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.

This is Dawn, Dean’s colleague here at CEPR. I just wanted to make sure you saw Dean’s recent BTP post about the New York Post reporter. In a story criticizing the great investigative work by our CEPR colleagues at the Revolving Door Project, he said that CEPR was, and I quote: “ a well-funded and influential left-wing think tank.”

OK, while I’m happy that he thinks we’re influential (we like to think so too), as CEPR’s Development Director I can assure you that (despite my absolute best efforts) we are not “well-funded”, especially if you compare our budgets to some other think tanks. The Heritage Foundation and the American Enterprise Foundation have budgets between $50 and $80 million with endowments in the hundreds of millions. The Center for American Progress’ budget is close to $50 million. CEPR’s? $2.5 million. And we don’t have an endowment.

As Dean mentioned in his piece there are thousands of Wall Street bankers and Hedge Fund gurus whose expense accounts are larger than our entire budget. Or put another way, the reporter who called us well-funded makes about 25% of our entire budget for salaries. The reporter surely hasn’t been following Dean or he would know not to lie about budget numbers.

Anyhow (as Dean likes to say), it made me think, hmmm, if this guy thinks we’re influential now, what if we really WERE well-funded? I know that a lot of you dear readers are also supporters of CEPR, either directly or though Dean’s Patreon page, but if you aren’t, please help us to become MORE influential AND well-funded by making a donation to CEPR here, or if you haven’t already, make a pledge to Dean on Patreon, here.

I’m sure that Dean would agree with me when I say success is the best revenge. And now back to your regularly scheduled program…

This is Dawn, Dean’s colleague here at CEPR. I just wanted to make sure you saw Dean’s recent BTP post about the New York Post reporter. In a story criticizing the great investigative work by our CEPR colleagues at the Revolving Door Project, he said that CEPR was, and I quote: “ a well-funded and influential left-wing think tank.”

OK, while I’m happy that he thinks we’re influential (we like to think so too), as CEPR’s Development Director I can assure you that (despite my absolute best efforts) we are not “well-funded”, especially if you compare our budgets to some other think tanks. The Heritage Foundation and the American Enterprise Foundation have budgets between $50 and $80 million with endowments in the hundreds of millions. The Center for American Progress’ budget is close to $50 million. CEPR’s? $2.5 million. And we don’t have an endowment.

As Dean mentioned in his piece there are thousands of Wall Street bankers and Hedge Fund gurus whose expense accounts are larger than our entire budget. Or put another way, the reporter who called us well-funded makes about 25% of our entire budget for salaries. The reporter surely hasn’t been following Dean or he would know not to lie about budget numbers.

Anyhow (as Dean likes to say), it made me think, hmmm, if this guy thinks we’re influential now, what if we really WERE well-funded? I know that a lot of you dear readers are also supporters of CEPR, either directly or though Dean’s Patreon page, but if you aren’t, please help us to become MORE influential AND well-funded by making a donation to CEPR here, or if you haven’t already, make a pledge to Dean on Patreon, here.

I’m sure that Dean would agree with me when I say success is the best revenge. And now back to your regularly scheduled program…

You can’t get a graduate education (or undergrad) in economics without hearing a thousand times that protectionism is bad. When you get to actually deal with policy issues, you discover that only protectionism that benefits ordinary workers is bad, protectionism that benefits high-end workers and corporate profits is sacred.

This is exactly the point of the Washington Post editorial condemning efforts to suspend patent monopolies and other protections of intellectual products on pandemic-related vaccines, treatments, and tests.  To make its case the Post does some name-calling and double-talk.

In the name-calling category, we are told the idea of a free people’s vaccine is “is more slogan than solution.” A little later it appears as a “chimera.” We get it, the Post doesn’t like it.

On the double-talk front, the Post tells us:

“The most salient fact is that patents on vaccines are not the central bottleneck, and even if turned over to other nations, would not quickly result in more shots. This is because vaccine manufacturing is exacting and time-consuming.”

Arguing over the “central bottleneck” is hardly worth anyone’s time. The demand is not just that patents be suspended, but that the technology needed to produce vaccines (and tests and treatments) be freely shared for the duration of the pandemic. It is amazing that the Post somehow does not realize this fact, or alternatively has deliberately decided to misrepresent the position it is criticizing.

The sharing of technology would mean that Pfizer, Moderna, and other producers of vaccines would share detailed descriptions of their manufacturing technology, conduct webinars, and provide hands-on assistance to manufacturers around the world to enable them to produce their vaccines on a large scale.  They can be paid for this, but they will have little choice in the matter. If they don’t agree, the government can offer large payments to their top engineers (e.g. $1 million a month) to share their knowledge directly, while indemnifying them from future legal actions by their former employers.

As far as the time involved, it’s not zero, but we know it is not all that long. The vaccines did not exist last March, yet these companies were able to produce large quantities by November. Presumably, we can assume at least the same speed going forward. Of course, it would have been much better if we had followed this path at the start of the pandemic, as some of us advocated at the time, or at least in October when South Africa and India introduced their resolution at the World Trade Organization.  

Perhaps the most stunning part of the editorial is the warning about incentives:

“It is true that pharmaceutical companies stand to profit handsomely from monopolies on individual patented vaccines. It is also true that stripping away their intellectual property now could discourage future innovation. The U.S. government spent some $10 billion in Operation Warp Speed to help that effort, among other things, but did not require companies to turn over their intellectual property to the government — or to share it.”

The companies involved have all made enormous profits on a relatively small short-term investment. The government put up much of the money and took much of the risk. That is not sufficient incentive?

Furthermore, we should assume that the people running pharmaceutical companies are not dumber than rocks. The law allows for the government to require the licensing of patents in emergencies (Section 1498 of the commercial code). Presumably, they know this. The loss of incentive story here is that if they hoped to get some pandemic super-bonanza in the future, they now know that they will just get extraordinarily large profits. Let’s cry for the drug companies.

I have argued that patent monopolies are actually a terrible way to finance drug research (see Rigged, chapter 5 [it’s free]). If we changed our mechanism for financing research, then we could ignore the issue of incentives here altogether. But that’s a longer discussion.

The reality is that much of the developing world is needlessly facing a humanitarian disaster because of vaccine nationalism and our protection of intellectual products. Furthermore, even the U.S. and other wealthy countries face an enormous risk that a new vaccine-resistant strain will develop (anyone want to go through another round of infections and lockdowns?), as long as the pandemic spreads unchecked anywhere in the world.

But to the Post, all of this is secondary to drug company profits.

You can’t get a graduate education (or undergrad) in economics without hearing a thousand times that protectionism is bad. When you get to actually deal with policy issues, you discover that only protectionism that benefits ordinary workers is bad, protectionism that benefits high-end workers and corporate profits is sacred.

This is exactly the point of the Washington Post editorial condemning efforts to suspend patent monopolies and other protections of intellectual products on pandemic-related vaccines, treatments, and tests.  To make its case the Post does some name-calling and double-talk.

In the name-calling category, we are told the idea of a free people’s vaccine is “is more slogan than solution.” A little later it appears as a “chimera.” We get it, the Post doesn’t like it.

On the double-talk front, the Post tells us:

“The most salient fact is that patents on vaccines are not the central bottleneck, and even if turned over to other nations, would not quickly result in more shots. This is because vaccine manufacturing is exacting and time-consuming.”

Arguing over the “central bottleneck” is hardly worth anyone’s time. The demand is not just that patents be suspended, but that the technology needed to produce vaccines (and tests and treatments) be freely shared for the duration of the pandemic. It is amazing that the Post somehow does not realize this fact, or alternatively has deliberately decided to misrepresent the position it is criticizing.

The sharing of technology would mean that Pfizer, Moderna, and other producers of vaccines would share detailed descriptions of their manufacturing technology, conduct webinars, and provide hands-on assistance to manufacturers around the world to enable them to produce their vaccines on a large scale.  They can be paid for this, but they will have little choice in the matter. If they don’t agree, the government can offer large payments to their top engineers (e.g. $1 million a month) to share their knowledge directly, while indemnifying them from future legal actions by their former employers.

As far as the time involved, it’s not zero, but we know it is not all that long. The vaccines did not exist last March, yet these companies were able to produce large quantities by November. Presumably, we can assume at least the same speed going forward. Of course, it would have been much better if we had followed this path at the start of the pandemic, as some of us advocated at the time, or at least in October when South Africa and India introduced their resolution at the World Trade Organization.  

Perhaps the most stunning part of the editorial is the warning about incentives:

“It is true that pharmaceutical companies stand to profit handsomely from monopolies on individual patented vaccines. It is also true that stripping away their intellectual property now could discourage future innovation. The U.S. government spent some $10 billion in Operation Warp Speed to help that effort, among other things, but did not require companies to turn over their intellectual property to the government — or to share it.”

The companies involved have all made enormous profits on a relatively small short-term investment. The government put up much of the money and took much of the risk. That is not sufficient incentive?

Furthermore, we should assume that the people running pharmaceutical companies are not dumber than rocks. The law allows for the government to require the licensing of patents in emergencies (Section 1498 of the commercial code). Presumably, they know this. The loss of incentive story here is that if they hoped to get some pandemic super-bonanza in the future, they now know that they will just get extraordinarily large profits. Let’s cry for the drug companies.

I have argued that patent monopolies are actually a terrible way to finance drug research (see Rigged, chapter 5 [it’s free]). If we changed our mechanism for financing research, then we could ignore the issue of incentives here altogether. But that’s a longer discussion.

The reality is that much of the developing world is needlessly facing a humanitarian disaster because of vaccine nationalism and our protection of intellectual products. Furthermore, even the U.S. and other wealthy countries face an enormous risk that a new vaccine-resistant strain will develop (anyone want to go through another round of infections and lockdowns?), as long as the pandemic spreads unchecked anywhere in the world.

But to the Post, all of this is secondary to drug company profits.

I was happy to see the New York Post take note of the work of the Revolving Door Project (RDP) at the Center for Economic and Policy Research. RDP has been very aggressive in vetting potential appointees in the Biden administration. It tries to prevent people with clear conflicts of interest from getting top-level jobs.

The immediate basis for the Post’s ire was the fact that Alex Oh was forced to step down from a top position at the Securities and Exchange Commission (SEC). Before getting the position at the SEC, Oh had worked at a major corporate law firm where she represented several of the country’s largest companies. One of these was Exxon-Mobil, which she defended in a suit claiming that claimed it was responsible for rape, torture, and murder committed by the Indonesian military in the vicinity of one of the company’s oil drilling operations. A judge in the case considered Oh’s conduct sufficiently egregious that he asked her to produce evidence that she should not be subject to sanctions. (Those interested in a fuller account of RDP’s case against Oh can read it here.)

The fact the Post did not agree with RDP’s position is not surprising, but what was striking was its description of the Center for Economic and Policy Research as a “well-funded and influential left-wing think tank.” While I like to think that CEPR is influential, as a co-founder and co-director for 18 years, I strongly dispute the claim that we are well-funded. My guess is that most senior Wall Street lawyers have annual salaries that exceed CEPR’s entire budget. Our office has a leaky roof, failing air conditioning and heating systems, and rodents.

The reality is that the people at CEPR do the work we do because we think it is important. We don’t get big bucks. People on the right may use politics as a path to personal enrichment, but that is not the way things work on our corner on the left. The Post is welcome to disagree with our work, but the idea that we are doing it for the money is a flat-out lie.

I was happy to see the New York Post take note of the work of the Revolving Door Project (RDP) at the Center for Economic and Policy Research. RDP has been very aggressive in vetting potential appointees in the Biden administration. It tries to prevent people with clear conflicts of interest from getting top-level jobs.

The immediate basis for the Post’s ire was the fact that Alex Oh was forced to step down from a top position at the Securities and Exchange Commission (SEC). Before getting the position at the SEC, Oh had worked at a major corporate law firm where she represented several of the country’s largest companies. One of these was Exxon-Mobil, which she defended in a suit claiming that claimed it was responsible for rape, torture, and murder committed by the Indonesian military in the vicinity of one of the company’s oil drilling operations. A judge in the case considered Oh’s conduct sufficiently egregious that he asked her to produce evidence that she should not be subject to sanctions. (Those interested in a fuller account of RDP’s case against Oh can read it here.)

The fact the Post did not agree with RDP’s position is not surprising, but what was striking was its description of the Center for Economic and Policy Research as a “well-funded and influential left-wing think tank.” While I like to think that CEPR is influential, as a co-founder and co-director for 18 years, I strongly dispute the claim that we are well-funded. My guess is that most senior Wall Street lawyers have annual salaries that exceed CEPR’s entire budget. Our office has a leaky roof, failing air conditioning and heating systems, and rodents.

The reality is that the people at CEPR do the work we do because we think it is important. We don’t get big bucks. People on the right may use politics as a path to personal enrichment, but that is not the way things work on our corner on the left. The Post is welcome to disagree with our work, but the idea that we are doing it for the money is a flat-out lie.

(This post first appeared on my Patreon page.)

There has been a lot of silliness around President Biden’s proposed infrastructure packages and the extent to which they are affordable for the country. First and foremost, there has been tremendous confusion about the size of the package. This is because the media have engaged in a feast of really big numbers, where they give us the size of the package with no context whatsoever, leaving their audience almost completely ignorant about the actual cost.

We have been told endlessly about Biden’s “massive” or “huge” proposal to spend $4 trillion. At this point, many people probably think that Biden actually proposed a “huge infrastructure” package, with “huge” or “massive,” being part of the proposal’s title.

While it would be helpful if media outlets could leave these adjectives to the opinion section, the bigger sin is using a very big number, which means almost nothing to its audience, without providing any context. In fact, much of the reporting doesn’t even bother to tell people that this spending is projected to take place over eight years, not one to two years, as was the case with Biden’s recovery package.

Over an eight-year period, Biden’s proposed spending averages $500 billion annually. This is a period in which GDP is projected to be more than $210 trillion, meaning that his package is projected to be around 1.9 percent of GDP. While that is hardly trivial, military spending is projected to be around 3.3 percent of GDP over this period. This means that Biden is proposing to increase infrastructure spending by an amount that is roughly 60 percent of projected military spending.

It is infuriating that most of the reporting on these proposals make no effort to put the spending in any context that would make it meaningful for people. Reporters all know that almost no one has any idea what $4 trillion over eight years means (especially if no one tells them it is over eight years), yet they refuse to take the two minutes that would be needed to add some context to make such really big numbers meaningful. Therefore, we have a large segment of the population that just thinks the program is massive or huge.

What Paying for Spending Really Means

As our MMT friends constantly remind us, a government that prints its own money, like the United States, does not need tax revenue to pay for its spending. This distinguishes the U.S. government from a household or state and local governments. Households and state and local governments actually need money in the bank to pay their bills. For them, more spending requires more income or taxes and/or more borrowing. The federal government does not have this constraint.

Nonetheless, the federal government does face a limit on its spending: the ability of the economy to produce goods and services. If the federal government spends so much that it pushes the economy beyond its ability to produce goods and services, we will see inflation. If this excessive spending is sustained over a substantial period of time then we could see the sort of inflationary spiral that we had in the 1970s.[1]

If the economy is already near its capacity when President Biden’s infrastructure package starts to come on line in 2022 and 2023, an increase in spending of a bit less than 2.0 percent of GDP could be large enough to create problems with inflation. This is the reason that we have to talk about “paying for” the infrastructure package. We need not be concerned about getting the money in the bank, we have to reduce demand in the economy by enough to make room for the additional spending in Biden’s infrastructure agenda. This is where a financial transactions tax comes in.

 

The Virtue of Financial Transactions Tax as a Pay For

The Biden tax proposals have focused on increasing the amount of money that corporations and wealthy individuals pay in taxes. This makes sense since they have been the big gainers in the economy over the last four decades.

His tax increases will just take back a fraction of the income that has been redistributed upward through a variety of government policies over this period. And, in the case of the corporate income tax, his proposal will just be partially reversing a tax cut that was put in place at the end of 2017 by Donald Trump and a Republican Congress. While taxing the economy’s big gainers is certainly fair, there is a problem with going this route to cover the cost of Biden’s program: the rich don’t spend a large share of their income.

This point is straightforward; if we give Jeff Bezos, Elon Musk, or any of the other super-wealthy another $100 million this year, it would likely not affect their consumption at all. They already have more than enough money to buy anything they could conceivably want, so even giving them a huge wad of money will not likely lead them to increase their consumption to any noticeable extent. Many of us are used to making this point when we argue that any stimulus payments in a recession should be focused on the middle class and the poor.

But this story also works in reverse, if we take $100 million away from the super-rich, it is not likely to reduce their spending to any noticeable extent. This means that Biden’s tax increases are not likely to have as much impact on reducing demand as tax increases that hit the poor and middle class. This is not an argument for hitting the people who have not fared well over the last four decades, it is just noting the impact of taxing the super-rich.

Financial transaction taxes (FTT) are qualitatively different in this respect. While the immediate impact of a financial transaction tax is hugely progressive, in the sense that the overwhelming majority of stock trading is done by the rich and very rich, the impact on the economy makes FTTs look even better.

Most research shows that the volume of stock trading falls roughly in proportion to the increase in the cost of trading. This means that if a FTT raises the cost of trading by 40 percent, the volume of trading will fall by roughly 40 percent. For a typical investor, that implies that they (or their fund manager) will be paying 40 percent more on each trade, but they will be doing 40 percent fewer trades. In other words, the total amount that they spend on trades with the tax in place will be roughly the same as the amount that they spent on trades before the tax is in place.

And investors will not be hurt by less trading. Every trade has a winner and a loser. If I’m lucky and dump my hundred shares of Amazon stock just before the price drops, it means that some unlucky sucker bought the stock a day too soon. Every trade is like this. The reality is that for the vast majority of investors, trades are a wash. Half the time they end up as winners, and half the time they end up as losers.

However, they do end up as losers by doing lots of trading, that’s because they are paying fees and commissions to the people in the financial industry carrying through the trades. This is why most financial advisers recommend that people buy and hold index funds so that they don’t waste money on trading.

A FTT reduces the money going to the financial industry to carry through trades by reducing the volume of trading. This very directly frees up resources in the economy. The number of people employed shuffling stocks, bonds, and various derivatives back and forth will be sharply reduced.

This is comparable to a situation where we found hundreds of thousands of people digging holes and filling them up again. A financial transactions tax, coupled with Biden’s infrastructure proposals, will be a way to redeploy these people to productive work elsewhere in the economy.

There is also a substantial amount of money here. According to the Congressional Budget Office, a tax of 0.1 percent (ten cents on a hundred dollars) would raise almost $800 billion over the course of a decade. I’ve calculated that a graduated tax, with different rates on different assets (0.2 percent on stock transactions, lower on everything else) could raise an amount of revenue equal to almost 0.6 percent of GDP over the course of a decade, or $1.6 trillion. My friend, Bob Pollin has calculated that a somewhat steeper tax, along the lines proposed by Senator Bernie Sanders, could raise close to twice as much. In short, this is real money.

That doesn’t mean that we should reject President Biden’s proposals to increase corporate income taxes and taxes on the top one or two percent. (My route for taxing corporations is better than his.) Even if Elon Musk might not change his consumption much as a result of paying another $100 million taxes, there are many moderately rich people, earning single-digit millions, who may have to forgo a third home or live-in cook, if we raise their taxes as President Biden proposed.

The bottom line is that Biden’s investment plan addresses longstanding needs in the country. We will likely have to reduce other spending in the economy to make room for it. A financial transactions tax is a great place to look for some of the offset.  

[1] People also often raise the issue of burdening our children with the debt. This is mostly an expression of extreme ignorance since the issue of debt service is incredibly trivial compared with the quality of the economy and society that we pass onto to our children. The debt service is also dwarfed by the rents created by government-granted patent and copyright monopolies, which are also a form of government debt passed on to our children. The debt whiners literally never talk about this massive implicit debt burden, which takes the form of higher prices on everything from drugs and software to video games and computers. In the case of prescription drugs alone, the rents come close to $400 billion annually, nearly twice the size of our debt service burden.

(This post first appeared on my Patreon page.)

There has been a lot of silliness around President Biden’s proposed infrastructure packages and the extent to which they are affordable for the country. First and foremost, there has been tremendous confusion about the size of the package. This is because the media have engaged in a feast of really big numbers, where they give us the size of the package with no context whatsoever, leaving their audience almost completely ignorant about the actual cost.

We have been told endlessly about Biden’s “massive” or “huge” proposal to spend $4 trillion. At this point, many people probably think that Biden actually proposed a “huge infrastructure” package, with “huge” or “massive,” being part of the proposal’s title.

While it would be helpful if media outlets could leave these adjectives to the opinion section, the bigger sin is using a very big number, which means almost nothing to its audience, without providing any context. In fact, much of the reporting doesn’t even bother to tell people that this spending is projected to take place over eight years, not one to two years, as was the case with Biden’s recovery package.

Over an eight-year period, Biden’s proposed spending averages $500 billion annually. This is a period in which GDP is projected to be more than $210 trillion, meaning that his package is projected to be around 1.9 percent of GDP. While that is hardly trivial, military spending is projected to be around 3.3 percent of GDP over this period. This means that Biden is proposing to increase infrastructure spending by an amount that is roughly 60 percent of projected military spending.

It is infuriating that most of the reporting on these proposals make no effort to put the spending in any context that would make it meaningful for people. Reporters all know that almost no one has any idea what $4 trillion over eight years means (especially if no one tells them it is over eight years), yet they refuse to take the two minutes that would be needed to add some context to make such really big numbers meaningful. Therefore, we have a large segment of the population that just thinks the program is massive or huge.

What Paying for Spending Really Means

As our MMT friends constantly remind us, a government that prints its own money, like the United States, does not need tax revenue to pay for its spending. This distinguishes the U.S. government from a household or state and local governments. Households and state and local governments actually need money in the bank to pay their bills. For them, more spending requires more income or taxes and/or more borrowing. The federal government does not have this constraint.

Nonetheless, the federal government does face a limit on its spending: the ability of the economy to produce goods and services. If the federal government spends so much that it pushes the economy beyond its ability to produce goods and services, we will see inflation. If this excessive spending is sustained over a substantial period of time then we could see the sort of inflationary spiral that we had in the 1970s.[1]

If the economy is already near its capacity when President Biden’s infrastructure package starts to come on line in 2022 and 2023, an increase in spending of a bit less than 2.0 percent of GDP could be large enough to create problems with inflation. This is the reason that we have to talk about “paying for” the infrastructure package. We need not be concerned about getting the money in the bank, we have to reduce demand in the economy by enough to make room for the additional spending in Biden’s infrastructure agenda. This is where a financial transactions tax comes in.

 

The Virtue of Financial Transactions Tax as a Pay For

The Biden tax proposals have focused on increasing the amount of money that corporations and wealthy individuals pay in taxes. This makes sense since they have been the big gainers in the economy over the last four decades.

His tax increases will just take back a fraction of the income that has been redistributed upward through a variety of government policies over this period. And, in the case of the corporate income tax, his proposal will just be partially reversing a tax cut that was put in place at the end of 2017 by Donald Trump and a Republican Congress. While taxing the economy’s big gainers is certainly fair, there is a problem with going this route to cover the cost of Biden’s program: the rich don’t spend a large share of their income.

This point is straightforward; if we give Jeff Bezos, Elon Musk, or any of the other super-wealthy another $100 million this year, it would likely not affect their consumption at all. They already have more than enough money to buy anything they could conceivably want, so even giving them a huge wad of money will not likely lead them to increase their consumption to any noticeable extent. Many of us are used to making this point when we argue that any stimulus payments in a recession should be focused on the middle class and the poor.

But this story also works in reverse, if we take $100 million away from the super-rich, it is not likely to reduce their spending to any noticeable extent. This means that Biden’s tax increases are not likely to have as much impact on reducing demand as tax increases that hit the poor and middle class. This is not an argument for hitting the people who have not fared well over the last four decades, it is just noting the impact of taxing the super-rich.

Financial transaction taxes (FTT) are qualitatively different in this respect. While the immediate impact of a financial transaction tax is hugely progressive, in the sense that the overwhelming majority of stock trading is done by the rich and very rich, the impact on the economy makes FTTs look even better.

Most research shows that the volume of stock trading falls roughly in proportion to the increase in the cost of trading. This means that if a FTT raises the cost of trading by 40 percent, the volume of trading will fall by roughly 40 percent. For a typical investor, that implies that they (or their fund manager) will be paying 40 percent more on each trade, but they will be doing 40 percent fewer trades. In other words, the total amount that they spend on trades with the tax in place will be roughly the same as the amount that they spent on trades before the tax is in place.

And investors will not be hurt by less trading. Every trade has a winner and a loser. If I’m lucky and dump my hundred shares of Amazon stock just before the price drops, it means that some unlucky sucker bought the stock a day too soon. Every trade is like this. The reality is that for the vast majority of investors, trades are a wash. Half the time they end up as winners, and half the time they end up as losers.

However, they do end up as losers by doing lots of trading, that’s because they are paying fees and commissions to the people in the financial industry carrying through the trades. This is why most financial advisers recommend that people buy and hold index funds so that they don’t waste money on trading.

A FTT reduces the money going to the financial industry to carry through trades by reducing the volume of trading. This very directly frees up resources in the economy. The number of people employed shuffling stocks, bonds, and various derivatives back and forth will be sharply reduced.

This is comparable to a situation where we found hundreds of thousands of people digging holes and filling them up again. A financial transactions tax, coupled with Biden’s infrastructure proposals, will be a way to redeploy these people to productive work elsewhere in the economy.

There is also a substantial amount of money here. According to the Congressional Budget Office, a tax of 0.1 percent (ten cents on a hundred dollars) would raise almost $800 billion over the course of a decade. I’ve calculated that a graduated tax, with different rates on different assets (0.2 percent on stock transactions, lower on everything else) could raise an amount of revenue equal to almost 0.6 percent of GDP over the course of a decade, or $1.6 trillion. My friend, Bob Pollin has calculated that a somewhat steeper tax, along the lines proposed by Senator Bernie Sanders, could raise close to twice as much. In short, this is real money.

That doesn’t mean that we should reject President Biden’s proposals to increase corporate income taxes and taxes on the top one or two percent. (My route for taxing corporations is better than his.) Even if Elon Musk might not change his consumption much as a result of paying another $100 million taxes, there are many moderately rich people, earning single-digit millions, who may have to forgo a third home or live-in cook, if we raise their taxes as President Biden proposed.

The bottom line is that Biden’s investment plan addresses longstanding needs in the country. We will likely have to reduce other spending in the economy to make room for it. A financial transactions tax is a great place to look for some of the offset.  

[1] People also often raise the issue of burdening our children with the debt. This is mostly an expression of extreme ignorance since the issue of debt service is incredibly trivial compared with the quality of the economy and society that we pass onto to our children. The debt service is also dwarfed by the rents created by government-granted patent and copyright monopolies, which are also a form of government debt passed on to our children. The debt whiners literally never talk about this massive implicit debt burden, which takes the form of higher prices on everything from drugs and software to video games and computers. In the case of prescription drugs alone, the rents come close to $400 billion annually, nearly twice the size of our debt service burden.

Two members of Congress, Tom Malinowski and Anna Eshoo, took to the Washington Post today to promote their meaningless plan to attack social media profits in the name of protecting democracy (their terminology). The gist of their column is that they want to take away Section 230 protection for any social media company that has algorithms that  “amplify content that contributes to an act of terrorism or to a violation of civil rights statutes meant to combat extremist groups.”

Just to remind folks, Section 230 gives Internet intermediaries special treatment that is denied to other media companies. While the New York Times or CNN could be sued for libelous ads or guest opinion pieces for material in a newspaper or broadcast on the airwaves, Section 230 means that Facebook could not be held libel for the same material. This means that someone could produce a bogus video, showing a person doing all sorts of horrible things that they did not actually do, pay Facebook millions to have it circulated to billions of people, and Facebook gets to pocket the cash with no liability.

But our brave members of Congress want to crack down on social media profits. So, first, we have to determine that its algorithms steer people to these bad groups or sites. Then of course we have to determine that the sites are in fact bad. I can assure you, that one will not be easy if you have not given it any thought.

It gets worse. Suppose that Facebook and other social media companies are quaking in their boots after Representatives Malinowski and Eshoo’s bill passes and then change their algorithms. Nothing in their bill, as described in their column, prevents Facebook from selling ads to hate groups to spread vile material to millions of specially targeted individuals. In other words, their bill does almost nothing to prevent Facebook from profiting from fostering the growth of hate groups.

To some of us, the big problem is that we have behemoths like Facebook and Twitter in the first place, which almost certainly could not exist in their current form without Section 230 protection. The future of democracy should not depend on the whims of billionaire jerks like Mark Zuckerberg.

The answer, in this case, would be to repeal Section 230 protection and hold Internet intermediaries to the same sort of liability as to their competitors in print and broadcast media. But that would actually jeopardize social media profits, apparently few members of Congress are willing to do that.

 

Two members of Congress, Tom Malinowski and Anna Eshoo, took to the Washington Post today to promote their meaningless plan to attack social media profits in the name of protecting democracy (their terminology). The gist of their column is that they want to take away Section 230 protection for any social media company that has algorithms that  “amplify content that contributes to an act of terrorism or to a violation of civil rights statutes meant to combat extremist groups.”

Just to remind folks, Section 230 gives Internet intermediaries special treatment that is denied to other media companies. While the New York Times or CNN could be sued for libelous ads or guest opinion pieces for material in a newspaper or broadcast on the airwaves, Section 230 means that Facebook could not be held libel for the same material. This means that someone could produce a bogus video, showing a person doing all sorts of horrible things that they did not actually do, pay Facebook millions to have it circulated to billions of people, and Facebook gets to pocket the cash with no liability.

But our brave members of Congress want to crack down on social media profits. So, first, we have to determine that its algorithms steer people to these bad groups or sites. Then of course we have to determine that the sites are in fact bad. I can assure you, that one will not be easy if you have not given it any thought.

It gets worse. Suppose that Facebook and other social media companies are quaking in their boots after Representatives Malinowski and Eshoo’s bill passes and then change their algorithms. Nothing in their bill, as described in their column, prevents Facebook from selling ads to hate groups to spread vile material to millions of specially targeted individuals. In other words, their bill does almost nothing to prevent Facebook from profiting from fostering the growth of hate groups.

To some of us, the big problem is that we have behemoths like Facebook and Twitter in the first place, which almost certainly could not exist in their current form without Section 230 protection. The future of democracy should not depend on the whims of billionaire jerks like Mark Zuckerberg.

The answer, in this case, would be to repeal Section 230 protection and hold Internet intermediaries to the same sort of liability as to their competitors in print and broadcast media. But that would actually jeopardize social media profits, apparently few members of Congress are willing to do that.

 

A New York Times piece on soaring CEO pay at one point noted how attaching most CEO pay to stock options is supposed to align CEO pay with shareholder interests:

“Executives at publicly traded companies receive most of their compensation in stock, an arrangement intended to align pay with the performance of a company’s share price. When the stock price goes up, the theory goes, investors and executives alike share in the gains.”

This would only be true if shareholders are able to determine the number of options and the structure of the package. The package could, for example, cap the amount of money that CEOs and other top executives get from options, or it could have the returns from options linked to the performance of other companies in the same industry. Tying pay to options in a context where CEOs and other top management largely control the boards that set their pay does not mean there is an alignment between CEO pay and shareholders’ interest.

If this is difficult to understand, imagine that cashiers at McDonald’s got paid in stock options, and the cashiers got to determine how many options they were awarded. By the theory described in the NYT piece, cashier’s pay would then be allied with shareholders’ interest. The piece actually provides evidence of this misalignment when noting that Starbuck’s shareholders voted down their CEO’s pay package, but since the vote was non-binding on the board of directors, the CEO’s pay was not affected. There is no shortage of examples of CEOs getting high pay that is in no obvious way related to returns to shareholders.

This matters because if CEOs are ripping off the companies that employ them, then shareholders should be allies in the effort to bring down CEO pay. The vast majority of the rise in inequality over the last four decades has been due to wage income being redistributed upward, not a shift from wages to profits. Soaring CEO pay is a big part of this story. When the CEO gets $20 million, the chief financial officer and other top execs are likely to be getting close to $10 million, and even third tier execs can be earning $2-3 million. This also affects pay in the non-corporate sector, where is now common for presidents of major foundations and universities to be paid well over $1 million a year. And, as fans of arithmetic know, more money going to the top means less money for everyone else.

The story would be very different if CEOs were paid 20 to 30 times the wages of ordinary workers, as was the case in the 1960s and 1970s. If shareholders can be empowered in ways that make them more able to control CEO pay, this could be a large step towards reducing income inequality.

A New York Times piece on soaring CEO pay at one point noted how attaching most CEO pay to stock options is supposed to align CEO pay with shareholder interests:

“Executives at publicly traded companies receive most of their compensation in stock, an arrangement intended to align pay with the performance of a company’s share price. When the stock price goes up, the theory goes, investors and executives alike share in the gains.”

This would only be true if shareholders are able to determine the number of options and the structure of the package. The package could, for example, cap the amount of money that CEOs and other top executives get from options, or it could have the returns from options linked to the performance of other companies in the same industry. Tying pay to options in a context where CEOs and other top management largely control the boards that set their pay does not mean there is an alignment between CEO pay and shareholders’ interest.

If this is difficult to understand, imagine that cashiers at McDonald’s got paid in stock options, and the cashiers got to determine how many options they were awarded. By the theory described in the NYT piece, cashier’s pay would then be allied with shareholders’ interest. The piece actually provides evidence of this misalignment when noting that Starbuck’s shareholders voted down their CEO’s pay package, but since the vote was non-binding on the board of directors, the CEO’s pay was not affected. There is no shortage of examples of CEOs getting high pay that is in no obvious way related to returns to shareholders.

This matters because if CEOs are ripping off the companies that employ them, then shareholders should be allies in the effort to bring down CEO pay. The vast majority of the rise in inequality over the last four decades has been due to wage income being redistributed upward, not a shift from wages to profits. Soaring CEO pay is a big part of this story. When the CEO gets $20 million, the chief financial officer and other top execs are likely to be getting close to $10 million, and even third tier execs can be earning $2-3 million. This also affects pay in the non-corporate sector, where is now common for presidents of major foundations and universities to be paid well over $1 million a year. And, as fans of arithmetic know, more money going to the top means less money for everyone else.

The story would be very different if CEOs were paid 20 to 30 times the wages of ordinary workers, as was the case in the 1960s and 1970s. If shareholders can be empowered in ways that make them more able to control CEO pay, this could be a large step towards reducing income inequality.

I know it was the last guy who promised hope and change, not Joe Biden, but I couldn’t resist stealing Sarah Palin’s best line ever. Besides, even if Biden didn’t promise hope and change, it looks like he might deliver.  

We are going to get the GDP growth data for the first quarter next week, and it is almost certain to be very strong, quite likely over 7.0 percent. This is great news in terms of recovering from the pandemic recession and getting people back to work, but we know that all the inflation hawks will be yelling that we will soon be back in the 1970s, with inflation spiraling ever higher. For this reason, it’s worth trying to dissect the data to see if it can give evidence that bears on this question.

 

Productivity Growth

One of the key factors that will determine whether inflation ends up being a problem is the economy’s rate of productivity growth. The story here is straightforward. If productivity grows more rapidly, then wages can grow more rapidly without causing inflation to increase or profit margins to be squeezed.

To take a simple example, if productivity growth is 1.0 percent annually, and wage growth is 3.0 percent, we would expect inflation to be roughly 2.0 percent. By contrast, if productivity grows 2.0 percent annually and wage growth were still 3.0 percent, then we would expect 1.0 percent inflation. Alternatively, if we want to see 2.0 percent inflation and we have 2.0 percent annual growth in productivity, then we would want wages to be rising 4.0 percent annually.

There is some evidence that we are actually seeing an uptick in productivity growth. Productivity grew at just a 1.0 percent annual rate from the fourth quarter of 2009 to the fourth quarter of 2019. However, it grew 2.5 from the fourth quarter of 2019 to the fourth quarter of 2020. Hours worked increased at roughly a 2.5 percent annual rate in the first quarter. If GDP growth comes in around 7.0 percent, it would imply productivity growth of around 4.5 percent.

Quarterly productivity data are enormously erratic, so we should be cautious about making much out of the extraordinary growth we are likely to see in the first quarter, but it is consistent with the continuation of the more rapid growth from 2019. If we can stay on track with something close to 2.5 percent annual productivity growth, or even 2.0 percent, it will go very far towards alleviating any inflationary pressure that might be caused by Biden’s recovery package.

Any discussion of productivity growth has to come with a huge caveat: our ability to predict it is close to zero. The figure below shows annual productivity growth in the post war era.

 

While the data are highly erratic, the average for the years 1947 to 1973 was 2.8 percent. Growth slowed sharply in the 1970s, averaging just 1.5 percent in the years from 1973 to 1995. Productivity growth then increased to 3.0 percent annually from 1995 to 2005, when it slowed again to just over 1.0 percent.

These sharp shifts in trends caught nearly everyone by surprise. Virtually no one saw the 1973 slowdown coming and it was not recognized for many years after the fact. Even today there is no widespread agreement as to its cause. Most economists feel reasonably comfortable attributing the 1990s upturn to computers and other information technologies, even if few saw it coming. The slowdown in 2006 again caught economists by surprise, and here also there is no generally accepted view as to its cause.

So, when we see an uptick in growth in 2020, that seems to be continuing at least into the first quarter of this year, we can be encouraged by it, but we should not have much confidence it will persist for any substantial period of time. Clearly the pandemic forced businesses to adjust their way of doing things, and it was undoubtedly a big factor in the rapid productivity growth we saw last year, but whether we will continue to see large gains is really little more than a guess at this point.

 

Investment

In the sloppy Econ 101 textbook, investment is the key to productivity growth. The idea is that we get more and better capital, and thereby make workers more productive. Think of one person driving a bulldozer instead of 20 workers with a shovel.

As a practical matter, most of the differences we see in rates of productivity growth over the post-World War II era are not due to differences in the rate of investment, or the rate of improvement in the education of the labor force, the other major input for productivity. Most of the differences between the periods of rapid productivity growth and the slowdown years are due to differences in the rate of multi-factor productivity growth.

This is the growth in productivity which cannot be attributed to either more capital or more educated workers. In other words, it is the growth in productivity that we can’t explain.

But if we do turn to the productivity growth that we can explain, investment is clearly a plus, In general, more investment means more productivity. And on this score, we have been seeing good news.    

Investment held up remarkably well through the pandemic. The fourth quarter level was only 1.4 percent lower than the year-ago level. And, this falloff was entirely due to weaker investment in structures. Businesses were cutting back spending on office buildings and retail space for obvious reasons.

By contrast, investment in both equipment and intellectual products was already slightly higher in the fourth quarter of 2020 than in the fourth quarter of 2019. We will see further increases in the first quarter, indicating that investment is pretty much in line or possibly even above its path from before the pandemic. 

With most business surveys showing considerable business optimism, much of it spurred by Biden’s recovery package and now his infrastructure plan, we should see investment continuing at a healthy pace for the immediate future. Again, this is not the biggest factor in productivity growth, but it certainly is a positive one. If investment remains strong, the resulting increases in productivity growth will help alleviate inflation risks.

 

The Trade Deficit

In other times, we may view the rise in the trade deficit as a bad signal about US competitiveness, however that is not the case at present. With the economy getting a solid boost from the recovery package, the trade deficit provides a useful relief valve. Insofar as domestic producers are unable to meet demand, foreign producers will be stepping in to fill the gap. The trade deficit will also provide a welcome boost to growth for our allies in Europe, Japan, and elsewhere.

In the past, the loss of manufacturing jobs also meant the loss of relatively high-paying jobs for people without college degrees. This was a good reason to be worried about the trade deficit.

This is no longer the case as the devastation the sector suffered due to import competition in prior decades has largely eliminated the wage premium in manufacturing. In 1990, the average hourly wage for production and non-supervisory workers in manufacturing was close to 6.0 percent higher than for the private sector as a whole. Now it is more than 6.0 percent lower. Manufacturing workers are still more likely to get health care insurance and other benefits than non-manufacturing workers, so there is still some compensation premium, but it is clearly much less than in prior decades.  

The reduction in the wage premium has gone along with a plunge in unionization rates in the sector. Historically, manufacturing has been a relatively heavily unionized sector. This is no longer true. Its 8.5 percent unionization rate is still somewhat higher than the 6.3 percent rate for the private sector as a whole, but it’s hardly a qualitatively different story.

Furthermore, when we added back jobs in manufacturing, they have not been union jobs. Since 2010, we have added more than 1.6 million jobs in manufacturing, however the number of union members in manufacturing has fallen by 180,000.

As a result of the deterioration in the quality of manufacturing jobs, there is little reason to be concerned about the impact of the trade deficit on the composition of employment. Instead, we can mostly be relieved that trade provides an outlet for excess demand in the U.S. economy.

That is what we have seen to date. Measured as a share of GDP, it had risen by 1.2 percentage points from the fourth quarter of 2019 to the fourth quarter of 2020. The share of the trade deficit in the first quarter is likely to be the largest since the start of the Great Recession.

This is a story where the US economy is growing far more rapidly than the economies of our trading partners. As a result, our imports in the fourth quarter were almost back to their pre-pandemic level, while our exports were still down by almost 11.0 percent.  

 

The Future is Bright

Okay, we have a long way to go, and there should be no celebrations when we still have 6.0 percent unemployment and millions of people who have dropped out of the labor market and given up looking for work altogether. But for the moment, the economy is moving in the right direction and at a very rapid pace. If this continues for another year or so, we will have some serious cause for celebrating.

I know it was the last guy who promised hope and change, not Joe Biden, but I couldn’t resist stealing Sarah Palin’s best line ever. Besides, even if Biden didn’t promise hope and change, it looks like he might deliver.  

We are going to get the GDP growth data for the first quarter next week, and it is almost certain to be very strong, quite likely over 7.0 percent. This is great news in terms of recovering from the pandemic recession and getting people back to work, but we know that all the inflation hawks will be yelling that we will soon be back in the 1970s, with inflation spiraling ever higher. For this reason, it’s worth trying to dissect the data to see if it can give evidence that bears on this question.

 

Productivity Growth

One of the key factors that will determine whether inflation ends up being a problem is the economy’s rate of productivity growth. The story here is straightforward. If productivity grows more rapidly, then wages can grow more rapidly without causing inflation to increase or profit margins to be squeezed.

To take a simple example, if productivity growth is 1.0 percent annually, and wage growth is 3.0 percent, we would expect inflation to be roughly 2.0 percent. By contrast, if productivity grows 2.0 percent annually and wage growth were still 3.0 percent, then we would expect 1.0 percent inflation. Alternatively, if we want to see 2.0 percent inflation and we have 2.0 percent annual growth in productivity, then we would want wages to be rising 4.0 percent annually.

There is some evidence that we are actually seeing an uptick in productivity growth. Productivity grew at just a 1.0 percent annual rate from the fourth quarter of 2009 to the fourth quarter of 2019. However, it grew 2.5 from the fourth quarter of 2019 to the fourth quarter of 2020. Hours worked increased at roughly a 2.5 percent annual rate in the first quarter. If GDP growth comes in around 7.0 percent, it would imply productivity growth of around 4.5 percent.

Quarterly productivity data are enormously erratic, so we should be cautious about making much out of the extraordinary growth we are likely to see in the first quarter, but it is consistent with the continuation of the more rapid growth from 2019. If we can stay on track with something close to 2.5 percent annual productivity growth, or even 2.0 percent, it will go very far towards alleviating any inflationary pressure that might be caused by Biden’s recovery package.

Any discussion of productivity growth has to come with a huge caveat: our ability to predict it is close to zero. The figure below shows annual productivity growth in the post war era.

 

While the data are highly erratic, the average for the years 1947 to 1973 was 2.8 percent. Growth slowed sharply in the 1970s, averaging just 1.5 percent in the years from 1973 to 1995. Productivity growth then increased to 3.0 percent annually from 1995 to 2005, when it slowed again to just over 1.0 percent.

These sharp shifts in trends caught nearly everyone by surprise. Virtually no one saw the 1973 slowdown coming and it was not recognized for many years after the fact. Even today there is no widespread agreement as to its cause. Most economists feel reasonably comfortable attributing the 1990s upturn to computers and other information technologies, even if few saw it coming. The slowdown in 2006 again caught economists by surprise, and here also there is no generally accepted view as to its cause.

So, when we see an uptick in growth in 2020, that seems to be continuing at least into the first quarter of this year, we can be encouraged by it, but we should not have much confidence it will persist for any substantial period of time. Clearly the pandemic forced businesses to adjust their way of doing things, and it was undoubtedly a big factor in the rapid productivity growth we saw last year, but whether we will continue to see large gains is really little more than a guess at this point.

 

Investment

In the sloppy Econ 101 textbook, investment is the key to productivity growth. The idea is that we get more and better capital, and thereby make workers more productive. Think of one person driving a bulldozer instead of 20 workers with a shovel.

As a practical matter, most of the differences we see in rates of productivity growth over the post-World War II era are not due to differences in the rate of investment, or the rate of improvement in the education of the labor force, the other major input for productivity. Most of the differences between the periods of rapid productivity growth and the slowdown years are due to differences in the rate of multi-factor productivity growth.

This is the growth in productivity which cannot be attributed to either more capital or more educated workers. In other words, it is the growth in productivity that we can’t explain.

But if we do turn to the productivity growth that we can explain, investment is clearly a plus, In general, more investment means more productivity. And on this score, we have been seeing good news.    

Investment held up remarkably well through the pandemic. The fourth quarter level was only 1.4 percent lower than the year-ago level. And, this falloff was entirely due to weaker investment in structures. Businesses were cutting back spending on office buildings and retail space for obvious reasons.

By contrast, investment in both equipment and intellectual products was already slightly higher in the fourth quarter of 2020 than in the fourth quarter of 2019. We will see further increases in the first quarter, indicating that investment is pretty much in line or possibly even above its path from before the pandemic. 

With most business surveys showing considerable business optimism, much of it spurred by Biden’s recovery package and now his infrastructure plan, we should see investment continuing at a healthy pace for the immediate future. Again, this is not the biggest factor in productivity growth, but it certainly is a positive one. If investment remains strong, the resulting increases in productivity growth will help alleviate inflation risks.

 

The Trade Deficit

In other times, we may view the rise in the trade deficit as a bad signal about US competitiveness, however that is not the case at present. With the economy getting a solid boost from the recovery package, the trade deficit provides a useful relief valve. Insofar as domestic producers are unable to meet demand, foreign producers will be stepping in to fill the gap. The trade deficit will also provide a welcome boost to growth for our allies in Europe, Japan, and elsewhere.

In the past, the loss of manufacturing jobs also meant the loss of relatively high-paying jobs for people without college degrees. This was a good reason to be worried about the trade deficit.

This is no longer the case as the devastation the sector suffered due to import competition in prior decades has largely eliminated the wage premium in manufacturing. In 1990, the average hourly wage for production and non-supervisory workers in manufacturing was close to 6.0 percent higher than for the private sector as a whole. Now it is more than 6.0 percent lower. Manufacturing workers are still more likely to get health care insurance and other benefits than non-manufacturing workers, so there is still some compensation premium, but it is clearly much less than in prior decades.  

The reduction in the wage premium has gone along with a plunge in unionization rates in the sector. Historically, manufacturing has been a relatively heavily unionized sector. This is no longer true. Its 8.5 percent unionization rate is still somewhat higher than the 6.3 percent rate for the private sector as a whole, but it’s hardly a qualitatively different story.

Furthermore, when we added back jobs in manufacturing, they have not been union jobs. Since 2010, we have added more than 1.6 million jobs in manufacturing, however the number of union members in manufacturing has fallen by 180,000.

As a result of the deterioration in the quality of manufacturing jobs, there is little reason to be concerned about the impact of the trade deficit on the composition of employment. Instead, we can mostly be relieved that trade provides an outlet for excess demand in the U.S. economy.

That is what we have seen to date. Measured as a share of GDP, it had risen by 1.2 percentage points from the fourth quarter of 2019 to the fourth quarter of 2020. The share of the trade deficit in the first quarter is likely to be the largest since the start of the Great Recession.

This is a story where the US economy is growing far more rapidly than the economies of our trading partners. As a result, our imports in the fourth quarter were almost back to their pre-pandemic level, while our exports were still down by almost 11.0 percent.  

 

The Future is Bright

Okay, we have a long way to go, and there should be no celebrations when we still have 6.0 percent unemployment and millions of people who have dropped out of the labor market and given up looking for work altogether. But for the moment, the economy is moving in the right direction and at a very rapid pace. If this continues for another year or so, we will have some serious cause for celebrating.

In an article that ran under the headline “Biden’s mammoth education agenda would expand the federal role from cradle to college,” the Washington Post spewed a whole set of budget numbers with literally no context whatsoever, not even giving the number of years over which the money would be spent. For example, the piece told readers about a $200 billion pre-K plan and a proposal for $225 billion for child care without telling readers the time period for this spending.

Presumably, this is a 10-year funding stream, which means the pre-K spending comes to $20 billion a year, while the child care spending would be $22.5 billion a year. The Congressional Budget Office projects that GDP will average $27.9 trillion over the next decade, which means that the additional spending on pre-K would come to just over 0.07 percent of GDP, while the proposal for child care would come to a bit more than 0.08 percent of GDP. To use another base of comparison, these proposed increases in spending are each equal to less than 3.0 percent of projected military spending.

The piece also includes a chart with the heading “Biden’s proposed increase in education spending is enormous,” which shows Biden’s requested increase in discretionary spending by the Education Department of 41 percent. As the chart shows, this follows cuts in the Trump years. If we compare Biden’s 2022 proposal to spending in 2016, the last full year President Obama was in office, the increase is 50.5 percent, in a period in which nominal GDP  grew 23.1 percent.

If we compare Biden’s proposed spending to 2011 spending, before the Republican Congress forced austerity on President Obama, the 2022 figure would be 50.4 percent higher. The economy is projected to be 48.5 percent larger in 2022 than it was in 2011, which means that Biden’s “enormous” increase in education spending would essentially be raising spending measured as a share of GDP back to its 2011 level. 

This context does not minimize the importance of Biden’s proposals, which will likely have a substantial impact on educational outcomes, especially for children from low and moderate-income families. The additional support for child care will also make it far easier for parents of young children to balance work and family obligations. However, it is irresponsible to imply that these proposals involve some extraordinary commitment of resources. They do not.  

In an article that ran under the headline “Biden’s mammoth education agenda would expand the federal role from cradle to college,” the Washington Post spewed a whole set of budget numbers with literally no context whatsoever, not even giving the number of years over which the money would be spent. For example, the piece told readers about a $200 billion pre-K plan and a proposal for $225 billion for child care without telling readers the time period for this spending.

Presumably, this is a 10-year funding stream, which means the pre-K spending comes to $20 billion a year, while the child care spending would be $22.5 billion a year. The Congressional Budget Office projects that GDP will average $27.9 trillion over the next decade, which means that the additional spending on pre-K would come to just over 0.07 percent of GDP, while the proposal for child care would come to a bit more than 0.08 percent of GDP. To use another base of comparison, these proposed increases in spending are each equal to less than 3.0 percent of projected military spending.

The piece also includes a chart with the heading “Biden’s proposed increase in education spending is enormous,” which shows Biden’s requested increase in discretionary spending by the Education Department of 41 percent. As the chart shows, this follows cuts in the Trump years. If we compare Biden’s 2022 proposal to spending in 2016, the last full year President Obama was in office, the increase is 50.5 percent, in a period in which nominal GDP  grew 23.1 percent.

If we compare Biden’s proposed spending to 2011 spending, before the Republican Congress forced austerity on President Obama, the 2022 figure would be 50.4 percent higher. The economy is projected to be 48.5 percent larger in 2022 than it was in 2011, which means that Biden’s “enormous” increase in education spending would essentially be raising spending measured as a share of GDP back to its 2011 level. 

This context does not minimize the importance of Biden’s proposals, which will likely have a substantial impact on educational outcomes, especially for children from low and moderate-income families. The additional support for child care will also make it far easier for parents of young children to balance work and family obligations. However, it is irresponsible to imply that these proposals involve some extraordinary commitment of resources. They do not.  

(This post first appeared on my Patreon page.)

President Biden has indicated that he wants to raise much of the money to cover the cost of his infrastructure program by raising the corporate income tax. The amount of money raised through the corporate income tax plummeted following the Trump tax cut in 2017. In non-recession years it had been averaging close to 2.0 percent of GDP. It had plummeted to just 1.0 percent of GDP in 2018 and 1.1 percent of GDP in 20019.

If we could get the corporate income tax back to 2.0 percent of GDP, it would add over $200 billion a year to government revenue. Over the ten-year budget planning horizon, this would add more than the projected $2.3 trillion projected cost of President Biden’s infrastructure program. This would be real money.

There are two issues with the corporate income tax, the nominal tax rate and the portion of the targeted tax that is actually collected. Corporations never pay taxes at a rate that is close to the nominal rate. Prior to the Trump tax cut, the nominal tax rate was 35 percent. Actual tax collections were around 21 percent of corporate profits, on average.

Both fell further after the Trump tax cut in 2017. The tax cut lowered the nominal rate to 21 percent. Part of the rationale for this tax cut was that it was supposed to eliminate many of the loopholes that had previously created the large gap between the nominal tax rate and the actual rate so that we would actually be collecting close to the 21 percent nominal rate.

That didn’t happen, the effective tax rate on corporate profits averaged less than 13.0 percent in 2018 and 2019. We lowered the tax rate and left in the loopholes.

Part of this story is that a substantial share of corporate profits is actually earned abroad, for example on sales by subsidiaries in Germany, to German companies or individuals. These profits are generally subject to taxes by other countries and therefore we would not expect to see substantial U.S. tax revenue raised on these foreign profits.

But that is a small part of the story of the gap between the nominal tax rate and the effective tax rate. Corporations use a wide variety of loopholes to avoid paying taxes on their profits. Tax gaming can be a very lucrative line of work for lawyers and accountants. Changing the tax code in a way that actually does eliminate opportunities for avoidance and evasion would both raise more revenue and reduce the amount of resources being wasted in legal fees and accounting.

 

A Simple Alternative – Taxing Stock Returns

Taxing stock returns is better than taxing corporate profits for the simple reason that it is completely transparent. Stock returns are the rise in the value of a company’s stock, plus whatever it paid out in dividends over the course of a year. It requires no complex calculations of depreciation or other issues, it can be calculated with a normal spreadsheet.

To take a simple example, if a company’s stock is worth $10 billion at the start of the year and $10.5 billion at the end of the year, then it would be taxed on this $500 million increase in the value of its shares. If it paid out $300 million in dividends, then it would also be taxed on this $300 million, for total stock returns of $800 million. If we apply a 25 percent corporate tax rate, then the company owes $200 million in taxes. All of the information needed for this calculation is fully public and could be calculated in seconds.

There is the small complication that most of our major companies are now multinationals, which means that they earn profits in more than one country. This does not need to be a major complication, we can simply allocate returns according to sales.

If 60 percent of their sales are in the United States, then they will be taxed based on 60 percent of their stock returns. This means that actually having large sales in Germany, Japan, and other major markets will lower their U.S. tax liability. Having a post office box in the Cayman Islands, or in other tax havens, will not do them any good.

In addition to being simple, having stock returns as the basis for the corporate income tax also means that companies can’t cheat the I.R.S. unless they also cheat their shareholders. The I.R.S. gets 25 percent of whatever their shareholders got: full stop.

There will still be a problem with private companies, with no publicly traded shares. These companies will still have to be taxed based on their profits. However, the vast majority of profits are earned by publicly traded companies, so this switch to having stock returns as the basis for the corporate income tax will deal with the vast majority of potential tax avoidance/evasion.

Also, by making the tax collection from publicly traded companies a simple spreadsheet calculation, this switch would free up I.R.S. resources to more carefully monitor privately traded companies. It would also be reasonable to structure the tax code so as to have a modest penalty on privately traded companies, to give them an incentive to go public.

Furthermore, the route of having stock returns as the basis for their corporate income tax should actually be a desirable switch for private companies that are not actively engaged in tax avoidance or evasion. Most companies have substantial fees associated with hiring tax lawyers and accountants. A simple tax structure, with no loopholes, will save them these fees. That should be an additional reason for private companies to go public, and also make the decision not to go public a huge warning flag for the I.R.S.

 

The Purpose of Taxing: Reducing Demand in the Economy

As our Modern Monetary Theory friends remind us, the purpose of taxes for a country that prints its own currency is to reduce demand in the economy, thereby preventing inflation. Corporate income taxes have this effect indirectly, by reducing the money going to shareholders. If shareholders have less income, they will consume less.[1] This frees up resources for spending in other areas, like President Biden’s investment and recovery package. (There is a small impact of taxes on investment, but we need not spend much time worrying about this.)

The switch from having corporate profits to stock returns as a basis for the corporate income tax will also reduce demand by reducing the need for accountants, lawyers, and others engaged in the tax avoidance/evasion industry. This secondary effect will likely free up tens of billions annually, that would be otherwise spent complying with, avoiding, and enforcing the tax code. These savings may be in the range of 5-10 percent of the money raised through the corporate income tax. Also, since there are big payoffs in the tax avoidance/evasion industry, this switch will eliminate one important source of inequality in the economy.[2]

Let’s Make Tax Reform Real

If the Biden administration wants to do a serious overhaul of the tax code, to both raise more money and make it fairer, it is difficult to imagine a better way to go than switching the basis for the corporate income tax from profits to stock returns. It will be a huge step towards simplicity and transparency. This is exactly what we should want in our tax code.

[1] There also is a wealth effect. Higher corporate taxes lead to lower stock prices, other things equal. Insofar as stockholders spend out of their wealth, a reduction in stock prices should mean they consume less.

[2] Michael Moore’s movie, Capitalism: A Love Story, featured a fascinating segment on “dead peasant insurance policies.” These are life insurance policies that large companies like Walmart take out on their front-line workers, like cashiers. Generally, the workers never know about the policies. The company, not the worker’s family collects when a worker dies. Moore pointed to these policies as an example of the perversity of American capitalism. But, apart from their morbid nature, the real story of dead peasant policies is that someone undoubtedly got very rich from this scheme for smoothing corporate profits and tax liability. There would be many fewer opportunities for great fortunes with a tax system based on stock returns.

(This post first appeared on my Patreon page.)

President Biden has indicated that he wants to raise much of the money to cover the cost of his infrastructure program by raising the corporate income tax. The amount of money raised through the corporate income tax plummeted following the Trump tax cut in 2017. In non-recession years it had been averaging close to 2.0 percent of GDP. It had plummeted to just 1.0 percent of GDP in 2018 and 1.1 percent of GDP in 20019.

If we could get the corporate income tax back to 2.0 percent of GDP, it would add over $200 billion a year to government revenue. Over the ten-year budget planning horizon, this would add more than the projected $2.3 trillion projected cost of President Biden’s infrastructure program. This would be real money.

There are two issues with the corporate income tax, the nominal tax rate and the portion of the targeted tax that is actually collected. Corporations never pay taxes at a rate that is close to the nominal rate. Prior to the Trump tax cut, the nominal tax rate was 35 percent. Actual tax collections were around 21 percent of corporate profits, on average.

Both fell further after the Trump tax cut in 2017. The tax cut lowered the nominal rate to 21 percent. Part of the rationale for this tax cut was that it was supposed to eliminate many of the loopholes that had previously created the large gap between the nominal tax rate and the actual rate so that we would actually be collecting close to the 21 percent nominal rate.

That didn’t happen, the effective tax rate on corporate profits averaged less than 13.0 percent in 2018 and 2019. We lowered the tax rate and left in the loopholes.

Part of this story is that a substantial share of corporate profits is actually earned abroad, for example on sales by subsidiaries in Germany, to German companies or individuals. These profits are generally subject to taxes by other countries and therefore we would not expect to see substantial U.S. tax revenue raised on these foreign profits.

But that is a small part of the story of the gap between the nominal tax rate and the effective tax rate. Corporations use a wide variety of loopholes to avoid paying taxes on their profits. Tax gaming can be a very lucrative line of work for lawyers and accountants. Changing the tax code in a way that actually does eliminate opportunities for avoidance and evasion would both raise more revenue and reduce the amount of resources being wasted in legal fees and accounting.

 

A Simple Alternative – Taxing Stock Returns

Taxing stock returns is better than taxing corporate profits for the simple reason that it is completely transparent. Stock returns are the rise in the value of a company’s stock, plus whatever it paid out in dividends over the course of a year. It requires no complex calculations of depreciation or other issues, it can be calculated with a normal spreadsheet.

To take a simple example, if a company’s stock is worth $10 billion at the start of the year and $10.5 billion at the end of the year, then it would be taxed on this $500 million increase in the value of its shares. If it paid out $300 million in dividends, then it would also be taxed on this $300 million, for total stock returns of $800 million. If we apply a 25 percent corporate tax rate, then the company owes $200 million in taxes. All of the information needed for this calculation is fully public and could be calculated in seconds.

There is the small complication that most of our major companies are now multinationals, which means that they earn profits in more than one country. This does not need to be a major complication, we can simply allocate returns according to sales.

If 60 percent of their sales are in the United States, then they will be taxed based on 60 percent of their stock returns. This means that actually having large sales in Germany, Japan, and other major markets will lower their U.S. tax liability. Having a post office box in the Cayman Islands, or in other tax havens, will not do them any good.

In addition to being simple, having stock returns as the basis for the corporate income tax also means that companies can’t cheat the I.R.S. unless they also cheat their shareholders. The I.R.S. gets 25 percent of whatever their shareholders got: full stop.

There will still be a problem with private companies, with no publicly traded shares. These companies will still have to be taxed based on their profits. However, the vast majority of profits are earned by publicly traded companies, so this switch to having stock returns as the basis for the corporate income tax will deal with the vast majority of potential tax avoidance/evasion.

Also, by making the tax collection from publicly traded companies a simple spreadsheet calculation, this switch would free up I.R.S. resources to more carefully monitor privately traded companies. It would also be reasonable to structure the tax code so as to have a modest penalty on privately traded companies, to give them an incentive to go public.

Furthermore, the route of having stock returns as the basis for their corporate income tax should actually be a desirable switch for private companies that are not actively engaged in tax avoidance or evasion. Most companies have substantial fees associated with hiring tax lawyers and accountants. A simple tax structure, with no loopholes, will save them these fees. That should be an additional reason for private companies to go public, and also make the decision not to go public a huge warning flag for the I.R.S.

 

The Purpose of Taxing: Reducing Demand in the Economy

As our Modern Monetary Theory friends remind us, the purpose of taxes for a country that prints its own currency is to reduce demand in the economy, thereby preventing inflation. Corporate income taxes have this effect indirectly, by reducing the money going to shareholders. If shareholders have less income, they will consume less.[1] This frees up resources for spending in other areas, like President Biden’s investment and recovery package. (There is a small impact of taxes on investment, but we need not spend much time worrying about this.)

The switch from having corporate profits to stock returns as a basis for the corporate income tax will also reduce demand by reducing the need for accountants, lawyers, and others engaged in the tax avoidance/evasion industry. This secondary effect will likely free up tens of billions annually, that would be otherwise spent complying with, avoiding, and enforcing the tax code. These savings may be in the range of 5-10 percent of the money raised through the corporate income tax. Also, since there are big payoffs in the tax avoidance/evasion industry, this switch will eliminate one important source of inequality in the economy.[2]

Let’s Make Tax Reform Real

If the Biden administration wants to do a serious overhaul of the tax code, to both raise more money and make it fairer, it is difficult to imagine a better way to go than switching the basis for the corporate income tax from profits to stock returns. It will be a huge step towards simplicity and transparency. This is exactly what we should want in our tax code.

[1] There also is a wealth effect. Higher corporate taxes lead to lower stock prices, other things equal. Insofar as stockholders spend out of their wealth, a reduction in stock prices should mean they consume less.

[2] Michael Moore’s movie, Capitalism: A Love Story, featured a fascinating segment on “dead peasant insurance policies.” These are life insurance policies that large companies like Walmart take out on their front-line workers, like cashiers. Generally, the workers never know about the policies. The company, not the worker’s family collects when a worker dies. Moore pointed to these policies as an example of the perversity of American capitalism. But, apart from their morbid nature, the real story of dead peasant policies is that someone undoubtedly got very rich from this scheme for smoothing corporate profits and tax liability. There would be many fewer opportunities for great fortunes with a tax system based on stock returns.

I have been following Washington debates on economic policy for several decades, so I’m used to silly claims. While it may not be in the top ten just yet, the idea that a shortage of semi-conductors now hitting the auto industry and other sectors is a supply-chain problem is certainly moving up.

A Washington Post piece on the issue began with a quote from Intel’s CEO, Pat Gelsinger, telling us that the shortage will be a problem that could last a couple of years. While this has been presented as a supply chain problem, it hardly fits the bill.

A supply chain problem is when a link in the supply chain suddenly breaks. Examples would be if a major producer of a product were idled by a fire or strike or if a country decided to block exports of an item for political reasons. If there were no easy alternative sources available, this could rightly be called a supply chain problem.

There is no disruption of any supply chain identified in this article. It simply seems to be the case that there is a worldwide shortage of semi-conductors.

That raises a completely different set of issues. How could such a shortage not have been anticipated by Intel and other major companies? Demand for semi-conductors doesn’t just appear out of thin air, they are needed in a wide range of products from computers and smartphones to cars and heavy machinery. These companies presumably have projections of demand for these products which should give them a reasonably good idea of future demand for semi-conductors.

The pandemic undoubtedly skewed buying patterns to some extent, but it is difficult to see how it could have led to a two-year shortage. For example, many people bought video game consoles and other devices in the pandemic that they would not have otherwise purchased. While this led to more demand for semi-conductors during the pandemic, now that these people have new video game consoles, presumably they are less likely to buy another one in the next two years. This means that it was largely an issue of timing, not an ongoing increase in demand.

If Mr. Gelsinger is, in fact, right about the shortage being a two-year problem, then the issue is not a supply chain one. The problem was the failure of major manufacturers to anticipate demand growth for some reason. And, there is no reason to believe that this failure would be affected by whether their chips were produced in South Korea, China, or Texas. Those interested in preventing this sort of problem should be asking why highly paid executives at major semi-conductor manufacturers don’t seem to know their industry. If the world is not producing enough semi-conductors, it doesn’t matter if the inadequate supply is coming from domestic plants.

I have been following Washington debates on economic policy for several decades, so I’m used to silly claims. While it may not be in the top ten just yet, the idea that a shortage of semi-conductors now hitting the auto industry and other sectors is a supply-chain problem is certainly moving up.

A Washington Post piece on the issue began with a quote from Intel’s CEO, Pat Gelsinger, telling us that the shortage will be a problem that could last a couple of years. While this has been presented as a supply chain problem, it hardly fits the bill.

A supply chain problem is when a link in the supply chain suddenly breaks. Examples would be if a major producer of a product were idled by a fire or strike or if a country decided to block exports of an item for political reasons. If there were no easy alternative sources available, this could rightly be called a supply chain problem.

There is no disruption of any supply chain identified in this article. It simply seems to be the case that there is a worldwide shortage of semi-conductors.

That raises a completely different set of issues. How could such a shortage not have been anticipated by Intel and other major companies? Demand for semi-conductors doesn’t just appear out of thin air, they are needed in a wide range of products from computers and smartphones to cars and heavy machinery. These companies presumably have projections of demand for these products which should give them a reasonably good idea of future demand for semi-conductors.

The pandemic undoubtedly skewed buying patterns to some extent, but it is difficult to see how it could have led to a two-year shortage. For example, many people bought video game consoles and other devices in the pandemic that they would not have otherwise purchased. While this led to more demand for semi-conductors during the pandemic, now that these people have new video game consoles, presumably they are less likely to buy another one in the next two years. This means that it was largely an issue of timing, not an ongoing increase in demand.

If Mr. Gelsinger is, in fact, right about the shortage being a two-year problem, then the issue is not a supply chain one. The problem was the failure of major manufacturers to anticipate demand growth for some reason. And, there is no reason to believe that this failure would be affected by whether their chips were produced in South Korea, China, or Texas. Those interested in preventing this sort of problem should be asking why highly paid executives at major semi-conductor manufacturers don’t seem to know their industry. If the world is not producing enough semi-conductors, it doesn’t matter if the inadequate supply is coming from domestic plants.

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