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David Wallace-Wells just wrote a column describing measures being passed in state legislatures controlled by Republicans, which will make it more difficult for governments to implement measures like temporary business closures or mask and vaccine mandates, all as tools to contain a deadly pandemic. While these laws may seem like an exercise in ungodly stupidity, the New York Times would not allow mention in its paper of restrictions that are likely to pose an even greater risk to public health in the next pandemic.
Of course, I am talking about intellectual property rules. Yes, I have been hitting this one hard in the last few days, but that is just because I find the arrogant ignorance on this issue so infuriating. And it matters.
We don’t know what the next deadly pandemic will look like, and with luck it will be many decades in the future. But we can envision what might have been different about the course of this pandemic if we went the open-source route, where all the science and technology was freely available for others to build on and to use to manufacture vaccines, tests, and treatments.
And, to be clear, this doesn’t mean that companies would not be compensated for their investments in developing the needed technology. The compensation would just take a different form, as a check from the government, rather than charging monopoly prices on vaccines or other products. Of course, companies could sue in court if they considered the compensation inadequate.
If we had gone down this route, all the information for making all vaccines, tests, and treatments would have been available for any manufacturer in the world. Governments interested in slowing the spread of the pandemic would also pay to produce and stockpile these products, especially vaccines, in advance of their approval by the FDA and other countries regulatory agencies.
This would be a very low risk proposition, since the vaccines were cheap to manufacture, less than $2 a shot in most cases. The potential loss from having to throw out 200 million vaccines that proved to be ineffective is trivial compared to the incredible benefits of having 200 million vaccines that could be quickly put into people’s arms once a vaccine was approved.
By pooling technology, we could ensure that people have a choice of vaccines. If people had refused to get vaccinated due to fears of mRNA vaccines (rational or otherwise), there were a number of vaccines based on well-established technologies that could have been made available as an alternative. (The FDA did approve non-mRNA vaccines manufactured by Johnson and Johnson and Novavax, but there were also non-mRNA vaccines widely used in other countries that in principle could have been available here.)
If a range of vaccines had been produced and stockpiled in vast quantities in 2020, when they were being tested for approval, we would have begun large-scale world-wide vaccination campaigns in late 2020 and the first months of 2021. This would have rapidly slowed the spread of the virus, almost certainly preventing the development of the omicron strain and quite possibly the delta strain.
That would have saved millions of lives and avoided trillions of dollars in economic damage. If we adopted the same approach to tests and treatments, this would both further reduce the spread and also the likelihood of death or serious illness among people who got infected.
But, any discussion of suspending intellectual property rules is strictly verboten in the New York Times. They only have space for trashing the Trumpers doing theatrics over banning pandemic mitigation measures. While these Trumpers do certainly deserve the criticism Wallace-Wells directs towards them, it would be great if we could have a discussion of the policies that do far more serious damage to public health, even if they mean big profits to the drug industry.
David Wallace-Wells just wrote a column describing measures being passed in state legislatures controlled by Republicans, which will make it more difficult for governments to implement measures like temporary business closures or mask and vaccine mandates, all as tools to contain a deadly pandemic. While these laws may seem like an exercise in ungodly stupidity, the New York Times would not allow mention in its paper of restrictions that are likely to pose an even greater risk to public health in the next pandemic.
Of course, I am talking about intellectual property rules. Yes, I have been hitting this one hard in the last few days, but that is just because I find the arrogant ignorance on this issue so infuriating. And it matters.
We don’t know what the next deadly pandemic will look like, and with luck it will be many decades in the future. But we can envision what might have been different about the course of this pandemic if we went the open-source route, where all the science and technology was freely available for others to build on and to use to manufacture vaccines, tests, and treatments.
And, to be clear, this doesn’t mean that companies would not be compensated for their investments in developing the needed technology. The compensation would just take a different form, as a check from the government, rather than charging monopoly prices on vaccines or other products. Of course, companies could sue in court if they considered the compensation inadequate.
If we had gone down this route, all the information for making all vaccines, tests, and treatments would have been available for any manufacturer in the world. Governments interested in slowing the spread of the pandemic would also pay to produce and stockpile these products, especially vaccines, in advance of their approval by the FDA and other countries regulatory agencies.
This would be a very low risk proposition, since the vaccines were cheap to manufacture, less than $2 a shot in most cases. The potential loss from having to throw out 200 million vaccines that proved to be ineffective is trivial compared to the incredible benefits of having 200 million vaccines that could be quickly put into people’s arms once a vaccine was approved.
By pooling technology, we could ensure that people have a choice of vaccines. If people had refused to get vaccinated due to fears of mRNA vaccines (rational or otherwise), there were a number of vaccines based on well-established technologies that could have been made available as an alternative. (The FDA did approve non-mRNA vaccines manufactured by Johnson and Johnson and Novavax, but there were also non-mRNA vaccines widely used in other countries that in principle could have been available here.)
If a range of vaccines had been produced and stockpiled in vast quantities in 2020, when they were being tested for approval, we would have begun large-scale world-wide vaccination campaigns in late 2020 and the first months of 2021. This would have rapidly slowed the spread of the virus, almost certainly preventing the development of the omicron strain and quite possibly the delta strain.
That would have saved millions of lives and avoided trillions of dollars in economic damage. If we adopted the same approach to tests and treatments, this would both further reduce the spread and also the likelihood of death or serious illness among people who got infected.
But, any discussion of suspending intellectual property rules is strictly verboten in the New York Times. They only have space for trashing the Trumpers doing theatrics over banning pandemic mitigation measures. While these Trumpers do certainly deserve the criticism Wallace-Wells directs towards them, it would be great if we could have a discussion of the policies that do far more serious damage to public health, even if they mean big profits to the drug industry.
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We have been getting conflicting data on inflation in recent days. The February Consumer Price Index was not great, showing a one-month rise of 0.4 percent in the overall index and 0.5 percent in the core. Combined with the last couple of months’ data, it indicates a modest acceleration over the rates seen in the fall.
By contrast, the Producer Price Index came in somewhat better than expected, with the overall finished goods index declining 0.1 percent, driven by drops in food and energy prices. The core index rose a modest 0.2 percent. Most of the indices at earlier stages of production also showed a good picture. For example, the intermediate index for processed goods fell 0.4 percent in February and is now up just 2.1 percent over the last year.
The picture for import prices in February was also encouraging. The overall index for imports fell 0.1 percent in the month. Excluding fuels, the index rose 0.4 percent in February, but is still up just 0.2 percent over the last year.
The Consumer Price Index does not closely track the indexes showing the price of items at earlier stages of production, but it is difficult to envision sustained divergences. For example, the CPI new vehicle component rose 5.8 percent last year. The index for imported vehicles, parts, and engines rose 2.5 percent. These categories are not identical, but it is difficult to imagine that we would go a decade with domestic vehicle price inflation outpacing the price increases of imports by 3.3 percentage points a year.
These two indices had tracked fairly closely prior to the pandemic. For those keeping score at home, the consumer price new vehicle index has risen by 20.3 percent since the start of the pandemic. The index for imported vehicles, parts, and engines has risen by 6.8 percent, which might suggest that we can anticipate some decline in vehicle prices going forward.
The import price and producer price indices would seem to indicate that the battle with inflation has been largely won, but that is not the picture with the CPI and probably not the story in the Personal Consumption Expenditure Deflator (PCE) that we will get later this month. Fortunately, we can use wage data to get another vantage point on inflation.
Wage Growth Is Moderating
If recent months’ CPI data have given us grounds to question whether inflation is still slowing, that is not true with the most recent wage data. The annualized rate of wage growth over the last three months in the average hourly earnings series is just 3.6 percent. This is down from a peak of 6.4 percent at start of the year, as can be seen in the graph.[1]
Source: Bureau of Labor Statistics and author’s calculations.
Furthermore, the current 3.6 percent rate is roughly consistent with the Fed’s 2.0 percent inflation target. There were several points in the two years prior to the pandemic when the pace of wage growth was this fast or higher, yet the core PCE deflator averaged less than 2.0 percent for this two-year period.
It is worth mentioning that the Employment Cost Index (ECI) shows a somewhat higher rate of wage growth, with the annualized rate for the fourth quarter coming in at 4.0 percent (actually 3.95 percent, if we want to go to a second decimal). This may be slightly more rapid than would be consistent with 2.0 percent inflation, but it’s still not clear this would be a problem.
First, there is no ambiguity about the direction of change. The ECI was rising at a 5.8 percent annual rate at the start of the year. And, by construction, there are no composition effects in the ECI, so the changing employment patterns associated with the reopening would not affect the pace of wage growth reported in this index.
The second reason why a pace of wage growth that might be slightly faster than would be consistent with 2.0 percent inflation should not be a problem, is that the Fed has quite explicitly said that 2.0 percent is an average, not a ceiling. In the decade prior to the pandemic, the rate of inflation in the core PCE averaged 1.6 percent, 0.4 percentage points below the Fed’s 2.0 percent target. While the Fed presumably would have liked to see a rate of inflation that was somewhat faster, being below 2.0 percent was not viewed as a major failing of Fed policy.
In the same vein, if the rate of inflation falls to a pace close to 2.0 percent, but still somewhat higher, say 2.4 percent, this could still be seen as consistent with the Fed’s 2.0 percent target. The key points are both that the rate of inflation is close to 2.0 percent, and that there not be a tendency for it to rise. While the definition of “close” can be debated, there is zero doubt from the wage data that the direction is downward, not upward.
This means that if price inflation follows wage inflation, we should expect inflation to be moving towards the Fed’s 2.0 percent target. The questions are: how rapidly will inflation drop and will it fall close enough to 2.0 percent for the Fed to declare victory?
Does Inflation Track Wage Growth?
Over any short period, we can see substantial divergences between the rate of inflation and the rate of wage growth. For example, inflation substantially outpaced wage growth in 2021 and the start of 2022. However, a sustained divergence would imply a continuing shift in income shares.
The gap between inflation and wage growth at the start of the pandemic was associated with a substantial increase in the profit share of national income. The before-tax profit share of national income rose from 13.1 percent in 2019 to 14.0 percent in 2021. [2] It edged back slightly to 13.9 percent in 2022.
If we have a view of inflation where we expect it to outpace wage growth on a sustained basis, it would imply a larger and continuing shift from wages to profits. This sort of sustained redistribution would be an extraordinary macroeconomic event. Furthermore, it is not clear that higher interest rates, designed to raise unemployment and slow wage growth, would be the best tool to reduce inflation in this context. Clearly, excessive wage growth is not the problem in this story.
Of course, the wage growth data are erratic and also subject to revision. We may be looking at a different picture when we get the March data on wages and the first quarter ECI, but based on the data we have to date, wages are growing at a pace consistent with the Fed’s 2.0 percent inflation target. This would provide a very good argument for the Fed to pause on further interest rate hikes, even if it did not have concerns about financial instability stemming from the collapse of the Silicon Valley Bank.
[1] The maximum and minimum were set to cut off wage growth peaks and troughs driven by changing workforce composition at the beginning and end of the pandemic shutdown period. The tighter range makes it easier to see the path of wage growth over this six-year period.
[2] These data are take from the Federal Reserve Board’s Financial Accounts of the United States, Table F.3, Line 7 divided by Line 1.
We have been getting conflicting data on inflation in recent days. The February Consumer Price Index was not great, showing a one-month rise of 0.4 percent in the overall index and 0.5 percent in the core. Combined with the last couple of months’ data, it indicates a modest acceleration over the rates seen in the fall.
By contrast, the Producer Price Index came in somewhat better than expected, with the overall finished goods index declining 0.1 percent, driven by drops in food and energy prices. The core index rose a modest 0.2 percent. Most of the indices at earlier stages of production also showed a good picture. For example, the intermediate index for processed goods fell 0.4 percent in February and is now up just 2.1 percent over the last year.
The picture for import prices in February was also encouraging. The overall index for imports fell 0.1 percent in the month. Excluding fuels, the index rose 0.4 percent in February, but is still up just 0.2 percent over the last year.
The Consumer Price Index does not closely track the indexes showing the price of items at earlier stages of production, but it is difficult to envision sustained divergences. For example, the CPI new vehicle component rose 5.8 percent last year. The index for imported vehicles, parts, and engines rose 2.5 percent. These categories are not identical, but it is difficult to imagine that we would go a decade with domestic vehicle price inflation outpacing the price increases of imports by 3.3 percentage points a year.
These two indices had tracked fairly closely prior to the pandemic. For those keeping score at home, the consumer price new vehicle index has risen by 20.3 percent since the start of the pandemic. The index for imported vehicles, parts, and engines has risen by 6.8 percent, which might suggest that we can anticipate some decline in vehicle prices going forward.
The import price and producer price indices would seem to indicate that the battle with inflation has been largely won, but that is not the picture with the CPI and probably not the story in the Personal Consumption Expenditure Deflator (PCE) that we will get later this month. Fortunately, we can use wage data to get another vantage point on inflation.
Wage Growth Is Moderating
If recent months’ CPI data have given us grounds to question whether inflation is still slowing, that is not true with the most recent wage data. The annualized rate of wage growth over the last three months in the average hourly earnings series is just 3.6 percent. This is down from a peak of 6.4 percent at start of the year, as can be seen in the graph.[1]
Source: Bureau of Labor Statistics and author’s calculations.
Furthermore, the current 3.6 percent rate is roughly consistent with the Fed’s 2.0 percent inflation target. There were several points in the two years prior to the pandemic when the pace of wage growth was this fast or higher, yet the core PCE deflator averaged less than 2.0 percent for this two-year period.
It is worth mentioning that the Employment Cost Index (ECI) shows a somewhat higher rate of wage growth, with the annualized rate for the fourth quarter coming in at 4.0 percent (actually 3.95 percent, if we want to go to a second decimal). This may be slightly more rapid than would be consistent with 2.0 percent inflation, but it’s still not clear this would be a problem.
First, there is no ambiguity about the direction of change. The ECI was rising at a 5.8 percent annual rate at the start of the year. And, by construction, there are no composition effects in the ECI, so the changing employment patterns associated with the reopening would not affect the pace of wage growth reported in this index.
The second reason why a pace of wage growth that might be slightly faster than would be consistent with 2.0 percent inflation should not be a problem, is that the Fed has quite explicitly said that 2.0 percent is an average, not a ceiling. In the decade prior to the pandemic, the rate of inflation in the core PCE averaged 1.6 percent, 0.4 percentage points below the Fed’s 2.0 percent target. While the Fed presumably would have liked to see a rate of inflation that was somewhat faster, being below 2.0 percent was not viewed as a major failing of Fed policy.
In the same vein, if the rate of inflation falls to a pace close to 2.0 percent, but still somewhat higher, say 2.4 percent, this could still be seen as consistent with the Fed’s 2.0 percent target. The key points are both that the rate of inflation is close to 2.0 percent, and that there not be a tendency for it to rise. While the definition of “close” can be debated, there is zero doubt from the wage data that the direction is downward, not upward.
This means that if price inflation follows wage inflation, we should expect inflation to be moving towards the Fed’s 2.0 percent target. The questions are: how rapidly will inflation drop and will it fall close enough to 2.0 percent for the Fed to declare victory?
Does Inflation Track Wage Growth?
Over any short period, we can see substantial divergences between the rate of inflation and the rate of wage growth. For example, inflation substantially outpaced wage growth in 2021 and the start of 2022. However, a sustained divergence would imply a continuing shift in income shares.
The gap between inflation and wage growth at the start of the pandemic was associated with a substantial increase in the profit share of national income. The before-tax profit share of national income rose from 13.1 percent in 2019 to 14.0 percent in 2021. [2] It edged back slightly to 13.9 percent in 2022.
If we have a view of inflation where we expect it to outpace wage growth on a sustained basis, it would imply a larger and continuing shift from wages to profits. This sort of sustained redistribution would be an extraordinary macroeconomic event. Furthermore, it is not clear that higher interest rates, designed to raise unemployment and slow wage growth, would be the best tool to reduce inflation in this context. Clearly, excessive wage growth is not the problem in this story.
Of course, the wage growth data are erratic and also subject to revision. We may be looking at a different picture when we get the March data on wages and the first quarter ECI, but based on the data we have to date, wages are growing at a pace consistent with the Fed’s 2.0 percent inflation target. This would provide a very good argument for the Fed to pause on further interest rate hikes, even if it did not have concerns about financial instability stemming from the collapse of the Silicon Valley Bank.
[1] The maximum and minimum were set to cut off wage growth peaks and troughs driven by changing workforce composition at the beginning and end of the pandemic shutdown period. The tighter range makes it easier to see the path of wage growth over this six-year period.
[2] These data are take from the Federal Reserve Board’s Financial Accounts of the United States, Table F.3, Line 7 divided by Line 1.
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It really is bizarre how elite policy types have such a hard time thinking clearly about intellectual property. Earlier this week, I was beating up on the NYT for having two columns on preparing for the next pandemic, neither of which mentioned even once the issue of intellectual property.
This issue of intellectual property in a pandemic should not seem like an obscure topic. In the fall of 2020, India and South Africa proposed a resolution at the WTO that all intellectual property claims on vaccines, tests, and treatments be suspended for the duration of the pandemic.
More than 100 countries eventually signed on to the resolution. The United States and other wealthy countries subsequently filibustered the resolution to the point of irrelevance.
However, the idea that questions of intellectual property might be important in the next pandemic should not seem far-fetched. If we had eliminated all IP barriers (this would include both suspending patent monopolies and other forms of exclusivity, as well as not enforcing non-disclosure agreements), we quite likely could have had enough people around the world vaccinated quickly enough to have prevented the development of the Omicron strain of the coronavirus. It is even possible that we could have slowed the spread enough to prevent the Delta strain.
Imagine the millions of lives that could have been saved and the trillions of dollars of economic losses that would have been averted if these mutations had not developed. You might think this would be sufficient to interest the great minds that write about pandemics for the New York Times.
Just to be clear — suspending IP doesn’t mean that companies forego their profits from these claims. The idea is that the suspension would allow for the free flow of knowledge and technology to address the pandemic. After the fact, the companies would receive compensation from the government, and of course they would have every right to sue in court if they felt the compensation was inadequate. The point is that all effort should be focused on stopping the pandemic, and the money issues can be dealt with later.
Okay, it was pretty amazing to see this extraordinary neglect in the NYT, but Planet Money on NPR arguably went one better. It actually had a very interesting piece on drug costs and innovation, but then walked away from the big question it raised.
The piece pointed out that the United States pays more than any other country in the world because we grant drug companies patent monopolies and then let them charge whatever they want for their drugs. It then discussed President Biden’s plan to negotiate drug prices in Medicare, which the Congressional Budget Office (CBO) projected would save $25 billion a year.
It also noted that CBO projected that the reduction in drug company profits would result in a reduction of one percent in the number of drugs being developed. Since we develop roughly 45 new drugs a year, this would mean one less drug every two years. If that lost drug was an important treatment for cancer, diabetes, or some other serious illness, that would be a big loss.
But then the NPR piece cites another CBO study that calculates that we could offset the reduction in drug company research spending by increasing spending on NIH research by $1 billion. The piece then comments:
“So the policies together would save the government billions of dollars overall with minimal harm to innovation,” and then moves on.
Okay folks, let’s slow down and look at what NPR just told us. They said that $1 billion in government spending on research would offset the impact of a $25 billion reduction in drug prices. That is a 25 to 1 return on investment. In cost-benefit analyses, this would be off-the-charts crazy. A ratio of 1.1 is considered good, and 1.5 to 1 is great. If you can get to 2 to 1, that’s really fantastic. This is 25 to 1.
Maybe we should be asking if we can push this further and have the government pick up the whole tab for the research that is currently supported by patent monopolies (a bit over $100 billion a year at present), and let all new drugs be sold as cheap generics as soon as they are approved by the FDA. This could easily save us over $400 billion a year in spending on prescription drugs.
And, not only would drugs be cheap, we would also have removed the enormous incentive to be dishonest about the safety and effectiveness of drugs which results from patent monopoly pricing. We would also radically reduce the amount of money spent researching copycat drugs, and could instead direct more money into exploring cures and treatments that may not involve patentable products.
I wouldn’t necessarily expect this piece to go all the way down this road, but it is more than a bit incredible that they tell us that increased spending on NIH research can have a 2500 percent return on investment, and then just walk away from the issue. Is it not possible for people to think clearly about alternatives to patent monopolies for supporting the development of new drugs?
There is a lot of money, as well as peoples’ lives and health, at issue. It should be possible for our leading news outlets to think about the problem seriously and not let prejudices about intellectual property get in the way.
It really is bizarre how elite policy types have such a hard time thinking clearly about intellectual property. Earlier this week, I was beating up on the NYT for having two columns on preparing for the next pandemic, neither of which mentioned even once the issue of intellectual property.
This issue of intellectual property in a pandemic should not seem like an obscure topic. In the fall of 2020, India and South Africa proposed a resolution at the WTO that all intellectual property claims on vaccines, tests, and treatments be suspended for the duration of the pandemic.
More than 100 countries eventually signed on to the resolution. The United States and other wealthy countries subsequently filibustered the resolution to the point of irrelevance.
However, the idea that questions of intellectual property might be important in the next pandemic should not seem far-fetched. If we had eliminated all IP barriers (this would include both suspending patent monopolies and other forms of exclusivity, as well as not enforcing non-disclosure agreements), we quite likely could have had enough people around the world vaccinated quickly enough to have prevented the development of the Omicron strain of the coronavirus. It is even possible that we could have slowed the spread enough to prevent the Delta strain.
Imagine the millions of lives that could have been saved and the trillions of dollars of economic losses that would have been averted if these mutations had not developed. You might think this would be sufficient to interest the great minds that write about pandemics for the New York Times.
Just to be clear — suspending IP doesn’t mean that companies forego their profits from these claims. The idea is that the suspension would allow for the free flow of knowledge and technology to address the pandemic. After the fact, the companies would receive compensation from the government, and of course they would have every right to sue in court if they felt the compensation was inadequate. The point is that all effort should be focused on stopping the pandemic, and the money issues can be dealt with later.
Okay, it was pretty amazing to see this extraordinary neglect in the NYT, but Planet Money on NPR arguably went one better. It actually had a very interesting piece on drug costs and innovation, but then walked away from the big question it raised.
The piece pointed out that the United States pays more than any other country in the world because we grant drug companies patent monopolies and then let them charge whatever they want for their drugs. It then discussed President Biden’s plan to negotiate drug prices in Medicare, which the Congressional Budget Office (CBO) projected would save $25 billion a year.
It also noted that CBO projected that the reduction in drug company profits would result in a reduction of one percent in the number of drugs being developed. Since we develop roughly 45 new drugs a year, this would mean one less drug every two years. If that lost drug was an important treatment for cancer, diabetes, or some other serious illness, that would be a big loss.
But then the NPR piece cites another CBO study that calculates that we could offset the reduction in drug company research spending by increasing spending on NIH research by $1 billion. The piece then comments:
“So the policies together would save the government billions of dollars overall with minimal harm to innovation,” and then moves on.
Okay folks, let’s slow down and look at what NPR just told us. They said that $1 billion in government spending on research would offset the impact of a $25 billion reduction in drug prices. That is a 25 to 1 return on investment. In cost-benefit analyses, this would be off-the-charts crazy. A ratio of 1.1 is considered good, and 1.5 to 1 is great. If you can get to 2 to 1, that’s really fantastic. This is 25 to 1.
Maybe we should be asking if we can push this further and have the government pick up the whole tab for the research that is currently supported by patent monopolies (a bit over $100 billion a year at present), and let all new drugs be sold as cheap generics as soon as they are approved by the FDA. This could easily save us over $400 billion a year in spending on prescription drugs.
And, not only would drugs be cheap, we would also have removed the enormous incentive to be dishonest about the safety and effectiveness of drugs which results from patent monopoly pricing. We would also radically reduce the amount of money spent researching copycat drugs, and could instead direct more money into exploring cures and treatments that may not involve patentable products.
I wouldn’t necessarily expect this piece to go all the way down this road, but it is more than a bit incredible that they tell us that increased spending on NIH research can have a 2500 percent return on investment, and then just walk away from the issue. Is it not possible for people to think clearly about alternatives to patent monopolies for supporting the development of new drugs?
There is a lot of money, as well as peoples’ lives and health, at issue. It should be possible for our leading news outlets to think about the problem seriously and not let prejudices about intellectual property get in the way.
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There are two key points that people should recognize about the decision to guarantee all the deposits at Silicon Valley Bank (SVB):
The first point is straightforward. We gave a government guarantee of great value to people who had not paid for it.
We will get a lot of silly game playing on this issue, just like we did back in 2008-09. The game players will tell us that this guarantee didn’t cost the government a penny, which will very likely end up being true. But that doesn’t mean we didn’t give the bank’s large depositors something of great value.
If the government offers to guarantee a loan, it makes it far more likely that the beneficiary will be able to get the loan and that they will pay a lower interest rate for this loan. In this case, the people who held large uninsured deposits at SVB apparently decided that it was better, for whatever reason, to expose themselves to the risk by keeping these deposits at SVB, rather than adjusting their finances in a way that would have kept their money better protected.
This would have meant either parking their deposits at a larger bank that was subject to more careful scrutiny by regulators, or adjusting their assets so that they were not so exposed to a single bank. They also could have taken ten minutes to examine SVB’s financial situation, which was mostly a matter of public record.
For whatever reason, the bank’s large depositors chose to expose themselves to serious risk. When their bet turned out badly, they in effect wanted the government to provide the insurance that they did not pay for.
This brings us to the second point; this is Donald Trump’s bailout. The reason this is a bailout is that the government is providing a benefit that the depositors did not pay for. It also is, in effect, a subsidy to other mid-sized banks, since it tells their depositors that they can count on the government covering their deposits, even though they are not insured and the bank is not subject to the same scrutiny as the largest banks.
This is where the fault lies with Donald Trump. It was his decision to stop scrutinizing banks with assets between $50 billion and $250 billion that led to the problems at SVB.
Prior to the passage of this bill, a bank the size of SVB would have been subject to stricter rules and regular stress tests. A stress test means projecting how a bank would fare in various bad situations, like the rise in interest rates that apparently sank SVB. The 2018 changes exempted banks with assets under $100 billion from undergoing stress tests (SVB had been in this category until 2021), and said that banks with assets between $100 billion and $250 billion had to undergo “periodic” stress tests.
If regulators had subjected to SVB to a stress test, they would have almost surely recognized its problems. They then would have required it to raise more capital and/or shed deposits.
But Trump pulled the regulators off the job. This is wrongly described as “deregulation.” It isn’t.
Deregulation would mean both eliminating the scrutiny of SVB and ending insurance for the bank. (In principle that would mean ending all deposit insurance, not the just the insurance for large accounts that is at issue here.)
What happened in 2018 was effectively allowing SVB to still benefit from insurance without having to pay for it. It is comparable to telling drivers that they don’t have to buy auto insurance, but will still be covered if they are in an accident. Or, perhaps a better example would be telling a restaurant that it is covered by fire insurance, but it doesn’t have to adhere to safety standards.
It is dishonest to describe this as “deregulation.” It is the government giving a subsidy to the banks in question. It is understandable that the banks prefer to describe their subsidy as deregulation, but it is not accurate.
Anyhow, this bailout is the Donald Trump bailout. He touted the 2018 bill when he signed it. We are now seeing the fruits of his action.
Note: An earlier version said that the 2018 changes would have exempted SVB from stress tests altogether.
There are two key points that people should recognize about the decision to guarantee all the deposits at Silicon Valley Bank (SVB):
The first point is straightforward. We gave a government guarantee of great value to people who had not paid for it.
We will get a lot of silly game playing on this issue, just like we did back in 2008-09. The game players will tell us that this guarantee didn’t cost the government a penny, which will very likely end up being true. But that doesn’t mean we didn’t give the bank’s large depositors something of great value.
If the government offers to guarantee a loan, it makes it far more likely that the beneficiary will be able to get the loan and that they will pay a lower interest rate for this loan. In this case, the people who held large uninsured deposits at SVB apparently decided that it was better, for whatever reason, to expose themselves to the risk by keeping these deposits at SVB, rather than adjusting their finances in a way that would have kept their money better protected.
This would have meant either parking their deposits at a larger bank that was subject to more careful scrutiny by regulators, or adjusting their assets so that they were not so exposed to a single bank. They also could have taken ten minutes to examine SVB’s financial situation, which was mostly a matter of public record.
For whatever reason, the bank’s large depositors chose to expose themselves to serious risk. When their bet turned out badly, they in effect wanted the government to provide the insurance that they did not pay for.
This brings us to the second point; this is Donald Trump’s bailout. The reason this is a bailout is that the government is providing a benefit that the depositors did not pay for. It also is, in effect, a subsidy to other mid-sized banks, since it tells their depositors that they can count on the government covering their deposits, even though they are not insured and the bank is not subject to the same scrutiny as the largest banks.
This is where the fault lies with Donald Trump. It was his decision to stop scrutinizing banks with assets between $50 billion and $250 billion that led to the problems at SVB.
Prior to the passage of this bill, a bank the size of SVB would have been subject to stricter rules and regular stress tests. A stress test means projecting how a bank would fare in various bad situations, like the rise in interest rates that apparently sank SVB. The 2018 changes exempted banks with assets under $100 billion from undergoing stress tests (SVB had been in this category until 2021), and said that banks with assets between $100 billion and $250 billion had to undergo “periodic” stress tests.
If regulators had subjected to SVB to a stress test, they would have almost surely recognized its problems. They then would have required it to raise more capital and/or shed deposits.
But Trump pulled the regulators off the job. This is wrongly described as “deregulation.” It isn’t.
Deregulation would mean both eliminating the scrutiny of SVB and ending insurance for the bank. (In principle that would mean ending all deposit insurance, not the just the insurance for large accounts that is at issue here.)
What happened in 2018 was effectively allowing SVB to still benefit from insurance without having to pay for it. It is comparable to telling drivers that they don’t have to buy auto insurance, but will still be covered if they are in an accident. Or, perhaps a better example would be telling a restaurant that it is covered by fire insurance, but it doesn’t have to adhere to safety standards.
It is dishonest to describe this as “deregulation.” It is the government giving a subsidy to the banks in question. It is understandable that the banks prefer to describe their subsidy as deregulation, but it is not accurate.
Anyhow, this bailout is the Donald Trump bailout. He touted the 2018 bill when he signed it. We are now seeing the fruits of his action.
Note: An earlier version said that the 2018 changes would have exempted SVB from stress tests altogether.
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Word from the grapevine is that the risk of contagion may cause the Fed or the FDIC to engineer some sort of bailout of uninsured deposits, where they get paid back in full, instead of being forced to accept a partial loss on deposits over $250k. That would be unfortunate, since the people who run these companies that have large deposits are supposed to be brilliant whizzes, who should be able to understand things like FDIC deposit insurance limits.
Their incessant whining, that losing 10-20 percent of their deposits, would shut down Silicon Valley and the country’s tech sector, made for good laughs. However, the risk of a nationwide series of bank runs is a high price to pay to teach these people about the limits on deposit insurance.
We know that the view of most of our policy elites (the politicians who make policy, their staff, and the people who write about it in major news outlets) is that the purpose of government is to make the rich richer. But, there are alternative ways to structure the financial system for people who care about fairness and efficiency.
The most obvious solution would be to have the Federal Reserve Board give every person and corporation in the country a digital bank account. The idea is that this would be a largely costless way for people to carry on their normal transactions. They could have their paychecks deposited there every two weeks or month. They could have their mortgage or rent, electric bill, credit card bill, and other bills paid directly from their accounts.
This sort of system could be operated at minimal cost, with the overwhelming majority of transactions handled electronically, requiring no human intervention. There could be modest charge for overdrafts, that would be structured to cover the cost of actually dealing with the problem, not gouging people to make big profits.
Former Fed economist (now at Dartmouth), Andy Levin, has been etching the outlines of this sort of system for a number of years. The idea would be to effectively separate out the banking system we use for carrying on transactions from the system we use for saving and financing investment.
We would have the Fed run system to carry out the vast majority of normal financial transactions, replacing the banks that we use now. However, we would continue to have investment banks, like Goldman Sachs and Morgan Stanley, that would borrow on financial markets and lend money to businesses, as well as underwriting stock and bond issues. While investment banks still require regulation to prevent abuses, we don’t have to worry about their failure shutting down the financial system.
Not only would the shift to Fed banking radically reduce the risk the financial sector poses to the economy, it would also make it hugely more efficient. We waste tens of billions of dollars every year maintaining the structure of a financial system that technology has made obsolete.
It is easy to see why this waste persists. The financial system as currently structured offers enormous rewards for people who get to the top. The Silicon Valley Bank (SVB) makes this case very clearly. The graph below shows the pay of the top seven executives at SVB alongside the pay of a minimum wage worker putting in 40 hours a week for 50 weeks. (It’s really there.)
Source: SVB and author’s calculations.
Greg Becker, the President and Chief Executive Officer, gets top pay among this group, pulling down 9,922,000 in SVB’s 2021 fiscal year (the most recent year for which I could find the data). That would be roughly 684 times what a minimum wage worker would earn for a full year’s work. (Top execs at the largest banks can earn three or four times this amount.) If we think that a worker has a 45-year working lifetime, then Mr. Becker pulls down more in a year than what a minimum wage worker would get in 15 working lifetimes. Yes, but we know the argument, how many minimum wage workers could threaten major financial upheaval, even in 15 working lifetimes?
We can go down the list, but the point should be clear. We maintain an enormously wasteful financial system because a relatively small number of people get very rich from it. And, these people use their money to lobby members of Congress to make sure no one talks about modernizing the system in a way that would take away the big bucks. (For those wondering about public sector comparisons, Fed Chair Jerome Powell gets $226,000 a year, just over 2.2 percent of Mr. Becker’s paycheck.)
And, our rich bankers have plenty of allies in the media and academic circles. Some of this is due to the fact that they can finance the voices of people who will tout their wisdom, but part of it is likely ideological bias. Plenty of neoliberal types, who will go on the warpath over a policy that helps workers or low-income people that they claim to be wasteful, can manage to completely ignore the massive waste in our financial system that is a major contributor to inequality.
Anyhow, we are not about to overturn the massive power of the rich in the financial system and the enormous network of elite opinion makers that supports them, but perhaps we can at least make the failure of SVB a teaching moment.
The rich are ripping us off big time. They are not lucky winners in a market competition due to their intelligence and hard work. They are people who have managed to rig the game to put big bucks in their pocket. That is the reality. We just have to find ways to change it. A key place to start is to stop pretending that their great wealth has anything to do with a free market.
Word from the grapevine is that the risk of contagion may cause the Fed or the FDIC to engineer some sort of bailout of uninsured deposits, where they get paid back in full, instead of being forced to accept a partial loss on deposits over $250k. That would be unfortunate, since the people who run these companies that have large deposits are supposed to be brilliant whizzes, who should be able to understand things like FDIC deposit insurance limits.
Their incessant whining, that losing 10-20 percent of their deposits, would shut down Silicon Valley and the country’s tech sector, made for good laughs. However, the risk of a nationwide series of bank runs is a high price to pay to teach these people about the limits on deposit insurance.
We know that the view of most of our policy elites (the politicians who make policy, their staff, and the people who write about it in major news outlets) is that the purpose of government is to make the rich richer. But, there are alternative ways to structure the financial system for people who care about fairness and efficiency.
The most obvious solution would be to have the Federal Reserve Board give every person and corporation in the country a digital bank account. The idea is that this would be a largely costless way for people to carry on their normal transactions. They could have their paychecks deposited there every two weeks or month. They could have their mortgage or rent, electric bill, credit card bill, and other bills paid directly from their accounts.
This sort of system could be operated at minimal cost, with the overwhelming majority of transactions handled electronically, requiring no human intervention. There could be modest charge for overdrafts, that would be structured to cover the cost of actually dealing with the problem, not gouging people to make big profits.
Former Fed economist (now at Dartmouth), Andy Levin, has been etching the outlines of this sort of system for a number of years. The idea would be to effectively separate out the banking system we use for carrying on transactions from the system we use for saving and financing investment.
We would have the Fed run system to carry out the vast majority of normal financial transactions, replacing the banks that we use now. However, we would continue to have investment banks, like Goldman Sachs and Morgan Stanley, that would borrow on financial markets and lend money to businesses, as well as underwriting stock and bond issues. While investment banks still require regulation to prevent abuses, we don’t have to worry about their failure shutting down the financial system.
Not only would the shift to Fed banking radically reduce the risk the financial sector poses to the economy, it would also make it hugely more efficient. We waste tens of billions of dollars every year maintaining the structure of a financial system that technology has made obsolete.
It is easy to see why this waste persists. The financial system as currently structured offers enormous rewards for people who get to the top. The Silicon Valley Bank (SVB) makes this case very clearly. The graph below shows the pay of the top seven executives at SVB alongside the pay of a minimum wage worker putting in 40 hours a week for 50 weeks. (It’s really there.)
Source: SVB and author’s calculations.
Greg Becker, the President and Chief Executive Officer, gets top pay among this group, pulling down 9,922,000 in SVB’s 2021 fiscal year (the most recent year for which I could find the data). That would be roughly 684 times what a minimum wage worker would earn for a full year’s work. (Top execs at the largest banks can earn three or four times this amount.) If we think that a worker has a 45-year working lifetime, then Mr. Becker pulls down more in a year than what a minimum wage worker would get in 15 working lifetimes. Yes, but we know the argument, how many minimum wage workers could threaten major financial upheaval, even in 15 working lifetimes?
We can go down the list, but the point should be clear. We maintain an enormously wasteful financial system because a relatively small number of people get very rich from it. And, these people use their money to lobby members of Congress to make sure no one talks about modernizing the system in a way that would take away the big bucks. (For those wondering about public sector comparisons, Fed Chair Jerome Powell gets $226,000 a year, just over 2.2 percent of Mr. Becker’s paycheck.)
And, our rich bankers have plenty of allies in the media and academic circles. Some of this is due to the fact that they can finance the voices of people who will tout their wisdom, but part of it is likely ideological bias. Plenty of neoliberal types, who will go on the warpath over a policy that helps workers or low-income people that they claim to be wasteful, can manage to completely ignore the massive waste in our financial system that is a major contributor to inequality.
Anyhow, we are not about to overturn the massive power of the rich in the financial system and the enormous network of elite opinion makers that supports them, but perhaps we can at least make the failure of SVB a teaching moment.
The rich are ripping us off big time. They are not lucky winners in a market competition due to their intelligence and hard work. They are people who have managed to rig the game to put big bucks in their pocket. That is the reality. We just have to find ways to change it. A key place to start is to stop pretending that their great wealth has anything to do with a free market.
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The New York Times had two pieces on Sunday talking about what we should do the next time we face a pandemic. Incredibly, neither said one word about waiving patents and other forms of intellectual property.
The NYT might have missed it, but this was actually a major issue in the developing world, as poor countries lacked access to vaccines, tests, and treatments. This was the reason that South Africa and India introduced a resolution at the WTO in October of 2020 calling for intellectual property rules to be waived for the duration of the pandemic.
I would hope that the NYT was aware of this issue, since it did affect a few billion people. It even featured a column on the resolution that was co-authored by Achal Prabhala, Arjun Jayadev, and me.
The logic of waiving intellectual property is probably too simple for the great minds that write for the NYT. The basic point is that we should want free exchanges of science to develop the best tools to combat the pandemic as quickly as possible.
And, we should want the technology to be dispersed as quickly as possible, both to directly protect lives, but also to stem the spread of the pandemic. We may not have seen the delta and omicron waves of the Covid pandemic if we had worked to disperse vaccines as quickly as possible.
Millions of lives would have been saved in this case. We would also have avoided trillions of dollars in economic losses worldwide.
I think government-granted patent monopolies are a terrible way to finance the development of drugs and vaccines for reasons I have listed in numerous pieces (e.g. see Rigged [it’s free] chapter 5 and here). To my mind, it is close to crazy to use the power of government to make drugs and vaccines, that are essential for people’s health, expensive when they are cheap to produce and distribute.
But that is not even the issue here. A temporary waiver does not preclude compensating companies for their patents and other claims to intellectual property. It just means that we don’t allow the intellectual property to interfere with the production and distribution of vaccines, tests, and treatments during the pandemic.
We instead make the focus treating people and slowing the spread of the pandemic as rapidly as possible. After the fact, we can work out the appropriate compensation for the companies with intellectual property claims. Presumably most of the payments would be negotiated, but companies would obviously have the option to sue the government if they didn’t feel the proposed compensation was adequate.
Could this mean that a Moderna or Pfizer ends up with less money than they felt they were entitled to? Sure, that is a possibility, but so what?
In any case, one might think that this would be the sort of issue that the NYT would discuss in the context of preparing for the next pandemic. But I suppose not. Some ideas just can’t be discussed in the pages of the New York Times. They apparently raise issues that hit too close to home.
The New York Times had two pieces on Sunday talking about what we should do the next time we face a pandemic. Incredibly, neither said one word about waiving patents and other forms of intellectual property.
The NYT might have missed it, but this was actually a major issue in the developing world, as poor countries lacked access to vaccines, tests, and treatments. This was the reason that South Africa and India introduced a resolution at the WTO in October of 2020 calling for intellectual property rules to be waived for the duration of the pandemic.
I would hope that the NYT was aware of this issue, since it did affect a few billion people. It even featured a column on the resolution that was co-authored by Achal Prabhala, Arjun Jayadev, and me.
The logic of waiving intellectual property is probably too simple for the great minds that write for the NYT. The basic point is that we should want free exchanges of science to develop the best tools to combat the pandemic as quickly as possible.
And, we should want the technology to be dispersed as quickly as possible, both to directly protect lives, but also to stem the spread of the pandemic. We may not have seen the delta and omicron waves of the Covid pandemic if we had worked to disperse vaccines as quickly as possible.
Millions of lives would have been saved in this case. We would also have avoided trillions of dollars in economic losses worldwide.
I think government-granted patent monopolies are a terrible way to finance the development of drugs and vaccines for reasons I have listed in numerous pieces (e.g. see Rigged [it’s free] chapter 5 and here). To my mind, it is close to crazy to use the power of government to make drugs and vaccines, that are essential for people’s health, expensive when they are cheap to produce and distribute.
But that is not even the issue here. A temporary waiver does not preclude compensating companies for their patents and other claims to intellectual property. It just means that we don’t allow the intellectual property to interfere with the production and distribution of vaccines, tests, and treatments during the pandemic.
We instead make the focus treating people and slowing the spread of the pandemic as rapidly as possible. After the fact, we can work out the appropriate compensation for the companies with intellectual property claims. Presumably most of the payments would be negotiated, but companies would obviously have the option to sue the government if they didn’t feel the proposed compensation was adequate.
Could this mean that a Moderna or Pfizer ends up with less money than they felt they were entitled to? Sure, that is a possibility, but so what?
In any case, one might think that this would be the sort of issue that the NYT would discuss in the context of preparing for the next pandemic. But I suppose not. Some ideas just can’t be discussed in the pages of the New York Times. They apparently raise issues that hit too close to home.
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The failure of Silicon Valley Bank yesterday overtook the really big event of the day, the February jobs report. The 311,000 jobs were far more than I had expected. I thought the huge January number was a fluke of seasonal adjustments and unusually good winter weather. For that reason, I expected the February number to be very weak, not because I thought the labor market had crashed, but just as a correction to the high number in January.
I was wrong in a very big way. The January number was obviously real and the economy is still creating jobs at a very rapid clip.
This is somewhat concerning in that there is no way the economy can keep creating jobs at this pace without seeing some serious inflationary pressure, but this is where the other part of the good news story comes in. Wage growth slowed in February. The slower growth in February, combined with a downward revision to the January number, gave us a 3.6 percent annual rate of wage growth over the last three months.
This pace of wage growth is consistent with the Fed’s 2.0 percent inflation target. We had wage growth at this pace through much of 2018 and 2019 even as inflation was coming in slightly under the targeted rate.
I ordinarily would not be cheering slower wage growth, but the reality is that the Fed is determined to bring inflation down towards its target. If wages are growing at a pace that is faster than is consistent with its target, it will keep raising rates, and throwing people out of work, until wage growth slows.
If wage growth is now more or less in line with the 2.0 percent target, then the Fed can hold off on further rate hikes. Hopefully, it would then allow the economy to continue to grow with the unemployment rate remaining near 3.5 percent.
Of course, we do need to see real wage growth and inflation has been running faster than 3.5 percent. However, there are good reasons for believing that inflation will be slowing in the months ahead. Most importantly, we know that inflation in rents will slow sharply, as private indexes measuring rents of units coming up on the market have showed little or no inflation in recent months. The CPI rent index, which measures the rent of all units (both those that come up on the market and those with a continuing tenant) follows these indices with a lag of 6-12 months.
It is also likely that we will see further drops in many of the supply chain goods, most importantly cars, where temporary shortages sent prices soaring in the pandemic. This will help put downward pressure on inflation in goods, and also services like car repairs, where the cost of goods is a large part of the price.
And, we are also likely to see less inflation in food prices. The wholesale prices of many items, most notably eggs, has fallen sharply in the last couple of months. This should show up in lower prices in stores.
If we have a story where wages are rising at a 3.6 percent annual rate, and inflation falls to under 2.5 percent, then we would be seeing a respectable pace of real wage growth. We can hope for better, and also that we continue to see disproportionate growth at the bottom, but low unemployment and modest real wage growth is a pretty good picture.
The failure of Silicon Valley Bank yesterday overtook the really big event of the day, the February jobs report. The 311,000 jobs were far more than I had expected. I thought the huge January number was a fluke of seasonal adjustments and unusually good winter weather. For that reason, I expected the February number to be very weak, not because I thought the labor market had crashed, but just as a correction to the high number in January.
I was wrong in a very big way. The January number was obviously real and the economy is still creating jobs at a very rapid clip.
This is somewhat concerning in that there is no way the economy can keep creating jobs at this pace without seeing some serious inflationary pressure, but this is where the other part of the good news story comes in. Wage growth slowed in February. The slower growth in February, combined with a downward revision to the January number, gave us a 3.6 percent annual rate of wage growth over the last three months.
This pace of wage growth is consistent with the Fed’s 2.0 percent inflation target. We had wage growth at this pace through much of 2018 and 2019 even as inflation was coming in slightly under the targeted rate.
I ordinarily would not be cheering slower wage growth, but the reality is that the Fed is determined to bring inflation down towards its target. If wages are growing at a pace that is faster than is consistent with its target, it will keep raising rates, and throwing people out of work, until wage growth slows.
If wage growth is now more or less in line with the 2.0 percent target, then the Fed can hold off on further rate hikes. Hopefully, it would then allow the economy to continue to grow with the unemployment rate remaining near 3.5 percent.
Of course, we do need to see real wage growth and inflation has been running faster than 3.5 percent. However, there are good reasons for believing that inflation will be slowing in the months ahead. Most importantly, we know that inflation in rents will slow sharply, as private indexes measuring rents of units coming up on the market have showed little or no inflation in recent months. The CPI rent index, which measures the rent of all units (both those that come up on the market and those with a continuing tenant) follows these indices with a lag of 6-12 months.
It is also likely that we will see further drops in many of the supply chain goods, most importantly cars, where temporary shortages sent prices soaring in the pandemic. This will help put downward pressure on inflation in goods, and also services like car repairs, where the cost of goods is a large part of the price.
And, we are also likely to see less inflation in food prices. The wholesale prices of many items, most notably eggs, has fallen sharply in the last couple of months. This should show up in lower prices in stores.
If we have a story where wages are rising at a 3.6 percent annual rate, and inflation falls to under 2.5 percent, then we would be seeing a respectable pace of real wage growth. We can hope for better, and also that we continue to see disproportionate growth at the bottom, but low unemployment and modest real wage growth is a pretty good picture.
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