Beat the Press

Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

Business Insider Does PR Work for Wall Street

I have known reporters at Business Insider. I had been under the impression that it tried to be a serious news outlet. Apparently, I was mistaken.

It ran an article this morning attacking the financial transactions taxes being proposed by Senators Bernie Sanders and Kamala Harris in their presidential campaigns, which was based entirely on an analysis by an industry-funded group.

The gist of the piece is that colleges and universities would pay the tax from their endowments, as would pension funds. While anyone who trades would pay the tax, the article ignored the basic logic of the tax even as it presented it to readers. It tells readers:

“‘Moreover, because trading volume decreased, the FTT failed to raise the amount of revenue expected in those countries, and in some countries like Italy and Sweden, the FTT only raised 3% to 15% of the annual expected revenue,’ MMI [the industry-funded organization] wrote in the report.”

Of course there would be a decline in trading, that is a main point of the tax, to discourage excessive trading. The proponents of the tax (which include me) always assume that trading will decline, although by an amount that is consistent with better-designed taxes, like the 320-year-old stock transfer tax in the United Kingdom.

The reduction in trading volume saves colleges, universities, pension funds and others money since they pay for this trading out of their assets. By most estimates of the impact of trading costs on trading volumes, the reduction in trading costs should be roughly equal to the size of the tax.

Since each trade has a winner and loser, investors on average are not profiting from the trading and would not be hurt by trading less. If trading fell too much, there would be a problem that prices are not reflecting fundamental values, but with the taxes being proposed we are just talking about reducing trading volumes to 1990s levels.

This means that the numbers on costs that are highlighted by the industry group and Business Insider are actually the loses being suffered by the financial industry, since the tax payments by colleges, universities, and pension funds would be almost completely offset by their savings on trading costs. 

It is understandable that a group funded by the financial industry would not want to highlight this point, but why would Business Insider not explain it to its readers?

I have known reporters at Business Insider. I had been under the impression that it tried to be a serious news outlet. Apparently, I was mistaken.

It ran an article this morning attacking the financial transactions taxes being proposed by Senators Bernie Sanders and Kamala Harris in their presidential campaigns, which was based entirely on an analysis by an industry-funded group.

The gist of the piece is that colleges and universities would pay the tax from their endowments, as would pension funds. While anyone who trades would pay the tax, the article ignored the basic logic of the tax even as it presented it to readers. It tells readers:

“‘Moreover, because trading volume decreased, the FTT failed to raise the amount of revenue expected in those countries, and in some countries like Italy and Sweden, the FTT only raised 3% to 15% of the annual expected revenue,’ MMI [the industry-funded organization] wrote in the report.”

Of course there would be a decline in trading, that is a main point of the tax, to discourage excessive trading. The proponents of the tax (which include me) always assume that trading will decline, although by an amount that is consistent with better-designed taxes, like the 320-year-old stock transfer tax in the United Kingdom.

The reduction in trading volume saves colleges, universities, pension funds and others money since they pay for this trading out of their assets. By most estimates of the impact of trading costs on trading volumes, the reduction in trading costs should be roughly equal to the size of the tax.

Since each trade has a winner and loser, investors on average are not profiting from the trading and would not be hurt by trading less. If trading fell too much, there would be a problem that prices are not reflecting fundamental values, but with the taxes being proposed we are just talking about reducing trading volumes to 1990s levels.

This means that the numbers on costs that are highlighted by the industry group and Business Insider are actually the loses being suffered by the financial industry, since the tax payments by colleges, universities, and pension funds would be almost completely offset by their savings on trading costs. 

It is understandable that a group funded by the financial industry would not want to highlight this point, but why would Business Insider not explain it to its readers?

NYT Does Mind Reading of Uber Execs

In an otherwise useful NYT article on the “gig economy,” Neil Irwin tells us:

“The company [Uber] views its role as making a market between people who want a ride and people who want to get somewhere. In other words, it sees itself more like a stock exchange or an auction website. The New York Stock Exchange doesn’t set the price of General Motors stock, nor eBay the price of Beanie Babies.”

Actually, Irwin doesn’t know how Uber “views” its role. This is a claim the company is making about its role in order to avoid being treated as an employer. That does not mean the company, in fact, views its role this way.

In an otherwise useful NYT article on the “gig economy,” Neil Irwin tells us:

“The company [Uber] views its role as making a market between people who want a ride and people who want to get somewhere. In other words, it sees itself more like a stock exchange or an auction website. The New York Stock Exchange doesn’t set the price of General Motors stock, nor eBay the price of Beanie Babies.”

Actually, Irwin doesn’t know how Uber “views” its role. This is a claim the company is making about its role in order to avoid being treated as an employer. That does not mean the company, in fact, views its role this way.

Health Care Premiums and Taxes

There’s an old joke about a lawyer who is questioning a doctor on an autopsy they had done on someone who was allegedly a murder victim.

The lawyer asked the doctor, “did you check whether the patient was breathing?”

The doctor answers “no.”

The lawyer then asks “did you check whether the patient had a pulse?”

The doctor again answers “no.”

The lawyer then asks, “so how did you know that the patient was dead,” to which the doctor responds, “because his brains were sitting in a jar on my desk.”

The lawyer then triumphantly asks, “so he could have still been alive?” To which the doctor responds, “I suppose he could have been practicing law somewhere.”

Our doctor may want to amend their answer to allow for the possibility that the patient could be a political pundit for a leading news outlet.

Our pundit class have to decided to make a crusade out of forcing Senators Warren and Sanders into saying that their proposals for universal Medicare will require a tax increase. Both have repeatedly responded by saying that total costs for the vast majority of people will fall, since Medicare for All will lead to a large reduction in costs by all accounts, because it reduces waste in the health care system.

Our pundit class have insisted that this is some sort of dodge. While there may be no hope in addressing arguments to people who have their brains in a jar on a doctor’s desk, there is a simple point that everyone else should understand.

When employers pay for the health care insurance of their employees, this is effectively a tax on workers’ wages. Employers don’t pay for insurance because they are nice, they provide insurance as a way to attract and retain workers, just as offering higher wages is a way to attract and retain workers.

If employers didn’t have to pay for insurance, then the savings would mostly end up in workers’ wages. This will not be true everywhere and always, but the fact that employers are indifferent between paying another dollar for health care and paying another dollar for wages is pretty much universally accepted by economists.

In fact, the Wall Street Journal just made this exact point in a slightly different context in a piece last week on Social Security taxes. In reference to a proposal by House Democrats that would increase Social Security benefits and pay for it in part with an increase in payroll taxes on both the employee and employer, the article commented:

“The tax would continue rising until 2043, when it would hit $3,700. Employers would face the same tax increase. Economists generally think workers bear the cost of both sides of the tax.” 

Just as economists generally think that workers bear the cost of a payroll tax imposed on their employer, they also think that workers bear the cost of health care insurance paid by their employer. So Senators Warren and Sanders are not being evasive, the pundits are being confused.

There is one additional point to be made here. As noted above, it would not be the case everywhere and immediately that the elimination of employer payments for health care premiums will end up in workers’ paychecks, even if this might be in general the outcome over time.

One way around this problem is to impose taxes to pay for Medicare for All on the employer side, effectively an employer side payroll tax. The idea is that the tax would be roughly equal to the premium for employers that are providing insurance, so that there is no question of whether the savings will be passed on to workers.

In any case, this is a finer design point that can be addressed down the road, but the key issue here is that workers with employer-provided health care insurance are effectively already being taxed for their health care insurance. People should understand this even if the pundits don’t.

There’s an old joke about a lawyer who is questioning a doctor on an autopsy they had done on someone who was allegedly a murder victim.

The lawyer asked the doctor, “did you check whether the patient was breathing?”

The doctor answers “no.”

The lawyer then asks “did you check whether the patient had a pulse?”

The doctor again answers “no.”

The lawyer then asks, “so how did you know that the patient was dead,” to which the doctor responds, “because his brains were sitting in a jar on my desk.”

The lawyer then triumphantly asks, “so he could have still been alive?” To which the doctor responds, “I suppose he could have been practicing law somewhere.”

Our doctor may want to amend their answer to allow for the possibility that the patient could be a political pundit for a leading news outlet.

Our pundit class have to decided to make a crusade out of forcing Senators Warren and Sanders into saying that their proposals for universal Medicare will require a tax increase. Both have repeatedly responded by saying that total costs for the vast majority of people will fall, since Medicare for All will lead to a large reduction in costs by all accounts, because it reduces waste in the health care system.

Our pundit class have insisted that this is some sort of dodge. While there may be no hope in addressing arguments to people who have their brains in a jar on a doctor’s desk, there is a simple point that everyone else should understand.

When employers pay for the health care insurance of their employees, this is effectively a tax on workers’ wages. Employers don’t pay for insurance because they are nice, they provide insurance as a way to attract and retain workers, just as offering higher wages is a way to attract and retain workers.

If employers didn’t have to pay for insurance, then the savings would mostly end up in workers’ wages. This will not be true everywhere and always, but the fact that employers are indifferent between paying another dollar for health care and paying another dollar for wages is pretty much universally accepted by economists.

In fact, the Wall Street Journal just made this exact point in a slightly different context in a piece last week on Social Security taxes. In reference to a proposal by House Democrats that would increase Social Security benefits and pay for it in part with an increase in payroll taxes on both the employee and employer, the article commented:

“The tax would continue rising until 2043, when it would hit $3,700. Employers would face the same tax increase. Economists generally think workers bear the cost of both sides of the tax.” 

Just as economists generally think that workers bear the cost of a payroll tax imposed on their employer, they also think that workers bear the cost of health care insurance paid by their employer. So Senators Warren and Sanders are not being evasive, the pundits are being confused.

There is one additional point to be made here. As noted above, it would not be the case everywhere and immediately that the elimination of employer payments for health care premiums will end up in workers’ paychecks, even if this might be in general the outcome over time.

One way around this problem is to impose taxes to pay for Medicare for All on the employer side, effectively an employer side payroll tax. The idea is that the tax would be roughly equal to the premium for employers that are providing insurance, so that there is no question of whether the savings will be passed on to workers.

In any case, this is a finer design point that can be addressed down the road, but the key issue here is that workers with employer-provided health care insurance are effectively already being taxed for their health care insurance. People should understand this even if the pundits don’t.

Patents and Copyright: Protection Racket for Intellectuals

Last week I was asked on Twitter why proposals for replacing patent monopoly financing of prescription drugs with direct public financing have gained so little traction. After all, this would mean that drugs would be cheap; no one would have to struggle with paying tens or hundreds of thousands of dollars for drugs that are needed for their health or to save their life. (This is discussed in chapter 5 of Rigged [it’s free].)

Public funding would also eliminate the incentive to misrepresent the safety and effectiveness of drugs in order to maximize sales at the patent monopoly price. Without patent monopolies, the drug companies would not have had the same incentive to push opioids, as well as many other drugs of questionable safety and effectiveness.

The idea of direct funding of biomedical research also should not seem strange to people. We currently spend close to $45 billion a year on research through the National Institutes of Health and other government agencies. The idea of doubling or tripling this funding to replace the roughly $70 billion of patent supported research now done by the pharmaceutical industry, should not appear outlandish, especially since the potential savings from free-market drugs would be close to $400 billion annually (1.9 percent of GDP).

So why is there so little interest in reforming the prescription drug industry along these lines? I can think of two plausible answers. The first is a self-serving one for the elites who dominate policy debates. They don’t like to have questions raised about the basic underpinnings of the distribution of income.

The second is perhaps a more simple proposition. Intellectuals have a hard time dealing with new ideas and paying for innovation outside of the patent system or creative work outside of the copyright system is a new idea that most intellectual types would rather not wrestle with.

Starting with the first one, the elites who dominate public policy debates are among the winners in the upward redistribution of the last four decades. While there are plenty of journalists struggling to keep their jobs or working as freelancers, and there are plenty of adjunct faculty who can’t pay the rent, these are not the people setting the agenda in policy debates. Rather we are talking about columnists who enjoy high six or even seven-figure incomes from their writings and speaking fees and top university faculty who can count on comparable pay.

These people do not want to entertain the idea that they didn’t end up as big winners through a combination of skill, hard work, and perhaps a dose of good luck. Even the progressives in this group, who support redistributive tax and transfer policy, would rather see this as an expression of their generosity than a refusal to take part in theft.

The issue can be seen as a distinction between someone who wins a big pile of money in a lottery and someone who slips in a fake card to win the poker pot. If we recognize that patent and copyright monopolies are government policies, that could be completely restructured or even eliminated altogether, it destroys the idea that technology has been responsible for upward redistribution or even a major factor in upward redistribution.

If Bill Gates got very rich because of Windows and other Microsoft software, it was not because of the technology, but rather because the government gave him copyright and patent monopolies on this software. All the high-paying jobs in the STEM sector are not the result of technological change creating new opportunities, but rather the large incentives the government provides with long and strong IP protections.    

This is a direction that many, perhaps most, elite types would rather not go. They might be open to coughing up more money in taxes to reduce inequality and provide opportunities for the poor, but they are not open to the idea that they never should have had the money in the first place.

Motivated reasoning is common in public debates, and this seems a plausible story. However, there is also the alternative option, that questioning patent and copyright monopolies is a new idea to most elite types, and they would rather not expend any mental energy on the effort.

If it had not been for my experiences during the housing bubble, and subsequent collapse and recession, I might be reluctant to accept that intellectual types would have a hard time thinking seriously about patent and copyright monopolies. That experience taught me that some ideas can be too simple for intellectuals to understand.

I first noticed that house sale prices were running far out of line with other prices and with historical experience in 2002. House sale prices had generally moved more or less in step with overall inflation. In the years from 1996 to 2002, they hugely outpaced inflation.

Furthermore, this did not seem to be driven by the fundamentals in the market. Rents were pretty much moving in line with inflation. And, vacancy rates were actually very high, not the story you expect when prices are rising rapidly.

Making the matter even more worrisome, the bubble was clearly driving the economy. Residential construction was growing rapidly as a share of the economy and consumption was soaring as people took advantage of the newly created equity in their homes to increase spending. The construction boom would clearly end when prices came back down to earth and the home equity-driven consumption surge would hit a wall when the home equity disappeared.

All of this was very straightforward. The analysis could be constructed from summary data in publically available series, it didn’t require any sophisticated econometric analysis.

Nonetheless, I couldn’t get any economists to take my concerns seriously. (Paul Krugman was a notable exception.) It wasn’t that they had any counter-arguments. It basically boiled down to “we haven’t seen anything like that before.”

Incredibly, even after the fact economists could not own up to their mistake. They insisted the story was not the housing bubble, but rather the financial crisis.

This gave them an out since credit default swaps and collateralized debt obligations can get complicated. Looking at the growth of residential construction and the fall in the savings rate in the GDP data is pretty damn simple. Rather than own up to being too lazy to look at the data that was right in front of their faces, economists and their followers in policy circles whipped up a cock and bull story to conceal their incredible incompetence and/or negligence.

Anyhow, having seen first-hand the laziness and narrow-mindedness of economists in refusing to take the risks of the housing bubble seriously, I certainly can find it plausible that they simply don’t want to entertain the idea that we could have alternative mechanisms to patents and copyrights to finance research and innovation. Furthermore, they don’t want to have to alter their view of the government and the economy to incorporate the fact that these forms of property are determined by policy and can be altered pretty much any way we like.

I have two accounts that are certainly consistent with this view. In one case, I had written an article for a major progressive publication, arguing that we should have publicly funded research for pharmaceuticals, rather than supporting the research through patent monopolies. After it had been through the editing process, the editor sent me a note asking whether I was arguing for “short patents” or no patents.

I wrote back clarifying that I meant no patents. I explained that short patents wouldn’t even make any sense. Since the government had paid for the research, who would get the patent?

When the piece was published it said “short patents.” Apparently, the editor could not even conceive of an innovative new drug being sold in the free market without some form of a patent monopoly.

In the other case, I asked an editor at the Atlantic, for whom I just wrote another piece, whether they would be interested in an article that made the point that patents and copyrights were tools of public policy and that there are alternative mechanisms for financing innovation and creative work. I indicated that the piece would focus on prescription drugs, given the enormous financial and health consequences at stake in the sector.

The editor responded that, although they personally were sympathetic to my argument, the magazine doesn’t publish opinion pieces. If it’s not obvious, nothing that I proposed was an opinion. I was giving facts and logic, but apparently, this editor could not make the distinction.

The takeaway here is that thinking about patents and copyrights as policy tools that can be altered, as opposed to being natural features of the market, requires more reflection than most people in policy debates are prepared to do. After all, it is not as though any of them will lose their job, or even see their career advancement jeopardized, by not considering the implications of this obvious truth, just as none of them suffered any consequence from ignoring the housing bubble.

So, how do we get the idea of replacing patent monopolies with public funding of prescription drug research into the public debate? Wish I had an answer. I couldn’t get the housing bubble into the public debate before its collapse sank the economy or, even after the fact.    

Anyhow, I’m open to suggestions. I will keep trying.

Last week I was asked on Twitter why proposals for replacing patent monopoly financing of prescription drugs with direct public financing have gained so little traction. After all, this would mean that drugs would be cheap; no one would have to struggle with paying tens or hundreds of thousands of dollars for drugs that are needed for their health or to save their life. (This is discussed in chapter 5 of Rigged [it’s free].)

Public funding would also eliminate the incentive to misrepresent the safety and effectiveness of drugs in order to maximize sales at the patent monopoly price. Without patent monopolies, the drug companies would not have had the same incentive to push opioids, as well as many other drugs of questionable safety and effectiveness.

The idea of direct funding of biomedical research also should not seem strange to people. We currently spend close to $45 billion a year on research through the National Institutes of Health and other government agencies. The idea of doubling or tripling this funding to replace the roughly $70 billion of patent supported research now done by the pharmaceutical industry, should not appear outlandish, especially since the potential savings from free-market drugs would be close to $400 billion annually (1.9 percent of GDP).

So why is there so little interest in reforming the prescription drug industry along these lines? I can think of two plausible answers. The first is a self-serving one for the elites who dominate policy debates. They don’t like to have questions raised about the basic underpinnings of the distribution of income.

The second is perhaps a more simple proposition. Intellectuals have a hard time dealing with new ideas and paying for innovation outside of the patent system or creative work outside of the copyright system is a new idea that most intellectual types would rather not wrestle with.

Starting with the first one, the elites who dominate public policy debates are among the winners in the upward redistribution of the last four decades. While there are plenty of journalists struggling to keep their jobs or working as freelancers, and there are plenty of adjunct faculty who can’t pay the rent, these are not the people setting the agenda in policy debates. Rather we are talking about columnists who enjoy high six or even seven-figure incomes from their writings and speaking fees and top university faculty who can count on comparable pay.

These people do not want to entertain the idea that they didn’t end up as big winners through a combination of skill, hard work, and perhaps a dose of good luck. Even the progressives in this group, who support redistributive tax and transfer policy, would rather see this as an expression of their generosity than a refusal to take part in theft.

The issue can be seen as a distinction between someone who wins a big pile of money in a lottery and someone who slips in a fake card to win the poker pot. If we recognize that patent and copyright monopolies are government policies, that could be completely restructured or even eliminated altogether, it destroys the idea that technology has been responsible for upward redistribution or even a major factor in upward redistribution.

If Bill Gates got very rich because of Windows and other Microsoft software, it was not because of the technology, but rather because the government gave him copyright and patent monopolies on this software. All the high-paying jobs in the STEM sector are not the result of technological change creating new opportunities, but rather the large incentives the government provides with long and strong IP protections.    

This is a direction that many, perhaps most, elite types would rather not go. They might be open to coughing up more money in taxes to reduce inequality and provide opportunities for the poor, but they are not open to the idea that they never should have had the money in the first place.

Motivated reasoning is common in public debates, and this seems a plausible story. However, there is also the alternative option, that questioning patent and copyright monopolies is a new idea to most elite types, and they would rather not expend any mental energy on the effort.

If it had not been for my experiences during the housing bubble, and subsequent collapse and recession, I might be reluctant to accept that intellectual types would have a hard time thinking seriously about patent and copyright monopolies. That experience taught me that some ideas can be too simple for intellectuals to understand.

I first noticed that house sale prices were running far out of line with other prices and with historical experience in 2002. House sale prices had generally moved more or less in step with overall inflation. In the years from 1996 to 2002, they hugely outpaced inflation.

Furthermore, this did not seem to be driven by the fundamentals in the market. Rents were pretty much moving in line with inflation. And, vacancy rates were actually very high, not the story you expect when prices are rising rapidly.

Making the matter even more worrisome, the bubble was clearly driving the economy. Residential construction was growing rapidly as a share of the economy and consumption was soaring as people took advantage of the newly created equity in their homes to increase spending. The construction boom would clearly end when prices came back down to earth and the home equity-driven consumption surge would hit a wall when the home equity disappeared.

All of this was very straightforward. The analysis could be constructed from summary data in publically available series, it didn’t require any sophisticated econometric analysis.

Nonetheless, I couldn’t get any economists to take my concerns seriously. (Paul Krugman was a notable exception.) It wasn’t that they had any counter-arguments. It basically boiled down to “we haven’t seen anything like that before.”

Incredibly, even after the fact economists could not own up to their mistake. They insisted the story was not the housing bubble, but rather the financial crisis.

This gave them an out since credit default swaps and collateralized debt obligations can get complicated. Looking at the growth of residential construction and the fall in the savings rate in the GDP data is pretty damn simple. Rather than own up to being too lazy to look at the data that was right in front of their faces, economists and their followers in policy circles whipped up a cock and bull story to conceal their incredible incompetence and/or negligence.

Anyhow, having seen first-hand the laziness and narrow-mindedness of economists in refusing to take the risks of the housing bubble seriously, I certainly can find it plausible that they simply don’t want to entertain the idea that we could have alternative mechanisms to patents and copyrights to finance research and innovation. Furthermore, they don’t want to have to alter their view of the government and the economy to incorporate the fact that these forms of property are determined by policy and can be altered pretty much any way we like.

I have two accounts that are certainly consistent with this view. In one case, I had written an article for a major progressive publication, arguing that we should have publicly funded research for pharmaceuticals, rather than supporting the research through patent monopolies. After it had been through the editing process, the editor sent me a note asking whether I was arguing for “short patents” or no patents.

I wrote back clarifying that I meant no patents. I explained that short patents wouldn’t even make any sense. Since the government had paid for the research, who would get the patent?

When the piece was published it said “short patents.” Apparently, the editor could not even conceive of an innovative new drug being sold in the free market without some form of a patent monopoly.

In the other case, I asked an editor at the Atlantic, for whom I just wrote another piece, whether they would be interested in an article that made the point that patents and copyrights were tools of public policy and that there are alternative mechanisms for financing innovation and creative work. I indicated that the piece would focus on prescription drugs, given the enormous financial and health consequences at stake in the sector.

The editor responded that, although they personally were sympathetic to my argument, the magazine doesn’t publish opinion pieces. If it’s not obvious, nothing that I proposed was an opinion. I was giving facts and logic, but apparently, this editor could not make the distinction.

The takeaway here is that thinking about patents and copyrights as policy tools that can be altered, as opposed to being natural features of the market, requires more reflection than most people in policy debates are prepared to do. After all, it is not as though any of them will lose their job, or even see their career advancement jeopardized, by not considering the implications of this obvious truth, just as none of them suffered any consequence from ignoring the housing bubble.

So, how do we get the idea of replacing patent monopolies with public funding of prescription drug research into the public debate? Wish I had an answer. I couldn’t get the housing bubble into the public debate before its collapse sank the economy or, even after the fact.    

Anyhow, I’m open to suggestions. I will keep trying.

That’s what readers of this article on a Democratic proposal which would both increase Social Security benefits and phase in a 1.2 percentage point increase in Social Security taxes (on both workers and employers) over 25 years. The article tells readers:

“Someone making $50,000 now faces an employee-side Social Security payroll tax of $3,100 a year. Under the bill, that tax bill would rise to $3,125 in 2020, which Mr. Larson pitches as an extra 50 cents a week. The tax would continue rising until 2043, when it would hit $3,700. Employers would face the same tax increase. Economists generally think workers bear the cost of both sides of the tax.”

Assuming that workers do pay the employers’ side of the tax (generally a reasonable assumption) the full tax increase for this worker would be $1,200 a year. However, Social Security projects that real wages will rise at a rate averaging roughly 1.4 percent over this period. This means that if a typical worker got their share of this wage growth, then the worker earning $50,000 a year would be earning almost 38 percent more in 2043, or $69,000 a year in 2043. This projected pay increase of $19,000 a year is more than fifteen times as large as the tax increase being proposed by the Democrats.

It would have been useful to include this projected rise in wages in the piece. It is also worth noting that most workers have not been getting their share of wage growth, as it has instead gone to CEOs and other top executives, Wall Street types, and highly protected professionals, like doctors. The prospect of losing out on their share of wage growth will have far more impact on workers’ living standards than the Social Security tax being proposed by the Democrats.

That’s what readers of this article on a Democratic proposal which would both increase Social Security benefits and phase in a 1.2 percentage point increase in Social Security taxes (on both workers and employers) over 25 years. The article tells readers:

“Someone making $50,000 now faces an employee-side Social Security payroll tax of $3,100 a year. Under the bill, that tax bill would rise to $3,125 in 2020, which Mr. Larson pitches as an extra 50 cents a week. The tax would continue rising until 2043, when it would hit $3,700. Employers would face the same tax increase. Economists generally think workers bear the cost of both sides of the tax.”

Assuming that workers do pay the employers’ side of the tax (generally a reasonable assumption) the full tax increase for this worker would be $1,200 a year. However, Social Security projects that real wages will rise at a rate averaging roughly 1.4 percent over this period. This means that if a typical worker got their share of this wage growth, then the worker earning $50,000 a year would be earning almost 38 percent more in 2043, or $69,000 a year in 2043. This projected pay increase of $19,000 a year is more than fifteen times as large as the tax increase being proposed by the Democrats.

It would have been useful to include this projected rise in wages in the piece. It is also worth noting that most workers have not been getting their share of wage growth, as it has instead gone to CEOs and other top executives, Wall Street types, and highly protected professionals, like doctors. The prospect of losing out on their share of wage growth will have far more impact on workers’ living standards than the Social Security tax being proposed by the Democrats.

In the United States, proposals for a Green New Deal have been getting considerable attention in recent months as activists have pressed both members of Congress and Democratic presidential candidates to support aggressive measures to combat global warming. There clearly is much more that we can and must do in the immediate future to prevent enormous damage to the planet.

However, major initiatives in the United States to combat global warming will almost certainly require some increases in taxes. There is likely some slack in the U.S. economy (perhaps we’ll see more slack as a result of Donald Trump’s misfires in his trade war), but a major push involving hundreds of billions of dollars of additional annual spending (2-3 percent of GDP) will almost certainly necessitate tax increases. This doesn’t mean we shouldn’t move quickly to take steps to save the planet, but these steps will have some cost.

In contrast, most of Europe is in a situation where it could easily make large commitments toward increased spending on clean energy, mass transit, and conservation at essentially no economic cost. In fact, a Green New Deal Agenda in Europe is likely to lead to increased employment and output. The big difference is that Europe is much further from facing constraints on its economy. It has plenty of room to expand output and employment without seeing inflation become a problem. 

Before getting into the specifics on Europe’s economy, it is important to add a bit of perspective. The European countries have been far better global citizens in this area than the United States. Their per-person emissions are roughly half as much as the United States. Furthermore, many European countries have already taken aggressive measures to promote clean energy and encourage conservation. 

Solar energy accounts for 7.3 percent of Italy’s electric power, 7.9 percent of Germany’s and 4.3 percent for the European Union as a whole. By comparison, the United States gets just 2.3 percent of its electric power from solar energy. There is a similar story with wind energy where the European Union’s installed capacity is more than 70 percent higher than the United States. 

But in the battle to slow global warming, simply doing better than the United States is not good enough. The European Union can and must do more to reduce its greenhouse gas (GHG) emissions.

The most immediate obstacle to aggressive measures to reduce GHG emissions in Europe is the continent’s mindless push for austerity. European governments, led by Germany, have become obsessed with keeping deficits low and balancing budgets. Most have small deficits or even budget surpluses. 

Germany exemplifies the European austerity obsession with a budget surplus that is close to 2.0 percent of GDP ($420 billion in the US economy). To some extent, fiscal austerity is not a choice. The eurozone’s rules require low budget deficits for the countries that use the euro, but even countries outside the eurozone have joined the austerity party. The United Kingdom has a budget deficit of less than 1.5 percent of GDP, Denmark less than 0.5 percent of GDP, and Sweden has a budget surplus of close to 0.5 percent of GDP.

There are certainly circumstances under which budget deficits can be too high, but these clearly do not apply to the countries in the European Union at present. Inflation has been persistently low and has been falling in recent months. The inflation rate for the eurozone countries has averaged just 1.0 percent over the last 12 months.

The story is even more dramatic if we look at interest rates. The classic problem of a large budget deficit is that it leads to high-interest rates that crowd out investment. Not only are interest rates extraordinarily low across Europe, in many countries investors have to pay governments to lend them money.

The interest rate on a ten-year government bond in France is -0.43 percent. In the Netherlands, it is -0.57 percent, and in Germany it is -0.71 percent. That means Investors have to pay Germany 0.71 percent annually to lend the government money. 

This is the context in which the concern for low budget deficits in these countries is utterly mindless. The financial markets are effectively begging these governments to borrow more money, but they refuse to do so. The need to address global warming makes this refusal especially painful. 

The fact that interest rates and inflation are so low indicates that these governments are needlessly sacrificing growth and jobs. That story would be bad enough in normal times –people should not go without work and important social needs should not go unmet for no reason — but the picture is much worse when we consider the urgent need to slow global warming.

If they were not limited by an unnecessary fixation with budget deficits, these governments could take strong measures to reduce emissions. For example, they could either pay directly to install solar and wind power, or provide large subsidies to businesses and homeowners. They could be subsidizing the switch to electric cars and making mass transit cheap or free, while they vastly ramp up capacity. 

Emanuel Macron did try steps in this direction last year, but he stumbled over the eurozone’s austerity requirement. Since France was already near the caps on budget deficits demanded by the rules of the eurozone, he was forced to impose new taxes to offset the additional spending he proposed to reduce GHG emissions. Since the taxes he imposed were largely regressive, they prompted a massive reaction (the “yellow vest” protests), which forced Macron to back away from most of his green agenda.

If France didn’t face an artificial budget constraint imposed by the European Union, Macron could have simply borrowed to pay for his green agenda. It likely would have been far better received in that situation. People who are just scraping by will resent taxes to discourage energy use. They are less likely to get angry over subsidies to improve the insulation of their homes or to install solar panels.

The absurd fixation of the EU on budget deficits should be getting more attention in the media. While events outside the United States generally don’t make much news, there has been no shortage of coverage of Boris Johnson, the prime minister of the United Kingdom, and his hare-brained efforts to pull the U.K. out of the EU. 

Brexit, especially the no-deal Brexit that Johnson seems to favor, will impose needless economic costs on the country, but the harm done by unnecessary austerity in Europe is far greater. While Johnson is largely portrayed as a power-hungry clown in the U.S. media, the enforcers of European austerity are treated with great respect. While these enforcers may all be smart and highly-educated people, their clownishness on this issue puts Johnson to shame.

There is one more point on austerity and combatting climate change that is worth mentioning here. The world has been appalled to see much of the Amazon in flames. While this is most immediately attributable to the development policies of Brazil’s far-right president, Jair Bolsonaro, there actually is a much deeper problem here.

The Amazon is a unique habitat that should be preserved in any case, but its survival is so important in the fight to limit global warming because of what the rest of the world has been doing. Rich countries have engaged in large-scale deforestation of their own lands, as well as having paid developing countries to destroy much of their natural forests to provide wood and other resources. In addition, we have been spewing vast amounts of carbon dioxide into the earth’s atmosphere for more than a century. 

This is the context in which the Amazon matters hugely for limiting GHG. Placing all of the blame on Brazil is fundamentally misrepresenting the history of the problem. Brazil must act to preserve the Amazon, but it should be paid for this choice by the rich countries. It will be foregoing a path that would aid its development, just as the rich countries were able to benefit economically by causing irreparable damage to their environment. 

Since climate change really is a global problem, we need to have the most effective measures to be taken, regardless of the country. Where we expect the actions to come from a developing country like Brazil, the rich countries will have to foot the bill. 

This is both a question of fairness and realism. We can’t force Brazil to protect the Amazon. No one is going to send in troops to prevent its destruction. We can make it more profitable for Brazil to protect the Amazon than to destroy it. And, with so much slack in the EU economies, this would be a great use of some of their resources. Perhaps one day we will have a sane government in the United States and we will contribute our share. 

In the United States, proposals for a Green New Deal have been getting considerable attention in recent months as activists have pressed both members of Congress and Democratic presidential candidates to support aggressive measures to combat global warming. There clearly is much more that we can and must do in the immediate future to prevent enormous damage to the planet.

However, major initiatives in the United States to combat global warming will almost certainly require some increases in taxes. There is likely some slack in the U.S. economy (perhaps we’ll see more slack as a result of Donald Trump’s misfires in his trade war), but a major push involving hundreds of billions of dollars of additional annual spending (2-3 percent of GDP) will almost certainly necessitate tax increases. This doesn’t mean we shouldn’t move quickly to take steps to save the planet, but these steps will have some cost.

In contrast, most of Europe is in a situation where it could easily make large commitments toward increased spending on clean energy, mass transit, and conservation at essentially no economic cost. In fact, a Green New Deal Agenda in Europe is likely to lead to increased employment and output. The big difference is that Europe is much further from facing constraints on its economy. It has plenty of room to expand output and employment without seeing inflation become a problem. 

Before getting into the specifics on Europe’s economy, it is important to add a bit of perspective. The European countries have been far better global citizens in this area than the United States. Their per-person emissions are roughly half as much as the United States. Furthermore, many European countries have already taken aggressive measures to promote clean energy and encourage conservation. 

Solar energy accounts for 7.3 percent of Italy’s electric power, 7.9 percent of Germany’s and 4.3 percent for the European Union as a whole. By comparison, the United States gets just 2.3 percent of its electric power from solar energy. There is a similar story with wind energy where the European Union’s installed capacity is more than 70 percent higher than the United States. 

But in the battle to slow global warming, simply doing better than the United States is not good enough. The European Union can and must do more to reduce its greenhouse gas (GHG) emissions.

The most immediate obstacle to aggressive measures to reduce GHG emissions in Europe is the continent’s mindless push for austerity. European governments, led by Germany, have become obsessed with keeping deficits low and balancing budgets. Most have small deficits or even budget surpluses. 

Germany exemplifies the European austerity obsession with a budget surplus that is close to 2.0 percent of GDP ($420 billion in the US economy). To some extent, fiscal austerity is not a choice. The eurozone’s rules require low budget deficits for the countries that use the euro, but even countries outside the eurozone have joined the austerity party. The United Kingdom has a budget deficit of less than 1.5 percent of GDP, Denmark less than 0.5 percent of GDP, and Sweden has a budget surplus of close to 0.5 percent of GDP.

There are certainly circumstances under which budget deficits can be too high, but these clearly do not apply to the countries in the European Union at present. Inflation has been persistently low and has been falling in recent months. The inflation rate for the eurozone countries has averaged just 1.0 percent over the last 12 months.

The story is even more dramatic if we look at interest rates. The classic problem of a large budget deficit is that it leads to high-interest rates that crowd out investment. Not only are interest rates extraordinarily low across Europe, in many countries investors have to pay governments to lend them money.

The interest rate on a ten-year government bond in France is -0.43 percent. In the Netherlands, it is -0.57 percent, and in Germany it is -0.71 percent. That means Investors have to pay Germany 0.71 percent annually to lend the government money. 

This is the context in which the concern for low budget deficits in these countries is utterly mindless. The financial markets are effectively begging these governments to borrow more money, but they refuse to do so. The need to address global warming makes this refusal especially painful. 

The fact that interest rates and inflation are so low indicates that these governments are needlessly sacrificing growth and jobs. That story would be bad enough in normal times –people should not go without work and important social needs should not go unmet for no reason — but the picture is much worse when we consider the urgent need to slow global warming.

If they were not limited by an unnecessary fixation with budget deficits, these governments could take strong measures to reduce emissions. For example, they could either pay directly to install solar and wind power, or provide large subsidies to businesses and homeowners. They could be subsidizing the switch to electric cars and making mass transit cheap or free, while they vastly ramp up capacity. 

Emanuel Macron did try steps in this direction last year, but he stumbled over the eurozone’s austerity requirement. Since France was already near the caps on budget deficits demanded by the rules of the eurozone, he was forced to impose new taxes to offset the additional spending he proposed to reduce GHG emissions. Since the taxes he imposed were largely regressive, they prompted a massive reaction (the “yellow vest” protests), which forced Macron to back away from most of his green agenda.

If France didn’t face an artificial budget constraint imposed by the European Union, Macron could have simply borrowed to pay for his green agenda. It likely would have been far better received in that situation. People who are just scraping by will resent taxes to discourage energy use. They are less likely to get angry over subsidies to improve the insulation of their homes or to install solar panels.

The absurd fixation of the EU on budget deficits should be getting more attention in the media. While events outside the United States generally don’t make much news, there has been no shortage of coverage of Boris Johnson, the prime minister of the United Kingdom, and his hare-brained efforts to pull the U.K. out of the EU. 

Brexit, especially the no-deal Brexit that Johnson seems to favor, will impose needless economic costs on the country, but the harm done by unnecessary austerity in Europe is far greater. While Johnson is largely portrayed as a power-hungry clown in the U.S. media, the enforcers of European austerity are treated with great respect. While these enforcers may all be smart and highly-educated people, their clownishness on this issue puts Johnson to shame.

There is one more point on austerity and combatting climate change that is worth mentioning here. The world has been appalled to see much of the Amazon in flames. While this is most immediately attributable to the development policies of Brazil’s far-right president, Jair Bolsonaro, there actually is a much deeper problem here.

The Amazon is a unique habitat that should be preserved in any case, but its survival is so important in the fight to limit global warming because of what the rest of the world has been doing. Rich countries have engaged in large-scale deforestation of their own lands, as well as having paid developing countries to destroy much of their natural forests to provide wood and other resources. In addition, we have been spewing vast amounts of carbon dioxide into the earth’s atmosphere for more than a century. 

This is the context in which the Amazon matters hugely for limiting GHG. Placing all of the blame on Brazil is fundamentally misrepresenting the history of the problem. Brazil must act to preserve the Amazon, but it should be paid for this choice by the rich countries. It will be foregoing a path that would aid its development, just as the rich countries were able to benefit economically by causing irreparable damage to their environment. 

Since climate change really is a global problem, we need to have the most effective measures to be taken, regardless of the country. Where we expect the actions to come from a developing country like Brazil, the rich countries will have to foot the bill. 

This is both a question of fairness and realism. We can’t force Brazil to protect the Amazon. No one is going to send in troops to prevent its destruction. We can make it more profitable for Brazil to protect the Amazon than to destroy it. And, with so much slack in the EU economies, this would be a great use of some of their resources. Perhaps one day we will have a sane government in the United States and we will contribute our share. 

“The idea of guaranteed income is gaining traction, from the presidential debate stage to Silicon Valley, where tech titans such as Mark Zuckerberg and Elon Musk have promoted it as a way to fend off a gloomy future in which automation and climate change eliminate millions of jobs.”

This came up as a throwaway line in an article about a trial program for a guaranteed basic income. The problem is that the type of job losses being described here are 180 percent opposite from each other.

Job loss from automation is ostensibly from too much productivity — we don’t need workers. (There is zero evidence for this story, but no one ever said that Mark Zuckerberg or Elon Musk had a clue about the economy.) Job loss attributed to addressing climate change is the result of too little productivity. The story (most get this wrong) is that there is plenty of work for people to do, such as retrofitting buildings and installing solar panels, but that with less energy use, the economy is less productive, and therefore these jobs pay less and workers don’t want to do them.

This is all very tangential to the article, but a serious paper should get these points right if it is going to print them.   

“The idea of guaranteed income is gaining traction, from the presidential debate stage to Silicon Valley, where tech titans such as Mark Zuckerberg and Elon Musk have promoted it as a way to fend off a gloomy future in which automation and climate change eliminate millions of jobs.”

This came up as a throwaway line in an article about a trial program for a guaranteed basic income. The problem is that the type of job losses being described here are 180 percent opposite from each other.

Job loss from automation is ostensibly from too much productivity — we don’t need workers. (There is zero evidence for this story, but no one ever said that Mark Zuckerberg or Elon Musk had a clue about the economy.) Job loss attributed to addressing climate change is the result of too little productivity. The story (most get this wrong) is that there is plenty of work for people to do, such as retrofitting buildings and installing solar panels, but that with less energy use, the economy is less productive, and therefore these jobs pay less and workers don’t want to do them.

This is all very tangential to the article, but a serious paper should get these points right if it is going to print them.   

It is widely known that for Washington Post columnists writing on economics, ignorance is an asset. Megan McArdle helps make the case in a piece on Chicago’s pensions that tells readers in its headline:

“Chicago kept saying it would pay for pensions later. Well, it’s later.”

The gist of the piece is that Chicago has seriously underfunded public pensions. This is true. Where McArdle combats reality is in implying that this sort of underfunding is typical for public pensions and also that the same logic applies to the federal budget.

McArdle absolves the current mayor, Lori Lightfoot, of blame (she just took office four months ago), as well as her immediate predecessor, Rahm Emanuel, who served two full terms. Instead she tells us:

“Rather, it’s the fault of generations of politicians before them who promised an ever-richer array of benefits to government workers. Particularly, they liked to raise the retirement benefits. …

“Oh, ho, ho, ho. Pay for the pensions? No, we have to stop; some politician might be reading this, and they could really hurt themselves laughing too hard. The whole point of giving workers pension benefits instead of cash was that you didn’t have to pay for them; you could promise the benefits now and gather up the votes that the grateful workers tossed at your feet, all without costing current taxpayers a single dime.”

There are two big problems with McArdle’s story here. First the story of grossly underfunded pensions is not generally true. Most are reasonably well funded because politicians were not hurting themselves laughing, but rather were responsibly setting aside money for the liabilities facing state and local governments. (This briefing paper from Brookings gives a good assessment of the financial state of public pensions.) The real story is that Chicago, along with some other state and local governments with seriously underfunded pensions, are outliers.

But even in the case of Chicago, McArdle did not get the story right. Its shortfall was not the work of “generations of politicians.” Rather it was the result of a specific event – the stock bubble of the late 1990s.

The bubble, which was cheered on by the budget hawks at the time (and is implicitly cheered on by McArdle here, as I will explain in a moment) made pensions look much better funded than they actually were. Even as price to earnings ratios in the stock market were hitting record highs, pension funds assumed that returns in the future would be the same as in the past. They effectively assumed that the bubble would grow ever larger. Those of who tried to warn of this problem were naturally ignored by outlets like the Washington Post.

The story with Chicago, as well as with many other state and local governments, was that they made little or no contribution to their pensions in the bubble years. The run-up in the market was doing it for them.

That ended when the bubble burst 2000-2002. Not only did this plunge in the market mean that pensions were seriously underfunded by standard accounting, it also led to a recession and a sharp deterioration in state and local budgets. This made it a difficult time to increase payments to pensions.

That was the story in Chicago, where then mayor Richard M. Daley decided to ignore the shortfall and hope that the stock bubble would return. It didn’t, and Daley, not “generations of politicians” left behind a hugely underfunded pension.

McArdle concludes her piece by telling us how Chicago’s experience is a lesson for the federal budget:

“The United States, like Chicago, hasn’t run a budget surplus since 2002. We’re headed for a deficit of nearly $1 trillion in a boom economy — thanks to Democrats who refuse to cut spending, Republicans who refuse to raise taxes and an electorate that seems curiously unworried about the increasingly parlous finances of Medicare and Social Security.”

Of course the reason the U.S. government had a budget surplus in 2001 (CBO says the government actually had a deficit of $157.8 billion [1.6 percent of GDP] in 2002) was that the stock bubble was driving the economy. The bursting bubble and gave us a recession, which while relatively mild from the standpoint of GDP was actually quite severe from the standpoint of the labor market. The economy went almost four full years with no net job creation, at the time, the worst downturn since the Great Depression.

But that’s history, suppose the budget hawks got their way today and we got big cuts in spending coupled with large increases in taxes so that we were somewhere close to a balanced budget. How would we do this without a massive hit to demand in the economy, likely causing a recession and mass unemployment?

Perhaps the budget will be closer to balance (recessions lead to increases in deficits), but apart from cultists who worship low deficits, it is hard to see this as a good story for the economy or our children.

One final point that we should demand the deficit hawks finally recognize. When the government grants patent and copyright monopolies, it is creating implicit debt in the form of the rents associated with these monopolies.

These implicit rents are quite large relative to current taxes. In the case of prescription drugs alone patents and related protections add almost $400 billion (1.8 percent of GDP) to the price of drugs. It makes no difference to taxpayers whether they pay another $400 billion a year in taxes to the government or $400 billion in excess payments to Pfizer and Merck because of government granted monopolies.

If someone expects to be taken seriously in talking about debts and deficits, they better include the cost of government granted patent and copyright monopolies. Budget hawks who ignore these implicit debts created by the government deserve only our ridicule. They are either pushing an agenda or are just completely ignorant of basic economics.  

It is widely known that for Washington Post columnists writing on economics, ignorance is an asset. Megan McArdle helps make the case in a piece on Chicago’s pensions that tells readers in its headline:

“Chicago kept saying it would pay for pensions later. Well, it’s later.”

The gist of the piece is that Chicago has seriously underfunded public pensions. This is true. Where McArdle combats reality is in implying that this sort of underfunding is typical for public pensions and also that the same logic applies to the federal budget.

McArdle absolves the current mayor, Lori Lightfoot, of blame (she just took office four months ago), as well as her immediate predecessor, Rahm Emanuel, who served two full terms. Instead she tells us:

“Rather, it’s the fault of generations of politicians before them who promised an ever-richer array of benefits to government workers. Particularly, they liked to raise the retirement benefits. …

“Oh, ho, ho, ho. Pay for the pensions? No, we have to stop; some politician might be reading this, and they could really hurt themselves laughing too hard. The whole point of giving workers pension benefits instead of cash was that you didn’t have to pay for them; you could promise the benefits now and gather up the votes that the grateful workers tossed at your feet, all without costing current taxpayers a single dime.”

There are two big problems with McArdle’s story here. First the story of grossly underfunded pensions is not generally true. Most are reasonably well funded because politicians were not hurting themselves laughing, but rather were responsibly setting aside money for the liabilities facing state and local governments. (This briefing paper from Brookings gives a good assessment of the financial state of public pensions.) The real story is that Chicago, along with some other state and local governments with seriously underfunded pensions, are outliers.

But even in the case of Chicago, McArdle did not get the story right. Its shortfall was not the work of “generations of politicians.” Rather it was the result of a specific event – the stock bubble of the late 1990s.

The bubble, which was cheered on by the budget hawks at the time (and is implicitly cheered on by McArdle here, as I will explain in a moment) made pensions look much better funded than they actually were. Even as price to earnings ratios in the stock market were hitting record highs, pension funds assumed that returns in the future would be the same as in the past. They effectively assumed that the bubble would grow ever larger. Those of who tried to warn of this problem were naturally ignored by outlets like the Washington Post.

The story with Chicago, as well as with many other state and local governments, was that they made little or no contribution to their pensions in the bubble years. The run-up in the market was doing it for them.

That ended when the bubble burst 2000-2002. Not only did this plunge in the market mean that pensions were seriously underfunded by standard accounting, it also led to a recession and a sharp deterioration in state and local budgets. This made it a difficult time to increase payments to pensions.

That was the story in Chicago, where then mayor Richard M. Daley decided to ignore the shortfall and hope that the stock bubble would return. It didn’t, and Daley, not “generations of politicians” left behind a hugely underfunded pension.

McArdle concludes her piece by telling us how Chicago’s experience is a lesson for the federal budget:

“The United States, like Chicago, hasn’t run a budget surplus since 2002. We’re headed for a deficit of nearly $1 trillion in a boom economy — thanks to Democrats who refuse to cut spending, Republicans who refuse to raise taxes and an electorate that seems curiously unworried about the increasingly parlous finances of Medicare and Social Security.”

Of course the reason the U.S. government had a budget surplus in 2001 (CBO says the government actually had a deficit of $157.8 billion [1.6 percent of GDP] in 2002) was that the stock bubble was driving the economy. The bursting bubble and gave us a recession, which while relatively mild from the standpoint of GDP was actually quite severe from the standpoint of the labor market. The economy went almost four full years with no net job creation, at the time, the worst downturn since the Great Depression.

But that’s history, suppose the budget hawks got their way today and we got big cuts in spending coupled with large increases in taxes so that we were somewhere close to a balanced budget. How would we do this without a massive hit to demand in the economy, likely causing a recession and mass unemployment?

Perhaps the budget will be closer to balance (recessions lead to increases in deficits), but apart from cultists who worship low deficits, it is hard to see this as a good story for the economy or our children.

One final point that we should demand the deficit hawks finally recognize. When the government grants patent and copyright monopolies, it is creating implicit debt in the form of the rents associated with these monopolies.

These implicit rents are quite large relative to current taxes. In the case of prescription drugs alone patents and related protections add almost $400 billion (1.8 percent of GDP) to the price of drugs. It makes no difference to taxpayers whether they pay another $400 billion a year in taxes to the government or $400 billion in excess payments to Pfizer and Merck because of government granted monopolies.

If someone expects to be taken seriously in talking about debts and deficits, they better include the cost of government granted patent and copyright monopolies. Budget hawks who ignore these implicit debts created by the government deserve only our ridicule. They are either pushing an agenda or are just completely ignorant of basic economics.  

No Recession for 2020

These days the business press is full of predictions of recessions. This could get people worried, except that the track record of economists in predicting recessions is basically awful. As much fun as a bunch of scary warnings from economists is, it is best to look at the data.

At the most basic level it is important to recognize that some sectors are very cyclical, meaning they grow rapidly in upturns and fall sharply in recessions, and others tend not to fluctuate very much over the course of a business cycle. The cyclical group is led by housing construction, durable goods consumption (cars and big household appliances), non-residential construction, equipment investment, and inventories. These components of demand tend to plunge in a recession.

On the other hand, we have several components of demand that are mostly unresponsive to the business cycle. Spending on consumer services (largely medical spending and rent) varies little over the course of the business cycle. Spending on consumer services fell just 0.3 percent in 2009 and actually rose through all prior post-war recessions.

The story is similar for investment in intellectual products like software and pharmaceutical research. This component of GDP fell by just 0.5 percent in 2009. While this category of spending did fall slightly in the recession following the late 1990s tech boom, the decline from 2000 to 2001 (the sharpest annual falloff) was just 0.8 percent.

This point about the varying cyclicality of different sectors matters for recession predictions, because the highly cyclical components have shrunk sharply as a share of the economy in the last four decades, as the less cyclical components have grown. 

This is seen most clearly with residential construction, the most cyclical component of GDP. Residential construction peaked at 6.7 percent of GDP during the housing boom before the Great Recession, it was just 3.7 percent of GDP in the most recent quarter. It was 5.7 percent of GDP before the 1980-82 recessions and 4.8 percent of GDP before Fed interest rate hikes began slowing construction in advance of the 1990 recession.

Recession driven plunges in housing construction can be dramatic. Residential construction fell by almost 60 percent from its peak in the third quarter of 2005 to the recession trough in the second quarter of 2009. This drop was extreme because of the huge housing bubble, but if we take a more typical recession, say the 1990 to 1991 recession, the fall from peak to trough in housing construction was still almost 25 percent.

If residential construction fell by 25 percent compared with current levels, the direct hit to GDP would be just 0.9 percentage points. That is substantial, but even with the multiplier effect, this is not likely a recession story.

The difference in composition also matters hugely with durable goods consumption.  Durable goods consumption was over 9.0 percent of GDP just before the 1990-91 recession. It was just 7.1 percent of GDP in the most recent data. Furthermore, close to half of this spending is now going to imports. Either the item itself is imported or many of the parts are. There are few U.S. made cars that don’t have at least 25 percent foreign components, and the same would be true for refrigerators, dishwashers, and most other major appliances.

If we use the 50 percent figure, then consumer durables only account for 3.6 percent of GDP. Again, even a large percentage hit to this sector has only a limited impact on GDP.

There is similar story with the other highly cyclical components of GDP. Investment in non-residential structures is just 3.0 percent of GDP, it peaked at over 4.0 percent of GDP in 2008 just as the recession was taking hold. (A little known secret of the Great Recession was that there was a bubble in non-residential real estate that grew just as the bubble in residential real estate started to deflate. Most economists don’t realize this because it would require looking at GDP data.) 

Equipment investment stands at 5.9 percent in the most recent quarters. It was slightly over 6.0 percent before the Great Recession and peaked at more than 7.5 percent before the 2001 recession. As with consumer durables, close to half of equipment investment is now comprised of imported value-added. This means that there is a limited impact on the domestic economy of any falloff in demand. 

Inventories are probably the most cyclical component of GDP. This is because we are actually measuring the change in inventories, quarter to quarter or year to year. When we go into a recession, inventories typically contract, meaning this figure will be negative for several quarters. While inventories are undoubtedly still highly cyclical, they just matter less as we move to an economy that is more service based. 

In the four years before the 2001 recession, the growth in inventories averaged 0.65 percent of GDP. In the four years before the 1980 recession, inventory accumulations averaged 0.95 percent of GDP. In the last four years they have averaged just 0.3 percent of GDP. Furthermore, close to half of these inventories are now imported. This means a slowdown or reversal in inventory accumulation will not have too large an impact on the economy.

While this simple arithmetic doesn’t rule out the possibility of a recession, it does mean that a recession will not look like ones we have seen in the past. It is very hard to envision the classic story of the Fed raising rates to slow inflation, which leads to a sharp slowing of residential construction and car-buying. 

First, there is no plausible inflation story where the Fed will need to suddenly jack up rates sharply. Second, even if it did start jacking up rates, the impact on growth is likely to be far smaller than in the past.

The other recession story is the bursting of an asset bubble. There is huge sloppiness on this topic in the business press. The story of the Great Recession was the collapse of a bubble (housing) that was driving the economy, not the financial panic, which was a sidebar. There is no bubble now driving the economy, so there is nothing whose collapse will lead to a recession.

In short, there is not an obvious recession story on the horizon. (Maybe someone has one, but I haven’t seen it.) That doesn’t mean that the economy can’t slow substantially, with the result being higher unemployment and a weakening labor market. 

There is evidence this is already the case. The growth numbers for the first half of 2019 are markedly slower than 2018. This was expected as the stimulus from the tax cut wore off. The Trump administration is further slowing growth, both by raising taxes (tariffs) and the uncertainty it is creating by its trade war, which is slowing investment. The latest Trump threats will almost certainly mean an even greater hit to investment.

The jobs numbers still look reasonably strong and the unemployment rate remains at historically low levels, but it is virtually certain that job growth will slow in the second half of the year. The sharp downward revision (501,000) to job growth previously reported from March of 2018 to 2019 shows growth over this period was not nearly as strong as we thought. Furthermore, we don’t know the distribution of this adjustment, but if it was skewed toward the end of the period, then it implies sharply lower growth in the first three months of 2019. It’s also worth noting that the last time we saw downward revision of this size were in 2002 and 2009, both recession years. 

A weaker labor market could explain the modest slowing in the rate of real wage growth, from a peak of 3.4 percent year over year at the start of 2019, to 3.2 percent in the July data. The slowdown is even sharper if we annualize the rate of growth over the last three months (May, June, July) compared with the prior three months (February, March, April). This fell from a peak of 3.5 percent in November to 2.8 percent in the most recent data. 

And, as I and others have argued, a weaker labor market will hit the most disadvantaged hardest. So the good stories of the last few years, like increasing employment rates among blacks and Hispanics, and people with disabilities and criminal records, will come to an end. That may not mean a recession, but it will be serious bad news.  

 

These days the business press is full of predictions of recessions. This could get people worried, except that the track record of economists in predicting recessions is basically awful. As much fun as a bunch of scary warnings from economists is, it is best to look at the data.

At the most basic level it is important to recognize that some sectors are very cyclical, meaning they grow rapidly in upturns and fall sharply in recessions, and others tend not to fluctuate very much over the course of a business cycle. The cyclical group is led by housing construction, durable goods consumption (cars and big household appliances), non-residential construction, equipment investment, and inventories. These components of demand tend to plunge in a recession.

On the other hand, we have several components of demand that are mostly unresponsive to the business cycle. Spending on consumer services (largely medical spending and rent) varies little over the course of the business cycle. Spending on consumer services fell just 0.3 percent in 2009 and actually rose through all prior post-war recessions.

The story is similar for investment in intellectual products like software and pharmaceutical research. This component of GDP fell by just 0.5 percent in 2009. While this category of spending did fall slightly in the recession following the late 1990s tech boom, the decline from 2000 to 2001 (the sharpest annual falloff) was just 0.8 percent.

This point about the varying cyclicality of different sectors matters for recession predictions, because the highly cyclical components have shrunk sharply as a share of the economy in the last four decades, as the less cyclical components have grown. 

This is seen most clearly with residential construction, the most cyclical component of GDP. Residential construction peaked at 6.7 percent of GDP during the housing boom before the Great Recession, it was just 3.7 percent of GDP in the most recent quarter. It was 5.7 percent of GDP before the 1980-82 recessions and 4.8 percent of GDP before Fed interest rate hikes began slowing construction in advance of the 1990 recession.

Recession driven plunges in housing construction can be dramatic. Residential construction fell by almost 60 percent from its peak in the third quarter of 2005 to the recession trough in the second quarter of 2009. This drop was extreme because of the huge housing bubble, but if we take a more typical recession, say the 1990 to 1991 recession, the fall from peak to trough in housing construction was still almost 25 percent.

If residential construction fell by 25 percent compared with current levels, the direct hit to GDP would be just 0.9 percentage points. That is substantial, but even with the multiplier effect, this is not likely a recession story.

The difference in composition also matters hugely with durable goods consumption.  Durable goods consumption was over 9.0 percent of GDP just before the 1990-91 recession. It was just 7.1 percent of GDP in the most recent data. Furthermore, close to half of this spending is now going to imports. Either the item itself is imported or many of the parts are. There are few U.S. made cars that don’t have at least 25 percent foreign components, and the same would be true for refrigerators, dishwashers, and most other major appliances.

If we use the 50 percent figure, then consumer durables only account for 3.6 percent of GDP. Again, even a large percentage hit to this sector has only a limited impact on GDP.

There is similar story with the other highly cyclical components of GDP. Investment in non-residential structures is just 3.0 percent of GDP, it peaked at over 4.0 percent of GDP in 2008 just as the recession was taking hold. (A little known secret of the Great Recession was that there was a bubble in non-residential real estate that grew just as the bubble in residential real estate started to deflate. Most economists don’t realize this because it would require looking at GDP data.) 

Equipment investment stands at 5.9 percent in the most recent quarters. It was slightly over 6.0 percent before the Great Recession and peaked at more than 7.5 percent before the 2001 recession. As with consumer durables, close to half of equipment investment is now comprised of imported value-added. This means that there is a limited impact on the domestic economy of any falloff in demand. 

Inventories are probably the most cyclical component of GDP. This is because we are actually measuring the change in inventories, quarter to quarter or year to year. When we go into a recession, inventories typically contract, meaning this figure will be negative for several quarters. While inventories are undoubtedly still highly cyclical, they just matter less as we move to an economy that is more service based. 

In the four years before the 2001 recession, the growth in inventories averaged 0.65 percent of GDP. In the four years before the 1980 recession, inventory accumulations averaged 0.95 percent of GDP. In the last four years they have averaged just 0.3 percent of GDP. Furthermore, close to half of these inventories are now imported. This means a slowdown or reversal in inventory accumulation will not have too large an impact on the economy.

While this simple arithmetic doesn’t rule out the possibility of a recession, it does mean that a recession will not look like ones we have seen in the past. It is very hard to envision the classic story of the Fed raising rates to slow inflation, which leads to a sharp slowing of residential construction and car-buying. 

First, there is no plausible inflation story where the Fed will need to suddenly jack up rates sharply. Second, even if it did start jacking up rates, the impact on growth is likely to be far smaller than in the past.

The other recession story is the bursting of an asset bubble. There is huge sloppiness on this topic in the business press. The story of the Great Recession was the collapse of a bubble (housing) that was driving the economy, not the financial panic, which was a sidebar. There is no bubble now driving the economy, so there is nothing whose collapse will lead to a recession.

In short, there is not an obvious recession story on the horizon. (Maybe someone has one, but I haven’t seen it.) That doesn’t mean that the economy can’t slow substantially, with the result being higher unemployment and a weakening labor market. 

There is evidence this is already the case. The growth numbers for the first half of 2019 are markedly slower than 2018. This was expected as the stimulus from the tax cut wore off. The Trump administration is further slowing growth, both by raising taxes (tariffs) and the uncertainty it is creating by its trade war, which is slowing investment. The latest Trump threats will almost certainly mean an even greater hit to investment.

The jobs numbers still look reasonably strong and the unemployment rate remains at historically low levels, but it is virtually certain that job growth will slow in the second half of the year. The sharp downward revision (501,000) to job growth previously reported from March of 2018 to 2019 shows growth over this period was not nearly as strong as we thought. Furthermore, we don’t know the distribution of this adjustment, but if it was skewed toward the end of the period, then it implies sharply lower growth in the first three months of 2019. It’s also worth noting that the last time we saw downward revision of this size were in 2002 and 2009, both recession years. 

A weaker labor market could explain the modest slowing in the rate of real wage growth, from a peak of 3.4 percent year over year at the start of 2019, to 3.2 percent in the July data. The slowdown is even sharper if we annualize the rate of growth over the last three months (May, June, July) compared with the prior three months (February, March, April). This fell from a peak of 3.5 percent in November to 2.8 percent in the most recent data. 

And, as I and others have argued, a weaker labor market will hit the most disadvantaged hardest. So the good stories of the last few years, like increasing employment rates among blacks and Hispanics, and people with disabilities and criminal records, will come to an end. That may not mean a recession, but it will be serious bad news.  

 

It’s probably too simple and obvious to be worth mentioning, but it seems none of the news coverage on the suits against opioid manufacturers says that the reason that companies like Purdue Pharma and Johnson & Johnson had so much incentive to push their drugs was that the government gave them patent monopolies that allowed them to sell their products for prices that were far above the free market level. While generic manufacturers also made money on opioids, the largest profits were made by the brand manufacturers, who also did the most pushing.

One of the unintended consequences of government-granted patent monopolies is that it gives companies an incentive to mislead physicians and the general public about the safety and effectiveness of their drugs. The costs from the resulting improper care can be enormous, as we showed in a short paper five years ago.

This should be a strong argument for alternatives to patent financed research, such as the $40 billion in direct public funding that now goes through the National Institutes of Health. Unfortunately, the idea of alternatives to patent-financed pharmaceutical research, which would allow all new drugs to sell at generic prices, saving close to $400 billion annually (1.8 percent of GDP), is too radical for U.S. politicians.

It’s probably too simple and obvious to be worth mentioning, but it seems none of the news coverage on the suits against opioid manufacturers says that the reason that companies like Purdue Pharma and Johnson & Johnson had so much incentive to push their drugs was that the government gave them patent monopolies that allowed them to sell their products for prices that were far above the free market level. While generic manufacturers also made money on opioids, the largest profits were made by the brand manufacturers, who also did the most pushing.

One of the unintended consequences of government-granted patent monopolies is that it gives companies an incentive to mislead physicians and the general public about the safety and effectiveness of their drugs. The costs from the resulting improper care can be enormous, as we showed in a short paper five years ago.

This should be a strong argument for alternatives to patent financed research, such as the $40 billion in direct public funding that now goes through the National Institutes of Health. Unfortunately, the idea of alternatives to patent-financed pharmaceutical research, which would allow all new drugs to sell at generic prices, saving close to $400 billion annually (1.8 percent of GDP), is too radical for U.S. politicians.

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