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.

We would probably think it is, if we relied on CNN and other such sources, but in good old reality land, that’s a hard story to tell. Anyhow, as some of us tried to explain, inflation is a worldwide phenomenon associated with reopening after a worldwide pandemic, which is not yet over.

We got some interesting news on inflation elsewhere today in the Bureau of Labor Statistics (BLS) release of data on import prices. It turns out that the price of imports has been rising even faster than domestic prices, with inflation of 10.4 percent over the last year.

A big part of this increase is higher energy prices, but the data do allow for an important comparison. BLS has a category for imports of manufactured goods from industrialized countries. This would be a wide range of items like cars, car parts, electronics, and other things we would import from Europe, Japan, Canada, and other wealthy countries. In other words, this is a cross-section of goods from countries we think of as similar to the United States.

We can compare this index to the category the BLS has in the Consumer Price Index (CPI), for goods excluding energy and agriculture. I also pulled used cars out of the CPI measure since presumably, we are not importing many used cars. In effect, I’m restricting the index to newly-produced goods. The chart below shows the picture.

 

Source: Bureau of Labor Statistics.

The CPI goods index showed a rise in price of 5.5 percent over the last year. The price of imported manufactured goods rose by 6.3 percent. This is not quite apples to apples since the dollar rose in price against the currencies of our trading partners by 3.5 percent over the last year.[1] The rise in the value of the dollar implies that these goods rose by 6.5 percent measured in the currencies of our trading partners. (Note that these prices do not include shipping costs, which would make the implied rise in import prices even larger.)

Anyhow, the implication is that if we look at the inflation in a roughly comparable set of goods, in similar countries, it was actually greater than the inflation we see in the United States. This is hard to fit with the “it’s Joe Biden’s fault” story, but this is what the data tell us.

Reopening from a pandemic creates bottlenecks. That’s the story elsewhere in the world, as well the United States.

[1] The index used is not entirely accurate for this purpose since it is weighted by all trade, not just manufactured goods imported from industrialized countries.

We would probably think it is, if we relied on CNN and other such sources, but in good old reality land, that’s a hard story to tell. Anyhow, as some of us tried to explain, inflation is a worldwide phenomenon associated with reopening after a worldwide pandemic, which is not yet over.

We got some interesting news on inflation elsewhere today in the Bureau of Labor Statistics (BLS) release of data on import prices. It turns out that the price of imports has been rising even faster than domestic prices, with inflation of 10.4 percent over the last year.

A big part of this increase is higher energy prices, but the data do allow for an important comparison. BLS has a category for imports of manufactured goods from industrialized countries. This would be a wide range of items like cars, car parts, electronics, and other things we would import from Europe, Japan, Canada, and other wealthy countries. In other words, this is a cross-section of goods from countries we think of as similar to the United States.

We can compare this index to the category the BLS has in the Consumer Price Index (CPI), for goods excluding energy and agriculture. I also pulled used cars out of the CPI measure since presumably, we are not importing many used cars. In effect, I’m restricting the index to newly-produced goods. The chart below shows the picture.

 

Source: Bureau of Labor Statistics.

The CPI goods index showed a rise in price of 5.5 percent over the last year. The price of imported manufactured goods rose by 6.3 percent. This is not quite apples to apples since the dollar rose in price against the currencies of our trading partners by 3.5 percent over the last year.[1] The rise in the value of the dollar implies that these goods rose by 6.5 percent measured in the currencies of our trading partners. (Note that these prices do not include shipping costs, which would make the implied rise in import prices even larger.)

Anyhow, the implication is that if we look at the inflation in a roughly comparable set of goods, in similar countries, it was actually greater than the inflation we see in the United States. This is hard to fit with the “it’s Joe Biden’s fault” story, but this is what the data tell us.

Reopening from a pandemic creates bottlenecks. That’s the story elsewhere in the world, as well the United States.

[1] The index used is not entirely accurate for this purpose since it is weighted by all trade, not just manufactured goods imported from industrialized countries.

No, I don’t expect calculations by statisticians in the Commerce Department to alleviate a real world problem, but there is an important point that many of us economist types could miss. We always work with seasonally adjusted data for obvious reasons. There are normal seasonal patterns to sales and hiring that we want to remove from our data.

If we didn’t make this adjustment, our data would show us plunging into recession every fall as workers in the tourism and construction industry lose their jobs. It would look like a boom every spring as these workers began to get rehired.

So all our data tries to remove these normal seasonal developments. The adjustments still can’t account for unusual weather, like a huge snowstorm in December or severe floods in the summer, but the adjustments help us to distinguish the underlying strength of the economy from what happens every year due to the changing seasons.

This can matter with respect to the supply chain backlog, because we are not moving seasonally adjusted cargo through our ports. We are moving containers of actual items. Insofar as our ports are constrained in their ability to move shipments, the constraint is not likely to change much over the various seasons.

It turns out the seasonal adjustments in retail sales are actually a big deal. I calculated implicit seasonal adjustments by comparing the ratio of unadjusted retail sales to the adjusted figures for the last pre-pandemic months. (I assume the actual adjustments used by the Commerce Department are sector-specific, so the final adjustment would depend on the mix of goods being sold.)

Source: Census Bureau and author’s calculations.

 

As can be seen, the adjustments for November, and especially December, are downward, meaning that we expect these months to have more sales than average due to to the holiday shopping season. The adjustments for January and February are sharply upward, since sales fall off after the holiday shopping season. The adjustments imply that we expect sales in January and February to be roughly 80 percent of sales in December. This means that we should be trying to get far fewer goods through our ports right now than back in November and December. (We should already have been seeing this effect in December, since it takes some time to get goods from the ports to store shelves.)

Anyhow, this means that even if there is no reduction in demand as shown in our seasonally adjusted data, there should be some reduction in pressure on our supply chains. We’ll see how much of the backlog this will clear up.

 

No, I don’t expect calculations by statisticians in the Commerce Department to alleviate a real world problem, but there is an important point that many of us economist types could miss. We always work with seasonally adjusted data for obvious reasons. There are normal seasonal patterns to sales and hiring that we want to remove from our data.

If we didn’t make this adjustment, our data would show us plunging into recession every fall as workers in the tourism and construction industry lose their jobs. It would look like a boom every spring as these workers began to get rehired.

So all our data tries to remove these normal seasonal developments. The adjustments still can’t account for unusual weather, like a huge snowstorm in December or severe floods in the summer, but the adjustments help us to distinguish the underlying strength of the economy from what happens every year due to the changing seasons.

This can matter with respect to the supply chain backlog, because we are not moving seasonally adjusted cargo through our ports. We are moving containers of actual items. Insofar as our ports are constrained in their ability to move shipments, the constraint is not likely to change much over the various seasons.

It turns out the seasonal adjustments in retail sales are actually a big deal. I calculated implicit seasonal adjustments by comparing the ratio of unadjusted retail sales to the adjusted figures for the last pre-pandemic months. (I assume the actual adjustments used by the Commerce Department are sector-specific, so the final adjustment would depend on the mix of goods being sold.)

Source: Census Bureau and author’s calculations.

 

As can be seen, the adjustments for November, and especially December, are downward, meaning that we expect these months to have more sales than average due to to the holiday shopping season. The adjustments for January and February are sharply upward, since sales fall off after the holiday shopping season. The adjustments imply that we expect sales in January and February to be roughly 80 percent of sales in December. This means that we should be trying to get far fewer goods through our ports right now than back in November and December. (We should already have been seeing this effect in December, since it takes some time to get goods from the ports to store shelves.)

Anyhow, this means that even if there is no reduction in demand as shown in our seasonally adjusted data, there should be some reduction in pressure on our supply chains. We’ll see how much of the backlog this will clear up.

 

The continuous drumbeat of inflation is louder than ever after the release of December’s data for the Consumer Price Index. This means it’s worth bringing a bit of sanity to the discussion.

First, as fans of reality like to point out, the jump in inflation over the last year is largely a worldwide phenomenon, not something that can be attributed to bad policies in the United States. Our year-over-year (December 2020 to December 2021) inflation figure was 7.0 percent, which is definitely high. But the figure for the U.K. was 4.6 percent, for Canada 4.7 percent, for Germany 5.2 percent, and for Spain 5.5 percent. (These are all inflation numbers from November 2020 to November 2021, since December data are not yet available.)  

The jumps in inflation in these countries cannot be blamed on the American Recovery Act (ARA) that Biden pushed through Congress back in February or Federal Reserve Board policy. Obviously, the US inflation rate is higher than in these other countries, but the point is that we would have seen a substantial jump in inflation even if Biden has not moved aggressively to restart the economy.

As a result of the ARA, we are the only country to have a level of output above the pre-pandemic level. The unemployment rate is down to a level rarely seen in the last half-century. And, workers at the lower tiers in the labor market have unprecedented freedom to leave jobs they don’t like and to look for better opportunities.

But the inflation data reported in December is definitely a cause for concern. There are a few points worth making here. First, the 0.5 percent inflation rate reported for the month of December itself is somewhat lower than the 0.9 percent rate for October and the 0.8 percent rate reported for November. The monthly data are always erratic, but still, this is going in the right direction.

Also, much of the inflation is not any mystery. We continue to see the supply chain crisis, aggravated by the shortage of semi-conductors, which has impeded car production. New car prices rose 1.0 percent in December and are up 11.8 percent over the last year. Used car prices rose 3.5 percent and have risen an incredible 37.3 percent over the last year. Together, these components accounted for almost 1.5 percentage points of the inflation we have seen over the last year.

The major auto manufacturers are getting around the chip shortage and ramping up production. Since the cost of producing cars has not hugely risen, we can expect most of the rise in new and used car prices to be reversed in the not distant future.

There is a similar story in the other components where supply chain issues have pushed up prices. Apparel prices, which have been trending downward for decades, rose 5.8 percent over the last year. The index for household supplies and furnishings, which includes everything from linen to major appliances, rose 7.4 percent over the last year.

This index has also been flat or moving downward in the decade prior to the pandemic. For this reason, it is likely that most of these price increases will also be reversed.

The big question that no one has a good answer to is, when will the supply chain problems be resolved? While I don’t have a good answer to this, the seasonal timing of purchases may provide some relief. The holiday season is peak demand for a wide variety of goods. The normal falloff in January and February sales is close to 20 percent. Our seasonal adjustments (correctly) hide this falloff, but the smaller flow of goods in these months should allow for shippers to catch up to some extent.

The spread of the omicron variant, which is preventing many people from working (in addition to filling hospitals), is a big factor going in the wrong direction. But there is some evidence that it is peaking in the Eastern part of the country, and we may be through this wave before too long.

One promising sign was a sharp drop in the inflation rate shown in the Producer Price Index Final Demand Index. (This is the last stage for goods and services before they reach retailers.) The overall index rose just 0.2 percent in December, while the goods index actually fell by 0.4 percent, driven by drops in food and energy prices.

The monthly data are highly erratic, so it would be foolish to make too much of the December report, but it is a promising sign. More importantly, there are good reasons to believe that much of the inflation that we have seen in the last year will be reversed in the months ahead, even if there is no easy way to predict the timing.

For what it’s worth, the financial markets seem to agree with this assessment. The interest rate on 10-year Treasury bonds is just over 1.7 percent. This is not consistent with an expectation that inflation will remain near 7.0 percent. The breakeven inflation rate between normal Treasury bonds and inflation-indexed bonds is less than 2.5 percent. Financial markets can be wrong (see stock and housing bubbles), but at the moment they don’t seem concerned about runaway inflation.

It would be incredibly irresponsible for the Fed to slam on the brakes, and throw millions of people out of work, to head off inflation associated with a clogged supply chain. We can unclog the supply chain by getting people to stop buying things, in the same way that we can cure cancer by draining a patient of blood. Neither is an especially effective way to accomplish the goal.

The continuous drumbeat of inflation is louder than ever after the release of December’s data for the Consumer Price Index. This means it’s worth bringing a bit of sanity to the discussion.

First, as fans of reality like to point out, the jump in inflation over the last year is largely a worldwide phenomenon, not something that can be attributed to bad policies in the United States. Our year-over-year (December 2020 to December 2021) inflation figure was 7.0 percent, which is definitely high. But the figure for the U.K. was 4.6 percent, for Canada 4.7 percent, for Germany 5.2 percent, and for Spain 5.5 percent. (These are all inflation numbers from November 2020 to November 2021, since December data are not yet available.)  

The jumps in inflation in these countries cannot be blamed on the American Recovery Act (ARA) that Biden pushed through Congress back in February or Federal Reserve Board policy. Obviously, the US inflation rate is higher than in these other countries, but the point is that we would have seen a substantial jump in inflation even if Biden has not moved aggressively to restart the economy.

As a result of the ARA, we are the only country to have a level of output above the pre-pandemic level. The unemployment rate is down to a level rarely seen in the last half-century. And, workers at the lower tiers in the labor market have unprecedented freedom to leave jobs they don’t like and to look for better opportunities.

But the inflation data reported in December is definitely a cause for concern. There are a few points worth making here. First, the 0.5 percent inflation rate reported for the month of December itself is somewhat lower than the 0.9 percent rate for October and the 0.8 percent rate reported for November. The monthly data are always erratic, but still, this is going in the right direction.

Also, much of the inflation is not any mystery. We continue to see the supply chain crisis, aggravated by the shortage of semi-conductors, which has impeded car production. New car prices rose 1.0 percent in December and are up 11.8 percent over the last year. Used car prices rose 3.5 percent and have risen an incredible 37.3 percent over the last year. Together, these components accounted for almost 1.5 percentage points of the inflation we have seen over the last year.

The major auto manufacturers are getting around the chip shortage and ramping up production. Since the cost of producing cars has not hugely risen, we can expect most of the rise in new and used car prices to be reversed in the not distant future.

There is a similar story in the other components where supply chain issues have pushed up prices. Apparel prices, which have been trending downward for decades, rose 5.8 percent over the last year. The index for household supplies and furnishings, which includes everything from linen to major appliances, rose 7.4 percent over the last year.

This index has also been flat or moving downward in the decade prior to the pandemic. For this reason, it is likely that most of these price increases will also be reversed.

The big question that no one has a good answer to is, when will the supply chain problems be resolved? While I don’t have a good answer to this, the seasonal timing of purchases may provide some relief. The holiday season is peak demand for a wide variety of goods. The normal falloff in January and February sales is close to 20 percent. Our seasonal adjustments (correctly) hide this falloff, but the smaller flow of goods in these months should allow for shippers to catch up to some extent.

The spread of the omicron variant, which is preventing many people from working (in addition to filling hospitals), is a big factor going in the wrong direction. But there is some evidence that it is peaking in the Eastern part of the country, and we may be through this wave before too long.

One promising sign was a sharp drop in the inflation rate shown in the Producer Price Index Final Demand Index. (This is the last stage for goods and services before they reach retailers.) The overall index rose just 0.2 percent in December, while the goods index actually fell by 0.4 percent, driven by drops in food and energy prices.

The monthly data are highly erratic, so it would be foolish to make too much of the December report, but it is a promising sign. More importantly, there are good reasons to believe that much of the inflation that we have seen in the last year will be reversed in the months ahead, even if there is no easy way to predict the timing.

For what it’s worth, the financial markets seem to agree with this assessment. The interest rate on 10-year Treasury bonds is just over 1.7 percent. This is not consistent with an expectation that inflation will remain near 7.0 percent. The breakeven inflation rate between normal Treasury bonds and inflation-indexed bonds is less than 2.5 percent. Financial markets can be wrong (see stock and housing bubbles), but at the moment they don’t seem concerned about runaway inflation.

It would be incredibly irresponsible for the Fed to slam on the brakes, and throw millions of people out of work, to head off inflation associated with a clogged supply chain. We can unclog the supply chain by getting people to stop buying things, in the same way that we can cure cancer by draining a patient of blood. Neither is an especially effective way to accomplish the goal.

The national debate on free trade is one where honesty has no place. The purpose of our trade agreements, which were not free trade, was to reduce the pay of manufacturing workers, and non-college educated workers more generally, to the benefit of more highly educated workers and corporations. This was the predicted (by standard economics) and actual result. 

We made our manufacturing workers compete with low-paid workers in China and elsewhere in the developing world. This led to a massive loss of manufacturing jobs as the trade deficit exploded. The hit to workers in manufacturing was so large that the historic wage premium in the industry has largely disappeared.

While the massive upward redistribution of income from our trade deals was sold on the principle of “free trade,” it has nothing to do with actual free trade. Our trade deals did almost nothing to make it easier for foreign-trained professionals, like doctors and dentists, to work in the United States. As a result, our doctors and dentists earn roughly twice as much as their counterparts in other wealthy countries.

For some reason (please guess) this fact literally never enters in discussions of free trade. It seems that the advocates of free trade can’t get access to data on doctors’ pay. Just for beginners, if our doctors got paid the same amount as their counterparts in Germany or Canada, it would save us around $100 billion a year (about $700 per household). While that might seem like big money, our “free traders” can’t be bothered with it. They only want to save money by lowering the wages of autoworkers.

The other item that never enters into discussions of free trade is patent and copyright monopolies. These forms of protections raise the price of items like prescription drugs, medical equipment, and vaccines by many thousand percent above their free market price. In other words, they are equivalent to tariffs of many thousand percent. While “free trade” economists go nuts over tariffs of 10 or 20 percent on shoes and steel, they somehow can’t be bothered to pay attention to government-granted patent monopolies that raise the price of prescription drugs by 2000 percent. 

And, guess what, these monopolies redistribute an enormous amount of money from the rest of us to folks like the Moderna billionaires.  This really is not subtle. The overwhelming majority of “free trade” economists don’t give a flying f**k about free trade. They are interested in policies that redistribute income upward.

Let’s stop with the stupid games. We are not having arguments about free trade. We are having arguments over policies that are designed to redistribute even more income from the bulk of the population to those at the top.

 

The national debate on free trade is one where honesty has no place. The purpose of our trade agreements, which were not free trade, was to reduce the pay of manufacturing workers, and non-college educated workers more generally, to the benefit of more highly educated workers and corporations. This was the predicted (by standard economics) and actual result. 

We made our manufacturing workers compete with low-paid workers in China and elsewhere in the developing world. This led to a massive loss of manufacturing jobs as the trade deficit exploded. The hit to workers in manufacturing was so large that the historic wage premium in the industry has largely disappeared.

While the massive upward redistribution of income from our trade deals was sold on the principle of “free trade,” it has nothing to do with actual free trade. Our trade deals did almost nothing to make it easier for foreign-trained professionals, like doctors and dentists, to work in the United States. As a result, our doctors and dentists earn roughly twice as much as their counterparts in other wealthy countries.

For some reason (please guess) this fact literally never enters in discussions of free trade. It seems that the advocates of free trade can’t get access to data on doctors’ pay. Just for beginners, if our doctors got paid the same amount as their counterparts in Germany or Canada, it would save us around $100 billion a year (about $700 per household). While that might seem like big money, our “free traders” can’t be bothered with it. They only want to save money by lowering the wages of autoworkers.

The other item that never enters into discussions of free trade is patent and copyright monopolies. These forms of protections raise the price of items like prescription drugs, medical equipment, and vaccines by many thousand percent above their free market price. In other words, they are equivalent to tariffs of many thousand percent. While “free trade” economists go nuts over tariffs of 10 or 20 percent on shoes and steel, they somehow can’t be bothered to pay attention to government-granted patent monopolies that raise the price of prescription drugs by 2000 percent. 

And, guess what, these monopolies redistribute an enormous amount of money from the rest of us to folks like the Moderna billionaires.  This really is not subtle. The overwhelming majority of “free trade” economists don’t give a flying f**k about free trade. They are interested in policies that redistribute income upward.

Let’s stop with the stupid games. We are not having arguments about free trade. We are having arguments over policies that are designed to redistribute even more income from the bulk of the population to those at the top.

 

The December job report again showed an extraordinary divergence between the establishment survey and the household survey. The establishment survey showed the economy creating just 199,000 jobs, while the household survey showed a growth in employment of 651,000, pushing the unemployment rate down by 0.3 percentage points to 3.9 percent, a level achieved at few points in the last fifty years.

It’s not unusual for there to be substantial differences between the surveys, but these are extraordinary. In the last months, the household survey has shown an increase in employment of 1,741,000. By comparison, the increase in jobs in the establishment survey has been just 448,000.

While these divergences are striking, they largely disappear if we look over a longer period. Over the last year, the household survey shows employment is up by 6,092,000. The establishment survey shows a gain of 6,448,000 jobs.

Since the start of the pandemic, the household survey shows a drop in employment of 2,891,000. The establishment survey shows a loss of 3,572,000 jobs. Most of this gap can be explained by an increase in self-employment of more than 500,000, which would not be picked up in the establishment data.

Long and short, there is nothing obviously wrong in the household data, so we should feel free to celebrate the extraordinarily low unemployment rate we are now seeing. Also, as I pointed out last month, the establishment data has consistently been revised up in recent months. In yesterday’s report, the job numbers for the prior two months were revised up by a total of 141,000, so it is likely that we will see an upward revision to the December data in the next two reports.

The other point is that it is clear that the constraint on employment is largely on the supply side at this point. Many employers, particularly those in low-paying sectors, are having trouble attracting workers. We see evidence of this in both the increase in the length of the average workweek and also rapidly rising wages. Also, we know from the Job Openings and Labor Turnover Survey that job openings are at record highs. So this is clearly a very good labor market from the standpoint of workers.

Okay, but enough with the data. Let’s get to the Biden versus Trump comparison. I know that this comparison is silly since so many factors affect job growth that are beyond the president’s control. But, everyone knows that if the situation were reversed, Donald Trump and his crew would be all over Fox and everywhere else touting the comparison. I’m doing this for them. As it now stands, President Biden has created 6,215,000 jobs in his first eleven months in the White House, compared to a loss of 2,876,000 jobs in the four years of Donald Trump’s presidency.

 

 

 

 

 

Source: Bureau of Labor Statistics.

The December job report again showed an extraordinary divergence between the establishment survey and the household survey. The establishment survey showed the economy creating just 199,000 jobs, while the household survey showed a growth in employment of 651,000, pushing the unemployment rate down by 0.3 percentage points to 3.9 percent, a level achieved at few points in the last fifty years.

It’s not unusual for there to be substantial differences between the surveys, but these are extraordinary. In the last months, the household survey has shown an increase in employment of 1,741,000. By comparison, the increase in jobs in the establishment survey has been just 448,000.

While these divergences are striking, they largely disappear if we look over a longer period. Over the last year, the household survey shows employment is up by 6,092,000. The establishment survey shows a gain of 6,448,000 jobs.

Since the start of the pandemic, the household survey shows a drop in employment of 2,891,000. The establishment survey shows a loss of 3,572,000 jobs. Most of this gap can be explained by an increase in self-employment of more than 500,000, which would not be picked up in the establishment data.

Long and short, there is nothing obviously wrong in the household data, so we should feel free to celebrate the extraordinarily low unemployment rate we are now seeing. Also, as I pointed out last month, the establishment data has consistently been revised up in recent months. In yesterday’s report, the job numbers for the prior two months were revised up by a total of 141,000, so it is likely that we will see an upward revision to the December data in the next two reports.

The other point is that it is clear that the constraint on employment is largely on the supply side at this point. Many employers, particularly those in low-paying sectors, are having trouble attracting workers. We see evidence of this in both the increase in the length of the average workweek and also rapidly rising wages. Also, we know from the Job Openings and Labor Turnover Survey that job openings are at record highs. So this is clearly a very good labor market from the standpoint of workers.

Okay, but enough with the data. Let’s get to the Biden versus Trump comparison. I know that this comparison is silly since so many factors affect job growth that are beyond the president’s control. But, everyone knows that if the situation were reversed, Donald Trump and his crew would be all over Fox and everywhere else touting the comparison. I’m doing this for them. As it now stands, President Biden has created 6,215,000 jobs in his first eleven months in the White House, compared to a loss of 2,876,000 jobs in the four years of Donald Trump’s presidency.

 

 

 

 

 

Source: Bureau of Labor Statistics.

Okay, I’m a bit slow for a New Year’s piece, but what the hell, we can always use a bit of optimism. Anyhow, I thought I would spout a few things about what the world might look like if we didn’t rig the market to give all the money to rich people. Not much new here for regular readers, I just thought I would spell it on paper, since it is a nice backdrop for many of our battles.

Before I go through my favorite unriggings, let me start by making a general point, which some people may miss. I focus much of my writing on ways that we rig the market to give money to the Bill Gates and Moderna billionaires of the world.

The idea of restructuring the market, so that these people do not get so rich, is not just a question of punishing the wealthy. When we give these people more money, in excess of what they contribute to the economy (we have to pay people something to develop mRNA vaccines, just not as much as we did), then we are generating more demand in the economy. This has the same effect on the economy as an increase in government spending.

To take my favorite example, if because of patent and related monopolies, we pay drug companies $400 billion a year more than is needed to have the drugs manufactured and distributed, this has the same effect on the economy as if we wrote $400 billion in checks ($3,300 per household) and sent them around to everyone. This policy (the writing of large checks) would run the risk of creating inflation if the economy is near its capacity.

The same is true of sending all this money to drug companies. While many people in the pharmaceutical industry earn normal salaries, higher-up employees can earn millions of dollars, or even tens of millions of dollars, a year. And those lucky enough to be at the top of the big winners, like Moderna, can score billions.

When these people spend this money on their second, third, or fourth homes, on their yachts, or their space trips, it pulls resources away from other areas. We, therefore, have fewer people to build homes for ordinary families (and less land), and fewer people to provide medical care or child care because the pharmaceutical industry folks have hired them.   

Restructuring the market so that less income flows upward has the same impact as taxing the income away. Of course, it has the huge benefit over taxation in that it is done through the market. This is enormously more efficient than handing rich people money and then trying to take it away with taxes. It also is likely to be far more feasible politically.

With that backdrop, it’s time for a bit of fun, thinking about what the world might look like if we unrigged the economy.

 

Free Market Drugs and Vaccines

There is probably no sector where the impact of government-granted patents and copyrights is more pernicious than in healthcare. Drugs are almost invariably cheap to produce and distribute. The reason that some can cost thousands, or even tens of thousands of dollars for a year’s treatment is because the government grants drug companies patent monopolies. When they are producing a drug that is essential for people’s health, or possibly even their lives, the patent monopoly allows companies to charge prices completely out of line with costs.[1]

This is a case where every good progressive should be a huge proponent of the free market.  If we didn’t have any patent or related protections for vaccines, we could have had manufacturers all around the world producing and stockpiling vaccines even before they were approved. (It costs around $2 to manufacture a vaccine dose, if we had stockpiled 400 million vaccines that proved ineffective and then had to throw them out, so what? The wasted $800 million is a bit more than 0.01 percent of what the U.S. government has spent on pandemic-related measures.) This would likely have meant that we could have had most of the world vaccinated by the spring, likely preventing the omicron variant and possibly even stopping the delta variant.

Also, to cut off a standard line from our friends in the pharmaceutical industry, it’s true that much of the technology of the industry is protected by industrial secrets rather than government-granted patent monopolies. This one is easily dealt with; we just make their non-disclosure agreements unenforceable. That would allow the top engineers at Pfizer, Moderna, and elsewhere to freely share their expertise with everyone in the world.

We do have to pay for research, but the patent monopoly system is a very inefficient mechanism. In addition to making drugs and vaccines very expensive, it also gives companies an incentive to carry on their research in secret, rather than sharing important findings with potential competitors.

Science advances most rapidly when it is open. If we pay for the research upfront as we did with Operation Warp Speed, we can make openness a condition of the research, with all results posted on the web as quickly as practical. This would allow researchers everywhere to build on each other’s successes and learn from their failures, preventing much needless duplication. Also, all patentable results would be placed in the public domain so that generic manufacturers anywhere in the world could produce them.  (In chapter 5 of Rigged [it’s free], I describe a mechanism involving long-term contracts that the government could use to dish out the money.) 

We would need some system of international sharing of research costs, which would have to be negotiated. But, this sort of open research system offers enormous potential gains for the whole world. And, it’s worth noting that our current system, requiring patent enforcement internationally, has hardly been problem-free in both negotiation and implementation. In a positive turn of events, the European Union is actively considering expanding public investment in biomedical research, including an open research option. 

Open research would also eliminate the incentives for misrepresenting research findings or outright fraud, like the Elizabeth Holmes-Theranos case. If research is fully open for the community of researchers to evaluate, it would be almost impossible for someone to perpetuate a Theranos-type fraud. Also, there would be very little incentive, since no one would stand to make millions or billions by pushing false claims.

In this context, it is worth noting that, while Theranos is an extreme case, the problem of companies hyping their drugs to maximize the profits from their patent monopolies, is pervasive. This is a huge part of the story of the opioid crisis. More recently the question of biased research has come up with reference to the high-priced Alzheimer’s drug Aduhelm. Without patent monopolies, not only would we get cheap drugs, but we would get honest assessments of their benefits and risks.

The idea that for some reason we can’t have successful innovation without patent monopolies is frankly bizarre. The pathbreaking research in developing mRNA technology was done almost entirely on the government’s dime, as was the work by Moderna to develop a Covid-specific vaccine. We also have the example of a Covid vaccine developed on a shoe-string by Texas Children’s Hospital and Baylor University. We need to pay researchers for their work, but the idea that we can’t have successful innovation without the lure of earning hundreds of millions or even billions from a patent monopoly is absurd on its face.

Imagine a world where most drugs, including the latest breakthrough drugs, were selling for $10 or $20 a prescription. That would be the case without patent monopolies or related protections. The same would be true of medical equipment. The latest blood tests and scans would also almost all be cheap.

In this world, doctors could without hesitation prescribe the course of treatment that they considered to be best for their patient. We would not have moral dilemmas, like whether an otherwise healthy 80-year-old should be prescribed a cancer drug that costs $150,000 a year. Since the drug would likely only cost a few hundred dollars, or at most a few thousand, this would be a no-brainer. Of course you would prescribe the drug that might save their life.   

The savings would be enormous. By my calculations, we would save around $400 billion a year ($3,000 per household) on prescription drugs if they all were sold in a free market without patent monopolies. We would need roughly $100 billion in additional spending to replace the research now supported by patent monopolies, but that would still leave us with savings of around $300 billion a year. That is more than one and half times the cost of the latest version of Build Back Better. If we are also covering the cost of developing medical equipment and tests, that would likely save us an additional $100 billion a year or so. In short, this is real money.

With these sorts of savings, we would be much of the way towards being able to pay for a universal Medicare system, like the one in Canada. Cutting out the insurance industry as a middleman would save us more than $300 billion a year. Also, getting doctors’ pay more in line with their pay in other wealthy countries could net us another $100 billion annually.[2]

Downsizing Patents and Copyrights More Generally

In addition to raising the price of everything from computers and software to video games and movies, patent and copyrights create a morass of legal issues that both raises costs for everyone and impedes the development of technology. It seems reasonable to minimize the role of these government-granted monopolies everywhere, as I describe in chapter 5 of Rigged. This means more public funding of research, with the cost of access for companies being that they have to accept much shorter patents (e.g. four to five years rather than twenty), with their patents being added to the public pool for the rest of the duration of the patent.

One major exception is innovations related to slowing climate change. Here it makes sense to have the same approach as with biomedical research, where we attempt to pool technology worldwide and have it available at no cost to whoever wants it. If China invests a huge amount to further increase its lead in clean energy and electric cars, that is not a threat to the United States, it is doing us and the world a favor.

The same story holds with every other country in the world. We want them to use the technology to lower their emissions. We shouldn’t be trying to keep it away from them with patent monopolies or related protections. This is just simple economics. If solar panels or batteries cost 20 to 30 percent less, because there is no charge for using patents, then businesses, governments, and households will be quicker to switch to clean energy. 

The other area where it would be desirable to largely replace the patent/copyright system is with the funding of journalism and creative work more generally. The amount of money going to support newspapers under the current system has plummeted due to both the Internet and the growth of Facebook and Google. The same is true for recorded music, where current spending is a small fraction of what we saw two decades ago.

I have argued for a system of individual tax credits, modeled on the charitable contribution tax deduction, to support creative work. Under this system, every adult would get a modest sum (e.g. $150 a year) to support the creative worker(s) or creative organization (newspaper, blues music promoter etc.) of their choice. Any work produced through this system would be in the public domain and therefore not subject to copyright protection. A neat aspect of this proposal, in my view, is that enterprising politicians could experiment with it at the state and local levels.

Anyhow, if fully implemented, it could produce a vast amount of creative work that would be available at no cost to anyone with Internet access. It could also revitalize news organizations at the state and local level, which have been hugely downsized in the last quarter-century, or put out of business altogether.[3]

Applying Market Forces to CEO Pay: Getting Corporate Boards that Do Their Job

There has been considerable research in the last two decades showing that CEO pay bears little relationship to their performance in terms of producing returns for shareholders. A recent study surveyed corporate directors and found that the vast majority did not even see it as their job to contain CEO pay. Instead, they saw their role as supporting top management.

In that context, it’s not surprising that even mediocre CEOs can get paychecks in the tens of millions of dollars. After all, if you’re a director sitting on a huge pot of money in the form of the company’s annual revenue, why wouldn’t you dish out tens of millions to your friend, the CEO? This attitude might explain how boards can give out lavish pay packages even when it’s against the explicit wishes of shareholders.

It is important to recognize that the issue with bloated CEO pay is not just one person getting $20 or $30 million (and sometimes considerably more), it is a whole pay structure that follows from the outsized pay for the CEO. If the CEO is earning $20 million, then it’s likely the chief financial officer and other top-tier executives are earning in the range of $8 to $12 million. The third-tier executives can easily be making $2 or $3 million.

This sort of pay structure also has an impact outside of the corporate sector. It is common for presidents of large foundations and charities or major universities to get paid well over $1 million a year. And, the next echelon at these institutions often get paid in the high six figures.  

If we go back to the sixties and seventies, the CEO of a major company would typically get paid twenty or thirty times as much as an ordinary worker. That would translate into $2 million to $3 million a year today. If CEOs were currently getting pay in this neighborhood, we would see correspondingly lower pay for other top management in the corporate sector and elsewhere.

Instead of getting well over $1 million a year, maybe the president of a major university would draw pay in the high hundreds of thousands. And the provost and deans would be in the middle six figures. That would mean a radically different pattern of income distribution with a lot more money available to those lower down the pay ladder.

It is common for policy types to accept the outlandish pay of CEOs and other top-level executives as simply market outcomes. But this view is hard to justify when we recognize that there is no one placing downward pressure on the pay of these people in the same way that these top-level people put downward pressure on the pay of ordinary workers.

It is a standard for economists to put lots of faith in the “invisible hand” of the market, but in the case of restraining the pay of CEOs and others at the top of the pay ladder, that hand really is invisible.

Pay for Performance in the Financial Industry?

The list of the country’s top earners is heavily populated with hedge fund and private equity partners, who typically pocket millions of dollars a year, and can sometimes earn tens of millions or even hundreds of millions. The rationale for these huge paychecks is that they are providing outsized returns for investors, which both makes money for investors and steers capital to its best uses. 

There are lots of bad stories about what hedge funds and especially private equity funds do with their money. They are notorious for downsizing and often bankrupting firms, laying off workers, stealing pensions, and leaving creditors empty-handed. In this story, creditors include not only knowing lenders like banks and bondholders, but also unintentional creditors like suppliers and landlords. They also are notorious for gaming the tax code.

But even apart from their dubious business practices, there is an even more basic issue with hedge funds and private equity funds: they don’t produce returns for shareholders. In prior decades, investors in these funds could count on beating a stock index fund, often by a large margin. The margin is appropriate since these are highly illiquid investments (money is typically locked in for a decade) and there is considerably more risk than with a stock index fund.

However, this is no longer true. In recent years, returns to investors on the typical hedge fund and private equity fund trailed a stock market index. This means that pension funds actually lost money by investing a portion of their assets with private equity funds rather than a stock market index. Similarly, many universities lost money by having a large portion of their endowment managed by hedge funds.

It shouldn’t be a radical demand to the presidents of Harvard and other schools with huge endowments that they not pay big bucks to investment managers to lose them money. For some reason, it doesn’t seem like anyone has taken up that cause.   

It is possible to structure contracts so that these managers only do get big payouts if they actually produce above-normal returns to pensions or universities. Contracts differ across institutions, but a standard pattern in years past was to pay fund managers 2 percent of the money being managed each year, and then 20 percent of returns over some target, such as the S&P 500. In this story, if a hedge fund was managing $1 billion of Harvard’s endowment, they would get paid $20 million a year, even if their investments trailed the S&P 500. That is a lot of money to pay to lose money.

Pension funds and universities can structure their contracts so that the entire payment is dependent on beating a threshold. In that case, if a fund trailed the S&P 500, they would get nothing. (There can be a clause that ensures everyone who worked for the fund gets the minimum wage for the time they put in. We wouldn’t want to undermine labor laws.) Some private equity and hedge funds would balk at this sort of arrangement, but if these fund managers don’t have confidence in their own ability to beat the market, why should institutions risk money with them?

There are many other areas where we have large amounts of economic waste in finance, which persists because rich people are pocketing this waste. For example, we could have the Fed give every person and business a digital account from which they could conduct normal business transactions, such as getting their paycheck and paying their bills. This would save us tens of billions of dollars annually in banking fees. But, that would mean less money for people in the financial industry.

There is a similar story with retirement accounts. It is common for the financial industry to charge people with 401(k)s or IRAs 1-2 percent of the money in their accounts each year as an administration fee. This means that if you have $100,000 in a 401(k), the bank, brokerage house, or insurance company that manages it could be charging you $1,000 to $2,000 a year. This can be in addition to the fees charged by specific funds, which also can be as high as 1 percent.

These fees can be radically reduced if the government offered a public option similar to the Federal Employees Thrift Saving Plan. The fee for that fund is around 0.1 percent annually. Many states have already taken the initiative to begin to allow workers in the private sector to have money invested by their public worker pension fund managers.  

We can also do a lot to downsize the financial industry with a modest financial transactions tax. A fee of 0.1 percent would eliminate a huge amount of wasteful transactions while having virtually no impact on productive investment. It would also radically reduce the money going to high-frequency traders and others engaged in speculative trading.

Making the World Safe and Good for Ordinary Workers

The sort of restructuring of the market described here would mean much less money going to the rich and very rich. That means they will be pulling away fewer resources for lavish lifestyles since their lifestyles would have to be somewhat less lavish. That leaves more money for everyone else.

I wrote a piece last year pointing out that in the three decades from 1938 to 1968, the minimum wage not only kept pace with prices, it also rose in step with productivity. This means that as the country got richer, so did the workers at the bottom rungs of the wage ladder.

In the years since 1968, the minimum wage has not even kept pace with prices, so that a worker getting $7.25 an hour in 2022 can buy far less than a worker earning the minimum wage in 1968. However, if the minimum wage had continued to keep pace with productivity growth, it would have been more than $23 an hour in 2021.

Imagine a country where the lowest-paid full-time worker was pocketing more than $46,000 a year and a two-earner couple would have more than $92,000 a year, even if both were just getting the minimum wage. This is not possible in our world, where the economy has been deliberately structured to send so much income to those at the top, but we should never forget that this is a policy choice.

We have implemented a set of policies that give large amounts of money to people in a position to benefit from patent and copyright monopolies, to CEOs and other top management, and to a favored few in the financial industry. These groups will fight like crazy to prevent these policies from being reversed.

But, the first step in the battle is recognizing they rigged the deck. Don’t let them ever get away with saying that it was just the natural workings of the market.

[1] It also helps that it is typically a deep-pocketed third-party payer, like an insurance company or the government, so drug companies don’t have to convince patients of the value of their drugs.

[2] I calculate the savings and costs involved in getting to a universal Medicare program here.

[3] I have also proposed radically restructuring Section 230 protection, taking it away from sites that sell personal information or accept advertising. This should have the effect of downsizing Facebook and other sites that operate along similar lines.

Okay, I’m a bit slow for a New Year’s piece, but what the hell, we can always use a bit of optimism. Anyhow, I thought I would spout a few things about what the world might look like if we didn’t rig the market to give all the money to rich people. Not much new here for regular readers, I just thought I would spell it on paper, since it is a nice backdrop for many of our battles.

Before I go through my favorite unriggings, let me start by making a general point, which some people may miss. I focus much of my writing on ways that we rig the market to give money to the Bill Gates and Moderna billionaires of the world.

The idea of restructuring the market, so that these people do not get so rich, is not just a question of punishing the wealthy. When we give these people more money, in excess of what they contribute to the economy (we have to pay people something to develop mRNA vaccines, just not as much as we did), then we are generating more demand in the economy. This has the same effect on the economy as an increase in government spending.

To take my favorite example, if because of patent and related monopolies, we pay drug companies $400 billion a year more than is needed to have the drugs manufactured and distributed, this has the same effect on the economy as if we wrote $400 billion in checks ($3,300 per household) and sent them around to everyone. This policy (the writing of large checks) would run the risk of creating inflation if the economy is near its capacity.

The same is true of sending all this money to drug companies. While many people in the pharmaceutical industry earn normal salaries, higher-up employees can earn millions of dollars, or even tens of millions of dollars, a year. And those lucky enough to be at the top of the big winners, like Moderna, can score billions.

When these people spend this money on their second, third, or fourth homes, on their yachts, or their space trips, it pulls resources away from other areas. We, therefore, have fewer people to build homes for ordinary families (and less land), and fewer people to provide medical care or child care because the pharmaceutical industry folks have hired them.   

Restructuring the market so that less income flows upward has the same impact as taxing the income away. Of course, it has the huge benefit over taxation in that it is done through the market. This is enormously more efficient than handing rich people money and then trying to take it away with taxes. It also is likely to be far more feasible politically.

With that backdrop, it’s time for a bit of fun, thinking about what the world might look like if we unrigged the economy.

 

Free Market Drugs and Vaccines

There is probably no sector where the impact of government-granted patents and copyrights is more pernicious than in healthcare. Drugs are almost invariably cheap to produce and distribute. The reason that some can cost thousands, or even tens of thousands of dollars for a year’s treatment is because the government grants drug companies patent monopolies. When they are producing a drug that is essential for people’s health, or possibly even their lives, the patent monopoly allows companies to charge prices completely out of line with costs.[1]

This is a case where every good progressive should be a huge proponent of the free market.  If we didn’t have any patent or related protections for vaccines, we could have had manufacturers all around the world producing and stockpiling vaccines even before they were approved. (It costs around $2 to manufacture a vaccine dose, if we had stockpiled 400 million vaccines that proved ineffective and then had to throw them out, so what? The wasted $800 million is a bit more than 0.01 percent of what the U.S. government has spent on pandemic-related measures.) This would likely have meant that we could have had most of the world vaccinated by the spring, likely preventing the omicron variant and possibly even stopping the delta variant.

Also, to cut off a standard line from our friends in the pharmaceutical industry, it’s true that much of the technology of the industry is protected by industrial secrets rather than government-granted patent monopolies. This one is easily dealt with; we just make their non-disclosure agreements unenforceable. That would allow the top engineers at Pfizer, Moderna, and elsewhere to freely share their expertise with everyone in the world.

We do have to pay for research, but the patent monopoly system is a very inefficient mechanism. In addition to making drugs and vaccines very expensive, it also gives companies an incentive to carry on their research in secret, rather than sharing important findings with potential competitors.

Science advances most rapidly when it is open. If we pay for the research upfront as we did with Operation Warp Speed, we can make openness a condition of the research, with all results posted on the web as quickly as practical. This would allow researchers everywhere to build on each other’s successes and learn from their failures, preventing much needless duplication. Also, all patentable results would be placed in the public domain so that generic manufacturers anywhere in the world could produce them.  (In chapter 5 of Rigged [it’s free], I describe a mechanism involving long-term contracts that the government could use to dish out the money.) 

We would need some system of international sharing of research costs, which would have to be negotiated. But, this sort of open research system offers enormous potential gains for the whole world. And, it’s worth noting that our current system, requiring patent enforcement internationally, has hardly been problem-free in both negotiation and implementation. In a positive turn of events, the European Union is actively considering expanding public investment in biomedical research, including an open research option. 

Open research would also eliminate the incentives for misrepresenting research findings or outright fraud, like the Elizabeth Holmes-Theranos case. If research is fully open for the community of researchers to evaluate, it would be almost impossible for someone to perpetuate a Theranos-type fraud. Also, there would be very little incentive, since no one would stand to make millions or billions by pushing false claims.

In this context, it is worth noting that, while Theranos is an extreme case, the problem of companies hyping their drugs to maximize the profits from their patent monopolies, is pervasive. This is a huge part of the story of the opioid crisis. More recently the question of biased research has come up with reference to the high-priced Alzheimer’s drug Aduhelm. Without patent monopolies, not only would we get cheap drugs, but we would get honest assessments of their benefits and risks.

The idea that for some reason we can’t have successful innovation without patent monopolies is frankly bizarre. The pathbreaking research in developing mRNA technology was done almost entirely on the government’s dime, as was the work by Moderna to develop a Covid-specific vaccine. We also have the example of a Covid vaccine developed on a shoe-string by Texas Children’s Hospital and Baylor University. We need to pay researchers for their work, but the idea that we can’t have successful innovation without the lure of earning hundreds of millions or even billions from a patent monopoly is absurd on its face.

Imagine a world where most drugs, including the latest breakthrough drugs, were selling for $10 or $20 a prescription. That would be the case without patent monopolies or related protections. The same would be true of medical equipment. The latest blood tests and scans would also almost all be cheap.

In this world, doctors could without hesitation prescribe the course of treatment that they considered to be best for their patient. We would not have moral dilemmas, like whether an otherwise healthy 80-year-old should be prescribed a cancer drug that costs $150,000 a year. Since the drug would likely only cost a few hundred dollars, or at most a few thousand, this would be a no-brainer. Of course you would prescribe the drug that might save their life.   

The savings would be enormous. By my calculations, we would save around $400 billion a year ($3,000 per household) on prescription drugs if they all were sold in a free market without patent monopolies. We would need roughly $100 billion in additional spending to replace the research now supported by patent monopolies, but that would still leave us with savings of around $300 billion a year. That is more than one and half times the cost of the latest version of Build Back Better. If we are also covering the cost of developing medical equipment and tests, that would likely save us an additional $100 billion a year or so. In short, this is real money.

With these sorts of savings, we would be much of the way towards being able to pay for a universal Medicare system, like the one in Canada. Cutting out the insurance industry as a middleman would save us more than $300 billion a year. Also, getting doctors’ pay more in line with their pay in other wealthy countries could net us another $100 billion annually.[2]

Downsizing Patents and Copyrights More Generally

In addition to raising the price of everything from computers and software to video games and movies, patent and copyrights create a morass of legal issues that both raises costs for everyone and impedes the development of technology. It seems reasonable to minimize the role of these government-granted monopolies everywhere, as I describe in chapter 5 of Rigged. This means more public funding of research, with the cost of access for companies being that they have to accept much shorter patents (e.g. four to five years rather than twenty), with their patents being added to the public pool for the rest of the duration of the patent.

One major exception is innovations related to slowing climate change. Here it makes sense to have the same approach as with biomedical research, where we attempt to pool technology worldwide and have it available at no cost to whoever wants it. If China invests a huge amount to further increase its lead in clean energy and electric cars, that is not a threat to the United States, it is doing us and the world a favor.

The same story holds with every other country in the world. We want them to use the technology to lower their emissions. We shouldn’t be trying to keep it away from them with patent monopolies or related protections. This is just simple economics. If solar panels or batteries cost 20 to 30 percent less, because there is no charge for using patents, then businesses, governments, and households will be quicker to switch to clean energy. 

The other area where it would be desirable to largely replace the patent/copyright system is with the funding of journalism and creative work more generally. The amount of money going to support newspapers under the current system has plummeted due to both the Internet and the growth of Facebook and Google. The same is true for recorded music, where current spending is a small fraction of what we saw two decades ago.

I have argued for a system of individual tax credits, modeled on the charitable contribution tax deduction, to support creative work. Under this system, every adult would get a modest sum (e.g. $150 a year) to support the creative worker(s) or creative organization (newspaper, blues music promoter etc.) of their choice. Any work produced through this system would be in the public domain and therefore not subject to copyright protection. A neat aspect of this proposal, in my view, is that enterprising politicians could experiment with it at the state and local levels.

Anyhow, if fully implemented, it could produce a vast amount of creative work that would be available at no cost to anyone with Internet access. It could also revitalize news organizations at the state and local level, which have been hugely downsized in the last quarter-century, or put out of business altogether.[3]

Applying Market Forces to CEO Pay: Getting Corporate Boards that Do Their Job

There has been considerable research in the last two decades showing that CEO pay bears little relationship to their performance in terms of producing returns for shareholders. A recent study surveyed corporate directors and found that the vast majority did not even see it as their job to contain CEO pay. Instead, they saw their role as supporting top management.

In that context, it’s not surprising that even mediocre CEOs can get paychecks in the tens of millions of dollars. After all, if you’re a director sitting on a huge pot of money in the form of the company’s annual revenue, why wouldn’t you dish out tens of millions to your friend, the CEO? This attitude might explain how boards can give out lavish pay packages even when it’s against the explicit wishes of shareholders.

It is important to recognize that the issue with bloated CEO pay is not just one person getting $20 or $30 million (and sometimes considerably more), it is a whole pay structure that follows from the outsized pay for the CEO. If the CEO is earning $20 million, then it’s likely the chief financial officer and other top-tier executives are earning in the range of $8 to $12 million. The third-tier executives can easily be making $2 or $3 million.

This sort of pay structure also has an impact outside of the corporate sector. It is common for presidents of large foundations and charities or major universities to get paid well over $1 million a year. And, the next echelon at these institutions often get paid in the high six figures.  

If we go back to the sixties and seventies, the CEO of a major company would typically get paid twenty or thirty times as much as an ordinary worker. That would translate into $2 million to $3 million a year today. If CEOs were currently getting pay in this neighborhood, we would see correspondingly lower pay for other top management in the corporate sector and elsewhere.

Instead of getting well over $1 million a year, maybe the president of a major university would draw pay in the high hundreds of thousands. And the provost and deans would be in the middle six figures. That would mean a radically different pattern of income distribution with a lot more money available to those lower down the pay ladder.

It is common for policy types to accept the outlandish pay of CEOs and other top-level executives as simply market outcomes. But this view is hard to justify when we recognize that there is no one placing downward pressure on the pay of these people in the same way that these top-level people put downward pressure on the pay of ordinary workers.

It is a standard for economists to put lots of faith in the “invisible hand” of the market, but in the case of restraining the pay of CEOs and others at the top of the pay ladder, that hand really is invisible.

Pay for Performance in the Financial Industry?

The list of the country’s top earners is heavily populated with hedge fund and private equity partners, who typically pocket millions of dollars a year, and can sometimes earn tens of millions or even hundreds of millions. The rationale for these huge paychecks is that they are providing outsized returns for investors, which both makes money for investors and steers capital to its best uses. 

There are lots of bad stories about what hedge funds and especially private equity funds do with their money. They are notorious for downsizing and often bankrupting firms, laying off workers, stealing pensions, and leaving creditors empty-handed. In this story, creditors include not only knowing lenders like banks and bondholders, but also unintentional creditors like suppliers and landlords. They also are notorious for gaming the tax code.

But even apart from their dubious business practices, there is an even more basic issue with hedge funds and private equity funds: they don’t produce returns for shareholders. In prior decades, investors in these funds could count on beating a stock index fund, often by a large margin. The margin is appropriate since these are highly illiquid investments (money is typically locked in for a decade) and there is considerably more risk than with a stock index fund.

However, this is no longer true. In recent years, returns to investors on the typical hedge fund and private equity fund trailed a stock market index. This means that pension funds actually lost money by investing a portion of their assets with private equity funds rather than a stock market index. Similarly, many universities lost money by having a large portion of their endowment managed by hedge funds.

It shouldn’t be a radical demand to the presidents of Harvard and other schools with huge endowments that they not pay big bucks to investment managers to lose them money. For some reason, it doesn’t seem like anyone has taken up that cause.   

It is possible to structure contracts so that these managers only do get big payouts if they actually produce above-normal returns to pensions or universities. Contracts differ across institutions, but a standard pattern in years past was to pay fund managers 2 percent of the money being managed each year, and then 20 percent of returns over some target, such as the S&P 500. In this story, if a hedge fund was managing $1 billion of Harvard’s endowment, they would get paid $20 million a year, even if their investments trailed the S&P 500. That is a lot of money to pay to lose money.

Pension funds and universities can structure their contracts so that the entire payment is dependent on beating a threshold. In that case, if a fund trailed the S&P 500, they would get nothing. (There can be a clause that ensures everyone who worked for the fund gets the minimum wage for the time they put in. We wouldn’t want to undermine labor laws.) Some private equity and hedge funds would balk at this sort of arrangement, but if these fund managers don’t have confidence in their own ability to beat the market, why should institutions risk money with them?

There are many other areas where we have large amounts of economic waste in finance, which persists because rich people are pocketing this waste. For example, we could have the Fed give every person and business a digital account from which they could conduct normal business transactions, such as getting their paycheck and paying their bills. This would save us tens of billions of dollars annually in banking fees. But, that would mean less money for people in the financial industry.

There is a similar story with retirement accounts. It is common for the financial industry to charge people with 401(k)s or IRAs 1-2 percent of the money in their accounts each year as an administration fee. This means that if you have $100,000 in a 401(k), the bank, brokerage house, or insurance company that manages it could be charging you $1,000 to $2,000 a year. This can be in addition to the fees charged by specific funds, which also can be as high as 1 percent.

These fees can be radically reduced if the government offered a public option similar to the Federal Employees Thrift Saving Plan. The fee for that fund is around 0.1 percent annually. Many states have already taken the initiative to begin to allow workers in the private sector to have money invested by their public worker pension fund managers.  

We can also do a lot to downsize the financial industry with a modest financial transactions tax. A fee of 0.1 percent would eliminate a huge amount of wasteful transactions while having virtually no impact on productive investment. It would also radically reduce the money going to high-frequency traders and others engaged in speculative trading.

Making the World Safe and Good for Ordinary Workers

The sort of restructuring of the market described here would mean much less money going to the rich and very rich. That means they will be pulling away fewer resources for lavish lifestyles since their lifestyles would have to be somewhat less lavish. That leaves more money for everyone else.

I wrote a piece last year pointing out that in the three decades from 1938 to 1968, the minimum wage not only kept pace with prices, it also rose in step with productivity. This means that as the country got richer, so did the workers at the bottom rungs of the wage ladder.

In the years since 1968, the minimum wage has not even kept pace with prices, so that a worker getting $7.25 an hour in 2022 can buy far less than a worker earning the minimum wage in 1968. However, if the minimum wage had continued to keep pace with productivity growth, it would have been more than $23 an hour in 2021.

Imagine a country where the lowest-paid full-time worker was pocketing more than $46,000 a year and a two-earner couple would have more than $92,000 a year, even if both were just getting the minimum wage. This is not possible in our world, where the economy has been deliberately structured to send so much income to those at the top, but we should never forget that this is a policy choice.

We have implemented a set of policies that give large amounts of money to people in a position to benefit from patent and copyright monopolies, to CEOs and other top management, and to a favored few in the financial industry. These groups will fight like crazy to prevent these policies from being reversed.

But, the first step in the battle is recognizing they rigged the deck. Don’t let them ever get away with saying that it was just the natural workings of the market.

[1] It also helps that it is typically a deep-pocketed third-party payer, like an insurance company or the government, so drug companies don’t have to convince patients of the value of their drugs.

[2] I calculate the savings and costs involved in getting to a universal Medicare program here.

[3] I have also proposed radically restructuring Section 230 protection, taking it away from sites that sell personal information or accept advertising. This should have the effect of downsizing Facebook and other sites that operate along similar lines.

I have been engaging on Twitter recently on my ideas on repealing Section 230. Not surprisingly, I provoked a considerable response. While much of it was angry ad hominems, some of it involved thoughtful comments, especially those from Jeff Koseff and Mike Masnick, the latter of whom took the time to write a full column responding to my proposals on repeal.

I will directly respond to Mike’s column, but first I should probably outline again what I am proposing. I somewhat foolishly assumed that people had read my earlier pieces, and probably even more foolishly assumed anyone remembered them. So, I will first give the highlights of how I would like to see the law restructured and then respond to some of the points made by Mike and others.

Narrowing the Scope of 230

To my view, the best way to limit the power of a Mark Zuckerberg or Jack Dorsey to shape our political debates and influence elections is to downsize Facebook and Twitter, and possibly other sites, that can grow so large as to have an outsize influence on American politics. Restructuring the protection provided by Section 230 can be a way to accomplish this goal.

As it stands, Section 230 means that Facebook and Twitter cannot be sued for defamation for third party content, either in the form of paid advertisements or for any defamatory material that might be contained in any of the billions of posts made on these sites every month. Newspapers and broadcast outlets do not enjoy this protection for third party content.

I would propose taking away this protection for sites that either accept paid advertisements or sell personal information. This means that the only sites that would still have Section 230 protection would be sites that either had paid subscriptions or survived on donations.

Since it would not be practical for a major site like Facebook to monitor every post as it was made, I proposed a notification and takedown rule similar to what now exists with material alleged to be infringing on copyrights. Under the Digital Millennium Copyright Act, a website, such as Facebook, can be subject to penalties for copyright infringement if they have been notified by the copyright holder and fail to take down the infringing material in a timely manner.

A similar rule can be put in place for allegedly defamatory material, where the person (or company) claiming defamation notifies the website, which then would have to remove the material in a timely manner in order to shield itself from potential liability.[1] Of course, many people could make complaints alleging defamation that are not justified. If a site owner has made this assessment, the site need not do anything, but it would then risk a lawsuit just as a newspaper or television station does now over circulating defamatory items.

This sort of change would not have much impact on the vast majority of websites. A business that has its own site would generally have no third party content that it would need to worry about.

Some business sites do have customer reviews of products. For example, many retail sites allow customers to comment on items they purchased. These reviews could include some potentially defamatory comments.

A business could decide to pre-emptively get rid of its review section, avoiding any potential problems. Alternatively, it could take responsibility for monitoring its reviews and be prepared to remove potentially defamatory reviews if a complaint is made. (I assume that most of these review sections already require some degree of moderation, at least to remove comments that are obscene, racist, or in other ways offensive.) It may also, as a substitute, simply have links to sites that host reviews.

There are also a large number of sites that would still enjoy 230 protection by virtue of the fact that they do not have paid advertising or sell personal information. For example, this would be the case with most websites for policy organizations, universities, or other non-profits.

There would be a clear issue with many sites that are essentially dependent on third party content for their business. This would include sites like Yelp, which is based on customer reviews of businesses, or Airbnb, which prominently feature guests’ reviews of hosts.

Without Section 230 protection these sites could be held liable for defamatory comments in these reviews. These sites could make the decision to accept responsibility for moderation (they already moderate to exclude offensive content) and be prepared to remove posts that are called to their attention as potentially defamatory.[2]

Another option would be to go to a subscription model where users paid some monthly or annual fee for use of the service. Even large sites could be supported with a fairly limited number of subscribers paying a modest fee.

As I noted in an earlier Tweet thread, the employee-employer website Glassdoor had revenue of $170 million in 2020. This could be covered by 3 million people paying $5 a month or 1.5 million paying $10 a month. That hardly seems like a big leap for a major website.

It is more than a bit far-fetched to claim such fees would make these sites exclusively for the rich. In prior decades it was common for working class and even poor people to have subscriptions to newspapers, which cost them far more in today’s dollars than $10 a month. There are currently over 290 million smartphone users in the United States and almost all of them are paying far more than $10 a month for their service. Needless to say, we do not have 290 million rich people in this country.

Of course, there is no guarantee that every service that exists today on an advertising model would survive a switch to a paid circulation model, but so what? Companies go out of business all the time, that is capitalism. If it turned out that very few people were willing to shell out money for a site like Glassdoor, we can infer that there were not very many people who valued the site.

I don’t mean to be glib about the prospect that sites that some people may value a great deal may not survive this sort of change in regimes, but almost all policy that accomplishes anything positive will also have negative effects. The growth of Internet retailing put many old-line retailers out of business. And the growth of Facebook, partially fueled by Section 230 protection, has helped to put many newspapers out of business. If we think we have a policy that won’t have any undesirable effects, then we probably don’t understand the policy.   

If we saw many sites switching to a paid circulation model, it is likely that we would see aggregators that charge a fee for access to a large number of sites. This would be similar to the combination of television channels offered by major cable providers. This means that instead of individually subscribing to Yelp, Glassdoor, etc., it would be possible to subscribe to a service that provided access to a wide range of sites.

It’s understandable that people would not be happy about paying for access to sites that had previously been free, but we see this all the time. Most newspapers now have paywalls, and many don’t even allow a single article to be viewed for free. (In the past, it was common for newspapers with paywalls to allow free access to some limited number of articles per month.)

Forty years ago, free broadcast television accounted for the vast majority of viewing. Households spent just $3.15 billion on cable TV in 1980, the equivalent (relative to the size of the economy) of $22.7 billion in 2020. By comparison, households spent $96.3 billion on cable television in 2020 (more than $700 per household), more than four times as much as in 1980.[3] In short, there is ample precedent for people being willing to pay for items that were formerly available for free, if they value them.

Would This Change Hurt Facebook?

Mike argues in his piece that changing Section 230 in the way that I have proposed would work to the benefit of Facebook, arguing that Facebook is actually now pushing for eliminating Section 230. It is true that Facebook is lobbying to have Section 230 changed, but it does not seem to be advocating eliminating this protection, at least for itself.

I’ll confess to not fully understanding the changes Facebook is advocating, but according to the Electric Frontier Foundation (EFF), it would amount to protection from liability for defamation, if a company spent a certain proportion of its revenue monitoring its site for offensive, dangerous, or defamatory material. That is certainly not the same as asking Congress to eliminate Section 230 protection altogether. (The EFF piece is titled “Facebook’s Pitch to Congress: Section 230 for Me, but not for Thee.”)

If Facebook had to operate without Section 230 protection, as I am proposing, it could face liability for defamation if it left material posted after being given notice by someone claiming damages. It is possible that it would just ignore these notices and operate as it does currently, but it seems more likely that it would take down much of the material that provided the basis for complaints. In fact, if we can extrapolate from the experience with copyright infringement claims, websites have in general been overly cautious after being given notice, often removing material that is not actually infringing.[4]

If we assume Facebook goes the compliance route, many users will see posts removed from their Facebook page over claims that they are defamatory. It seems likely that this would upset users, causing many of them to look for sites that will not remove their posts. Since sites that did not depend on advertising or selling personal information would still enjoy Section 230 protection, it seems likely that many current users would opt to leave Facebook for these alternatives.

I also pointed out that as a simple financial matter, the Facebook leavers are likely to be more affluent, since they could easily afford the fees charged for a subscription site. While most households may be able to pay $5 or $10 for a subscription site, this expense would be trivial for the 30 plus percent of households with incomes over $100,000 a year.[5] This is the group that advertisers on Facebook are most interested in reaching. If a substantial percent of higher income users left Facebook, or used the site less frequently, it would be a big hit to the company’s profits.

It is also worth noting that, even if alternative sites may be many magnitudes smaller in their potential reach than Facebook, this is not likely to make much difference to the overwhelming majority of Facebook users. While Facebook may have billions of users, almost none of its users will ever reach more than a tiny fraction of the total with their posts. If their friends and family members shared a site that was 0.01 percent as large as Facebook, in almost all cases they could count on reaching just as many viewers. As a practical matter, the billions of users that will never see a person’s Facebook page are irrelevant to them. 

The other possibility is that Facebook would simply ignore complaints and leave potentially defamatory material posted on its site. Masnick seems to think this is a possibility for Facebook.

“First off, the actual bar for defamation is quite high, especially for public figures. Baker, incorrectly, seems to think that merely saying something false about a public figure is defamatory. That’s not how it works. It has to meet the standard of defamation, including the actual malice standard (which is not just that you were really mad when you said it). Second, and much more important for this situation, is that if the speaker was liable, that does not automatically mean that the intermediary would be liable. Under the two key cases prior to Section 230 becoming law, Cubby v. Compuserve and Stratton Oakmont v. Prodigy, the courts had to wrestle with what makes 3rd party intermediary liability consistent with the 1st Amendment.”

Of course, the bar for defamation is high, and especially so for public figures. That doesn’t mean that they are not brought and occasionally successful. General William Westmoreland sued CBS News in 1982 for a segment it did on his conduct during the Vietnam War. This suit survived summary judgement (wrong call in my view) and was settled just before the jury reached a verdict.

More recently, the former professional wrestler Jesse Ventura won a suit against American Sniper author Chris Kyle. After securing a judgement at the trial level, Ventura received an out-of-court settlement before the case was appealed.

But the issue of public figure defamation is the less important one. The overwhelming majority of defamation claims on a site like Facebook would not involve public figures but rather comments about a business or worker, friend, neighbor, or family member. It’s not obvious why in these sorts of cases, that Facebook should enjoy a greater level of immunity (post-notification) than a newspaper or television station.

If a person had a letter printed in a newspaper, claiming that a restaurant served rotten meat, causing dozens of customers to get sick, the paper, and not just the letter writer, could be sued for libel if the claim was not true. Why should the restaurant have no recourse against Facebook, if it allowed this false claim to continue to circulate, even after they brought it to Facebook’s attention?

Apart from the cost that news organizations incur when they defend against, and possibly lose, a defamation suit, they also incur considerable expenses to avoid facing suits. News outlets carefully comb investigative pieces to ensure that they do not contain potentially defamatory material. They review third party submissions, such as columns and letters to the editor, the same way.

Section 230 ensures that Facebook does not now have to incur these expenses. Repealing this protection will unambiguously raise its costs, both relative to the outlets that do not now have Section 230 protection and also relative to sites that would still enjoy this protection.

It is not clear what constitutional issues Masnick envisions in holding intermediaries liable for carrying defamatory material. The two cases he cites both focus on whether the intermediary could have reasonably been expected to know of the defamatory material at the time it was posted. In a case where Facebook has been given a takedown notice, they obviously have knowledge of the material. The courts have apparently not seen any First Amendment issues with holding intermediaries liable for carrying material that infringes on copyrights, it’s not clear why they would then hold that the First Amendment protects them from suits on hosting defamatory material.   

Is Mark Zuckerberg a Good Guy and Should We Care?

Facebook has obviously made some effort to limit the amount of false and hateful material that circulates on its site. We can be thankful for this, even if we can debate whether it has done enough.

But the more fundamental question is whether such important decisions should be left to the discretion of a private company. The disproportionate control of the media by large corporations and wealthy individuals has long been a problem, but the situation is much more serious when a single company can have the reach of Facebook.   

Even if people are reasonably satisfied with Mark Zuckerberg’s moderation of Facebook, he is not going to be running the company forever. Would people be equally satisfied if some Koch-Murdoch-type billionaire were in control? Would it be okay if they started removing any content pointing out that Donald Trump lost the 2020 election by a wide margin and that the allegations of vote fraud are absurd?

When a key communications outlet gets as large as Facebook it is a real problem. We can hope that it exercises its power responsibly, but the problem is that it has the power in the first place. At the same time, no one can reasonably want the government to dictate Facebook’s moderation policy, which would raise all sorts of First Amendment issues.

The better answer lies in downsizing Facebook so that what Mark Zuckerberg or any billionaire wants, doesn’t matter so much. Taking away its Section 230 protection is an effective route to accomplish this goal.

[1] With a site like Facebook, which effectively has a record of who has viewed any post, there could be an additional requirement that all the users that viewed the defamatory item be notified that it was removed. This would be equivalent to a newspaper publishing a retraction in response to a threat of a defamation suit. 

[2] A site like Airbnb could probably also get their hosts to waive their right to sue for defamation as a condition of listing on the service. 

[3] These data are taken from Bureau of Economic Analysis, National Income and Product Accounts, Table 2.4.5U,  Line 217.

[4] Mike Masnick called my attention to this issue.

[5] I have argued for a tax credit system, modeled on the charitable contribution tax deduction as an alternative to copyright for supporting creative work. Such a credit would be a great way to ensure that even the poorest households could afford access to subscription sites.

I have been engaging on Twitter recently on my ideas on repealing Section 230. Not surprisingly, I provoked a considerable response. While much of it was angry ad hominems, some of it involved thoughtful comments, especially those from Jeff Koseff and Mike Masnick, the latter of whom took the time to write a full column responding to my proposals on repeal.

I will directly respond to Mike’s column, but first I should probably outline again what I am proposing. I somewhat foolishly assumed that people had read my earlier pieces, and probably even more foolishly assumed anyone remembered them. So, I will first give the highlights of how I would like to see the law restructured and then respond to some of the points made by Mike and others.

Narrowing the Scope of 230

To my view, the best way to limit the power of a Mark Zuckerberg or Jack Dorsey to shape our political debates and influence elections is to downsize Facebook and Twitter, and possibly other sites, that can grow so large as to have an outsize influence on American politics. Restructuring the protection provided by Section 230 can be a way to accomplish this goal.

As it stands, Section 230 means that Facebook and Twitter cannot be sued for defamation for third party content, either in the form of paid advertisements or for any defamatory material that might be contained in any of the billions of posts made on these sites every month. Newspapers and broadcast outlets do not enjoy this protection for third party content.

I would propose taking away this protection for sites that either accept paid advertisements or sell personal information. This means that the only sites that would still have Section 230 protection would be sites that either had paid subscriptions or survived on donations.

Since it would not be practical for a major site like Facebook to monitor every post as it was made, I proposed a notification and takedown rule similar to what now exists with material alleged to be infringing on copyrights. Under the Digital Millennium Copyright Act, a website, such as Facebook, can be subject to penalties for copyright infringement if they have been notified by the copyright holder and fail to take down the infringing material in a timely manner.

A similar rule can be put in place for allegedly defamatory material, where the person (or company) claiming defamation notifies the website, which then would have to remove the material in a timely manner in order to shield itself from potential liability.[1] Of course, many people could make complaints alleging defamation that are not justified. If a site owner has made this assessment, the site need not do anything, but it would then risk a lawsuit just as a newspaper or television station does now over circulating defamatory items.

This sort of change would not have much impact on the vast majority of websites. A business that has its own site would generally have no third party content that it would need to worry about.

Some business sites do have customer reviews of products. For example, many retail sites allow customers to comment on items they purchased. These reviews could include some potentially defamatory comments.

A business could decide to pre-emptively get rid of its review section, avoiding any potential problems. Alternatively, it could take responsibility for monitoring its reviews and be prepared to remove potentially defamatory reviews if a complaint is made. (I assume that most of these review sections already require some degree of moderation, at least to remove comments that are obscene, racist, or in other ways offensive.) It may also, as a substitute, simply have links to sites that host reviews.

There are also a large number of sites that would still enjoy 230 protection by virtue of the fact that they do not have paid advertising or sell personal information. For example, this would be the case with most websites for policy organizations, universities, or other non-profits.

There would be a clear issue with many sites that are essentially dependent on third party content for their business. This would include sites like Yelp, which is based on customer reviews of businesses, or Airbnb, which prominently feature guests’ reviews of hosts.

Without Section 230 protection these sites could be held liable for defamatory comments in these reviews. These sites could make the decision to accept responsibility for moderation (they already moderate to exclude offensive content) and be prepared to remove posts that are called to their attention as potentially defamatory.[2]

Another option would be to go to a subscription model where users paid some monthly or annual fee for use of the service. Even large sites could be supported with a fairly limited number of subscribers paying a modest fee.

As I noted in an earlier Tweet thread, the employee-employer website Glassdoor had revenue of $170 million in 2020. This could be covered by 3 million people paying $5 a month or 1.5 million paying $10 a month. That hardly seems like a big leap for a major website.

It is more than a bit far-fetched to claim such fees would make these sites exclusively for the rich. In prior decades it was common for working class and even poor people to have subscriptions to newspapers, which cost them far more in today’s dollars than $10 a month. There are currently over 290 million smartphone users in the United States and almost all of them are paying far more than $10 a month for their service. Needless to say, we do not have 290 million rich people in this country.

Of course, there is no guarantee that every service that exists today on an advertising model would survive a switch to a paid circulation model, but so what? Companies go out of business all the time, that is capitalism. If it turned out that very few people were willing to shell out money for a site like Glassdoor, we can infer that there were not very many people who valued the site.

I don’t mean to be glib about the prospect that sites that some people may value a great deal may not survive this sort of change in regimes, but almost all policy that accomplishes anything positive will also have negative effects. The growth of Internet retailing put many old-line retailers out of business. And the growth of Facebook, partially fueled by Section 230 protection, has helped to put many newspapers out of business. If we think we have a policy that won’t have any undesirable effects, then we probably don’t understand the policy.   

If we saw many sites switching to a paid circulation model, it is likely that we would see aggregators that charge a fee for access to a large number of sites. This would be similar to the combination of television channels offered by major cable providers. This means that instead of individually subscribing to Yelp, Glassdoor, etc., it would be possible to subscribe to a service that provided access to a wide range of sites.

It’s understandable that people would not be happy about paying for access to sites that had previously been free, but we see this all the time. Most newspapers now have paywalls, and many don’t even allow a single article to be viewed for free. (In the past, it was common for newspapers with paywalls to allow free access to some limited number of articles per month.)

Forty years ago, free broadcast television accounted for the vast majority of viewing. Households spent just $3.15 billion on cable TV in 1980, the equivalent (relative to the size of the economy) of $22.7 billion in 2020. By comparison, households spent $96.3 billion on cable television in 2020 (more than $700 per household), more than four times as much as in 1980.[3] In short, there is ample precedent for people being willing to pay for items that were formerly available for free, if they value them.

Would This Change Hurt Facebook?

Mike argues in his piece that changing Section 230 in the way that I have proposed would work to the benefit of Facebook, arguing that Facebook is actually now pushing for eliminating Section 230. It is true that Facebook is lobbying to have Section 230 changed, but it does not seem to be advocating eliminating this protection, at least for itself.

I’ll confess to not fully understanding the changes Facebook is advocating, but according to the Electric Frontier Foundation (EFF), it would amount to protection from liability for defamation, if a company spent a certain proportion of its revenue monitoring its site for offensive, dangerous, or defamatory material. That is certainly not the same as asking Congress to eliminate Section 230 protection altogether. (The EFF piece is titled “Facebook’s Pitch to Congress: Section 230 for Me, but not for Thee.”)

If Facebook had to operate without Section 230 protection, as I am proposing, it could face liability for defamation if it left material posted after being given notice by someone claiming damages. It is possible that it would just ignore these notices and operate as it does currently, but it seems more likely that it would take down much of the material that provided the basis for complaints. In fact, if we can extrapolate from the experience with copyright infringement claims, websites have in general been overly cautious after being given notice, often removing material that is not actually infringing.[4]

If we assume Facebook goes the compliance route, many users will see posts removed from their Facebook page over claims that they are defamatory. It seems likely that this would upset users, causing many of them to look for sites that will not remove their posts. Since sites that did not depend on advertising or selling personal information would still enjoy Section 230 protection, it seems likely that many current users would opt to leave Facebook for these alternatives.

I also pointed out that as a simple financial matter, the Facebook leavers are likely to be more affluent, since they could easily afford the fees charged for a subscription site. While most households may be able to pay $5 or $10 for a subscription site, this expense would be trivial for the 30 plus percent of households with incomes over $100,000 a year.[5] This is the group that advertisers on Facebook are most interested in reaching. If a substantial percent of higher income users left Facebook, or used the site less frequently, it would be a big hit to the company’s profits.

It is also worth noting that, even if alternative sites may be many magnitudes smaller in their potential reach than Facebook, this is not likely to make much difference to the overwhelming majority of Facebook users. While Facebook may have billions of users, almost none of its users will ever reach more than a tiny fraction of the total with their posts. If their friends and family members shared a site that was 0.01 percent as large as Facebook, in almost all cases they could count on reaching just as many viewers. As a practical matter, the billions of users that will never see a person’s Facebook page are irrelevant to them. 

The other possibility is that Facebook would simply ignore complaints and leave potentially defamatory material posted on its site. Masnick seems to think this is a possibility for Facebook.

“First off, the actual bar for defamation is quite high, especially for public figures. Baker, incorrectly, seems to think that merely saying something false about a public figure is defamatory. That’s not how it works. It has to meet the standard of defamation, including the actual malice standard (which is not just that you were really mad when you said it). Second, and much more important for this situation, is that if the speaker was liable, that does not automatically mean that the intermediary would be liable. Under the two key cases prior to Section 230 becoming law, Cubby v. Compuserve and Stratton Oakmont v. Prodigy, the courts had to wrestle with what makes 3rd party intermediary liability consistent with the 1st Amendment.”

Of course, the bar for defamation is high, and especially so for public figures. That doesn’t mean that they are not brought and occasionally successful. General William Westmoreland sued CBS News in 1982 for a segment it did on his conduct during the Vietnam War. This suit survived summary judgement (wrong call in my view) and was settled just before the jury reached a verdict.

More recently, the former professional wrestler Jesse Ventura won a suit against American Sniper author Chris Kyle. After securing a judgement at the trial level, Ventura received an out-of-court settlement before the case was appealed.

But the issue of public figure defamation is the less important one. The overwhelming majority of defamation claims on a site like Facebook would not involve public figures but rather comments about a business or worker, friend, neighbor, or family member. It’s not obvious why in these sorts of cases, that Facebook should enjoy a greater level of immunity (post-notification) than a newspaper or television station.

If a person had a letter printed in a newspaper, claiming that a restaurant served rotten meat, causing dozens of customers to get sick, the paper, and not just the letter writer, could be sued for libel if the claim was not true. Why should the restaurant have no recourse against Facebook, if it allowed this false claim to continue to circulate, even after they brought it to Facebook’s attention?

Apart from the cost that news organizations incur when they defend against, and possibly lose, a defamation suit, they also incur considerable expenses to avoid facing suits. News outlets carefully comb investigative pieces to ensure that they do not contain potentially defamatory material. They review third party submissions, such as columns and letters to the editor, the same way.

Section 230 ensures that Facebook does not now have to incur these expenses. Repealing this protection will unambiguously raise its costs, both relative to the outlets that do not now have Section 230 protection and also relative to sites that would still enjoy this protection.

It is not clear what constitutional issues Masnick envisions in holding intermediaries liable for carrying defamatory material. The two cases he cites both focus on whether the intermediary could have reasonably been expected to know of the defamatory material at the time it was posted. In a case where Facebook has been given a takedown notice, they obviously have knowledge of the material. The courts have apparently not seen any First Amendment issues with holding intermediaries liable for carrying material that infringes on copyrights, it’s not clear why they would then hold that the First Amendment protects them from suits on hosting defamatory material.   

Is Mark Zuckerberg a Good Guy and Should We Care?

Facebook has obviously made some effort to limit the amount of false and hateful material that circulates on its site. We can be thankful for this, even if we can debate whether it has done enough.

But the more fundamental question is whether such important decisions should be left to the discretion of a private company. The disproportionate control of the media by large corporations and wealthy individuals has long been a problem, but the situation is much more serious when a single company can have the reach of Facebook.   

Even if people are reasonably satisfied with Mark Zuckerberg’s moderation of Facebook, he is not going to be running the company forever. Would people be equally satisfied if some Koch-Murdoch-type billionaire were in control? Would it be okay if they started removing any content pointing out that Donald Trump lost the 2020 election by a wide margin and that the allegations of vote fraud are absurd?

When a key communications outlet gets as large as Facebook it is a real problem. We can hope that it exercises its power responsibly, but the problem is that it has the power in the first place. At the same time, no one can reasonably want the government to dictate Facebook’s moderation policy, which would raise all sorts of First Amendment issues.

The better answer lies in downsizing Facebook so that what Mark Zuckerberg or any billionaire wants, doesn’t matter so much. Taking away its Section 230 protection is an effective route to accomplish this goal.

[1] With a site like Facebook, which effectively has a record of who has viewed any post, there could be an additional requirement that all the users that viewed the defamatory item be notified that it was removed. This would be equivalent to a newspaper publishing a retraction in response to a threat of a defamation suit. 

[2] A site like Airbnb could probably also get their hosts to waive their right to sue for defamation as a condition of listing on the service. 

[3] These data are taken from Bureau of Economic Analysis, National Income and Product Accounts, Table 2.4.5U,  Line 217.

[4] Mike Masnick called my attention to this issue.

[5] I have argued for a tax credit system, modeled on the charitable contribution tax deduction as an alternative to copyright for supporting creative work. Such a credit would be a great way to ensure that even the poorest households could afford access to subscription sites.

We Temporarily Interrupt this Blog

Hi everyone, this is Dean’s colleague Dawn, CEPR’s Development Director. I am hijacking Dean’s blog as I do on occasion to make sure you saw this post I wrote about Dean’s work on vaccines and intellectual property and to point out why that work is worthy of your support.

I was thinking as I began to write this post that I have worked with Dean for over 13 years now (a record in my profession, and a testament to CEPR’s positive work environment and respect for its employees). Anyhow (as Dean wound say) it struck me that just as his 2002 prediction that a growing housing bubble would wreck the economy proved to be true, his work showing that unfair patent and copyright protections lead to economic inequality and poor health outcomes has also proven to be true, with deadly consequences thanks to the Covid 19 pandemic. As regular readers of this blog, I know that you are aware of Dean’s prolific writings on this topic. He’s been saying these things for years, and people are now finally starting to listen.

Dean warned that the collapse of the housing bubble would bring economic pain. Now, he is ramping up his call for policy change that will both level the economic playing field and save lives around the world. I know that BTP readers are some of CEPR’s staunchest financial supporters and we thank you. But if you haven’t already given, please consider making a donation to CEPR today so that we can amplify Dean’s message. We’ve had some success, but thanks to the money and power of those patent protectors, we unfortunately still have a long way to go.

Again, thanks to all of you for supporting Beat the Press over the years. Now back to your regularly scheduled program. And remember, don’t believe everything you read in the papers.

Hi everyone, this is Dean’s colleague Dawn, CEPR’s Development Director. I am hijacking Dean’s blog as I do on occasion to make sure you saw this post I wrote about Dean’s work on vaccines and intellectual property and to point out why that work is worthy of your support.

I was thinking as I began to write this post that I have worked with Dean for over 13 years now (a record in my profession, and a testament to CEPR’s positive work environment and respect for its employees). Anyhow (as Dean wound say) it struck me that just as his 2002 prediction that a growing housing bubble would wreck the economy proved to be true, his work showing that unfair patent and copyright protections lead to economic inequality and poor health outcomes has also proven to be true, with deadly consequences thanks to the Covid 19 pandemic. As regular readers of this blog, I know that you are aware of Dean’s prolific writings on this topic. He’s been saying these things for years, and people are now finally starting to listen.

Dean warned that the collapse of the housing bubble would bring economic pain. Now, he is ramping up his call for policy change that will both level the economic playing field and save lives around the world. I know that BTP readers are some of CEPR’s staunchest financial supporters and we thank you. But if you haven’t already given, please consider making a donation to CEPR today so that we can amplify Dean’s message. We’ve had some success, but thanks to the money and power of those patent protectors, we unfortunately still have a long way to go.

Again, thanks to all of you for supporting Beat the Press over the years. Now back to your regularly scheduled program. And remember, don’t believe everything you read in the papers.

From the way our policy types talk about patents, or refuse to talk about them, they must think that the constitution guarantees life, liberty, and people getting incredibly rich from patents. Even as this pandemic has been needlessly prolonged by patent restrictions on the spread of technology for vaccines, tests, and treatments, resulting in millions of preventable deaths, we are still seeing no real debate as to whether we want to rely on these monopolies as a primary mechanism for financing medical innovation in the future.

At the most basic level, we need an explicit recognition that patent monopolies are just one possible mechanism for financing research. This should have always been obvious, but the pandemic should have hit us over the head with this simple but important fact.

The bulk of the research developing mRNA technology was done on the government’s dime. When it came to developing the Moderna vaccine, the government put up almost a billion dollars for the research and clinical testing. It also provided the company with insurance against failure, with a large advance purchase agreement that would have required it to buy hundreds of millions of doses even if it was not the best available vaccine.

Many people in policy circles somehow maintain a bizarre view that scientists would not have incentive to innovate without patent monopolies. This view is bizarre since there is considerable evidence that money can also provide incentives. The overwhelming majority of people in this country and around the world work for money, not patent monopolies, so it really should not be too hard to understand that we can just pay people to do the work and skip the government-granted patent monopoly.

This is especially important in terms of preparing for future pandemics because we are likely to see a large amount of public money put forward to develop vaccines, as well as tests and treatments.[1]  Our practice in the case of Operation Warp Speed (OWS) was to both pay for research and development costs upfront, and leave the companies with ownership rights for intellectual property, both in the form of patent and copyright monopolies, and also with protection of industrial secrets.

This has created the absurd situation where we have both limited the availability of vaccines, and other items needed to control the pandemic, and made the price far higher than what would exist in a free market. The mRNA vaccines cost less than $1.00 each to manufacture, if we double that to cover the cost of distribution, the companies are still charging markups of close to 2000 percent above their costs. There is a similar story for tests and treatments. In almost all cases, these would be available at very low prices in a market without patent or related monopolies.

If we had gone the open route at the beginning of the pandemic where research was freely shared throughout the world, there could have been many more manufacturers of all the vaccines. Anyone with the expertise, anywhere in the world, could have manufactured the vaccines. We could have had large stockpiles waiting to be distributed as soon as they were approved by the Food and Drug Administration as well as regulatory agencies in other countries.

Of course, this might have meant accumulating hundreds of millions of doses of a vaccine that proved ineffective, but so what? The benefit from getting hundreds of millions of people vaccinated a few months earlier dwarfs the money involved in manufacturing vaccines that may go to waste.

 

Designing a Pandemic Response Focused on Stopping the Pandemic Rather than Making Billionaires

If the Biden administration follows through with its current plans, it will put up funding to develop prototype mRNA vaccines that can be quickly modified to deal with whatever specific virus is causing a pandemic. This is a great plan which can potentially save millions of lives and prevent trillions of dollars in economic losses. But, we need to avoid making the same mistakes as with OWS.

First and foremost, this means that everything is fully open. All results should be posted on the web as soon as practical. Any patents stemming from the research should be in the public domain. If a company already has patents that are related to the work, then the government should buy them out when it arranges the contract. If they don’t want to sell, then they aren’t eligible for a contract. It’s pretty simple.

There also cannot be any industrial secrets related to this work. This is again a very simple provision. Industrial secrets are protected through non-disclosure agreements. Any non-disclosure agreements that employees might sign for work related to the government-funded project are simply non-enforceable. That means that any employee of a future Moderna equivalent can make themselves a nice chunk of money, and help to save a large number of lives, by sharing any engineering information that this Moderna equivalent wants to keep secret.  

I have outlined in chapter 5 of Rigged (it’s free) how a system of contracting like this could work. Briefly, I see military contracting as a useful model. While there is lots of waste in military contracting, the United States does get good weapons systems.

Also, there would be an enormous advantage in this system since everything would be fully open. Work done on military contracts is typically enmeshed in secrecy. This is partly for the valid reason that we don’t want potential enemies to get access to our latest weapons systems. If other countries use technology funded under this system to help protect their own populations, and possibly improve on it to provide better health technologies for the world, that is a great outcome, not something to be feared.[2]

Ideally, we would share research costs internationally. Presumably we would expect countries to contribute in proportion to their GDP, with rich countries paying a higher percentage than poor countries, with the poorest presumably paying little or nothing. The exact formulas would have to be negotiated, and there could major differences in views across countries. But anyone who thinks the current system of enforcing IP rules internationally is simple has not been paying attention to trade negotiations over the last quarter century.

I have been told that no companies would agree to contracts where they have to surrender their intellectual property. That seems like a proposition worth testing. If a Pfizer or Moderna finds these conditions unacceptable then perhaps some of their employees would be willing to make lots of money with a new start-up. And, it’s at least possible that some of the people doing this research give a damn about human life.

It’s also important to remember that this is an international market. If U.S.-based scientists find themselves unable to work for money rather than patent monopolies, then we can look to pay scientists from Europe, India, China, or elsewhere. If our scientists don’t want the government’s money, it’s likely that scientists elsewhere in the world would be happy to take it.

It’s also worth mentioning in this context that the refusers will likely find themselves competing with vaccines and other products that are being sold as cheap generics. That probably will not be very good for their sales.

From Pandemics to Climate

Just as the world has an enormous shared interest in containing pandemics, we also have a common and urgent interest in limiting climate change. Here too, the approach of shared and open research makes an enormous amount of sense.

No one should be scared by the possibility that the Chinese might take advantage of a breakthrough in solar power or energy storage to aggressively install new capacity across China. We desperately want clean technologies to be adopted as quickly as possible. This should mean paying for the research upfront and making it fully open.

There is plenty of room in this story for good old-fashioned capitalist competition in the production and installation of clean energy products and electric cars. There also should be plenty of competition for research contracts.

But the products of this research, in the form of technical information, would be available at its marginal cost – zero. Any producer anywhere in the world would be free to incorporate the latest advances in solar technology in producing solar panels. This process would not only mean technology spreads more quickly, it will also reduce the price of solar panels and other forms of clean energy.

If all the research costs are paid upfront from public funds, and the price is not inflated due to patent monopolies, we can expect the price of many of these items to be 20 to 30 percent less. That should considerably hasten the rate at which the technology is adopted.    

Cooperating with China: An Alternative to a New Cold War

China now has the largest economy in the world. It will likely be more than fifty percent larger than the U.S. economy by the end of the decade. This is worth mentioning because if anyone has the idea that we can spend China into the ground with a Cold War arms race, they are not thinking very clearly.

The Soviet economy at its peak was roughly half the size of the U.S. economy. Matching our spending was a huge economic burden for them. In an arms race with China, we will be the ones facing a huge burden.

China’s government is not a democracy. It does not respect human rights and in fact, is committing atrocities against its Uyghur population, but we lack the ability to change this reality. We have to live with China as it is.

Rather than looking for costly, and potentially deadly, confrontations, we should look to areas of cooperation where we share a clear common interest. Containing pandemics and combatting global warming certainly fit this bill. We should want China to be as successful as possible in preventing, or at least limiting, the spread of pandemics within its borders. And, China has the same interest in terms of preventing spread in the United States.

In the same vein, we both should want to see greenhouse gas emissions reduced as quickly as possible everywhere in the world. If our technology can help China reduce emissions, that is a victory for us, and vice versa. There is no reason we should not be as cooperative as possible in these efforts.

I will also add the possibility that more extensive cooperation could change China’s internal politics. A quarter-century ago, when the standard wisdom in political and academic circles was that we had to open up trade with China as quickly as possible, it was common to claim that this would help to democratize the country. The idea was that somehow having tens of millions of workers producing cheap clothes and shoes for consumers in the United States would make the country a democracy.

That didn’t quite pan out. I would not be so brazen as to claim that greater cooperation with China’s scientists in key areas, like public health and climate technology, will make the country a democracy. However, it does seem plausible that increased contact with a group of people who have children, siblings, and parents among China’s political rulers, is likely to have more impact on China’s politics than having millions of low-paid workers producing clothes for U.S. consumers.     

The Great Choice: Producing Pandemic Billionaires or Combatting Pandemics

Back in April, Forbes identified 40 people who had become billionaires from the pandemic. Moderna alone was responsible for three of these newly minted billionaires. With the continued spread of the pandemic, and the increased sales of vaccines and other pandemic-related items, the numbers would surely be larger today.

Structuring our response to the pandemic in a way that created billionaires was clearly a policy choice. The Trump administration decided at the start of the pandemic, that even in cases where the government was picking up most of the development costs, it will still allow private companies to benefit from patent monopolies and other forms of intellectual property.

The decision to go this route made the pandemic worse and cost millions of lives. In a fully open-sourced system, the whole world could have been vaccinated months ago. Tests and treatments would be readily available and cheap.

We can avoid this mistake in preparing for future pandemics, but we face an important choice: is our priority combatting a pandemic or is it allowing a small number of people to get incredibly rich from a pandemic. Unfortunately, in our political system, this is a tough call.

[1] While most people understand that vaccines are needed to contain a pandemic, tests and treatments are also essential. We need people to be tested, so that infected people will take steps to avoid spreading the disease. But people will be less likely to get tested if there is no affordable treatment available. Therefore, if we want to contain a pandemic it is important that all three, vaccines, tests, and treatments be freely available.

[2] Earlier this year I was debating a representative of the pharmaceutical industry about the proposal before the WTO to suspend IP rights for the duration of the pandemic. He warned that if information about the mRNA vaccines was made freely available, then countries like China could use it to jump ahead of U.S. pharmaceutical companies, and possibly do things like developing a vaccine against cancer. I told him that I would not be scared of the possibility that China might develop a vaccine against cancer.

From the way our policy types talk about patents, or refuse to talk about them, they must think that the constitution guarantees life, liberty, and people getting incredibly rich from patents. Even as this pandemic has been needlessly prolonged by patent restrictions on the spread of technology for vaccines, tests, and treatments, resulting in millions of preventable deaths, we are still seeing no real debate as to whether we want to rely on these monopolies as a primary mechanism for financing medical innovation in the future.

At the most basic level, we need an explicit recognition that patent monopolies are just one possible mechanism for financing research. This should have always been obvious, but the pandemic should have hit us over the head with this simple but important fact.

The bulk of the research developing mRNA technology was done on the government’s dime. When it came to developing the Moderna vaccine, the government put up almost a billion dollars for the research and clinical testing. It also provided the company with insurance against failure, with a large advance purchase agreement that would have required it to buy hundreds of millions of doses even if it was not the best available vaccine.

Many people in policy circles somehow maintain a bizarre view that scientists would not have incentive to innovate without patent monopolies. This view is bizarre since there is considerable evidence that money can also provide incentives. The overwhelming majority of people in this country and around the world work for money, not patent monopolies, so it really should not be too hard to understand that we can just pay people to do the work and skip the government-granted patent monopoly.

This is especially important in terms of preparing for future pandemics because we are likely to see a large amount of public money put forward to develop vaccines, as well as tests and treatments.[1]  Our practice in the case of Operation Warp Speed (OWS) was to both pay for research and development costs upfront, and leave the companies with ownership rights for intellectual property, both in the form of patent and copyright monopolies, and also with protection of industrial secrets.

This has created the absurd situation where we have both limited the availability of vaccines, and other items needed to control the pandemic, and made the price far higher than what would exist in a free market. The mRNA vaccines cost less than $1.00 each to manufacture, if we double that to cover the cost of distribution, the companies are still charging markups of close to 2000 percent above their costs. There is a similar story for tests and treatments. In almost all cases, these would be available at very low prices in a market without patent or related monopolies.

If we had gone the open route at the beginning of the pandemic where research was freely shared throughout the world, there could have been many more manufacturers of all the vaccines. Anyone with the expertise, anywhere in the world, could have manufactured the vaccines. We could have had large stockpiles waiting to be distributed as soon as they were approved by the Food and Drug Administration as well as regulatory agencies in other countries.

Of course, this might have meant accumulating hundreds of millions of doses of a vaccine that proved ineffective, but so what? The benefit from getting hundreds of millions of people vaccinated a few months earlier dwarfs the money involved in manufacturing vaccines that may go to waste.

 

Designing a Pandemic Response Focused on Stopping the Pandemic Rather than Making Billionaires

If the Biden administration follows through with its current plans, it will put up funding to develop prototype mRNA vaccines that can be quickly modified to deal with whatever specific virus is causing a pandemic. This is a great plan which can potentially save millions of lives and prevent trillions of dollars in economic losses. But, we need to avoid making the same mistakes as with OWS.

First and foremost, this means that everything is fully open. All results should be posted on the web as soon as practical. Any patents stemming from the research should be in the public domain. If a company already has patents that are related to the work, then the government should buy them out when it arranges the contract. If they don’t want to sell, then they aren’t eligible for a contract. It’s pretty simple.

There also cannot be any industrial secrets related to this work. This is again a very simple provision. Industrial secrets are protected through non-disclosure agreements. Any non-disclosure agreements that employees might sign for work related to the government-funded project are simply non-enforceable. That means that any employee of a future Moderna equivalent can make themselves a nice chunk of money, and help to save a large number of lives, by sharing any engineering information that this Moderna equivalent wants to keep secret.  

I have outlined in chapter 5 of Rigged (it’s free) how a system of contracting like this could work. Briefly, I see military contracting as a useful model. While there is lots of waste in military contracting, the United States does get good weapons systems.

Also, there would be an enormous advantage in this system since everything would be fully open. Work done on military contracts is typically enmeshed in secrecy. This is partly for the valid reason that we don’t want potential enemies to get access to our latest weapons systems. If other countries use technology funded under this system to help protect their own populations, and possibly improve on it to provide better health technologies for the world, that is a great outcome, not something to be feared.[2]

Ideally, we would share research costs internationally. Presumably we would expect countries to contribute in proportion to their GDP, with rich countries paying a higher percentage than poor countries, with the poorest presumably paying little or nothing. The exact formulas would have to be negotiated, and there could major differences in views across countries. But anyone who thinks the current system of enforcing IP rules internationally is simple has not been paying attention to trade negotiations over the last quarter century.

I have been told that no companies would agree to contracts where they have to surrender their intellectual property. That seems like a proposition worth testing. If a Pfizer or Moderna finds these conditions unacceptable then perhaps some of their employees would be willing to make lots of money with a new start-up. And, it’s at least possible that some of the people doing this research give a damn about human life.

It’s also important to remember that this is an international market. If U.S.-based scientists find themselves unable to work for money rather than patent monopolies, then we can look to pay scientists from Europe, India, China, or elsewhere. If our scientists don’t want the government’s money, it’s likely that scientists elsewhere in the world would be happy to take it.

It’s also worth mentioning in this context that the refusers will likely find themselves competing with vaccines and other products that are being sold as cheap generics. That probably will not be very good for their sales.

From Pandemics to Climate

Just as the world has an enormous shared interest in containing pandemics, we also have a common and urgent interest in limiting climate change. Here too, the approach of shared and open research makes an enormous amount of sense.

No one should be scared by the possibility that the Chinese might take advantage of a breakthrough in solar power or energy storage to aggressively install new capacity across China. We desperately want clean technologies to be adopted as quickly as possible. This should mean paying for the research upfront and making it fully open.

There is plenty of room in this story for good old-fashioned capitalist competition in the production and installation of clean energy products and electric cars. There also should be plenty of competition for research contracts.

But the products of this research, in the form of technical information, would be available at its marginal cost – zero. Any producer anywhere in the world would be free to incorporate the latest advances in solar technology in producing solar panels. This process would not only mean technology spreads more quickly, it will also reduce the price of solar panels and other forms of clean energy.

If all the research costs are paid upfront from public funds, and the price is not inflated due to patent monopolies, we can expect the price of many of these items to be 20 to 30 percent less. That should considerably hasten the rate at which the technology is adopted.    

Cooperating with China: An Alternative to a New Cold War

China now has the largest economy in the world. It will likely be more than fifty percent larger than the U.S. economy by the end of the decade. This is worth mentioning because if anyone has the idea that we can spend China into the ground with a Cold War arms race, they are not thinking very clearly.

The Soviet economy at its peak was roughly half the size of the U.S. economy. Matching our spending was a huge economic burden for them. In an arms race with China, we will be the ones facing a huge burden.

China’s government is not a democracy. It does not respect human rights and in fact, is committing atrocities against its Uyghur population, but we lack the ability to change this reality. We have to live with China as it is.

Rather than looking for costly, and potentially deadly, confrontations, we should look to areas of cooperation where we share a clear common interest. Containing pandemics and combatting global warming certainly fit this bill. We should want China to be as successful as possible in preventing, or at least limiting, the spread of pandemics within its borders. And, China has the same interest in terms of preventing spread in the United States.

In the same vein, we both should want to see greenhouse gas emissions reduced as quickly as possible everywhere in the world. If our technology can help China reduce emissions, that is a victory for us, and vice versa. There is no reason we should not be as cooperative as possible in these efforts.

I will also add the possibility that more extensive cooperation could change China’s internal politics. A quarter-century ago, when the standard wisdom in political and academic circles was that we had to open up trade with China as quickly as possible, it was common to claim that this would help to democratize the country. The idea was that somehow having tens of millions of workers producing cheap clothes and shoes for consumers in the United States would make the country a democracy.

That didn’t quite pan out. I would not be so brazen as to claim that greater cooperation with China’s scientists in key areas, like public health and climate technology, will make the country a democracy. However, it does seem plausible that increased contact with a group of people who have children, siblings, and parents among China’s political rulers, is likely to have more impact on China’s politics than having millions of low-paid workers producing clothes for U.S. consumers.     

The Great Choice: Producing Pandemic Billionaires or Combatting Pandemics

Back in April, Forbes identified 40 people who had become billionaires from the pandemic. Moderna alone was responsible for three of these newly minted billionaires. With the continued spread of the pandemic, and the increased sales of vaccines and other pandemic-related items, the numbers would surely be larger today.

Structuring our response to the pandemic in a way that created billionaires was clearly a policy choice. The Trump administration decided at the start of the pandemic, that even in cases where the government was picking up most of the development costs, it will still allow private companies to benefit from patent monopolies and other forms of intellectual property.

The decision to go this route made the pandemic worse and cost millions of lives. In a fully open-sourced system, the whole world could have been vaccinated months ago. Tests and treatments would be readily available and cheap.

We can avoid this mistake in preparing for future pandemics, but we face an important choice: is our priority combatting a pandemic or is it allowing a small number of people to get incredibly rich from a pandemic. Unfortunately, in our political system, this is a tough call.

[1] While most people understand that vaccines are needed to contain a pandemic, tests and treatments are also essential. We need people to be tested, so that infected people will take steps to avoid spreading the disease. But people will be less likely to get tested if there is no affordable treatment available. Therefore, if we want to contain a pandemic it is important that all three, vaccines, tests, and treatments be freely available.

[2] Earlier this year I was debating a representative of the pharmaceutical industry about the proposal before the WTO to suspend IP rights for the duration of the pandemic. He warned that if information about the mRNA vaccines was made freely available, then countries like China could use it to jump ahead of U.S. pharmaceutical companies, and possibly do things like developing a vaccine against cancer. I told him that I would not be scared of the possibility that China might develop a vaccine against cancer.

As we all know, local newspapers have been dropping like flies over the last two decades. Even major regional papers like the Chicago Tribune and Cleveland Plain Dealer have fallen on hard times, sharply cutting back their staff and coverage. In many cases, hedge or private equity funds have done the downsizing or closures. They continue to circle like vultures over the ones they have not already bought. It is reasonable to ask whether anything can be done to reverse this decline.

My friends, Robert McChesney and John Nichols, have put forward the “Local Journalism Initiative (LJI)” to answer the call. (A fuller version is available here.) Their proposal would set out a pot of money to be distributed to local newspapers, based on votes at the county level. They propose elections take place every three years, with each person given three votes. The money would be distributed to news organizations in proportion to the votes received, with a cutoff of 1.0 percent required to get any funding, or 0.5 percent in large counties.

They envision the total size of the pot to be equal to 0.21 percent of GDP or roughly $46 billion in the 2021 economy. This is their estimate of the size of the subsidy from the Postal Service to newspapers in the 19th century, when it was required to deliver newspapers at a loss.

The logic of the LJI is that organizations that provide news provide an essential public service in informing the population. There is a need for a public subsidy since the service will be grossly underprovided in the market as currently structured.

They point to the postal subsidy as a recognition of this need. Like the postal subsidy, their proposal leaves the government neutral as to the content of the news. Voters will decide which organizations they believe are worth their support and the money would be divided accordingly.

They do set out criteria for qualifying for eligibility. A news organization must meet the following:

  • Be formally identified and understood as nonprofit;
  • Be functioning for six months prior to the election, so voters can see what the applicant actually does;
  • Be based in the home county with 75 percent of its salaries going to employees based in the home county;
  • Be completely independent; not a subsidiary of a larger nonprofit group;
  • Produce and publish original material at least five days per week on its website;

To my view, this is an interesting proposal that deserves serious consideration. It is also worth noting in this context a proposal that was included at one time in the Build Back Better (BBB) plan, which would give subsidies to local news outlets for employing reporters.

These subsidies would be much smaller, coming to around $340 million a year. They also are intended to go to existing for-profit newspapers, including newspapers that are owned by large chains. Although the sum of the money involved in the BBB proposal is two orders of magnitude smaller than the amount in the LCI, it at least is an explicit recognition of the desirability of subsidizing the provision of local news.

A Tax Credit System: A Third Option

While I think the LJI would be an enormous gain, if we could win it, I continue to prefer the tax credit system that I have been pushing for several decades. This is a proposal for an amount of money to be allotted to every person (e.g. $100) to be given to the creative worker or organization of their choice. This funding would not be restricted to news organizations. It would instead go to whoever the person designated to get the money. (I describe the proposal in chapter 5 of Rigged [it’s free].)

I would have only three conditions for receiving the money. First, that the person (an individual writer, musician, singer, etc.) or organization (publisher, newspaper, recording company, etc.) must register with the IRS saying what it is they do.

Second, whoever registers is ineligible for copyright protection for a substantial period of time, say three to five years after being in the system. This is to prevent people from getting money through the tax credit system and then establishing a name for themselves and earning really big bucks in the copyright system (more on this in a moment). We give people one subsidy for their work, not two. It also follows from this that all material produced in the system is fully open and cannot be subject to any sort of paywall.

Third, a person or organization must get a certain minimum amount, say $3,000, to collect anything. This is to prevent the most obvious type of fraud, where one person gives their friend their $100 credit, and in turn, their friend gives them their $100 credit. It would still be possible to coordinate 30 people giving the same person their $100 and then rebating the payment to each one, but that would be a lot of illegal coordination for very little potential payoff.

Simple, Simple, Simple: The Key to the Tax Credit System

My preference for the tax credit system is both that it applies to a much broader range of material than just news, and that I think it would be far easier to implement and enforce. I would also add that it can, in principle, be sliced and diced so that it can be phased in incrementally at the national level or put in place at the state or even local level.

Before getting into some of the logistics, it is important to make an often overlooked point about copyrights. McChesney and Nichols are right to point out the postal subsidy in the 19th century as an explicit recognition that newspapers filled an important public purpose. In the same vein, copyright monopolies are established by Congress for the public purpose of promoting creative work.

This is stated explicitly in the constitution where the issuance of patents or copyright monopolies is laid out as one of the powers of Congress, in Article 1, Section 8, just like the power to tax or the power to declare war:

“To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries;”

It would be difficult to envision clearer wording. Copyright monopolies are given to promote a public purpose, which may not be adequately met without some form of government subsidy. They are not a right of individual creators included in the Bill of Rights.

Issuing copyrights is a power that Congress may or may not choose to exercise, just as it is not obligated to impose taxes or declare war. It can also set whatever terms it deems appropriate for copyright, making the monopoly longer or shorter or stronger or weaker.

This is the context in which it makes sense to exclude recipients of tax credit money from copyright protection. If the government is giving a person one subsidy through the tax credit system, it doesn’t make sense to give them a second subsidy in the form of a copyright monopoly. We also want to ensure that the public gets the full benefit of its tax credit subsidy by requiring that any material produced through the system is fully open and can be freely distributed all around the world.

This also fits with the “simple, simple, simple” requirement. The ban on recipients getting copyright protection is self-enforcing. Anyone can claim a copyright, but if they tried to enforce it for material they produced when they were in the tax credit system, the alleged infringer need only point out that they were in the tax credit system at the time the work was produced. Therefore, there is no valid copyright. The government does not have to do anything in this story.

The model for this tax credit system is the tax deduction for charitable contributions. Under this provision, a wide range of organizations, including churches, charities for the poor, and cultural and scientific organizations, can effectively receive a subsidy from the government by registering with the IRS as a nonprofit organization.

For a person in the top tax bracket, this subsidy comes to almost 40 cents on the dollar. This means that if a wealthy person wants to give $1 million to a particular church or cultural organization, the government reimburses them for $400,000 of this sum.  

The IRS makes no effort to determine whether a particular charity is an efficient way to provide services to the poor, or whether a certain religion is a good religion. The only question is whether the organization does what it claims to do.

The same principle would apply to registering to be eligible for the tax credit system. An individual or organization would have to indicate what it is they claim to do (e.g. write, perform music, report on local news, etc.). The IRS would only have the responsibility to verify that the organization does in fact do what they claim.

From the individual’s standpoint, using the tax credit would be as simple as taking the charitable deduction, with the distinction that the credit would be available to everyone, not just people who had tax liabilities. And, unlike the charitable deduction, the government would be picking up the full amount, not just reducing tax liabilities by some fraction of the amount contributed. (If we wanted to make the use of the credit system very simple, we can have a unique number for each person or organization registered. Taxpayers could then indicate on their tax forms the amount of their credit they want to go to them.)   

Tax Credits vs. Local Journalism Initiative 

This tax credit system is obviously much broader than the LJI, but even though promoting local journalism may not be its primary purpose, it may actually be more effective in meeting this goal. The main point here is that local journalism gets nothing if there is not a measure that can gain political support. By making the target of the tax credit creative work more generally, and not just local journalism, there is potentially a much wider range of supporters.

It is also important to recognize that it is not just newspapers that have suffered in the digital age. The money spent on recorded music has also plummeted over the last quarter-century. In 2000, people spent $19.1 billion on recorded music, an amount equal to 0.18 percent of GDP. This had fallen to $2.3 billion by 2020, just over 0.01 percent of GDP. The bulk of this money goes to a small number of big-name singers and musicians, leaving almost nothing for the vast majority of recording artists.[1] There is a strong argument for creating an alternative mechanism of support in this area as well.

Making a broad target also gets the government out of the business of defining what is a local news organization. In the digital era, we are talking primarily about online news sites, with physical newspapers playing at most a very secondary role. Is the government going to police these sites and disqualify ones that make fiction, cartoons, or music available on their sites in addition to local news? These additions would likely make them more attractive to the people voting on where their money goes, but don’t fit the definition of local news.

To my view, the profit/nonprofit distinction is also not especially valuable. There are plenty of nonprofit organizations where CEOs and other top executives can pocket millions of dollars a year. I can’t see any reason for being okay with an organization that has grossly overpaid top management pocketing money, but being upset if someone is making a profit off the system through owning shares. It seems the main check on abuses has to be that people will be less likely to give their credits or votes to an organization that does not actually provide useful material.

In terms of the money that news organizations actually need to be effective, I am inclined to think that it is likely far less than would have been true sixty or seventy years ago. Part of the reason is that people are less dependent on the news media to get information.

Forty, or even thirty, years ago, if someone wanted to know what their city council or state legislature did, they would be almost totally dependent on the media. Unless they were prepared to physically go to the relevant offices to get the records of meetings and bills that were passed or voted on, they would have no way of knowing what was going on. Today, the vast majority of this material is available on the web.

The same is true for government data in a wide range of areas. For example, if I wanted my state or county budget, three decades ago I would have to go down to the offices where they are kept, or arrange to have copies sent to me.   

We still need reporters to do the legwork and find out what is going behind the scenes. They need to find out which politicians or interest groups were pushing or blocking specific legislature. We also need experienced reporters to explain the significance of various measures whose meaning might not be clear to casual observers, but much of the background information can now be provided by a link to a website.[2]

Also, if we compare the publication process today to what would have existed forty years ago, there have been substantial efficiencies in writing up news that did not exist in the past. Most obviously, no one has a secretary anymore to type up their articles. They also can rely on spellcheck programs to correct most spelling errors and many grammatical mistakes. There is still a need for editors to review articles, but much of the office staff that would have been essential in a newsroom forty years ago would not be necessary today.

In addition, since print copies are likely to be a relatively unimportant part of news operations going forward, the expenses associated with laying out and physically printing and distributing newspapers are no longer a major issue. Of course, newspapers would always be able to sell physical copies to people who wanted them, but presumably the price would roughly cover the cost of print editions.

News outlets could also get some money from advertising, although the amount available in a copyright-free world would be less than what they may be able to take in now.[3] Still, it would be far from zero. People are attached to specific websites, and even if they could find all the material posted at various other sites, if they like what is produced on a news outlet’s site, they will be regular visitors and therefore good targets for advertisers.    

The prohibition on copyright protection for organizations and individuals receiving the tax credit would also mean that most of the largest newspapers in the country would not be eligible. It is unlikely that a profitable paper like the New York Times or Wall Street Journal would opt to give up their copyright protection to be eligible for tax credit money. Nor would their reporters, many of whom expect to make large sums from book contracts, be willing to have the option for copyright protection precluded. This means that tax credit money destined for news outlets would be going to smaller ones and new upstarts.

For these reasons, a reasonable target for money from a tax credit to support news production is considerably smaller than the 0.21 percent of GDP that McChesney and Nichols envision. There are roughly 3,000 counties in the United States. Suppose that we would like an average of between five and ten full-time equivalent (FTE) reporters and editors for each one. If this seems insufficient, consider that many of these counties have just a few thousand people and can likely be well-served with just two or three FTE reporters and editors.

This would imply total staffing of between 15,000 and 30,000 people. The average compensation in the private sector for a FTE worker in 2019 was $66,800.[4] If we raise this 10 percent to cover inflation and pay increases in the last two years, and throw in 20 percent for non-wage compensation, we get an average of $88,200 for a FTE employee. That would imply a total cost of between $1.3 billion and $2.6 billion for staffing up the nation’s newsrooms.

It seems plausible that this much money can be raised from a tax credit of say $100 to $150 per person, designed to support creative workers of all types. The country has roughly 280 million adults. If everyone took advantage of a tax credit of this size it would generate $28 billion to $42 billion annually. Clearly, take-up won’t be 100 percent, but it is likely to be fairly high since it is effectively free money.[5]

Would it be possible to convince the public that five or ten percent of the money designated to support creative work more generally should support local news coverage? That seems unknowable in advance of putting in place this sort of system, but if individuals would not voluntarily cough up this much money from a broader tax credit, it seems like a measure designated to give this much, or more, money to support local news would have a difficult legislative path.

Experimenting at the State and Local Level

Since opportunities for getting major legislation passed at the national level are rare, it is always useful to consider whether proposals can be structured in a way where they can be effectively implemented at the state or local level. (A wealthy person who cared about democracy could also cough up the money.) There actually could be a very interesting story where a state or even city attempts to experiment with a creative worker tax credit.

Suppose a state, or even city, proposed to give all their residents $100 or $150 to support creative workers. This would create a substantial pot of money to attract creative workers of all types. As with the national credit, the rules would require that all the material created during the period the person is receiving money through the system not be subject to copyright protection. This means it would be freely available for the whole world.

There could also be a residency requirement, with recipients required to live in the city or state, say for eight or nine months a year. If musicians, writers, or other creative workers are required to live in an area for much of the year, they are likely to want to perform music or plays, or run writing workshops, or do other activities to increase their income. This would also be a good strategy for them since it would make them better known to the people who are giving out their tax credits.

This sort of concentration of creative workers could make a state or city a mecca for the arts that could attract a large number of visitors each year. The revenue from visitors could plausibly cover much or all of the cost of the credit. Of course, this benefit would be in addition to the material produced for the people in the state or city.   

In any case, it would be a relatively limited commitment for a state or city to put a tax credit system in place for a period of time. This sort of experiment would provide insight into how it could work on a larger scale.

Subsidies Without Selecting Content

The most important characteristic of both the tax credit system and LJI is that they provide public subsidies without any attempt to determine content. This is an essential feature since there would be little public support for a major expansion of government-run news or culture production, nor should there be.

It is important that individuals decide what news and cultural organizations they are prepared to support. This is the beauty of the original public subsidy, the provision for copyright monopolies in the constitution. The ability to claim a copyright monopoly does not depend on the content, only that the work be original.

In the same vein, these proposals do not get the government involved in determining content. This is left to individuals to determine where their money will go. If we hope that news outlets survive, and creative work will thrive, this is the path we should want to follow.

[1] There is also a sharp decline in the money spent at movie theaters, from 0.008 percent of GDP in 2000 to 0.006 percent of GDP in 2019, which is partially offset by increased spending on streaming services. The overall picture will not be clear until after the pandemic is over.

[2] This is also a large part of the story of the decline of major regional newspapers like the Chicago Tribune or the Los Angeles Times. Since almost all papers can be readily viewed on the web, no one is dependent on these papers for their coverage of national or international news

[3] To level the playing field a bit, in my dream world social media companies, like Facebook, would not enjoy Section 230 protection. If a company takes ads or sells personal information, it should be liable for defamatory material that it circulates, as is already the case for newspapers.

[4] This figure comes from the Bureau of Economic Analysis’ National Income and Product Accounts, Table 6.6D, Line 1.

[5] There is an argument that take-up rates would initially be lower, since people would be unfamiliar with the system. If there is reason to believe this would be the case, then the initial sums could be larger, phasing down to the targeted level over time.

As we all know, local newspapers have been dropping like flies over the last two decades. Even major regional papers like the Chicago Tribune and Cleveland Plain Dealer have fallen on hard times, sharply cutting back their staff and coverage. In many cases, hedge or private equity funds have done the downsizing or closures. They continue to circle like vultures over the ones they have not already bought. It is reasonable to ask whether anything can be done to reverse this decline.

My friends, Robert McChesney and John Nichols, have put forward the “Local Journalism Initiative (LJI)” to answer the call. (A fuller version is available here.) Their proposal would set out a pot of money to be distributed to local newspapers, based on votes at the county level. They propose elections take place every three years, with each person given three votes. The money would be distributed to news organizations in proportion to the votes received, with a cutoff of 1.0 percent required to get any funding, or 0.5 percent in large counties.

They envision the total size of the pot to be equal to 0.21 percent of GDP or roughly $46 billion in the 2021 economy. This is their estimate of the size of the subsidy from the Postal Service to newspapers in the 19th century, when it was required to deliver newspapers at a loss.

The logic of the LJI is that organizations that provide news provide an essential public service in informing the population. There is a need for a public subsidy since the service will be grossly underprovided in the market as currently structured.

They point to the postal subsidy as a recognition of this need. Like the postal subsidy, their proposal leaves the government neutral as to the content of the news. Voters will decide which organizations they believe are worth their support and the money would be divided accordingly.

They do set out criteria for qualifying for eligibility. A news organization must meet the following:

  • Be formally identified and understood as nonprofit;
  • Be functioning for six months prior to the election, so voters can see what the applicant actually does;
  • Be based in the home county with 75 percent of its salaries going to employees based in the home county;
  • Be completely independent; not a subsidiary of a larger nonprofit group;
  • Produce and publish original material at least five days per week on its website;

To my view, this is an interesting proposal that deserves serious consideration. It is also worth noting in this context a proposal that was included at one time in the Build Back Better (BBB) plan, which would give subsidies to local news outlets for employing reporters.

These subsidies would be much smaller, coming to around $340 million a year. They also are intended to go to existing for-profit newspapers, including newspapers that are owned by large chains. Although the sum of the money involved in the BBB proposal is two orders of magnitude smaller than the amount in the LCI, it at least is an explicit recognition of the desirability of subsidizing the provision of local news.

A Tax Credit System: A Third Option

While I think the LJI would be an enormous gain, if we could win it, I continue to prefer the tax credit system that I have been pushing for several decades. This is a proposal for an amount of money to be allotted to every person (e.g. $100) to be given to the creative worker or organization of their choice. This funding would not be restricted to news organizations. It would instead go to whoever the person designated to get the money. (I describe the proposal in chapter 5 of Rigged [it’s free].)

I would have only three conditions for receiving the money. First, that the person (an individual writer, musician, singer, etc.) or organization (publisher, newspaper, recording company, etc.) must register with the IRS saying what it is they do.

Second, whoever registers is ineligible for copyright protection for a substantial period of time, say three to five years after being in the system. This is to prevent people from getting money through the tax credit system and then establishing a name for themselves and earning really big bucks in the copyright system (more on this in a moment). We give people one subsidy for their work, not two. It also follows from this that all material produced in the system is fully open and cannot be subject to any sort of paywall.

Third, a person or organization must get a certain minimum amount, say $3,000, to collect anything. This is to prevent the most obvious type of fraud, where one person gives their friend their $100 credit, and in turn, their friend gives them their $100 credit. It would still be possible to coordinate 30 people giving the same person their $100 and then rebating the payment to each one, but that would be a lot of illegal coordination for very little potential payoff.

Simple, Simple, Simple: The Key to the Tax Credit System

My preference for the tax credit system is both that it applies to a much broader range of material than just news, and that I think it would be far easier to implement and enforce. I would also add that it can, in principle, be sliced and diced so that it can be phased in incrementally at the national level or put in place at the state or even local level.

Before getting into some of the logistics, it is important to make an often overlooked point about copyrights. McChesney and Nichols are right to point out the postal subsidy in the 19th century as an explicit recognition that newspapers filled an important public purpose. In the same vein, copyright monopolies are established by Congress for the public purpose of promoting creative work.

This is stated explicitly in the constitution where the issuance of patents or copyright monopolies is laid out as one of the powers of Congress, in Article 1, Section 8, just like the power to tax or the power to declare war:

“To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries;”

It would be difficult to envision clearer wording. Copyright monopolies are given to promote a public purpose, which may not be adequately met without some form of government subsidy. They are not a right of individual creators included in the Bill of Rights.

Issuing copyrights is a power that Congress may or may not choose to exercise, just as it is not obligated to impose taxes or declare war. It can also set whatever terms it deems appropriate for copyright, making the monopoly longer or shorter or stronger or weaker.

This is the context in which it makes sense to exclude recipients of tax credit money from copyright protection. If the government is giving a person one subsidy through the tax credit system, it doesn’t make sense to give them a second subsidy in the form of a copyright monopoly. We also want to ensure that the public gets the full benefit of its tax credit subsidy by requiring that any material produced through the system is fully open and can be freely distributed all around the world.

This also fits with the “simple, simple, simple” requirement. The ban on recipients getting copyright protection is self-enforcing. Anyone can claim a copyright, but if they tried to enforce it for material they produced when they were in the tax credit system, the alleged infringer need only point out that they were in the tax credit system at the time the work was produced. Therefore, there is no valid copyright. The government does not have to do anything in this story.

The model for this tax credit system is the tax deduction for charitable contributions. Under this provision, a wide range of organizations, including churches, charities for the poor, and cultural and scientific organizations, can effectively receive a subsidy from the government by registering with the IRS as a nonprofit organization.

For a person in the top tax bracket, this subsidy comes to almost 40 cents on the dollar. This means that if a wealthy person wants to give $1 million to a particular church or cultural organization, the government reimburses them for $400,000 of this sum.  

The IRS makes no effort to determine whether a particular charity is an efficient way to provide services to the poor, or whether a certain religion is a good religion. The only question is whether the organization does what it claims to do.

The same principle would apply to registering to be eligible for the tax credit system. An individual or organization would have to indicate what it is they claim to do (e.g. write, perform music, report on local news, etc.). The IRS would only have the responsibility to verify that the organization does in fact do what they claim.

From the individual’s standpoint, using the tax credit would be as simple as taking the charitable deduction, with the distinction that the credit would be available to everyone, not just people who had tax liabilities. And, unlike the charitable deduction, the government would be picking up the full amount, not just reducing tax liabilities by some fraction of the amount contributed. (If we wanted to make the use of the credit system very simple, we can have a unique number for each person or organization registered. Taxpayers could then indicate on their tax forms the amount of their credit they want to go to them.)   

Tax Credits vs. Local Journalism Initiative 

This tax credit system is obviously much broader than the LJI, but even though promoting local journalism may not be its primary purpose, it may actually be more effective in meeting this goal. The main point here is that local journalism gets nothing if there is not a measure that can gain political support. By making the target of the tax credit creative work more generally, and not just local journalism, there is potentially a much wider range of supporters.

It is also important to recognize that it is not just newspapers that have suffered in the digital age. The money spent on recorded music has also plummeted over the last quarter-century. In 2000, people spent $19.1 billion on recorded music, an amount equal to 0.18 percent of GDP. This had fallen to $2.3 billion by 2020, just over 0.01 percent of GDP. The bulk of this money goes to a small number of big-name singers and musicians, leaving almost nothing for the vast majority of recording artists.[1] There is a strong argument for creating an alternative mechanism of support in this area as well.

Making a broad target also gets the government out of the business of defining what is a local news organization. In the digital era, we are talking primarily about online news sites, with physical newspapers playing at most a very secondary role. Is the government going to police these sites and disqualify ones that make fiction, cartoons, or music available on their sites in addition to local news? These additions would likely make them more attractive to the people voting on where their money goes, but don’t fit the definition of local news.

To my view, the profit/nonprofit distinction is also not especially valuable. There are plenty of nonprofit organizations where CEOs and other top executives can pocket millions of dollars a year. I can’t see any reason for being okay with an organization that has grossly overpaid top management pocketing money, but being upset if someone is making a profit off the system through owning shares. It seems the main check on abuses has to be that people will be less likely to give their credits or votes to an organization that does not actually provide useful material.

In terms of the money that news organizations actually need to be effective, I am inclined to think that it is likely far less than would have been true sixty or seventy years ago. Part of the reason is that people are less dependent on the news media to get information.

Forty, or even thirty, years ago, if someone wanted to know what their city council or state legislature did, they would be almost totally dependent on the media. Unless they were prepared to physically go to the relevant offices to get the records of meetings and bills that were passed or voted on, they would have no way of knowing what was going on. Today, the vast majority of this material is available on the web.

The same is true for government data in a wide range of areas. For example, if I wanted my state or county budget, three decades ago I would have to go down to the offices where they are kept, or arrange to have copies sent to me.   

We still need reporters to do the legwork and find out what is going behind the scenes. They need to find out which politicians or interest groups were pushing or blocking specific legislature. We also need experienced reporters to explain the significance of various measures whose meaning might not be clear to casual observers, but much of the background information can now be provided by a link to a website.[2]

Also, if we compare the publication process today to what would have existed forty years ago, there have been substantial efficiencies in writing up news that did not exist in the past. Most obviously, no one has a secretary anymore to type up their articles. They also can rely on spellcheck programs to correct most spelling errors and many grammatical mistakes. There is still a need for editors to review articles, but much of the office staff that would have been essential in a newsroom forty years ago would not be necessary today.

In addition, since print copies are likely to be a relatively unimportant part of news operations going forward, the expenses associated with laying out and physically printing and distributing newspapers are no longer a major issue. Of course, newspapers would always be able to sell physical copies to people who wanted them, but presumably the price would roughly cover the cost of print editions.

News outlets could also get some money from advertising, although the amount available in a copyright-free world would be less than what they may be able to take in now.[3] Still, it would be far from zero. People are attached to specific websites, and even if they could find all the material posted at various other sites, if they like what is produced on a news outlet’s site, they will be regular visitors and therefore good targets for advertisers.    

The prohibition on copyright protection for organizations and individuals receiving the tax credit would also mean that most of the largest newspapers in the country would not be eligible. It is unlikely that a profitable paper like the New York Times or Wall Street Journal would opt to give up their copyright protection to be eligible for tax credit money. Nor would their reporters, many of whom expect to make large sums from book contracts, be willing to have the option for copyright protection precluded. This means that tax credit money destined for news outlets would be going to smaller ones and new upstarts.

For these reasons, a reasonable target for money from a tax credit to support news production is considerably smaller than the 0.21 percent of GDP that McChesney and Nichols envision. There are roughly 3,000 counties in the United States. Suppose that we would like an average of between five and ten full-time equivalent (FTE) reporters and editors for each one. If this seems insufficient, consider that many of these counties have just a few thousand people and can likely be well-served with just two or three FTE reporters and editors.

This would imply total staffing of between 15,000 and 30,000 people. The average compensation in the private sector for a FTE worker in 2019 was $66,800.[4] If we raise this 10 percent to cover inflation and pay increases in the last two years, and throw in 20 percent for non-wage compensation, we get an average of $88,200 for a FTE employee. That would imply a total cost of between $1.3 billion and $2.6 billion for staffing up the nation’s newsrooms.

It seems plausible that this much money can be raised from a tax credit of say $100 to $150 per person, designed to support creative workers of all types. The country has roughly 280 million adults. If everyone took advantage of a tax credit of this size it would generate $28 billion to $42 billion annually. Clearly, take-up won’t be 100 percent, but it is likely to be fairly high since it is effectively free money.[5]

Would it be possible to convince the public that five or ten percent of the money designated to support creative work more generally should support local news coverage? That seems unknowable in advance of putting in place this sort of system, but if individuals would not voluntarily cough up this much money from a broader tax credit, it seems like a measure designated to give this much, or more, money to support local news would have a difficult legislative path.

Experimenting at the State and Local Level

Since opportunities for getting major legislation passed at the national level are rare, it is always useful to consider whether proposals can be structured in a way where they can be effectively implemented at the state or local level. (A wealthy person who cared about democracy could also cough up the money.) There actually could be a very interesting story where a state or even city attempts to experiment with a creative worker tax credit.

Suppose a state, or even city, proposed to give all their residents $100 or $150 to support creative workers. This would create a substantial pot of money to attract creative workers of all types. As with the national credit, the rules would require that all the material created during the period the person is receiving money through the system not be subject to copyright protection. This means it would be freely available for the whole world.

There could also be a residency requirement, with recipients required to live in the city or state, say for eight or nine months a year. If musicians, writers, or other creative workers are required to live in an area for much of the year, they are likely to want to perform music or plays, or run writing workshops, or do other activities to increase their income. This would also be a good strategy for them since it would make them better known to the people who are giving out their tax credits.

This sort of concentration of creative workers could make a state or city a mecca for the arts that could attract a large number of visitors each year. The revenue from visitors could plausibly cover much or all of the cost of the credit. Of course, this benefit would be in addition to the material produced for the people in the state or city.   

In any case, it would be a relatively limited commitment for a state or city to put a tax credit system in place for a period of time. This sort of experiment would provide insight into how it could work on a larger scale.

Subsidies Without Selecting Content

The most important characteristic of both the tax credit system and LJI is that they provide public subsidies without any attempt to determine content. This is an essential feature since there would be little public support for a major expansion of government-run news or culture production, nor should there be.

It is important that individuals decide what news and cultural organizations they are prepared to support. This is the beauty of the original public subsidy, the provision for copyright monopolies in the constitution. The ability to claim a copyright monopoly does not depend on the content, only that the work be original.

In the same vein, these proposals do not get the government involved in determining content. This is left to individuals to determine where their money will go. If we hope that news outlets survive, and creative work will thrive, this is the path we should want to follow.

[1] There is also a sharp decline in the money spent at movie theaters, from 0.008 percent of GDP in 2000 to 0.006 percent of GDP in 2019, which is partially offset by increased spending on streaming services. The overall picture will not be clear until after the pandemic is over.

[2] This is also a large part of the story of the decline of major regional newspapers like the Chicago Tribune or the Los Angeles Times. Since almost all papers can be readily viewed on the web, no one is dependent on these papers for their coverage of national or international news

[3] To level the playing field a bit, in my dream world social media companies, like Facebook, would not enjoy Section 230 protection. If a company takes ads or sells personal information, it should be liable for defamatory material that it circulates, as is already the case for newspapers.

[4] This figure comes from the Bureau of Economic Analysis’ National Income and Product Accounts, Table 6.6D, Line 1.

[5] There is an argument that take-up rates would initially be lower, since people would be unfamiliar with the system. If there is reason to believe this would be the case, then the initial sums could be larger, phasing down to the targeted level over time.

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