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.

In a New York Times column today, William Cohan, a writer and former investment banker, warned of impending disaster if the Federal Reserve Board does not quickly move away from its low interest rate policy. Cohan tells readers:

“But many people wonder if Jerome Powell, the chairman of the Fed, has reckoned with the power of the easy-money monster the central bank spawned all those years ago. They worry that Mr. Powell has helped inflate bubbles in housing, lumber, copper, Bitcoin and stocks, bonds and other assets. The evidence is mounting: The Consumer Price Index, a gauge of inflation, rose 5 percent in May from a severely depressed number a year earlier — the fastest rate in nearly 13 years. And that’s just one worrisome indicator.”

The piece goes on to warn of all the horrible things to come if Powell does not soon start to raise interest rates. The basic story is that we have bubbles in many markets that will collapse, costing investors in these bubbles hundreds of billions, or  even trillions, of dollars. [It is worth noting that lumber prices have been plummeting in the last few weeks.]

If this sounds familiar, that might be because Mr.  Cohan had a very similar column in the NYT a couple of years ago. In August of 2019, Cohan warned that “only the Fed can save us now,” and urged Fed Chair Jerome Powell to stand up to Trump and raise interest rates. The piece begins:

“Here’s the moment I realized the next financial crisis is inevitable.”

We find out that this was the moment when he realized he was listening to a speech where Powell indicated that he had no plans to raise interest rates.

Later Cohan explains:

“But although a sense of euphoria spread through the room, as well as through debt and equity markets, I was overcome by a sense of dread. A decade of historically low interest rates has begun to warp our economy. As we learned to our collective horror during the 2008 financial crisis, a period of sustained low interest rates forces investors on a desperate search for higher yields, inflating asset prices and the risks of owning loans and debt of all kinds.”

To  be clear, there are undoubtedly many bubbles in the U.S. economy right now. Bitcoin is the most obvious example, but we also have the proliferation of non-fungible tokens, as well as many stock prices that bear no relationship to plausible estimates of future earnings.

But none of this sets the stage for a 2008-09 disaster. In the years leading up to the Great Recession, the housing bubble was driving the economy. This was easy to see for anyone who bothered to look at the GDP data the Commerce Department publishes every quarter. Residential construction had increased from its normal rate, which is around 3.5 percent of GDP, to a peak of 6.8 percent of GDP. Similarly, soaring house prices led to a consumption boom, as people spent based on the bubble created equity in their home.

When the bubble collapsed, and housing construction fell to less than 2.0 percent of GDP due to overbuilding during the bubble. There was nothing to replace the loss of 4.8 percentage points of GDP or annual demand (more than $1 trillion in today’s economy). Similarly, the bubble driven consumption boom collapsed, costing us another 3-4 percentage points in demand.

This was the story of the Great Recession. The financial crisis was just the market working its magic on the banks and other financial institutions that had been reckless in issuing and marketing loans.

If we were to see a similar collapse in asset prices today, it would have no comparable impact on the real economy. If the roughly $1 trillion market capitalization in the digital currency market went to zero tomorrow, how would that affect the real economy? Some Bitcoin millionaires and billionaires would be very unhappy, but so what? There would be no economy-wide plunge in consumption. The same is true with asset prices in other markets.

Could this tank some banks that made bad loans? Sure, that’s what markets are for. Companies that are not competent are supposed to go out of business. The idea that this will create some financial crisis where we can’t undertake normal business transactions has zero foundation in reality.

In short, Mr. Cohan’s piece is just irresponsible fearmongering. There apparently is a big market for this stuff, but this is little reason to take it seriously.

 

Addendum

I should have mentioned that William Cohan’s columns forecasting disaster are a regular feature in the NYT, see here, here, and here.

In a New York Times column today, William Cohan, a writer and former investment banker, warned of impending disaster if the Federal Reserve Board does not quickly move away from its low interest rate policy. Cohan tells readers:

“But many people wonder if Jerome Powell, the chairman of the Fed, has reckoned with the power of the easy-money monster the central bank spawned all those years ago. They worry that Mr. Powell has helped inflate bubbles in housing, lumber, copper, Bitcoin and stocks, bonds and other assets. The evidence is mounting: The Consumer Price Index, a gauge of inflation, rose 5 percent in May from a severely depressed number a year earlier — the fastest rate in nearly 13 years. And that’s just one worrisome indicator.”

The piece goes on to warn of all the horrible things to come if Powell does not soon start to raise interest rates. The basic story is that we have bubbles in many markets that will collapse, costing investors in these bubbles hundreds of billions, or  even trillions, of dollars. [It is worth noting that lumber prices have been plummeting in the last few weeks.]

If this sounds familiar, that might be because Mr.  Cohan had a very similar column in the NYT a couple of years ago. In August of 2019, Cohan warned that “only the Fed can save us now,” and urged Fed Chair Jerome Powell to stand up to Trump and raise interest rates. The piece begins:

“Here’s the moment I realized the next financial crisis is inevitable.”

We find out that this was the moment when he realized he was listening to a speech where Powell indicated that he had no plans to raise interest rates.

Later Cohan explains:

“But although a sense of euphoria spread through the room, as well as through debt and equity markets, I was overcome by a sense of dread. A decade of historically low interest rates has begun to warp our economy. As we learned to our collective horror during the 2008 financial crisis, a period of sustained low interest rates forces investors on a desperate search for higher yields, inflating asset prices and the risks of owning loans and debt of all kinds.”

To  be clear, there are undoubtedly many bubbles in the U.S. economy right now. Bitcoin is the most obvious example, but we also have the proliferation of non-fungible tokens, as well as many stock prices that bear no relationship to plausible estimates of future earnings.

But none of this sets the stage for a 2008-09 disaster. In the years leading up to the Great Recession, the housing bubble was driving the economy. This was easy to see for anyone who bothered to look at the GDP data the Commerce Department publishes every quarter. Residential construction had increased from its normal rate, which is around 3.5 percent of GDP, to a peak of 6.8 percent of GDP. Similarly, soaring house prices led to a consumption boom, as people spent based on the bubble created equity in their home.

When the bubble collapsed, and housing construction fell to less than 2.0 percent of GDP due to overbuilding during the bubble. There was nothing to replace the loss of 4.8 percentage points of GDP or annual demand (more than $1 trillion in today’s economy). Similarly, the bubble driven consumption boom collapsed, costing us another 3-4 percentage points in demand.

This was the story of the Great Recession. The financial crisis was just the market working its magic on the banks and other financial institutions that had been reckless in issuing and marketing loans.

If we were to see a similar collapse in asset prices today, it would have no comparable impact on the real economy. If the roughly $1 trillion market capitalization in the digital currency market went to zero tomorrow, how would that affect the real economy? Some Bitcoin millionaires and billionaires would be very unhappy, but so what? There would be no economy-wide plunge in consumption. The same is true with asset prices in other markets.

Could this tank some banks that made bad loans? Sure, that’s what markets are for. Companies that are not competent are supposed to go out of business. The idea that this will create some financial crisis where we can’t undertake normal business transactions has zero foundation in reality.

In short, Mr. Cohan’s piece is just irresponsible fearmongering. There apparently is a big market for this stuff, but this is little reason to take it seriously.

 

Addendum

I should have mentioned that William Cohan’s columns forecasting disaster are a regular feature in the NYT, see here, here, and here.

If the waitress works in an upscale restaurant and earns a decent living, there is a good chance that she is paying a higher tax rate than a private equity partner. The reason is that private equity (PE) partners get most of their pay in the form of “carried interest.” This is money that is paid to them as a share of the returns on the money they manage. Since private equity partners are rich and powerful, their carried interest payments are taxed at the capital gains tax rate of 20 percent, instead of the 37 percent top tax rate that people earning millions a year would be paying.

The ostensible rationale for allowing PE partners to pay a lower tax rate on their carried interest is that these payments involve risk. If the funds don’t meet some threshold rate of return, then they don’t earn any money.

The New York Times had a major piece on tax avoidance and evasion by private equity partners, which gave this rationale. However, the piece neglected to point out that millions of workers take this sort of risk, since they get paid, in large part, on commission. This list would include realtors, car salespeople, and waiters and waitresses. In all of these cases, the money earned as a commission is taxed as normal income. It is only PE partners, or hedge fund and venture capital partners, that get to pay a lower tax rate.

The tax savings for PE partners are substantial. For a PE partner earning $10 million a year, the savings between the current 37 percent top marginal rate and the 20 percent capital gains rate would be roughly $1.7 million a year. That comes to more than 1,100 food stamp person years.

If the waitress works in an upscale restaurant and earns a decent living, there is a good chance that she is paying a higher tax rate than a private equity partner. The reason is that private equity (PE) partners get most of their pay in the form of “carried interest.” This is money that is paid to them as a share of the returns on the money they manage. Since private equity partners are rich and powerful, their carried interest payments are taxed at the capital gains tax rate of 20 percent, instead of the 37 percent top tax rate that people earning millions a year would be paying.

The ostensible rationale for allowing PE partners to pay a lower tax rate on their carried interest is that these payments involve risk. If the funds don’t meet some threshold rate of return, then they don’t earn any money.

The New York Times had a major piece on tax avoidance and evasion by private equity partners, which gave this rationale. However, the piece neglected to point out that millions of workers take this sort of risk, since they get paid, in large part, on commission. This list would include realtors, car salespeople, and waiters and waitresses. In all of these cases, the money earned as a commission is taxed as normal income. It is only PE partners, or hedge fund and venture capital partners, that get to pay a lower tax rate.

The tax savings for PE partners are substantial. For a PE partner earning $10 million a year, the savings between the current 37 percent top marginal rate and the 20 percent capital gains rate would be roughly $1.7 million a year. That comes to more than 1,100 food stamp person years.

There is plenty of evidence at this point that CEO pay bears little relationship to returns to shareholders. Yet, it is an article of faith in policy circles, especially progressive policy circles, that companies are being run to maximize returns to shareholders.

This is why I loved this story. According to the NYT, Chad Richison, the CEO of Paycom, had a pay package that was worth $211 million. When it came up for vote of shareholders in a say-on-pay ballot, it was voted down. The article tells readers:

“Shareholders opposing the compensation won a say-on-pay vote at the company, and a majority also withheld votes from a director on the board’s compensation committee. Under Paycom’s governance guidelines, the director had to tender his resignation. The board’s nominating and corporate governance committee did not accept it, however, instead reaffirming his appointment, according to a company filing.”

So we have a story where the shareholders explicitly rejected a CEO pay package and voted to remove the director most responsible for the pay package. But their votes on both are ignored and the director stays on the job and the CEO keeps the cash.

Can someone explain how this is maximizing shareholder value?

 

 

There is plenty of evidence at this point that CEO pay bears little relationship to returns to shareholders. Yet, it is an article of faith in policy circles, especially progressive policy circles, that companies are being run to maximize returns to shareholders.

This is why I loved this story. According to the NYT, Chad Richison, the CEO of Paycom, had a pay package that was worth $211 million. When it came up for vote of shareholders in a say-on-pay ballot, it was voted down. The article tells readers:

“Shareholders opposing the compensation won a say-on-pay vote at the company, and a majority also withheld votes from a director on the board’s compensation committee. Under Paycom’s governance guidelines, the director had to tender his resignation. The board’s nominating and corporate governance committee did not accept it, however, instead reaffirming his appointment, according to a company filing.”

So we have a story where the shareholders explicitly rejected a CEO pay package and voted to remove the director most responsible for the pay package. But their votes on both are ignored and the director stays on the job and the CEO keeps the cash.

Can someone explain how this is maximizing shareholder value?

 

 

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The consumer price index (CPI) rose 0.6 percent in May, with the core index (which excludes food and energy) rising at an even more rapid 0.7 percent. This brought the increases in the overall and core index over the last year to 5.0 and 3.8 percent, respectively.

Does this mean the inflation hawks were right? Did Biden’s recovery package throw too much wood on the fire and is now setting off an inflationary spiral?

A little closer look at the numbers indicates that caution is still advised. First of all, prices plunged last April and May of last year, as the economy was shutting down in response to the pandemic. This means that the year-over-year comparison is not very informative.

To get a more honest evaluation, we should look at the rate of change of prices since February of 2020, before the pandemic was having an impact. Using this as a base, the overall CPI has increased at a 3.0 percent annual rate, while the core has increased at a 2.6 percent annual rate.

The 2.6 percent rate is somewhat above the Fed’s 2.0 percent target, but the Fed targets the personal consumption expenditure deflator (PCE), not the CPI. For coverage and methodology reasons, the core PCE is generally 0.2-0.3 percentage points lower than the core CPI.

Also, as the Fed has stated explicitly, the 2.0 percent target is an average, not a ceiling. Given that inflation has consistently run well below 2.0 percent, to maintain a 2.0 percent average the inflation rate has to be above 2.0 percent on occasion, so there is nothing in the data to indicate that we have a problem, accepting the Fed’s target.

 

The Used Car Crisis

In fact, even this above 2.0 percent inflation figure can be a bit deceptive. Used car prices have soared in recent months, rising 7.3 percent in May and 10.0 percent in April. (These are monthly increases, not annual rates of increase.) If we take the period since February of 2020, used car prices have increased at a 23.2 percent annual rate.

The weight of used cars in the core CPI is 3.8 percent. This means that this jump in used car prices alone added almost 0.9 percentage points to the rate of inflation in the core index in the months since the pandemic began. That means that if we pull used cars out of the core index, it would have been increasing at just under a 1.8 percent annual rate since the pandemic began, well below the Fed’s target.

The reason for the jump in used car prices is not a mystery. The worldwide shortage of semi-conductors has slowed auto production, leading several assembly lines to shut down for a period of time. (Most are now back up and running.) The shortage of new cars led many people to turn to buying used cars, sending their prices soaring.

This shortage of cars is a problem. People need cars for transportation and rental car companies need cars to restock their fleets, which they sold off at the start of the pandemic to conserve cash. But this is clearly a temporary problem. Semi-conductor output will increase as existing plants add capacity and new ones come back on line. When that happens, we are likely to see the price of used cars return to something comparable to their pre-pandemic levels. New car prices, which have also risen rapidly, should also fall back in line with pre-pandemic trends.

If we take the car story out of the picture, there is not much of a story of run-away inflation. The prices of some items have been rising rapidly, but this is a bounce back from price declines at the start of the pandemic. Apparel prices jumped 1.2 percent in May, car insurance 0.7 percent, and air fares 7.0 percent. These indexes are respectively 2.2 percent, 0.2 percent, and 6.3 percent below the February 2020 level.

Inflation in the rent indexes remains well contained. The rent proper index rose 0.2 percent in May, while the owners equivalent rent index rose 0.3 percent. Over the last year, they are up 1.8 percent and 2.1 percent, respectively. The medical care index, which has been a major source of inflation, has risen at just a 1.7 percent annual rate since the pandemic began. The index for college tuition has risen at less than a 0.6 percent annual rate.

We will see more erratic price movements as the economy continues to reopen. There will be some spot shortages of different items and there will be cases where strong demand gives workers the bargaining power to raise their wages, but there is not a story of an inflation crisis in these data.

 

Productivity

It is worth mentioning once again the importance of productivity growth in the inflation story. Productivity growth had been running at just a 1.0 percent annual rate in the decade before the pandemic. In the last year, it rose at a 4.1 percent rate. The data we have for the second quarter, indicates that we will see extraordinarily high productivity growth again in the current quarter.

While no one expects anything like a 4.1 percent rate of productivity growth to continue, we may well be seeing productivity growth on a faster track. Businesses were forced to find new ways to operate in the pandemic.[1] In many cases this will lead to continuing gains in productivity. Even an increase to a 2.0 percent rate of productivity growth will hugely reduce the risks of inflation.

It is important to remember that the 1970s inflation was associated with a sharp drop in productivity growth. Productivity had been increasing at 3.0 percent annual rate in the long post-war boom from 1947 to 1973. It slowed to just over 1.0 percent from 1973 to 1980. This slowdown was a major cause of inflationary pressure during the decade. If productivity growth increases instead, it will act to alleviate inflation.

Anyhow, we will certainly need more quarters’ data before we can say anything definitive about productivity growth. The series is highly erratic and we could see sharp reversals of the recent increases. But if the growth over the last year turns out not to be fluke or due to measurement error, it’s hard to see how we can have too much to worry about with inflation.

[1] Not all the increases in efficiency will show up in productivity data. For example, the savings in time and commuting expenditures for people who can now work remotely, will not appear as an increase in productivity. To take another example, my wife had to have a consultation with a medical specialist half-way across the country. In the pre-pandemic era, this likely would have required a 3-day trip, with two flights each way and two nights in a hotel. Instead, she just had to put an hour aside for a Zoom meeting. This is an enormous savings in resources, but does not show up in the productivity data at all.  

 

The consumer price index (CPI) rose 0.6 percent in May, with the core index (which excludes food and energy) rising at an even more rapid 0.7 percent. This brought the increases in the overall and core index over the last year to 5.0 and 3.8 percent, respectively.

Does this mean the inflation hawks were right? Did Biden’s recovery package throw too much wood on the fire and is now setting off an inflationary spiral?

A little closer look at the numbers indicates that caution is still advised. First of all, prices plunged last April and May of last year, as the economy was shutting down in response to the pandemic. This means that the year-over-year comparison is not very informative.

To get a more honest evaluation, we should look at the rate of change of prices since February of 2020, before the pandemic was having an impact. Using this as a base, the overall CPI has increased at a 3.0 percent annual rate, while the core has increased at a 2.6 percent annual rate.

The 2.6 percent rate is somewhat above the Fed’s 2.0 percent target, but the Fed targets the personal consumption expenditure deflator (PCE), not the CPI. For coverage and methodology reasons, the core PCE is generally 0.2-0.3 percentage points lower than the core CPI.

Also, as the Fed has stated explicitly, the 2.0 percent target is an average, not a ceiling. Given that inflation has consistently run well below 2.0 percent, to maintain a 2.0 percent average the inflation rate has to be above 2.0 percent on occasion, so there is nothing in the data to indicate that we have a problem, accepting the Fed’s target.

 

The Used Car Crisis

In fact, even this above 2.0 percent inflation figure can be a bit deceptive. Used car prices have soared in recent months, rising 7.3 percent in May and 10.0 percent in April. (These are monthly increases, not annual rates of increase.) If we take the period since February of 2020, used car prices have increased at a 23.2 percent annual rate.

The weight of used cars in the core CPI is 3.8 percent. This means that this jump in used car prices alone added almost 0.9 percentage points to the rate of inflation in the core index in the months since the pandemic began. That means that if we pull used cars out of the core index, it would have been increasing at just under a 1.8 percent annual rate since the pandemic began, well below the Fed’s target.

The reason for the jump in used car prices is not a mystery. The worldwide shortage of semi-conductors has slowed auto production, leading several assembly lines to shut down for a period of time. (Most are now back up and running.) The shortage of new cars led many people to turn to buying used cars, sending their prices soaring.

This shortage of cars is a problem. People need cars for transportation and rental car companies need cars to restock their fleets, which they sold off at the start of the pandemic to conserve cash. But this is clearly a temporary problem. Semi-conductor output will increase as existing plants add capacity and new ones come back on line. When that happens, we are likely to see the price of used cars return to something comparable to their pre-pandemic levels. New car prices, which have also risen rapidly, should also fall back in line with pre-pandemic trends.

If we take the car story out of the picture, there is not much of a story of run-away inflation. The prices of some items have been rising rapidly, but this is a bounce back from price declines at the start of the pandemic. Apparel prices jumped 1.2 percent in May, car insurance 0.7 percent, and air fares 7.0 percent. These indexes are respectively 2.2 percent, 0.2 percent, and 6.3 percent below the February 2020 level.

Inflation in the rent indexes remains well contained. The rent proper index rose 0.2 percent in May, while the owners equivalent rent index rose 0.3 percent. Over the last year, they are up 1.8 percent and 2.1 percent, respectively. The medical care index, which has been a major source of inflation, has risen at just a 1.7 percent annual rate since the pandemic began. The index for college tuition has risen at less than a 0.6 percent annual rate.

We will see more erratic price movements as the economy continues to reopen. There will be some spot shortages of different items and there will be cases where strong demand gives workers the bargaining power to raise their wages, but there is not a story of an inflation crisis in these data.

 

Productivity

It is worth mentioning once again the importance of productivity growth in the inflation story. Productivity growth had been running at just a 1.0 percent annual rate in the decade before the pandemic. In the last year, it rose at a 4.1 percent rate. The data we have for the second quarter, indicates that we will see extraordinarily high productivity growth again in the current quarter.

While no one expects anything like a 4.1 percent rate of productivity growth to continue, we may well be seeing productivity growth on a faster track. Businesses were forced to find new ways to operate in the pandemic.[1] In many cases this will lead to continuing gains in productivity. Even an increase to a 2.0 percent rate of productivity growth will hugely reduce the risks of inflation.

It is important to remember that the 1970s inflation was associated with a sharp drop in productivity growth. Productivity had been increasing at 3.0 percent annual rate in the long post-war boom from 1947 to 1973. It slowed to just over 1.0 percent from 1973 to 1980. This slowdown was a major cause of inflationary pressure during the decade. If productivity growth increases instead, it will act to alleviate inflation.

Anyhow, we will certainly need more quarters’ data before we can say anything definitive about productivity growth. The series is highly erratic and we could see sharp reversals of the recent increases. But if the growth over the last year turns out not to be fluke or due to measurement error, it’s hard to see how we can have too much to worry about with inflation.

[1] Not all the increases in efficiency will show up in productivity data. For example, the savings in time and commuting expenditures for people who can now work remotely, will not appear as an increase in productivity. To take another example, my wife had to have a consultation with a medical specialist half-way across the country. In the pre-pandemic era, this likely would have required a 3-day trip, with two flights each way and two nights in a hotel. Instead, she just had to put an hour aside for a Zoom meeting. This is an enormous savings in resources, but does not show up in the productivity data at all.  

 

I suppose trying to be unbiased is difficult when one side of a debate is certifiably loony, but the Washington Post should try a bit harder. In an article on Florida Governor Ron DeSantis’ attempt to prohibit cruise ships docking in Florida from requiring vaccines, the Post wrote:

“DeSantis’s resistance to companies’ use of so-called vaccine passports, which would certify an individual’s immunization, is just the latest rejection of corporate preferences in favor of cultural appeals that resonate with Trump voters.”

The vaccine requirement is a safety regulation, designed to protect crew and other passengers from the risk of catching the Covid. The paper is trivializing this risk by describing it simply as a “preference.”

I suppose trying to be unbiased is difficult when one side of a debate is certifiably loony, but the Washington Post should try a bit harder. In an article on Florida Governor Ron DeSantis’ attempt to prohibit cruise ships docking in Florida from requiring vaccines, the Post wrote:

“DeSantis’s resistance to companies’ use of so-called vaccine passports, which would certify an individual’s immunization, is just the latest rejection of corporate preferences in favor of cultural appeals that resonate with Trump voters.”

The vaccine requirement is a safety regulation, designed to protect crew and other passengers from the risk of catching the Covid. The paper is trivializing this risk by describing it simply as a “preference.”

We know it would be too much to expect that New York Times reporters might have some knowledge of policies that the United States had in place twenty or even ten years ago. After all, that would require some memory or some knowledge of history.

Anyhow, for those of us who do have some memory, it was rather striking to see the first paragraph of an article reporting on the expected Senate approval of measures that are explicitly protectionist:

“Faced with an urgent competitive threat from China, the Senate is poised to pass the most expansive industrial policy legislation in U.S. history, blowing past partisan divisions over government support for private industry to embrace a nearly quarter-trillion-dollar investment in building up America’s manufacturing and technological edge.”

So now the United States faces an “urgent” competitive threat from China.  Note this this is a news story, not an opinion column.

This framing contrasts sharply with what we saw in the first decade of the century, when the United States was losing millions of manufacturing jobs to China. This led to the destruction of towns and cities across the Midwest, which were overwhelmingly dependent on these manufacturing jobs. Back then, this was simply a story of free trade benefiting the economy, not a problem of an urgent competitive threat.

But now, when the jobs being subjected to competition are those of are most highly educated workers, software designers, biotech engineers and others with advanced degrees, free trade is no longer good. And, instead of U.S. companies like GE and Walmart benefiting from cheap Chinese labor, our leading tech companies are worried about going head-to-head with more efficient Chinese competitors.

We can all see why there would be urgency now. Oh well, this should help sustain the market for hand-wringing books and articles about inequality.

 

 

We know it would be too much to expect that New York Times reporters might have some knowledge of policies that the United States had in place twenty or even ten years ago. After all, that would require some memory or some knowledge of history.

Anyhow, for those of us who do have some memory, it was rather striking to see the first paragraph of an article reporting on the expected Senate approval of measures that are explicitly protectionist:

“Faced with an urgent competitive threat from China, the Senate is poised to pass the most expansive industrial policy legislation in U.S. history, blowing past partisan divisions over government support for private industry to embrace a nearly quarter-trillion-dollar investment in building up America’s manufacturing and technological edge.”

So now the United States faces an “urgent” competitive threat from China.  Note this this is a news story, not an opinion column.

This framing contrasts sharply with what we saw in the first decade of the century, when the United States was losing millions of manufacturing jobs to China. This led to the destruction of towns and cities across the Midwest, which were overwhelmingly dependent on these manufacturing jobs. Back then, this was simply a story of free trade benefiting the economy, not a problem of an urgent competitive threat.

But now, when the jobs being subjected to competition are those of are most highly educated workers, software designers, biotech engineers and others with advanced degrees, free trade is no longer good. And, instead of U.S. companies like GE and Walmart benefiting from cheap Chinese labor, our leading tech companies are worried about going head-to-head with more efficient Chinese competitors.

We can all see why there would be urgency now. Oh well, this should help sustain the market for hand-wringing books and articles about inequality.

 

 

The New York Times reported on the decision by the Food and Drug Administration to approve the drug aducanumab, as a treatment for Alzheimer’s disease. According to the piece, it is the first new treatment for the disease in almost two decades.

As the article makes clear, there is no consensus in the scientific community about the effectiveness of the drug. The clinical trials for the drug were not conclusive, according to several experts cited in the piece, and the drug has harmful side effects, the risk of which can easily outweigh any potential benefits.

As the piece points out, the drugs manufacturer Biogen, stands  to make billions of dollars from aducanumab. This gives it a strong incentive to overstate the benefits and downplay the risks. This means that it may pay physicians and patient advocacy groups to promote the drug. (I’m one of those old-fashioned economists who believe that people respond to incentives.)

If the government did not rely on patent monopolies to finance the development of drugs, it would mean that no one would have the same sort of incentive to push drugs that are not safe and effective.

The New York Times reported on the decision by the Food and Drug Administration to approve the drug aducanumab, as a treatment for Alzheimer’s disease. According to the piece, it is the first new treatment for the disease in almost two decades.

As the article makes clear, there is no consensus in the scientific community about the effectiveness of the drug. The clinical trials for the drug were not conclusive, according to several experts cited in the piece, and the drug has harmful side effects, the risk of which can easily outweigh any potential benefits.

As the piece points out, the drugs manufacturer Biogen, stands  to make billions of dollars from aducanumab. This gives it a strong incentive to overstate the benefits and downplay the risks. This means that it may pay physicians and patient advocacy groups to promote the drug. (I’m one of those old-fashioned economists who believe that people respond to incentives.)

If the government did not rely on patent monopolies to finance the development of drugs, it would mean that no one would have the same sort of incentive to push drugs that are not safe and effective.

In recent weeks there have been several articles noting the enormous wealth that a small number of people have made off of the vaccines and treatments developed to control the pandemic. Many see this as an unfortunate outcome of our efforts to contain the pandemic. In that view, containing the pandemic is an immensely important goal, if some people get incredibly rich as result, it’s a price well worth paying. After all, maybe we can even tax back some of their wealth after the fact.

The infuriating part of this story is that it is so obviously not true. But, just as followers of Donald Trump are prepared to believe any crazy story he tells about the stolen election, our intellectual types are willing to accept the idea that the only way we could have gotten vaccines as quickly as we did was by granting a small number of companies and individuals patent monopolies. And, just as no amount of evidence can dissuade Trumpers from believing their guy actually won the election, it is not possible to get most people involved in policy debates to consider the possibility that we don’t need patent monopolies to finance the development of drugs or vaccines.

This is especially disturbing in the case of the current crop of vaccines developed in the United States and Europe. The development of mRNA technology was done overwhelming on the public dime. This is hardly a secret. In fact, the NIH owns one of the key patents that Moderna used in the development of its vaccine.

The New York Times even recently featured a piece highlighting the work of Dr. Kato Kariko, who it claims spent her whole career working on government grants and never earned more than $60,000 a year. Of course, it is reasonable to pay top notch researchers like Dr. Kariko considerably more than $60,000 a year, but the point is that researchers can be motivated by money (as well, as the commitment of many to help humanity), they don’t need government-granted patent monopolies.

The development of the Oxford-AstraZeneca vaccine was also paid for almost entirely with public money. AstraZeneca was in fact brought on after the fact as a partner, at the urging of Bill Gates. The vaccine itself was developed by a team of researchers at Oxford.   

In the case of both the mRNA vaccines and the Oxford-AstraZeneca vaccine we could have just contracted with the companies to do the work, we didn’t have to give them patent monopolies. If this sounds strange, go outside and look at the street in front of your house. The company that paved the street was paid on a contract with the government, it did not get a patent monopoly on the street.

For some reason, we cannot even get a serious discussion in policy circles about alternatives to patent monopolies for financing the development of drugs and vaccines. To my view, we should be looking to alternatives to patent and copyright monopolies as government funding mechanisms everywhere, but the case for alternatives is especially compelling in the case of biomedical research.[1]

The problem with biomedical research is that the proprietary nature of the knowledge, coupled with the enormous incentive to sell products at patent protected prices, is a huge invitation to corruption. The most dramatic example of this problem is with the opioid crisis, where the leading manufacturers have billions of dollars in settlements based on the allegation that they deliberately misled doctors and the general public about the addictiveness of the new generation of opioids. If OxyContin and other opioids had been selling as cheap generics, there would have been little incentive to lie about their addictiveness. And, of course if all the clinical trial results were fully public, they would not have been able to get away with lying in any case.

There is also the issue with drugs that the government or private insurers, regulated by the government, pick up the vast majority of the tab. For this reason, we don’t have to worry about direct government funding of research over-riding individual consumer decisions, as might be the case with items like cars or smart phones. Demand for a particular drug is already not determined by individuals, so there is nothing to usurp.

The great fortunes created by patent and copyright monopolies go well beyond the current crop of Covid vaccine billionaires. There are many people who have gotten tremendously rich developing software and other information technologies, medical equipment, and genetically modified plants, as a result of patent or copyright monopolies. Bill Gates has volunteered to be the poster child here.

While many of the contributions made by these rich people have been socially valuable, we have to recognize that the rewards they received were a policy choice. We could have made their patent and copyright monopolies shorter and/or weaker. We also could have relied more on direct funding for open-source research.

That is a basic logical point. Patent and copyright monopolies are not given by god, or even the constitution (go read Article 1, Section 8). We can structure them anyway we like and we can integrate them with other mechanisms for supporting research. Our decision to structure patent and copyright monopolies in a way that allows for a small number of people to get incredibly rich is because we have politicians who like very rich people.

There is nothing inherent in the market or any requirement of technology that requires this outcome. And, this outcome is justified by economists and reporters who are too lazy or incompetent to think for themselves. Just like any good Trumper, they repeat what they are told.

Vaccine Failure in the Pandemic

In spite of the celebration of the success of our vaccines in controlling the spread of the virus among people who get them, we have done an abysmal job in vaccinating the world. At this point, Africa, which has more than 15 percent of the world’s population, has received just 1.7 percent of the world’s vaccines. The situation in much of Latin America is not much better, as is the case in some of the poorer countries in Asia. India is of course suffering terribly from a shortage of vaccines, even though it is one of the world’s leading manufacturers and has a vaccine it developed itself.

China has been able to distribute 460 million vaccines domestically, in the last month. This is in addition to providing tens of millions off doses to countries around the world. At that pace, it will be able to produce enough vaccines to cover most of the world’s unvaccinated population early in 2022. By contrast, our experts insist that we can’t possibly make the U.S.-European vaccines any more rapidly than we already are, even if we suspend patent protections and share technology. In fact. Thomas Cueni, the director general of the International Federation of Pharmaceutical Manufacturers and Associations, insists that we can’t even produce items like syringes and vials that are needed to distribute the vaccines. (This assertion can be found at 21.10 here.)  

The implication is that China’s scientists and engineers must be much more competent than the U.S. ones. (I realize the mRNA vaccines are more effective, but the Chinese vaccines have been very effective in bringing the pandemic under control in countries where they have been widely distributed, like Serbia and Hungary.) It’s too bad that we have such second-rate people in charge of our anti-pandemic efforts. (Bill Gates played a leading role with his foundation.) Maybe next time we should outsource the job to China.  

[1] I discuss this issue in Chapter 5 of Rigged (it’s free).

In recent weeks there have been several articles noting the enormous wealth that a small number of people have made off of the vaccines and treatments developed to control the pandemic. Many see this as an unfortunate outcome of our efforts to contain the pandemic. In that view, containing the pandemic is an immensely important goal, if some people get incredibly rich as result, it’s a price well worth paying. After all, maybe we can even tax back some of their wealth after the fact.

The infuriating part of this story is that it is so obviously not true. But, just as followers of Donald Trump are prepared to believe any crazy story he tells about the stolen election, our intellectual types are willing to accept the idea that the only way we could have gotten vaccines as quickly as we did was by granting a small number of companies and individuals patent monopolies. And, just as no amount of evidence can dissuade Trumpers from believing their guy actually won the election, it is not possible to get most people involved in policy debates to consider the possibility that we don’t need patent monopolies to finance the development of drugs or vaccines.

This is especially disturbing in the case of the current crop of vaccines developed in the United States and Europe. The development of mRNA technology was done overwhelming on the public dime. This is hardly a secret. In fact, the NIH owns one of the key patents that Moderna used in the development of its vaccine.

The New York Times even recently featured a piece highlighting the work of Dr. Kato Kariko, who it claims spent her whole career working on government grants and never earned more than $60,000 a year. Of course, it is reasonable to pay top notch researchers like Dr. Kariko considerably more than $60,000 a year, but the point is that researchers can be motivated by money (as well, as the commitment of many to help humanity), they don’t need government-granted patent monopolies.

The development of the Oxford-AstraZeneca vaccine was also paid for almost entirely with public money. AstraZeneca was in fact brought on after the fact as a partner, at the urging of Bill Gates. The vaccine itself was developed by a team of researchers at Oxford.   

In the case of both the mRNA vaccines and the Oxford-AstraZeneca vaccine we could have just contracted with the companies to do the work, we didn’t have to give them patent monopolies. If this sounds strange, go outside and look at the street in front of your house. The company that paved the street was paid on a contract with the government, it did not get a patent monopoly on the street.

For some reason, we cannot even get a serious discussion in policy circles about alternatives to patent monopolies for financing the development of drugs and vaccines. To my view, we should be looking to alternatives to patent and copyright monopolies as government funding mechanisms everywhere, but the case for alternatives is especially compelling in the case of biomedical research.[1]

The problem with biomedical research is that the proprietary nature of the knowledge, coupled with the enormous incentive to sell products at patent protected prices, is a huge invitation to corruption. The most dramatic example of this problem is with the opioid crisis, where the leading manufacturers have billions of dollars in settlements based on the allegation that they deliberately misled doctors and the general public about the addictiveness of the new generation of opioids. If OxyContin and other opioids had been selling as cheap generics, there would have been little incentive to lie about their addictiveness. And, of course if all the clinical trial results were fully public, they would not have been able to get away with lying in any case.

There is also the issue with drugs that the government or private insurers, regulated by the government, pick up the vast majority of the tab. For this reason, we don’t have to worry about direct government funding of research over-riding individual consumer decisions, as might be the case with items like cars or smart phones. Demand for a particular drug is already not determined by individuals, so there is nothing to usurp.

The great fortunes created by patent and copyright monopolies go well beyond the current crop of Covid vaccine billionaires. There are many people who have gotten tremendously rich developing software and other information technologies, medical equipment, and genetically modified plants, as a result of patent or copyright monopolies. Bill Gates has volunteered to be the poster child here.

While many of the contributions made by these rich people have been socially valuable, we have to recognize that the rewards they received were a policy choice. We could have made their patent and copyright monopolies shorter and/or weaker. We also could have relied more on direct funding for open-source research.

That is a basic logical point. Patent and copyright monopolies are not given by god, or even the constitution (go read Article 1, Section 8). We can structure them anyway we like and we can integrate them with other mechanisms for supporting research. Our decision to structure patent and copyright monopolies in a way that allows for a small number of people to get incredibly rich is because we have politicians who like very rich people.

There is nothing inherent in the market or any requirement of technology that requires this outcome. And, this outcome is justified by economists and reporters who are too lazy or incompetent to think for themselves. Just like any good Trumper, they repeat what they are told.

Vaccine Failure in the Pandemic

In spite of the celebration of the success of our vaccines in controlling the spread of the virus among people who get them, we have done an abysmal job in vaccinating the world. At this point, Africa, which has more than 15 percent of the world’s population, has received just 1.7 percent of the world’s vaccines. The situation in much of Latin America is not much better, as is the case in some of the poorer countries in Asia. India is of course suffering terribly from a shortage of vaccines, even though it is one of the world’s leading manufacturers and has a vaccine it developed itself.

China has been able to distribute 460 million vaccines domestically, in the last month. This is in addition to providing tens of millions off doses to countries around the world. At that pace, it will be able to produce enough vaccines to cover most of the world’s unvaccinated population early in 2022. By contrast, our experts insist that we can’t possibly make the U.S.-European vaccines any more rapidly than we already are, even if we suspend patent protections and share technology. In fact. Thomas Cueni, the director general of the International Federation of Pharmaceutical Manufacturers and Associations, insists that we can’t even produce items like syringes and vials that are needed to distribute the vaccines. (This assertion can be found at 21.10 here.)  

The implication is that China’s scientists and engineers must be much more competent than the U.S. ones. (I realize the mRNA vaccines are more effective, but the Chinese vaccines have been very effective in bringing the pandemic under control in countries where they have been widely distributed, like Serbia and Hungary.) It’s too bad that we have such second-rate people in charge of our anti-pandemic efforts. (Bill Gates played a leading role with his foundation.) Maybe next time we should outsource the job to China.  

[1] I discuss this issue in Chapter 5 of Rigged (it’s free).

That seems to be the case. A few weeks ago it ran a major piece on vaccinating the world. The article never once mentioned China’s vaccines (or Russia or India’s). It had another piece today on the topic, which again did not mention China’s vaccines.

Ignoring China’s vaccines in the context of vaccinating the world is truly bizarre. It has been by far the leading supplier of vaccines to South America, North Africa, and the countries of South Asia, excepting India. It also has administered more than 750 million shots domestically. (The NYT piece bizarrely told readers that 85 percent of the shots given have gone to the world’s wealthiest countries. This is clearly false, unless the NYT considers China one of the world’s wealthiest countries.)

China is also producing around 500 million doses a month. At this pace, it should be hitting its target vaccination rate in a bit over two months, which means it would be in a position to distribute 500 million doses a month to the rest of the world. By contrast, our pharmaceutical companies claim they can’t even figure out how to get the syringes and vials needed to distribute the volume of vaccines necessary to protect the developing world. (Thomas Cueni, the director general of the International Federation of Pharmaceutical Manufacturers and Associations, makes that assertion  here [the comment can be found at 21:10 in the exchange.])

Given that China can apparently produce and distribute 500 million doses a month, while the western industry claims to lack the competence to substantially increase production, it looks like vaccinating the world will be primarily a Chinese project. It’s too bad New York Times reporters are not allowed to talk about it.

That seems to be the case. A few weeks ago it ran a major piece on vaccinating the world. The article never once mentioned China’s vaccines (or Russia or India’s). It had another piece today on the topic, which again did not mention China’s vaccines.

Ignoring China’s vaccines in the context of vaccinating the world is truly bizarre. It has been by far the leading supplier of vaccines to South America, North Africa, and the countries of South Asia, excepting India. It also has administered more than 750 million shots domestically. (The NYT piece bizarrely told readers that 85 percent of the shots given have gone to the world’s wealthiest countries. This is clearly false, unless the NYT considers China one of the world’s wealthiest countries.)

China is also producing around 500 million doses a month. At this pace, it should be hitting its target vaccination rate in a bit over two months, which means it would be in a position to distribute 500 million doses a month to the rest of the world. By contrast, our pharmaceutical companies claim they can’t even figure out how to get the syringes and vials needed to distribute the volume of vaccines necessary to protect the developing world. (Thomas Cueni, the director general of the International Federation of Pharmaceutical Manufacturers and Associations, makes that assertion  here [the comment can be found at 21:10 in the exchange.])

Given that China can apparently produce and distribute 500 million doses a month, while the western industry claims to lack the competence to substantially increase production, it looks like vaccinating the world will be primarily a Chinese project. It’s too bad New York Times reporters are not allowed to talk about it.

To repeat my standard disclaimer, I know this sort of comparison is silly, but I also know that Trump and the Republicans would be touting this to the sky if the shoe were on the other foot. So, here’s the latest, the economy has created almost 2.2 million jobs in fours months under Biden. It lost almost 2.9 million jobs in the four years of the Trump administration.

Source: Bureau of Labor Statistics.

To repeat my standard disclaimer, I know this sort of comparison is silly, but I also know that Trump and the Republicans would be touting this to the sky if the shoe were on the other foot. So, here’s the latest, the economy has created almost 2.2 million jobs in fours months under Biden. It lost almost 2.9 million jobs in the four years of the Trump administration.

Source: Bureau of Labor Statistics.

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