profits. 

The complete elimination of patents and copyrights is of course an extreme scenario, but it is a possible policy option. If we did choose this policy option, we would have a much more equal distribution of income, in spite of having the same technology. In short, the fact that there was a huge increase in inequality associated with the development of technology over the last four decades was the result of policy choices, not the technology.

Policy Choices on Promoting Innovation and Creative Work

If we acknowledge the extreme case, where we literally have no patent or copyright protection, then we have to recognize that there is nothing inherent in our technology that would cause inequality. It is entirely our rules on technology that can cause inequality to increase. 

Basically, the strength and length of patent and copyright protections, and other forms of support for innovation and creative work can be thought of as being like a faucet, that we can turn higher or lower. As a practical matter, we have chosen to turn the faucet much higher in the last four decades. 

We have extended the length of both patent and copyright protection repeatedly during this period. Incredibly, we have even extended the length of copyright protection retroactively, as though it makes sense to give someone incentives for actions long in the past. 

We have also expanded the scope for both patents and copyrights. In the case of patents, we have allowed these monopolies to apply to new areas, such as life forms, software, and business methods. Copyrights were also applied to the Internet. 

In addition, we attached very harsh punitive damages to copyright violations that can exceed the actual damages by many orders of magnitude. This is hugely important for their enforcement. For example, the royalties for an individual song run well under 1 cent per play. This means that even someone who was engaged in fairly large-scale copying, say transferring 10,000 copies, would be liable for actual damages of less than $100. No one would bother to pursue a lawsuit where they stand to gain less than $100, if they win.

However, the law allows for punitive damages that could reach into the tens of thousands of dollars in such cases. Whether or not this is good policy can be debated, but the fact that the harsh punitive damages associated with copyright violations is policy, is not debatable. This policy provides support for a wide range of industries, including movies and television, newspapers, and video games, in addition to recorded music.

Technology Policy, not Technology Creates Inequality

It will be a huge step forward when we can get economists and others involved in debates on inequality that it is our policy on technology that drives inequality, not the technology itself.  That would both get rid of the strawman argument, that the losers in the modern economy somehow failed to adjust to technology, and also open the door to a more serious discussion of technology policy.

As it is, the changes in technology policy have largely taken place in dark corners far out of view of the public, even though the amount of money at stake swamps the amount at issue with contentious programs like food stamps and TANF. There should be serious public debate about both how strong we want patent and copyright protections to be and also whether they are always the best way to promote innovation and creative work, as opposed to alternatives like direct public funding (see Rigged, chapter 5 [it’s free].)

And, an important part of that debate should be the impact of these protections on inequality. It is not clear that we do have to make any sacrifices in the rate of progress of technology to lessen inequality, but it would be reasonable to ask if such sacrifices are worth making. However, raising such questions is not even possible until we talk about intellectual property in an honest way, something that has not happened to date in public policy debates.

It is popular for people, especially economist-type people, to claim that technology has been a major driver of the increase in inequality over the last four decades. This view is very convenient for those on the winning side of the inequality divide, since it implies that the growth in inequality was largely an organic process independent of government policy. Inequality might be an unfortunate outcome, but who would be opposed to the advance of technology?

However convenient the technology driving inequality story might be, it falls down on even the most simple examination of its logic. To take an example that has often been used, there is a concern that displacing workers with robots will lead to a transfer of income from workers to the people who own the robots.

While this comment is often treated as presenting the basic problem created by technology, in fact it does the exact opposite. “Owning” the robot is not a technical relationship, it is a legal one, and therefore one that depends on our laws. 

To be more concrete, the income from owning a robot is not the result of owning the physical robot. Robots will generally be relatively cheap to manufacture. So people will not be deriving large incomes from owning the steel and other components of the robot. The reason some people might get very rich from owning robots is because they own patents and copyrights that are needed for the making of the robots. Without these patent and copyright monopolies, robots would be cheap, like washing machines, and there would be no large-scale upward redistribution associated with them.

 

A World Without Patent and Copyright Monopolies

If it is not already obvious, patent and copyright monopolies are instruments of public policy, not acts of god. We can make them stronger and longer if we want, or shorter and weaker, or not have them at all. The treatment of these monopolies in the constitution is a very good starting point for a clear understanding of the issues. 

Patents and copyrights appear as one of the specific powers granted to Congress (Article I, Section 8, Clause 8). The clause states that Congress has the power:

“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

Note that this is explicitly a power granted to Congress that it can either use or not use, like the power to tax or the power to declare war. Patents and copyrights are not guaranteed as individual rights, like the right to free speech or religion. 

Patents and copyrights are also explicitly tied to the public purpose of promoting “the progress of science and the useful arts.” There is 180 degrees at odds with the idea that a person has an inherent right to get a patent or copyright.

Anyhow, let’s imagine that Congress chooses to eliminate patent and copyright monopolies tomorrow. But, we still have all the technologies that exist today, such as computers, smartphones, artificial intelligence and the rest. In this world, there would likely be little demand for people with skills as software engineers, bio-technicians, or skills in other STEM-related areas that are highly valued in the current economy. (We’ll assume no government funded research at the moment.)  

After all, why would a drug company pay large amounts of money to people to develop new drugs if the drugs can be copied and sold by competitors from the day they enter the market? The same would be true of software developers, makers of medical equipment, computer manufacturers, smartphone companies, and any other product where the cost of research and development was a substantial portion of the price of the product. 

The ending of patent and copyright protections would unambiguously send demand for these highly-skilled people through the floor. If we believe in markets, then the plunge in demand should also send the wages of people with college and advanced degrees in science, engineering, and other STEM areas through the floor.

In the same vein, the real wages for people not employed in these sectors should jump. If there are no patents or related protections on prescription drugs, instead of spending close to $500 billion this year, we would likely be spending less than $100 billion. Even the most expensive drugs would likely only sell for hundreds of dollars for a year’s prescription. The savings of $400 billion annually, would come to close to $3,000 per family. We would likely save another $100 to $150 billion a year (roughly, another $1,000 per family) on medical equipment, such as kidney dialysis machines, MRIs, and all sorts of other medical equipment which would now be cheap.

There would be a similar story with items like smart phones and computers. The newest iPhone may sell for $100 or less. The same would be true of high end computers that might sell for well over $1,000 today, due to patent and copyright protections. And, of course all of the television shows, movies, video games, and other copyrighted material, for which people now pay considerable sums, would be available at no cost. 

These savings would hugely increase the real wage of workers without highly specialized skills in the STEM-related areas. We would likely be seeing a story in which typical workers were seeing the benefits of the economy’s gains in productivity, as had been true up until 1979. In this world, we would not have to worry about income going from workers to the people who owned the robots, since there would not be especially large returns to the people who owned the robots, just as the makers of washing machines are not making especially large profits. 

The complete elimination of patents and copyrights is of course an extreme scenario, but it is a possible policy option. If we did choose this policy option, we would have a much more equal distribution of income, in spite of having the same technology. In short, the fact that there was a huge increase in inequality associated with the development of technology over the last four decades was the result of policy choices, not the technology.

Policy Choices on Promoting Innovation and Creative Work

If we acknowledge the extreme case, where we literally have no patent or copyright protection, then we have to recognize that there is nothing inherent in our technology that would cause inequality. It is entirely our rules on technology that can cause inequality to increase. 

Basically, the strength and length of patent and copyright protections, and other forms of support for innovation and creative work can be thought of as being like a faucet, that we can turn higher or lower. As a practical matter, we have chosen to turn the faucet much higher in the last four decades. 

We have extended the length of both patent and copyright protection repeatedly during this period. Incredibly, we have even extended the length of copyright protection retroactively, as though it makes sense to give someone incentives for actions long in the past. 

We have also expanded the scope for both patents and copyrights. In the case of patents, we have allowed these monopolies to apply to new areas, such as life forms, software, and business methods. Copyrights were also applied to the Internet. 

In addition, we attached very harsh punitive damages to copyright violations that can exceed the actual damages by many orders of magnitude. This is hugely important for their enforcement. For example, the royalties for an individual song run well under 1 cent per play. This means that even someone who was engaged in fairly large-scale copying, say transferring 10,000 copies, would be liable for actual damages of less than $100. No one would bother to pursue a lawsuit where they stand to gain less than $100, if they win.

However, the law allows for punitive damages that could reach into the tens of thousands of dollars in such cases. Whether or not this is good policy can be debated, but the fact that the harsh punitive damages associated with copyright violations is policy, is not debatable. This policy provides support for a wide range of industries, including movies and television, newspapers, and video games, in addition to recorded music.

Technology Policy, not Technology Creates Inequality

It will be a huge step forward when we can get economists and others involved in debates on inequality that it is our policy on technology that drives inequality, not the technology itself.  That would both get rid of the strawman argument, that the losers in the modern economy somehow failed to adjust to technology, and also open the door to a more serious discussion of technology policy.

As it is, the changes in technology policy have largely taken place in dark corners far out of view of the public, even though the amount of money at stake swamps the amount at issue with contentious programs like food stamps and TANF. There should be serious public debate about both how strong we want patent and copyright protections to be and also whether they are always the best way to promote innovation and creative work, as opposed to alternatives like direct public funding (see Rigged, chapter 5 [it’s free].)

And, an important part of that debate should be the impact of these protections on inequality. It is not clear that we do have to make any sacrifices in the rate of progress of technology to lessen inequality, but it would be reasonable to ask if such sacrifices are worth making. However, raising such questions is not even possible until we talk about intellectual property in an honest way, something that has not happened to date in public policy debates.

It’s amazing how Samuelson can continue to push his concerns about the budget deficit when all the evidence points to it not being a problem. In his latest tirade he tells us the problems of the deficit:

“First: As government debt piles up, it increasingly crowds out private investment. This, in turn, weakens productivity growth, which is a major source of higher living standards. With interest rates now so low, this doesn’t seem a problem — which is why it is.

“Second: The truly scary possibility is a run on the dollar. If huge budget deficits subvert global confidence in the dollar — causing investors to dump the currency — restoring that confidence might require deep cuts in federal spending and steep increases in taxes.”

Okay, that first one is a real head scratcher. The classic story is that large budget deficits lead to high interest rates, which then crowd out investment. That slows productivity growth, which makes us poorer in the future.

The problem with this story in the current environment is that interest rates are not high, they are extraordinarily low. The interest rate on the 10-year Treasury bill is hovering around 1.7 percent. That compares to rates around 4.5 percent back in the late 1990s when we were running budget surpluses. (Inflation in the two periods is comparable, so comparing the nominal rates gives us a rough comparison of the real rates.) Samuelson acknowleges that rates are low, which he says is why the budget deficit is a problem.

This is a bit like being accused of murder, then bringing in the alleged victim alive and healthy, and then have the prosecutor tell you that this is the problem with your defense. This is loon tune land. If interest rates are low, they cannot be crowding out investment: full stop.

The run on the dollar story is also problematic for anyone who gives it a moment’s thought. The real value of the dollar is actually quite high now, about 20 percent higher than it was a decade ago. Let’s say that it fell by 20 percent to its levels of 2010, would that be a crisis? That’s a bit hard to see.

Could it fall further? Well, how would the EU, China, Japan and other countries feel about us putting 25-30 percent tariffs on their exports to us? A drop in the dollar of this magnitude is equivalent to a tariff of the same size, except it is worse for their trade position. A drop in the dollar of 25-30 percent is also equivalent to a subsidy to our exports of 25 to 30 percent. The reality is that an uncontrolled fall in the dollar is at least as much a threat to our trading partners as it is to the United States, which is why we don’t have to worry about it as long as we have an otherwise healthy economy that produces tens of trillions of dollars of goods and services.

There are a couple of other points about Samuelson’s piece that need correcting. He tells readers:

“Let’s concede that higher deficits are one problem that can’t be blamed on President Trump. Since the 1970s and 1980s, Democrats and Republicans alike have evaded the hard questions required to balance the budget.”

Umm, no, we absolutely can blame higher deficits on Donald Trump. The deficit was relatively modest when he took office, with the debt to GDP ratio nearly stable. This is easy to show, we can just look the projections from the Congressional Budget Office. In January of 2017, before Trump’s tax cuts, we were projected to have a deficit this year of 2.9 percent of GDP in 2020. The most recent projections show a deficit of 4.5 percent of GDP.

The difference is entirely attributable to a drop in projected tax revenue equal to 1.8 percent of GDP. In other words, we can absolutely attribute our large current deficit to Donald Trump’s tax cuts.

Now just to qualify this point, the larger deficit was a good thing. It has helped to boost the economy, reduce the unemployment rate, and give workers more bargaining power to secure wage gains. Increasing the deficit by giving more money to rich people was just about the worse way to do this (we could have spent the money on education, infrastructure, clean energy etc.), but we are still better off with this larger deficit than a smaller one.

The last point is that Samuelson ignores the costs of government granted patent and copyright monopolies. These forms of implicit debt dwarf the actual debt over which Samuelson and others obsess, but I guess forcing people to pay hundreds of billions extra each year to drug and software companies is not the sort of thing that bothers Samuelson.

It’s amazing how Samuelson can continue to push his concerns about the budget deficit when all the evidence points to it not being a problem. In his latest tirade he tells us the problems of the deficit:

“First: As government debt piles up, it increasingly crowds out private investment. This, in turn, weakens productivity growth, which is a major source of higher living standards. With interest rates now so low, this doesn’t seem a problem — which is why it is.

“Second: The truly scary possibility is a run on the dollar. If huge budget deficits subvert global confidence in the dollar — causing investors to dump the currency — restoring that confidence might require deep cuts in federal spending and steep increases in taxes.”

Okay, that first one is a real head scratcher. The classic story is that large budget deficits lead to high interest rates, which then crowd out investment. That slows productivity growth, which makes us poorer in the future.

The problem with this story in the current environment is that interest rates are not high, they are extraordinarily low. The interest rate on the 10-year Treasury bill is hovering around 1.7 percent. That compares to rates around 4.5 percent back in the late 1990s when we were running budget surpluses. (Inflation in the two periods is comparable, so comparing the nominal rates gives us a rough comparison of the real rates.) Samuelson acknowleges that rates are low, which he says is why the budget deficit is a problem.

This is a bit like being accused of murder, then bringing in the alleged victim alive and healthy, and then have the prosecutor tell you that this is the problem with your defense. This is loon tune land. If interest rates are low, they cannot be crowding out investment: full stop.

The run on the dollar story is also problematic for anyone who gives it a moment’s thought. The real value of the dollar is actually quite high now, about 20 percent higher than it was a decade ago. Let’s say that it fell by 20 percent to its levels of 2010, would that be a crisis? That’s a bit hard to see.

Could it fall further? Well, how would the EU, China, Japan and other countries feel about us putting 25-30 percent tariffs on their exports to us? A drop in the dollar of this magnitude is equivalent to a tariff of the same size, except it is worse for their trade position. A drop in the dollar of 25-30 percent is also equivalent to a subsidy to our exports of 25 to 30 percent. The reality is that an uncontrolled fall in the dollar is at least as much a threat to our trading partners as it is to the United States, which is why we don’t have to worry about it as long as we have an otherwise healthy economy that produces tens of trillions of dollars of goods and services.

There are a couple of other points about Samuelson’s piece that need correcting. He tells readers:

“Let’s concede that higher deficits are one problem that can’t be blamed on President Trump. Since the 1970s and 1980s, Democrats and Republicans alike have evaded the hard questions required to balance the budget.”

Umm, no, we absolutely can blame higher deficits on Donald Trump. The deficit was relatively modest when he took office, with the debt to GDP ratio nearly stable. This is easy to show, we can just look the projections from the Congressional Budget Office. In January of 2017, before Trump’s tax cuts, we were projected to have a deficit this year of 2.9 percent of GDP in 2020. The most recent projections show a deficit of 4.5 percent of GDP.

The difference is entirely attributable to a drop in projected tax revenue equal to 1.8 percent of GDP. In other words, we can absolutely attribute our large current deficit to Donald Trump’s tax cuts.

Now just to qualify this point, the larger deficit was a good thing. It has helped to boost the economy, reduce the unemployment rate, and give workers more bargaining power to secure wage gains. Increasing the deficit by giving more money to rich people was just about the worse way to do this (we could have spent the money on education, infrastructure, clean energy etc.), but we are still better off with this larger deficit than a smaller one.

The last point is that Samuelson ignores the costs of government granted patent and copyright monopolies. These forms of implicit debt dwarf the actual debt over which Samuelson and others obsess, but I guess forcing people to pay hundreds of billions extra each year to drug and software companies is not the sort of thing that bothers Samuelson.

(This piece first appeared on my Patreon page.)

Last week, as Donald Trump was trying to distract attention from his impeachment trial, he was holding events touting his big trade victories. The two items for celebration were the new NAFTA, dubbed by Trump as the U.S.-Mexico-Canada Agreement, and a “phase one” trade deal with China. While these deals may be useful props for the impeachment distraction, they are unlikely to offer much to the manufacturing workers who Trump claims are at the center of his trade agenda.

The new NAFTA may lead to some modest shifts of employment in the auto industry, but its impact on the larger manufacturing sector will be invisible for all practical purposes. The China pact includes bizarre commitments of Chinese purchases of specific items. It’s not clear how these would be enforced, but if they choose to comply with the treaty and play games, there is nothing that prevents China from meeting its commitments by being an intermediary between the United States and other importers of U.S. goods.

Specifically, if China needs to buy another $50 billion of U.S. manufactured goods to meet its commitments, it could simply make $50 billion in purchases and then sell them to current U.S. importers in Japan, Korea, and elsewhere. That leads to no net gain in U.S. exports, but would comply with China’s trade commitments.

The markets have already indicated that they are not impressed with the impact of this deal on U.S. exports. The price of major farm commodities, like soy beans and wheat, remain well below their levels earlier in the decade. If there was an expectation that China’s purchases were going to substantially improve the fate of America’s farmers, then we should have seen the price of these products soaring after the outlines of the deal became known.

Trump punted on the one issue that likely would have made a substantial difference in the U.S. trade balance, the value of the dollar. After running around the country for two years denouncing China as a “world class currency manipulator,” the deal does nothing to change the exchange rate between the Chinese yuan and the dollar. (The term “manipulation” implies something which is surely not appropriate in this case. China openly manages the value of its currency, so we don’t have to catch them doing something secretly in the dark.)

Anyhow, it will take some time to see how these deals fully play out in practice, but we do have plenty of data to assess how manufacturing workers have been doing thus far under Trump. The answer for the most part is not very good.

At the most basic level, employment in the sector has been virtually flat since July, rising by a total of just 5,000 over this period. Manufacturing employment fell 12,000 in December. The situation looks considerably worse if we look at hours worked. The index of aggregate hours worked in the sector peaked in December of last year and has dropped 0.5 percent over the last year.

The wage picture looks even worse. Wage growth in manufacturing has consistently lagged overall wage growth in the private sector under Trump. The average hourly wage for manufacturing workers has risen by less than 2.3 percent annually over the last three years compared to almost 3.0 percent for the private sector as a whole. In fact, the average hourly wage for the private sector as a whole exceeded the average for manufacturing for the first time ever in May of 2018.

The situation looks even worse if we look at the weekly wage. While average weekly earnings have risen an average of 2.5 percent in the Trump years, in the last year they have risen just 1.3 percent. This means that the real weekly wage for manufacturing workers had fallen by roughly 1.0 percent over the last year.

While manufacturing has been hit hard by competition from low paid workers in the developing world, it has also been hit by a plunge in the unionization rate. The biggest hit was from 2000 to 2007, as the trade deficit exploded. The country lost nearly 40 percent of unionized workers in manufacturing in these years.

The number of union members in manufacturing fell further in the Great Recession. It then recovered somewhat as employment expanded, but peaked in 2013 and has been headed in a mostly downward path the last six years. The number of union members in manufacturing in 2019 was just over 46 percent of the number in 2000. The 8.7 percent current unionization rate in the sector is somewhat above the private sector average of 6.4 percent, but below the economy-wide average of 10.3 percent.

With this sharp drop in unionization rates, it is not surprising that manufacturing workers have not been able to secure wage gains in step with the rest of the workforce. The few new jobs that have been added in manufacturing in this recovery have mostly not been union jobs or especially well-paying.

This has meant that the industrial Midwest, which is still more heavily unionized, has largely been bypassed by the growth in manufacturing employment during the Trump years. Here is the story for the five Midwest states that were considered swing states in the last election.

Change in Manufacturing Employment

                                                                          Last Year                             Since January 2017

Michigan                                                             -6,100                                    +9,800 (1.5 percent)

Minnesota                                                          -1,900                                    +1,900 (0.6 percent)

Ohio                                                                   -2,200                                    +12,100 (1.8 percent)

Pennsylvania                                                      -4,500                                    +3,700 (0.6 percent)

Wisconsin                                                          -6,000                                    +4,100 (0.9 percent)

Source: Bureau of Labor Statistics.

By comparison, manufacturing employment for the country as whole is up 487,000 since Trump came into office, an increase of 4.0 percent. This means all of these states have seen gains in manufacturing far below the national average.

The prospects for the immediate future do not look much better. The Federal Reserve reported that manufacturing production increased a modest 0.2 percent in December, but that still left it 0.3 percent below its August level and 1.3 percent below its year ago level. Assuming even modest rates of productivity growth, production would have to increase by 1.0-1.5 percent annually just keep employment levels constant.

Other labor market measures also indicate weakness in manufacturing, most notably data on job openings. According to the Bureau of Labor Statistics, the rate of job openings in manufacturing was 2.9 percent in November, down from 3.8 percent last year. The one-month diffusion index, which reports the percentage of industries in the sector that expect to increase hiring next month, was just 44.7 last month. That compares to a reading of 65.1 in December of 2018 and 71.7 in December of 2017. These measures certainly suggest that a hiring boom in manufacturing is not imminent.

In fairness, it is difficult to know at this point how Trump’s trade deals, especially the one with China, will play out.  However, to date, Trump certainly has not been able to produce big gains for the manufacturing industries who he had promised to help in his campaign. The trade deficit has actually risen as a share of GDP in the first three years of his administration.

The major impact of his trade war to date has been to reduce manufacturing output and investment by both raising costs with his tariffs and increasing uncertainty about future trade arrangements. Investment in equipment and structures has been falling the last three quarters. There is still some time where things could turn around before the election, but with each passing month this is looking less likely.

(This piece first appeared on my Patreon page.)

Last week, as Donald Trump was trying to distract attention from his impeachment trial, he was holding events touting his big trade victories. The two items for celebration were the new NAFTA, dubbed by Trump as the U.S.-Mexico-Canada Agreement, and a “phase one” trade deal with China. While these deals may be useful props for the impeachment distraction, they are unlikely to offer much to the manufacturing workers who Trump claims are at the center of his trade agenda.

The new NAFTA may lead to some modest shifts of employment in the auto industry, but its impact on the larger manufacturing sector will be invisible for all practical purposes. The China pact includes bizarre commitments of Chinese purchases of specific items. It’s not clear how these would be enforced, but if they choose to comply with the treaty and play games, there is nothing that prevents China from meeting its commitments by being an intermediary between the United States and other importers of U.S. goods.

Specifically, if China needs to buy another $50 billion of U.S. manufactured goods to meet its commitments, it could simply make $50 billion in purchases and then sell them to current U.S. importers in Japan, Korea, and elsewhere. That leads to no net gain in U.S. exports, but would comply with China’s trade commitments.

The markets have already indicated that they are not impressed with the impact of this deal on U.S. exports. The price of major farm commodities, like soy beans and wheat, remain well below their levels earlier in the decade. If there was an expectation that China’s purchases were going to substantially improve the fate of America’s farmers, then we should have seen the price of these products soaring after the outlines of the deal became known.

Trump punted on the one issue that likely would have made a substantial difference in the U.S. trade balance, the value of the dollar. After running around the country for two years denouncing China as a “world class currency manipulator,” the deal does nothing to change the exchange rate between the Chinese yuan and the dollar. (The term “manipulation” implies something which is surely not appropriate in this case. China openly manages the value of its currency, so we don’t have to catch them doing something secretly in the dark.)

Anyhow, it will take some time to see how these deals fully play out in practice, but we do have plenty of data to assess how manufacturing workers have been doing thus far under Trump. The answer for the most part is not very good.

At the most basic level, employment in the sector has been virtually flat since July, rising by a total of just 5,000 over this period. Manufacturing employment fell 12,000 in December. The situation looks considerably worse if we look at hours worked. The index of aggregate hours worked in the sector peaked in December of last year and has dropped 0.5 percent over the last year.

The wage picture looks even worse. Wage growth in manufacturing has consistently lagged overall wage growth in the private sector under Trump. The average hourly wage for manufacturing workers has risen by less than 2.3 percent annually over the last three years compared to almost 3.0 percent for the private sector as a whole. In fact, the average hourly wage for the private sector as a whole exceeded the average for manufacturing for the first time ever in May of 2018.

The situation looks even worse if we look at the weekly wage. While average weekly earnings have risen an average of 2.5 percent in the Trump years, in the last year they have risen just 1.3 percent. This means that the real weekly wage for manufacturing workers had fallen by roughly 1.0 percent over the last year.

While manufacturing has been hit hard by competition from low paid workers in the developing world, it has also been hit by a plunge in the unionization rate. The biggest hit was from 2000 to 2007, as the trade deficit exploded. The country lost nearly 40 percent of unionized workers in manufacturing in these years.

The number of union members in manufacturing fell further in the Great Recession. It then recovered somewhat as employment expanded, but peaked in 2013 and has been headed in a mostly downward path the last six years. The number of union members in manufacturing in 2019 was just over 46 percent of the number in 2000. The 8.7 percent current unionization rate in the sector is somewhat above the private sector average of 6.4 percent, but below the economy-wide average of 10.3 percent.

With this sharp drop in unionization rates, it is not surprising that manufacturing workers have not been able to secure wage gains in step with the rest of the workforce. The few new jobs that have been added in manufacturing in this recovery have mostly not been union jobs or especially well-paying.

This has meant that the industrial Midwest, which is still more heavily unionized, has largely been bypassed by the growth in manufacturing employment during the Trump years. Here is the story for the five Midwest states that were considered swing states in the last election.

Change in Manufacturing Employment

                                                                          Last Year                             Since January 2017

Michigan                                                             -6,100                                    +9,800 (1.5 percent)

Minnesota                                                          -1,900                                    +1,900 (0.6 percent)

Ohio                                                                   -2,200                                    +12,100 (1.8 percent)

Pennsylvania                                                      -4,500                                    +3,700 (0.6 percent)

Wisconsin                                                          -6,000                                    +4,100 (0.9 percent)

Source: Bureau of Labor Statistics.

By comparison, manufacturing employment for the country as whole is up 487,000 since Trump came into office, an increase of 4.0 percent. This means all of these states have seen gains in manufacturing far below the national average.

The prospects for the immediate future do not look much better. The Federal Reserve reported that manufacturing production increased a modest 0.2 percent in December, but that still left it 0.3 percent below its August level and 1.3 percent below its year ago level. Assuming even modest rates of productivity growth, production would have to increase by 1.0-1.5 percent annually just keep employment levels constant.

Other labor market measures also indicate weakness in manufacturing, most notably data on job openings. According to the Bureau of Labor Statistics, the rate of job openings in manufacturing was 2.9 percent in November, down from 3.8 percent last year. The one-month diffusion index, which reports the percentage of industries in the sector that expect to increase hiring next month, was just 44.7 last month. That compares to a reading of 65.1 in December of 2018 and 71.7 in December of 2017. These measures certainly suggest that a hiring boom in manufacturing is not imminent.

In fairness, it is difficult to know at this point how Trump’s trade deals, especially the one with China, will play out.  However, to date, Trump certainly has not been able to produce big gains for the manufacturing industries who he had promised to help in his campaign. The trade deficit has actually risen as a share of GDP in the first three years of his administration.

The major impact of his trade war to date has been to reduce manufacturing output and investment by both raising costs with his tariffs and increasing uncertainty about future trade arrangements. Investment in equipment and structures has been falling the last three quarters. There is still some time where things could turn around before the election, but with each passing month this is looking less likely.

It’s great that we have investigative reporters to expose this sort of corruption. The break for electric cars, which the piece only reports as costing California $32 million a year (that comes to 80 cents per resident per year), is explicitly discussed as a hit on the working class.

It’s great that we have investigative reporters to expose this sort of corruption. The break for electric cars, which the piece only reports as costing California $32 million a year (that comes to 80 cents per resident per year), is explicitly discussed as a hit on the working class.

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