• Economic Crisis and RecoveryCrisis económica y recuperaciónEconomic GrowthEl DesarolloUnited StatesEE. UU.
Jason Furman has been tweeting about how real disposable personal income has been falling behind its trend growth. After the August data came out last week, Jason tweeted that per capita real disposable income was 8.0 percent below its pre-pandemic trend growth pace. Since Jason is generally very careful in his work, and this would be a big falloff, I thought it was worth a closer look.
The first question to ask, is what growth should we have expected? Jason is projecting a pre-pandemic trend. It is generally reasonable to expect the future to be like the past, except when we know there will be some important differences.
In this case, we did know of an important difference even before the pandemic: the retirement of the baby boom generation. The bulk of the baby boomers is now in their sixties and seventies. We are in the peak years of baby boomer retirement, which means the labor force would be expected to grow more slowly than it had in the recent past.
If we want to know where we should have expected to be in terms of disposable income, we need projections that take baby boomer retirements into account. A useful place to start is the Congressional Budget Office (CBO) projections from January of 2020, which were made before anyone knew of the impact of the pandemic.
Table 1 below derives growth in real per capita personal income from the CBO projections. (I used population projections from the 2019 Social Security Trustees Report.) The CBO data is given quarterly rather than monthly, so I used the projections from the first quarter of 2020 (which would correspond closely to levels for February of 2020) and the third quarter of 2022 (which would correspond closely to August of 2022).
| 2020:Q1 | 2022:Q3 | Growth | |
|---|---|---|---|
| Personal Income | 19100 | 21094 | 10.44% |
| Inflation (CPI) | 260 | 276 | 6.37% |
| Real Personal Income | 7354 | 7636 | 3.83% |
| Population | 338 | 344 | 1.88% |
| Real per capita income | 21,790 | 22,206 | 1.91% |
The first row shows projected personal income for the first quarter of 2020 and the third quarter of 2022. As can be seen, CBO projected cumulative growth over this period of 10.4 percent. CBO doesn’t directly give real income growth, but it does have projections for the CPI. They projected that cumulative inflation over this period, as measured by the CPI, would be 6.4 percent. This implied real income personal income growth of 3.8 percent.
CBO does not directly project disposable personal income, but the difference between personal income and disposable income is taxes. If the tax rate does not change, then disposable personal income would increase at the same rate as personal income. I’ll come to the issue of taxes shortly.
The next issue is population growth. The Social Security Trustees Report projected a 1.9 percent population growth over this period. (I assumed the population for the period from the start of 2020 to the middle of 2022 was half the growth projected for the five years from 2020 to 2025.) This leaves us with a projection of real per capita personal income growth of 1.9 percent over this period.
| Actual | Predicted | Percent of Predicted | |||||
|---|---|---|---|---|---|---|---|
| Feb-20 | Aug-22 | 22-Aug | |||||
| Real per capita personal income | $52,140 | $53,121 | $53,136 | 99.97% | |||
| Real per capita disposable income | $45,948 | $45,292 | $46,826 | 96.72% | |||
| Tax Share of personal income | 11.88% | 14.74% | |||||
Table 2 shows the actual and predicted values of real per capita personal income and real per capita disposable income for February 2020 and August 2022. As can be seen, the actual value for real per capita personal income was almost exactly what we would have expected based on the CBO projections from January 2020. It is just 0.03 percent lower than the projected value.
However, the value for disposable income is 3.3 percent less than what would have been expected based on the CBO numbers. It turns out there is a simple explanation for this difference. People were paying a much larger share of their income in taxes in August of 2022 than in February of 2020.
Since there have been no major increases in personal taxes in the last two and a half years, the most obvious explanation for this increase in taxes is that people are paying capital gains taxes on stocks they sold at a profit. The capital gains themselves do not count as personal income, however, the taxes they pay on these gains are subtracted from disposable income. Insofar as we are seeing disposable income fall behind its projected growth path, it seems an increase in capital gain tax payments is the main factor.
In short, it looks as though income growth has held up surprisingly well through the pandemic, as well as the disruptions created by the war in Ukraine. The economy clearly faces serious problems, but these have not as yet had a major impact on the growth of disposable income.
Jason Furman has been tweeting about how real disposable personal income has been falling behind its trend growth. After the August data came out last week, Jason tweeted that per capita real disposable income was 8.0 percent below its pre-pandemic trend growth pace. Since Jason is generally very careful in his work, and this would be a big falloff, I thought it was worth a closer look.
The first question to ask, is what growth should we have expected? Jason is projecting a pre-pandemic trend. It is generally reasonable to expect the future to be like the past, except when we know there will be some important differences.
In this case, we did know of an important difference even before the pandemic: the retirement of the baby boom generation. The bulk of the baby boomers is now in their sixties and seventies. We are in the peak years of baby boomer retirement, which means the labor force would be expected to grow more slowly than it had in the recent past.
If we want to know where we should have expected to be in terms of disposable income, we need projections that take baby boomer retirements into account. A useful place to start is the Congressional Budget Office (CBO) projections from January of 2020, which were made before anyone knew of the impact of the pandemic.
Table 1 below derives growth in real per capita personal income from the CBO projections. (I used population projections from the 2019 Social Security Trustees Report.) The CBO data is given quarterly rather than monthly, so I used the projections from the first quarter of 2020 (which would correspond closely to levels for February of 2020) and the third quarter of 2022 (which would correspond closely to August of 2022).
| 2020:Q1 | 2022:Q3 | Growth | |
|---|---|---|---|
| Personal Income | 19100 | 21094 | 10.44% |
| Inflation (CPI) | 260 | 276 | 6.37% |
| Real Personal Income | 7354 | 7636 | 3.83% |
| Population | 338 | 344 | 1.88% |
| Real per capita income | 21,790 | 22,206 | 1.91% |
The first row shows projected personal income for the first quarter of 2020 and the third quarter of 2022. As can be seen, CBO projected cumulative growth over this period of 10.4 percent. CBO doesn’t directly give real income growth, but it does have projections for the CPI. They projected that cumulative inflation over this period, as measured by the CPI, would be 6.4 percent. This implied real income personal income growth of 3.8 percent.
CBO does not directly project disposable personal income, but the difference between personal income and disposable income is taxes. If the tax rate does not change, then disposable personal income would increase at the same rate as personal income. I’ll come to the issue of taxes shortly.
The next issue is population growth. The Social Security Trustees Report projected a 1.9 percent population growth over this period. (I assumed the population for the period from the start of 2020 to the middle of 2022 was half the growth projected for the five years from 2020 to 2025.) This leaves us with a projection of real per capita personal income growth of 1.9 percent over this period.
| Actual | Predicted | Percent of Predicted | |||||
|---|---|---|---|---|---|---|---|
| Feb-20 | Aug-22 | 22-Aug | |||||
| Real per capita personal income | $52,140 | $53,121 | $53,136 | 99.97% | |||
| Real per capita disposable income | $45,948 | $45,292 | $46,826 | 96.72% | |||
| Tax Share of personal income | 11.88% | 14.74% | |||||
Table 2 shows the actual and predicted values of real per capita personal income and real per capita disposable income for February 2020 and August 2022. As can be seen, the actual value for real per capita personal income was almost exactly what we would have expected based on the CBO projections from January 2020. It is just 0.03 percent lower than the projected value.
However, the value for disposable income is 3.3 percent less than what would have been expected based on the CBO numbers. It turns out there is a simple explanation for this difference. People were paying a much larger share of their income in taxes in August of 2022 than in February of 2020.
Since there have been no major increases in personal taxes in the last two and a half years, the most obvious explanation for this increase in taxes is that people are paying capital gains taxes on stocks they sold at a profit. The capital gains themselves do not count as personal income, however, the taxes they pay on these gains are subtracted from disposable income. Insofar as we are seeing disposable income fall behind its projected growth path, it seems an increase in capital gain tax payments is the main factor.
In short, it looks as though income growth has held up surprisingly well through the pandemic, as well as the disruptions created by the war in Ukraine. The economy clearly faces serious problems, but these have not as yet had a major impact on the growth of disposable income.
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• InequalityLa DesigualdadUnited StatesEE. UU.
It is a complete article of faith in intellectual circles that the market is responsible for the rise in inequality that we have seen in the United States and elsewhere over the last half-century. Intellectual types literally cannot even consider the alternative that inequality was the result of government policies, not the natural workings of the market.
The standard line is that technology and globalization were responsible for the increasing gap in income between people with college, especially advanced, degrees and non-college-educated workers. This belief that market forces drove inequality and not policy is apparently central to the identity of its beneficiaries, who determine what appears in major news outlets.
In this way, the belief in the market causes of inequality can be similar to the belief among Trumpers that the 2020 election was stolen from Trump. They simply do not even want to see the issue debated.
Spencer Bokat-Lindell: The Latest Perp
My current prompt to make my standard complaint is a column by New York Times columnist Spencer Bokat-Lindell which raises the question, “Is liberal democracy dying?” While the causes of growing inequality are not directly the piece’s topic, the issue comes up at several points.
For example, in discussing the rise of authoritarian sentiments among the masses, he tells readers:
“How does class come into the picture? Some scholars have theorized a link between democratic backsliding and the Great Recession, if not global free-market capitalism itself.”
Later the piece continues with a similar theme:
“Yet there are also those who believe technocratic fixes are unequal to the problem [of rising support for authoritarianism]. In a 2016 essay, the Indian writer Pankaj Mishra presented the declining health of democracy around the world as a crisis for the ideology of modern market-based liberalism itself: A ‘religion of technology and G.D.P. and the crude 19th-century calculus of self-interest,’ it can neither account for nor provide an answer to the anger of those who feel left behind by the disruptions and inequalities wrought by globalized capitalism.”
To be clear, I am not picking on Bokat-Lindell because he is the exception. I am picking on him because he is repeating a dogma that goes almost entirely unquestioned in major media outlets, including the New York Times.
Let’s Say Policy, not the Market, Drove Inequality
I will briefly restate my case for how policy drove inequality (this can be found in Rigged [it’s free]), but first, let’s think about the rise of right-wing populism, assuming it is true. This means that we had government policies that prevented more than half of the workforce from seeing any substantial gains from productivity growth over the last half-century. This is a period in which productivity more than doubled.
While the bottom 60 percent of the workforce saw little gains from productivity growth, the top ten percent were doing great. Those in the 90-95th percentile of the wage distribution saw gains at least in step with productivity growth. Workers in the 95th to 99th percentile had wage gains that far outstripped productivity growth, and those in the top 1 percent were getting wage gains that were close to double the rate of productivity growth.
Now, suppose that that massive upward redistribution was all by design. The government put in place policies designed to take money from the bottom 60 percent of the population and give it to those at the top.
Furthermore, suppose that the mechanisms that caused this upward redistribution were prohibited from being discussed. We instead had people like Bokat-Lindell, and thousands of others, filling news stories, columns, and other ruminations on inequality in major media outlets as simply an unfortunate outcome of natural market processes. The idea that government policies actually caused inequality would virtually never be discussed or even contemplated.
In this scenario, would it be surprising that tens of millions of people would be angry at the government for acting to make them worse off? Is it surprising that they might distrust mainstream news outlets like the New York Times or National Public Radio, which endlessly tell them they are losers, but they feel very badly about that fact?
To my mind, in this scenario, it is not the least bit surprising that tens of millions would turn to a despicable demagogue like Donald Trump, or his foreign equivalents, who tell them it is not their fault. Their explanations might be nonsensical racism and/or nationalism, but he is at least pointing his finger somewhat in the right direction. (Trump’s rich backers of course benefitted hugely from the upward redistribution of the last half century.)
The right-wing populists are blaming the people who have benefitted from upward redistribution along with the targeted minority groups. Howard Jarvis, the originator of California’s anti-tax initiative Proposition 13, laid out the case perfectly. He said that “in the battle of us against them, I’m for us.” Jarvis made it very clear, “them” in this story were welfare cheats (read minorities) and pointy-headed bureaucrats (read professionals). “Us” was good old white guys. This is the theme that Trump and other right-wing populists harp on endlessly.
Against this red meat, mainstream liberals want to have policies that modestly increase the size of the welfare state, subject of course to budget limits. And, we also have to worry about inflation. If that gets too high, well the Fed will just have to raise interest rates and throw millions of working-class people out of work and push down the pay of those able to keep their jobs.
Pretty amazing that the working class isn’t signing up to get Democrats elected, huh?
The Story on Policy and Inequality
I know I give this all the time, but for the folks who have never read my other stuff, and don’t intend to, let me give the super-brief version. Let’s start with intellectual property. This is the clearest case and probably the most important in terms of upward redistribution.
Imagine a world where there are no government-granted patent or copyright monopolies or related protections. This means that anyone who wants to can manufacture any drug they want, without getting the permission of the patent holder. (This has nothing to with safety requirements, which could be left in place.)
Everyone would be able to make copies of software they liked, and even resell them. They could make and sell copies of books, recorded music, movies, and video games and never have to worry about compensating a copyright holder.
Now, I know many people are screaming that in this world no one would ever innovate, develop new drugs, perform music, or make movies. Stop screaming for a moment and think about the issue at hand. We could have a market economy without government-granted patent and copyright monopolies.
These monopolies are government policies to promote innovation and creative work. We can and should argue about whether these government-granted monopolies are the best mechanisms for promoting innovation, but the fact that patents and copyrights are government policy, and are not inherent features of the market is not a debatable point.
This means that the extent to which people are able to benefit from these monopolies is determined by the government, not the market. Bill Gates is one of the richest people in the world because the government will arrest people who make copies of Microsoft’s software without his permission. It was not the market that made Bill Gates insanely rich, it was a government policy.
The same story applies to the idea that technology has benefitted more educated workers at the expense of those without college degrees. There would be much less money to be shared by all those software designers, computer engineers, and biotech inventors in a world without patent and copyright monopolies.
The fact that these people have done very well in the last half-century was due to the decision to not only have these government-granted monopolies, but also policy choices that made them longer and stronger. Just to take the case of prescription drugs, Congress approved the Bayh-Dole Act in 1980, which made it much easier for drug companies to get control of government-funded research.
In the last four decades, spending on prescription drugs exploded from 0.4 percent of GDP to 2.2 percent of GDP. The difference comes to $450 billion a year, more than ten times the money at stake in the Inflation Reduction Act.
To be clear, we had other changes to policy beyond Bayh-Dole. Also, there were undoubtedly many important drugs that were incentivized by this and other policy changes that strengthened intellectual property in drugs. But, we are paying a huge amount more for drugs as a result of policy changes, not the natural workings of the market.
There is a similar story with medical equipment, computers, software, and a wide range of other items. To be clear, I don’t dispute that we should provide incentives for innovation and creative work (my preferred route with prescription drugs is more direct public funding, as we do with NIH), but the structure and size of these incentives are a matter of public policy. It is not a market outcome as the New York Times tells us.
There are other areas where policy has quite obviously shaped distribution. We could have structured globalization differently. Instead of focusing on removing barriers to trade in manufactured goods, so that our manufacturing workers had to compete with low-cost labor in the developing world, we could have focused on promoting free trade in professional services.
In this scenario, our trade teams would be working 24-7 to develop mechanisms that would allow smart ambitious kids in India, Mexico, and elsewhere to train to U.S. standards and then practice medicine in the United States, just like a native-born doctor. How much would doctors here earn, if a half million foreign-educated doctors were working here? My guess is that the sum would be substantially less than the $300,000 plus a year that the average doctor makes now. We could tell the same story for other highly-paid professionals.
The fact that globalization, as we pursued it, was designed to lower the pay of less-educated workers and not the most highly educated and highly paid, was a policy choice. It was not a natural outcome of the market.
When the Elite Lie About Taking Money from the Bottom Half, is it a Surprise the Masses are Mad?
I could go on with other economic policies that allowed for the massive upward redistribution of the last half century, those who are interested can look at Rigged, but the basic point should be clear. The upward redistribution of the last half century was the result of policies designed by the sort of people who write for and edit publications like the New York Times. They refuse to acknowledge this fact.
Let me just preempt a silly comment I have heard when raising this point. I AM ABSOLUTELY CERTAIN THAT ALMOST NO WORKING-CLASS PEOPLE VOTE BASED ON PATENT POLICY. (All caps to make it more difficult to ignore.)
The argument is that working-class voters see themselves as being screwed in the economy of the last half century and are convinced that it was something that was done to them by the elites. They are entirely right in this view, even if they (like our public intellectuals) have little understanding of the processes. And, you can’t make this claim in polite circles. And, for that reason, they are very angry.
It is a complete article of faith in intellectual circles that the market is responsible for the rise in inequality that we have seen in the United States and elsewhere over the last half-century. Intellectual types literally cannot even consider the alternative that inequality was the result of government policies, not the natural workings of the market.
The standard line is that technology and globalization were responsible for the increasing gap in income between people with college, especially advanced, degrees and non-college-educated workers. This belief that market forces drove inequality and not policy is apparently central to the identity of its beneficiaries, who determine what appears in major news outlets.
In this way, the belief in the market causes of inequality can be similar to the belief among Trumpers that the 2020 election was stolen from Trump. They simply do not even want to see the issue debated.
Spencer Bokat-Lindell: The Latest Perp
My current prompt to make my standard complaint is a column by New York Times columnist Spencer Bokat-Lindell which raises the question, “Is liberal democracy dying?” While the causes of growing inequality are not directly the piece’s topic, the issue comes up at several points.
For example, in discussing the rise of authoritarian sentiments among the masses, he tells readers:
“How does class come into the picture? Some scholars have theorized a link between democratic backsliding and the Great Recession, if not global free-market capitalism itself.”
Later the piece continues with a similar theme:
“Yet there are also those who believe technocratic fixes are unequal to the problem [of rising support for authoritarianism]. In a 2016 essay, the Indian writer Pankaj Mishra presented the declining health of democracy around the world as a crisis for the ideology of modern market-based liberalism itself: A ‘religion of technology and G.D.P. and the crude 19th-century calculus of self-interest,’ it can neither account for nor provide an answer to the anger of those who feel left behind by the disruptions and inequalities wrought by globalized capitalism.”
To be clear, I am not picking on Bokat-Lindell because he is the exception. I am picking on him because he is repeating a dogma that goes almost entirely unquestioned in major media outlets, including the New York Times.
Let’s Say Policy, not the Market, Drove Inequality
I will briefly restate my case for how policy drove inequality (this can be found in Rigged [it’s free]), but first, let’s think about the rise of right-wing populism, assuming it is true. This means that we had government policies that prevented more than half of the workforce from seeing any substantial gains from productivity growth over the last half-century. This is a period in which productivity more than doubled.
While the bottom 60 percent of the workforce saw little gains from productivity growth, the top ten percent were doing great. Those in the 90-95th percentile of the wage distribution saw gains at least in step with productivity growth. Workers in the 95th to 99th percentile had wage gains that far outstripped productivity growth, and those in the top 1 percent were getting wage gains that were close to double the rate of productivity growth.
Now, suppose that that massive upward redistribution was all by design. The government put in place policies designed to take money from the bottom 60 percent of the population and give it to those at the top.
Furthermore, suppose that the mechanisms that caused this upward redistribution were prohibited from being discussed. We instead had people like Bokat-Lindell, and thousands of others, filling news stories, columns, and other ruminations on inequality in major media outlets as simply an unfortunate outcome of natural market processes. The idea that government policies actually caused inequality would virtually never be discussed or even contemplated.
In this scenario, would it be surprising that tens of millions of people would be angry at the government for acting to make them worse off? Is it surprising that they might distrust mainstream news outlets like the New York Times or National Public Radio, which endlessly tell them they are losers, but they feel very badly about that fact?
To my mind, in this scenario, it is not the least bit surprising that tens of millions would turn to a despicable demagogue like Donald Trump, or his foreign equivalents, who tell them it is not their fault. Their explanations might be nonsensical racism and/or nationalism, but he is at least pointing his finger somewhat in the right direction. (Trump’s rich backers of course benefitted hugely from the upward redistribution of the last half century.)
The right-wing populists are blaming the people who have benefitted from upward redistribution along with the targeted minority groups. Howard Jarvis, the originator of California’s anti-tax initiative Proposition 13, laid out the case perfectly. He said that “in the battle of us against them, I’m for us.” Jarvis made it very clear, “them” in this story were welfare cheats (read minorities) and pointy-headed bureaucrats (read professionals). “Us” was good old white guys. This is the theme that Trump and other right-wing populists harp on endlessly.
Against this red meat, mainstream liberals want to have policies that modestly increase the size of the welfare state, subject of course to budget limits. And, we also have to worry about inflation. If that gets too high, well the Fed will just have to raise interest rates and throw millions of working-class people out of work and push down the pay of those able to keep their jobs.
Pretty amazing that the working class isn’t signing up to get Democrats elected, huh?
The Story on Policy and Inequality
I know I give this all the time, but for the folks who have never read my other stuff, and don’t intend to, let me give the super-brief version. Let’s start with intellectual property. This is the clearest case and probably the most important in terms of upward redistribution.
Imagine a world where there are no government-granted patent or copyright monopolies or related protections. This means that anyone who wants to can manufacture any drug they want, without getting the permission of the patent holder. (This has nothing to with safety requirements, which could be left in place.)
Everyone would be able to make copies of software they liked, and even resell them. They could make and sell copies of books, recorded music, movies, and video games and never have to worry about compensating a copyright holder.
Now, I know many people are screaming that in this world no one would ever innovate, develop new drugs, perform music, or make movies. Stop screaming for a moment and think about the issue at hand. We could have a market economy without government-granted patent and copyright monopolies.
These monopolies are government policies to promote innovation and creative work. We can and should argue about whether these government-granted monopolies are the best mechanisms for promoting innovation, but the fact that patents and copyrights are government policy, and are not inherent features of the market is not a debatable point.
This means that the extent to which people are able to benefit from these monopolies is determined by the government, not the market. Bill Gates is one of the richest people in the world because the government will arrest people who make copies of Microsoft’s software without his permission. It was not the market that made Bill Gates insanely rich, it was a government policy.
The same story applies to the idea that technology has benefitted more educated workers at the expense of those without college degrees. There would be much less money to be shared by all those software designers, computer engineers, and biotech inventors in a world without patent and copyright monopolies.
The fact that these people have done very well in the last half-century was due to the decision to not only have these government-granted monopolies, but also policy choices that made them longer and stronger. Just to take the case of prescription drugs, Congress approved the Bayh-Dole Act in 1980, which made it much easier for drug companies to get control of government-funded research.
In the last four decades, spending on prescription drugs exploded from 0.4 percent of GDP to 2.2 percent of GDP. The difference comes to $450 billion a year, more than ten times the money at stake in the Inflation Reduction Act.
To be clear, we had other changes to policy beyond Bayh-Dole. Also, there were undoubtedly many important drugs that were incentivized by this and other policy changes that strengthened intellectual property in drugs. But, we are paying a huge amount more for drugs as a result of policy changes, not the natural workings of the market.
There is a similar story with medical equipment, computers, software, and a wide range of other items. To be clear, I don’t dispute that we should provide incentives for innovation and creative work (my preferred route with prescription drugs is more direct public funding, as we do with NIH), but the structure and size of these incentives are a matter of public policy. It is not a market outcome as the New York Times tells us.
There are other areas where policy has quite obviously shaped distribution. We could have structured globalization differently. Instead of focusing on removing barriers to trade in manufactured goods, so that our manufacturing workers had to compete with low-cost labor in the developing world, we could have focused on promoting free trade in professional services.
In this scenario, our trade teams would be working 24-7 to develop mechanisms that would allow smart ambitious kids in India, Mexico, and elsewhere to train to U.S. standards and then practice medicine in the United States, just like a native-born doctor. How much would doctors here earn, if a half million foreign-educated doctors were working here? My guess is that the sum would be substantially less than the $300,000 plus a year that the average doctor makes now. We could tell the same story for other highly-paid professionals.
The fact that globalization, as we pursued it, was designed to lower the pay of less-educated workers and not the most highly educated and highly paid, was a policy choice. It was not a natural outcome of the market.
When the Elite Lie About Taking Money from the Bottom Half, is it a Surprise the Masses are Mad?
I could go on with other economic policies that allowed for the massive upward redistribution of the last half century, those who are interested can look at Rigged, but the basic point should be clear. The upward redistribution of the last half century was the result of policies designed by the sort of people who write for and edit publications like the New York Times. They refuse to acknowledge this fact.
Let me just preempt a silly comment I have heard when raising this point. I AM ABSOLUTELY CERTAIN THAT ALMOST NO WORKING-CLASS PEOPLE VOTE BASED ON PATENT POLICY. (All caps to make it more difficult to ignore.)
The argument is that working-class voters see themselves as being screwed in the economy of the last half century and are convinced that it was something that was done to them by the elites. They are entirely right in this view, even if they (like our public intellectuals) have little understanding of the processes. And, you can’t make this claim in polite circles. And, for that reason, they are very angry.
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• BudgetGovernmentEl GobiernoUnited StatesEE. UU.
There were headlines all over the place yesterday telling us how the Congressional Budget Office (CBO) estimated that Biden’s student debt forgiveness plan would cost $400 billion. I suspect that sounded very scary to lots of people who heard it. After all, those not named Elon Musk will never see anything like $400 billion over our lifetimes.
But suppose reporters had to work for a living. They might have taken two minutes to read the three-page CBO report (actually a letter to two members of Congress).
If they had done that, they might have noticed that this is the discounted cost projected over a 40-year time horizon. Much of the reporting might have led people to believe it was over a year, and more informed types might have assumed it is over CBO’s usual 10-year budget time horizon. The period over which the cost is incurred does matter.
The reports also could have included some context since most people would not have a clear idea in their heads of how large $400 billion is over a forty-year time horizon. Here also reading the three-page report would have been of great help. Page 2 of the report has a very nice graph showing the reduction in student loan payments from the forgiveness package measured as a share of GDP.
It peaks at a bit more than 0.09 percent of GDP in 2023-25. That is less than one-thirtieth of the military budget. It falls to around 0.07 percent of GDP by 2032 and then drops further to 0.02 percent of GDP by 2042.
It would help if reporters covering budget issues saw it as their responsibility to convey information to their audiences rather than just engaging in fraternity rituals of writing down big numbers that are meaningless to almost everyone.
There were headlines all over the place yesterday telling us how the Congressional Budget Office (CBO) estimated that Biden’s student debt forgiveness plan would cost $400 billion. I suspect that sounded very scary to lots of people who heard it. After all, those not named Elon Musk will never see anything like $400 billion over our lifetimes.
But suppose reporters had to work for a living. They might have taken two minutes to read the three-page CBO report (actually a letter to two members of Congress).
If they had done that, they might have noticed that this is the discounted cost projected over a 40-year time horizon. Much of the reporting might have led people to believe it was over a year, and more informed types might have assumed it is over CBO’s usual 10-year budget time horizon. The period over which the cost is incurred does matter.
The reports also could have included some context since most people would not have a clear idea in their heads of how large $400 billion is over a forty-year time horizon. Here also reading the three-page report would have been of great help. Page 2 of the report has a very nice graph showing the reduction in student loan payments from the forgiveness package measured as a share of GDP.
It peaks at a bit more than 0.09 percent of GDP in 2023-25. That is less than one-thirtieth of the military budget. It falls to around 0.07 percent of GDP by 2032 and then drops further to 0.02 percent of GDP by 2042.
It would help if reporters covering budget issues saw it as their responsibility to convey information to their audiences rather than just engaging in fraternity rituals of writing down big numbers that are meaningless to almost everyone.
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• Intellectual PropertyPropiedad IntelectualUnited StatesEE. UU.
As every graduate of Econ 101 can tell you, tariffs lead to corruption. The basic point is that if the government puts a 25 percent tariff on imports of say, steel or shoes, domestic producers are able to sell their products at a price that is 25 percent higher than the world price.
This both creates incentives to try to bring in items without paying the tariff, for example misclassifying the product, and for companies to effectively pay off politicians to extend and increase the tariff. If all items were imported tariff-free, then these opportunities for corruption would disappear.
It’s the same story with government-granted patent monopolies on prescription drugs, except the effective tariffs are much larger, as is the amount of money at issue. Patent monopolies on prescription drugs can often raise the price of a drug by 20 or 30 times the free market price, making them equivalent to tariffs of 2000—3000 percent.
Also, the amount of money we spend on prescription drugs dwarfs spending on almost any other item. We are on a track to spend over $530 billion on prescription drugs this year, more than $4,000 per family. These drugs would likely sell for less than $100 billion in a free market without patent monopolies or other protections.
Given the huge gap between the patent-protected price and the free market price, it would be surprising if we did not see a great deal of corruption. Therefore, when the New York Times ran a piece on how an inner city hospital in Richmond, Virginia had shut down its intensive care unit and stopped providing many other services, it should not have been a shock to discover that the exploitation of a government program on prescription drugs was the source of the problem.
According to the piece, the government provides hospitals located in depressed areas with drugs at a discount below their patent-protected price. This allows the hospital to profit by selling the drugs at the patent-protected price.
The piece gives one example of this scam:
“Thanks to 340B, Richmond Community Hospital can buy a vial of Keytruda, a cancer drug, at the discounted price of $3,444, according to an estimate by Sara Tabatabai, a former researcher at Memorial Sloan Kettering Cancer Center.
“But the hospital charges the private insurer Blue Cross Blue Shield more than seven times that price — $25,425, according to a price list that hospitals are required to publish. That is nearly $22,000 profit on a single vial. Adults need two vials per treatment course.”
The free market price of Keytruda (no patent monopolies or related protection) would likely be just a few hundred dollars per vial, providing little opportunity for scamming. However, when a government-granted patent monopoly allows the drug to sell for a price that could be a hundred times its free market price, it creates enormous opportunities for corruption. In this case, the company that owns the hospital found it more profitable to run this scam than to serve the patients in the community in which it is located.
It would be good if we could have a serious discussion of alternatives to patent monopoly financing of prescription drugs, to end this sort of corruption. Unfortunately, major media outlets don’t want to raise this issue on their pages. Instead, we just get hand-wringing over the resulting corruption and the usual “what can you do?”
As every graduate of Econ 101 can tell you, tariffs lead to corruption. The basic point is that if the government puts a 25 percent tariff on imports of say, steel or shoes, domestic producers are able to sell their products at a price that is 25 percent higher than the world price.
This both creates incentives to try to bring in items without paying the tariff, for example misclassifying the product, and for companies to effectively pay off politicians to extend and increase the tariff. If all items were imported tariff-free, then these opportunities for corruption would disappear.
It’s the same story with government-granted patent monopolies on prescription drugs, except the effective tariffs are much larger, as is the amount of money at issue. Patent monopolies on prescription drugs can often raise the price of a drug by 20 or 30 times the free market price, making them equivalent to tariffs of 2000—3000 percent.
Also, the amount of money we spend on prescription drugs dwarfs spending on almost any other item. We are on a track to spend over $530 billion on prescription drugs this year, more than $4,000 per family. These drugs would likely sell for less than $100 billion in a free market without patent monopolies or other protections.
Given the huge gap between the patent-protected price and the free market price, it would be surprising if we did not see a great deal of corruption. Therefore, when the New York Times ran a piece on how an inner city hospital in Richmond, Virginia had shut down its intensive care unit and stopped providing many other services, it should not have been a shock to discover that the exploitation of a government program on prescription drugs was the source of the problem.
According to the piece, the government provides hospitals located in depressed areas with drugs at a discount below their patent-protected price. This allows the hospital to profit by selling the drugs at the patent-protected price.
The piece gives one example of this scam:
“Thanks to 340B, Richmond Community Hospital can buy a vial of Keytruda, a cancer drug, at the discounted price of $3,444, according to an estimate by Sara Tabatabai, a former researcher at Memorial Sloan Kettering Cancer Center.
“But the hospital charges the private insurer Blue Cross Blue Shield more than seven times that price — $25,425, according to a price list that hospitals are required to publish. That is nearly $22,000 profit on a single vial. Adults need two vials per treatment course.”
The free market price of Keytruda (no patent monopolies or related protection) would likely be just a few hundred dollars per vial, providing little opportunity for scamming. However, when a government-granted patent monopoly allows the drug to sell for a price that could be a hundred times its free market price, it creates enormous opportunities for corruption. In this case, the company that owns the hospital found it more profitable to run this scam than to serve the patients in the community in which it is located.
It would be good if we could have a serious discussion of alternatives to patent monopoly financing of prescription drugs, to end this sort of corruption. Unfortunately, major media outlets don’t want to raise this issue on their pages. Instead, we just get hand-wringing over the resulting corruption and the usual “what can you do?”
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• Economic Crisis and RecoveryCrisis económica y recuperaciónInequalityLa DesigualdadUnited StatesEE. UU.
Catherine Rampell’s latest Washington Post column argued that lower-income people have been hardest hit by inflation, so they will benefit most if the Fed gets inflation under control. The argument is that items that they must buy, like food, gas, and rent, have risen most rapidly in price. Furthermore, since lower-income people tend to already be buying lower-priced brands, they have little ability to protect themselves against inflation by switching to less expensive alternatives.
There are two problems with this logic. As many of us have noted, and Rampell acknowledges, workers at the bottom end of the wage distribution have seen wage increases well above the average over the last two years. If the unemployment rate were to rise by a percentage point or more (it could rise by much more), we would almost certainly see the more rapid wage gains at the bottom come to an end.
In fact, the story could well go into reverse. Over the last four decades, wage gains for the bottom half of the wage distribution trailed average wage growth, this is especially true during periods of high unemployment. In fairness, if the unemployment rate stays under 5.0 percent, this would still qualify as a period of relatively low unemployment, but there is no guarantee that workers at the bottom would be seeing wage gains equal to the average pace of wage growth.
There is also the issue of the distribution of unemployment. Relatively few doctors and computer scientists are likely to face unemployment as a result of the Fed’s rate hikes. The people who lose their jobs will be disproportionately retail and restaurant workers and others employed in a low-paying sector.
The Black unemployment rate is on average twice as high as the unemployment rate for whites. For Hispanics, the ratio is roughly 1.5 times as high. If the unemployment rate for whites rises by 1.0 percentage points, this means we can expect a rise in the unemployment rate for Blacks of around 2.0 percentage points and 1.5 percentage points for Hispanics.
It is very difficult to see how families who have one or more member going from being employed to being unemployed can benefit from the Fed’s fight against inflation. These families will be unambiguous losers in this story. Also, since most spells of unemployment are short, there will actually be a large number of families who are in this situation over the course of a year or two.
Will the Fed’s Fight Slow Inflation in the Staples?
If we want to make the argument that the Fed has to fight inflation to help lower-income people, then we would have to believe that higher rates will be especially effective in slowing inflation in food, energy, and rent. That is not obviously the case.
Starting with food, the jump in prices since the pandemic was largely a worldwide phenomenon. We saw big increases in the price of wheat and many other commodities associated with supply chain disruptions from both the pandemic and the war in Ukraine.
These prices are now headed downward as the world economy is adjusting to these disruptions. Reducing demand in the United States can help relieve the stress in these markets, but U.S. demand has only a limited impact on the world market.
In some cases, the Fed’s rate hikes will provide almost no benefit. For example, Avian flu devastated the U.S. chicken stock, pushing up both the price of chicken and eggs. Fed rate hikes will not help this story much. In short, it is not likely that the Fed’s rate hikes will save people much on food.
There is a similar story with gas and energy more generally. These prices are determined on a world market. The U.S. is a major user of energy, but still only accounts for around a fifth of world demand. Reducing U.S. consumption by 2-3 percent (a large reduction) will not have a big impact on world prices.
There is an issue of the “crack spread,” the gap between the price of a gallon of gasoline and the cost of the oil contained in it. That had exploded earlier this year, arguably because of oil companies using monopoly power to limit supply, but has now fallen back to more normal levels. This spread can be affected somewhat by domestic demand, but it accounts for less than 20 percent of the price of a gallon of gas.
Finally, there is rent. The Fed’s rate hikes had an immediate and large impact on home sales. Mortgage rates have more than doubled from their year-ago level. This has led to a sharp drop in sales. This decline in sales has only had a limited effect on sale prices to date, but with inventories of unsold homes rising rapidly, it seems inevitable that prices will soon decline.
There is likely to be a spillover from the sale market to the rental market. Many of the houses that go unsold are likely to end up as rentals. An increased supply of rental units will put downward pressure on rents.
We are seeing some evidence of slower rental inflation in some private indexes, but this process will take time to work through. This will definitely help low and moderate-income households, but the good news is that the Fed has pretty much done its work in this area.
With mortgage rates now over 6.0 percent, it is not clear that pushing rates still higher will have much additional impact on the housing market. We are likely to see some improvement in the rental market over the next six months to a year.
However, getting prices down to more affordable levels is a longer-term story that depends on more construction. In this area, Fed rate hikes are a clear negative. Housing starts are already down by double-digit levels against their year-ago pace. Further hikes are likely to slow construction even more. That is not a good story for housing affordability.
Fed Rate Hikes Are Bad News at the Bottom
To sum up the story, we know with absolute certainty that Fed rate hikes will disproportionately hit lower-paid workers. They are both the ones most likely to lose their jobs and the ones to see the biggest impact on wage growth.
Insofar as lower-income families are seeing the biggest hit from inflation, due to rising prices in necessities, Fed policy is likely to be of limited help. The rate hikes have slowed inflation in the housing sector, which is huge, but it is not clear that further hikes will provide much benefit in the form of lower rents for moderate-income households. In short, it is hard to make the case that Fed rate hikes will somehow help lower-income households.
We all understand the Fed’s responsibility for preventing inflation from spiraling to dangerous levels. There can be reasonable differences on the extent of this threat currently, but we should be clear on the trade-offs involved in Fed policy. Those at the bottom end of the income distribution will be paying the biggest price for the Fed’s anti-inflation policy, and it is important to recognize this fact.
Catherine Rampell’s latest Washington Post column argued that lower-income people have been hardest hit by inflation, so they will benefit most if the Fed gets inflation under control. The argument is that items that they must buy, like food, gas, and rent, have risen most rapidly in price. Furthermore, since lower-income people tend to already be buying lower-priced brands, they have little ability to protect themselves against inflation by switching to less expensive alternatives.
There are two problems with this logic. As many of us have noted, and Rampell acknowledges, workers at the bottom end of the wage distribution have seen wage increases well above the average over the last two years. If the unemployment rate were to rise by a percentage point or more (it could rise by much more), we would almost certainly see the more rapid wage gains at the bottom come to an end.
In fact, the story could well go into reverse. Over the last four decades, wage gains for the bottom half of the wage distribution trailed average wage growth, this is especially true during periods of high unemployment. In fairness, if the unemployment rate stays under 5.0 percent, this would still qualify as a period of relatively low unemployment, but there is no guarantee that workers at the bottom would be seeing wage gains equal to the average pace of wage growth.
There is also the issue of the distribution of unemployment. Relatively few doctors and computer scientists are likely to face unemployment as a result of the Fed’s rate hikes. The people who lose their jobs will be disproportionately retail and restaurant workers and others employed in a low-paying sector.
The Black unemployment rate is on average twice as high as the unemployment rate for whites. For Hispanics, the ratio is roughly 1.5 times as high. If the unemployment rate for whites rises by 1.0 percentage points, this means we can expect a rise in the unemployment rate for Blacks of around 2.0 percentage points and 1.5 percentage points for Hispanics.
It is very difficult to see how families who have one or more member going from being employed to being unemployed can benefit from the Fed’s fight against inflation. These families will be unambiguous losers in this story. Also, since most spells of unemployment are short, there will actually be a large number of families who are in this situation over the course of a year or two.
Will the Fed’s Fight Slow Inflation in the Staples?
If we want to make the argument that the Fed has to fight inflation to help lower-income people, then we would have to believe that higher rates will be especially effective in slowing inflation in food, energy, and rent. That is not obviously the case.
Starting with food, the jump in prices since the pandemic was largely a worldwide phenomenon. We saw big increases in the price of wheat and many other commodities associated with supply chain disruptions from both the pandemic and the war in Ukraine.
These prices are now headed downward as the world economy is adjusting to these disruptions. Reducing demand in the United States can help relieve the stress in these markets, but U.S. demand has only a limited impact on the world market.
In some cases, the Fed’s rate hikes will provide almost no benefit. For example, Avian flu devastated the U.S. chicken stock, pushing up both the price of chicken and eggs. Fed rate hikes will not help this story much. In short, it is not likely that the Fed’s rate hikes will save people much on food.
There is a similar story with gas and energy more generally. These prices are determined on a world market. The U.S. is a major user of energy, but still only accounts for around a fifth of world demand. Reducing U.S. consumption by 2-3 percent (a large reduction) will not have a big impact on world prices.
There is an issue of the “crack spread,” the gap between the price of a gallon of gasoline and the cost of the oil contained in it. That had exploded earlier this year, arguably because of oil companies using monopoly power to limit supply, but has now fallen back to more normal levels. This spread can be affected somewhat by domestic demand, but it accounts for less than 20 percent of the price of a gallon of gas.
Finally, there is rent. The Fed’s rate hikes had an immediate and large impact on home sales. Mortgage rates have more than doubled from their year-ago level. This has led to a sharp drop in sales. This decline in sales has only had a limited effect on sale prices to date, but with inventories of unsold homes rising rapidly, it seems inevitable that prices will soon decline.
There is likely to be a spillover from the sale market to the rental market. Many of the houses that go unsold are likely to end up as rentals. An increased supply of rental units will put downward pressure on rents.
We are seeing some evidence of slower rental inflation in some private indexes, but this process will take time to work through. This will definitely help low and moderate-income households, but the good news is that the Fed has pretty much done its work in this area.
With mortgage rates now over 6.0 percent, it is not clear that pushing rates still higher will have much additional impact on the housing market. We are likely to see some improvement in the rental market over the next six months to a year.
However, getting prices down to more affordable levels is a longer-term story that depends on more construction. In this area, Fed rate hikes are a clear negative. Housing starts are already down by double-digit levels against their year-ago pace. Further hikes are likely to slow construction even more. That is not a good story for housing affordability.
Fed Rate Hikes Are Bad News at the Bottom
To sum up the story, we know with absolute certainty that Fed rate hikes will disproportionately hit lower-paid workers. They are both the ones most likely to lose their jobs and the ones to see the biggest impact on wage growth.
Insofar as lower-income families are seeing the biggest hit from inflation, due to rising prices in necessities, Fed policy is likely to be of limited help. The rate hikes have slowed inflation in the housing sector, which is huge, but it is not clear that further hikes will provide much benefit in the form of lower rents for moderate-income households. In short, it is hard to make the case that Fed rate hikes will somehow help lower-income households.
We all understand the Fed’s responsibility for preventing inflation from spiraling to dangerous levels. There can be reasonable differences on the extent of this threat currently, but we should be clear on the trade-offs involved in Fed policy. Those at the bottom end of the income distribution will be paying the biggest price for the Fed’s anti-inflation policy, and it is important to recognize this fact.
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• JobsTrabajosUnited StatesEE. UU.WorkersSector del trabajo
I have long been a big fan of reduced work time, whether it take the form of more vacations, more time for paid leaves, such as family leave and sick days, or shorter workweeks. The basic logic is that, as our economy gets more productive, we should get some of the benefit in the form of more leisure, instead of just higher income. (Yeah, I know about income inequality, and that most workers have not seen much in terms of higher income in the last half century, but let’s leave that one aside for the moment.)
Anyhow, four-day workweeks always seemed an especially interesting way to reduce work hours, since they also eliminated one day of commuting. If everyone commuted 20 percent less, it would save a huge amount in commuting costs. And, not only would people be commuting fewer days, but by having fewer trips, we would have less congestion and less energy wasted by cars sitting in traffic. That sounds like a really good deal all around. (Of course, working from home, and not commuting at all, is even better.)
One issue is what happens to the productivity of workers who work a four-day week rather than a five-day week. The New York Times had a piece on an experiment in the United Kingdom, where 70 companies switched to a four-day week at the start of the year.
According to the piece, a private foundation covered the cost of paying workers for a fifth day, even when they were only coming in four days a week. The piece reports that the experience has been overwhelmingly positive, with the vast majority reporting that they intend to stick to a four-day workweek even after the experiment is over.
While this is very positive news for fans of a four-day workweek, the piece is very unclear about its measure of productivity. According to the piece, productivity did not fall at the companies that switched to a four-day workweek. But it is not clear how productivity is being measured.
Ordinarily, economists measure productivity as output per hour of work. Is the piece using this measure of productivity? This means that if workers were putting in four eight-hour days, then their output would be 20 percent less than when they were working five eight-hour days. If this is the case, it would be difficult to see how employers could pay them the same amount per week, unless they had extraordinary profits before the experiment.
It’s possible that workers are putting longer days now. Perhaps they are working 10-hour days, so their four-day workweeks still correspond to a 40-hour workweek. In that case, we can be encouraged that the longer day didn’t mean any decline in productivity, and if workers prefer one fewer day of work per week, that would be great.
It’s also possible that workers are putting in fewer hours in their four-day week than they did in their five-day week, but still managing to produce the same amount of output. There is some evidence than when France adopted a 35-hour standard workweek in the late 1990s it was associated with an increase in the rate of productivity growth. Perhaps we are seeing the same story with a four-day week.
However, to assess the extent to which productivity might have been increased in the companies switching to a four-day week, we have to know how many hours workers are putting in each day. It is not at all clear from this NYT piece (or the linked site for the organization coordinating the experiment), how many hours people are working.
If we take the extreme case, where workers are still putting in eight-hour days, the four-day week would imply a 25 percent increase in productivity. This is almost impossible to imagine. Economists would be thrilled by any policy that would increase aggregate productivity by just 1.0 percent over a period of years. That would imply an increase of $250 billion a year in annual output, that would be a really big deal.
A policy that could lead to an increase in productivity of 25 percent, overnight, is impossibly great. Even if workers were putting in nine-hour days and maintaining the same level of output it would imply an extraordinary 11.1 percent increase in productivity. That would be a really huge deal, as would an increase in productivity of even half this size.
Anyhow, it is hugely important for those advocating four-day workweeks to know what its impact is on productivity. Unfortunately, this piece provides no real basis for making that assessment.
Addendum
I was happy to hear that my friend, Juliet Schor, is the lead researcher on this project. They are in fact making an effort to measure productivity, or at least revenue. Since many of these companies produce software, that should be pretty much the same thing.
She has informed me that while the bulk have gone to four eight-hour days a few have increased hours per day, so that they have not gone from a 40-hour week to a 35 or 36 hour-week. This would still imply very substantial productivity gains if they can maintain output levels.
According to Schor, even the ones that have gone from 40 to 32 hours are still managing to maintain the same level of output. They did this by planning for several months in advance and finding tasks (mostly meetings) that could be eliminated without reducing output.
In any case, Schor is a serious researcher and I’m confident that we will get useful data from this experiment after it is completed at the end of the year. Hopefully, the New York Times will do a follow up piece when the final report is available.
I have long been a big fan of reduced work time, whether it take the form of more vacations, more time for paid leaves, such as family leave and sick days, or shorter workweeks. The basic logic is that, as our economy gets more productive, we should get some of the benefit in the form of more leisure, instead of just higher income. (Yeah, I know about income inequality, and that most workers have not seen much in terms of higher income in the last half century, but let’s leave that one aside for the moment.)
Anyhow, four-day workweeks always seemed an especially interesting way to reduce work hours, since they also eliminated one day of commuting. If everyone commuted 20 percent less, it would save a huge amount in commuting costs. And, not only would people be commuting fewer days, but by having fewer trips, we would have less congestion and less energy wasted by cars sitting in traffic. That sounds like a really good deal all around. (Of course, working from home, and not commuting at all, is even better.)
One issue is what happens to the productivity of workers who work a four-day week rather than a five-day week. The New York Times had a piece on an experiment in the United Kingdom, where 70 companies switched to a four-day week at the start of the year.
According to the piece, a private foundation covered the cost of paying workers for a fifth day, even when they were only coming in four days a week. The piece reports that the experience has been overwhelmingly positive, with the vast majority reporting that they intend to stick to a four-day workweek even after the experiment is over.
While this is very positive news for fans of a four-day workweek, the piece is very unclear about its measure of productivity. According to the piece, productivity did not fall at the companies that switched to a four-day workweek. But it is not clear how productivity is being measured.
Ordinarily, economists measure productivity as output per hour of work. Is the piece using this measure of productivity? This means that if workers were putting in four eight-hour days, then their output would be 20 percent less than when they were working five eight-hour days. If this is the case, it would be difficult to see how employers could pay them the same amount per week, unless they had extraordinary profits before the experiment.
It’s possible that workers are putting longer days now. Perhaps they are working 10-hour days, so their four-day workweeks still correspond to a 40-hour workweek. In that case, we can be encouraged that the longer day didn’t mean any decline in productivity, and if workers prefer one fewer day of work per week, that would be great.
It’s also possible that workers are putting in fewer hours in their four-day week than they did in their five-day week, but still managing to produce the same amount of output. There is some evidence than when France adopted a 35-hour standard workweek in the late 1990s it was associated with an increase in the rate of productivity growth. Perhaps we are seeing the same story with a four-day week.
However, to assess the extent to which productivity might have been increased in the companies switching to a four-day week, we have to know how many hours workers are putting in each day. It is not at all clear from this NYT piece (or the linked site for the organization coordinating the experiment), how many hours people are working.
If we take the extreme case, where workers are still putting in eight-hour days, the four-day week would imply a 25 percent increase in productivity. This is almost impossible to imagine. Economists would be thrilled by any policy that would increase aggregate productivity by just 1.0 percent over a period of years. That would imply an increase of $250 billion a year in annual output, that would be a really big deal.
A policy that could lead to an increase in productivity of 25 percent, overnight, is impossibly great. Even if workers were putting in nine-hour days and maintaining the same level of output it would imply an extraordinary 11.1 percent increase in productivity. That would be a really huge deal, as would an increase in productivity of even half this size.
Anyhow, it is hugely important for those advocating four-day workweeks to know what its impact is on productivity. Unfortunately, this piece provides no real basis for making that assessment.
Addendum
I was happy to hear that my friend, Juliet Schor, is the lead researcher on this project. They are in fact making an effort to measure productivity, or at least revenue. Since many of these companies produce software, that should be pretty much the same thing.
She has informed me that while the bulk have gone to four eight-hour days a few have increased hours per day, so that they have not gone from a 40-hour week to a 35 or 36 hour-week. This would still imply very substantial productivity gains if they can maintain output levels.
According to Schor, even the ones that have gone from 40 to 32 hours are still managing to maintain the same level of output. They did this by planning for several months in advance and finding tasks (mostly meetings) that could be eliminated without reducing output.
In any case, Schor is a serious researcher and I’m confident that we will get useful data from this experiment after it is completed at the end of the year. Hopefully, the New York Times will do a follow up piece when the final report is available.
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• Economic Crisis and RecoveryCrisis económica y recuperaciónInflation
There is a common myth that Germany’s hyperinflation led to the collapse of democracy in Germany and the rise of Hitler. That is a nice story for pushing the inflation hawks’ agenda, but it doesn’t correspond to reality.
The hyperinflation had ended by 1924 and Germany’s economy stabilized with moderate rates of inflation and unemployment. The economic event that most directly was associated with Hitler’s rise to power was the Great Depression and surge in unemployment that followed the crash of the US stock market in 1929.
This reality didn’t stop Jonathan Wiseman, in a NYT “political memo,” from invoking this myth in a piece on the political consequences of inflation.
“’From bitter historical experience, we know how quickly inflation destroys confidence in the reliability of political institutions and ends up endangering democracy,’ Helmut Kohl, the chancellor of Germany, said in 1995, harking back to the hyperinflation of the Weimar Republic.”
The piece also blames Jimmy Carter’s failed re-election effort on the inflation in 1979 and 1980.
“Four years later, Jimmy Carter’s dreams of a second term were vaporized by 13.5 percent inflation.”
While high inflation surely hurt Carter’s re-election prospects, we also had a severe recession in 1980.
The unemployment rate soared from 6.0 percent in December of 1979, to 7.8 percent in July of 1980. This was one of the fastest surges of unemployment in the country’s history. The run-up in unemployment, just months before the election, surely had a large impact on Carter’s prospects. It is very misleading to imply that it was just inflation that sank Carter.
There is a common myth that Germany’s hyperinflation led to the collapse of democracy in Germany and the rise of Hitler. That is a nice story for pushing the inflation hawks’ agenda, but it doesn’t correspond to reality.
The hyperinflation had ended by 1924 and Germany’s economy stabilized with moderate rates of inflation and unemployment. The economic event that most directly was associated with Hitler’s rise to power was the Great Depression and surge in unemployment that followed the crash of the US stock market in 1929.
This reality didn’t stop Jonathan Wiseman, in a NYT “political memo,” from invoking this myth in a piece on the political consequences of inflation.
“’From bitter historical experience, we know how quickly inflation destroys confidence in the reliability of political institutions and ends up endangering democracy,’ Helmut Kohl, the chancellor of Germany, said in 1995, harking back to the hyperinflation of the Weimar Republic.”
The piece also blames Jimmy Carter’s failed re-election effort on the inflation in 1979 and 1980.
“Four years later, Jimmy Carter’s dreams of a second term were vaporized by 13.5 percent inflation.”
While high inflation surely hurt Carter’s re-election prospects, we also had a severe recession in 1980.
The unemployment rate soared from 6.0 percent in December of 1979, to 7.8 percent in July of 1980. This was one of the fastest surges of unemployment in the country’s history. The run-up in unemployment, just months before the election, surely had a large impact on Carter’s prospects. It is very misleading to imply that it was just inflation that sank Carter.
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• Intellectual PropertyPropiedad IntelectualUnited StatesEE. UU.
I was glad to see Ezra Klein’s piece today touting the Biden administration’s creation of ARPA-H. This is the Advanced Research Projects Agency-Health, a DARPA-type agency explicitly designed to promote the development of health-related innovations, like vaccines, drugs, and medical equipment.
Like Ezra, I’m a big fan of increased public funding for biomedical research. However, he goes a bit astray in his thinking near the end of the piece. He notes proposals, like those put forward by Bernie Sanders, for a cash prize to take the place of a patent monopoly. The government hands out $100 million, $500 million or $1 billion, and then allows the drug, vaccine, or whatever to be sold as a cheap generic. That likely means breakthrough cancer drugs selling for hundreds of dollars rather than hundreds of thousands of dollars.
“The government could identify, say, 12 conditions that it wants to see a drug developed for. The first group to develop and prove out such a drug would get a princely sum — $100 million, or $500 million, or a billion dollars, depending on the condition and the efficacy. In return, that drug would be immediately off-patent, available for any generic drug producer to manufacture for a pittance (and available for other countries, particularly poor countries, to produce immediately).”
I think the Sanders’ proposal is a great improvement over the current system. But coming in the middle of a discussion of a plan for more direct government funding, it makes the famous Moderna mistake: paying companies twice.
For folks who may have forgotten, we paid Moderna $450 million to develop its coronavirus vaccine. We then paid it another $450 million to cover the cost of the phase 3 testing needed for FDA approval. We then allowed it to claim intellectual property in the vaccine, which meant tens of billions of dollars in revenue. It also led to the creation of at least five Moderna billionaires. Tell me again how technology creates inequality.
It really shouldn’t not sound too radical to say that companies only get paid once for their work. If the government pays for the research, it doesn’t also give you a patent monopoly. These are alternative funding mechanisms, not part of a smorgasbord that we throw at innovators to allow them to get incredibly rich at the expense of the rest of us.
Like Ezra, I applaud the Biden administration’s commitment to increase government support for developing new technologies, but we should not be doing this in a way that makes our inequality problem even worse. We can argue over the best mechanisms.
I personally prefer direct public funding to a Sanders-type prize system. The main reason is that we can require everything be fully open-sourced as quickly as possible under a direct funding system, allowing science to advance more quickly.
Also, I suspect that awarding the prizes will prove to be a huge legal and moral nightmare. It is not always clear who actually met the prize conditions and also who made the biggest contribution to getting there. For example, a researcher may make a huge breakthrough that allows pretty much anyone to come along and cross the finish line and claim the prize. Direct upfront funding removes this problem. (I discuss this issue in chapter 5 of the good book, Rigged [it’s free].)
In any case, we can debate the best mechanism through which public funding can take place, patent monopolies, prizes, or direct funding, but the idea that you only get paid once should not be controversial. It is unfortunate that Ezra doesn’t address this issue in his piece, since he does know better (he reads my stuff). There is a huge amount of money at stake in who gets the gains from innovation, likely more than $1 trillion a year, and it would be an incredible failing of the political process if the issue is not even discussed.
I was glad to see Ezra Klein’s piece today touting the Biden administration’s creation of ARPA-H. This is the Advanced Research Projects Agency-Health, a DARPA-type agency explicitly designed to promote the development of health-related innovations, like vaccines, drugs, and medical equipment.
Like Ezra, I’m a big fan of increased public funding for biomedical research. However, he goes a bit astray in his thinking near the end of the piece. He notes proposals, like those put forward by Bernie Sanders, for a cash prize to take the place of a patent monopoly. The government hands out $100 million, $500 million or $1 billion, and then allows the drug, vaccine, or whatever to be sold as a cheap generic. That likely means breakthrough cancer drugs selling for hundreds of dollars rather than hundreds of thousands of dollars.
“The government could identify, say, 12 conditions that it wants to see a drug developed for. The first group to develop and prove out such a drug would get a princely sum — $100 million, or $500 million, or a billion dollars, depending on the condition and the efficacy. In return, that drug would be immediately off-patent, available for any generic drug producer to manufacture for a pittance (and available for other countries, particularly poor countries, to produce immediately).”
I think the Sanders’ proposal is a great improvement over the current system. But coming in the middle of a discussion of a plan for more direct government funding, it makes the famous Moderna mistake: paying companies twice.
For folks who may have forgotten, we paid Moderna $450 million to develop its coronavirus vaccine. We then paid it another $450 million to cover the cost of the phase 3 testing needed for FDA approval. We then allowed it to claim intellectual property in the vaccine, which meant tens of billions of dollars in revenue. It also led to the creation of at least five Moderna billionaires. Tell me again how technology creates inequality.
It really shouldn’t not sound too radical to say that companies only get paid once for their work. If the government pays for the research, it doesn’t also give you a patent monopoly. These are alternative funding mechanisms, not part of a smorgasbord that we throw at innovators to allow them to get incredibly rich at the expense of the rest of us.
Like Ezra, I applaud the Biden administration’s commitment to increase government support for developing new technologies, but we should not be doing this in a way that makes our inequality problem even worse. We can argue over the best mechanisms.
I personally prefer direct public funding to a Sanders-type prize system. The main reason is that we can require everything be fully open-sourced as quickly as possible under a direct funding system, allowing science to advance more quickly.
Also, I suspect that awarding the prizes will prove to be a huge legal and moral nightmare. It is not always clear who actually met the prize conditions and also who made the biggest contribution to getting there. For example, a researcher may make a huge breakthrough that allows pretty much anyone to come along and cross the finish line and claim the prize. Direct upfront funding removes this problem. (I discuss this issue in chapter 5 of the good book, Rigged [it’s free].)
In any case, we can debate the best mechanism through which public funding can take place, patent monopolies, prizes, or direct funding, but the idea that you only get paid once should not be controversial. It is unfortunate that Ezra doesn’t address this issue in his piece, since he does know better (he reads my stuff). There is a huge amount of money at stake in who gets the gains from innovation, likely more than $1 trillion a year, and it would be an incredible failing of the political process if the issue is not even discussed.
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• Economic Crisis and RecoveryCrisis económica y recuperaciónJobsTrabajosUnited StatesEE. UU.WorkersSector del trabajo
It is bizarre how the media keep insisting that we have some big problem of missing workers, since we don’t. The Washington Post has the latest entry in the search for non-missing workers.
As with other pieces, it implies that an unusual large percentage of people are opting not to be in the labor market. It tells readers:
“The share of working-age Americans who have a job or are looking for one is at 62.4 percent, a full percentage point lower than it was in February 2020, according to Labor Department data.”
This is not true. That figure refers to the share of the civilian non-institutionalized population that has a job or is looking for work. This includes everyone over age 16 who is not in the military, prison, or some other institution.
The population is two and half years older now than it was in February of 2020. This matters because the huge baby boom generation is now mostly in its sixties and seventies. It is hardly a secret, even to labor economists, that people who are age 66 and a half are less likely to be working than people who are 64.
If we control for age, there is very little evidence of people dropping out of the labor force. The labor force participation rate for prime age workers, people between the ages of 25 and 54, was 82.8 percent in August. This is just 0.2 percentage points below the level in February of 2020 and only below the rate for one month of 2019.
It is a bit far-fetched to see this falloff as a big problem to be explained. It is common for the labor force participation rate to move this much in a single month.
The piece also tells us the big issue is with older workers:
“It’s unclear whether — or when — many of the people who left the workforce during the pandemic will return. That’s particularly true for workers 55 and older, who have stopped working at higher rates. The job market is still short more than 500,000 workers from that age group.”
As noted, this group is close to two and half years older than it was two and a half years ago. It is surprising that anyone would be surprised that a smaller share of them is working. If we hold age constant, the Post’s mystery disappears.
In February of 2020 the labor force participation rate for people between the ages of 55 and 64 was 65.5 percent, the same as the rate in February and March of this year. The rate has fallen by a percentage point in the last five months, but this is likely just error in the data. In short, there is nothing here either.
The problem we are seeing is an extraordinary restructuring of the labor market due to the pandemic. Many businesses will not survive (welcome to capitalism). With luck, we will end up with a situation where employers will be forced to offer higher pay and better conditions to attract and keep workers. That is not a bad story.
It is bizarre how the media keep insisting that we have some big problem of missing workers, since we don’t. The Washington Post has the latest entry in the search for non-missing workers.
As with other pieces, it implies that an unusual large percentage of people are opting not to be in the labor market. It tells readers:
“The share of working-age Americans who have a job or are looking for one is at 62.4 percent, a full percentage point lower than it was in February 2020, according to Labor Department data.”
This is not true. That figure refers to the share of the civilian non-institutionalized population that has a job or is looking for work. This includes everyone over age 16 who is not in the military, prison, or some other institution.
The population is two and half years older now than it was in February of 2020. This matters because the huge baby boom generation is now mostly in its sixties and seventies. It is hardly a secret, even to labor economists, that people who are age 66 and a half are less likely to be working than people who are 64.
If we control for age, there is very little evidence of people dropping out of the labor force. The labor force participation rate for prime age workers, people between the ages of 25 and 54, was 82.8 percent in August. This is just 0.2 percentage points below the level in February of 2020 and only below the rate for one month of 2019.
It is a bit far-fetched to see this falloff as a big problem to be explained. It is common for the labor force participation rate to move this much in a single month.
The piece also tells us the big issue is with older workers:
“It’s unclear whether — or when — many of the people who left the workforce during the pandemic will return. That’s particularly true for workers 55 and older, who have stopped working at higher rates. The job market is still short more than 500,000 workers from that age group.”
As noted, this group is close to two and half years older than it was two and a half years ago. It is surprising that anyone would be surprised that a smaller share of them is working. If we hold age constant, the Post’s mystery disappears.
In February of 2020 the labor force participation rate for people between the ages of 55 and 64 was 65.5 percent, the same as the rate in February and March of this year. The rate has fallen by a percentage point in the last five months, but this is likely just error in the data. In short, there is nothing here either.
The problem we are seeing is an extraordinary restructuring of the labor market due to the pandemic. Many businesses will not survive (welcome to capitalism). With luck, we will end up with a situation where employers will be forced to offer higher pay and better conditions to attract and keep workers. That is not a bad story.
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• Economic PolicyInflationUnited StatesEE. UU.WorkersSector del trabajo
I have had many people ask me if there is not a better way to fight inflation than the current route of Federal Reserve Board rate hikes. Just to remind people, this route fights inflation by slowing the economy, throwing people out of work, and then forcing workers to take pay cuts.
The people who are most likely to lose jobs are the ones who already face the most discrimination in the labor market: Blacks, Hispanics, people with less education, and people with criminal records. Not only will millions of these workers lose jobs, tens of millions of workers at the bottom half of the wage distribution will be forced to take pay cuts. They are the ones whose bargaining power is most sensitive to the level of unemployment in the economy, not doctors and lawyers.
It seems more than a bit absurd, that when we have all these various public and private initiatives that are supposed to improve the lot of disadvantaged groups, we can have an arm of the government, the Federal Reserve Board, just swamp these efforts by creating a tidal wave of unemployment. I don’t want to disparage well-meaning efforts to help the disadvantaged, but they can’t come to close to offsetting the impact of a three or four percentage point rise in the unemployment rate for Blacks or Hispanics. And, the hit could be much larger.
So, it seems like a good idea to think of an alternative path to lowering the rate of inflation. When I want to reduce inflationary pressures I naturally think of the ways in which we have structured the market to redistribute income upward, as discussed in Rigged [it’s free].
We can look to reduce some of the waste in the financial sector that makes some Wall Street types very rich at the expense of the rest of us. My toolbox includes a financial transactions tax, universal accounts at the Fed (eliminates tens of billions in annual bank fees), getting pension funds to stop throwing money away making private equity partners rich, and getting universities to stop making hedge fund partners rich managing their endowments.
These are all great things to do, but not the sorts of policies that can be implemented overnight to stem current inflation. We can maybe get a foot in the door, but even in a best-case scenario the benefits will only be felt several years down the road.
Then there is the plan to end the protectionism that benefits highly paid professionals, like doctors and dentists. If our doctors got paid roughly the same as their counterparts in Germany or Canada, it would save us around $100 billion a year, or $900 per family. This would mean setting up international standards to ensure quality, and then many years of foreign doctors coming to the U.S., as well as increased competition from nurse practitioners and other health care professionals, to bring our physicians’ pay structure into balance. Again, great policy, but not the sort of thing that will have a big effect in the immediate future.
Next, we have reducing the corruption in the corporate governance structure. As it is, the corporate boards, who are supposed to keep a lid on CEO pay, don’t even see this as part of their job description. They see their jobs as helping the CEO and other top management.
We can look to change the incentive structure for directors, so they actually do take an interest in putting a check on CEO pay. As I point out, this matters not just for the CEO, but bloated CEO pay affects pay structures at the top more generally, taking huge amounts of money out of the pockets of ordinary workers.
My favorite tool is to put some teeth in the “say on pay” votes by shareholders on CEO pay. I would have the directors lose their pay when a CEO pay package is voted down. That seems like a great way to get their attention, but again, a change that will take years to have an impact, not something that could address the current inflation.
The last item in my market restructuring has more promise. This is the system of government granted patent and copyright monopolies, which has allowed Bill Gates and many others to get ridiculously rich. I have argued for radically downsizing the importance of these monopolies, by increasing the role of public funding for research and creative work.
While the full agenda calls for largely replacing patents as a source of funding for innovation in the case of prescription drugs and medical equipment, and reducing their importance elsewhere, there are intermediate steps which can be taken to both reduce costs and get us further down this road. One is simply the sort of price controls on prescription drugs that were part of the Inflation Reduction Act.
These don’t begin to take effect until 2026 and only apply to a limited number of drugs, but we could in principle go much further. We will spend over $500 billion this year (almost $4,000 per family), for drugs that would likely sell for less than $100 billion in a free market. In other words, there is lots of room for inflation reduction here.
If we don’t like the government setting prices, even when government-granted monopolies made prices high in the first place, there is also the option of weakening the monopoly. We can require drug and medical equipment companies to issue compulsory licenses.
This means that anyone could produce a patented drug or medical device, but they would have to pay a modest licensing fee (say 5 percent) to the holder of the patent. This can be put in place now under the Defense Production Act, but going forward we can require companies to agree to this condition as a requirement for anyone benefiting from the fruits of government funded research.
All of these routes to curbing inflation involve more time than just having the Fed raise interest rates, but it seems much fairer to make those who benefited from the upward redistribution of the last four decades pay the price for reducing inflation than those who have been the victims. It is also worth keeping in mind that the pandemic inflation may not a one-time story.
We know that climate change is going to lead to more and larger weather disasters in the years ahead. If we see a major industry or agricultural crop knocked out by flooding, fires, or extreme heat or alternatively, if millions of people must be relocated due to such events, it will impose a serious strain on the economy. The supply-side impact could lead to another bout of inflation like we are seeing now.
It hardly seems fair that we again tell the Fed to throw the must vulnerable people out of work to get inflation under control. We can use other routes, if we plan ahead.
I know that this program has pretty much zero chance in Washington. It means challenging the Great Big Lie, that inequality just happened, but we can still talk about these sorts of alternatives. And progressives who actually want to see less inequality will push them.
I have had many people ask me if there is not a better way to fight inflation than the current route of Federal Reserve Board rate hikes. Just to remind people, this route fights inflation by slowing the economy, throwing people out of work, and then forcing workers to take pay cuts.
The people who are most likely to lose jobs are the ones who already face the most discrimination in the labor market: Blacks, Hispanics, people with less education, and people with criminal records. Not only will millions of these workers lose jobs, tens of millions of workers at the bottom half of the wage distribution will be forced to take pay cuts. They are the ones whose bargaining power is most sensitive to the level of unemployment in the economy, not doctors and lawyers.
It seems more than a bit absurd, that when we have all these various public and private initiatives that are supposed to improve the lot of disadvantaged groups, we can have an arm of the government, the Federal Reserve Board, just swamp these efforts by creating a tidal wave of unemployment. I don’t want to disparage well-meaning efforts to help the disadvantaged, but they can’t come to close to offsetting the impact of a three or four percentage point rise in the unemployment rate for Blacks or Hispanics. And, the hit could be much larger.
So, it seems like a good idea to think of an alternative path to lowering the rate of inflation. When I want to reduce inflationary pressures I naturally think of the ways in which we have structured the market to redistribute income upward, as discussed in Rigged [it’s free].
We can look to reduce some of the waste in the financial sector that makes some Wall Street types very rich at the expense of the rest of us. My toolbox includes a financial transactions tax, universal accounts at the Fed (eliminates tens of billions in annual bank fees), getting pension funds to stop throwing money away making private equity partners rich, and getting universities to stop making hedge fund partners rich managing their endowments.
These are all great things to do, but not the sorts of policies that can be implemented overnight to stem current inflation. We can maybe get a foot in the door, but even in a best-case scenario the benefits will only be felt several years down the road.
Then there is the plan to end the protectionism that benefits highly paid professionals, like doctors and dentists. If our doctors got paid roughly the same as their counterparts in Germany or Canada, it would save us around $100 billion a year, or $900 per family. This would mean setting up international standards to ensure quality, and then many years of foreign doctors coming to the U.S., as well as increased competition from nurse practitioners and other health care professionals, to bring our physicians’ pay structure into balance. Again, great policy, but not the sort of thing that will have a big effect in the immediate future.
Next, we have reducing the corruption in the corporate governance structure. As it is, the corporate boards, who are supposed to keep a lid on CEO pay, don’t even see this as part of their job description. They see their jobs as helping the CEO and other top management.
We can look to change the incentive structure for directors, so they actually do take an interest in putting a check on CEO pay. As I point out, this matters not just for the CEO, but bloated CEO pay affects pay structures at the top more generally, taking huge amounts of money out of the pockets of ordinary workers.
My favorite tool is to put some teeth in the “say on pay” votes by shareholders on CEO pay. I would have the directors lose their pay when a CEO pay package is voted down. That seems like a great way to get their attention, but again, a change that will take years to have an impact, not something that could address the current inflation.
The last item in my market restructuring has more promise. This is the system of government granted patent and copyright monopolies, which has allowed Bill Gates and many others to get ridiculously rich. I have argued for radically downsizing the importance of these monopolies, by increasing the role of public funding for research and creative work.
While the full agenda calls for largely replacing patents as a source of funding for innovation in the case of prescription drugs and medical equipment, and reducing their importance elsewhere, there are intermediate steps which can be taken to both reduce costs and get us further down this road. One is simply the sort of price controls on prescription drugs that were part of the Inflation Reduction Act.
These don’t begin to take effect until 2026 and only apply to a limited number of drugs, but we could in principle go much further. We will spend over $500 billion this year (almost $4,000 per family), for drugs that would likely sell for less than $100 billion in a free market. In other words, there is lots of room for inflation reduction here.
If we don’t like the government setting prices, even when government-granted monopolies made prices high in the first place, there is also the option of weakening the monopoly. We can require drug and medical equipment companies to issue compulsory licenses.
This means that anyone could produce a patented drug or medical device, but they would have to pay a modest licensing fee (say 5 percent) to the holder of the patent. This can be put in place now under the Defense Production Act, but going forward we can require companies to agree to this condition as a requirement for anyone benefiting from the fruits of government funded research.
All of these routes to curbing inflation involve more time than just having the Fed raise interest rates, but it seems much fairer to make those who benefited from the upward redistribution of the last four decades pay the price for reducing inflation than those who have been the victims. It is also worth keeping in mind that the pandemic inflation may not a one-time story.
We know that climate change is going to lead to more and larger weather disasters in the years ahead. If we see a major industry or agricultural crop knocked out by flooding, fires, or extreme heat or alternatively, if millions of people must be relocated due to such events, it will impose a serious strain on the economy. The supply-side impact could lead to another bout of inflation like we are seeing now.
It hardly seems fair that we again tell the Fed to throw the must vulnerable people out of work to get inflation under control. We can use other routes, if we plan ahead.
I know that this program has pretty much zero chance in Washington. It means challenging the Great Big Lie, that inequality just happened, but we can still talk about these sorts of alternatives. And progressives who actually want to see less inequality will push them.
Read More Leer más Join the discussion Participa en la discusión
