Elizabeth Warren Is Right on Currency Values (see Second Addendum)

June 10, 2019

10 Junio 2019

Elizabeth Warren’s proposal to raise the value of the Chinese yuan and other currencies against the dollar is not getting good reviews in the media from economists. As can be expected, some of the arguments are pretty strange. As the usually astute Noah Smith tells it in his Bloomberg piece, the problem with the trade deficit is: “U.S. consumers are consistently living beyond their means, which seems unsustainable.” The implication is that if the trade deficit were lower than we would be forced to cut back consumption. But the major problem the United States has faced over the last decade, according to many economists, is “secular stagnation,” which is an obscure way of saying, not enough demand. Contrary to what Smith tells us, U.S. consumers are not living beyond their means, rather we actually need them to spend more money to bring the economy to full employment. To be more precise, we need them to spend more in the domestic economy, to increase demand here as opposed to in our trading partners. (We can also bring the economy to full employment by having the government spend more money on things like health care or a green new deal.) Smith also disagrees with Warren’s mechanism for getting the dollar down, which involves a mixture of negotiations and threats of countervailing measures. The idea is that the biggest actor is China, who for some reason it is assumed would never agree to raise the value of its currency. CNN raises similar concerns. This view seems badly off the mark. First, it is assumed in both pieces that China is no longer acting to deliberately keep down the value of the yuan against the dollar, even though most economists now concede that it deliberately depressed the value of its currency to maintain large trade surpluses in the last decade. (They did not acknowledge China’s currency management at the time.) It is wrong to claim that China is not now acting to keep down the value of the yuan. While it is no longer buying large amounts of dollars and other currencies, it holds a stock of more than $3 trillion in reserves, which is well over $4 trillion if we add in its sovereign wealth fund. This huge stock of foreign assets has the effect of depressing the value of the yuan against the dollar in the same way that the Fed’s holding of more than $3 trillion in assets helps to keep down interest rates. While few economists question that the Fed’s holding of assets leads to lower long-term rates than would otherwise be the case, they seem to deny that China’s holding of a large stock of foreign assets has similar effects in currency markets.

The Corporate Debt Stories Show People Still Don’t Understand the Great Recession

By CEPRCEPR

June 07, 2019

07 Junio 2019

The Washington Post had another column telling us about the run-up in corporate debt and how this is going to be 2008 all over again. This is a popular one with the media. William Cohan has a regular feature in the New York Times telling us how a collapse of the debt bubble is imminent, giving us another financial crisis. While excessive corporate debt can pose problems, nothing we see now, or will plausibly see in the near future, looks anything like 2008. The fact that ostensibly knowledgeable people can say this shows that they not only missed the housing bubble as it was growing, ten years after it burst, they still don’t have a clue as to what happened. So let’s try our Econ 101 lesson once again. The reason the economy collapsed in 2008 was that the housing bubble that had been driving the economy collapsed. The financial crisis was lots of fun (always good to see billionaire types sweating), but it was very much secondary. The issue was that the housing bubble created a massive amount of demand in the economy, which disappeared when the bubble collapsed. Most economists probably didn’t recognize the impact of the bubble because you would need access to GDP data, as in the data that is readily available on the Commerce Department’s website any time anyone cares to look. Those who did think that GDP data are useful in understanding the economy would see that residential construction, which had averaged a bit more than 4.0 percent of GDP in the 1980s and 1990s, soared to a peak of 6.7 percent of GDP in 2005. This surge in construction spending was not associated with any developments in the fundamentals of the housing market. After all, the baby boomers, the largest demographic group, were seeing their children move away from home and downsizing. Rents were not sharing in the upswing in house prices, moving more or less in line with inflation. And, vacancy rates were hitting record highs. All of this should have suggested that the surge in residential construction was transitory and likely to end when house prices came back down to earth. In fact, construction was likely to over-correct since the construction boom meant there was a lot of overbuilding. Construction ultimately bottomed out at 2.4 percent of GDP in 2010 and 2011. (It is 3.8 percent in the most recent data.)

Curing Alzheimer's Without Drug Patents

By CEPRCEPR

June 05, 2019

05 Junio 2019

The Washington Post had an interesting article on how Pfizer learned that its arthritis drug, Enbrel, may be useful in slowing the onset of Alzheimer’s disease. According to the article, Pfizer chose not to pursue any further testing of the usefulness of Enbrel as an Alzheimer’s treatment, nor did it share its evidence with anyone else.

The most obvious reason why it did not pursue further testing itself is that the main patent on Enbrel was about to expire. This meant that if Pfizer invested the tens of millions, or possibly even hundreds of millions, needed for the clinical testing and FDA approval, it would likely be selling Enbrel as a generic competing with other companies who only have to cover their manufacturing cost. This means that Pfizer would never be able to recover the cost of the clinical tests and going through the FDA approval process.

The most obvious reason Pfizer didn’t share its evidence with the scientific community is that it is a drug company that exists to make profits. It is not in the habit of making research publicly available to advance public health.

It is interesting to think of what this story might look like in a system of publicly funded research, where a condition of getting the money is that all findings are made available as soon as practical. (This system is described here and in chapter five of Rigged [it’s free].)

In this case, the Pfizer equivalent that is finding evidence that the arthritis drug it developed would quickly post this on the web. Since its funding does not depend on patents, it may opt to pursue further research itself. However, if it is not well-situated to actually carry through the research on Alzheimer’s, other researchers could pick up the ball and do the work themselves.

In the event that it proved to be a useful treatment for Alzheimer’s the Pfizer equivalent would use this success as an argument for renewing and/or expanding its contract for research. While it is obviously better to actually test and prove the effectiveness of a new drug, finding an important discovery that laid the basis for further testing is a valuable contribution that should be rewarded. In this case, it doesn’t seem the patent system would provide such a reward.

The Washington Post had an interesting article on how Pfizer learned that its arthritis drug, Enbrel, may be useful in slowing the onset of Alzheimer’s disease. According to the article, Pfizer chose not to pursue any further testing of the usefulness of Enbrel as an Alzheimer’s treatment, nor did it share its evidence with anyone else.

The most obvious reason why it did not pursue further testing itself is that the main patent on Enbrel was about to expire. This meant that if Pfizer invested the tens of millions, or possibly even hundreds of millions, needed for the clinical testing and FDA approval, it would likely be selling Enbrel as a generic competing with other companies who only have to cover their manufacturing cost. This means that Pfizer would never be able to recover the cost of the clinical tests and going through the FDA approval process.

The most obvious reason Pfizer didn’t share its evidence with the scientific community is that it is a drug company that exists to make profits. It is not in the habit of making research publicly available to advance public health.

It is interesting to think of what this story might look like in a system of publicly funded research, where a condition of getting the money is that all findings are made available as soon as practical. (This system is described here and in chapter five of Rigged [it’s free].)

In this case, the Pfizer equivalent that is finding evidence that the arthritis drug it developed would quickly post this on the web. Since its funding does not depend on patents, it may opt to pursue further research itself. However, if it is not well-situated to actually carry through the research on Alzheimer’s, other researchers could pick up the ball and do the work themselves.

In the event that it proved to be a useful treatment for Alzheimer’s the Pfizer equivalent would use this success as an argument for renewing and/or expanding its contract for research. While it is obviously better to actually test and prove the effectiveness of a new drug, finding an important discovery that laid the basis for further testing is a valuable contribution that should be rewarded. In this case, it doesn’t seem the patent system would provide such a reward.

Trump Tariffs: Money to Reward Friends

By CEPRCEPR

June 04, 2019

04 Junio 2019

Paul Krugman used his column today to criticize Donald Trump’s tariffs for everything policy. While he provides a useful historical account of the abuse of tariffs in the 1920s, he left out one important reason why tariffs can be pernicious, especially in the hands of someone like Donald Trump.

Trump obviously views the presidency as a position to use for rewarding friends, punishing foes, and enriching his family. Tariffs give him a great opportunity to do this.

Not only can he put a tariff on an essential imported input for a company that criticizes him, but he can also give exemptions to tariffs (they always have exemptions) for his friends. The NYT had a good piece on the issuing of exemptions last year.

The potential for abuse of the discretion associated with tariff policy is a cause for concern in general. However, with a president and a Republican party that have corruption as a guiding principle, this discretion is a very big deal. We should absolutely assume that Trump will abuse his tariff authority. It would probably never even occur to him that it is wrong.

Paul Krugman used his column today to criticize Donald Trump’s tariffs for everything policy. While he provides a useful historical account of the abuse of tariffs in the 1920s, he left out one important reason why tariffs can be pernicious, especially in the hands of someone like Donald Trump.

Trump obviously views the presidency as a position to use for rewarding friends, punishing foes, and enriching his family. Tariffs give him a great opportunity to do this.

Not only can he put a tariff on an essential imported input for a company that criticizes him, but he can also give exemptions to tariffs (they always have exemptions) for his friends. The NYT had a good piece on the issuing of exemptions last year.

The potential for abuse of the discretion associated with tariff policy is a cause for concern in general. However, with a president and a Republican party that have corruption as a guiding principle, this discretion is a very big deal. We should absolutely assume that Trump will abuse his tariff authority. It would probably never even occur to him that it is wrong.

Jim Hoagland and the Washington Post Agree to Play Straight Man in the Globalization Debate

By CEPRCEPR

June 01, 2019

01 Junio 2019

Sometimes events in the world can lead one to believe in a higher power. Just after I had a Twitter exchange with Matt Yglesias on the backlash against globalization and other changes in society over the last four decades, Jim Hoagland was good enough to give me a beautiful example of the elite attitude that fostered the backlash.

As I said in my tweet in response to Matt:

“Yes, and that we cosmopolitan types aggressively pushed integration in a way that was designed to reduce the wages of the bulk of the population. And, then to deny that we did it and there is something wrong with the people who are upset about it.“

Hoagland’s piece is exactly the sort of mindless trashing of people unhappy with the current economic and social situation. As the headline puts it, “the tech economy is hard to explain. Running against the Other is much easier.”

The argument is straightforward, those dumb rubes can’t figure out that their standard of living was wrecked by technology and globalization, so they lash out at immigrants and other out groups.

I know there is a large industry that insists that all Trump supporters are hopeless racists, some of whom voted twice for a black man for president, but I am not really interested in the souls of Trump voters. I am more interested in having a truthful dialogue among people who pretend to be knowledgeable intellectual types.

There was nothing inevitable about the upward redistribution of the last four decades. It was not the result of technology, it was the result of our policy technology.

Let me put this in a way that even Jim Hoagland could understand. How rich would Bill Gates be if Microsoft didn’t hold any copyrights or patents on software? While I’m sure Bill Gates would still be doing fine, he’s a smart and ambitious guy, he would not have $100 billion. In fact, he probably wouldn’t even have $1 billion.

We have patents and copyrights to provide incentives for innovation and creative work. We can make them longer and stronger or shorter and weaker. We can also have alternative mechanisms (see Rigged, chapter 5 [It’s free]). If we wanted the gains from growth to be broadly shared, instead of flowing to the top, then we could make patents and copyrights shorter and weaker. The decision to make them longer and stronger was a decision to transfer money from the “ignorant” masses to elites who then denounce them as racist.

Anyhow, we aren’t likely to see a piece making this obvious point in the Post, but it does happen to be true.

Sometimes events in the world can lead one to believe in a higher power. Just after I had a Twitter exchange with Matt Yglesias on the backlash against globalization and other changes in society over the last four decades, Jim Hoagland was good enough to give me a beautiful example of the elite attitude that fostered the backlash.

As I said in my tweet in response to Matt:

“Yes, and that we cosmopolitan types aggressively pushed integration in a way that was designed to reduce the wages of the bulk of the population. And, then to deny that we did it and there is something wrong with the people who are upset about it.“

Hoagland’s piece is exactly the sort of mindless trashing of people unhappy with the current economic and social situation. As the headline puts it, “the tech economy is hard to explain. Running against the Other is much easier.”

The argument is straightforward, those dumb rubes can’t figure out that their standard of living was wrecked by technology and globalization, so they lash out at immigrants and other out groups.

I know there is a large industry that insists that all Trump supporters are hopeless racists, some of whom voted twice for a black man for president, but I am not really interested in the souls of Trump voters. I am more interested in having a truthful dialogue among people who pretend to be knowledgeable intellectual types.

There was nothing inevitable about the upward redistribution of the last four decades. It was not the result of technology, it was the result of our policy technology.

Let me put this in a way that even Jim Hoagland could understand. How rich would Bill Gates be if Microsoft didn’t hold any copyrights or patents on software? While I’m sure Bill Gates would still be doing fine, he’s a smart and ambitious guy, he would not have $100 billion. In fact, he probably wouldn’t even have $1 billion.

We have patents and copyrights to provide incentives for innovation and creative work. We can make them longer and stronger or shorter and weaker. We can also have alternative mechanisms (see Rigged, chapter 5 [It’s free]). If we wanted the gains from growth to be broadly shared, instead of flowing to the top, then we could make patents and copyrights shorter and weaker. The decision to make them longer and stronger was a decision to transfer money from the “ignorant” masses to elites who then denounce them as racist.

Anyhow, we aren’t likely to see a piece making this obvious point in the Post, but it does happen to be true.

The Wonderful World of Free Market Drugs

By CEPRCEPR

May 30, 2019

30 Mayo 2019

(This post first appeared on my Patreon page.) I write about the possibility of producing drugs without patent monopolies frequently for several reasons. First, drugs can be essential for people’s health or even life. It should not be a struggle for people to pay for them. Second, there is a huge amount of money at stake, way more than in almost any other realm of public policy. Third, it is such a great example where government intervention, in the form of patents and related monopolies, creates the problem. This is not a story where we need the government to correct an inequity created by the market, we need the government to stop intervening in a way that creates tremendous inequities and inefficiencies. I find that people (I mean people engaged in public policy work, not random people grabbed off the bus) have a hard time even understanding what the market for prescription drugs looks like in the absence of patent and related monopolies,[1] so I thought I would devote a blogpost to describing my view of such a world. The first and most basic point is that in nearly all cases drugs would be cheap. Drugs are very rarely expensive to manufacture. They are expensive for patients because drug companies have patent or related monopolies and they use these monopolies to charge very high prices to the people who need their drugs. If there were dozens of competing manufacturers producing the same drug, they would be no better positioned to get away with charging incredibly high prices than a supermarket could get away with charging incredibly high prices for food. (We need food to survive, too.) They would be welcome to try, but almost everyone would simply turn to a competitor, likely driving them out of business. We know that drugs are cheap in the absence of patent monopolies for two reasons. First, because generic prices in the United States are much less than brand prices. In addition, many of the high priced drugs sold with patent protection in the United States are sold as generics elsewhere in the world, in some cases for less than one percent of the price in the U.S. According to data from the Association for Accessible Medicines, the trade group for the generic industry, brand drugs accounted for 74 percent of spending even though they were only 11 percent of the prescriptions sold. By contrast, generic drugs accounted for just 26 percent of spending even though they were 89 percent of sales. This implies that the average generic prescription cost just 3.6 percent of the price of the average brand prescription, or $29.70 per prescription in 2017. This figure would mean that we could save 96.4 percent of the money spent on brand drugs if we immediately got rid of protections and allowed them to be sold as generics.

Robert Rubin, Who Made a Fortune on the Housing Bubble, and Wanted the Fed to Raise Interest Rates When the Unemployment Rate Was Over 6.0 Percent, Is Concerned About the Social Determinants of Health

By CEPRCEPR

May 28, 2019

28 Mayo 2019

Most people probably know of Robert Rubin as the person who thought deregulating finance and having a huge housing bubble was cool. They may also know that he hugely profited from the bubble personally as a top executive at Citigroup, a bank that was at the center of the bubble’s finance and would have gone bankrupt in the crash, had it not been for a massive government bailout.

They may also know Robert Rubin as the person who pushed for an over-valued dollar, which led to a huge trade deficit and decimated U.S. manufacturing. And, they may know Robert Rubin as the person who wanted the Fed to raise interest rates back in 2014 when the overall unemployment rate was over 6.0 percent and the unemployment rate for blacks was over 11.0 percent.

But, thanks to the New York Times, we can also learn that Robert Rubin wants us to take into account the federal government’s savings on health care costs associated with programs like food stamps. Rubin is of course right on this, but it would really be hard to beat him on the trivia scale here.

Most people probably know of Robert Rubin as the person who thought deregulating finance and having a huge housing bubble was cool. They may also know that he hugely profited from the bubble personally as a top executive at Citigroup, a bank that was at the center of the bubble’s finance and would have gone bankrupt in the crash, had it not been for a massive government bailout.

They may also know Robert Rubin as the person who pushed for an over-valued dollar, which led to a huge trade deficit and decimated U.S. manufacturing. And, they may know Robert Rubin as the person who wanted the Fed to raise interest rates back in 2014 when the overall unemployment rate was over 6.0 percent and the unemployment rate for blacks was over 11.0 percent.

But, thanks to the New York Times, we can also learn that Robert Rubin wants us to take into account the federal government’s savings on health care costs associated with programs like food stamps. Rubin is of course right on this, but it would really be hard to beat him on the trivia scale here.

Is Uber's Stock Scam Evidence of a Successful Business Model?

By CEPRCEPR

May 28, 2019

28 Mayo 2019

Back in the old days, economists used to think that having a profitable business was evidence of a successful business model. This success could be based on things like ripping off workers and/or customers or destroying the environment, which obviously are not good, but if a business was not profitable, it would be hard to call it a success, whether or not it followed the law and social norms.

However, for Roger Lowenstein and the Washington Post, profits no longer matter. Lowenstein proclaimed the taxi services Uber and Lyft successes based on the large amount of money they raised in their IPOs. This is in spite of the fact that both companies are huge money losers, with no immediate prospect of reversing course. Also, they both have difficulty following the law in areas like treating their drivers as employees and following labor law on issues like minimum wages and overtime. (They insist their drivers are independent contractors, but since both companies set their pay, this price setting among independent contractors would violate anti-trust law.)

The argument that a company has a successful business model because it can fetch a high stock price would mean all the crazy dotcoms of the 1990s stock boom had successful business models as did Theranos. It should not be too much to demand that a company at least show a capacity to earn a profit before being touted for its successful business model.

Lowenstein is correct that the taxi system was horribly regulated for the benefit of the taxi companies. However, it does not follow that we should want completely unregulated taxis from Uber and Lyft. People getting a ride should be able to know that their driver won’t assault them, that they are not driving drunk, that they will be covered by insurance if there is an accident, and that the car is safe. And the drivers should be protected by minimum wage and overtime regulations and other basic labor standards.

These are legitimate forms of regulation that both companies have fiercely resisted. When they can comply with regulations in these areas and make a profit, then we will know that they have a successful business model.

Back in the old days, economists used to think that having a profitable business was evidence of a successful business model. This success could be based on things like ripping off workers and/or customers or destroying the environment, which obviously are not good, but if a business was not profitable, it would be hard to call it a success, whether or not it followed the law and social norms.

However, for Roger Lowenstein and the Washington Post, profits no longer matter. Lowenstein proclaimed the taxi services Uber and Lyft successes based on the large amount of money they raised in their IPOs. This is in spite of the fact that both companies are huge money losers, with no immediate prospect of reversing course. Also, they both have difficulty following the law in areas like treating their drivers as employees and following labor law on issues like minimum wages and overtime. (They insist their drivers are independent contractors, but since both companies set their pay, this price setting among independent contractors would violate anti-trust law.)

The argument that a company has a successful business model because it can fetch a high stock price would mean all the crazy dotcoms of the 1990s stock boom had successful business models as did Theranos. It should not be too much to demand that a company at least show a capacity to earn a profit before being touted for its successful business model.

Lowenstein is correct that the taxi system was horribly regulated for the benefit of the taxi companies. However, it does not follow that we should want completely unregulated taxis from Uber and Lyft. People getting a ride should be able to know that their driver won’t assault them, that they are not driving drunk, that they will be covered by insurance if there is an accident, and that the car is safe. And the drivers should be protected by minimum wage and overtime regulations and other basic labor standards.

These are legitimate forms of regulation that both companies have fiercely resisted. When they can comply with regulations in these areas and make a profit, then we will know that they have a successful business model.

Robert Samuelson Warns China Might Pull Out Its Water Pistol and Sell U.S. Treasury Bonds

By CEPRCEPR

May 27, 2019

27 Mayo 2019

With the trade war between the U.S. and China heating up, Robert Samuelson warns us that China may just sell the trillions of dollars worth of U.S. assets it holds. While the idea is that this is a potential threat, it is not clear why.

Other things equal, China’s decision to sell large amounts of Treasury bonds would drive up interest rates in the United States. That would be bad news, but if the Fed did not want interest rates to rise, then it could simply buy the Treasury bonds that China is selling, leaving interest rates unchanged.

China’s decision to sell large amounts of U.S. Treasury bonds and other dollar-based assets would have the effect of lowering the value of the dollar against the yuan, ending its currency management, or “manipulation,” as Donald Trump calls it. This would make U.S. goods and services relatively more competitive internationally and Chinese goods and services less competitive.

That could be a peace gesture in the trade war, as it would likely mean a sharply lower U.S. trade deficit with China, but this is not how Samuelson is presenting it.

With the trade war between the U.S. and China heating up, Robert Samuelson warns us that China may just sell the trillions of dollars worth of U.S. assets it holds. While the idea is that this is a potential threat, it is not clear why.

Other things equal, China’s decision to sell large amounts of Treasury bonds would drive up interest rates in the United States. That would be bad news, but if the Fed did not want interest rates to rise, then it could simply buy the Treasury bonds that China is selling, leaving interest rates unchanged.

China’s decision to sell large amounts of U.S. Treasury bonds and other dollar-based assets would have the effect of lowering the value of the dollar against the yuan, ending its currency management, or “manipulation,” as Donald Trump calls it. This would make U.S. goods and services relatively more competitive internationally and Chinese goods and services less competitive.

That could be a peace gesture in the trade war, as it would likely mean a sharply lower U.S. trade deficit with China, but this is not how Samuelson is presenting it.

Trump’s Trade War with China and “Our” Intellectual Property

By CEPRCEPR

May 23, 2019

23 Mayo 2019

(This post first appeared on my Patreon page.) Some events give extraordinary insights into the biases of the economics profession. The trade war with China clearly fit the bill. The origins of the trade war can be traced to campaign promises Trump made to go after China over its large trade surplus with the United States, which he attributed to “currency manipulation.” The argument was that by intervening in currency markets (buying up U.S. dollars), China was propping up the value of the dollar against its own currency. This makes Chinese goods and services relatively cheaper to U.S. consumers and makes U.S. goods more expensive to Chinese purchasers. The net effect is to increase U.S. imports of Chinese goods and reduce U.S. exports to China, thereby leading to a large trade deficit. While most economists now acknowledge that China was intervening in currency markets in the last decade (they did not acknowledge the currency intervention at the time), they insist that this is no longer an issue. China is no longer a large net buyer of dollar denominated assets, so the argument goes, therefore it is not currently keeping down the value of its currency against the dollar. As I have argued elsewhere, this argument ignores the effect of China holding well in excess of $3 trillion worth of dollar denominated assets. Its decision to hold a massive stock of dollar assets depresses the value of the Chinese yuan against the dollar, thereby maintaining the competitive advantage from a lower valued currency. This is the same logic that applies with the Fed’s decision to hold trillions of dollars worth of assets that it acquired as part of its quantitative easing program. Even though the Fed is not currently buying assets, most economists argue that its holding of assets still works to keep down interest rates. Perhaps in the next decade they will acknowledge that the same relationship holds with China’s massive stock of dollars and the relative value of the dollar and the yuan, but for now they insist that currency intervention was only an issue in the past. This is important background, because currency values will directly affect our trade balance with China, and thereby impact the number of manufacturing jobs in the United States. While reducing the trade deficit will not get back most of the relatively high paying manufacturing jobs that were lost in the last decade, it would likely still be a plus for relatively less-educated workers who still rely on manufacturing as a source of higher paying jobs.