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Bret Stephens rightly takes Elon Musk to task for his buffoonish attacks on his critics, dubbing him “The Donald of Silicon Valley.” (I prefer my line, “the Donald Trump of futuristic entrepreneurs,” but the point is the same.) Like Trump, Musk apparently is unable to accept criticism and lashes out at the integrity and competence of his critics. Also like Trump, he is apparently unable to run a profitable company.
However, where Stephens goes badly astray is in telling his readers that electric cars are not a viable technology. China is expected to sell more than 1 million electric cars this year. It expects to be selling more than 7 million electric cars annually by 2025. It’s true that electric cars have substantial government subsidies in China, but this has been true of many technologies, such as the Internet.
Electric cars can clearly be very competitive in the near future with gas powered cars. They are clearly not decades away as Stephens tells readers.
Bret Stephens rightly takes Elon Musk to task for his buffoonish attacks on his critics, dubbing him “The Donald of Silicon Valley.” (I prefer my line, “the Donald Trump of futuristic entrepreneurs,” but the point is the same.) Like Trump, Musk apparently is unable to accept criticism and lashes out at the integrity and competence of his critics. Also like Trump, he is apparently unable to run a profitable company.
However, where Stephens goes badly astray is in telling his readers that electric cars are not a viable technology. China is expected to sell more than 1 million electric cars this year. It expects to be selling more than 7 million electric cars annually by 2025. It’s true that electric cars have substantial government subsidies in China, but this has been true of many technologies, such as the Internet.
Electric cars can clearly be very competitive in the near future with gas powered cars. They are clearly not decades away as Stephens tells readers.
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We all know that protectionism is bad. If someone proposes a 20 percent tariff on steel or cars the news pages will be filled with economists and other serious sounding people hyperventilating about how this tax will devastate the economy. Unfortunately, these voices are completely absent from discussions of the much more costly protectionism that allows our broken health care system to rip us off for hundreds of billions annually, and cost lives.
NPR and ProPublica gave us a fascinating account of how our broken health care system operates. The basic story was that Aetna had a contract with a major hospital that allowed it to charge grossly excessive fees for some procedures. Apparently, Aetna didn’t mind the overbilling since it is able to pass its costs on to patients in a largely uncompetitive market.
The piece is fascinating since the protagonist, Michael Frank, was an actuary with three decades of experience working with insurance companies. It describes in detail the effort he went through to try to get a clear explanation of why his bill was two or three times as high as the normal billing for a procedure he had done.
If anyone involved in the health care debate was committed to free trade, we would have a discussion of how this sort of abuse could be avoided if we facilitated foreign medical travel. If patients were routinely offered the opportunity to have this sort of procedure in high-quality facilities in other countries, with patients splitting the tens of thousands of dollars in savings (net of travel costs for themselves and a family member), it is likely that hospitals and insurers that engaged in this sort of price rigging would go out of business.
However, medical travel never features in discussions of trade. One can speculate on the reason, but it is almost certainly true that the reporters, economists, and political actors involved in trade debates have many more friends and relatives who benefit from the bloated health care system than work in manufacturing jobs.
Addendum
The International Federal of Health Plans has some data on relative prices. To take an example, it reports an average price for bypass surgery in the United States of $78,300. This compares to $24,100 in the U.K. and $14,600 in Spain. This sort of gap would leave plenty of room to cover airfare and hotel stays, and still leave plenty of money to put in the bank.
We all know that protectionism is bad. If someone proposes a 20 percent tariff on steel or cars the news pages will be filled with economists and other serious sounding people hyperventilating about how this tax will devastate the economy. Unfortunately, these voices are completely absent from discussions of the much more costly protectionism that allows our broken health care system to rip us off for hundreds of billions annually, and cost lives.
NPR and ProPublica gave us a fascinating account of how our broken health care system operates. The basic story was that Aetna had a contract with a major hospital that allowed it to charge grossly excessive fees for some procedures. Apparently, Aetna didn’t mind the overbilling since it is able to pass its costs on to patients in a largely uncompetitive market.
The piece is fascinating since the protagonist, Michael Frank, was an actuary with three decades of experience working with insurance companies. It describes in detail the effort he went through to try to get a clear explanation of why his bill was two or three times as high as the normal billing for a procedure he had done.
If anyone involved in the health care debate was committed to free trade, we would have a discussion of how this sort of abuse could be avoided if we facilitated foreign medical travel. If patients were routinely offered the opportunity to have this sort of procedure in high-quality facilities in other countries, with patients splitting the tens of thousands of dollars in savings (net of travel costs for themselves and a family member), it is likely that hospitals and insurers that engaged in this sort of price rigging would go out of business.
However, medical travel never features in discussions of trade. One can speculate on the reason, but it is almost certainly true that the reporters, economists, and political actors involved in trade debates have many more friends and relatives who benefit from the bloated health care system than work in manufacturing jobs.
Addendum
The International Federal of Health Plans has some data on relative prices. To take an example, it reports an average price for bypass surgery in the United States of $78,300. This compares to $24,100 in the U.K. and $14,600 in Spain. This sort of gap would leave plenty of room to cover airfare and hotel stays, and still leave plenty of money to put in the bank.
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The reporting of pay ratios between CEOs and median workers has drawn considerable attention to the enormous gap. Most of this has taken a moral tone, noting that would take the typical worker hundreds of years, or in some cases, more than a thousand years to earn as much as the company’s CEO gets in a year. While there are certainly important moral questions here, it is also important to ask a simple economic question.
Are the highly paid CEOs actually producing returns for shareholders? This is not an expression of concern for shareholders, the question is whether CEOs are actually worth their pay to the company or whether they are effectively ripping off shareholders. The latter story is plausible because it is difficult for a diverse group of shareholders to carefully monitor and control the conduct of a company, just as it is difficult for citizens to make sure that their city or state government is not ripping them off by having patronage jobs or sweetheart deals with well-connected contractors.
The argument would be that the directors who most immediately monitor the CEOs have more allegiance to the CEOs and top management than the shareholders whom they ostensibly represent. This is a plausible story since directors who are renominated by their board win their elections more than 99 percent of the time. This means that directors would have little incentive to upset top management and their colleagues by asking annoying questions about whether CEOs get paid too much.
There is considerable research indicating that CEO pay does not reflect performance (measured as returns to shareholders), much of it summarized in Lucien Bebchuk and Jesse Fried’s book, Pay Without Performance. Jessica Schieder and I did a short piece that also supports this view, showing no drop in CEO pay at health insurers, after the Affordable Care Act ended tax deductibility for pay over $1 million.
This matters because it means that if rules of corporate governance were changed (these come from the government, not the market) to give shareholders more control over CEO pay, it is likely CEO pay would fall. This is not just a matter between rich CEOs and mostly rich shareholders. (Pension funds and middle-income people with 401(k)s also do own stock.)
Bloated CEO pay affects pay scales throughout the economy. If the CEO gets $30 million, the folks next in line likely get $10–15 million, and the third-tier executives may earn in the range of $1–2 million. Also, top executives in the non-profit sector also get bloated pay, often well over $1 million a year at universities and major charities.
By contrast, if CEOs were getting $2–$3 million a year, the next in line would likely be getting paychecks not much over $1 million, with the third tier settling for the high hundreds of thousands. And, the presidents of elite universities might also see paychecks in the high hundreds of thousands. And, if there was less pay for those at the top, there would be more pay for everyone else.
The point here is that this would not be a story of just saying we don’t like some people getting incredibly rich, while others get little (which may be the case), it would also be the story of getting the market to work better so that CEO pay reflects their actual performance, not their ability to take advantage of their insider position. There is no good argument for defending CEO pay that does not reflect performance unless you think it is a positive good that some people incredibly get rich while most workers get little benefit from the economy’s growth.
The reporting of pay ratios between CEOs and median workers has drawn considerable attention to the enormous gap. Most of this has taken a moral tone, noting that would take the typical worker hundreds of years, or in some cases, more than a thousand years to earn as much as the company’s CEO gets in a year. While there are certainly important moral questions here, it is also important to ask a simple economic question.
Are the highly paid CEOs actually producing returns for shareholders? This is not an expression of concern for shareholders, the question is whether CEOs are actually worth their pay to the company or whether they are effectively ripping off shareholders. The latter story is plausible because it is difficult for a diverse group of shareholders to carefully monitor and control the conduct of a company, just as it is difficult for citizens to make sure that their city or state government is not ripping them off by having patronage jobs or sweetheart deals with well-connected contractors.
The argument would be that the directors who most immediately monitor the CEOs have more allegiance to the CEOs and top management than the shareholders whom they ostensibly represent. This is a plausible story since directors who are renominated by their board win their elections more than 99 percent of the time. This means that directors would have little incentive to upset top management and their colleagues by asking annoying questions about whether CEOs get paid too much.
There is considerable research indicating that CEO pay does not reflect performance (measured as returns to shareholders), much of it summarized in Lucien Bebchuk and Jesse Fried’s book, Pay Without Performance. Jessica Schieder and I did a short piece that also supports this view, showing no drop in CEO pay at health insurers, after the Affordable Care Act ended tax deductibility for pay over $1 million.
This matters because it means that if rules of corporate governance were changed (these come from the government, not the market) to give shareholders more control over CEO pay, it is likely CEO pay would fall. This is not just a matter between rich CEOs and mostly rich shareholders. (Pension funds and middle-income people with 401(k)s also do own stock.)
Bloated CEO pay affects pay scales throughout the economy. If the CEO gets $30 million, the folks next in line likely get $10–15 million, and the third-tier executives may earn in the range of $1–2 million. Also, top executives in the non-profit sector also get bloated pay, often well over $1 million a year at universities and major charities.
By contrast, if CEOs were getting $2–$3 million a year, the next in line would likely be getting paychecks not much over $1 million, with the third tier settling for the high hundreds of thousands. And, the presidents of elite universities might also see paychecks in the high hundreds of thousands. And, if there was less pay for those at the top, there would be more pay for everyone else.
The point here is that this would not be a story of just saying we don’t like some people getting incredibly rich, while others get little (which may be the case), it would also be the story of getting the market to work better so that CEO pay reflects their actual performance, not their ability to take advantage of their insider position. There is no good argument for defending CEO pay that does not reflect performance unless you think it is a positive good that some people incredibly get rich while most workers get little benefit from the economy’s growth.
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The Washington Post’s analysis of projected increases in the cost of health care plans in the exchanges created by the Affordable Care Act (ACA) is seriously confused. Paige Winfield Cunningham seems to think she found a contradiction between Democrats who minimized the importance of price increases during the Obama presidency, but now highlight smaller increases projected under the Trump administration. Rather than being a contradiction, this reflects confusion on Cunningham’s part.
The original premiums in the exchanges were lower than had been projected by the Congressional Budget Office prior to the bill’s passage. Insurers priced their plans too low either because they wanted to attract patients or they failed to predict the health condition of the people who signed up. By 2016, premiums had pretty much caught up with the original projections.
Even though the 7.0 percent rate of increase projected for the next decade is lower than the 2017 increase, it still implies that premiums will double in nominal terms and rise by more than 60 percent after adjusting for inflation over the next decade. If this projection proves accurate it means that the unsubsidized premiums will be unaffordable to all but the richest people.
For example, this projection implies that an unsubsidized silver plan would cost more than $11,000 (in 2018 dollars) to a single 50-year old in 2027. A 60-year-old would have to pay almost $17,000 for a silver plan. It is understandable that anyone concerned about affordable health care would not view this as a good story, even if they happened to be Republicans.
The Washington Post’s analysis of projected increases in the cost of health care plans in the exchanges created by the Affordable Care Act (ACA) is seriously confused. Paige Winfield Cunningham seems to think she found a contradiction between Democrats who minimized the importance of price increases during the Obama presidency, but now highlight smaller increases projected under the Trump administration. Rather than being a contradiction, this reflects confusion on Cunningham’s part.
The original premiums in the exchanges were lower than had been projected by the Congressional Budget Office prior to the bill’s passage. Insurers priced their plans too low either because they wanted to attract patients or they failed to predict the health condition of the people who signed up. By 2016, premiums had pretty much caught up with the original projections.
Even though the 7.0 percent rate of increase projected for the next decade is lower than the 2017 increase, it still implies that premiums will double in nominal terms and rise by more than 60 percent after adjusting for inflation over the next decade. If this projection proves accurate it means that the unsubsidized premiums will be unaffordable to all but the richest people.
For example, this projection implies that an unsubsidized silver plan would cost more than $11,000 (in 2018 dollars) to a single 50-year old in 2027. A 60-year-old would have to pay almost $17,000 for a silver plan. It is understandable that anyone concerned about affordable health care would not view this as a good story, even if they happened to be Republicans.
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The New York Times ran a piece on a warning from the Internal Revenue Service that it would not allow plans to circumvent the new limits on the State and Local Tax (SALT) deduction by providing a credit for contributions to state-established charitable funds. At one point the piece told readers:
“The Treasury Department and the I.R.S. are worried that the workarounds could further balloon the cost of the tax cuts, which are projected to add more than $1 trillion to the national debt over a decade.”
NYT reporters must have some extraordinary mind-reading abilities if they can know what is really worrying the Treasury Department and IRS. The worries attributed to them here seem especially out of line with the known facts since the Trump administration and Republicans in Congress have shown zero concern in their behavior about the size of the deficit.
The New York Times ran a piece on a warning from the Internal Revenue Service that it would not allow plans to circumvent the new limits on the State and Local Tax (SALT) deduction by providing a credit for contributions to state-established charitable funds. At one point the piece told readers:
“The Treasury Department and the I.R.S. are worried that the workarounds could further balloon the cost of the tax cuts, which are projected to add more than $1 trillion to the national debt over a decade.”
NYT reporters must have some extraordinary mind-reading abilities if they can know what is really worrying the Treasury Department and IRS. The worries attributed to them here seem especially out of line with the known facts since the Trump administration and Republicans in Congress have shown zero concern in their behavior about the size of the deficit.
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MarketWatch had a short piece reporting that Michael Woodford, one of the country’s most prominent macroeconomists, is now arguing that the Fed should actively look to stem the growth of asset bubbles like the housing bubble in the last decade. It points out that house prices have been rising rapidly in recent years. It also notes that Woodford argues the Fed should not distinguish between run-ups in house prices based on fundamentals and run-ups based on speculation.
As someone who advocated the Fed should counteract bubbles long before the crash of the housing bubble sank the economy, I am glad to see Woodford make this case. However, I think he is badly mistaken in arguing for using interest rate policy, rather than regulatory policy and public statements and information to try to sink a bubble. Also, it is very important to distinguish between a bubble-driven run-up in house prices and one driven by the fundamentals of the market.
Interest rates are a very inefficient tool for targeting an asset bubble. High enough interest rates will eventually burst the bubble, but they will also sink the economy. Bubbles are not likely to respond to modest increases in interest rates absent other measures from the Fed.
The effort to target rising housing prices, if they are driven by fundamentals (as is now the case), is likely to be self-defeating. Insofar as house prices are driven by fundamentals, it means that the best way to bring them down is by increasing supply. While this can be done through changing zoning policy at the local level, the Fed is not in a position to directly affect zoning. However, higher interest rates will reduce construction, making shortages of housing worse.
While higher rates will also eventually reduce demand by making house buying less affordable, this is a very indirect way of addressing the problem. It also means that it addresses a real shortage of housing by making it difficult for people to buy homes rather than increasing the supply. That doesn’t seem like good policy.
MarketWatch had a short piece reporting that Michael Woodford, one of the country’s most prominent macroeconomists, is now arguing that the Fed should actively look to stem the growth of asset bubbles like the housing bubble in the last decade. It points out that house prices have been rising rapidly in recent years. It also notes that Woodford argues the Fed should not distinguish between run-ups in house prices based on fundamentals and run-ups based on speculation.
As someone who advocated the Fed should counteract bubbles long before the crash of the housing bubble sank the economy, I am glad to see Woodford make this case. However, I think he is badly mistaken in arguing for using interest rate policy, rather than regulatory policy and public statements and information to try to sink a bubble. Also, it is very important to distinguish between a bubble-driven run-up in house prices and one driven by the fundamentals of the market.
Interest rates are a very inefficient tool for targeting an asset bubble. High enough interest rates will eventually burst the bubble, but they will also sink the economy. Bubbles are not likely to respond to modest increases in interest rates absent other measures from the Fed.
The effort to target rising housing prices, if they are driven by fundamentals (as is now the case), is likely to be self-defeating. Insofar as house prices are driven by fundamentals, it means that the best way to bring them down is by increasing supply. While this can be done through changing zoning policy at the local level, the Fed is not in a position to directly affect zoning. However, higher interest rates will reduce construction, making shortages of housing worse.
While higher rates will also eventually reduce demand by making house buying less affordable, this is a very indirect way of addressing the problem. It also means that it addresses a real shortage of housing by making it difficult for people to buy homes rather than increasing the supply. That doesn’t seem like good policy.
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A Washington Post article reporting the decision by the Trump administration to not press employers to use E-Verify to prevent undocumented workers from getting jobs repeatedly tells readers there is a labor shortage, especially in farming, restaurants, and construction. The data indicate otherwise.
If there were a shortage of workers in these industries, we should see rapidly rising wages. We don’t.
The Bureau of Labor Statistics establishment survey does not include farms, but we don’t see especially rapid wage growth in either construction or restaurants. Here is the picture for the average hourly wage of production and non-supervisory workers in construction.
Construction: Average Hourly Wage, Production and Non-Supervisory Workers
Source: Bureau of Labor Statistics.
Wage growth has been somewhat higher in the last two years than earlier in the recovery, but they still are rising less than 4.0 percent a year. And, the rate of increase is considerably less than at the peak of the last cycle.
There is even less of a case of a labor shortage in restaurants.
Restaurants: Average Hourly Wage, Production and Non-Supervisory Workers
Source: Bureau of Labor Statistics.
The pace of wage growth has slackened some in recent months. It is more than a percentage point lower than peaks hit in 2017 and well below the pre-recession pace.
It undoubtedly is true that some employers cannot afford to pay higher wages. In this case, they will go out of business. This is what happens in capitalism. It is the reason we don’t still have half of our workforce employed in agriculture. Workers had better-paying opportunities in cities that small farmers could not match.
Apparently, the Post thinks we should interfere with markets to protect low-wage employers and keep wages down. Those of us who like markets don’t share the political views expressed in this article.
A Washington Post article reporting the decision by the Trump administration to not press employers to use E-Verify to prevent undocumented workers from getting jobs repeatedly tells readers there is a labor shortage, especially in farming, restaurants, and construction. The data indicate otherwise.
If there were a shortage of workers in these industries, we should see rapidly rising wages. We don’t.
The Bureau of Labor Statistics establishment survey does not include farms, but we don’t see especially rapid wage growth in either construction or restaurants. Here is the picture for the average hourly wage of production and non-supervisory workers in construction.
Construction: Average Hourly Wage, Production and Non-Supervisory Workers
Source: Bureau of Labor Statistics.
Wage growth has been somewhat higher in the last two years than earlier in the recovery, but they still are rising less than 4.0 percent a year. And, the rate of increase is considerably less than at the peak of the last cycle.
There is even less of a case of a labor shortage in restaurants.
Restaurants: Average Hourly Wage, Production and Non-Supervisory Workers
Source: Bureau of Labor Statistics.
The pace of wage growth has slackened some in recent months. It is more than a percentage point lower than peaks hit in 2017 and well below the pre-recession pace.
It undoubtedly is true that some employers cannot afford to pay higher wages. In this case, they will go out of business. This is what happens in capitalism. It is the reason we don’t still have half of our workforce employed in agriculture. Workers had better-paying opportunities in cities that small farmers could not match.
Apparently, the Post thinks we should interfere with markets to protect low-wage employers and keep wages down. Those of us who like markets don’t share the political views expressed in this article.
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Neil Irwin had an interesting Upshot piece in the NYT that takes advantage of new data on the median worker’s pay at major corporations. The piece calculates the “Marx ratio” which is the ratio of profits per worker to the median worker’s pay. It shows this number for each of the companies who have released data on their ratio of CEO pay to median worker’s pay, as required by a provision of the Dodd-Frank financial reform act.
It’s not clear exactly what this ratio is giving us. Suppose that a major manufacturer has subsidiaries in China and other low-wage countries that do most of its work. In this case, the median worker could be someone in one of these countries, giving it a low, median wage. However, it also has lots of workers (it’s likely they employ more workers per unit of output in low wage Bangladesh than in the United States) so it may have low profits per worker.
Now suppose the company contracts out its manufacturing work in low-wage countries so that the people who work in these countries are no longer on the companies payroll. This will raise the median wage by getting rid of many of the company’s lowest-paid workers. It will also raise per worker profits since it has fewer workers, but its profits will be pretty much unchanged.
There is a similar problem domestically. A company that contracts out its custodial staff, cafeteria workers, and other lower-paid workers will have higher median pay than an otherwise identical company that has many of these workers on the company’s payroll. A better measure of the profits the company makes on its workers would not be sensitive to this sort of maneuver.
Of course, the main point of the new requirement was to call attention to how high CEO pay is relative to the pay of ordinary workers. This is arguably justified if the CEO is extremely innovative and able to produce large returns to shareholders. However, there is good evidence that CEO pay bears little relationship to their value to shareholders.
In that case, the tens of millions earned by CEOs is not reflecting their contribution to the company or the economy, but rather their insider contacts that allow them to secure and hold positions. This has a corrupting impact on incomes throughout the economy since it raises the pay for both the second- and third-tier executives, as well as setting a higher benchmark for pay in the non-profit sector and government.
And, as economists and fans of arithmetic everywhere know, more money for those at the top means less money for everyone else.
Neil Irwin had an interesting Upshot piece in the NYT that takes advantage of new data on the median worker’s pay at major corporations. The piece calculates the “Marx ratio” which is the ratio of profits per worker to the median worker’s pay. It shows this number for each of the companies who have released data on their ratio of CEO pay to median worker’s pay, as required by a provision of the Dodd-Frank financial reform act.
It’s not clear exactly what this ratio is giving us. Suppose that a major manufacturer has subsidiaries in China and other low-wage countries that do most of its work. In this case, the median worker could be someone in one of these countries, giving it a low, median wage. However, it also has lots of workers (it’s likely they employ more workers per unit of output in low wage Bangladesh than in the United States) so it may have low profits per worker.
Now suppose the company contracts out its manufacturing work in low-wage countries so that the people who work in these countries are no longer on the companies payroll. This will raise the median wage by getting rid of many of the company’s lowest-paid workers. It will also raise per worker profits since it has fewer workers, but its profits will be pretty much unchanged.
There is a similar problem domestically. A company that contracts out its custodial staff, cafeteria workers, and other lower-paid workers will have higher median pay than an otherwise identical company that has many of these workers on the company’s payroll. A better measure of the profits the company makes on its workers would not be sensitive to this sort of maneuver.
Of course, the main point of the new requirement was to call attention to how high CEO pay is relative to the pay of ordinary workers. This is arguably justified if the CEO is extremely innovative and able to produce large returns to shareholders. However, there is good evidence that CEO pay bears little relationship to their value to shareholders.
In that case, the tens of millions earned by CEOs is not reflecting their contribution to the company or the economy, but rather their insider contacts that allow them to secure and hold positions. This has a corrupting impact on incomes throughout the economy since it raises the pay for both the second- and third-tier executives, as well as setting a higher benchmark for pay in the non-profit sector and government.
And, as economists and fans of arithmetic everywhere know, more money for those at the top means less money for everyone else.
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It’s rare that you get a more explicitly classist piece in a major newspaper than Catherine Rampell’s column on Donald Trump’s trade war with China. While its assessment of the Trump administration’s blustery rhetoric and confused actions seems very much on the money, its assertions about the country’s actual interests is not.
It tells readers:
“So rather than taking the time to learn about our actual complaints regarding China’s trade policy (primarily, intellectual property theft), or how we could deal with them (through multilateral pressure, such as the Trans-Pacific Partnership that Trump killed), Trump fixated on deficits. The part of the story that sold with the public.”
Okay, so Rampell tells us that we should not be concerned about a trade deficit that costs in the neighborhood of 2 million manufacturing jobs. Instead, we should be concerned that China is not as protectionist as she wants it to be when it comes to intellectual property claims of our software and pharmaceutical companies.
And why exactly should those of us who don’t own lots of stock in Microsoft and Pfizer care if China doesn’t pay them licensing fees and royalties? If we think through the economics here, this means that other things equal, lower payments to these companies mean a lower valued dollar, which would improve our trade balance on manufactured goods. What’s the problem here?
Actually, the story gets even better. Suppose that China doesn’t honor the patents of Pfizer and other drug companies so that it produces generic version of new drugs that sell for hundreds of dollars for a course of treatment instead of the hundreds of thousands of dollars that these companies demand for the patent-protected product (equivalent to tariffs of tens of thousands of percent). Suppose it sells these generic versions to people in the United States or just lets them come to China for their treatment.
This would save patients in the United States enormous amounts of money, and possibly save lives. This is what free trade is all about.
Sure, it means that Microsoft and Pfizer will not be as profitable and their shareholders will be less rich. It probably also means that some of the highly skilled workers whose pay depends largely on these forms of protectionism will get smaller paychecks. But as I recall, we are all supposed to be concerned about income inequality, so why should the country be pursuing a trade policy intended to give us more of it?
Yes, we do need a mechanism for financing innovation and research. But we can do better than extending a relics of the feudal guild system, even if most of the folks in policy debates are too lazy to bother thinking about the issue. (See Rigged, chapter 5. It’s free.)
It’s rare that you get a more explicitly classist piece in a major newspaper than Catherine Rampell’s column on Donald Trump’s trade war with China. While its assessment of the Trump administration’s blustery rhetoric and confused actions seems very much on the money, its assertions about the country’s actual interests is not.
It tells readers:
“So rather than taking the time to learn about our actual complaints regarding China’s trade policy (primarily, intellectual property theft), or how we could deal with them (through multilateral pressure, such as the Trans-Pacific Partnership that Trump killed), Trump fixated on deficits. The part of the story that sold with the public.”
Okay, so Rampell tells us that we should not be concerned about a trade deficit that costs in the neighborhood of 2 million manufacturing jobs. Instead, we should be concerned that China is not as protectionist as she wants it to be when it comes to intellectual property claims of our software and pharmaceutical companies.
And why exactly should those of us who don’t own lots of stock in Microsoft and Pfizer care if China doesn’t pay them licensing fees and royalties? If we think through the economics here, this means that other things equal, lower payments to these companies mean a lower valued dollar, which would improve our trade balance on manufactured goods. What’s the problem here?
Actually, the story gets even better. Suppose that China doesn’t honor the patents of Pfizer and other drug companies so that it produces generic version of new drugs that sell for hundreds of dollars for a course of treatment instead of the hundreds of thousands of dollars that these companies demand for the patent-protected product (equivalent to tariffs of tens of thousands of percent). Suppose it sells these generic versions to people in the United States or just lets them come to China for their treatment.
This would save patients in the United States enormous amounts of money, and possibly save lives. This is what free trade is all about.
Sure, it means that Microsoft and Pfizer will not be as profitable and their shareholders will be less rich. It probably also means that some of the highly skilled workers whose pay depends largely on these forms of protectionism will get smaller paychecks. But as I recall, we are all supposed to be concerned about income inequality, so why should the country be pursuing a trade policy intended to give us more of it?
Yes, we do need a mechanism for financing innovation and research. But we can do better than extending a relics of the feudal guild system, even if most of the folks in policy debates are too lazy to bother thinking about the issue. (See Rigged, chapter 5. It’s free.)
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