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.

I have repeatedly raised the point that media accounts routinely use the term “free trade” when they can more accurately say simply “trade” or trade policy. It is amazing to me that this practice continues.

We saw it yet again in a NYT article on how many Republicans continue to be faithful to Trump even after last week’s coup attempt. The article told readers:

“Anthony Sabatini, a Florida state representative, described Ms. Cheney and other Republicans who voted for impeachment as ‘artifacts,’ saying they were out of step in a party that has embraced a more populist platform opposed to foreign interventions and skeptical of free trade.”

As I have pointed out endlessly, we do not have a policy of “free trade.” We do not allow foreign trained professionals, such as doctors and dentists, to freely practice in the United States. Our trade policy has been focused on reducing barriers to trade in manufactured goods, while leaving in place the barriers that protect the most highly paid professionals.

This has the effect of putting U.S. manufacturing workers in direct competition with low-paid workers in the developing world. This has the predicted and actual effect of lowering the pay of manufacturing workers in the United States. Since manufacturing has historically been a source of relatively high-paying jobs for workers without college degrees, the loss of good-paying jobs in manufacturing has put downward pressure on the pay of non-college educated workers more generally. This distributional impact has nothing to do with “free trade,” it is due to a policy of selective protectionism.

In the same vein, much of our trade policy has been focused on making our patent and copyright protections longer and stronger and imposing these rules on our trading partners. These protections are 180 degrees at odds with free trade, they are government granted monopolies. They also have the effect of redistributing income upward, to drug and software companies and people with skills in the relevant fields. Very few dishwashers and custodians benefit from patent rents or royalties from copyrights.

It would be helpful if the NYT and other media outlets could stop trying to pretend that the upward redistribution from globalization was some sort of natural process involving free trade. That is a Trumpian lie and it would be good if the media stopped repeating it. 

I have repeatedly raised the point that media accounts routinely use the term “free trade” when they can more accurately say simply “trade” or trade policy. It is amazing to me that this practice continues.

We saw it yet again in a NYT article on how many Republicans continue to be faithful to Trump even after last week’s coup attempt. The article told readers:

“Anthony Sabatini, a Florida state representative, described Ms. Cheney and other Republicans who voted for impeachment as ‘artifacts,’ saying they were out of step in a party that has embraced a more populist platform opposed to foreign interventions and skeptical of free trade.”

As I have pointed out endlessly, we do not have a policy of “free trade.” We do not allow foreign trained professionals, such as doctors and dentists, to freely practice in the United States. Our trade policy has been focused on reducing barriers to trade in manufactured goods, while leaving in place the barriers that protect the most highly paid professionals.

This has the effect of putting U.S. manufacturing workers in direct competition with low-paid workers in the developing world. This has the predicted and actual effect of lowering the pay of manufacturing workers in the United States. Since manufacturing has historically been a source of relatively high-paying jobs for workers without college degrees, the loss of good-paying jobs in manufacturing has put downward pressure on the pay of non-college educated workers more generally. This distributional impact has nothing to do with “free trade,” it is due to a policy of selective protectionism.

In the same vein, much of our trade policy has been focused on making our patent and copyright protections longer and stronger and imposing these rules on our trading partners. These protections are 180 degrees at odds with free trade, they are government granted monopolies. They also have the effect of redistributing income upward, to drug and software companies and people with skills in the relevant fields. Very few dishwashers and custodians benefit from patent rents or royalties from copyrights.

It would be helpful if the NYT and other media outlets could stop trying to pretend that the upward redistribution from globalization was some sort of natural process involving free trade. That is a Trumpian lie and it would be good if the media stopped repeating it. 

Representative Peter DeFazio, along with seven House co-sponsors, introduced the “Wall Street Tax Act” today. This bill would impose a tax of 0.1 percent of sales of stocks, bonds, options, and other derivatives. According to the Congressional Budget Office, it would raise almost $800 billion over the course of the next decade. This would be more than enough to cover the entire food stamp budget over this period. It would be almost enough to fully replace the annual research spending of the pharmaceutical industry, which would mean that all new drugs could be sold as cheap generics from the day they approved by the Food and Drug Administration. In short, this is real money.

The financial industry is already screaming bloody murder over this bill for an obvious reason – it comes out of their hide. The financial industry has been ripping off retirement savers for decades with exorbitant fees and excessive trading. It’s not uncommon for an insurance company or brokerage house to charge people 1.0 percent a year or more for the privilege of letting them host your 401(k) or IRA. Just to be clear, this is simply what they charge for hosting the account. They charge additional fees for the various funds (e.g. stock or bond index or value fund) in which people actually invest their money.

This means that a person with $100,000 in a 401(k) may be paying $1,000 a year to an insurance company or a brokerage house, for essentially nothing. Then we add in the fees for the individual funds. If they actively trade your account, these can easily run to another 1.0 percent annually, and often considerably more. It would not be uncommon for someone to be handing the financial industry 2.0 percent of their 401(k) every year, or $2,000 for this person with $100,000 in their account.

The DeFazio bill will take a bite out of the industry’s take. The story is a simple one. It will make it more costly to trade financial assets. The industry will be hyping the additional trading cost as the end of the world.

Some simple arithmetic shows that the additional costs are not much for retirement savers to get excited over. Suppose our investor with $100,000 in their account trades 25 percent each year. This would be $25,000 in trades. The DeFazio bill would tax these trades at a rate of 0.1 percent. That comes to $25 a year, assuming the industry fully passes on the tax to investors. That doesn’t sound too devastating and in fact is trivial compared to the $1,000 to $2,000 that the financial industry might be pocketing off this person’s account.

But wait, it gets better. When the cost of trading goes up, people do less trading – sort of like when the price of apples go up we expect people to buy fewer apples. Most research indicates the decline in the volume of trading will be roughly proportional to the percentage increase in the cost. This means, for example, if the DeFazio bill raises the cost of trading by 30 percent, then the amount an account is traded will be reduced by roughly 30 percent.[1]

If each trade costs the account holder 30 percent more, but they reduce their trading by 30 percent, then the total cost of trading will be essentially unchanged. That means the $25 cost to this investor that we just calculated is actually close to the zero. The $25 comes out of the pockets of the financial industry, since it will be collecting less money in fees and commissions on trading. And now you understand why they hate the DeFazio bill.

There is a part of this story that always leaves people uneasy. If accounts are trading less, then won’t investors be earning less money? The answer to this is no.

Every trade has a winner and a loser. If I was lucky enough to sell shares of stock before the price fell, then I ended up ahead on the deal. But there was some sucker who had the misfortune to have bought the stock just before the price drop. On average, we end up winners half the time and losers half the time, so no, on average we don’t gain from trading and we won’t suffer from less trading.[2] (Yes, there are some very astute fund managers that consistently beat the market, you don’t have one.)  

The financial industry doesn’t like it when people point out that investors don’t make money from trading, since it makes it clear what the real tax on retirement savings is – the industry’s fees. But that is the reality, and DeFazio is proposing a bill that will substantially reduce the size of the financial industry’s tax on our savings.

And, we can use this money for important public purposes, like providing child care or combatting global warming. This is a tax we need.

[1] I realize most people are not directly trading their account. This means that fund managers will reduce the amount they trade by roughly 30 percent.

[2] There is of course a value to being able to trade stocks, bonds and other financial assets, so there would be a problem if trading fell to zero or something close to it. But we don’t have to worry about that story. Trading volume today is more than twice what it was in the 1990s, when almost everyone would agree we had very robust capital markets. This means that even if we saw sharp declines in volume we need not be concerned about being able to cash out of our 401(k) when we retired, or if we needed the money for an emergency.

Representative Peter DeFazio, along with seven House co-sponsors, introduced the “Wall Street Tax Act” today. This bill would impose a tax of 0.1 percent of sales of stocks, bonds, options, and other derivatives. According to the Congressional Budget Office, it would raise almost $800 billion over the course of the next decade. This would be more than enough to cover the entire food stamp budget over this period. It would be almost enough to fully replace the annual research spending of the pharmaceutical industry, which would mean that all new drugs could be sold as cheap generics from the day they approved by the Food and Drug Administration. In short, this is real money.

The financial industry is already screaming bloody murder over this bill for an obvious reason – it comes out of their hide. The financial industry has been ripping off retirement savers for decades with exorbitant fees and excessive trading. It’s not uncommon for an insurance company or brokerage house to charge people 1.0 percent a year or more for the privilege of letting them host your 401(k) or IRA. Just to be clear, this is simply what they charge for hosting the account. They charge additional fees for the various funds (e.g. stock or bond index or value fund) in which people actually invest their money.

This means that a person with $100,000 in a 401(k) may be paying $1,000 a year to an insurance company or a brokerage house, for essentially nothing. Then we add in the fees for the individual funds. If they actively trade your account, these can easily run to another 1.0 percent annually, and often considerably more. It would not be uncommon for someone to be handing the financial industry 2.0 percent of their 401(k) every year, or $2,000 for this person with $100,000 in their account.

The DeFazio bill will take a bite out of the industry’s take. The story is a simple one. It will make it more costly to trade financial assets. The industry will be hyping the additional trading cost as the end of the world.

Some simple arithmetic shows that the additional costs are not much for retirement savers to get excited over. Suppose our investor with $100,000 in their account trades 25 percent each year. This would be $25,000 in trades. The DeFazio bill would tax these trades at a rate of 0.1 percent. That comes to $25 a year, assuming the industry fully passes on the tax to investors. That doesn’t sound too devastating and in fact is trivial compared to the $1,000 to $2,000 that the financial industry might be pocketing off this person’s account.

But wait, it gets better. When the cost of trading goes up, people do less trading – sort of like when the price of apples go up we expect people to buy fewer apples. Most research indicates the decline in the volume of trading will be roughly proportional to the percentage increase in the cost. This means, for example, if the DeFazio bill raises the cost of trading by 30 percent, then the amount an account is traded will be reduced by roughly 30 percent.[1]

If each trade costs the account holder 30 percent more, but they reduce their trading by 30 percent, then the total cost of trading will be essentially unchanged. That means the $25 cost to this investor that we just calculated is actually close to the zero. The $25 comes out of the pockets of the financial industry, since it will be collecting less money in fees and commissions on trading. And now you understand why they hate the DeFazio bill.

There is a part of this story that always leaves people uneasy. If accounts are trading less, then won’t investors be earning less money? The answer to this is no.

Every trade has a winner and a loser. If I was lucky enough to sell shares of stock before the price fell, then I ended up ahead on the deal. But there was some sucker who had the misfortune to have bought the stock just before the price drop. On average, we end up winners half the time and losers half the time, so no, on average we don’t gain from trading and we won’t suffer from less trading.[2] (Yes, there are some very astute fund managers that consistently beat the market, you don’t have one.)  

The financial industry doesn’t like it when people point out that investors don’t make money from trading, since it makes it clear what the real tax on retirement savings is – the industry’s fees. But that is the reality, and DeFazio is proposing a bill that will substantially reduce the size of the financial industry’s tax on our savings.

And, we can use this money for important public purposes, like providing child care or combatting global warming. This is a tax we need.

[1] I realize most people are not directly trading their account. This means that fund managers will reduce the amount they trade by roughly 30 percent.

[2] There is of course a value to being able to trade stocks, bonds and other financial assets, so there would be a problem if trading fell to zero or something close to it. But we don’t have to worry about that story. Trading volume today is more than twice what it was in the 1990s, when almost everyone would agree we had very robust capital markets. This means that even if we saw sharp declines in volume we need not be concerned about being able to cash out of our 401(k) when we retired, or if we needed the money for an emergency.

With a Democrat in the White House, the season of the deficit hawk has returned. So, it’s worth going through the old arguments just to remind everyone that the best response to these people is ridicule.

It looks like President Biden will propose a robust stimulus package of well over $1 trillion. According to press accounts, the package is likely to include another check for $2,000. (I believe it is supposed to $1,400 above the $600 in the last package.) It is likely to include a refundable child tax credit that will do much to reduce child poverty.

It will also include money to state and local governments to make up massive pandemic induced shortfalls. There will also be money for mass transit and a down payment on green new deal programs. Biden also plans to increase the subsidies provided in the Affordable Care Act, to make its insurance more affordable. And, he is likely to ask for a reduction in the age of Medicare eligibility.  

In other words, this will be a really big deal. And, it will cost money. Biden will propose tax increases on the rich and corporations, but there is little doubt there will be a large increase in the deficit and the debt. So should we be worried?

The immediate issue is the deficit. The deficit hawks will be screaming that the Biden package will over-stimulate the economy, leading to rising interest rates and inflation. There is some truth to these claims, but we have to think clearly about what is at issue.

Interest rates have been extraordinarily low following the pandemic shutdown as the Federal Reserve Board sought to use the power it had to boost the economy. It set short-term interest rates to zero and brought the long-term interest rate on Treasury bonds down to 0.5 percent. Long-term rates have crept up over 1.0 percent, both due to economic recovery and the expectation that Biden will have a robust rescue package.

When Biden puts his proposal on the table, it is likely to push interest rates higher and they will rise further when we actually see the spending taking place. This should not bother us. We more typically have seen long-term interest rates in the 4-6 percent range and considerably higher in the decades of the 1970s and 1980s.

We saw interest rates first plummet in the Great Recession before recovering modestly in the recovery. They then plummeted again with the shutdown. Suppose interest rates return to the 4-6 percent range we saw before the Great Recession. What’s the problem?

Interest rates in this range would have been considered normal, or even low, prior to the Great Recession. Higher interest rates will have some negative effects. We will see less construction, mortgage refinancing will slow sharply, and there will be a modest falloff in public and private investment. The dollar will also likely rise. This will make U.S. goods and services less competitive internationally, leading to a somewhat higher trade deficit.

These downsides are real, but if we are engaged in useful spending, like reducing child poverty, rescuing state and local governments so that they can maintain vital public services, slowing global warming, extending health care coverage, then these costs seem minor by comparison. In any case, it is hard to understand how having the same interest rates we saw in the 1990s and pre-Great Recession 00s is supposed to be a major catastrophe.

There is also the issue that we might see higher inflation. This also needs a big “so what?” The Fed sets a target of 2.0 percent inflation. This is supposed to be an average, not a ceiling. We have not hit this target since before the Great Recession. (The measure targeted by the Fed is the core Personal Consumption Expenditure Deflator (PCE), which is consistently 0.2-0.4 percentage points lower than the Consumer Price Index we more often see mentioned in the media.)

Suppose the inflation rate increases by 1.0 percentage point. The core PCE increased by 1.4 percentage points over the last year. A 1.0 percentage point increase puts us at 2.4 percent. This is totally consistent with the Fed’s target of a 2.0 percent average inflation rate. (We can debate whether the 2.0 percent target is even appropriate, but let’s ignore that for now.)

If we continue to push the economy too hard, we can see inflation rise further, hitting rates that should trouble us. But there are no models that show inflation just jumping from a modest level to more worrisome levels, barring some sort of catastrophe like a climate disaster or war. The Fed is totally prepared to take steps to slow the economy if inflation threatens to be a problem.

In short, there seems little basis for concern that too much spending will create a dangerous inflationary spiral. In addition to the valuable goals that will be furthered by this spending, we also can see the economy move back to full employment, with workers enjoying increased bargaining power.

As I and others (including Fed Chair Jerome Powell) have frequently argued, low unemployment disproportionately benefits the most disadvantaged in the labor market. The sharpest gains in employment and wages will be seen by Blacks, Hispanics, the less educated, people with disabilities, and people with criminal records. This is a really huge deal for those concerned about inequality and racial justice.

The Hit to the Stock Market

There is one issue with higher interest rates that should be noted. If long-term interest rates rise even back to pre-pandemic levels, it could lead to a substantial decline in the stock market. One of the reasons the stock market was so strong in 2020 was that there were few alternative options for investors. With long-term interest rates under 1.0 percent, the return from holding government bonds was extremely low. Also, investors took a risk of large capital losses on their bonds if interest rates rise. If the interest were 2.5 percent or 3.0 percent, holding bonds looks much better. Also, there is much less risk of a capital loss due to further rises in interest rates.

With bonds becoming a more attractive alternative, many investors will switch from stocks to bonds, putting downward pressure on stock prices. It wouldn’t be unreasonable to see a 20 or 30 percent drop in stock prices. While the Donald Trump whiners will be screaming bloody murder, more serious people need not be concerned. The vast majority of stock is held by the richest of the population, with close to half held by the top one percent. A drop in stock prices would mostly be hitting the wealth of the relatively affluent and the very rich.

We should think of stock prices as being like wheat prices. A drop in wheat prices is bad news for wheat farmers, but for the rest of us, it might mean lower bread prices. We should think of the stock market the same way. Lower stock prices are not necessarily bad for the economy (they can be if the drop is due to a plunge in the economy), but they are bad news for the wealth holdings of the very rich.

Of course, not everyone who owns stock is rich. Plenty of middle-class people own stock. Also, pension funds are heavily invested in the stock market. While we may not be happy to see these folks take a hit, there are two points to keep in mind.

There was an extraordinary run-up in stock prices in the years following the Great Recession. If the market were to fall 20, or even 30, percent, investors would still be looking at a pretty good return in the last decade. They have little grounds for complaint.

The other point is that if we look at the annual returns to stockholders from dividends and share buybacks, there is little reason to think they would be hurt. If we look at a company like Apple or Walmart, their profits are likely to be just as good, or possibly even better, with a robust Biden rescue package. This means that on annual basis, these shareholders will be getting just as much money with lower stock prices as do with the current high stock prices. They have a loss of wealth, but their income from their stocks should be little affected.

Long and short, we should not be worried if we see a stock market correction in the next year or two. We need to worry about employment, wages, and other factors affecting the living standards of the bulk of the population. A drop in the stock market need not be a cause for concern.

 

The Debt and our Children

Perhaps the most pathetic argument against an ambitious rescue package is that the debt will be an enormous burden on our children. This argument usually begins and ends by pointing out that the debt is a really large number. (It is.) But throwing out a really big number doesn’t tell us anything about the burden of the debt.

This is measured by the interest we pay. Last year, we paid $338 billion in interest, this year we are projected to pay $290 billion. Measured as a share of GDP, last year our interest payments came to around 1.6 percent, this year’s payments are projected at 1.4 percent. By comparison, in the early and mid-1990s (a very prosperous decade) our interest burden was over 3.0 percent of GDP.

But even the 1.6 percent figure overstates the actual burden. The Federal Reserve Board currently holds trillions of dollars of government debt. The interest paid on the debt held by the Fed is refunded right back to the Treasury. Last year the Fed paid $88.5 billion to the Treasury, reducing the true interest burden by 0.4 percentage points, which leaves the interest burden at only slightly above 1.0 percentage point of GDP.

The deficit hawks rightly point out that if interest rates rise then the burden will be greater, but this ignores two points. First, interest rates are only likely to rise very much if inflation increases, in which case inflation will be eroding the real value of the debt and the burden on our children.

The other point is that higher interest rates will only gradually raise the interest burden. Much of the debt outstanding is long-term, which means that we will only see higher payments when a ten-year or thirty-year bond expires. So the idea we will suddenly be facing a crushing interest burden doesn’t make any sense.

 

Debt Burden and the Burden of Government-Granted Patent and Copyright Monopolies

The deficit hawks not only exaggerate the burden of deficits and debt, they are not honest about them. Direct spending is only one way in which the government pays for things. It also pays for services by offering patent and copyright monopolies. By my calculations, these government-granted monopolies cost the economy over $1 trillion a year in higher prices for drugs, medical equipment, software, and other items.

This is a real burden that swamps the interest payments that the deficit hawks tell us will impoverish our children and grandchildren. I have never seen any economist other than myself make this point, so I will try to explain the issue in a way that even an economist can understand.

Suppose the government were to spend another $90 billion a year on developing prescription drugs, replacing what the industry currently spends. (This is in addition to the $45 billion we spend annually through the National Institutes of Health and other governmental agencies.) This $90 billion would be added to other spending and would add to the debt, with an implied future interest burden.

Suppose that to cover this spending, the government raised taxes on prescription drugs to cover the future interest cost. While the taxes will mean future deficits would be lower, they don’t change the fact that the additional spending has added to our debt.

Instead of paying for the development of new drugs with direct spending, we pay for the development of new drugs by granting patent monopolies. These monopolies effectively allow drug companies to impose a tax on prescription drugs. It makes no sense to say that the interest we pay on the debt from direct government spending is a burden, but the patent rents that drug companies are allowed to collect are not a burden. In the case of prescription drugs alone, I calculated the burden in the form of higher drug prices to be close to $400 billion a year.

I’m not raising this point to say that our debt burdens are even higher than the deficit hawks claim, I’m raising the issue to make the point that our debt burden really doesn’t tell us anything about the hardships we are imposing on future generations.

We will hand down a whole economy and society to future generations. If we had zero national debt, but massive amounts of patent and copyright rents, it would be hard to claim that we had served them well.

But the issue goes much further. If we fail to educate our children, with more than one-sixth growing up in poverty, we have not done well by future generations. If we leave them a decrepit infrastructure, we will not have served future generations well. And, if we destroy the natural environment by not arresting global warming and destroying the country’s natural beauty, we will not have been fair to our children.

In short, the debt doesn’t really measure anything. Highlighting the debt is a way for people with a political agenda to oppose spending that they don’t like. It is not an honest complaint and doesn’t deserve to be treated as such.

We should have a serious debate of whether the specific items being put forward by President-Elect Biden are a good use of resources. They will surely be grounds for real criticisms. But the complaint that they will add to the debt should simply be laughed out of the public debate.

With a Democrat in the White House, the season of the deficit hawk has returned. So, it’s worth going through the old arguments just to remind everyone that the best response to these people is ridicule.

It looks like President Biden will propose a robust stimulus package of well over $1 trillion. According to press accounts, the package is likely to include another check for $2,000. (I believe it is supposed to $1,400 above the $600 in the last package.) It is likely to include a refundable child tax credit that will do much to reduce child poverty.

It will also include money to state and local governments to make up massive pandemic induced shortfalls. There will also be money for mass transit and a down payment on green new deal programs. Biden also plans to increase the subsidies provided in the Affordable Care Act, to make its insurance more affordable. And, he is likely to ask for a reduction in the age of Medicare eligibility.  

In other words, this will be a really big deal. And, it will cost money. Biden will propose tax increases on the rich and corporations, but there is little doubt there will be a large increase in the deficit and the debt. So should we be worried?

The immediate issue is the deficit. The deficit hawks will be screaming that the Biden package will over-stimulate the economy, leading to rising interest rates and inflation. There is some truth to these claims, but we have to think clearly about what is at issue.

Interest rates have been extraordinarily low following the pandemic shutdown as the Federal Reserve Board sought to use the power it had to boost the economy. It set short-term interest rates to zero and brought the long-term interest rate on Treasury bonds down to 0.5 percent. Long-term rates have crept up over 1.0 percent, both due to economic recovery and the expectation that Biden will have a robust rescue package.

When Biden puts his proposal on the table, it is likely to push interest rates higher and they will rise further when we actually see the spending taking place. This should not bother us. We more typically have seen long-term interest rates in the 4-6 percent range and considerably higher in the decades of the 1970s and 1980s.

We saw interest rates first plummet in the Great Recession before recovering modestly in the recovery. They then plummeted again with the shutdown. Suppose interest rates return to the 4-6 percent range we saw before the Great Recession. What’s the problem?

Interest rates in this range would have been considered normal, or even low, prior to the Great Recession. Higher interest rates will have some negative effects. We will see less construction, mortgage refinancing will slow sharply, and there will be a modest falloff in public and private investment. The dollar will also likely rise. This will make U.S. goods and services less competitive internationally, leading to a somewhat higher trade deficit.

These downsides are real, but if we are engaged in useful spending, like reducing child poverty, rescuing state and local governments so that they can maintain vital public services, slowing global warming, extending health care coverage, then these costs seem minor by comparison. In any case, it is hard to understand how having the same interest rates we saw in the 1990s and pre-Great Recession 00s is supposed to be a major catastrophe.

There is also the issue that we might see higher inflation. This also needs a big “so what?” The Fed sets a target of 2.0 percent inflation. This is supposed to be an average, not a ceiling. We have not hit this target since before the Great Recession. (The measure targeted by the Fed is the core Personal Consumption Expenditure Deflator (PCE), which is consistently 0.2-0.4 percentage points lower than the Consumer Price Index we more often see mentioned in the media.)

Suppose the inflation rate increases by 1.0 percentage point. The core PCE increased by 1.4 percentage points over the last year. A 1.0 percentage point increase puts us at 2.4 percent. This is totally consistent with the Fed’s target of a 2.0 percent average inflation rate. (We can debate whether the 2.0 percent target is even appropriate, but let’s ignore that for now.)

If we continue to push the economy too hard, we can see inflation rise further, hitting rates that should trouble us. But there are no models that show inflation just jumping from a modest level to more worrisome levels, barring some sort of catastrophe like a climate disaster or war. The Fed is totally prepared to take steps to slow the economy if inflation threatens to be a problem.

In short, there seems little basis for concern that too much spending will create a dangerous inflationary spiral. In addition to the valuable goals that will be furthered by this spending, we also can see the economy move back to full employment, with workers enjoying increased bargaining power.

As I and others (including Fed Chair Jerome Powell) have frequently argued, low unemployment disproportionately benefits the most disadvantaged in the labor market. The sharpest gains in employment and wages will be seen by Blacks, Hispanics, the less educated, people with disabilities, and people with criminal records. This is a really huge deal for those concerned about inequality and racial justice.

The Hit to the Stock Market

There is one issue with higher interest rates that should be noted. If long-term interest rates rise even back to pre-pandemic levels, it could lead to a substantial decline in the stock market. One of the reasons the stock market was so strong in 2020 was that there were few alternative options for investors. With long-term interest rates under 1.0 percent, the return from holding government bonds was extremely low. Also, investors took a risk of large capital losses on their bonds if interest rates rise. If the interest were 2.5 percent or 3.0 percent, holding bonds looks much better. Also, there is much less risk of a capital loss due to further rises in interest rates.

With bonds becoming a more attractive alternative, many investors will switch from stocks to bonds, putting downward pressure on stock prices. It wouldn’t be unreasonable to see a 20 or 30 percent drop in stock prices. While the Donald Trump whiners will be screaming bloody murder, more serious people need not be concerned. The vast majority of stock is held by the richest of the population, with close to half held by the top one percent. A drop in stock prices would mostly be hitting the wealth of the relatively affluent and the very rich.

We should think of stock prices as being like wheat prices. A drop in wheat prices is bad news for wheat farmers, but for the rest of us, it might mean lower bread prices. We should think of the stock market the same way. Lower stock prices are not necessarily bad for the economy (they can be if the drop is due to a plunge in the economy), but they are bad news for the wealth holdings of the very rich.

Of course, not everyone who owns stock is rich. Plenty of middle-class people own stock. Also, pension funds are heavily invested in the stock market. While we may not be happy to see these folks take a hit, there are two points to keep in mind.

There was an extraordinary run-up in stock prices in the years following the Great Recession. If the market were to fall 20, or even 30, percent, investors would still be looking at a pretty good return in the last decade. They have little grounds for complaint.

The other point is that if we look at the annual returns to stockholders from dividends and share buybacks, there is little reason to think they would be hurt. If we look at a company like Apple or Walmart, their profits are likely to be just as good, or possibly even better, with a robust Biden rescue package. This means that on annual basis, these shareholders will be getting just as much money with lower stock prices as do with the current high stock prices. They have a loss of wealth, but their income from their stocks should be little affected.

Long and short, we should not be worried if we see a stock market correction in the next year or two. We need to worry about employment, wages, and other factors affecting the living standards of the bulk of the population. A drop in the stock market need not be a cause for concern.

 

The Debt and our Children

Perhaps the most pathetic argument against an ambitious rescue package is that the debt will be an enormous burden on our children. This argument usually begins and ends by pointing out that the debt is a really large number. (It is.) But throwing out a really big number doesn’t tell us anything about the burden of the debt.

This is measured by the interest we pay. Last year, we paid $338 billion in interest, this year we are projected to pay $290 billion. Measured as a share of GDP, last year our interest payments came to around 1.6 percent, this year’s payments are projected at 1.4 percent. By comparison, in the early and mid-1990s (a very prosperous decade) our interest burden was over 3.0 percent of GDP.

But even the 1.6 percent figure overstates the actual burden. The Federal Reserve Board currently holds trillions of dollars of government debt. The interest paid on the debt held by the Fed is refunded right back to the Treasury. Last year the Fed paid $88.5 billion to the Treasury, reducing the true interest burden by 0.4 percentage points, which leaves the interest burden at only slightly above 1.0 percentage point of GDP.

The deficit hawks rightly point out that if interest rates rise then the burden will be greater, but this ignores two points. First, interest rates are only likely to rise very much if inflation increases, in which case inflation will be eroding the real value of the debt and the burden on our children.

The other point is that higher interest rates will only gradually raise the interest burden. Much of the debt outstanding is long-term, which means that we will only see higher payments when a ten-year or thirty-year bond expires. So the idea we will suddenly be facing a crushing interest burden doesn’t make any sense.

 

Debt Burden and the Burden of Government-Granted Patent and Copyright Monopolies

The deficit hawks not only exaggerate the burden of deficits and debt, they are not honest about them. Direct spending is only one way in which the government pays for things. It also pays for services by offering patent and copyright monopolies. By my calculations, these government-granted monopolies cost the economy over $1 trillion a year in higher prices for drugs, medical equipment, software, and other items.

This is a real burden that swamps the interest payments that the deficit hawks tell us will impoverish our children and grandchildren. I have never seen any economist other than myself make this point, so I will try to explain the issue in a way that even an economist can understand.

Suppose the government were to spend another $90 billion a year on developing prescription drugs, replacing what the industry currently spends. (This is in addition to the $45 billion we spend annually through the National Institutes of Health and other governmental agencies.) This $90 billion would be added to other spending and would add to the debt, with an implied future interest burden.

Suppose that to cover this spending, the government raised taxes on prescription drugs to cover the future interest cost. While the taxes will mean future deficits would be lower, they don’t change the fact that the additional spending has added to our debt.

Instead of paying for the development of new drugs with direct spending, we pay for the development of new drugs by granting patent monopolies. These monopolies effectively allow drug companies to impose a tax on prescription drugs. It makes no sense to say that the interest we pay on the debt from direct government spending is a burden, but the patent rents that drug companies are allowed to collect are not a burden. In the case of prescription drugs alone, I calculated the burden in the form of higher drug prices to be close to $400 billion a year.

I’m not raising this point to say that our debt burdens are even higher than the deficit hawks claim, I’m raising the issue to make the point that our debt burden really doesn’t tell us anything about the hardships we are imposing on future generations.

We will hand down a whole economy and society to future generations. If we had zero national debt, but massive amounts of patent and copyright rents, it would be hard to claim that we had served them well.

But the issue goes much further. If we fail to educate our children, with more than one-sixth growing up in poverty, we have not done well by future generations. If we leave them a decrepit infrastructure, we will not have served future generations well. And, if we destroy the natural environment by not arresting global warming and destroying the country’s natural beauty, we will not have been fair to our children.

In short, the debt doesn’t really measure anything. Highlighting the debt is a way for people with a political agenda to oppose spending that they don’t like. It is not an honest complaint and doesn’t deserve to be treated as such.

We should have a serious debate of whether the specific items being put forward by President-Elect Biden are a good use of resources. They will surely be grounds for real criticisms. But the complaint that they will add to the debt should simply be laughed out of the public debate.

Keep up with our latest news

Suscríbase a las últimas noticias

There is no doubt that bureaucratic bungling and authoritarian practices slowed China’s response to the coronavirus. A New York Times piece documents many of these failings. But, it is a big step to go from the evidence presented in the article to the assertion in the first paragraph:

“Beijing acted against the coronavirus with stunning force, as its official narratives recount. But not before a political logjam had allowed a local outbreak to kindle a global pandemic.”

The clear implication of the second sentence is that if China’s leadership had responded effectively to the pandemic, it could have been quickly contained in Wuhan and not spread around the world. The biggest problem with this assertion is that there is evidence that the pandemic was already present in Europe before the end of 2019, at a point where no one in China had any clear idea what they were dealing with.

A study released in June found evidence in sewage that the coronavirus had been present in Italy in December of 2019. A more recent study found that a child in Italy may have been infected with the coronavirus in November of last year. There has been other evidence that people in Europe may have already been infected with the disease in late 2019.

If the pandemic was already present in Europe by December of 2019 then China’s actions in January 2020 could not have prevented its spread to the rest of the world. This doesn’t excuse the government’s efforts to suppress information about the pandemic, but it does mean that these efforts did not have the dire consequences claimed by the New York Times.

There is no doubt that bureaucratic bungling and authoritarian practices slowed China’s response to the coronavirus. A New York Times piece documents many of these failings. But, it is a big step to go from the evidence presented in the article to the assertion in the first paragraph:

“Beijing acted against the coronavirus with stunning force, as its official narratives recount. But not before a political logjam had allowed a local outbreak to kindle a global pandemic.”

The clear implication of the second sentence is that if China’s leadership had responded effectively to the pandemic, it could have been quickly contained in Wuhan and not spread around the world. The biggest problem with this assertion is that there is evidence that the pandemic was already present in Europe before the end of 2019, at a point where no one in China had any clear idea what they were dealing with.

A study released in June found evidence in sewage that the coronavirus had been present in Italy in December of 2019. A more recent study found that a child in Italy may have been infected with the coronavirus in November of last year. There has been other evidence that people in Europe may have already been infected with the disease in late 2019.

If the pandemic was already present in Europe by December of 2019 then China’s actions in January 2020 could not have prevented its spread to the rest of the world. This doesn’t excuse the government’s efforts to suppress information about the pandemic, but it does mean that these efforts did not have the dire consequences claimed by the New York Times.

A few weeks ago I had exchanges with people on Twitter in which I argued against across the board payments to individuals. I was concerned that these were likely to come out of other provisions (most importantly unemployment insurance) in the pandemic relief package. Since most people have actually not seen their income cut from the pandemic (they are still working) and many are saving on commuting costs, there is no obvious reason they need another check.

On the other hand, the people who have lost their jobs or are unable to work because of care giving responsibilities or health, really do need their unemployment benefits. (One item often overlooked in these exchanges is that the Pandemic Unemployment Assistance Program gives benefits to more than 9 million people who would not ordinarily be eligible for UI benefits.)

Unemployment has been extraordinarily concentrated in this recession, as can be seen in the sharp rise in the number of long-term unemployed. People lost their jobs in March and have not gotten them back. In a normal recession, different groups of workers see short spells of unemployment.

Also, there has been no reduction in the length of the average workweek in this downturn. This is true even within sectors, so it is not just a result of the compositional change. In other recessions, part of the reduction in demand for labor is met by reduced hours of those who keep their jobs. That is not the case in the pandemic recession.

Anyhow, what I feared happened. A month was cut from the duration of the unemployment supplements and the life of the special pandemic programs to cover the cost of the $600 checks. To my view, that was a very bad deal.

But now we have The Reality Denier in Chief insisting that people need $2,000 checks, even though he has already signed the bill. This is a very different picture. Now we can get another $1,400 per person with no trade-off for other forms of necessary spending. What is the argument on the other side?

According to Larry Summers, this extra payment will end secular stagnation and cause us to worry about inflation. That’s not likely since, based on the earlier checks, most people will save most of their money, but it would be great to see the labor market get to the point where we were worried about wages rising too rapidly.

The higher payments will add to the debt, but so what? The debt mongers will complain about the debt no matter what and there is zero reason to think we’re coming up against any limitations.

But will the Republicans use the high debt as a reason to block all of Biden’s initiatives on climate, health care, and child care? Of course they will, and they would use the high debt as a reason to block all of Biden’s initiatives even if the debt were half as large. We all know that the Republicans don’t give a damn about debt and deficits, they will do whatever they can to sabotage Biden and the debt is just an excuse.

In short, right now, the $2,000 per person check is the closest thing in politics we will ever see to free money. Do it folks, I want my check!

 

A few weeks ago I had exchanges with people on Twitter in which I argued against across the board payments to individuals. I was concerned that these were likely to come out of other provisions (most importantly unemployment insurance) in the pandemic relief package. Since most people have actually not seen their income cut from the pandemic (they are still working) and many are saving on commuting costs, there is no obvious reason they need another check.

On the other hand, the people who have lost their jobs or are unable to work because of care giving responsibilities or health, really do need their unemployment benefits. (One item often overlooked in these exchanges is that the Pandemic Unemployment Assistance Program gives benefits to more than 9 million people who would not ordinarily be eligible for UI benefits.)

Unemployment has been extraordinarily concentrated in this recession, as can be seen in the sharp rise in the number of long-term unemployed. People lost their jobs in March and have not gotten them back. In a normal recession, different groups of workers see short spells of unemployment.

Also, there has been no reduction in the length of the average workweek in this downturn. This is true even within sectors, so it is not just a result of the compositional change. In other recessions, part of the reduction in demand for labor is met by reduced hours of those who keep their jobs. That is not the case in the pandemic recession.

Anyhow, what I feared happened. A month was cut from the duration of the unemployment supplements and the life of the special pandemic programs to cover the cost of the $600 checks. To my view, that was a very bad deal.

But now we have The Reality Denier in Chief insisting that people need $2,000 checks, even though he has already signed the bill. This is a very different picture. Now we can get another $1,400 per person with no trade-off for other forms of necessary spending. What is the argument on the other side?

According to Larry Summers, this extra payment will end secular stagnation and cause us to worry about inflation. That’s not likely since, based on the earlier checks, most people will save most of their money, but it would be great to see the labor market get to the point where we were worried about wages rising too rapidly.

The higher payments will add to the debt, but so what? The debt mongers will complain about the debt no matter what and there is zero reason to think we’re coming up against any limitations.

But will the Republicans use the high debt as a reason to block all of Biden’s initiatives on climate, health care, and child care? Of course they will, and they would use the high debt as a reason to block all of Biden’s initiatives even if the debt were half as large. We all know that the Republicans don’t give a damn about debt and deficits, they will do whatever they can to sabotage Biden and the debt is just an excuse.

In short, right now, the $2,000 per person check is the closest thing in politics we will ever see to free money. Do it folks, I want my check!

 

The approach of the end of the year seems a good time to sum up thoughts. My comments here will not be news to regular readers, but may be to others. Also, this exercise is helpful for me to keep my thoughts clear. (I also expect to take next week off, so you won’t be hearing from me for a while.)

Most of my work for the last several years has been focused on ways to reduce before tax inequality by reducing the amount of before-tax income that goes to those at the top of the income distribution. For better or worse, there don’t seem to be a lot of progressives that share this beat. There are a few points that are worth making.

First, my focus on reducing income at the top doesn’t mean for a second that I don’t see efforts at raising income for those at the bottom (and middle) as being important. I have long been involved with or worked alongside people trying to raise minimum wages, protect or increase Social Security benefits, and increase unionization rates.

These are very important efforts, but at the end of the day, our ability to raise incomes at the middle and bottom will depend on reducing incomes at the top. This gets to the old pie-cutting story. If we want those at the middle and bottom to have much bigger slices of the pie, the folks at the top will have to get by with smaller slices.

To see how skewed the pie eating has gotten, if the federal minimum wage had kept pace with productivity growth since 1968, as it did from its establishment in 1938 until 1968, it would be $24 an hour today. That means a single full-time minimum wage earner would have an income of $48,000 a year. A two-earner couple getting the minimum wage would have an income of $96,000 a year.

This is a striking counter-factual, but we can’t just go from here to there. In order for the economy to allow for this sort income and consumption by those at the middle and bottom, we have to reduce income and consumption at the top.

We can talk about expanding the pie, but I don’t think that I, or anyone else, has a magical formula to hugely expand the size of the pie.  There are areas where better policy can lead to a more productive economy, but we are more likely talking about one to two percent rather than ten to twenty percent, and even these gains are likely to be a long-term story, not gains we can see in two or three years.

It is also worth focusing on what pie-eating among the top means. There are many progressives who have made a sport of highlighting the enormous wealth that Jeff Bezos, Mark Zuckerberg, and other super-rich types have accrued from recent stock market gains. While the wealth of the super-rich is obscene, reducing these fortunes will actually not free up much room for more income lower down the ladder.

As a practical matter, Jeff Bezos and Mark Zuckerberg probably don’t consume much more in a given year than your average single-digit billionaire. This means that if we took away $100 billion from each of them, it would not free up much consumption for those at the bottom. If we want to create the economic space to substantially expand incomes at the middle and the bottom, we will have to substantially reduce the consumption of not just some tiny segment of super-rich people, but also the rest of the top one percent and even the top five percent. (That gets us a cutoff in household income of around $300,000.) We might even have to knock down the income a bit of the next five percent (cutoff of household income around $200,000).   

There is the political issue of the enormous influence that the super-rich can buy with their wealth. This is a huge problem, but it is best addressed in the near-term by increasing the opportunities for ordinary people to have a voice.

I know many on the left want to use taxes to reduce the income, and therefore consumption, of those at the top. While we can and should make our tax system more progressive, there are real limits on how far we can push progressive taxation. Rich people don’t like to pay taxes. They can and do find ways to avoid and evade taxes. Insofar as they are successful in these efforts, we fail to reduce their income in the way intended, we create a huge tax-gaming industry, which is a source of economic waste and itself a generator of inequality, and we undermine faith in the system.

It is far better if we change economic structures in ways that don’t allow people to get so rich in the first place. As a political matter, it is hard to defend an institutional structure that is both inefficient and a large generator inequality. As a practical matter, it is much easier to design systems that don’t give rich people billions of dollars in the first place, than to try to impose taxes that pull most of their billions back after the fact.

This is the basis of my thinking in much of my work. I lay out the case most completely in Rigged (it’s free), but I am constantly looking for new areas where altering rules can lead to less inequality, without jeopardizing efficiency.   

 

 

Patent and Copyright Monopolies

I like to begin with patent and copyright monopolies both because this is the clearest case, and also because the most money is at stake. The basic point is painfully simple: patent and copyright monopolies are not intrinsic to the market, they are government policies designed to promote innovation and creative work.

As policies, they can be altered as we choose. They can be shorter or longer, stronger or weaker. We also can use other mechanisms to promote innovation and creative work.

These policies transfer an enormous amount of income from the bulk of the population to those in a position to benefit from patent and copyright monopolies. I calculated that these policies may transfer over $1 trillion a year from the rest of us to the beneficiaries of patent and copyright monopolies. This is an amount that is larger than the military budget, it is close to half of all before-tax corporate profits. In other words, it is real money.

Prescription drugs are the largest single chunk of this sum. Drugs are important, not only because of the money involved, but also because people’s lives and health are at stake. The drugs that sell for tens, or even hundreds, of thousands of dollars would almost invariably be cheap in a world without patent monopolies and related protections. While any price is expensive for the poor, for most people, paying for drugs would not be a big problem if they sold for ten or fifteen dollars per prescription. Doctors could freely prescribe what they view as the best drug for their patients, without regard to price. (We need to make sure that government programs pick up the tab for the poor.)

There is also the issue of the perverse incentives created by patent monopolies. Drug companies routinely misrepresent the safety and effectiveness of their drugs to maximize their sales and therefore the benefit of monopoly pricing. The most extreme case (which no one ever talks about) is the opioid crisis, which was worsened as a result of drug companies widely pushing drugs that they knew to be more addictive than claimed.

The inequality story is also straightforward. Dishwashers and custodians don’t benefit from patent monopolies. A very limited group of workers are in a position to get big gains from these policies. Bill Gates would likely still be working for a living if not for the patent and copyright monopolies on Microsoft software. When economists say that “technology” has increased the returns to education and inequality, they actually mean that patent and copyright monopolies have increased the returns to education and inequality, but it sounds much better to blame inequality on an abstract force than government policy.

 

The Corruption of Corporate Governance

There is a simple point here that seems to largely escape people on the left. CEOs are not worth their $20 million paychecks. That is not a moral assessment of the value of their work, that is a dollar and cents calculation about their value to the companies that employ them.

At this point there is a considerable body of research that shows the pay of CEOs is not closely related to the returns they provide to shareholders. Bebchek and Fried have a somewhat dated collection of research on the topic. I reference some more recent material in chapter 6 of Rigged. A couple of years ago, Jessica Schieder and I also contributed a piece to this literature.

The fact that CEOs are not worth their pay matters because it means that they are effectively ripping off the companies for which they work. There is a widely held view, that in recent decades, companies have been run to maximize returns to shareholders. However, if CEOs have been earning huge paychecks at the expense of the companies they work for, then it is not the case that companies are being run to maximize returns to shareholders.

The fact that returns to shareholders have not been high by historical standards over the last two decades supports the view that CEOs are not maximizing returns to shareholders. It is also worth noting that the shift of income from labor to capital only explains about 10 percent of the upward redistribution of the last four decades.

The fact that CEOs might be gaining at the expense of shareholders is not just a question of which group of rich people get the money. At the most basic level, there is reason to prefer the marginal dollar goes to shareholders, since even with the enormous skewing stock ownership, a substantial portion of shares are owned by middle class people in their 401(k)s and pension funds. By contrast, every dollar going to a CEO is going to someone in the top 0.001 percent of the income distribution.

But more importantly, the bloated pay of CEOs has a huge impact on pays scales throughout the economy. If the CEO is getting $20 million then it is likely the chief financial officer and other top tier executives are getting close to $10 million. And the third tier can be getting $2 or $3 million. By contrast, if we had the pay scales of forty years ago, the CEO would be getting $2 to $3 million. The second tier would be correspondingly lower, and the third tier may not even crack $1 million. The excess pay at the top in the corporate sector also leads to bloated pay for top executives in universities and private charities. And, with all this money going to the top, there is less for everyone else.  

Anyhow, it should be apparent both that lowering the pay for CEOs will be a huge step in reducing income inequality, and that shareholders should be allies in this battle. Changing the rules of corporate governance (these are set by the government) to give shareholders more control over CEO pay can lead to lower pay at the top and therefore less inequality.

 

Globalization is a Policy, not an Exogenous Event

A popular story among elite types is that we can’t have good-paying factory jobs that can support a family because of globalization. The deal is that workers earning $30 an hour, plus benefits, can’t compete with workers in places like Mexico and China, who can do the same work for less than one-tenth as much. 

This is true. But the fact that our factory workers were put in direct competition with low paid workers in the developing world was not just something that happened, it was the result of deliberate policy. Our trade deals were designed to make it as easy as possible for U.S. corporations to outsource work to developing countries and bring manufactured goods back into the United States. The massive loss of manufacturing jobs in the years from 2000 to 2007 (pre-Great Recession) was not an accident, that was the point of our trade deals.

We could have constructed our trade deals differently. Instead of putting manufacturing workers in competition with their counterparts in the developing world, we could have designed our trade deals to put doctors, dentists and other highly paid professionals in direct competition with their counterparts in the developing world. This would have meant standardizing licensing requirements in ways that ensured safety standards, while making it as easy as possible for foreign professionals to train to meet these standards and then practice freely in the United States.

While doctors are not among the super-rich, their average pay is close to $280,000 a year, putting them in the top two percent of wage earners.  They also earn roughly $100,000 more annually than their counterparts in other wealthy countries. If we got doctors’ pay down to the levels in Germany or France, it would save us close to $100 billion a year. That comes to $700 per year per household.

When I have raised this issue with other progressives, many first dispute the idea that we could get foreign doctors that meet our standards. When I convince them of the absurdity of this position (there are plenty of very smart people in places like Mexico and India who would be happy to train to our standards for the opportunity to practice medicine here), they often respond with comments like people like their doctors or that they personally like their doctor.

I get that, but there is some serious logic missing. I like the person who cuts my hair; she doesn’t earn $280,000 a year. Essentially, these progressive types are expressing class solidarity with very highly paid professionals. They are welcome to do so, although it is an odd position for people who consider themselves progressive, but there is a more fundamental and simple point at stake.

The fact that autoworkers have to compete with low-paid workers in the developing world, and doctors don’t, is a political choice. This was not the result of an exorable process of globalization, it was the result of how policy types chose to structure globalization. No one should be surprised if manufacturing workers, and workers without college degrees more generally, who have been hurt by the loss of good-paying manufacturing jobs, are resentful of this decision. 

 

The Financial Sector: Economic Bloat and the Bloated

The financial sector is the source of many of the country’s great fortunes, it is also a source of enormous waste. Finance is an intermediate good, like trucking. It is very important to the economy; we need an industry that allocates capital and makes payments. But just as we want as few resources as possible involved in shipping our goods from Point A to Point B, we also want as few resources as possible tied up in the financial sector. 

In fact, the financial sector has exploded in size relative to the rest of the economy over the last five decades. We have seen a massive increase in financial transactions, as new financial assets are being constantly created and the existing ones are being traded more frequently. It is difficult to see much gain to the real economy from this explosion in the size and complexity of the financial sector, even if it has meant big fortunes for many people in the sector.

My favorite remedy is a financial transactions tax, which can be thought of as equivalent to the sales tax we impose on most of the goods we buy. A modest tax could easily raise $100 billion a year (0.5 percent of GDP), which would come almost entirely at the expense of the industry.

I find that many people have difficulty understanding how the tax would come at the expense of the industry and not investors. They insist that that banks and brokerage houses will just pass on the tax to investors. This is largely true but it misses the point.

There is considerable research showing that the volume of trading falls roughly in proportion to the increase in the cost of trading. This means that if the cost of trading rises by 40 percent, then the number of shares bought and sold will fall by roughly 40 percent. This means that, for a typical investor, the increase in the cost per trade due to the tax will be offset by the reduction in the number of trades they or their fund manager make.

This means that the total amount that they spend on trading will be little changed, but money they used to pay to the industry for carrying through trades will instead be paid to the government in taxes. Since trades are on net a wash (every trade has a winner and loser, this averages out for all but the most astute investors), investors will not be hurt by a reduction in trading volume.

This one often leaves people baffled, since if they aren’t gaining from trading now, they could reduce their volume of trading and save money. That view is correct, they could save money with fewer trades, but nonetheless many people choose to bet that they, or a fund manager will be able to beat the market.

Anyhow, the point here is that if we just applied similar tax treatment to the financial sector as we apply to most goods and services we buy, we would have a radically downsized sector and many fewer great fortunes being earned there.

The other simple quick fix would be to crack down on private equity funds, which are a source of great fortunes for fund partners. My colleague Eileen Appelbaum, along with Rose Batt, has documented many of the abuses the industry has developed to maximize their returns.

In addition to cracking down on abuses, which can get complicated, a simpler issue is that private equity is no longer giving above market returns. In the 1980s and 1990s private equity companies were able to find many underpriced companies, turn them around and make large profits reselling them when they took the company public. This no longer seems to be the case as their returns have largely followed the market since 2006. This means that there is no reason for pension funds, the major source of private equity funding, to be tying up their assets with them.

Even though pension funds may not be gaining by investing with private equity, many of their managers are convinced that they do. There is an easy remedy here. Just require the terms of all contracts of public pension funds with investment managers, including private equity, be posted on the fund’s website, showing in clear terms what the managers get paid and the return on the investment. It is likely that the mediocre returns on private equity funds, coupled with the large payments to the private equity managers, would soon discourage pensions from continuing to turn over large amounts of money to these funds.

There are other areas where we can both make the economy more efficient and reduce the opportunities for large fortunes in the financial sector. The most obvious is cleaning up the room for abusive credit practices that the Consumer Financial Protection Bureau was designed to target. There is no economic reason to give clever lawyers and accountants incentives to design ways to rip-off their customers. If these practices are blocked, by regulation or law, it a pure gain for the economy.

As a general rule when it comes to the financial sector, we want it small and we want it simple. If we see lots of resources being devoted to the sector, it is clear indication we have a problem.

 

Fixing Facebook and Social Media: Treat Them Like Other Media

The battle over Section 230 of the 1996 Communications Decency Act has taken a bizarre turn in recent months because Donald Trump seems to have been convinced that repealing it would mean that Twitter and Facebook couldn’t comment on or take down his posts. Actually, the opposite is true. In their current form, without Section 230 protection, Twitter and Facebook would probably be more likely to remove material posted by Donald Trump because it could be libelous and make them subject to legal actions.

But ignoring the Trump confusion, the issue with Section 230 protection is why should Internet outlets be protected from damages, when the exact same material in a traditional print or broadcast outlet could lead to a lawsuit costing millions? Just to be clear, the issue is not directly posted material. If Facebook itself were to post libelous material it would face the same legal liability as the New York Times or CNN. The issue is third party content, where social media companies are completely protected.

If we applied the same rules to Facebook, Twitter, and other social media companies as we do to traditional news outlets (I describe how this could be done in more detail here), we would likely see a radically downsized Facebook and Twitter. There would still be considerable opportunities to make money in this sector, but likely much less than Mark Zuckerberg has made to date.

Even more important than downsizing Mark Zuckerberg’s fortune is the issue of democratic control. In both the 2016 and 2020 elections, the public was in the position of begging Mark Zuckerberg to be responsible in the material he was allowing to be spread across his network. We should never be in the position of hoping some billionaire media mogul acts responsibly, with enormous consequences for democracy if they don’t. This is a very good argument for breaking up Facebook, so that Mr. Zuckerberg’s decisions do not have so much impact on our political process, but repealing Section 230 may get us to the same place through a much simpler mechanism.

 

Wishing You a Happy and More Egalitarian New Year

 

Well, that’s the list for now. I have other schemes, as my regular readers know, but these are the big ones. The point is that we should never take market outcomes as simple givens. We can structure the market in an infinite number of different ways. Any political strategy that doesn’t acknowledge this basic point is doomed to failure.

The approach of the end of the year seems a good time to sum up thoughts. My comments here will not be news to regular readers, but may be to others. Also, this exercise is helpful for me to keep my thoughts clear. (I also expect to take next week off, so you won’t be hearing from me for a while.)

Most of my work for the last several years has been focused on ways to reduce before tax inequality by reducing the amount of before-tax income that goes to those at the top of the income distribution. For better or worse, there don’t seem to be a lot of progressives that share this beat. There are a few points that are worth making.

First, my focus on reducing income at the top doesn’t mean for a second that I don’t see efforts at raising income for those at the bottom (and middle) as being important. I have long been involved with or worked alongside people trying to raise minimum wages, protect or increase Social Security benefits, and increase unionization rates.

These are very important efforts, but at the end of the day, our ability to raise incomes at the middle and bottom will depend on reducing incomes at the top. This gets to the old pie-cutting story. If we want those at the middle and bottom to have much bigger slices of the pie, the folks at the top will have to get by with smaller slices.

To see how skewed the pie eating has gotten, if the federal minimum wage had kept pace with productivity growth since 1968, as it did from its establishment in 1938 until 1968, it would be $24 an hour today. That means a single full-time minimum wage earner would have an income of $48,000 a year. A two-earner couple getting the minimum wage would have an income of $96,000 a year.

This is a striking counter-factual, but we can’t just go from here to there. In order for the economy to allow for this sort income and consumption by those at the middle and bottom, we have to reduce income and consumption at the top.

We can talk about expanding the pie, but I don’t think that I, or anyone else, has a magical formula to hugely expand the size of the pie.  There are areas where better policy can lead to a more productive economy, but we are more likely talking about one to two percent rather than ten to twenty percent, and even these gains are likely to be a long-term story, not gains we can see in two or three years.

It is also worth focusing on what pie-eating among the top means. There are many progressives who have made a sport of highlighting the enormous wealth that Jeff Bezos, Mark Zuckerberg, and other super-rich types have accrued from recent stock market gains. While the wealth of the super-rich is obscene, reducing these fortunes will actually not free up much room for more income lower down the ladder.

As a practical matter, Jeff Bezos and Mark Zuckerberg probably don’t consume much more in a given year than your average single-digit billionaire. This means that if we took away $100 billion from each of them, it would not free up much consumption for those at the bottom. If we want to create the economic space to substantially expand incomes at the middle and the bottom, we will have to substantially reduce the consumption of not just some tiny segment of super-rich people, but also the rest of the top one percent and even the top five percent. (That gets us a cutoff in household income of around $300,000.) We might even have to knock down the income a bit of the next five percent (cutoff of household income around $200,000).   

There is the political issue of the enormous influence that the super-rich can buy with their wealth. This is a huge problem, but it is best addressed in the near-term by increasing the opportunities for ordinary people to have a voice.

I know many on the left want to use taxes to reduce the income, and therefore consumption, of those at the top. While we can and should make our tax system more progressive, there are real limits on how far we can push progressive taxation. Rich people don’t like to pay taxes. They can and do find ways to avoid and evade taxes. Insofar as they are successful in these efforts, we fail to reduce their income in the way intended, we create a huge tax-gaming industry, which is a source of economic waste and itself a generator of inequality, and we undermine faith in the system.

It is far better if we change economic structures in ways that don’t allow people to get so rich in the first place. As a political matter, it is hard to defend an institutional structure that is both inefficient and a large generator inequality. As a practical matter, it is much easier to design systems that don’t give rich people billions of dollars in the first place, than to try to impose taxes that pull most of their billions back after the fact.

This is the basis of my thinking in much of my work. I lay out the case most completely in Rigged (it’s free), but I am constantly looking for new areas where altering rules can lead to less inequality, without jeopardizing efficiency.   

 

 

Patent and Copyright Monopolies

I like to begin with patent and copyright monopolies both because this is the clearest case, and also because the most money is at stake. The basic point is painfully simple: patent and copyright monopolies are not intrinsic to the market, they are government policies designed to promote innovation and creative work.

As policies, they can be altered as we choose. They can be shorter or longer, stronger or weaker. We also can use other mechanisms to promote innovation and creative work.

These policies transfer an enormous amount of income from the bulk of the population to those in a position to benefit from patent and copyright monopolies. I calculated that these policies may transfer over $1 trillion a year from the rest of us to the beneficiaries of patent and copyright monopolies. This is an amount that is larger than the military budget, it is close to half of all before-tax corporate profits. In other words, it is real money.

Prescription drugs are the largest single chunk of this sum. Drugs are important, not only because of the money involved, but also because people’s lives and health are at stake. The drugs that sell for tens, or even hundreds, of thousands of dollars would almost invariably be cheap in a world without patent monopolies and related protections. While any price is expensive for the poor, for most people, paying for drugs would not be a big problem if they sold for ten or fifteen dollars per prescription. Doctors could freely prescribe what they view as the best drug for their patients, without regard to price. (We need to make sure that government programs pick up the tab for the poor.)

There is also the issue of the perverse incentives created by patent monopolies. Drug companies routinely misrepresent the safety and effectiveness of their drugs to maximize their sales and therefore the benefit of monopoly pricing. The most extreme case (which no one ever talks about) is the opioid crisis, which was worsened as a result of drug companies widely pushing drugs that they knew to be more addictive than claimed.

The inequality story is also straightforward. Dishwashers and custodians don’t benefit from patent monopolies. A very limited group of workers are in a position to get big gains from these policies. Bill Gates would likely still be working for a living if not for the patent and copyright monopolies on Microsoft software. When economists say that “technology” has increased the returns to education and inequality, they actually mean that patent and copyright monopolies have increased the returns to education and inequality, but it sounds much better to blame inequality on an abstract force than government policy.

 

The Corruption of Corporate Governance

There is a simple point here that seems to largely escape people on the left. CEOs are not worth their $20 million paychecks. That is not a moral assessment of the value of their work, that is a dollar and cents calculation about their value to the companies that employ them.

At this point there is a considerable body of research that shows the pay of CEOs is not closely related to the returns they provide to shareholders. Bebchek and Fried have a somewhat dated collection of research on the topic. I reference some more recent material in chapter 6 of Rigged. A couple of years ago, Jessica Schieder and I also contributed a piece to this literature.

The fact that CEOs are not worth their pay matters because it means that they are effectively ripping off the companies for which they work. There is a widely held view, that in recent decades, companies have been run to maximize returns to shareholders. However, if CEOs have been earning huge paychecks at the expense of the companies they work for, then it is not the case that companies are being run to maximize returns to shareholders.

The fact that returns to shareholders have not been high by historical standards over the last two decades supports the view that CEOs are not maximizing returns to shareholders. It is also worth noting that the shift of income from labor to capital only explains about 10 percent of the upward redistribution of the last four decades.

The fact that CEOs might be gaining at the expense of shareholders is not just a question of which group of rich people get the money. At the most basic level, there is reason to prefer the marginal dollar goes to shareholders, since even with the enormous skewing stock ownership, a substantial portion of shares are owned by middle class people in their 401(k)s and pension funds. By contrast, every dollar going to a CEO is going to someone in the top 0.001 percent of the income distribution.

But more importantly, the bloated pay of CEOs has a huge impact on pays scales throughout the economy. If the CEO is getting $20 million then it is likely the chief financial officer and other top tier executives are getting close to $10 million. And the third tier can be getting $2 or $3 million. By contrast, if we had the pay scales of forty years ago, the CEO would be getting $2 to $3 million. The second tier would be correspondingly lower, and the third tier may not even crack $1 million. The excess pay at the top in the corporate sector also leads to bloated pay for top executives in universities and private charities. And, with all this money going to the top, there is less for everyone else.  

Anyhow, it should be apparent both that lowering the pay for CEOs will be a huge step in reducing income inequality, and that shareholders should be allies in this battle. Changing the rules of corporate governance (these are set by the government) to give shareholders more control over CEO pay can lead to lower pay at the top and therefore less inequality.

 

Globalization is a Policy, not an Exogenous Event

A popular story among elite types is that we can’t have good-paying factory jobs that can support a family because of globalization. The deal is that workers earning $30 an hour, plus benefits, can’t compete with workers in places like Mexico and China, who can do the same work for less than one-tenth as much. 

This is true. But the fact that our factory workers were put in direct competition with low paid workers in the developing world was not just something that happened, it was the result of deliberate policy. Our trade deals were designed to make it as easy as possible for U.S. corporations to outsource work to developing countries and bring manufactured goods back into the United States. The massive loss of manufacturing jobs in the years from 2000 to 2007 (pre-Great Recession) was not an accident, that was the point of our trade deals.

We could have constructed our trade deals differently. Instead of putting manufacturing workers in competition with their counterparts in the developing world, we could have designed our trade deals to put doctors, dentists and other highly paid professionals in direct competition with their counterparts in the developing world. This would have meant standardizing licensing requirements in ways that ensured safety standards, while making it as easy as possible for foreign professionals to train to meet these standards and then practice freely in the United States.

While doctors are not among the super-rich, their average pay is close to $280,000 a year, putting them in the top two percent of wage earners.  They also earn roughly $100,000 more annually than their counterparts in other wealthy countries. If we got doctors’ pay down to the levels in Germany or France, it would save us close to $100 billion a year. That comes to $700 per year per household.

When I have raised this issue with other progressives, many first dispute the idea that we could get foreign doctors that meet our standards. When I convince them of the absurdity of this position (there are plenty of very smart people in places like Mexico and India who would be happy to train to our standards for the opportunity to practice medicine here), they often respond with comments like people like their doctors or that they personally like their doctor.

I get that, but there is some serious logic missing. I like the person who cuts my hair; she doesn’t earn $280,000 a year. Essentially, these progressive types are expressing class solidarity with very highly paid professionals. They are welcome to do so, although it is an odd position for people who consider themselves progressive, but there is a more fundamental and simple point at stake.

The fact that autoworkers have to compete with low-paid workers in the developing world, and doctors don’t, is a political choice. This was not the result of an exorable process of globalization, it was the result of how policy types chose to structure globalization. No one should be surprised if manufacturing workers, and workers without college degrees more generally, who have been hurt by the loss of good-paying manufacturing jobs, are resentful of this decision. 

 

The Financial Sector: Economic Bloat and the Bloated

The financial sector is the source of many of the country’s great fortunes, it is also a source of enormous waste. Finance is an intermediate good, like trucking. It is very important to the economy; we need an industry that allocates capital and makes payments. But just as we want as few resources as possible involved in shipping our goods from Point A to Point B, we also want as few resources as possible tied up in the financial sector. 

In fact, the financial sector has exploded in size relative to the rest of the economy over the last five decades. We have seen a massive increase in financial transactions, as new financial assets are being constantly created and the existing ones are being traded more frequently. It is difficult to see much gain to the real economy from this explosion in the size and complexity of the financial sector, even if it has meant big fortunes for many people in the sector.

My favorite remedy is a financial transactions tax, which can be thought of as equivalent to the sales tax we impose on most of the goods we buy. A modest tax could easily raise $100 billion a year (0.5 percent of GDP), which would come almost entirely at the expense of the industry.

I find that many people have difficulty understanding how the tax would come at the expense of the industry and not investors. They insist that that banks and brokerage houses will just pass on the tax to investors. This is largely true but it misses the point.

There is considerable research showing that the volume of trading falls roughly in proportion to the increase in the cost of trading. This means that if the cost of trading rises by 40 percent, then the number of shares bought and sold will fall by roughly 40 percent. This means that, for a typical investor, the increase in the cost per trade due to the tax will be offset by the reduction in the number of trades they or their fund manager make.

This means that the total amount that they spend on trading will be little changed, but money they used to pay to the industry for carrying through trades will instead be paid to the government in taxes. Since trades are on net a wash (every trade has a winner and loser, this averages out for all but the most astute investors), investors will not be hurt by a reduction in trading volume.

This one often leaves people baffled, since if they aren’t gaining from trading now, they could reduce their volume of trading and save money. That view is correct, they could save money with fewer trades, but nonetheless many people choose to bet that they, or a fund manager will be able to beat the market.

Anyhow, the point here is that if we just applied similar tax treatment to the financial sector as we apply to most goods and services we buy, we would have a radically downsized sector and many fewer great fortunes being earned there.

The other simple quick fix would be to crack down on private equity funds, which are a source of great fortunes for fund partners. My colleague Eileen Appelbaum, along with Rose Batt, has documented many of the abuses the industry has developed to maximize their returns.

In addition to cracking down on abuses, which can get complicated, a simpler issue is that private equity is no longer giving above market returns. In the 1980s and 1990s private equity companies were able to find many underpriced companies, turn them around and make large profits reselling them when they took the company public. This no longer seems to be the case as their returns have largely followed the market since 2006. This means that there is no reason for pension funds, the major source of private equity funding, to be tying up their assets with them.

Even though pension funds may not be gaining by investing with private equity, many of their managers are convinced that they do. There is an easy remedy here. Just require the terms of all contracts of public pension funds with investment managers, including private equity, be posted on the fund’s website, showing in clear terms what the managers get paid and the return on the investment. It is likely that the mediocre returns on private equity funds, coupled with the large payments to the private equity managers, would soon discourage pensions from continuing to turn over large amounts of money to these funds.

There are other areas where we can both make the economy more efficient and reduce the opportunities for large fortunes in the financial sector. The most obvious is cleaning up the room for abusive credit practices that the Consumer Financial Protection Bureau was designed to target. There is no economic reason to give clever lawyers and accountants incentives to design ways to rip-off their customers. If these practices are blocked, by regulation or law, it a pure gain for the economy.

As a general rule when it comes to the financial sector, we want it small and we want it simple. If we see lots of resources being devoted to the sector, it is clear indication we have a problem.

 

Fixing Facebook and Social Media: Treat Them Like Other Media

The battle over Section 230 of the 1996 Communications Decency Act has taken a bizarre turn in recent months because Donald Trump seems to have been convinced that repealing it would mean that Twitter and Facebook couldn’t comment on or take down his posts. Actually, the opposite is true. In their current form, without Section 230 protection, Twitter and Facebook would probably be more likely to remove material posted by Donald Trump because it could be libelous and make them subject to legal actions.

But ignoring the Trump confusion, the issue with Section 230 protection is why should Internet outlets be protected from damages, when the exact same material in a traditional print or broadcast outlet could lead to a lawsuit costing millions? Just to be clear, the issue is not directly posted material. If Facebook itself were to post libelous material it would face the same legal liability as the New York Times or CNN. The issue is third party content, where social media companies are completely protected.

If we applied the same rules to Facebook, Twitter, and other social media companies as we do to traditional news outlets (I describe how this could be done in more detail here), we would likely see a radically downsized Facebook and Twitter. There would still be considerable opportunities to make money in this sector, but likely much less than Mark Zuckerberg has made to date.

Even more important than downsizing Mark Zuckerberg’s fortune is the issue of democratic control. In both the 2016 and 2020 elections, the public was in the position of begging Mark Zuckerberg to be responsible in the material he was allowing to be spread across his network. We should never be in the position of hoping some billionaire media mogul acts responsibly, with enormous consequences for democracy if they don’t. This is a very good argument for breaking up Facebook, so that Mr. Zuckerberg’s decisions do not have so much impact on our political process, but repealing Section 230 may get us to the same place through a much simpler mechanism.

 

Wishing You a Happy and More Egalitarian New Year

 

Well, that’s the list for now. I have other schemes, as my regular readers know, but these are the big ones. The point is that we should never take market outcomes as simple givens. We can structure the market in an infinite number of different ways. Any political strategy that doesn’t acknowledge this basic point is doomed to failure.

The Washington Post tells us that 7.7 million first doses of vaccines have been shipped to date (two million shots have been given), with a target of 16 million by the end of the year. This is warp speed?

By comparison, we manage to get over 170 million flu shots in people’s arms every year, without any heroic efforts by the government and the military. Most of those doses are given over roughly a four-month period, which means a bit less than 1.5 million a day. That puts our flu shot delivery system ahead of Donald Trump’s warp speed. What the f**k?

Last week I wrote a piece asking why we didn’t have 400 million doses of vaccines on hand by the start of December. Of course production takes time, and we didn’t know back in the summer which vaccines would prove effective, but so what?

We could have started mass production of every vaccine that entered Phase 3 trials. If some of them proved to be ineffective, we would have wasted some money, but the cost would be trivial. The per shot cost of a vaccine is in the range of $2-$4. This means if we had to throw 200 million vaccines in the toilet, we would have wasted $800 million dollars, using the higher end estimate. That is less than 20 percent of the two-year cost of Donald Trump’s three martini lunch tax break and less than 1 percent of the size of the double-dip tax break, allowing companies to write off expenses that were reimbursed under the paycheck protection program.

Along with massive production of vaccines, they should have been pre-positioned to allow for faster distribution. We should have had major warehouses located around the country so that as soon as the FDA  green-lighted a vaccine, it could quickly be delivered to hospitals and clinics in every corner of the country.

The basic point here is that we have two distinct processes. One is the manufacture and distribution of the vaccines. The other is the determination that they are safe and effective. These can go on simultaneously.

We should have been prepared to start inoculating millions of people the day a vaccine was approved. This is a massive policy failure, or as Donald Trump would say, #MAGA!    

The Washington Post tells us that 7.7 million first doses of vaccines have been shipped to date (two million shots have been given), with a target of 16 million by the end of the year. This is warp speed?

By comparison, we manage to get over 170 million flu shots in people’s arms every year, without any heroic efforts by the government and the military. Most of those doses are given over roughly a four-month period, which means a bit less than 1.5 million a day. That puts our flu shot delivery system ahead of Donald Trump’s warp speed. What the f**k?

Last week I wrote a piece asking why we didn’t have 400 million doses of vaccines on hand by the start of December. Of course production takes time, and we didn’t know back in the summer which vaccines would prove effective, but so what?

We could have started mass production of every vaccine that entered Phase 3 trials. If some of them proved to be ineffective, we would have wasted some money, but the cost would be trivial. The per shot cost of a vaccine is in the range of $2-$4. This means if we had to throw 200 million vaccines in the toilet, we would have wasted $800 million dollars, using the higher end estimate. That is less than 20 percent of the two-year cost of Donald Trump’s three martini lunch tax break and less than 1 percent of the size of the double-dip tax break, allowing companies to write off expenses that were reimbursed under the paycheck protection program.

Along with massive production of vaccines, they should have been pre-positioned to allow for faster distribution. We should have had major warehouses located around the country so that as soon as the FDA  green-lighted a vaccine, it could quickly be delivered to hospitals and clinics in every corner of the country.

The basic point here is that we have two distinct processes. One is the manufacture and distribution of the vaccines. The other is the determination that they are safe and effective. These can go on simultaneously.

We should have been prepared to start inoculating millions of people the day a vaccine was approved. This is a massive policy failure, or as Donald Trump would say, #MAGA!    

That is the implication of a major piece on how the coronavirus vaccines are leading to greater worldwide inequality since rich countries have reserved the vast majority of the 2021 supplies of the leading U.S.-European vaccines. While this is, in fact, a serious problem, as my co-authors and I have noted, China also has produced several effective vaccines and is distributing them to developing countries.

China has already made commitments to supply hundreds of millions of doses to Brazil, Morocco, Indonesia, and other developing countries. While it would be best if every country with manufacturing capacity could produce any vaccine, without regard to intellectual property rules, it is bizarre that a piece on access to vaccines in the developing world would fail to mention the vaccines developed by China.

That is the implication of a major piece on how the coronavirus vaccines are leading to greater worldwide inequality since rich countries have reserved the vast majority of the 2021 supplies of the leading U.S.-European vaccines. While this is, in fact, a serious problem, as my co-authors and I have noted, China also has produced several effective vaccines and is distributing them to developing countries.

China has already made commitments to supply hundreds of millions of doses to Brazil, Morocco, Indonesia, and other developing countries. While it would be best if every country with manufacturing capacity could produce any vaccine, without regard to intellectual property rules, it is bizarre that a piece on access to vaccines in the developing world would fail to mention the vaccines developed by China.

It is more than a bit annoying to hear reporters endlessly refer to China as the world’s second largest economy. It isn’t. It’s the world’s largest economy and has been since 2017. Here are the data from the International Monetary Fund.

Source: International Monetary Fund.

As the chart shows, China’s economy first passed the U.S. in 2017. It is projected to be more than 16 percent larger this year, and by 2025 is projected to be almost 40 percent larger by 2025. 

Purchasing power parity (PPP) measures of GDP are based on applying a common set of prices for all goods and services produced across countries. While it is difficult to measure accurately, most economists view PPP as being the better way to calculate GDP, since it reflects living standards and does not fluctuate with currency values. China does have four times the population of the United States, so it is still much poorer on a per capita basis.

The fact that China has a larger GDP than the United States is important for policy debates since many people seem to hold illusions about the ability of the U.S. to influence China. While the United States can take steps that will damage China’s economy, even the harshest measures will only have limited impact, and China will be able to take steps to overcome them through time. This is important background for debates on China policy.  

It is more than a bit annoying to hear reporters endlessly refer to China as the world’s second largest economy. It isn’t. It’s the world’s largest economy and has been since 2017. Here are the data from the International Monetary Fund.

Source: International Monetary Fund.

As the chart shows, China’s economy first passed the U.S. in 2017. It is projected to be more than 16 percent larger this year, and by 2025 is projected to be almost 40 percent larger by 2025. 

Purchasing power parity (PPP) measures of GDP are based on applying a common set of prices for all goods and services produced across countries. While it is difficult to measure accurately, most economists view PPP as being the better way to calculate GDP, since it reflects living standards and does not fluctuate with currency values. China does have four times the population of the United States, so it is still much poorer on a per capita basis.

The fact that China has a larger GDP than the United States is important for policy debates since many people seem to hold illusions about the ability of the U.S. to influence China. While the United States can take steps that will damage China’s economy, even the harshest measures will only have limited impact, and China will be able to take steps to overcome them through time. This is important background for debates on China policy.  

When Pennsylvania Senator Pat Toomey, at the last minute, insisted on adding language to the pandemic rescue package, stripping the Fed of emergency powers, I was among those screaming “No Deal.”  I have not always been a huge fan of the Fed, but I felt this plan was a deliberate effort to sabotage an effective response to any financial/economic crises that may arise in a Biden administration.

Just for background, we know that the Republicans are perfectly fine with sabotaging the economy in order to hurt the political prospects of a Democrat in the White House. This is exactly what they did under President Obama, as they demanded recovery killing austerity as they feigned concern about deficits. Republican Senate Leader Mitch McConnell openly said that his job was to make Obama a one-term president.

With this recent history, there can be little doubt that Republicans in Congress will do everything they can to sabotage the economy under President Biden. In this context, it is especially important that the Fed have the ability to take the steps necessary to counteract crises that could arise.

The specific power at issue with Senator Toomey’s proposal was whether the Fed could establish special lending facilities to help a market facing a crisis. This could be the situation if, for example, there is a sudden fear of widespread bankruptcies in the municipal bond market, if a major city defaults on its debt.

Without emergency powers, the only thing the Fed could do is to push down Treasury bond rates (they are already very low) and buy some short-term municipal debt. It could not engage in purchases of long-term debt and commit to support the market. Many, perhaps most, Republicans in Congress would then be celebrating as “Democrat” cities lost their ability to borrow and suddenly were unable to pay their bills.

Fed critics (I have often been one myself), have argued that we should not view the Fed as an ally of progressives. It certainly has a very mixed record, so there are plenty of grounds for suspicion. Under Paul Volcker and Alan Greenspan, the Fed repeatedly raised interest rates in an explicit effort to weaken workers’ bargaining power and thereby reduce wages. This was done ostensibly to prevent inflation.

More recently, the Fed, beginning under Janet Yellen and continuing under Jerome Powell, the current chair, has acknowledged the role of monetary policy in inequality and especially racial inequality. Chair Powell has committed to keeping interest rates low until we are seeing a full employment economy that is creating serious inflationary pressures

This change in approach stems at least in part from the Fed Up Campaign, organized by the Center for Popular Democracy. (Ady Barkan was lead organizer in getting this campaign going.) This group brought labor and community organizers together to press the Fed for more pro-worker policies. (I was one of the economists who worked with Fed Up.) Chair Yellen and other members of the Fed’s leadership took the effort seriously and listened to the arguments. This was a big victory.

As far as the Fed’s conduct in the pandemic recession, I would mostly be supportive. They lowered interest rates as much as possible and acted to stabilize markets. This did help businesses and the stock market, but it also led to a housing boom that created hundreds of thousands of jobs. In addition, lower interest rates allowed millions of middle class homeowners to refinance, putting thousands of dollars in interest savings in their pocket every year going forward. I have a hard time seeing the world being in a better place if the Fed had sat on its hands.

By contrast, I was one of few economists to criticize the bailouts in the Great Recession. The banks and financial institutions were in a crisis of their own creation, they had made hundreds of billions of dollars of bad loans due to their own greed and stupidity. Being a good capitalist, I thought it was important to let these companies enjoy the fruits of their labor. (We also would have gotten instant financial reform, as the financial sector would have been quickly downsized, eliminating an enormous source of economic waste.) 

The Fed was 100 percent complicit in covering the tracks of the industry, including pushing end of the world stories to force Congress to approve the TARP. By far the best argument for the TARP was that the commercial paper market was shutting down. This meant that even healthy non-financial companies, like Verizon and Boeing, could not get the money they needed to meet their payroll and other regular bills. This really would have been an economic catastrophe.

However, the dirty little secret here was that the Fed always had the power to sustain the commercial paper market on its own, without any assist from Congress. We found this out the weekend after the TARP passed when the Fed announced the creation of a commercial paper lending facility.

The long and short, is yes, we absolutely have to view the Fed with suspicion, but it can play a positive role, and has so far in this crisis. It would be foolish to let Republicans take away its ability to do so in a future crisis.

 

 

When Pennsylvania Senator Pat Toomey, at the last minute, insisted on adding language to the pandemic rescue package, stripping the Fed of emergency powers, I was among those screaming “No Deal.”  I have not always been a huge fan of the Fed, but I felt this plan was a deliberate effort to sabotage an effective response to any financial/economic crises that may arise in a Biden administration.

Just for background, we know that the Republicans are perfectly fine with sabotaging the economy in order to hurt the political prospects of a Democrat in the White House. This is exactly what they did under President Obama, as they demanded recovery killing austerity as they feigned concern about deficits. Republican Senate Leader Mitch McConnell openly said that his job was to make Obama a one-term president.

With this recent history, there can be little doubt that Republicans in Congress will do everything they can to sabotage the economy under President Biden. In this context, it is especially important that the Fed have the ability to take the steps necessary to counteract crises that could arise.

The specific power at issue with Senator Toomey’s proposal was whether the Fed could establish special lending facilities to help a market facing a crisis. This could be the situation if, for example, there is a sudden fear of widespread bankruptcies in the municipal bond market, if a major city defaults on its debt.

Without emergency powers, the only thing the Fed could do is to push down Treasury bond rates (they are already very low) and buy some short-term municipal debt. It could not engage in purchases of long-term debt and commit to support the market. Many, perhaps most, Republicans in Congress would then be celebrating as “Democrat” cities lost their ability to borrow and suddenly were unable to pay their bills.

Fed critics (I have often been one myself), have argued that we should not view the Fed as an ally of progressives. It certainly has a very mixed record, so there are plenty of grounds for suspicion. Under Paul Volcker and Alan Greenspan, the Fed repeatedly raised interest rates in an explicit effort to weaken workers’ bargaining power and thereby reduce wages. This was done ostensibly to prevent inflation.

More recently, the Fed, beginning under Janet Yellen and continuing under Jerome Powell, the current chair, has acknowledged the role of monetary policy in inequality and especially racial inequality. Chair Powell has committed to keeping interest rates low until we are seeing a full employment economy that is creating serious inflationary pressures

This change in approach stems at least in part from the Fed Up Campaign, organized by the Center for Popular Democracy. (Ady Barkan was lead organizer in getting this campaign going.) This group brought labor and community organizers together to press the Fed for more pro-worker policies. (I was one of the economists who worked with Fed Up.) Chair Yellen and other members of the Fed’s leadership took the effort seriously and listened to the arguments. This was a big victory.

As far as the Fed’s conduct in the pandemic recession, I would mostly be supportive. They lowered interest rates as much as possible and acted to stabilize markets. This did help businesses and the stock market, but it also led to a housing boom that created hundreds of thousands of jobs. In addition, lower interest rates allowed millions of middle class homeowners to refinance, putting thousands of dollars in interest savings in their pocket every year going forward. I have a hard time seeing the world being in a better place if the Fed had sat on its hands.

By contrast, I was one of few economists to criticize the bailouts in the Great Recession. The banks and financial institutions were in a crisis of their own creation, they had made hundreds of billions of dollars of bad loans due to their own greed and stupidity. Being a good capitalist, I thought it was important to let these companies enjoy the fruits of their labor. (We also would have gotten instant financial reform, as the financial sector would have been quickly downsized, eliminating an enormous source of economic waste.) 

The Fed was 100 percent complicit in covering the tracks of the industry, including pushing end of the world stories to force Congress to approve the TARP. By far the best argument for the TARP was that the commercial paper market was shutting down. This meant that even healthy non-financial companies, like Verizon and Boeing, could not get the money they needed to meet their payroll and other regular bills. This really would have been an economic catastrophe.

However, the dirty little secret here was that the Fed always had the power to sustain the commercial paper market on its own, without any assist from Congress. We found this out the weekend after the TARP passed when the Fed announced the creation of a commercial paper lending facility.

The long and short, is yes, we absolutely have to view the Fed with suspicion, but it can play a positive role, and has so far in this crisis. It would be foolish to let Republicans take away its ability to do so in a future crisis.

 

 

Want to search in the archives?

¿Quieres buscar en los archivos?

Click Here Haga clic aquí