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.

Economists and economic reporters all know that tariffs can lead to corruption. The idea is that if a government-imposed tariff raises the price of a product by 10-25 percent above the free market price, companies have a large incentive to find ways to avoid the tariff. This can mean reclassifying imports to get around the tariff or trying to curry favor with politicians to get exemptions. The New York Times and ProPublica have run several excellent pieces providing examples of such behavior (e.g. here, here, and here).

The reasonable takeaway from these stories is that tariffs should be applied sparingly and with clear purposes in mind. Indiscriminate use of tariffs is likely to lead to large-scale corruption, as corporations use their political power to gain special treatment.

We should be glad that reporters have actively worked to expose the abuses associated with the tariffs Donald Trump has imposed since coming into the White House. But what about the abuses associated with government-granted patent monopolies for prescription drugs? We literally never see a piece pointing out that patent protection creates an enormous incentive for corruption, in fact, one that is far larger than with the Trump tariffs.

Just to get some basic orientation, depending on the country and the product, Trump’s tariffs were generally between 10 and 25 percent. By contrast, government granted patent monopolies often raise the price of a protected drug by at least a factor of ten and often by a factor of one hundred or more. The impact of this protection is therefore equivalent to tariffs of 1,000 or 10,000 percent.

If we think that a tariff of 25 percent provides incentives for corruption, how can we not think that patent protection that is equivalent to tariffs of 1,000 or 10,000 percent provide grounds for corruption? That makes zero sense. Any numerate person who is concerned about the incentives for corruption created by Trump’s tariffs must be concerned about the incentives for corruption created by patent monopolies for prescription drugs.

And, we don’t have to look far. The immediate inspiration for this post is a NYT article on how Pfizer is playing along with Trump in touting his late October date for a vaccine because they hope it will win them favor in any proposals he puts forward to lower drug prices.

If folks are missing the point here, the article implies that Pfizer might push forward for a vaccine approval, before there is sufficient evidence to establish safety and effectiveness, because it hopes Trump will allow Pfizer to enjoy larger patent monopoly rents. So, given Trump’s control of the FDA, we could be getting a vaccine that is either not safe, or effective, or neither, because of Pfizer’s efforts to maximize patent rents. This is exactly the sort of rent-seeking our Econ 101 textbooks all predict.

And, this situation is far from rare. Although it is literally never reported this way, the opioid crisis is largely a story of abuse of patent monopolies. Purdue Pharma and other major opioid manufacturers have paid billions of dollars to settle suits alleging that they misled doctors about the addictiveness of their new generation of opioid painkillers. These companies had incentive to lie about the addictiveness of their drugs because they had government-granted monopolies. If their drugs were selling as generics, it is unlikely they would have made the same sort of effort to push them.

There are many other instances where drug companies have concealed information on the safety and effectiveness of their drugs. The cost from these lies, in poor health and unnecessary deaths, is enormous. Yet, it is never discussed in policy circles.

The refusal to consider the costs stemming from the abuses of patent monopolies would perhaps be more understandable, if there were no alternative mechanisms for financing the development of new drugs and vaccines. But we know this is not true, we just got some great examples with the pandemic.

Moderna, one of the leading contenders to develop a U.S. vaccine, had its research costs pretty much entirely picked by the government. We paid more than $400 million for the pre-clinical research and early phase clinical testing, and then kicked in another $450 million to cover the cost of its Phase 3 clinical tests. While we are — incredibly — still giving the company a monopoly on its vaccine, the fact is that the government basically picked up the full tab for its development costs.

There is no reason that we cannot do this in other circumstances, but without handing out a patent monopoly. In other words, the government can pick up the tab for developing and testing drugs for treating cancer, diabetes, AIDS, and other diseases. When a drug or vaccine goes through the FDA approval process, it can then be sold as a generic that any manufacturer could produce. (I describe a system for financing research in chapter 5 of Rigged [it’s free].)

This could knock $400 billion (five times the food stamp budget or half the military budget) off our annual bill for prescription drugs. It would also eliminate the incentives for corruption created by patent monopolies.

It would be great if we could one day have a serious debate over whether patent monopolies are the best way to finance the development of new drugs and vaccines. But to do so, we need to have a better informed public and policy audience. That means reporting on the corruption that results from patent monopolies, something that the media refuse to do for some reason.

Economists and economic reporters all know that tariffs can lead to corruption. The idea is that if a government-imposed tariff raises the price of a product by 10-25 percent above the free market price, companies have a large incentive to find ways to avoid the tariff. This can mean reclassifying imports to get around the tariff or trying to curry favor with politicians to get exemptions. The New York Times and ProPublica have run several excellent pieces providing examples of such behavior (e.g. here, here, and here).

The reasonable takeaway from these stories is that tariffs should be applied sparingly and with clear purposes in mind. Indiscriminate use of tariffs is likely to lead to large-scale corruption, as corporations use their political power to gain special treatment.

We should be glad that reporters have actively worked to expose the abuses associated with the tariffs Donald Trump has imposed since coming into the White House. But what about the abuses associated with government-granted patent monopolies for prescription drugs? We literally never see a piece pointing out that patent protection creates an enormous incentive for corruption, in fact, one that is far larger than with the Trump tariffs.

Just to get some basic orientation, depending on the country and the product, Trump’s tariffs were generally between 10 and 25 percent. By contrast, government granted patent monopolies often raise the price of a protected drug by at least a factor of ten and often by a factor of one hundred or more. The impact of this protection is therefore equivalent to tariffs of 1,000 or 10,000 percent.

If we think that a tariff of 25 percent provides incentives for corruption, how can we not think that patent protection that is equivalent to tariffs of 1,000 or 10,000 percent provide grounds for corruption? That makes zero sense. Any numerate person who is concerned about the incentives for corruption created by Trump’s tariffs must be concerned about the incentives for corruption created by patent monopolies for prescription drugs.

And, we don’t have to look far. The immediate inspiration for this post is a NYT article on how Pfizer is playing along with Trump in touting his late October date for a vaccine because they hope it will win them favor in any proposals he puts forward to lower drug prices.

If folks are missing the point here, the article implies that Pfizer might push forward for a vaccine approval, before there is sufficient evidence to establish safety and effectiveness, because it hopes Trump will allow Pfizer to enjoy larger patent monopoly rents. So, given Trump’s control of the FDA, we could be getting a vaccine that is either not safe, or effective, or neither, because of Pfizer’s efforts to maximize patent rents. This is exactly the sort of rent-seeking our Econ 101 textbooks all predict.

And, this situation is far from rare. Although it is literally never reported this way, the opioid crisis is largely a story of abuse of patent monopolies. Purdue Pharma and other major opioid manufacturers have paid billions of dollars to settle suits alleging that they misled doctors about the addictiveness of their new generation of opioid painkillers. These companies had incentive to lie about the addictiveness of their drugs because they had government-granted monopolies. If their drugs were selling as generics, it is unlikely they would have made the same sort of effort to push them.

There are many other instances where drug companies have concealed information on the safety and effectiveness of their drugs. The cost from these lies, in poor health and unnecessary deaths, is enormous. Yet, it is never discussed in policy circles.

The refusal to consider the costs stemming from the abuses of patent monopolies would perhaps be more understandable, if there were no alternative mechanisms for financing the development of new drugs and vaccines. But we know this is not true, we just got some great examples with the pandemic.

Moderna, one of the leading contenders to develop a U.S. vaccine, had its research costs pretty much entirely picked by the government. We paid more than $400 million for the pre-clinical research and early phase clinical testing, and then kicked in another $450 million to cover the cost of its Phase 3 clinical tests. While we are — incredibly — still giving the company a monopoly on its vaccine, the fact is that the government basically picked up the full tab for its development costs.

There is no reason that we cannot do this in other circumstances, but without handing out a patent monopoly. In other words, the government can pick up the tab for developing and testing drugs for treating cancer, diabetes, AIDS, and other diseases. When a drug or vaccine goes through the FDA approval process, it can then be sold as a generic that any manufacturer could produce. (I describe a system for financing research in chapter 5 of Rigged [it’s free].)

This could knock $400 billion (five times the food stamp budget or half the military budget) off our annual bill for prescription drugs. It would also eliminate the incentives for corruption created by patent monopolies.

It would be great if we could one day have a serious debate over whether patent monopolies are the best way to finance the development of new drugs and vaccines. But to do so, we need to have a better informed public and policy audience. That means reporting on the corruption that results from patent monopolies, something that the media refuse to do for some reason.

Donald Trump boasts endlessly about the economic recovery and insists that people are doing great now. The numbers disagree.

We will get the last employment report before the election on Friday. The unemployment rate reported for August was 8.4 percent. We’ll see what happens on Friday, but we are not doing especially well compared to other countries. Here’s the picture.

Source: OECD.

As can be seen, the 8.4 percent August unemployment rate reported for August was well above the 2.9 percent rate reported for Japan, 3.4 percent rate for the United Kingdom, and 4.4 percent rate for Germany. (These are July rates, except for the UK, for which the OECD only has the May rate.) Denmark comes in at 6.0 percent and France at 6.9 percent. The U.S does come in better than Italy, which had a 9.7 percent unemployment rate, and Canada with a 10.2 percent unemployment rate.

In short, the economy has come back a long way from the middle of the shutdown in April, but it still has far to go. And workers in many other countries have done much better.

As Trump might say, numbers have been very bad to him.

Donald Trump boasts endlessly about the economic recovery and insists that people are doing great now. The numbers disagree.

We will get the last employment report before the election on Friday. The unemployment rate reported for August was 8.4 percent. We’ll see what happens on Friday, but we are not doing especially well compared to other countries. Here’s the picture.

Source: OECD.

As can be seen, the 8.4 percent August unemployment rate reported for August was well above the 2.9 percent rate reported for Japan, 3.4 percent rate for the United Kingdom, and 4.4 percent rate for Germany. (These are July rates, except for the UK, for which the OECD only has the May rate.) Denmark comes in at 6.0 percent and France at 6.9 percent. The U.S does come in better than Italy, which had a 9.7 percent unemployment rate, and Canada with a 10.2 percent unemployment rate.

In short, the economy has come back a long way from the middle of the shutdown in April, but it still has far to go. And workers in many other countries have done much better.

As Trump might say, numbers have been very bad to him.

It is a cult among policy types to say that CEOs maximize shareholder returns, as in this NYT piece. This is in spite of the fact that returns to shareholders have not been especially good in the last two decades. And, this is even though returns were boosted by a huge corporate tax cut in 2017 that increased after-tax profits by more than 10 percent, other things equal.

There is considerable evidence that CEOs do not earn their $20 million pay, in the sense of providing $20 million in additional returns to shareholders, compared to the next schmuck down the line. This matters in a big way because CEO pay influences pay structures throughout the economy. If CEOs got paid 20 to 30 times the pay of ordinary workers, like they did in the 1960s or 1970s, or around $2 million to $3 million a year, the next in line execs would likely get around $1.5 million and the third tier corporate execs would get in the high hundreds of thousands. That is a contrast from today when the CFO and other top tier execs might get close to $10 million and the third tier can easily make $2-$3 million. 

In that world, a university president would probably make around $400,000 to $500,000, with corresponding reductions in pay for other top administrators. The same would be true for foundations and other non-profits, as well as government. Perhaps the fact that people’s whose pay is inflated, at least indirectly, by high CEO pay, largely set the terms of debate in this country, explains why the untrue claim that corporations are run to maximize shareholder returns is taken as gospel. 

It is a cult among policy types to say that CEOs maximize shareholder returns, as in this NYT piece. This is in spite of the fact that returns to shareholders have not been especially good in the last two decades. And, this is even though returns were boosted by a huge corporate tax cut in 2017 that increased after-tax profits by more than 10 percent, other things equal.

There is considerable evidence that CEOs do not earn their $20 million pay, in the sense of providing $20 million in additional returns to shareholders, compared to the next schmuck down the line. This matters in a big way because CEO pay influences pay structures throughout the economy. If CEOs got paid 20 to 30 times the pay of ordinary workers, like they did in the 1960s or 1970s, or around $2 million to $3 million a year, the next in line execs would likely get around $1.5 million and the third tier corporate execs would get in the high hundreds of thousands. That is a contrast from today when the CFO and other top tier execs might get close to $10 million and the third tier can easily make $2-$3 million. 

In that world, a university president would probably make around $400,000 to $500,000, with corresponding reductions in pay for other top administrators. The same would be true for foundations and other non-profits, as well as government. Perhaps the fact that people’s whose pay is inflated, at least indirectly, by high CEO pay, largely set the terms of debate in this country, explains why the untrue claim that corporations are run to maximize shareholder returns is taken as gospel. 

Last week an official with China’s Center for Disease Control and Prevention (CDC) said that the country may have a vaccine available for widespread distribution by November or December. This would almost certainly be at least a month or two before a vaccine is available for distribution in the United States, and possibly quite a bit longer.

While we may want to treat statements from Chinese government officials with some skepticism, there is reason to believe that this claim is close to the mark. China has reported giving its vaccines to more than 100,000 people. In addition to giving it to tens of thousands of people enrolled in clinical trials, it also has given them to front line workers, such as medical personal, through an emergency use authorization. 

This may not have been a good policy, since these workers faced the safety risks associated with a vaccine that has only undergone limited testing, but it does mean that a large number of people have now been exposed to China’s leading vaccine candidates. If there were serious side effects, it would be hard for China to bury evidence of large numbers of adverse reactions. If no such evidence surfaces, we can assume that bad reactions to the vaccines were either rare and/or not very serious.

Of course, the evidence to date tells us little about long-term effects. But that would be true even if we had a couple more months of testing. Evidence of long-term effects may not show up for years. Ideally, researchers would have enough understanding of a vaccine so that they would largely be able to rule out problems showing up years down the road, but we know they do sometimes overlook risks. In any case, the possibility of longer-term problems would still be there with a longer initial testing period.

It is possible that the vaccines are not as effective as claimed. Since China has been very successful in controlling the pandemic, even front-line workers would face a limited risk of exposure. However, they have been doing Phase 3 testing in Brazil, Bangladesh, and other countries with much more severe outbreaks. 

On this issue, it is worth noting that the United Arab Emirates (UAE), one of the countries in which China is conducting its phase 3 trials, just granted an emergency use authorization for one of its vaccines to be given to frontline workers there. Presumably, this reflects the positive results of the trial, since it is unlikely that the UAE would grant this authorization simply to please China’s government. 

The companies have not yet shared their data, so it’s possible that the evidence does not support the claim of this Chinese CDC official. But here too, the value of making an obviously false claim would be limited. If the companies either fail to produce their data or the data does not show solid evidence of a vaccine’s effectiveness, the official and China’s government would end up looking rather foolish.

Since they are not just trying to bluff their way through an election, but are rather concerned about China’s longer-term standing to the world, it’s hard to see why they would make a claim that would soon be shown to be false. In short, the promise of a vaccine being distributed in November or December is quite likely true. 

I suppose this will get those hoping that the United States would win the vaccine “race” very angry. But it should get the rest of us asking why we were having a race. 

Why Is Cooperative Research So Hard to Understand?

In the early days of the pandemic, there was a large degree of international cooperation, with scientists around the world quickly sharing new findings. This allowed for our understanding of the virus to advance far more rapidly than would otherwise be the case. 

But we quickly shifted to a path of nationalistic competition. Donald Trump led the way down this path, with his “Operation Warp Speed.” Other countries followed a similar route, even as they maintained some commitment to the World Health Organization’s efforts to promote sharing with developing countries.

But the issue was not just nationalism, it is also the monopolization of research findings. If Moderna, Pfizer, or one of the other U.S. drug companies ends up developing a safe and effective vaccine, they fully intend to sell it at a considerable profit, and they will be sharing the money with their top executives and their shareholders, not the American people. This outcome makes sense if the point of the policy is to maximize drug company profits. It makes no sense if the policy goal is to produce the best health outcomes at the lowest possible cost.

The United States did not have to take the patent monopoly nationalistic route. Suppose that all the money from Operation Warp Speed went to fully open research. This would not just be an accidental outcome, it would be an explicit condition of the funding. If a drug company received money from this program, all its results must be posted on the Internet as quickly as practical, and any findings would be in the public domain.

Since we would not just want to pay for the rest of the world’s research, we could have negotiated commitments from other countries to make payments that are proportionate, given their size and per capita income. Of course, there is no guarantee that they would all go along, especially with Donald Trump as president. But in principle, this would be a mutually beneficial agreement for pretty much everyone. 

They would contribute their share of funding to the research pool and they would then have the right to produce any vaccines or treatments that are developed. If it turned out to be the case that a U.S. drug company was the first to come up with an effective vaccine, any company with the necessary manufacturing facilities would be able to freely produce and distribute the vaccine anywhere in the world. They would not need to negotiate over patent rights.

The same would be true if, as now seems to be the case, China turned out to develop the first effective vaccine. Our manufacturers would be free to start producing the vaccine as soon as it received the necessary approvals from the Food and Drug Administration. There would be no issue of people here going without the vaccine just because the developer was a Chinese company.

It’s not surprising that Donald Trump did not go the route of cooperative development. His first priority is advancing his own political prospects and if he thinks that means having the U.S. win a vaccine race, that is what he is going to do. And, he certainly has no intention of pursuing a course that could limit drug company profits.

But the big question is where were the Democrats? If they were objecting to the path of vaccine nationalism and monopoly, it was not easy to hear their complaints. And, I’m not talking just about centrist Democrats like Biden, Pelosi, and Schumer, I also didn’t hear complaints from the Bernie Sanders or Elizabeth Warren wing of the party. Why were there no objections to the Trump course and advocacy for a cooperative alternative?

Going a cooperative route would not just offer benefits in the context of developing vaccines and treatments for the coronavirus, although these benefits would be incredibly important. It also could have provided a great model of an alternative path for financing the development of prescription drugs. 

We will spend over $500 billion this year on prescription drugs. We would pay less than $100 billion if these drugs were available in a free market without patent monopolies and related protections. The $400 billion in annual savings is more than five times what we spend on food stamps each year. It comes close to $3,000 per household. In other words, it is real money.

Patent and copyright monopolies are also a big part of the upward redistribution of income over the last four decades. If we had alternatives mechanisms for financing innovation and creative work, people like Bill Gates would be much less rich, and the rest of us would have far more money.

Again, it is easy to understand why Donald Trump would have zero interest in promoting world health and reducing inequality. It’s also understandable that politicians who are dependent on campaign contributions from those who have benefitted from upward redistribution, would not want to pursue routes that call into question the mechanisms of upward redistribution. 

But where were the progressive voices? The pandemic gave us an extraordinary opportunity to experiment with an alternative mechanism for financing research that could have enormously benefitted public health, both in the United States and elsewhere. The failure to have a visible alternative will cost both lives and money long into the future.  

Last week an official with China’s Center for Disease Control and Prevention (CDC) said that the country may have a vaccine available for widespread distribution by November or December. This would almost certainly be at least a month or two before a vaccine is available for distribution in the United States, and possibly quite a bit longer.

While we may want to treat statements from Chinese government officials with some skepticism, there is reason to believe that this claim is close to the mark. China has reported giving its vaccines to more than 100,000 people. In addition to giving it to tens of thousands of people enrolled in clinical trials, it also has given them to front line workers, such as medical personal, through an emergency use authorization. 

This may not have been a good policy, since these workers faced the safety risks associated with a vaccine that has only undergone limited testing, but it does mean that a large number of people have now been exposed to China’s leading vaccine candidates. If there were serious side effects, it would be hard for China to bury evidence of large numbers of adverse reactions. If no such evidence surfaces, we can assume that bad reactions to the vaccines were either rare and/or not very serious.

Of course, the evidence to date tells us little about long-term effects. But that would be true even if we had a couple more months of testing. Evidence of long-term effects may not show up for years. Ideally, researchers would have enough understanding of a vaccine so that they would largely be able to rule out problems showing up years down the road, but we know they do sometimes overlook risks. In any case, the possibility of longer-term problems would still be there with a longer initial testing period.

It is possible that the vaccines are not as effective as claimed. Since China has been very successful in controlling the pandemic, even front-line workers would face a limited risk of exposure. However, they have been doing Phase 3 testing in Brazil, Bangladesh, and other countries with much more severe outbreaks. 

On this issue, it is worth noting that the United Arab Emirates (UAE), one of the countries in which China is conducting its phase 3 trials, just granted an emergency use authorization for one of its vaccines to be given to frontline workers there. Presumably, this reflects the positive results of the trial, since it is unlikely that the UAE would grant this authorization simply to please China’s government. 

The companies have not yet shared their data, so it’s possible that the evidence does not support the claim of this Chinese CDC official. But here too, the value of making an obviously false claim would be limited. If the companies either fail to produce their data or the data does not show solid evidence of a vaccine’s effectiveness, the official and China’s government would end up looking rather foolish.

Since they are not just trying to bluff their way through an election, but are rather concerned about China’s longer-term standing to the world, it’s hard to see why they would make a claim that would soon be shown to be false. In short, the promise of a vaccine being distributed in November or December is quite likely true. 

I suppose this will get those hoping that the United States would win the vaccine “race” very angry. But it should get the rest of us asking why we were having a race. 

Why Is Cooperative Research So Hard to Understand?

In the early days of the pandemic, there was a large degree of international cooperation, with scientists around the world quickly sharing new findings. This allowed for our understanding of the virus to advance far more rapidly than would otherwise be the case. 

But we quickly shifted to a path of nationalistic competition. Donald Trump led the way down this path, with his “Operation Warp Speed.” Other countries followed a similar route, even as they maintained some commitment to the World Health Organization’s efforts to promote sharing with developing countries.

But the issue was not just nationalism, it is also the monopolization of research findings. If Moderna, Pfizer, or one of the other U.S. drug companies ends up developing a safe and effective vaccine, they fully intend to sell it at a considerable profit, and they will be sharing the money with their top executives and their shareholders, not the American people. This outcome makes sense if the point of the policy is to maximize drug company profits. It makes no sense if the policy goal is to produce the best health outcomes at the lowest possible cost.

The United States did not have to take the patent monopoly nationalistic route. Suppose that all the money from Operation Warp Speed went to fully open research. This would not just be an accidental outcome, it would be an explicit condition of the funding. If a drug company received money from this program, all its results must be posted on the Internet as quickly as practical, and any findings would be in the public domain.

Since we would not just want to pay for the rest of the world’s research, we could have negotiated commitments from other countries to make payments that are proportionate, given their size and per capita income. Of course, there is no guarantee that they would all go along, especially with Donald Trump as president. But in principle, this would be a mutually beneficial agreement for pretty much everyone. 

They would contribute their share of funding to the research pool and they would then have the right to produce any vaccines or treatments that are developed. If it turned out to be the case that a U.S. drug company was the first to come up with an effective vaccine, any company with the necessary manufacturing facilities would be able to freely produce and distribute the vaccine anywhere in the world. They would not need to negotiate over patent rights.

The same would be true if, as now seems to be the case, China turned out to develop the first effective vaccine. Our manufacturers would be free to start producing the vaccine as soon as it received the necessary approvals from the Food and Drug Administration. There would be no issue of people here going without the vaccine just because the developer was a Chinese company.

It’s not surprising that Donald Trump did not go the route of cooperative development. His first priority is advancing his own political prospects and if he thinks that means having the U.S. win a vaccine race, that is what he is going to do. And, he certainly has no intention of pursuing a course that could limit drug company profits.

But the big question is where were the Democrats? If they were objecting to the path of vaccine nationalism and monopoly, it was not easy to hear their complaints. And, I’m not talking just about centrist Democrats like Biden, Pelosi, and Schumer, I also didn’t hear complaints from the Bernie Sanders or Elizabeth Warren wing of the party. Why were there no objections to the Trump course and advocacy for a cooperative alternative?

Going a cooperative route would not just offer benefits in the context of developing vaccines and treatments for the coronavirus, although these benefits would be incredibly important. It also could have provided a great model of an alternative path for financing the development of prescription drugs. 

We will spend over $500 billion this year on prescription drugs. We would pay less than $100 billion if these drugs were available in a free market without patent monopolies and related protections. The $400 billion in annual savings is more than five times what we spend on food stamps each year. It comes close to $3,000 per household. In other words, it is real money.

Patent and copyright monopolies are also a big part of the upward redistribution of income over the last four decades. If we had alternatives mechanisms for financing innovation and creative work, people like Bill Gates would be much less rich, and the rest of us would have far more money.

Again, it is easy to understand why Donald Trump would have zero interest in promoting world health and reducing inequality. It’s also understandable that politicians who are dependent on campaign contributions from those who have benefitted from upward redistribution, would not want to pursue routes that call into question the mechanisms of upward redistribution. 

But where were the progressive voices? The pandemic gave us an extraordinary opportunity to experiment with an alternative mechanism for financing research that could have enormously benefitted public health, both in the United States and elsewhere. The failure to have a visible alternative will cost both lives and money long into the future.  

This is an incredibly ghoulish question that would be absurd to ask in normal times. But these are not normal times. We know Donald Trump has staffed the top levels of his administration with people who unhesitatingly put Donald Trump’s political prospects above the well-being of the people. It is certainly plausible that Republican governors have similar priorities.

A simple test for the governors is to look at their positive test rates for the coronavirus. Test rates are a good measure of how serious the governors are in trying to bring the pandemic under control. While they can take measures to limit the actual spread, such as longer and stronger lockdowns and mask requirements, many factors determining the spread are outside their control.

For example, New York, New Jersey, and other states in the Northeast were hard hit early because they had a large number of international travelers. More recently, North Dakota has seen a huge spike in infections because Kristi Noem, the governor of neighboring South Dakota, thought it was clever to have a huge week long motorcycle rally in the middle of a pandemic.

However, positive rates are largely under the control of the state. If the governor makes more of an effort to find positive cases, the state will have a lower positive rate. In states with high positive rates, governors have been less concerned about tracking the spread of the pandemic.

This is a matter of life and death for tens of thousands of people, since if a person knows they are infected, they can take steps to protect their co-workers, friends, and family. If they don’t know, they will likely get many of these people infected as well.

It is not hard to imagine that Republican governors would deliberately limit testing so that they find fewer cases. Donald Trump explicitly said at a campaign rally that he told his staff to “slow the testing down.” He subsequently insisted that he was not joking.

In this context, it is perfectly reasonable to ask whether there is evidence that Republican governors have decided to deliberately slow testing, knowing that it will mean that more people in their states get sick and die, just so that Donald Trump will have fewer reported cases.

Here is the story. The chart shows the ten states with the highest positive rates and the ten states with the lowest rates. (The data are seven-day averages, given for September 20th, by the John Hopkins University Coronavirus Resource Center.)    

 

 

 

Eight of the ten states with the highest positive rates have Republican governors. The exceptions are Wisconsin and Kansas. Wisconsin stands out as being the worst state by this measure.  This could be the fault of its Democratic governor, Tony Evers, but the Republican controlled legislature may also be a factor. The legislature has repeatedly taken steps to thwart Evers’ effort to contain the virus, as has the state’s Supreme Court.

We see pretty much the opposite picture when we look at the states with low positive rates, although the relationship is not as strong. Six of the ten states have Democratic leaders. The four exceptions are Phil Scott in Vermont, which has the second lowest rate, Charlie Baker, in Massachusetts, which has the third lowest positive rate, Chris Sununu in New Hampshire, with seventh lowest rate,  and Mike Dunleavy in Alaska, which scrapes in with the tenth lowest positive rate.

The sharp contrast, with blue states having very low positive rates, and red states having very high positive rates, does not prove that Republican governors are deliberately restricting testing. However, it is certainly consistent with this story and should be the basis for some serious questioning of these governors.

(Correction: this post has been corrected to reflect the fact that Kansas has a Democratic governor and Vermont and New Hampshire have Republican governors.)

This is an incredibly ghoulish question that would be absurd to ask in normal times. But these are not normal times. We know Donald Trump has staffed the top levels of his administration with people who unhesitatingly put Donald Trump’s political prospects above the well-being of the people. It is certainly plausible that Republican governors have similar priorities.

A simple test for the governors is to look at their positive test rates for the coronavirus. Test rates are a good measure of how serious the governors are in trying to bring the pandemic under control. While they can take measures to limit the actual spread, such as longer and stronger lockdowns and mask requirements, many factors determining the spread are outside their control.

For example, New York, New Jersey, and other states in the Northeast were hard hit early because they had a large number of international travelers. More recently, North Dakota has seen a huge spike in infections because Kristi Noem, the governor of neighboring South Dakota, thought it was clever to have a huge week long motorcycle rally in the middle of a pandemic.

However, positive rates are largely under the control of the state. If the governor makes more of an effort to find positive cases, the state will have a lower positive rate. In states with high positive rates, governors have been less concerned about tracking the spread of the pandemic.

This is a matter of life and death for tens of thousands of people, since if a person knows they are infected, they can take steps to protect their co-workers, friends, and family. If they don’t know, they will likely get many of these people infected as well.

It is not hard to imagine that Republican governors would deliberately limit testing so that they find fewer cases. Donald Trump explicitly said at a campaign rally that he told his staff to “slow the testing down.” He subsequently insisted that he was not joking.

In this context, it is perfectly reasonable to ask whether there is evidence that Republican governors have decided to deliberately slow testing, knowing that it will mean that more people in their states get sick and die, just so that Donald Trump will have fewer reported cases.

Here is the story. The chart shows the ten states with the highest positive rates and the ten states with the lowest rates. (The data are seven-day averages, given for September 20th, by the John Hopkins University Coronavirus Resource Center.)    

 

 

 

Eight of the ten states with the highest positive rates have Republican governors. The exceptions are Wisconsin and Kansas. Wisconsin stands out as being the worst state by this measure.  This could be the fault of its Democratic governor, Tony Evers, but the Republican controlled legislature may also be a factor. The legislature has repeatedly taken steps to thwart Evers’ effort to contain the virus, as has the state’s Supreme Court.

We see pretty much the opposite picture when we look at the states with low positive rates, although the relationship is not as strong. Six of the ten states have Democratic leaders. The four exceptions are Phil Scott in Vermont, which has the second lowest rate, Charlie Baker, in Massachusetts, which has the third lowest positive rate, Chris Sununu in New Hampshire, with seventh lowest rate,  and Mike Dunleavy in Alaska, which scrapes in with the tenth lowest positive rate.

The sharp contrast, with blue states having very low positive rates, and red states having very high positive rates, does not prove that Republican governors are deliberately restricting testing. However, it is certainly consistent with this story and should be the basis for some serious questioning of these governors.

(Correction: this post has been corrected to reflect the fact that Kansas has a Democratic governor and Vermont and New Hampshire have Republican governors.)

I have long enjoyed reading Matthew Klein’s columns in the Financial Times and elsewhere. They are invariably insightful and I have learned much from them. I am less familiar with Michael Pettis’ work, but I have liked what I have read. Therefore, I expected a lot from their book, Trade Wars are Class Wars, and I was not disappointed.

The basic point is that the major trade imbalances in the world over the last four decades have been driven by the suppression of wage growth, with income being redistributed from labor to capital. This has led to shortfalls in aggregate demand that countries try to offset by having trade surpluses. The main actors in that picture are China and Germany.

In the Klein-Pettis view, the U.S. has also suffered from this upward redistribution, although it has taken a somewhat different form since the country has run persistent trade deficits over this period. While I largely agree with this framing, I have some minor quibbles with the story they layout and one very large one.

In the minor quibble category, Klein and Pettis (KP) criticize Trump adviser Peter Navarro for focusing on the bilateral trade deficits the United States runs with China and other countries. I have no stake in defending Peter Navarro, but at least some of us who are concerned about the trade deficit with China have argued that the U.S. should be pressing China to raise the value of its currency relative to the dollar.

If the renminbi rose against the dollar, it should mean, other things equal, that China would have a lower trade surplus and therefore fewer savings, and the United States would have a smaller trade deficit, and therefore more savings. This isn’t an issue of a policy being thwarted by the inescapable logic of accounting identities, it is a question of the direction of causation in these identities. And, if we don’t think the U.S. economy is at full employment, more net exports will mean higher GDP and more savings.

I should also mention here that KP make the valid point that the direct trade balance between China and the U.S. does not accurately measure the net flows between the two countries, since much of the price of items exported from China is due to inputs from other countries. Therefore, our imports from China overstate the value of goods produced in China and then exported to the United States.

While this is true, it neglects the flip side, that many of the items we buy from Japan, the European Union, and elsewhere, include inputs from China. If we want to pull out the third country value-added from the goods imported from China, to get a better measure of bilateral trade flows, we also have to add in the Chinese value-added in the items imported from third countries. While KP are not guilty of the one-sided adjustment, other economists are. It is one of the items in the Games Economists Play textbook.  

Another point that is at least under-emphasized in KP, is that real wages soared in China in the period since 2000, in spite of the wage repression measures they describe. Real wages have risen at close to double-digit annual rates over this period. While they would have risen even faster if the country had not maintained an undervalued currency, and other measures to suppress wage growth, it has to be easier politically to maintain a policy of repressing wage growth in a context where wages are rising rapidly than when they are stagnating or falling.

KP also hold out the prospect that China is going to run up against some limit as it encourages companies to pursue wasteful investment projects that leave them ever further in debt. It’s not clear why a country that issues its own currency and has massive foreign reserves and a trade surplus, would ever hit a limit. I suppose if somehow excessive debt leads to explosive demand growth, and an inflationary spiral, it would be a serious problem. But it is hard to see how we get from where we are now, with persistent shortfalls in demand as the main issue, to the complete opposite problem.

My last quibble on the surplus country side is the claim that the assets issued or guaranteed by the U.S. government are risk-free. I know this is the standard wisdom, but I have no idea what it is supposed to mean.

I get that the U.S. government is not about to default on its debt. That can be treated as a near certainty. But the dollar can and often does fall in value relative to other currencies. In fact, since the start of 2020, the dollar has fallen by more than 6.0 percent against the euro. I’m not sure why the prospect that the dollar could fall in value relative to other currencies should not be seen as a risk. I don’t think most people would consider an investment that loses 6.0 percent of its value in eight months as risk-free.

On the U.S. side, KP for some reason ignore the wealth effect when discussing the low savings rates in the United States in the 1990s and the 2000s pre-crash. The idea of a wealth effect on consumption is not new, nor to my knowledge especially controversial.

The 1990s stock market bubble created close to $10 billion in bubble wealth. Assuming a wealth effect of 3-4 percent, this implied increased consumption on the order of 3-4 percent of GDP. That fits well with the drop in savings we saw over this period. As a practical matter, this manifested itself in smaller contributions to 401(k)s and also declining employer contributions to defined benefit pensions. The rise in the stock market was effectively making the contribution for employers. Some of us warned about the problem this was creating for pensions at the time, but the irrational exuberance of the day drowned us out.   

There was a similar story with the housing bubble. As KP note, people were happy to borrow against the rapidly growing equity in their homes. With the bubble creating roughly $8 trillion in additional housing equity, and a housing wealth effect of 4-6 cents on the dollar, the run-up in house prices can fully explain the fall in saving rates in the bubble years.

My reason for harping on this issue is that many economists were surprised when consumption plunged in 2008-2010. There was no basis for this surprise. The bubble that had been driving consumption had been deflated. Savings rates returned to roughly their long-term average, and have stayed there even as the debt overhang from the crash dissipated. There is nothing surprising in this story that needs explaining.

Okay, but enough of the quibbles, my big objection is the failure to focus adequately on the structuring of trade. This is a very central part of the wage suppression story, at least in the United States.

First, it is important to make the point that in the United States the upward redistribution was for the most part not from wages to profits, but from the wages of ordinary workers to the wages of highly paid workers like CEOs and other top executives, Wall Street and Silicon Valley types, and highly paid professionals.

KP for some reason see a very different picture of the data than me. They report a 7.0 percentage point drop in the labor share of national income from 2000 to 2007 (p 179). I see a drop of 1.2 percentage points (NIPA Table 1.10, Line 2 divided by the sum of Line 2 and Line 9).

Furthermore, even this drop in labor shares is questionable. Profits were inflated during these years by the profits earned in the financial sector from issuing dubious loans that subsequently went bad. This would be similar to companies reporting profits on non-existent sales. There were not real profits and of course, the banks lost hugely when these loans went bad in 2008—2010.[1]

There was a drop in labor shares in the weak labor market resulting from the Great Recession. This was being reversed with the recovery, but we still had some way to go when the pandemic hit. By my calculations, just over 10 percent of the gap between productivity growth and median wage growth from 1979 to 2019 can be explained by this shift from labor to capital. The rest is due to upward redistribution within the wage structure.  

This gets us to the structure of the trade. Our trade policy was focused on reducing or eliminating barriers to merchandise trade. This has the predicted and actual result of lowering the wages of manufacturing workers, which spilled over to putting downward pressure on the wages of non-college-educated workers more generally. When workers in the United States had to compete with workers in China and elsewhere, earning less than one-tenth of their pay, it was inevitable they would either take large pay cuts or lose their jobs.

However, trade liberalization did not have to focus on manufactured goods or at least exclusively focus on manufactured goods. We could have focused trade policy on reducing barriers that prevent qualified professionals from working in the United States. Doctors and dentists in the United States earn roughly twice as much as their counterparts in other wealthy countries. Trade liberalization in these professions could have brought their pay closer to the OECD average, saving households more than $100 billion annually from their healthcare bill. We didn’t see the liberalization of licensing restrictions (they were actually made tighter in the 1990s) because doctors and dentists have far more political power than autoworkers.

The other part of this story that is almost completely absent from KP is the tightening of rules on patent and copyright monopolies, which have been a key part of every trade deal for the last three decades. These monopolies are forms of protectionism, the polar opposite of free trade. They lead to prices for prescription drugs, medical equipment, software, and other protected items that are often hundreds of times the free market price, the equivalent of tariffs of tens of thousands percent.

They also are associated with enormous upward redistribution, as ordinary workers have to pay much higher prices for the benefit of the people with the skills associated with producing these products. Bill Gates would likely still be working for a living if Microsoft had to sell software without government-granted copyright or patent monopolies.   

This is a huge issue going forward, as the cost of protection for intellectual products is likely to continue to grow as a share of the economy. It is already huge. We will spend over $500 billion this year on prescription drugs alone. If these drugs were sold in a free market, we would almost certainly pay less than $100 billion. The difference of $400 billion is more than $3,000 per family. This $400 billion in potential savings is almost 80 percent of what we will spend on cars and parts in 2020.

In future trade deals, the terms of protection for intellectual products, both foreign and domestic, will swamp the importance of trade in manufactured goods. The loss of good-paying jobs in manufacturing was a huge deal in the 1980s, 1990s, and especially the 2000s, but unfortunately, we don’t stand much to lose anymore.

Manufacturing employment is now less than 9.0 percent of total employment. Furthermore, while manufacturing jobs used to provide relatively good-paying employment for workers without college degrees, this is no longer true. The average wage for production and non-supervisory workers in manufacturing is 6.0 percent less than for production and non-supervisory workers in the private sector as a whole. This gap would be reduced when factoring in benefits, but the idea that a manufacturing job is a good-paying job where a worker could support a family and have health care and a pension is simply no longer true.

The reason for the deterioration in the quality of manufacturing jobs is not a secret. The unionization rate in manufacturing has plummeted, largely due to trade. Until the pandemic hit in March, we had added back more than 1.6 million manufacturing jobs from the Great Recession trough in 2010. Nonetheless, the number of union members in manufacturing had fallen by almost 900,000. In short, as we added back jobs in the sector, they were overwhelmingly lower paying non-union jobs. There is little reason to believe that these workers were much better off than workers in an Amazon distribution center or other service sector jobs.

This points to the fact that manufacturing jobs should not be at the center of the trade agenda for those concerned about reversing the upward redistribution of income. The focus should be on reducing the protectionist barriers that raise the pay of the most highly paid professionals, and on limiting the protections for intellectual property that raise the prices we pay for a wide range of items and hand the money to a relatively small elite in a position to benefit.

As in real war, when it comes to trade, it is important that we not be fighting the last war. We have to go beyond KP to be properly prepared for battle.

[1] The corresponding overstatement on the output side would be treating the issuance of the loan as adding value. In reality, a bad loan is not adding value to the economy.

I have long enjoyed reading Matthew Klein’s columns in the Financial Times and elsewhere. They are invariably insightful and I have learned much from them. I am less familiar with Michael Pettis’ work, but I have liked what I have read. Therefore, I expected a lot from their book, Trade Wars are Class Wars, and I was not disappointed.

The basic point is that the major trade imbalances in the world over the last four decades have been driven by the suppression of wage growth, with income being redistributed from labor to capital. This has led to shortfalls in aggregate demand that countries try to offset by having trade surpluses. The main actors in that picture are China and Germany.

In the Klein-Pettis view, the U.S. has also suffered from this upward redistribution, although it has taken a somewhat different form since the country has run persistent trade deficits over this period. While I largely agree with this framing, I have some minor quibbles with the story they layout and one very large one.

In the minor quibble category, Klein and Pettis (KP) criticize Trump adviser Peter Navarro for focusing on the bilateral trade deficits the United States runs with China and other countries. I have no stake in defending Peter Navarro, but at least some of us who are concerned about the trade deficit with China have argued that the U.S. should be pressing China to raise the value of its currency relative to the dollar.

If the renminbi rose against the dollar, it should mean, other things equal, that China would have a lower trade surplus and therefore fewer savings, and the United States would have a smaller trade deficit, and therefore more savings. This isn’t an issue of a policy being thwarted by the inescapable logic of accounting identities, it is a question of the direction of causation in these identities. And, if we don’t think the U.S. economy is at full employment, more net exports will mean higher GDP and more savings.

I should also mention here that KP make the valid point that the direct trade balance between China and the U.S. does not accurately measure the net flows between the two countries, since much of the price of items exported from China is due to inputs from other countries. Therefore, our imports from China overstate the value of goods produced in China and then exported to the United States.

While this is true, it neglects the flip side, that many of the items we buy from Japan, the European Union, and elsewhere, include inputs from China. If we want to pull out the third country value-added from the goods imported from China, to get a better measure of bilateral trade flows, we also have to add in the Chinese value-added in the items imported from third countries. While KP are not guilty of the one-sided adjustment, other economists are. It is one of the items in the Games Economists Play textbook.  

Another point that is at least under-emphasized in KP, is that real wages soared in China in the period since 2000, in spite of the wage repression measures they describe. Real wages have risen at close to double-digit annual rates over this period. While they would have risen even faster if the country had not maintained an undervalued currency, and other measures to suppress wage growth, it has to be easier politically to maintain a policy of repressing wage growth in a context where wages are rising rapidly than when they are stagnating or falling.

KP also hold out the prospect that China is going to run up against some limit as it encourages companies to pursue wasteful investment projects that leave them ever further in debt. It’s not clear why a country that issues its own currency and has massive foreign reserves and a trade surplus, would ever hit a limit. I suppose if somehow excessive debt leads to explosive demand growth, and an inflationary spiral, it would be a serious problem. But it is hard to see how we get from where we are now, with persistent shortfalls in demand as the main issue, to the complete opposite problem.

My last quibble on the surplus country side is the claim that the assets issued or guaranteed by the U.S. government are risk-free. I know this is the standard wisdom, but I have no idea what it is supposed to mean.

I get that the U.S. government is not about to default on its debt. That can be treated as a near certainty. But the dollar can and often does fall in value relative to other currencies. In fact, since the start of 2020, the dollar has fallen by more than 6.0 percent against the euro. I’m not sure why the prospect that the dollar could fall in value relative to other currencies should not be seen as a risk. I don’t think most people would consider an investment that loses 6.0 percent of its value in eight months as risk-free.

On the U.S. side, KP for some reason ignore the wealth effect when discussing the low savings rates in the United States in the 1990s and the 2000s pre-crash. The idea of a wealth effect on consumption is not new, nor to my knowledge especially controversial.

The 1990s stock market bubble created close to $10 billion in bubble wealth. Assuming a wealth effect of 3-4 percent, this implied increased consumption on the order of 3-4 percent of GDP. That fits well with the drop in savings we saw over this period. As a practical matter, this manifested itself in smaller contributions to 401(k)s and also declining employer contributions to defined benefit pensions. The rise in the stock market was effectively making the contribution for employers. Some of us warned about the problem this was creating for pensions at the time, but the irrational exuberance of the day drowned us out.   

There was a similar story with the housing bubble. As KP note, people were happy to borrow against the rapidly growing equity in their homes. With the bubble creating roughly $8 trillion in additional housing equity, and a housing wealth effect of 4-6 cents on the dollar, the run-up in house prices can fully explain the fall in saving rates in the bubble years.

My reason for harping on this issue is that many economists were surprised when consumption plunged in 2008-2010. There was no basis for this surprise. The bubble that had been driving consumption had been deflated. Savings rates returned to roughly their long-term average, and have stayed there even as the debt overhang from the crash dissipated. There is nothing surprising in this story that needs explaining.

Okay, but enough of the quibbles, my big objection is the failure to focus adequately on the structuring of trade. This is a very central part of the wage suppression story, at least in the United States.

First, it is important to make the point that in the United States the upward redistribution was for the most part not from wages to profits, but from the wages of ordinary workers to the wages of highly paid workers like CEOs and other top executives, Wall Street and Silicon Valley types, and highly paid professionals.

KP for some reason see a very different picture of the data than me. They report a 7.0 percentage point drop in the labor share of national income from 2000 to 2007 (p 179). I see a drop of 1.2 percentage points (NIPA Table 1.10, Line 2 divided by the sum of Line 2 and Line 9).

Furthermore, even this drop in labor shares is questionable. Profits were inflated during these years by the profits earned in the financial sector from issuing dubious loans that subsequently went bad. This would be similar to companies reporting profits on non-existent sales. There were not real profits and of course, the banks lost hugely when these loans went bad in 2008—2010.[1]

There was a drop in labor shares in the weak labor market resulting from the Great Recession. This was being reversed with the recovery, but we still had some way to go when the pandemic hit. By my calculations, just over 10 percent of the gap between productivity growth and median wage growth from 1979 to 2019 can be explained by this shift from labor to capital. The rest is due to upward redistribution within the wage structure.  

This gets us to the structure of the trade. Our trade policy was focused on reducing or eliminating barriers to merchandise trade. This has the predicted and actual result of lowering the wages of manufacturing workers, which spilled over to putting downward pressure on the wages of non-college-educated workers more generally. When workers in the United States had to compete with workers in China and elsewhere, earning less than one-tenth of their pay, it was inevitable they would either take large pay cuts or lose their jobs.

However, trade liberalization did not have to focus on manufactured goods or at least exclusively focus on manufactured goods. We could have focused trade policy on reducing barriers that prevent qualified professionals from working in the United States. Doctors and dentists in the United States earn roughly twice as much as their counterparts in other wealthy countries. Trade liberalization in these professions could have brought their pay closer to the OECD average, saving households more than $100 billion annually from their healthcare bill. We didn’t see the liberalization of licensing restrictions (they were actually made tighter in the 1990s) because doctors and dentists have far more political power than autoworkers.

The other part of this story that is almost completely absent from KP is the tightening of rules on patent and copyright monopolies, which have been a key part of every trade deal for the last three decades. These monopolies are forms of protectionism, the polar opposite of free trade. They lead to prices for prescription drugs, medical equipment, software, and other protected items that are often hundreds of times the free market price, the equivalent of tariffs of tens of thousands percent.

They also are associated with enormous upward redistribution, as ordinary workers have to pay much higher prices for the benefit of the people with the skills associated with producing these products. Bill Gates would likely still be working for a living if Microsoft had to sell software without government-granted copyright or patent monopolies.   

This is a huge issue going forward, as the cost of protection for intellectual products is likely to continue to grow as a share of the economy. It is already huge. We will spend over $500 billion this year on prescription drugs alone. If these drugs were sold in a free market, we would almost certainly pay less than $100 billion. The difference of $400 billion is more than $3,000 per family. This $400 billion in potential savings is almost 80 percent of what we will spend on cars and parts in 2020.

In future trade deals, the terms of protection for intellectual products, both foreign and domestic, will swamp the importance of trade in manufactured goods. The loss of good-paying jobs in manufacturing was a huge deal in the 1980s, 1990s, and especially the 2000s, but unfortunately, we don’t stand much to lose anymore.

Manufacturing employment is now less than 9.0 percent of total employment. Furthermore, while manufacturing jobs used to provide relatively good-paying employment for workers without college degrees, this is no longer true. The average wage for production and non-supervisory workers in manufacturing is 6.0 percent less than for production and non-supervisory workers in the private sector as a whole. This gap would be reduced when factoring in benefits, but the idea that a manufacturing job is a good-paying job where a worker could support a family and have health care and a pension is simply no longer true.

The reason for the deterioration in the quality of manufacturing jobs is not a secret. The unionization rate in manufacturing has plummeted, largely due to trade. Until the pandemic hit in March, we had added back more than 1.6 million manufacturing jobs from the Great Recession trough in 2010. Nonetheless, the number of union members in manufacturing had fallen by almost 900,000. In short, as we added back jobs in the sector, they were overwhelmingly lower paying non-union jobs. There is little reason to believe that these workers were much better off than workers in an Amazon distribution center or other service sector jobs.

This points to the fact that manufacturing jobs should not be at the center of the trade agenda for those concerned about reversing the upward redistribution of income. The focus should be on reducing the protectionist barriers that raise the pay of the most highly paid professionals, and on limiting the protections for intellectual property that raise the prices we pay for a wide range of items and hand the money to a relatively small elite in a position to benefit.

As in real war, when it comes to trade, it is important that we not be fighting the last war. We have to go beyond KP to be properly prepared for battle.

[1] The corresponding overstatement on the output side would be treating the issuance of the loan as adding value. In reality, a bad loan is not adding value to the economy.

Robert Samuelson, the Washington Post columnist who has provided so much material for this blog over the years, announced his retirement today. I’ll take this opportunity to agree with a couple of points he made in his final column.

Samuelson notes the work that Treasury secretaries Henry Paulson and Timothy Geithner, along with Federal Reserve Board Chair Ben Bernanke did to combat the Great Recession, and then says “but that doesn’t excuse their failure to anticipate the housing boom and to preempt the bust.” This is absolutely right.

The fact that house sale prices had risen in an unprecedented manner, with no corresponding rise in rents, and at a time when vacancy rates were hitting record levels, should have been the sort of thing that even a top economist could notice. The fact that this bubble was driving the economy was also easily seen in a quick glance at the quarterly GDP data. There was no excuse for failing to recognize the bubble and the failure to realize that its collapse would sink the economy.

Unfortunately, Samuelson also gives this trio credit for avoiding a second Great Depression. That’s just a fairy tale they tell to children to justify shoveling hundreds of billions of dollars to the richest people in the country, to save their banks from their own incompetence. There is nothing about the situation in 2008-09  that would have forced us to endure a second Great Depression. We know the secret of getting out of a depression. It’s called “spending money.”

While the initial downturn surely would have been worse if we allowed the market to work its magic on Goldman Sachs, Citigroup, and the rest, there is no economic reason we could not have boosted the economy back to something close to full employment in 2010 with a big spending package. There are of course political issues, but that is rarely how this debate is framed.

The other point I want to endorse is Samuelson’s complaint that economists (present company included) exaggerate their ability to steer policy to achieve desired outcomes. This can lead to seriously flawed policy and a disillusioned public. Of course, this exaggerated confidence is a rationale for economists’ six-figure salaries. It is the reason that they get paid so much more than custodians and dishwashers. (It ain’t the market, as I argue in Rigged [its free].)

But you won’t find a column saying that in the Washington Post. It hits too close to home.

Robert Samuelson, the Washington Post columnist who has provided so much material for this blog over the years, announced his retirement today. I’ll take this opportunity to agree with a couple of points he made in his final column.

Samuelson notes the work that Treasury secretaries Henry Paulson and Timothy Geithner, along with Federal Reserve Board Chair Ben Bernanke did to combat the Great Recession, and then says “but that doesn’t excuse their failure to anticipate the housing boom and to preempt the bust.” This is absolutely right.

The fact that house sale prices had risen in an unprecedented manner, with no corresponding rise in rents, and at a time when vacancy rates were hitting record levels, should have been the sort of thing that even a top economist could notice. The fact that this bubble was driving the economy was also easily seen in a quick glance at the quarterly GDP data. There was no excuse for failing to recognize the bubble and the failure to realize that its collapse would sink the economy.

Unfortunately, Samuelson also gives this trio credit for avoiding a second Great Depression. That’s just a fairy tale they tell to children to justify shoveling hundreds of billions of dollars to the richest people in the country, to save their banks from their own incompetence. There is nothing about the situation in 2008-09  that would have forced us to endure a second Great Depression. We know the secret of getting out of a depression. It’s called “spending money.”

While the initial downturn surely would have been worse if we allowed the market to work its magic on Goldman Sachs, Citigroup, and the rest, there is no economic reason we could not have boosted the economy back to something close to full employment in 2010 with a big spending package. There are of course political issues, but that is rarely how this debate is framed.

The other point I want to endorse is Samuelson’s complaint that economists (present company included) exaggerate their ability to steer policy to achieve desired outcomes. This can lead to seriously flawed policy and a disillusioned public. Of course, this exaggerated confidence is a rationale for economists’ six-figure salaries. It is the reason that they get paid so much more than custodians and dishwashers. (It ain’t the market, as I argue in Rigged [its free].)

But you won’t find a column saying that in the Washington Post. It hits too close to home.

This post was intended to be the first part of a four part exchange on this topic. Unfortunately, that exchange has not taken place.

 

Repeal Section 230 to Fix Facebook

Many people are worried that Facebook is playing the same role in the 2020 election that it did in the 2016 election, acting as a conduit for massive amounts of false and misleading information. They hope that Mark Zuckerberg will rise to the task and act to limit the spread of false and hateful stories.

This blind faith in Mark Zuckerberg is bizarre. Mark Zuckerberg and Facebook are there to make money. Fostering democracy is not really on their agenda, in the same way that helping the Kansas City Royals win the World Series is not on their agenda. If we want to be serious about limiting the sort of abuses that happened in 2016 we need to recognize that Facebook is about making money: full stop. And, we have to make sure that Facebook, or a Facebook like entity, is not making big bucks pushing nonsense stories related to the election.

The quickest way to fix the problem is the repeal of Section 230 of the 1996 Communications Decency Act. This provision exempts Facebook from being liable for material that is passed along through its network, either as ads or through individuals’ or groups’ Facebook pages.

This provision means that if someone buys ads on Facebook, or spreads a false story through a Facebook page, say that a prominent person is actually a serial killer, Facebook would face no liability. The person who spread the story could be sued for libel, but the victim of this libel would have no case against Facebook itself because of Section 230.

There would be logic to this exemption if Facebook were a common carrier like a telephone company. A telephone company charges people for use, either by the minute or the month, it doesn’t make a profit from the content of people’s calls. For this reason, it makes sense that AT&T can’t be held liable if people spread false and damaging stories over its lines.

We might feel differently about exempting AT&T if it was monitoring our calls and selling ads based on the things that we said or heard on these calls. However, this is exactly what Facebook does. They know everything we post and everything we look at. This is how Facebook makes its money, they can sell our eyeballs to advertisers since their system allows them to know in very great detail who we are and what we are interested in. 

This is why exempting Facebook from facing the same sort of liability as its competitors in traditional media, like the New York Times or Time-Warner, makes zero sense. If these media outlets have to be responsible for the material they carry, why shouldn’t Facebook also be held responsible?

To be clear, the issue is not a direct act of libel by Facebook. If Facebook were to directly post a false and damaging charge against someone, it could be sued for libel in the same way as a traditional media outlet. The issue is with third party posters. If the New York Times runs an ad, a column, or a letter to the editor, it can be sued for libelous content.

In fact, the famous New York Times v. Sullivan case, which established that to win a libel suit public figures had to overcome a greater burden in establishing reckless disregard of the truth than an ordinary citizen, was over an ad placed in the New York Times, not the news or editorial content of the paper. In spite of this fact, there was no legal question that the New York Times would have been forced to pay damages, if it was determined that the ad actually met the standard of being libelous. It doesn’t make sense that Facebook should be subject to a different standard just because its medium is the Internet rather than a print publication.

Removing Section 230 protections would mean both that it could be sued for libelous content in a paid ad and that it could also be sued for libelous content transmitted through its system on individual or group Facebook pages. The first sort of liability is straightforward, just as traditional media outlets know they have to scrutinize ads for libelous material before accepting them, Facebook would have to go through the same process. This would make the process of buying ads on Facebook more time-consuming, and impose more costs on Facebook, but so what? If traditional media outlets have to spend resources to prevent the spread of libelous material through their ads, why shouldn’t Facebook have to incur the same costs?

The issue of individuals’ or groups’ postings is a bit more complicated, but not too much more. It would be unreasonable to expect that Facebook would scrutinize every item someone wants to post on its system for libelous content before it is actually posted. However, it could do this after the fact, when a complaint was brought.

The way this could work is that if a person, group, or corporation believes that they are being libeled by material posted on a Facebook page, they would bring their complaint to the company’s attention. Facebook could be allowed some reasonable period of time to assess the complaint. If it determined that the material is in fact libelous, then it would be obligated to remove it from the page(s) where it appeared.

Since Facebook’s system allows it to know everyone who viewed the libelous material, it would also be required to send out a notice to all these people indicating that the material was libelous and had been removed from the page where it had appeared. If Facebook failed to take these steps in a timely manner or determined that the material was not libelous, then it could be sued just like the New York Times was in Times v. Sullivan.

Mark Zuckerberg would undoubtedly be appalled at the idea that his company could potentially be held liable for all manner of nutty posts that appear on his system. He would have to spend large amounts of money paying people to evaluate the claims. Facebook would end up being a much less profitable, and likely a far smaller company. In that world, there would be little reason to care what Facebook’s policy was on political advertising since it would matter much less.

People obviously like Facebook, since they use it, but changing the law would not mean that this sort of social network type system would go out of existence. While Facebook may be hugely downsized, there could be other competitors that would step up as competitors.

We may also see systems set up that actually are common carriers, that would get the exemption laid out in Section 230. These would be systems that charged a flat fee, say $10 a year, to carry people’s pages, and allow them to interact with others on the network. (I have no idea if $10 would be a reasonable fee to cover costs and allow for a reasonable profit, but since this sort of system should require minimal labor inputs, hopefully $10 a year would be in the ballpark.)

These systems would not sell ads, nor would they acquire personal information on the people that used them. They would be similar to the on-line bulletin boards that many of us used in the early days of the Internet, although advances in technology would allow them to have much more sophisticated graphics and video material.   

It is absurd that so many people are in the position of hoping and praying that Mark Zuckerberg will be responsible in how he deals with the 2020 election. We should never be in the position of having to rely on the goodwill of a billionaire to allow democracy to work. Repealing Section 230 will put an end to this problem.

 

This post was intended to be the first part of a four part exchange on this topic. Unfortunately, that exchange has not taken place.

 

Repeal Section 230 to Fix Facebook

Many people are worried that Facebook is playing the same role in the 2020 election that it did in the 2016 election, acting as a conduit for massive amounts of false and misleading information. They hope that Mark Zuckerberg will rise to the task and act to limit the spread of false and hateful stories.

This blind faith in Mark Zuckerberg is bizarre. Mark Zuckerberg and Facebook are there to make money. Fostering democracy is not really on their agenda, in the same way that helping the Kansas City Royals win the World Series is not on their agenda. If we want to be serious about limiting the sort of abuses that happened in 2016 we need to recognize that Facebook is about making money: full stop. And, we have to make sure that Facebook, or a Facebook like entity, is not making big bucks pushing nonsense stories related to the election.

The quickest way to fix the problem is the repeal of Section 230 of the 1996 Communications Decency Act. This provision exempts Facebook from being liable for material that is passed along through its network, either as ads or through individuals’ or groups’ Facebook pages.

This provision means that if someone buys ads on Facebook, or spreads a false story through a Facebook page, say that a prominent person is actually a serial killer, Facebook would face no liability. The person who spread the story could be sued for libel, but the victim of this libel would have no case against Facebook itself because of Section 230.

There would be logic to this exemption if Facebook were a common carrier like a telephone company. A telephone company charges people for use, either by the minute or the month, it doesn’t make a profit from the content of people’s calls. For this reason, it makes sense that AT&T can’t be held liable if people spread false and damaging stories over its lines.

We might feel differently about exempting AT&T if it was monitoring our calls and selling ads based on the things that we said or heard on these calls. However, this is exactly what Facebook does. They know everything we post and everything we look at. This is how Facebook makes its money, they can sell our eyeballs to advertisers since their system allows them to know in very great detail who we are and what we are interested in. 

This is why exempting Facebook from facing the same sort of liability as its competitors in traditional media, like the New York Times or Time-Warner, makes zero sense. If these media outlets have to be responsible for the material they carry, why shouldn’t Facebook also be held responsible?

To be clear, the issue is not a direct act of libel by Facebook. If Facebook were to directly post a false and damaging charge against someone, it could be sued for libel in the same way as a traditional media outlet. The issue is with third party posters. If the New York Times runs an ad, a column, or a letter to the editor, it can be sued for libelous content.

In fact, the famous New York Times v. Sullivan case, which established that to win a libel suit public figures had to overcome a greater burden in establishing reckless disregard of the truth than an ordinary citizen, was over an ad placed in the New York Times, not the news or editorial content of the paper. In spite of this fact, there was no legal question that the New York Times would have been forced to pay damages, if it was determined that the ad actually met the standard of being libelous. It doesn’t make sense that Facebook should be subject to a different standard just because its medium is the Internet rather than a print publication.

Removing Section 230 protections would mean both that it could be sued for libelous content in a paid ad and that it could also be sued for libelous content transmitted through its system on individual or group Facebook pages. The first sort of liability is straightforward, just as traditional media outlets know they have to scrutinize ads for libelous material before accepting them, Facebook would have to go through the same process. This would make the process of buying ads on Facebook more time-consuming, and impose more costs on Facebook, but so what? If traditional media outlets have to spend resources to prevent the spread of libelous material through their ads, why shouldn’t Facebook have to incur the same costs?

The issue of individuals’ or groups’ postings is a bit more complicated, but not too much more. It would be unreasonable to expect that Facebook would scrutinize every item someone wants to post on its system for libelous content before it is actually posted. However, it could do this after the fact, when a complaint was brought.

The way this could work is that if a person, group, or corporation believes that they are being libeled by material posted on a Facebook page, they would bring their complaint to the company’s attention. Facebook could be allowed some reasonable period of time to assess the complaint. If it determined that the material is in fact libelous, then it would be obligated to remove it from the page(s) where it appeared.

Since Facebook’s system allows it to know everyone who viewed the libelous material, it would also be required to send out a notice to all these people indicating that the material was libelous and had been removed from the page where it had appeared. If Facebook failed to take these steps in a timely manner or determined that the material was not libelous, then it could be sued just like the New York Times was in Times v. Sullivan.

Mark Zuckerberg would undoubtedly be appalled at the idea that his company could potentially be held liable for all manner of nutty posts that appear on his system. He would have to spend large amounts of money paying people to evaluate the claims. Facebook would end up being a much less profitable, and likely a far smaller company. In that world, there would be little reason to care what Facebook’s policy was on political advertising since it would matter much less.

People obviously like Facebook, since they use it, but changing the law would not mean that this sort of social network type system would go out of existence. While Facebook may be hugely downsized, there could be other competitors that would step up as competitors.

We may also see systems set up that actually are common carriers, that would get the exemption laid out in Section 230. These would be systems that charged a flat fee, say $10 a year, to carry people’s pages, and allow them to interact with others on the network. (I have no idea if $10 would be a reasonable fee to cover costs and allow for a reasonable profit, but since this sort of system should require minimal labor inputs, hopefully $10 a year would be in the ballpark.)

These systems would not sell ads, nor would they acquire personal information on the people that used them. They would be similar to the on-line bulletin boards that many of us used in the early days of the Internet, although advances in technology would allow them to have much more sophisticated graphics and video material.   

It is absurd that so many people are in the position of hoping and praying that Mark Zuckerberg will be responsible in how he deals with the 2020 election. We should never be in the position of having to rely on the goodwill of a billionaire to allow democracy to work. Repealing Section 230 will put an end to this problem.

 

Richard Reeves and

While that is true, the point is that ending the deduction means that rich people in blue states now face much higher tax rates. This gives them more incentive to not live in blue states. To get an idea of the money involved, California has a top tax bracket of 13.0 percent. If someone had an income of $2.2 million a year, they would be paying around $200,000 a year in state taxes. (The top rate applies on income above $1.2 million.) The loss of the deduction would mean that their federal tax bill is now $74,000 a year higher than it had been previously. (They would be in the 37 percent bracket.)

The research on tax-induced mobility is mixed, but that is in part because it would be a hard effect to measure. There are plenty of reasons that people would want to live in a place like California or New York, rather than Arkansas, even if the tax rate is much higher. The issue is, given the benefits of living in California or New York relative to Arkansas, how many people would move if they now had to pay a considerably higher tax rate.

And, keep in mind, no one thinks this happens all at once. New York doesn’t raise its taxes in May and all the rich people move to Florida in June. This would be a process that takes place over time, leaving fewer rich people to tax in New York.

If you are inclined to trivialize this impact, think about differences in housing costs. An additional tax payment of $74,000 a year would be roughly equivalent to a 4 percent mortgage on a home selling for $1,850,000. If a rich person were looking at two roughly identical homes and one cost $1,850,000 more than the other, do we think they would be more likely to choose the cheaper one?

Being an old-fashioned economist, I am inclined to think they would opt for the cheaper one. And, since I don’t think that taxes are a unique cost that rich people for some reason don’t care about, it seems very plausible to me that the higher effective tax rate without the federal deduction will cause more rich people to move out of state, meaning they will have less money to pay for education, infrastructure, and social services.

On this last point, Reeves and Pulliam add a line that belongs on the Comedy Channel, not a NYT column:

“But if the goal is for the federal government to provide additional support to state and local governments, far better to do so directly, rather than by the roundabout route of offering a tax break to the rich.”

I suppose that it is hard to learn about what is going on in Congress at the Brookings Institution, but everyone outside of this esteemed center of learning knows that ain’t going to happen.

Richard Reeves and

While that is true, the point is that ending the deduction means that rich people in blue states now face much higher tax rates. This gives them more incentive to not live in blue states. To get an idea of the money involved, California has a top tax bracket of 13.0 percent. If someone had an income of $2.2 million a year, they would be paying around $200,000 a year in state taxes. (The top rate applies on income above $1.2 million.) The loss of the deduction would mean that their federal tax bill is now $74,000 a year higher than it had been previously. (They would be in the 37 percent bracket.)

The research on tax-induced mobility is mixed, but that is in part because it would be a hard effect to measure. There are plenty of reasons that people would want to live in a place like California or New York, rather than Arkansas, even if the tax rate is much higher. The issue is, given the benefits of living in California or New York relative to Arkansas, how many people would move if they now had to pay a considerably higher tax rate.

And, keep in mind, no one thinks this happens all at once. New York doesn’t raise its taxes in May and all the rich people move to Florida in June. This would be a process that takes place over time, leaving fewer rich people to tax in New York.

If you are inclined to trivialize this impact, think about differences in housing costs. An additional tax payment of $74,000 a year would be roughly equivalent to a 4 percent mortgage on a home selling for $1,850,000. If a rich person were looking at two roughly identical homes and one cost $1,850,000 more than the other, do we think they would be more likely to choose the cheaper one?

Being an old-fashioned economist, I am inclined to think they would opt for the cheaper one. And, since I don’t think that taxes are a unique cost that rich people for some reason don’t care about, it seems very plausible to me that the higher effective tax rate without the federal deduction will cause more rich people to move out of state, meaning they will have less money to pay for education, infrastructure, and social services.

On this last point, Reeves and Pulliam add a line that belongs on the Comedy Channel, not a NYT column:

“But if the goal is for the federal government to provide additional support to state and local governments, far better to do so directly, rather than by the roundabout route of offering a tax break to the rich.”

I suppose that it is hard to learn about what is going on in Congress at the Brookings Institution, but everyone outside of this esteemed center of learning knows that ain’t going to happen.

On the days when he is not celebrating his friendship and trade deals with China’s president Xi Jinping, Donald Trump has sought to hype China as the United States’ major enemy in the world. This has meant not only absurd allegations about the pandemic (top Trump economic adviser Peter Navarro has claimed that China deliberately sent infected people to the U.S. to spread the virus and damage the U.S. economy), but also sanctions, tariffs, and hints of military confrontations. While much of this silliness will go away if Donald Trump is defeated, the idea that the United States is involved in an intense global rivalry with China has gained serious credence among elite types. This is both wrong and dangerous.

First, just to clear the deck of some obvious points, China is not a democracy and it does not respect human rights. Critics of the government face serious risks of persecution and imprisonment. It has engaged in large-scale abuses against minority populations in Tibet and the Uygur population in Xinjiang. It also is reversing commitments it made to respect the autonomy of Hong Kong.

Saying that we should not be engaging in a Cold War with China does not imply approval of these actions. It is simply a recognition of two facts.

First, many of the people who are most vigorous in touting abuses in China seem just fine with serious abuses in U.S. allies. Saudi Arabia, a close U.S. ally, tolerates no open dissent and has an explicit policy of treating women as second-class citizens. It recently had a U.S. resident suffocated and torn to pieces in its Turkish embassy. The U.S. government gave open support to a coup in Bolivia and raised no objection to the repression that followed, most of which was directed against its indigenous population.

There is no shortage of places around the world where the United States has tolerated or even actively supported human rights abuses. It is simply not plausible that Donald Trump or most other politicians are genuinely concerned about human rights when they make complaints against China. They are pursuing an agenda of hostility against China for other reasons.

The other point is that it is not clear how those who push this agenda hope that their hostile actions will improve the human rights situation in China. If we assume, for the moment, that the human rights critics don’t intend to go to war to overthrow China’s current government, and then install a regime that will respect human rights, we should ask how we think a stance of growing hostility to China will improve the prospects for the people who we hope to help?

China is not some small country that is dependent on the economic and political support of the United States. It has almost 1.4 billion people. It also has an economy that is larger than ours. As a result of its extraordinary growth over the last four decades, its economy is almost one third larger than the U.S. economy.

While we can impose tariffs, investment bans, and other measures, the impact on China’s economy will be limited. In fact, the Trump tariffs have had relatively little impact on China to date, as almost all of their cost has been borne by people in the United States. (The link shows that the prices that China gets for the goods it sells to the United States have barely changed over the last year. If China was paying for tariff, the price of the goods they sell would fall by almost the amount of the tariff.) 

It is worth noting that it is possible that we could have done more to influence China’s political system back in 2000, when we made the decision to admit the country into the WTO. At that time, China’s economy was a bit more than one-third the size of the U.S. economy. However, back then the political leadership in the United States, including President Bill Clinton and most leading Republicans in Congress, was adamantly opposed to demanding any conditions on human or labor rights in exchange for China’s admission to the WTO.

Ironically, many of these same people are now pushing the line about needing to take a stand against China. Oh well, no one expects politicians or leading intellectual figures to be consistent.

 

The New Cold Warriors

There are many different groups that we are likely to see pushing the New Cold War against China. At the top of the list are the people who stand most directly to benefit from an arms race: the people who sell arms. The military contractors, their lobbyists, and the intellectuals they support in think tanks and universities can be expected to push the need to have ever greater levels of military spending to protect against China.

Some have already talked about spending China’s economy into the ground, as we ostensibly did in the first Cold War with the Soviet Union. There is a simple problem with this plan, apart from its enormous potential human and environmental costs. While the Soviet economy was roughly half the size of the U.S. economy at the peak of its power, the Chinese economy will be close to twice the size of the U.S. economy by the end of the decade. Spending China into the ground might be a rather difficult task.

There are also the Henry Kissinger wannabes. These are the people who want the United States to be the world’s big superpower so that they can play grand chess games with other countries around the world. Many of the people deciding U.S. foreign policy fit this bill.

But beyond those who directly benefit from a hostile rivalry with China, there are also many less obvious economic interests who will be cheering on the battle. At the top of this list are the people who benefit from stronger protections for “our” intellectual property that China is ostensibly trying to steal.

It is important to step back from the standard reporting on this issue to understand what is going on here. Unlike property in land or buildings, intellectual property is not inherently exclusive. While two people can’t sit in the same spot at the same time, an infinite number of people can listen to the same song, see the same movie, and use the same software at the same time. The ability to exclude people is created by the government as a way to allow creative workers and innovators to profit from their work.

While patent and copyright monopolies are one way to finance innovation and creative work, they are not the only way, and there are good reasons for thinking they are not the best way. I have written extensively on alternative mechanisms (see Rigged chapter 5 [it’s free] and here). Patent and copyright monopolies create enormous distortions in the market, they are equivalent to tariffs of many thousand percent. They are a recipe for dishonesty and corruption, such as drug companies lying about the addictiveness of the new generation of opioids.

Patents and copyrights also lead to an enormous amount of upward redistribution. People like Bill Gates can get incredibly rich from the patents and copyrights that the government gives them on software. We will spend over $500 billion this year on prescription drugs that would almost certainly cost us less than $100 billion. The difference of $400 billion is more than five times the annual food stamp budget.

When economists and other policy types say that technology is causing inequality, they actually mean that government-granted patents and copyrights are causing inequality. The people who are getting rich off various new technologies are doing so because the government designed the system so that they will get rich. We could design it differently. A different design can mean much less money going to the beneficiaries of patent and copyright monopolies and much more going to the rest of us.

As China’s economy surges past the U.S. economy, with many of its key sectors equal to, or even superior to, their U.S. counterparts, it would be a great time to redesign mechanisms for innovation. We can design systems that are based on open research and sharing of results rather than secreting off innovations to ensure that a small clique has large benefits. This would be a huge benefit to the vast majority of people in the United States, China, and the rest of the world. But the beneficiaries of the current system don’t want to see their incomes threatened. They prefer to have the rest of us fight for them, under the illusion that “our” intellectual property is at stake.

The development of a coronavirus vaccine provides a great example of the problem. If we approached the issue with the idea of helping people, both in the United States and the rest of the world, we would be making all findings fully public as quickly as possible. We would have any successful vaccines available to all as generics, as soon as they are developed. This means that any manufacturer anywhere in the world could produce as much as their facilities will allow, without paying a penny to the innovators. This would allow for the development of a vaccine as quickly as possible and for its quick distribution throughout the world. (It would still be necessary to have some assistance for the poorest countries, for whom the cost of even a generic vaccine would be a substantial burden.)

Of course, we do have to pay the innovators for their work and that is exactly what we are doing. Except we are both doing it upfront, with direct payments, and then doing it again at the back end with patent monopolies. Moderna will walk away with close to a billion government dollars in upfront payments for its efforts, even if it never produces a usable vaccine. It stands to make even more by taking advantage of its patent monopoly on the vaccine. Several of its top executives have already made tens of millions of dollars selling stock that has become hugely more valuable as a result of taxpayers’ largesse.

While the U.S. government pursued the profit-maximizing path for Moderna, it looks like it is coming at the expense of the health, and possibly lives, of hundreds of thousands of people in the United States. At the moment, it seems that China is ahead of the United States in the development process. This could mean that we will have access to a vaccine perhaps a month or two later, or even more, because we chose the path of competitive patent monopoly rather than cooperation.

If our infection rate remains at 40,000 a day and our death rate at 1,000 a day, a two-month delay means almost a quarter-million additional infection and more than 60,000 additional deaths. That’s a high price to pay for furthering the patent system. (People die in poor countries all the time because of patent monopolies, but it is unusual to see this sort of toll in the United States.)

If we had gone the alternative route, we would have had to try to enlist China’s government in a commitment to open-source research. We would also want other wealthy countries, like France and Germany, to share in the cost. Obviously, there would be issues that would be fought over in negotiations, but it is hard to believe that the U.S. government could not push through some sort of deal.

After all, this would benefit everyone. Also, in the face of the pandemic, no deal has to be perfect. We just need to establish some general principles. If the U.S. spent $200 million too much or too little, who cares? We almost certainly gave more money than that to well-connected companies in the pandemic bailouts.

It is also worth briefly ridiculing the idea that the U.S. lacks power in this sort of negotiation. We get other countries to go along with Donald Trump’s temper tantrums all the time, like his sanctions against Iran after he pulled out of the nuclear pact. Surely, we could get buy in from other countries on something that will actually benefit them.

This discussion of the development of a coronavirus vaccine is a bit of digression, but it should make the point that the people of the United States do not in general have an interest in pressing China or anyone else to respect the patent and copyright monopolies of U.S. corporations. We have an interest in negotiating the sharing of research costs and this may be done in a way that is far less costly to our economy and far less generous to the top one percent, or ten percent, than is currently the case.

 

Other Issues in Trade

 

If we recognize that the yelping over China not respecting patent and copyright monopolies is largely the concern of the wealthy, and not the typical person, there are still other trade issues that should be on the table. China has deliberately kept down the value of its currency, in order to make its goods and services more competitive internationally. It also directly subsidizes many industries to further their advantage.

This was a huge issue before the Great Recession, it is less so today. The reason it was a huge issue before the Great Recession is that back then, manufacturing provided a large number of good-paying jobs to people with less education. This is less of an issue today because many of these jobs have been lost to imports, largely from China.

We lost more than 3.5 million manufacturing jobs, more than 20 percent of the total, between December of 1999 and December of 2007, the start of the Great Recession. We lost another 2 million in the Great Recession. While roughly half of these Great Recession losses had come back before the pandemic hit, the jobs that came back paid much less than the jobs we lost. In 1999, the average hourly wage of a production worker in manufacturing was about 2 percent higher than for the private sector as a whole, by 2019 it was about 6.0 percent lower.

Higher benefits for manufacturing workers likely mean that total compensation is still higher but the gap in pay is not large. A new hire in an auto parts factory may be doing no better than a new hire in an Amazon fulfillment center.

This is largely attributable to the loss of union jobs in manufacturing. Even as we have added more than 1 million manufacturing jobs since 2010, the number of union members in the industry has fallen by almost 120,000, more than 8 percent. As a result, the jobs that we have been adding, for the most part, have not been good jobs.

The reason for this digression is to make the point that it does not matter as much as it used to that China is effectively subsidizing its exports. We no longer have many good-paying jobs at risk. We still should be pressing China not to prop up the dollar against its currency, and not to provide subsidies to favored industries, but the stakes for U.S. workers are far less than they were fifteen or twenty years ago.

 

The U.S. -China Confrontation: A Battle for Elites, not Ordinary People

To sum up, most of us have little at stake in the outcome of the big battle of the super-powers, except that it is taking place. It would be great if the human rights situation in China improved, but there is little reason to believe that many of the politicians complaining about abuses really care, or have any serious plan to bring them to an end.

The vast majority of workers have no stake in the battle to protect U.S. patents and copyrights. In fact, these policies are major factors in the increase in inequality over the last four decades. We certainly have an interest in agreements under which China, the U.S., and other countries share in the cost of open-source research, but our politicians and the interest groups they represent are not looking at all in this direction.

Finally, the labor market would be better off if China did not subsidize its exports with an under-valued currency and other mechanisms, but this matters much less today than it did two decades ago. Most of the good-paying jobs in manufacturing have been lost and there is little reason to believe they will come back in the absence of major structural changes, most importantly, higher unionization rates.

The U.S.-China confrontation is a game for the elites. The rest of us would be best served by sitting this one out.

On the days when he is not celebrating his friendship and trade deals with China’s president Xi Jinping, Donald Trump has sought to hype China as the United States’ major enemy in the world. This has meant not only absurd allegations about the pandemic (top Trump economic adviser Peter Navarro has claimed that China deliberately sent infected people to the U.S. to spread the virus and damage the U.S. economy), but also sanctions, tariffs, and hints of military confrontations. While much of this silliness will go away if Donald Trump is defeated, the idea that the United States is involved in an intense global rivalry with China has gained serious credence among elite types. This is both wrong and dangerous.

First, just to clear the deck of some obvious points, China is not a democracy and it does not respect human rights. Critics of the government face serious risks of persecution and imprisonment. It has engaged in large-scale abuses against minority populations in Tibet and the Uygur population in Xinjiang. It also is reversing commitments it made to respect the autonomy of Hong Kong.

Saying that we should not be engaging in a Cold War with China does not imply approval of these actions. It is simply a recognition of two facts.

First, many of the people who are most vigorous in touting abuses in China seem just fine with serious abuses in U.S. allies. Saudi Arabia, a close U.S. ally, tolerates no open dissent and has an explicit policy of treating women as second-class citizens. It recently had a U.S. resident suffocated and torn to pieces in its Turkish embassy. The U.S. government gave open support to a coup in Bolivia and raised no objection to the repression that followed, most of which was directed against its indigenous population.

There is no shortage of places around the world where the United States has tolerated or even actively supported human rights abuses. It is simply not plausible that Donald Trump or most other politicians are genuinely concerned about human rights when they make complaints against China. They are pursuing an agenda of hostility against China for other reasons.

The other point is that it is not clear how those who push this agenda hope that their hostile actions will improve the human rights situation in China. If we assume, for the moment, that the human rights critics don’t intend to go to war to overthrow China’s current government, and then install a regime that will respect human rights, we should ask how we think a stance of growing hostility to China will improve the prospects for the people who we hope to help?

China is not some small country that is dependent on the economic and political support of the United States. It has almost 1.4 billion people. It also has an economy that is larger than ours. As a result of its extraordinary growth over the last four decades, its economy is almost one third larger than the U.S. economy.

While we can impose tariffs, investment bans, and other measures, the impact on China’s economy will be limited. In fact, the Trump tariffs have had relatively little impact on China to date, as almost all of their cost has been borne by people in the United States. (The link shows that the prices that China gets for the goods it sells to the United States have barely changed over the last year. If China was paying for tariff, the price of the goods they sell would fall by almost the amount of the tariff.) 

It is worth noting that it is possible that we could have done more to influence China’s political system back in 2000, when we made the decision to admit the country into the WTO. At that time, China’s economy was a bit more than one-third the size of the U.S. economy. However, back then the political leadership in the United States, including President Bill Clinton and most leading Republicans in Congress, was adamantly opposed to demanding any conditions on human or labor rights in exchange for China’s admission to the WTO.

Ironically, many of these same people are now pushing the line about needing to take a stand against China. Oh well, no one expects politicians or leading intellectual figures to be consistent.

 

The New Cold Warriors

There are many different groups that we are likely to see pushing the New Cold War against China. At the top of the list are the people who stand most directly to benefit from an arms race: the people who sell arms. The military contractors, their lobbyists, and the intellectuals they support in think tanks and universities can be expected to push the need to have ever greater levels of military spending to protect against China.

Some have already talked about spending China’s economy into the ground, as we ostensibly did in the first Cold War with the Soviet Union. There is a simple problem with this plan, apart from its enormous potential human and environmental costs. While the Soviet economy was roughly half the size of the U.S. economy at the peak of its power, the Chinese economy will be close to twice the size of the U.S. economy by the end of the decade. Spending China into the ground might be a rather difficult task.

There are also the Henry Kissinger wannabes. These are the people who want the United States to be the world’s big superpower so that they can play grand chess games with other countries around the world. Many of the people deciding U.S. foreign policy fit this bill.

But beyond those who directly benefit from a hostile rivalry with China, there are also many less obvious economic interests who will be cheering on the battle. At the top of this list are the people who benefit from stronger protections for “our” intellectual property that China is ostensibly trying to steal.

It is important to step back from the standard reporting on this issue to understand what is going on here. Unlike property in land or buildings, intellectual property is not inherently exclusive. While two people can’t sit in the same spot at the same time, an infinite number of people can listen to the same song, see the same movie, and use the same software at the same time. The ability to exclude people is created by the government as a way to allow creative workers and innovators to profit from their work.

While patent and copyright monopolies are one way to finance innovation and creative work, they are not the only way, and there are good reasons for thinking they are not the best way. I have written extensively on alternative mechanisms (see Rigged chapter 5 [it’s free] and here). Patent and copyright monopolies create enormous distortions in the market, they are equivalent to tariffs of many thousand percent. They are a recipe for dishonesty and corruption, such as drug companies lying about the addictiveness of the new generation of opioids.

Patents and copyrights also lead to an enormous amount of upward redistribution. People like Bill Gates can get incredibly rich from the patents and copyrights that the government gives them on software. We will spend over $500 billion this year on prescription drugs that would almost certainly cost us less than $100 billion. The difference of $400 billion is more than five times the annual food stamp budget.

When economists and other policy types say that technology is causing inequality, they actually mean that government-granted patents and copyrights are causing inequality. The people who are getting rich off various new technologies are doing so because the government designed the system so that they will get rich. We could design it differently. A different design can mean much less money going to the beneficiaries of patent and copyright monopolies and much more going to the rest of us.

As China’s economy surges past the U.S. economy, with many of its key sectors equal to, or even superior to, their U.S. counterparts, it would be a great time to redesign mechanisms for innovation. We can design systems that are based on open research and sharing of results rather than secreting off innovations to ensure that a small clique has large benefits. This would be a huge benefit to the vast majority of people in the United States, China, and the rest of the world. But the beneficiaries of the current system don’t want to see their incomes threatened. They prefer to have the rest of us fight for them, under the illusion that “our” intellectual property is at stake.

The development of a coronavirus vaccine provides a great example of the problem. If we approached the issue with the idea of helping people, both in the United States and the rest of the world, we would be making all findings fully public as quickly as possible. We would have any successful vaccines available to all as generics, as soon as they are developed. This means that any manufacturer anywhere in the world could produce as much as their facilities will allow, without paying a penny to the innovators. This would allow for the development of a vaccine as quickly as possible and for its quick distribution throughout the world. (It would still be necessary to have some assistance for the poorest countries, for whom the cost of even a generic vaccine would be a substantial burden.)

Of course, we do have to pay the innovators for their work and that is exactly what we are doing. Except we are both doing it upfront, with direct payments, and then doing it again at the back end with patent monopolies. Moderna will walk away with close to a billion government dollars in upfront payments for its efforts, even if it never produces a usable vaccine. It stands to make even more by taking advantage of its patent monopoly on the vaccine. Several of its top executives have already made tens of millions of dollars selling stock that has become hugely more valuable as a result of taxpayers’ largesse.

While the U.S. government pursued the profit-maximizing path for Moderna, it looks like it is coming at the expense of the health, and possibly lives, of hundreds of thousands of people in the United States. At the moment, it seems that China is ahead of the United States in the development process. This could mean that we will have access to a vaccine perhaps a month or two later, or even more, because we chose the path of competitive patent monopoly rather than cooperation.

If our infection rate remains at 40,000 a day and our death rate at 1,000 a day, a two-month delay means almost a quarter-million additional infection and more than 60,000 additional deaths. That’s a high price to pay for furthering the patent system. (People die in poor countries all the time because of patent monopolies, but it is unusual to see this sort of toll in the United States.)

If we had gone the alternative route, we would have had to try to enlist China’s government in a commitment to open-source research. We would also want other wealthy countries, like France and Germany, to share in the cost. Obviously, there would be issues that would be fought over in negotiations, but it is hard to believe that the U.S. government could not push through some sort of deal.

After all, this would benefit everyone. Also, in the face of the pandemic, no deal has to be perfect. We just need to establish some general principles. If the U.S. spent $200 million too much or too little, who cares? We almost certainly gave more money than that to well-connected companies in the pandemic bailouts.

It is also worth briefly ridiculing the idea that the U.S. lacks power in this sort of negotiation. We get other countries to go along with Donald Trump’s temper tantrums all the time, like his sanctions against Iran after he pulled out of the nuclear pact. Surely, we could get buy in from other countries on something that will actually benefit them.

This discussion of the development of a coronavirus vaccine is a bit of digression, but it should make the point that the people of the United States do not in general have an interest in pressing China or anyone else to respect the patent and copyright monopolies of U.S. corporations. We have an interest in negotiating the sharing of research costs and this may be done in a way that is far less costly to our economy and far less generous to the top one percent, or ten percent, than is currently the case.

 

Other Issues in Trade

 

If we recognize that the yelping over China not respecting patent and copyright monopolies is largely the concern of the wealthy, and not the typical person, there are still other trade issues that should be on the table. China has deliberately kept down the value of its currency, in order to make its goods and services more competitive internationally. It also directly subsidizes many industries to further their advantage.

This was a huge issue before the Great Recession, it is less so today. The reason it was a huge issue before the Great Recession is that back then, manufacturing provided a large number of good-paying jobs to people with less education. This is less of an issue today because many of these jobs have been lost to imports, largely from China.

We lost more than 3.5 million manufacturing jobs, more than 20 percent of the total, between December of 1999 and December of 2007, the start of the Great Recession. We lost another 2 million in the Great Recession. While roughly half of these Great Recession losses had come back before the pandemic hit, the jobs that came back paid much less than the jobs we lost. In 1999, the average hourly wage of a production worker in manufacturing was about 2 percent higher than for the private sector as a whole, by 2019 it was about 6.0 percent lower.

Higher benefits for manufacturing workers likely mean that total compensation is still higher but the gap in pay is not large. A new hire in an auto parts factory may be doing no better than a new hire in an Amazon fulfillment center.

This is largely attributable to the loss of union jobs in manufacturing. Even as we have added more than 1 million manufacturing jobs since 2010, the number of union members in the industry has fallen by almost 120,000, more than 8 percent. As a result, the jobs that we have been adding, for the most part, have not been good jobs.

The reason for this digression is to make the point that it does not matter as much as it used to that China is effectively subsidizing its exports. We no longer have many good-paying jobs at risk. We still should be pressing China not to prop up the dollar against its currency, and not to provide subsidies to favored industries, but the stakes for U.S. workers are far less than they were fifteen or twenty years ago.

 

The U.S. -China Confrontation: A Battle for Elites, not Ordinary People

To sum up, most of us have little at stake in the outcome of the big battle of the super-powers, except that it is taking place. It would be great if the human rights situation in China improved, but there is little reason to believe that many of the politicians complaining about abuses really care, or have any serious plan to bring them to an end.

The vast majority of workers have no stake in the battle to protect U.S. patents and copyrights. In fact, these policies are major factors in the increase in inequality over the last four decades. We certainly have an interest in agreements under which China, the U.S., and other countries share in the cost of open-source research, but our politicians and the interest groups they represent are not looking at all in this direction.

Finally, the labor market would be better off if China did not subsidize its exports with an under-valued currency and other mechanisms, but this matters much less today than it did two decades ago. Most of the good-paying jobs in manufacturing have been lost and there is little reason to believe they will come back in the absence of major structural changes, most importantly, higher unionization rates.

The U.S.-China confrontation is a game for the elites. The rest of us would be best served by sitting this one out.

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