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I’m serious, you just have to carry through with a little bit of logic. (I know Governor DeSantis is opposed to logic, but this is for the rest of the country.)
Governor DeSantis is on the warpath against whatever he decides is “woke.” DeSantis decided that it was woke when Anheuser-Busch signed a contract with Dylan Mulvaney, a transgender influencer, to promote Bud Light, one of the beers it markets. DeSantis joined with other right-wingers to push a boycott of Bud Light.
The boycott was effective in that it had a measurable impact on the sales of Bud Light. Now, DeSantis is calling for the Florida State Board of Administration to sue Anheuser-Busch because its decision to contract with a transgender influencer lowered its stock price and thereby hurt Florida’s public employee pension fund. (Never mind that Governor DeSantis played a big role in pushing the boycott that hurt sales.)
DeSantis’ basis for the lawsuit is the claim that by concerning itself with something other than profits, the management of Anheuser-Busch hurt its stockholders. He says that companies should only be concerned about maximizing profit, not doing “woke” things like making deals with transgender influencers.
Okay, we’ll ignore the fact that Anheuser-Busch’s management may actually have thought they were maximizing profits when they signed the deal with Mulvaney. After all, there are a significant number of people who are transgender, have friends or family members who are transgender, or just think that transgender people should be able to be accepted as normal, and think it’s cool that Anheuser-Busch agrees.
Maybe it’s not fair to blame Anheuser-Busch’s management for not recognizing the fact that an ambitious Florida governor thinks that his path to the presidency depends on convincing Republican primary voters that he is more right-wing than Donald Trump. But, we’ll leave that issue aside.
DeSantis made it clear that he thinks companies should only maximize profit and be subject to shareholder lawsuits if they do anything other than maximizing profits. So how does this get us to suing Gilead?
According to a New York Times article today, Gilead may have delayed bringing an HIV drug onto the market, because it didn’t want to jeopardize the sales of its blockbuster HIV drug Truvada. It wanted to delay bringing the new drug on the market because it wanted Truvada to get the full benefit of its patent monopoly and to only introduce the new drug as Truvada’s patent was about to expire. This would then allow it to benefit from the full length of patent protection for its new drug.
The newer drug would have been safer for patients, since it posed less risk of kidney and bone damage. Gilead is now being sued, based on this allegation, by patients who were harmed by Truvada.
Gilead denies it was motivated by profit considerations in the timing of its introduction of the Truvada replacement. The article tells readers:
“Gilead’s top lawyer, Deborah Telman said in a statement that the company’s ‘research and development decisions have always been, and continue to be, guided by our focus on delivering safe and effective medicines for the people who prescribe and use them.’”
Okay, so now we have Gilead’s top lawyer asserting that the company is not being run to maximize profit, but rather is “guided by our focus on delivering safe and effective medicines for the people who prescribe and use them.”
That sounds dangerously woke. Seems like Gilead is crying out for a lawsuit from Mr. DeSantis. Their top lawyer is openly claiming that the company might be jeopardizing profits, and thereby giving lower returns to shareholders, because it is concerned with people’s health.
Presumably, Mr. DeSantis will be pushing his lawsuit against Gilead any day now.
I’m serious, you just have to carry through with a little bit of logic. (I know Governor DeSantis is opposed to logic, but this is for the rest of the country.)
Governor DeSantis is on the warpath against whatever he decides is “woke.” DeSantis decided that it was woke when Anheuser-Busch signed a contract with Dylan Mulvaney, a transgender influencer, to promote Bud Light, one of the beers it markets. DeSantis joined with other right-wingers to push a boycott of Bud Light.
The boycott was effective in that it had a measurable impact on the sales of Bud Light. Now, DeSantis is calling for the Florida State Board of Administration to sue Anheuser-Busch because its decision to contract with a transgender influencer lowered its stock price and thereby hurt Florida’s public employee pension fund. (Never mind that Governor DeSantis played a big role in pushing the boycott that hurt sales.)
DeSantis’ basis for the lawsuit is the claim that by concerning itself with something other than profits, the management of Anheuser-Busch hurt its stockholders. He says that companies should only be concerned about maximizing profit, not doing “woke” things like making deals with transgender influencers.
Okay, we’ll ignore the fact that Anheuser-Busch’s management may actually have thought they were maximizing profits when they signed the deal with Mulvaney. After all, there are a significant number of people who are transgender, have friends or family members who are transgender, or just think that transgender people should be able to be accepted as normal, and think it’s cool that Anheuser-Busch agrees.
Maybe it’s not fair to blame Anheuser-Busch’s management for not recognizing the fact that an ambitious Florida governor thinks that his path to the presidency depends on convincing Republican primary voters that he is more right-wing than Donald Trump. But, we’ll leave that issue aside.
DeSantis made it clear that he thinks companies should only maximize profit and be subject to shareholder lawsuits if they do anything other than maximizing profits. So how does this get us to suing Gilead?
According to a New York Times article today, Gilead may have delayed bringing an HIV drug onto the market, because it didn’t want to jeopardize the sales of its blockbuster HIV drug Truvada. It wanted to delay bringing the new drug on the market because it wanted Truvada to get the full benefit of its patent monopoly and to only introduce the new drug as Truvada’s patent was about to expire. This would then allow it to benefit from the full length of patent protection for its new drug.
The newer drug would have been safer for patients, since it posed less risk of kidney and bone damage. Gilead is now being sued, based on this allegation, by patients who were harmed by Truvada.
Gilead denies it was motivated by profit considerations in the timing of its introduction of the Truvada replacement. The article tells readers:
“Gilead’s top lawyer, Deborah Telman said in a statement that the company’s ‘research and development decisions have always been, and continue to be, guided by our focus on delivering safe and effective medicines for the people who prescribe and use them.’”
Okay, so now we have Gilead’s top lawyer asserting that the company is not being run to maximize profit, but rather is “guided by our focus on delivering safe and effective medicines for the people who prescribe and use them.”
That sounds dangerously woke. Seems like Gilead is crying out for a lawsuit from Mr. DeSantis. Their top lawyer is openly claiming that the company might be jeopardizing profits, and thereby giving lower returns to shareholders, because it is concerned with people’s health.
Presumably, Mr. DeSantis will be pushing his lawsuit against Gilead any day now.
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That line is effectively the conventional wisdom among people in policy circles. If that seems absurd, then you need to think more about the way many politicians and intellectual types are approaching climate change.
Just this week, John Kerry, President Biden’s climate envoy, was in China. He was asking the Chinese government to move more quickly in reducing its greenhouse gas emissions. President Xi told Kerry that China was not going to move its current target forward, which is to start reducing emissions by 2030.
I know from Twitter that many people think that Kerry’s request was reasonable and that Xi is jeopardizing the planet with his refusal to move forward China’s schedule for emission reductions. This is in spite of the fact that China is by far the world leader in wind energy, solar energy, and electric cars and that all three are growing at double-digit annual rates.
The basic complaint is that China must start reducing its emissions now because of the crisis facing the planet. To my Twitter friends, the problem is that China is the world’s biggest emitter of greenhouse gas. It doesn’t matter that it has four times the population of the U.S. and emits less than half as much on a per-person basis. Nor does it matter that its economy is growing rapidly as it tries to catch up to the living standards enjoyed in the United States and other wealthy countries.
This complaint against China hinges on two sorts of arguments that would be dismissed as nonsense if they were used against the United States.
Taking these in turn, a line I heard endlessly (maybe it came from Chatgpt) is that the climate doesn’t care about per capita emissions, it only cares about total emissions. I have no idea what people were thinking when they wrote this.
Would it be okay if Djibouti, with a population of just over 1 million had fifty times the emissions it has now because the climate only cares about total emissions, not per capita? After all, even with fifty times its current emissions, Djibouti would only be admitting a small fraction of what the U.S. emits.
If we said this about every country with a relatively small population, we would have enormously more emissions than is now the case. I assume anyone who actually cares about the future of the planet would not say that it’s okay for small countries to have per capita emissions that are many times larger than the U.S.
Measured in per capita terms, the United States is among the worst emitters on the planet. We only have a prayer of preventing a horrible climate disaster because just about every other country emits far less per capita.
The second argument raises the question of whether historic emissions somehow entitle a country to future emissions. Just writing that sentence seems close to crazy, but that is in fact what many of my Twitter friends seem to believe.
If we only care about changes and not levels, we are effectively saying that high levels of past emissions allow us to have high levels of future emissions. This line becomes even more absurd when we consider that, in general, higher GDP has been associated with higher levels of emissions. In other words, at least historically, as countries have gotten richer, they have emitted more greenhouse gases.
In the context of China, which is no longer poor, but still a rapidly growing developing country, limiting its future emissions growth would effectively be saying that the country doesn’t have the right to reach U.S. standards of living. This sort of restriction applied to poorer countries would be even more onerous. It would mean that poor countries in Sub-Saharan Africa, Latin America, and South Asia should be denied the opportunity to improve the living standards of their populations because they had not had high emissions in prior years.
The story gets even worse when we consider that the only reason that the planet now faces a climate crisis is that the United States and other wealthy countries have been spewing vast amounts of greenhouse gases into the atmosphere for decades. If we all still had 19th or 18thcentury living standards, global warming would not pose an imminent crisis.
Our China critics are effectively saying that China, and implicitly other developing countries, must be denied the opportunity to improve the living standards of their people because we messed up the planet so badly. That might make sense in intellectual circles here, but that is not an argument that is likely to impress people in China or anywhere outside those circles.
Fortunately for the planet, China actually is moving ahead rapidly in promoting clean energy and electric cars. It is now projected to have its emissions peak in 2025, after which the emissions will be headed downward. This is the result of aggressive policies that it has undertaken to control its emissions, policies that are far more aggressive than anything we have put in place here.
The Chinese government apparently has far more concern for the future of the planet than its critics in the United States. If we did want an opportunity to put our money where our mouth is, the United States could adopt a policy of making all the technology that it develops fully open-source, so that everyone in the world could take advantage of it, without concerns about patent monopolies or other protections.
That would help to speed the process of diffusion so that clean technologies could be adopted more quickly around the world. But doing this could actually mean money out of the pocket of intellectual types here. For that reason, don’t expect to see any discussion of open-sourcing clean technologies in any reputable publication here. Hurting poor people in the developing world might be a fair topic for debate, not taking away money from relatively affluent people here.
That line is effectively the conventional wisdom among people in policy circles. If that seems absurd, then you need to think more about the way many politicians and intellectual types are approaching climate change.
Just this week, John Kerry, President Biden’s climate envoy, was in China. He was asking the Chinese government to move more quickly in reducing its greenhouse gas emissions. President Xi told Kerry that China was not going to move its current target forward, which is to start reducing emissions by 2030.
I know from Twitter that many people think that Kerry’s request was reasonable and that Xi is jeopardizing the planet with his refusal to move forward China’s schedule for emission reductions. This is in spite of the fact that China is by far the world leader in wind energy, solar energy, and electric cars and that all three are growing at double-digit annual rates.
The basic complaint is that China must start reducing its emissions now because of the crisis facing the planet. To my Twitter friends, the problem is that China is the world’s biggest emitter of greenhouse gas. It doesn’t matter that it has four times the population of the U.S. and emits less than half as much on a per-person basis. Nor does it matter that its economy is growing rapidly as it tries to catch up to the living standards enjoyed in the United States and other wealthy countries.
This complaint against China hinges on two sorts of arguments that would be dismissed as nonsense if they were used against the United States.
Taking these in turn, a line I heard endlessly (maybe it came from Chatgpt) is that the climate doesn’t care about per capita emissions, it only cares about total emissions. I have no idea what people were thinking when they wrote this.
Would it be okay if Djibouti, with a population of just over 1 million had fifty times the emissions it has now because the climate only cares about total emissions, not per capita? After all, even with fifty times its current emissions, Djibouti would only be admitting a small fraction of what the U.S. emits.
If we said this about every country with a relatively small population, we would have enormously more emissions than is now the case. I assume anyone who actually cares about the future of the planet would not say that it’s okay for small countries to have per capita emissions that are many times larger than the U.S.
Measured in per capita terms, the United States is among the worst emitters on the planet. We only have a prayer of preventing a horrible climate disaster because just about every other country emits far less per capita.
The second argument raises the question of whether historic emissions somehow entitle a country to future emissions. Just writing that sentence seems close to crazy, but that is in fact what many of my Twitter friends seem to believe.
If we only care about changes and not levels, we are effectively saying that high levels of past emissions allow us to have high levels of future emissions. This line becomes even more absurd when we consider that, in general, higher GDP has been associated with higher levels of emissions. In other words, at least historically, as countries have gotten richer, they have emitted more greenhouse gases.
In the context of China, which is no longer poor, but still a rapidly growing developing country, limiting its future emissions growth would effectively be saying that the country doesn’t have the right to reach U.S. standards of living. This sort of restriction applied to poorer countries would be even more onerous. It would mean that poor countries in Sub-Saharan Africa, Latin America, and South Asia should be denied the opportunity to improve the living standards of their populations because they had not had high emissions in prior years.
The story gets even worse when we consider that the only reason that the planet now faces a climate crisis is that the United States and other wealthy countries have been spewing vast amounts of greenhouse gases into the atmosphere for decades. If we all still had 19th or 18thcentury living standards, global warming would not pose an imminent crisis.
Our China critics are effectively saying that China, and implicitly other developing countries, must be denied the opportunity to improve the living standards of their people because we messed up the planet so badly. That might make sense in intellectual circles here, but that is not an argument that is likely to impress people in China or anywhere outside those circles.
Fortunately for the planet, China actually is moving ahead rapidly in promoting clean energy and electric cars. It is now projected to have its emissions peak in 2025, after which the emissions will be headed downward. This is the result of aggressive policies that it has undertaken to control its emissions, policies that are far more aggressive than anything we have put in place here.
The Chinese government apparently has far more concern for the future of the planet than its critics in the United States. If we did want an opportunity to put our money where our mouth is, the United States could adopt a policy of making all the technology that it develops fully open-source, so that everyone in the world could take advantage of it, without concerns about patent monopolies or other protections.
That would help to speed the process of diffusion so that clean technologies could be adopted more quickly around the world. But doing this could actually mean money out of the pocket of intellectual types here. For that reason, don’t expect to see any discussion of open-sourcing clean technologies in any reputable publication here. Hurting poor people in the developing world might be a fair topic for debate, not taking away money from relatively affluent people here.
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In some really big news that is likely to get almost no media attention, Senator Bernie Sanders, the chair of the Senate HELP Committee, negotiated a deal with Bill Cassidy, the ranking Republican, on a package of amendments to the reauthorization of the nation’s pandemic preparedness law. While there are a number of items in the deal, a really big one is funding for a study to be done by the National Academies of Sciences, Engineering, and Medicine (NASEM) to consider alternatives to patent monopoly financing of the development of prescription drugs.
This is potentially huge, since our current system is a disaster. No one ever said it was a great idea to finance research by charging tens of thousands of dollars for life-saving drugs, when these drugs would sell for a few hundred dollars in a free market without patent protection. We just ended up here. The study outlined in this bill should mean that we will get a serious evaluation of the current route for financing research relative to alternatives.
As I have argued endlessly, the current patent monopoly system is just an incredibly bad way to finance the development of new drugs, vaccines, and other health-related products. There are many different reasons for this view.
Without patent monopolies and related protections, such as test data exclusivity or non-disclosure agreements, drugs would almost invariably be cheap. It is rare that it is expensive to manufacture and distribute a drug. In this free market world, most drugs would sell for a few dollars a prescription, or in some cases, ten or twenty dollars. We would not have drugs selling for hundreds or even thousands of dollars per prescription.
Most people have some type of insurance, either from the government or private insurance, which picks up much of the tab for drugs. Even if this may make the price affordable for patients, this is not the end of the story.
Insurers are not happy about paying hundreds of dollars for a prescription. When a patient is prescribed an expensive drug, insurers will typically make patients jump through hoops, like getting special letters from their doctor, or first trying a cheaper alternative. These bureaucratic hoops would be an annoyance for anyone, but they are especially bad in this context.
The people who need expensive drugs are often in poor health. That is why they need expensive drugs. So, we end up forcing people in bad health to spend their time chasing after doctors or other healthcare professionals, to get insurers to pay for a drug that would be cheap in a free market. That doesn’t make a lot of sense. Needless to say, many people don’t follow through with the necessary steps and end up not getting the drug their doctor prescribed.
Everyone who took Econ 101 can tell you how a 10 or 25 percent trade tariff leads to corruption. People play games mis-categorizing products to find ways around the tariff. The beneficiaries of the tariff use campaign contributions, and occasionally outright bribes, to get politicians to extend and expand the tariff.
These sorts of corruption are completely predictable outcomes from trade tariffs, and we routinely see them in the world. Patent monopolies on drugs raise the same sort of problems, but instead of a tariff that might raise the price of a product by 10-25 percent, we’re talking about raising the price of drugs by many thousand percent with patent monopolies.
The potential profits from selling a drug at a price that is several thousand percent above its production cost gives a very big incentive for corruption. Most immediately the corruption takes the form of misleading doctors and the public about the safety and effectiveness of a product.
This effort takes a variety of forms. The most visible are the endless television ads telling us about the merits of various drugs for treating arthritis, diabetes, or various other conditions. While these ads can provide some information, hearing a famous actor touting a drug they were paid to promote is probably not a good way to determine the best course of treatment for a medical condition.
In fact, this sort of direct-to-the-patient advertising had been banned for many decades, until the Supreme Court determined that this restriction violated free speech. Whether or not the Court’s decision was correct, it would become moot if we took away the patent monopolies. No one would be spending billions of dollars on ads pushing prescription drugs if they were sold in a free market like shovels and paper clips.
But this is only the beginning of the corruption story. Drug companies routinely pay doctors to promote their drugs through various channels. While there have been efforts in recent decades to crack down on the practice of having professional medical opinions for hire, medical journals still struggle to ensure that published articles were actually written by the named authors and were not paid for by drug companies. Researchers who get generous consulting fees from drug companies may be reluctant to criticize a drug marketed by that company, for fear of having this income stream cut off.
This is an especially big issue in health care, as opposed to other areas where companies push their products. This is partly because there are serious problems of asymmetric information; the drug companies know more about their drugs than patients or their doctors. And, also because the consequences are so huge. People may be unhappy if their latest smartphone didn’t live up to expectations, but this just means they wasted some money. If they take a heart medication that is ineffective, or possibly even harmful, it can seriously damage their health or even cost them their life.
The real dangers from mismarketing drugs are not hard to find. To take a couple of examples, the pharmaceutical giant Merck paid billions of dollars to settle suits alleging that it concealed evidence that its arthritis drug, Vioxx, posed serious dangers to people with heart conditions. The opioid crisis stemmed in large part from drug companies misleading doctors about the extent to which the new generation of opioids was addictive. More recently, Biogen lobbied the FDA to get it to approve its Alzheimer’s drug Adulhem, even though its expert panel felt that it was ineffective and potentially dangerous.
Some mistakes in research are inevitable, but the incentive to deliberately mislead doctors and the public about the safety and effectiveness of drugs will largely disappear without patent monopolies. This would be a huge victory for public health.
The costs of maintaining and enforcing the patent system are a large deadweight loss from the standpoint of the economy as a whole. The resources devoted to filing and enforcing patents do not add even a minute to anyone’s life or improve its quality in any way. The time of the people involved in this process could instead be employed in something productive.
This is getting to be a bigger deal over time. It is increasingly common for drug companies to file dozens of patents of dubious quality to extend the period of protection for their blockbuster drugs. This is a practice that can pay off big for the drug company, even if it is an incredible waste for society.
Patent monopolies are supposed to be an incentive for innovation, but a dubious patent, claiming a monopoly on a trivial innovation, is simply a way to block competition. Drug companies can benefit from this process because of the incredible asymmetry involved in any potential legal dispute. A drug company protecting its patent is fighting for the ability to continue to sell their drug at the patent monopoly-protected price. A generic company challenging the patent is seeking the right to sell the drug in a competitive market.
In addition to possibly securing a monopoly for a longer time than is warranted, millions of dollars of legal expenses can be incurred in these battles. These cases also present another opportunity for corruption, with drug companies sometimes making what are effectively payoffs, in the form of licensing agreements, to persuade generic manufacturers to drop lawsuits contesting patents.
The patent monopoly financing system encourages secrecy in research. Pfizer and Merck want to get as much as possible out of their research and avoid giving away information that could provide an advantage to competitors. This means they only disclose information that is necessary to get a patent. They will not publish research findings that could be useful to competitors. Also, their clinical trial results are proprietary, although in response to pressure, drug companies have been much better about making their full results available in recent years.
If we paid for research upfront, it could be a requirement that all findings be posted on the web as soon as practical. All patents would be in the public domain and any non-disclosure agreements on the research would not be enforceable.[1]
If this sort of system had been in place during the pandemic it would have meant that all the research being done on tests, treatments, and vaccines, everywhere in the world, would have been freely shared. This meant that anyone with the manufacturing capacity could have begun making not only the mRNA vaccines, but also the AstraZeneca vaccine, as well as the ones developed by China, India, and Cuba. The manufacturing could have been done even in advance of approval, since the benefits of having tens of millions of vaccines quickly available swamps the risk of having to throw them out if they don’t prove safe and effective. This would have allowed the world to get vaccinated far more quickly, slowing the spread of the pandemic. It quite likely would have prevented the development of the omicron strain and possibly even the delta strain, saving millions of lives and avoiding hundreds of millions of infections.
It is true that this would have required some sort of international agreement on sharing technology, but the patent system also requires agreement on rules and enforcement. And, anyone who has followed recent trade negotiations knows these agreements have not been easy to reach.
When we are relying on patent monopolies to finance research, the only avenues that companies will pursue are ones that are likely to lead to a patentable product. If it seems that diet, exercise, or environmental factors might be important for addressing a specific condition, companies will have no incentive to pursue these paths.
In principle, we have the National Institutes of Health and other public agencies that can pursue these avenues, but there is no reason to assume that information will be freely transferred. After all, if a drug company has spent years researching a drug for diabetes, and it uncovers evidence that dietary issues can be very important in treatment, it has little incentive to share information that could undermine the market for its drug.
By contrast, if all research was fully open, and drug companies are being rewarded for doing research that advances public health, they would have every reason in the world to share findings that were not related to a patentable product. It is also worth noting that this problem also applies to researching new uses for old drugs. If a drug that is off-patent proves to be effective in treating a different condition than the one for which it had been approved, a company would have little incentive to pursue this research.
People in policy debates like to blame the rise in inequality over the last four decades on technology. This is not true. It is our rules on technology, not the technology itself, that has led to the growth in inequality.
The case of the Moderna Covid vaccine provides a great case study to make this point. The government paid Moderna just under $1 billion to develop and test its vaccine. Rather than insisting that the vaccine be placed in the public domain, so that it could be produced as a cheap generic, we allowed Moderna to maintain control over its production and distribution. As a result we created at least five Moderna billionaires by the summer of 2021.
There was nothing about the technology that required that a small number of people at Moderna would get incredibly rich. The problem was the rules we put in place for controlling the technology.
This issue applies to the patent monopoly system more broadly. If we had a system where drug companies contracted with the government to do research, there would undoubtedly be talented and hardworking researchers who would get substantial rewards. However, it is unlikely that this system would produce many billionaires.
And, we should all recognize that there is an enormous amount of money at stake. We will spend over $550 billion this year on prescription drugs. These drugs would likely cost less than $100 billion in a free market without patents and other protections. The difference of $450 billion (more than $5 trillion over a decade) comes to more than $3,000 a year per family. It is real money and it makes a really big difference whose pockets it ends up in.
The issue of inequality should not be a primary factor in designing the best mechanism for developing new drugs, however it is reasonable to consider the impact that the system has on inequality. It is more than a bit backward to design a system that produces an enormous amount of inequality and then to complain about inequality. It is much easier to avoid creating massive inequality in the first place, than to structure the system in a way that generates inequality and somehow expect to be able to tax it back.
As should be clear to everyone by now, money creates political power. If we allow people to get very rich, they will use their political power to ensure that they stay rich.
It is great that NASEM will do a study evaluating alternatives to patent monopoly financing for the development of prescription drugs. A serious investigation of this issue is long overdue. I am confident that an honest study would not conclude that the current system is the best system.
However, I have been around Washington long enough to realize that we cannot take an honest study for granted. There is no shortage of academics who are prepared to do the pharmaceutical industry’s bidding. If these people end up carrying out the study, we can assume that they will find that we live in the best of all possible worlds.
Anyhow, this study offers some hope. It would be nice if its existence got a little attention from the media, but I suppose the issue is too important for them to be concerned about. We will see where this goes, but Senator Sanders should be congratulated for moving the ball forward.
[1] In my ideal world, money would be parceled out in long-term contracts (10-15 years) to do research in specific areas, such as lung cancer or heart disease. The companies that got the money would be like prime contractors in the military, with the understanding that they would likely subcontract with smaller companies or start-ups. These subcontractors would also be bound by the openness requirements. Companies would have a strong incentive to produce results, since they presumably would want contracts renewed and expanded. (I discuss this plan in chapter 5 of Rigged [it’s free].) This openness requirement would not be feasible in a prize system, since companies would still have an incentive to keep their work secret until the point where the prize was awarded.
In some really big news that is likely to get almost no media attention, Senator Bernie Sanders, the chair of the Senate HELP Committee, negotiated a deal with Bill Cassidy, the ranking Republican, on a package of amendments to the reauthorization of the nation’s pandemic preparedness law. While there are a number of items in the deal, a really big one is funding for a study to be done by the National Academies of Sciences, Engineering, and Medicine (NASEM) to consider alternatives to patent monopoly financing of the development of prescription drugs.
This is potentially huge, since our current system is a disaster. No one ever said it was a great idea to finance research by charging tens of thousands of dollars for life-saving drugs, when these drugs would sell for a few hundred dollars in a free market without patent protection. We just ended up here. The study outlined in this bill should mean that we will get a serious evaluation of the current route for financing research relative to alternatives.
As I have argued endlessly, the current patent monopoly system is just an incredibly bad way to finance the development of new drugs, vaccines, and other health-related products. There are many different reasons for this view.
Without patent monopolies and related protections, such as test data exclusivity or non-disclosure agreements, drugs would almost invariably be cheap. It is rare that it is expensive to manufacture and distribute a drug. In this free market world, most drugs would sell for a few dollars a prescription, or in some cases, ten or twenty dollars. We would not have drugs selling for hundreds or even thousands of dollars per prescription.
Most people have some type of insurance, either from the government or private insurance, which picks up much of the tab for drugs. Even if this may make the price affordable for patients, this is not the end of the story.
Insurers are not happy about paying hundreds of dollars for a prescription. When a patient is prescribed an expensive drug, insurers will typically make patients jump through hoops, like getting special letters from their doctor, or first trying a cheaper alternative. These bureaucratic hoops would be an annoyance for anyone, but they are especially bad in this context.
The people who need expensive drugs are often in poor health. That is why they need expensive drugs. So, we end up forcing people in bad health to spend their time chasing after doctors or other healthcare professionals, to get insurers to pay for a drug that would be cheap in a free market. That doesn’t make a lot of sense. Needless to say, many people don’t follow through with the necessary steps and end up not getting the drug their doctor prescribed.
Everyone who took Econ 101 can tell you how a 10 or 25 percent trade tariff leads to corruption. People play games mis-categorizing products to find ways around the tariff. The beneficiaries of the tariff use campaign contributions, and occasionally outright bribes, to get politicians to extend and expand the tariff.
These sorts of corruption are completely predictable outcomes from trade tariffs, and we routinely see them in the world. Patent monopolies on drugs raise the same sort of problems, but instead of a tariff that might raise the price of a product by 10-25 percent, we’re talking about raising the price of drugs by many thousand percent with patent monopolies.
The potential profits from selling a drug at a price that is several thousand percent above its production cost gives a very big incentive for corruption. Most immediately the corruption takes the form of misleading doctors and the public about the safety and effectiveness of a product.
This effort takes a variety of forms. The most visible are the endless television ads telling us about the merits of various drugs for treating arthritis, diabetes, or various other conditions. While these ads can provide some information, hearing a famous actor touting a drug they were paid to promote is probably not a good way to determine the best course of treatment for a medical condition.
In fact, this sort of direct-to-the-patient advertising had been banned for many decades, until the Supreme Court determined that this restriction violated free speech. Whether or not the Court’s decision was correct, it would become moot if we took away the patent monopolies. No one would be spending billions of dollars on ads pushing prescription drugs if they were sold in a free market like shovels and paper clips.
But this is only the beginning of the corruption story. Drug companies routinely pay doctors to promote their drugs through various channels. While there have been efforts in recent decades to crack down on the practice of having professional medical opinions for hire, medical journals still struggle to ensure that published articles were actually written by the named authors and were not paid for by drug companies. Researchers who get generous consulting fees from drug companies may be reluctant to criticize a drug marketed by that company, for fear of having this income stream cut off.
This is an especially big issue in health care, as opposed to other areas where companies push their products. This is partly because there are serious problems of asymmetric information; the drug companies know more about their drugs than patients or their doctors. And, also because the consequences are so huge. People may be unhappy if their latest smartphone didn’t live up to expectations, but this just means they wasted some money. If they take a heart medication that is ineffective, or possibly even harmful, it can seriously damage their health or even cost them their life.
The real dangers from mismarketing drugs are not hard to find. To take a couple of examples, the pharmaceutical giant Merck paid billions of dollars to settle suits alleging that it concealed evidence that its arthritis drug, Vioxx, posed serious dangers to people with heart conditions. The opioid crisis stemmed in large part from drug companies misleading doctors about the extent to which the new generation of opioids was addictive. More recently, Biogen lobbied the FDA to get it to approve its Alzheimer’s drug Adulhem, even though its expert panel felt that it was ineffective and potentially dangerous.
Some mistakes in research are inevitable, but the incentive to deliberately mislead doctors and the public about the safety and effectiveness of drugs will largely disappear without patent monopolies. This would be a huge victory for public health.
The costs of maintaining and enforcing the patent system are a large deadweight loss from the standpoint of the economy as a whole. The resources devoted to filing and enforcing patents do not add even a minute to anyone’s life or improve its quality in any way. The time of the people involved in this process could instead be employed in something productive.
This is getting to be a bigger deal over time. It is increasingly common for drug companies to file dozens of patents of dubious quality to extend the period of protection for their blockbuster drugs. This is a practice that can pay off big for the drug company, even if it is an incredible waste for society.
Patent monopolies are supposed to be an incentive for innovation, but a dubious patent, claiming a monopoly on a trivial innovation, is simply a way to block competition. Drug companies can benefit from this process because of the incredible asymmetry involved in any potential legal dispute. A drug company protecting its patent is fighting for the ability to continue to sell their drug at the patent monopoly-protected price. A generic company challenging the patent is seeking the right to sell the drug in a competitive market.
In addition to possibly securing a monopoly for a longer time than is warranted, millions of dollars of legal expenses can be incurred in these battles. These cases also present another opportunity for corruption, with drug companies sometimes making what are effectively payoffs, in the form of licensing agreements, to persuade generic manufacturers to drop lawsuits contesting patents.
The patent monopoly financing system encourages secrecy in research. Pfizer and Merck want to get as much as possible out of their research and avoid giving away information that could provide an advantage to competitors. This means they only disclose information that is necessary to get a patent. They will not publish research findings that could be useful to competitors. Also, their clinical trial results are proprietary, although in response to pressure, drug companies have been much better about making their full results available in recent years.
If we paid for research upfront, it could be a requirement that all findings be posted on the web as soon as practical. All patents would be in the public domain and any non-disclosure agreements on the research would not be enforceable.[1]
If this sort of system had been in place during the pandemic it would have meant that all the research being done on tests, treatments, and vaccines, everywhere in the world, would have been freely shared. This meant that anyone with the manufacturing capacity could have begun making not only the mRNA vaccines, but also the AstraZeneca vaccine, as well as the ones developed by China, India, and Cuba. The manufacturing could have been done even in advance of approval, since the benefits of having tens of millions of vaccines quickly available swamps the risk of having to throw them out if they don’t prove safe and effective. This would have allowed the world to get vaccinated far more quickly, slowing the spread of the pandemic. It quite likely would have prevented the development of the omicron strain and possibly even the delta strain, saving millions of lives and avoiding hundreds of millions of infections.
It is true that this would have required some sort of international agreement on sharing technology, but the patent system also requires agreement on rules and enforcement. And, anyone who has followed recent trade negotiations knows these agreements have not been easy to reach.
When we are relying on patent monopolies to finance research, the only avenues that companies will pursue are ones that are likely to lead to a patentable product. If it seems that diet, exercise, or environmental factors might be important for addressing a specific condition, companies will have no incentive to pursue these paths.
In principle, we have the National Institutes of Health and other public agencies that can pursue these avenues, but there is no reason to assume that information will be freely transferred. After all, if a drug company has spent years researching a drug for diabetes, and it uncovers evidence that dietary issues can be very important in treatment, it has little incentive to share information that could undermine the market for its drug.
By contrast, if all research was fully open, and drug companies are being rewarded for doing research that advances public health, they would have every reason in the world to share findings that were not related to a patentable product. It is also worth noting that this problem also applies to researching new uses for old drugs. If a drug that is off-patent proves to be effective in treating a different condition than the one for which it had been approved, a company would have little incentive to pursue this research.
People in policy debates like to blame the rise in inequality over the last four decades on technology. This is not true. It is our rules on technology, not the technology itself, that has led to the growth in inequality.
The case of the Moderna Covid vaccine provides a great case study to make this point. The government paid Moderna just under $1 billion to develop and test its vaccine. Rather than insisting that the vaccine be placed in the public domain, so that it could be produced as a cheap generic, we allowed Moderna to maintain control over its production and distribution. As a result we created at least five Moderna billionaires by the summer of 2021.
There was nothing about the technology that required that a small number of people at Moderna would get incredibly rich. The problem was the rules we put in place for controlling the technology.
This issue applies to the patent monopoly system more broadly. If we had a system where drug companies contracted with the government to do research, there would undoubtedly be talented and hardworking researchers who would get substantial rewards. However, it is unlikely that this system would produce many billionaires.
And, we should all recognize that there is an enormous amount of money at stake. We will spend over $550 billion this year on prescription drugs. These drugs would likely cost less than $100 billion in a free market without patents and other protections. The difference of $450 billion (more than $5 trillion over a decade) comes to more than $3,000 a year per family. It is real money and it makes a really big difference whose pockets it ends up in.
The issue of inequality should not be a primary factor in designing the best mechanism for developing new drugs, however it is reasonable to consider the impact that the system has on inequality. It is more than a bit backward to design a system that produces an enormous amount of inequality and then to complain about inequality. It is much easier to avoid creating massive inequality in the first place, than to structure the system in a way that generates inequality and somehow expect to be able to tax it back.
As should be clear to everyone by now, money creates political power. If we allow people to get very rich, they will use their political power to ensure that they stay rich.
It is great that NASEM will do a study evaluating alternatives to patent monopoly financing for the development of prescription drugs. A serious investigation of this issue is long overdue. I am confident that an honest study would not conclude that the current system is the best system.
However, I have been around Washington long enough to realize that we cannot take an honest study for granted. There is no shortage of academics who are prepared to do the pharmaceutical industry’s bidding. If these people end up carrying out the study, we can assume that they will find that we live in the best of all possible worlds.
Anyhow, this study offers some hope. It would be nice if its existence got a little attention from the media, but I suppose the issue is too important for them to be concerned about. We will see where this goes, but Senator Sanders should be congratulated for moving the ball forward.
[1] In my ideal world, money would be parceled out in long-term contracts (10-15 years) to do research in specific areas, such as lung cancer or heart disease. The companies that got the money would be like prime contractors in the military, with the understanding that they would likely subcontract with smaller companies or start-ups. These subcontractors would also be bound by the openness requirements. Companies would have a strong incentive to produce results, since they presumably would want contracts renewed and expanded. (I discuss this plan in chapter 5 of Rigged [it’s free].) This openness requirement would not be feasible in a prize system, since companies would still have an incentive to keep their work secret until the point where the prize was awarded.
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I have a birthday coming up, so it seems a good time to assess progress, or lack thereof, on the various issues that I have worked on over the decades. There is some big progress in at least a couple of areas, but not much to boast about in the others.
I’ll start with the success stories.
The Benefits of a Tight Labor Market
The big one, where I feel we really have made huge progress, is the battle for full employment. It might seem like ancient history, but a quarter century ago the absolute standard wisdom in the economics profession was that we could not get unemployment rates below 6.0 percent without ever accelerating inflation. To argue otherwise was to invite ridicule.
The reality repeatedly contradicted the theory. We sustained an unemployment rate of 4.0 percent in 2000, with only a very modest increase in the inflation rate. The recession caused by the collapse of the stock bubble drove the unemployment rate back up in 2001 and 2002, but we eventually did start to see it fall again, eventually reaching levels around 4.5 percent in 2007.
Unfortunately, this drop in unemployment was driven by a housing bubble, the collapse of which gave us the worst downturn since the Great Depression. The timid response to the recession by the Obama administration and the Republican Congress gave us a weak recovery. However, by the end of 2017, the unemployment rate was again approaching 4.0 percent.
The Federal Reserve Board had already begun raising interest rates, following the theory that an unemployment rate this low would trigger inflation. But inflation remained tame. In the summer of 2019, the Fed made the remarkable decision to lower rates, even though the unemployment rate was below 4.0 percent.
Fed Chair Jerome Powell said it was time to give the full employment side of the Fed’s mandate equal weight with the price stability side. He noted the huge benefits accruing to Black workers, Hispanic workers, people with less education, and people with criminal records from low unemployment. He said, given the huge benefits of low unemployment, he wanted to press the unemployment rate as low as possible, until there was clear evidence of inflation.
This was exactly the script that those of us on the left had been pushing for decades. It was great to hear it from the mouth of a Fed chair.
We saw this story further reinforced following the pandemic. Many leading lights of the economic profession denounced the Biden stimulus package and warned that it would take a prolonged period of high unemployment to bring inflation back down to acceptable levels.
Well, at this point we can say that the package, along with subsequent policies like the infrastructure bill and the Inflation Reduction Act, quickly boosted the economy back to full employment. While inflation did jump in 2021 and the first half of 2022, we are most of the way back down to the Fed’s 2.0 percent target, even as unemployment remains near its half century low. We are not necessarily out of the woods yet, as the Fed will likely have further rate hikes and we have not yet seen the full impact of past hikes, but, thus far, things look pretty damn good.
Furthermore, the benefits of a tight labor market for those at the bottom are clearer than ever. Work by Arin Dube, David Autor, and Annie Mcgrew shows that as much as a quarter of the wage inequality that built up over the prior four decades has been reversed with the tight labor markets in the recovery from the pandemic recession. That is a really big deal.
We also have moved away from the idea that we need to weaken unions and reduce labor market supports, like minimum wages and unemployment benefits, to have a strong labor market. These were literally the policies being pushed on countries by the OECD in the 1990s and the start of the century. They reflected the consensus view in the economics profession.
This is no longer the case. Countries with very high unionization rates, like Denmark and Sweden, have managed to maintain high levels of employment and strong growth. It is also now generally recognized that reasonable levels of minimum wages are not impediments to employment. This is huge progress.
Saving Social Security
In the 1990s there was widespread agreement across party lines that Social Security was broken and needed to be “fixed.” Only the ramshackle left and most of the public wanted to protect the current benefit structure. Incredibly, in spite of efforts supported by presidents of both parties, there were no cuts to the program.
This was a period in which the program faced serious vulnerability because of its structure and the demographics of the populations. In the 1990s, and the first decade of this century, Social Security had a large annual surplus. This was due to the fact that the huge baby boom cohort was in its prime working years. The program was structured so that its trust fund would build up a large surplus in these decades, which could then be used to partially cover the cost of the baby boomers’ retirement.
This surplus also created a door for privatization. Instead of putting the money into the trust fund, the privatizers dreamed of turning it over to Wall Street, who could make tens of billions of dollars in fees managing individual accounts.
We managed to get through these decades without privatizing or cutting the program. Now a large portion of the baby boom generation is retired and receiving benefits, eliminating the annual surplus. Also, with this huge cohort either currently dependent on Social Security, or likely to be in the very near future, cuts to benefits will face more opposition than ever. This doesn’t mean that there can never be any cuts to the program, but the probability of cuts that hit a substantial segment of the poor or middle class seems very low.
Failed Efforts
Well, that’s my good news. The story with other issues that I worked on is much less bright.
Patent and Copyright Monopolies
In the effort to promote alternative mechanisms to patent and copyright monopolies for financing innovation and creative work, I would say that we have gotten pretty much nowhere. There is virtually no understanding of how these monopolies work and that there can, in fact, be alternative mechanisms. There is also almost no understanding of how much money is at stake.
On the first point, it is really hard to get people, including economist-type people, to understand that we don’t need to attach patents to innovation and copyrights to creative work. I don’t know how many times I have laid out a scheme to have the government pay for all the research and testing involved with developing a drug and then have someone ask “how long would the patent be?” [1]
Somehow people just can’t grasp that if the government pays for the research, there is no patent, there would be no point to a patent, and there would be no one to have a claim to one. Patent monopolies are a mechanism for providing incentive. If the government paid the money (as we did with the Moderna Covid vaccine), it already provided the incentive. If the money wasn’t adequate, then people didn’t have do the work.
I recall when I read Marx back when I was an undergrad. In Capital he talks about how people see it as natural that money gets interest, failing to recognize that lending money at interest is a social relationship. There seems to be a similar story with innovation and creative work and patents and copyrights. People seem to think that these government-granted monopolies are inherent to these processes, rather than an explicit policy choice.
There are obviously arguments for these mechanisms as policy tools, but it is impossible to have a serious discussion if people don’t even recognize that they are policy tools and not facts of nature. I don’t know how to advance this point, I just know that, to date, I and others have made very little progress.
I’m sure that part of the issue is that this hits very directly at people’s view of the economy and its fairness. It is absolutely conventional wisdom that the upward redistribution of the last four decades is explained in large part by the development of technology.
However, pointing out that who benefits from this technology and how much is a political decision, destroys that view. As a practical matter, we can make patent and copyright monopolies longer and stronger, or shorter and weaker. We don’t even need to have them at all.
In a world where these monopolies do not exist, there is zero reason to think that all the educated STEM-types would get rich at the expense of everyone else. That may not be a good way to structure the economy, but the point is that it is a possible way. The fact that people like Bill Gates can get hugely rewarded for his talent and work is the result of how we chose to structure the market. It was not “technology.”
The other part of the story is getting people to understand how much money is at stake. Here also the ignorance of well-educated people is astounding. If we had a world without patent and copyright monopolies, we would likely free up more than $1 trillion a year, close to half of all after-tax corporate profits.
In the case of prescription drugs alone, we are likely talking about more than $450 billion a year. That comes to $3,000 per family or more than four times the annual food stamp budget. The money at stake with these monopolies swamps the amount at stake in almost all the political battles that take place in Washington.
Apart from the money involved, expecting someone with a serious illness to effectively pay for research that was done long ago should strike anyone as an act of irrational cruelty. Economists all go nuts if you talk about a tariff of 10-20 percent. Drug patents are effectively tariffs of several thousand percent. Furthermore, since we generally have third party payers (insurers or the government) this is not even a question of consumer choice. How can this policy possibly make any sense?
I have been around Washington long enough to know that you don’t just reshape the whole financing mechanism for prescription drugs, medical equipment, or anything else important in one big move. But it should be possible to get a foot, or ideally feet, in the door, pointing the way to alternatives. In recent months I have been hoping that it would be possible to secure funding for a trial of the open-source Covid vaccine developed by Drs. Peter Hotez and Maria Elena Bottari at Baylor College of Medicine and Texas Children’s Hospital.
This vaccine has already been used by over 100 million people in India and Indonesia, so they should not be too much question about its safety and effectiveness. It just needs a domestic trial to get FDA approval so that it can be used here.
If it were approved, the shots would likely cost less than $5 each (they cost $2 in India), compared to more than $100 a shot for the Moderna or Pfizer boosters. This contrast should help drive home the benefits of open-source funding of research, but it is an uphill battle.
For the most part, people, including progressives, can’t even conceive of a world where drugs are cheap. Their hope is largely that the U.S. government will limit drug prices in the same way that governments in Europe, Canada, and elsewhere limit them. But the idea that we would get the government to stop making drugs expensive by giving out patent monopolies is not even within their realm of thinking. That’s a problem.
The Financial Industry Money Pit
Any economics textbook tells students that the purpose of the financial industry is to facilitate transactions and to allocate capital. That should be fairly straightforward, sort of like the purpose of the trucking industry is to move goods from one place to another.
Unfortunately, while most people grasp the purpose of the trucking industry pretty well, they seem to have forgotten the textbook story on finance the moment they leave the class. The point here is simple, but important. An efficient financial industry is a small financial industry.
We want to be able to conduct transactions quickly and safely. That means I should be able to buy my groceries, pay my rent or mortgage, or do other transactions in the least amount of time and with minimal risk of fraud or theft.
We also want capital allocated efficiently. That means when someone has a useful innovation, they should be able to get the money to market it on a large scale. People also need capital to buy homes, cars, and to pay for education.
The textbook tells us we want these tasks done with as few resources as possible, meaning a minimal number of workers and capital being used. If we applied this standard in thinking about the financial industry, many issues become simple.
Take Bitcoin and other crypto currencies. These currencies serve no purpose for the real economy, they are just a form of gambling. And, how do we deal with gambling? We tax it.
Suppose we had a 1.0 percent tax on all crypto trades. That should radically downsize the industry, while raising a nice chunk of revenue for the government, with no negative effects on the real economy at all.
I know that crypto proponents insist it will eliminate racial discrimination in the financial industry and in other ways create heaven on earth. It’s hard to take these folks seriously, but let’s put it this way. In Utah, I paid 8.0 percent sales tax when I bought a pair of shoes. Surely if crypto is the way to heaven on earth, a 1.0 percent tax won’t stand in the way.
It’s the same story with the financial industry more generally. We will have roughly $40 trillion in stock trades this year, or $160 billion a day. Does anyone think capital would be less efficiently allocated if we cut this in half to $20 trillion a year? A financial transaction tax that cut the volume in trading in half would free up roughly $120 billion a year (0.5 percent of GDP) that is now spent carrying through these trades.
The same goes for other parts of the financial industry. We may not outlaw private equity, but we need not structure our tax laws to give the industry special tax advantages like the carried interest tax break. We could also look to have the Fed offer everyone digital bank accounts so that we could save tens of billions annually in bank fees. And, we could have the federal government offer low cost IRAs, like the federal employees’ Thrift Savings Plan, which would save people tens of billions annually on needless management fees charged by brokerage houses and insurance companies.
On this issue, there is some progress to report. Several states now let private sector employees buy into their state employees retirement system, effectively giving them a low-cost IRA/401(k) option.
But progress in this and other areas would be so much easier if we could just get everyone to remember their Intro Econ treatment of finance. We want it simple and we want it cheap: full stop.
In this vein, I should probably also mention the idea of converting the basis of the corporate income tax from profits to the returns companies provide to shareholders (dividends and capital gains). The logic of this is straightforward, corporate accountants tell us how much profit the company made. We can get returns to shareholders from any financial website.
This would effectively be a tax that would be impossible to avoid. The I.R.S. could calculate every company’s tax liability on a single spreadsheet. (That is, all companies tax liability could be calculated on the same spreadsheet.)
Not only does this mean that we could be sure to get the tax rate we targeted, it would also destroy the tax gaming industry. The tens of billions of dollars that companies currently spend on gaming the tax code could instead go to productive uses.
We actually have made serious progress on this sort of switch. As part of the Inflation Reduction Act, we now have a 1.0 percent tax on share buybacks. I’m sure that this tax was not put in place as a step towards shifting the basis for the corporate income tax to returns to shareholders, but it could end up being a big step in this direction.
Since buybacks are 100 percent transparent (companies can’t very well keep them a secret), this will be the easiest tax ever from the standpoint of enforcement. When people recognize how simple and easy it is to collect a tax that is based on returns to shareholders, there could be momentum to increase the portion of the income tax that is based on buybacks, dividends, and capital gains. It’s always best to tax things we can see directly, as opposed to a number manufactured by corporate accountants.
Reining in CEO Pay
It is common to see people on Twitter and elsewhere complain about the tens of millions pulled down each year by the CEOs of major corporations. While the complaints are certainly justified, they rarely go beyond moral indignation. Few make the point that CEOs are not worth their paychecks, at least in the very narrow sense that they do not produce for their companies an amount of value equal to their $20 million or $30 million paycheck.
This point is important, since it means CEOs are ripping off the companies they work for. That implies that the shareholders of these companies should be allies in the effort to rein in CEO pay.
While that point would seem obvious, there is almost no recognition of this logical inference from most progressives. Even people who complain about CEOs using stock buybacks to manipulate stock prices and increase the value of their options, rarely take the next step and say shareholders should be upset about CEOs taking money from them.
In my view, the key to bringing down CEO pay is to give shareholders more ability to rein it in. As it stands, the corporate board of directors are supposed to be the ones who act on shareholders’ behalf to limit CEO pay. But a recent survey found that these boards don’t even see it as their responsibility to rein in CEO pay. Rather, they see their job as helping top management.
We should be focused on making it easy for shareholders to pressure boards to take CEO pay seriously. I have suggested that the “Say on Pay” votes on CEO pay, which were part of the Dodd-Frank financial reform act, have a bit more teeth.
As it stands, there is no consequence for a no vote on a CEO compensation package, except for a bit of embarrassment. Suppose that directors lost their pay if a vote went down. My guess is that if two or three packages went down, and boards felt some real consequence from overpaying their CEOs, they would start to ask questions like “can we get someone just as good for less money?” That could end the upward spiral of CEO pay and start to bring it back down to earth.
This is not just a question of a small number of top execs getting too much money. The bloated pay for CEOs affects pay structures throughout the economy. If the CEO gets $20 million, the rest of C-suite might get close to $10 million, and third tier execs can get $2 million or $3 million. This also affects pay outside the corporate sector. It is now common for presidents of universities or major charities to get several million dollars a year for their work.
The world would look very different if we had not seen the explosion of CEO pay relative to ordinary workers. If we still had the ratios of 20 or 30 to 1, that we had in the 1960s and 1970s, CEOs would be getting $2 million to $3 million a year. The lower pay for the top end of the income distribution would free up lots of money for everyone else. Unfortunately, we cannot even get a serious discussion of this issue.
Free Trade for Doctors and Other High-End Professionals
It has become gospel that the United States has pursued a policy of free trade for the last four decades. This is a lie.
Our trade policy has been focused on removing barriers to trade in manufactured goods. This has the effect of putting U.S. manufacturing workers in direct competition with low-paid workers in the developing world. This has the predicted and actual effect of reducing the number of manufacturing jobs in the United States and reducing the pay for the jobs that remain.
While this policy can be justified by pointing to the benefits for consumers in the form of lower prices, we could have gone the same route of “free trade” when it came to doctors and other highly paid professionals. The models show the gains from trade work the same way when we talk about physicians’ or dentists’ services as when we talk about cars and clothes.
However, our trade negotiators never had free trade in physicians’ services on their agenda. That is understandable, since they probably all have friends and relatives who work as doctors, dentists, or other highly paid professionals.
But, even if we have to recognize the power relations that are behind trade deals that have the effect of redistributing income upward, there is no excuse for covering up the true story by calling it “free trade.” Trade rules were constructed to redistribute income upward. No one involved in the process had any interest in real free trade.
Anyhow, we continue to get these absurd battles over “free trade.” It’s sort of like debating Catholic or Jewish theology where you first have to accept the tenets of the faith before you can be admitted into the discussion. For now, the participants in trade debates all must pretend that we have a free trade policy, instead of a policy of selective protectionism designed to screw ordinary workers.
Saving Journalism
I raise this one because there is not even a debate on the topic, simply a steady drumbeat of stories about how local newspapers are closing around the country and how national news outlets, both print and broadcast, are laying off reporters because they can’t make money in the current system. While there apparently is a big market for pieces bemoaning the current situation, there is very little interest in discussing policies that could alter the picture and revitalize reporting.
This is unfortunate, because these ideas do exist. The basic story is finding some way to get public funds to people doing journalism. For whatever reason, we can’t get a serious discussion in major news outlets about how to repair the news system.
I should also mention another aspect to this issue. Many people rightly complain about the outsize power that the rich have in politics. Under the current system, billionaires can basically contribute as much as they want to support their favored candidates or causes.
Here also, there is a lot of ink spilled decrying the situation, but almost no discussion of serious remedies. Not only would it be almost impossible to limit political contributions given the current makeup of the Supreme Court, it’s not clear it would make much difference even if we could.
Suppose no one was allowed to give more than $1,000 to a candidate and/or a PAC or PAC-equivalent. Is anyone proposing measures that would prevent right-wing billionaires from creating another Fox News, or two or three Fox News networks? Alternatively, are there proposals to prevent right-wing billionaires from buying up CBS, NBC, CNN and every other major news outlets?
If right-wing billionaires controlled all the major news outlets, they could effectively run ads for their favored candidates as “news.” They would have no reason to make campaign contributions to get their candidates elected. Their news shows would be far more effective in pushing the case.
If progressives want to be serious about countering the political power of billionaires, there is no alternative to finding mechanisms that give more voice to ordinary people. No one has even conceived of an effective way to restrict billionaires’ political power, much less put forward a proposal that would have prayer in hell of becoming law in anyone’s lifetime.
While we are on the topic of the political power of the rich, it would also be a good idea to have a serious discussion of restructuring Section 230 protection for Internet platforms. There is no obvious reason that Internet platforms should be protected from liability for defamation suits based on third party content, when print and broadcast media don’t enjoy this protection.
Although it is not feasible for these platforms to preemptively screen content for defamatory material, they could be subject to take-down rules in the same way that is now the case for allegations of copyright infringement. We can also write the rules in ways that are likely to disadvantage giants like Facebook and Twitter and benefit smaller sites.
Anyhow, there are an infinite number of ways to slice and dice a Section 230 repeal, but the key thing is to get it on the agenda. As of now, it isn’t. All we get are complaints about the way billionaire jerks run their platforms, as though the rest of us are powerless in the story.
Changing the Narrative Is Not Easy
It is not easy to move policy debates, as most people recognize. As the old saying goes, “intellectuals have a hard time dealing with new ideas.” And, as we know, intellectuals control the outlets where these issues get debated, which means it’s hard to find an entry point to even try to move the debate. Anyhow, I will keep trying and maybe the picture will look better on my next birthday.
[1] See Rigged chapter 5 for an outline of my alternative mechanisms. (It’s free.)
I have a birthday coming up, so it seems a good time to assess progress, or lack thereof, on the various issues that I have worked on over the decades. There is some big progress in at least a couple of areas, but not much to boast about in the others.
I’ll start with the success stories.
The Benefits of a Tight Labor Market
The big one, where I feel we really have made huge progress, is the battle for full employment. It might seem like ancient history, but a quarter century ago the absolute standard wisdom in the economics profession was that we could not get unemployment rates below 6.0 percent without ever accelerating inflation. To argue otherwise was to invite ridicule.
The reality repeatedly contradicted the theory. We sustained an unemployment rate of 4.0 percent in 2000, with only a very modest increase in the inflation rate. The recession caused by the collapse of the stock bubble drove the unemployment rate back up in 2001 and 2002, but we eventually did start to see it fall again, eventually reaching levels around 4.5 percent in 2007.
Unfortunately, this drop in unemployment was driven by a housing bubble, the collapse of which gave us the worst downturn since the Great Depression. The timid response to the recession by the Obama administration and the Republican Congress gave us a weak recovery. However, by the end of 2017, the unemployment rate was again approaching 4.0 percent.
The Federal Reserve Board had already begun raising interest rates, following the theory that an unemployment rate this low would trigger inflation. But inflation remained tame. In the summer of 2019, the Fed made the remarkable decision to lower rates, even though the unemployment rate was below 4.0 percent.
Fed Chair Jerome Powell said it was time to give the full employment side of the Fed’s mandate equal weight with the price stability side. He noted the huge benefits accruing to Black workers, Hispanic workers, people with less education, and people with criminal records from low unemployment. He said, given the huge benefits of low unemployment, he wanted to press the unemployment rate as low as possible, until there was clear evidence of inflation.
This was exactly the script that those of us on the left had been pushing for decades. It was great to hear it from the mouth of a Fed chair.
We saw this story further reinforced following the pandemic. Many leading lights of the economic profession denounced the Biden stimulus package and warned that it would take a prolonged period of high unemployment to bring inflation back down to acceptable levels.
Well, at this point we can say that the package, along with subsequent policies like the infrastructure bill and the Inflation Reduction Act, quickly boosted the economy back to full employment. While inflation did jump in 2021 and the first half of 2022, we are most of the way back down to the Fed’s 2.0 percent target, even as unemployment remains near its half century low. We are not necessarily out of the woods yet, as the Fed will likely have further rate hikes and we have not yet seen the full impact of past hikes, but, thus far, things look pretty damn good.
Furthermore, the benefits of a tight labor market for those at the bottom are clearer than ever. Work by Arin Dube, David Autor, and Annie Mcgrew shows that as much as a quarter of the wage inequality that built up over the prior four decades has been reversed with the tight labor markets in the recovery from the pandemic recession. That is a really big deal.
We also have moved away from the idea that we need to weaken unions and reduce labor market supports, like minimum wages and unemployment benefits, to have a strong labor market. These were literally the policies being pushed on countries by the OECD in the 1990s and the start of the century. They reflected the consensus view in the economics profession.
This is no longer the case. Countries with very high unionization rates, like Denmark and Sweden, have managed to maintain high levels of employment and strong growth. It is also now generally recognized that reasonable levels of minimum wages are not impediments to employment. This is huge progress.
Saving Social Security
In the 1990s there was widespread agreement across party lines that Social Security was broken and needed to be “fixed.” Only the ramshackle left and most of the public wanted to protect the current benefit structure. Incredibly, in spite of efforts supported by presidents of both parties, there were no cuts to the program.
This was a period in which the program faced serious vulnerability because of its structure and the demographics of the populations. In the 1990s, and the first decade of this century, Social Security had a large annual surplus. This was due to the fact that the huge baby boom cohort was in its prime working years. The program was structured so that its trust fund would build up a large surplus in these decades, which could then be used to partially cover the cost of the baby boomers’ retirement.
This surplus also created a door for privatization. Instead of putting the money into the trust fund, the privatizers dreamed of turning it over to Wall Street, who could make tens of billions of dollars in fees managing individual accounts.
We managed to get through these decades without privatizing or cutting the program. Now a large portion of the baby boom generation is retired and receiving benefits, eliminating the annual surplus. Also, with this huge cohort either currently dependent on Social Security, or likely to be in the very near future, cuts to benefits will face more opposition than ever. This doesn’t mean that there can never be any cuts to the program, but the probability of cuts that hit a substantial segment of the poor or middle class seems very low.
Failed Efforts
Well, that’s my good news. The story with other issues that I worked on is much less bright.
Patent and Copyright Monopolies
In the effort to promote alternative mechanisms to patent and copyright monopolies for financing innovation and creative work, I would say that we have gotten pretty much nowhere. There is virtually no understanding of how these monopolies work and that there can, in fact, be alternative mechanisms. There is also almost no understanding of how much money is at stake.
On the first point, it is really hard to get people, including economist-type people, to understand that we don’t need to attach patents to innovation and copyrights to creative work. I don’t know how many times I have laid out a scheme to have the government pay for all the research and testing involved with developing a drug and then have someone ask “how long would the patent be?” [1]
Somehow people just can’t grasp that if the government pays for the research, there is no patent, there would be no point to a patent, and there would be no one to have a claim to one. Patent monopolies are a mechanism for providing incentive. If the government paid the money (as we did with the Moderna Covid vaccine), it already provided the incentive. If the money wasn’t adequate, then people didn’t have do the work.
I recall when I read Marx back when I was an undergrad. In Capital he talks about how people see it as natural that money gets interest, failing to recognize that lending money at interest is a social relationship. There seems to be a similar story with innovation and creative work and patents and copyrights. People seem to think that these government-granted monopolies are inherent to these processes, rather than an explicit policy choice.
There are obviously arguments for these mechanisms as policy tools, but it is impossible to have a serious discussion if people don’t even recognize that they are policy tools and not facts of nature. I don’t know how to advance this point, I just know that, to date, I and others have made very little progress.
I’m sure that part of the issue is that this hits very directly at people’s view of the economy and its fairness. It is absolutely conventional wisdom that the upward redistribution of the last four decades is explained in large part by the development of technology.
However, pointing out that who benefits from this technology and how much is a political decision, destroys that view. As a practical matter, we can make patent and copyright monopolies longer and stronger, or shorter and weaker. We don’t even need to have them at all.
In a world where these monopolies do not exist, there is zero reason to think that all the educated STEM-types would get rich at the expense of everyone else. That may not be a good way to structure the economy, but the point is that it is a possible way. The fact that people like Bill Gates can get hugely rewarded for his talent and work is the result of how we chose to structure the market. It was not “technology.”
The other part of the story is getting people to understand how much money is at stake. Here also the ignorance of well-educated people is astounding. If we had a world without patent and copyright monopolies, we would likely free up more than $1 trillion a year, close to half of all after-tax corporate profits.
In the case of prescription drugs alone, we are likely talking about more than $450 billion a year. That comes to $3,000 per family or more than four times the annual food stamp budget. The money at stake with these monopolies swamps the amount at stake in almost all the political battles that take place in Washington.
Apart from the money involved, expecting someone with a serious illness to effectively pay for research that was done long ago should strike anyone as an act of irrational cruelty. Economists all go nuts if you talk about a tariff of 10-20 percent. Drug patents are effectively tariffs of several thousand percent. Furthermore, since we generally have third party payers (insurers or the government) this is not even a question of consumer choice. How can this policy possibly make any sense?
I have been around Washington long enough to know that you don’t just reshape the whole financing mechanism for prescription drugs, medical equipment, or anything else important in one big move. But it should be possible to get a foot, or ideally feet, in the door, pointing the way to alternatives. In recent months I have been hoping that it would be possible to secure funding for a trial of the open-source Covid vaccine developed by Drs. Peter Hotez and Maria Elena Bottari at Baylor College of Medicine and Texas Children’s Hospital.
This vaccine has already been used by over 100 million people in India and Indonesia, so they should not be too much question about its safety and effectiveness. It just needs a domestic trial to get FDA approval so that it can be used here.
If it were approved, the shots would likely cost less than $5 each (they cost $2 in India), compared to more than $100 a shot for the Moderna or Pfizer boosters. This contrast should help drive home the benefits of open-source funding of research, but it is an uphill battle.
For the most part, people, including progressives, can’t even conceive of a world where drugs are cheap. Their hope is largely that the U.S. government will limit drug prices in the same way that governments in Europe, Canada, and elsewhere limit them. But the idea that we would get the government to stop making drugs expensive by giving out patent monopolies is not even within their realm of thinking. That’s a problem.
The Financial Industry Money Pit
Any economics textbook tells students that the purpose of the financial industry is to facilitate transactions and to allocate capital. That should be fairly straightforward, sort of like the purpose of the trucking industry is to move goods from one place to another.
Unfortunately, while most people grasp the purpose of the trucking industry pretty well, they seem to have forgotten the textbook story on finance the moment they leave the class. The point here is simple, but important. An efficient financial industry is a small financial industry.
We want to be able to conduct transactions quickly and safely. That means I should be able to buy my groceries, pay my rent or mortgage, or do other transactions in the least amount of time and with minimal risk of fraud or theft.
We also want capital allocated efficiently. That means when someone has a useful innovation, they should be able to get the money to market it on a large scale. People also need capital to buy homes, cars, and to pay for education.
The textbook tells us we want these tasks done with as few resources as possible, meaning a minimal number of workers and capital being used. If we applied this standard in thinking about the financial industry, many issues become simple.
Take Bitcoin and other crypto currencies. These currencies serve no purpose for the real economy, they are just a form of gambling. And, how do we deal with gambling? We tax it.
Suppose we had a 1.0 percent tax on all crypto trades. That should radically downsize the industry, while raising a nice chunk of revenue for the government, with no negative effects on the real economy at all.
I know that crypto proponents insist it will eliminate racial discrimination in the financial industry and in other ways create heaven on earth. It’s hard to take these folks seriously, but let’s put it this way. In Utah, I paid 8.0 percent sales tax when I bought a pair of shoes. Surely if crypto is the way to heaven on earth, a 1.0 percent tax won’t stand in the way.
It’s the same story with the financial industry more generally. We will have roughly $40 trillion in stock trades this year, or $160 billion a day. Does anyone think capital would be less efficiently allocated if we cut this in half to $20 trillion a year? A financial transaction tax that cut the volume in trading in half would free up roughly $120 billion a year (0.5 percent of GDP) that is now spent carrying through these trades.
The same goes for other parts of the financial industry. We may not outlaw private equity, but we need not structure our tax laws to give the industry special tax advantages like the carried interest tax break. We could also look to have the Fed offer everyone digital bank accounts so that we could save tens of billions annually in bank fees. And, we could have the federal government offer low cost IRAs, like the federal employees’ Thrift Savings Plan, which would save people tens of billions annually on needless management fees charged by brokerage houses and insurance companies.
On this issue, there is some progress to report. Several states now let private sector employees buy into their state employees retirement system, effectively giving them a low-cost IRA/401(k) option.
But progress in this and other areas would be so much easier if we could just get everyone to remember their Intro Econ treatment of finance. We want it simple and we want it cheap: full stop.
In this vein, I should probably also mention the idea of converting the basis of the corporate income tax from profits to the returns companies provide to shareholders (dividends and capital gains). The logic of this is straightforward, corporate accountants tell us how much profit the company made. We can get returns to shareholders from any financial website.
This would effectively be a tax that would be impossible to avoid. The I.R.S. could calculate every company’s tax liability on a single spreadsheet. (That is, all companies tax liability could be calculated on the same spreadsheet.)
Not only does this mean that we could be sure to get the tax rate we targeted, it would also destroy the tax gaming industry. The tens of billions of dollars that companies currently spend on gaming the tax code could instead go to productive uses.
We actually have made serious progress on this sort of switch. As part of the Inflation Reduction Act, we now have a 1.0 percent tax on share buybacks. I’m sure that this tax was not put in place as a step towards shifting the basis for the corporate income tax to returns to shareholders, but it could end up being a big step in this direction.
Since buybacks are 100 percent transparent (companies can’t very well keep them a secret), this will be the easiest tax ever from the standpoint of enforcement. When people recognize how simple and easy it is to collect a tax that is based on returns to shareholders, there could be momentum to increase the portion of the income tax that is based on buybacks, dividends, and capital gains. It’s always best to tax things we can see directly, as opposed to a number manufactured by corporate accountants.
Reining in CEO Pay
It is common to see people on Twitter and elsewhere complain about the tens of millions pulled down each year by the CEOs of major corporations. While the complaints are certainly justified, they rarely go beyond moral indignation. Few make the point that CEOs are not worth their paychecks, at least in the very narrow sense that they do not produce for their companies an amount of value equal to their $20 million or $30 million paycheck.
This point is important, since it means CEOs are ripping off the companies they work for. That implies that the shareholders of these companies should be allies in the effort to rein in CEO pay.
While that point would seem obvious, there is almost no recognition of this logical inference from most progressives. Even people who complain about CEOs using stock buybacks to manipulate stock prices and increase the value of their options, rarely take the next step and say shareholders should be upset about CEOs taking money from them.
In my view, the key to bringing down CEO pay is to give shareholders more ability to rein it in. As it stands, the corporate board of directors are supposed to be the ones who act on shareholders’ behalf to limit CEO pay. But a recent survey found that these boards don’t even see it as their responsibility to rein in CEO pay. Rather, they see their job as helping top management.
We should be focused on making it easy for shareholders to pressure boards to take CEO pay seriously. I have suggested that the “Say on Pay” votes on CEO pay, which were part of the Dodd-Frank financial reform act, have a bit more teeth.
As it stands, there is no consequence for a no vote on a CEO compensation package, except for a bit of embarrassment. Suppose that directors lost their pay if a vote went down. My guess is that if two or three packages went down, and boards felt some real consequence from overpaying their CEOs, they would start to ask questions like “can we get someone just as good for less money?” That could end the upward spiral of CEO pay and start to bring it back down to earth.
This is not just a question of a small number of top execs getting too much money. The bloated pay for CEOs affects pay structures throughout the economy. If the CEO gets $20 million, the rest of C-suite might get close to $10 million, and third tier execs can get $2 million or $3 million. This also affects pay outside the corporate sector. It is now common for presidents of universities or major charities to get several million dollars a year for their work.
The world would look very different if we had not seen the explosion of CEO pay relative to ordinary workers. If we still had the ratios of 20 or 30 to 1, that we had in the 1960s and 1970s, CEOs would be getting $2 million to $3 million a year. The lower pay for the top end of the income distribution would free up lots of money for everyone else. Unfortunately, we cannot even get a serious discussion of this issue.
Free Trade for Doctors and Other High-End Professionals
It has become gospel that the United States has pursued a policy of free trade for the last four decades. This is a lie.
Our trade policy has been focused on removing barriers to trade in manufactured goods. This has the effect of putting U.S. manufacturing workers in direct competition with low-paid workers in the developing world. This has the predicted and actual effect of reducing the number of manufacturing jobs in the United States and reducing the pay for the jobs that remain.
While this policy can be justified by pointing to the benefits for consumers in the form of lower prices, we could have gone the same route of “free trade” when it came to doctors and other highly paid professionals. The models show the gains from trade work the same way when we talk about physicians’ or dentists’ services as when we talk about cars and clothes.
However, our trade negotiators never had free trade in physicians’ services on their agenda. That is understandable, since they probably all have friends and relatives who work as doctors, dentists, or other highly paid professionals.
But, even if we have to recognize the power relations that are behind trade deals that have the effect of redistributing income upward, there is no excuse for covering up the true story by calling it “free trade.” Trade rules were constructed to redistribute income upward. No one involved in the process had any interest in real free trade.
Anyhow, we continue to get these absurd battles over “free trade.” It’s sort of like debating Catholic or Jewish theology where you first have to accept the tenets of the faith before you can be admitted into the discussion. For now, the participants in trade debates all must pretend that we have a free trade policy, instead of a policy of selective protectionism designed to screw ordinary workers.
Saving Journalism
I raise this one because there is not even a debate on the topic, simply a steady drumbeat of stories about how local newspapers are closing around the country and how national news outlets, both print and broadcast, are laying off reporters because they can’t make money in the current system. While there apparently is a big market for pieces bemoaning the current situation, there is very little interest in discussing policies that could alter the picture and revitalize reporting.
This is unfortunate, because these ideas do exist. The basic story is finding some way to get public funds to people doing journalism. For whatever reason, we can’t get a serious discussion in major news outlets about how to repair the news system.
I should also mention another aspect to this issue. Many people rightly complain about the outsize power that the rich have in politics. Under the current system, billionaires can basically contribute as much as they want to support their favored candidates or causes.
Here also, there is a lot of ink spilled decrying the situation, but almost no discussion of serious remedies. Not only would it be almost impossible to limit political contributions given the current makeup of the Supreme Court, it’s not clear it would make much difference even if we could.
Suppose no one was allowed to give more than $1,000 to a candidate and/or a PAC or PAC-equivalent. Is anyone proposing measures that would prevent right-wing billionaires from creating another Fox News, or two or three Fox News networks? Alternatively, are there proposals to prevent right-wing billionaires from buying up CBS, NBC, CNN and every other major news outlets?
If right-wing billionaires controlled all the major news outlets, they could effectively run ads for their favored candidates as “news.” They would have no reason to make campaign contributions to get their candidates elected. Their news shows would be far more effective in pushing the case.
If progressives want to be serious about countering the political power of billionaires, there is no alternative to finding mechanisms that give more voice to ordinary people. No one has even conceived of an effective way to restrict billionaires’ political power, much less put forward a proposal that would have prayer in hell of becoming law in anyone’s lifetime.
While we are on the topic of the political power of the rich, it would also be a good idea to have a serious discussion of restructuring Section 230 protection for Internet platforms. There is no obvious reason that Internet platforms should be protected from liability for defamation suits based on third party content, when print and broadcast media don’t enjoy this protection.
Although it is not feasible for these platforms to preemptively screen content for defamatory material, they could be subject to take-down rules in the same way that is now the case for allegations of copyright infringement. We can also write the rules in ways that are likely to disadvantage giants like Facebook and Twitter and benefit smaller sites.
Anyhow, there are an infinite number of ways to slice and dice a Section 230 repeal, but the key thing is to get it on the agenda. As of now, it isn’t. All we get are complaints about the way billionaire jerks run their platforms, as though the rest of us are powerless in the story.
Changing the Narrative Is Not Easy
It is not easy to move policy debates, as most people recognize. As the old saying goes, “intellectuals have a hard time dealing with new ideas.” And, as we know, intellectuals control the outlets where these issues get debated, which means it’s hard to find an entry point to even try to move the debate. Anyhow, I will keep trying and maybe the picture will look better on my next birthday.
[1] See Rigged chapter 5 for an outline of my alternative mechanisms. (It’s free.)
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The New York Times editorial board came to a shocking realization this week: we are living on borrowed money. That was the headline of an editorial it ran calling for deficit reduction.
Having discovered the deficit, the piece then went on to call for a combination of increased revenue and reduced spending to reduce the need to borrow. In this process, it insisted that cuts to Social Security and Medicare must be on the table.
Needless to say, this insistence caught the eye of many people. Republicans, and many Democrats, have been looking to cut and/or privatize these programs for decades. Beating back these efforts has been a major victory against the drive to give all the money to the rich.
Seeing the NYT join the ranks of those demanding cuts is more than a bit disturbing. Of course, this is not the first time the NYT’s editorial board has joined with those on the right. Back in the 1980s the paper famously told readers that the “right minimum wage” was $0.00.
But let’s step back for a moment and look at the bigger picture. The NYT is indisputably correct in saying that we are running unusually large annual deficits. However, the piece is more than a bit off the mark in focusing on the debt, rather than these deficits.
Here it spends a lot of time getting into the “really big number” game, telling us:
“Over the next decade, the Congressional Budget Office projects that annual federal budget deficits will average around $2 trillion per year, adding to the $25.4 trillion in debt the government already owes to investors.”
The NYT has a very educated readership, but I am fairly certain that almost none of its readers has any idea what $2 trillion a year means, nor do they have a good idea how large $25.4 trillion is over the course of a decade. And, I am also pretty sure the NYT editorial board knows that its readers don’t know what these really big numbers mean. But hey, this is a good way to scare people.
The piece does tell us the debt is projected to hit 115 percent of GDP by the end of this period. If that’s scary, consider that Japan’s debt is over 250 percent of GDP, and its economy has yet to collapse.
But, there is potentially a real issue here, if we get beyond the really big number silliness. Deficits can get so large that they raise inflation to unacceptable rates. Here the problem is not that we are borrowing (we can always print money, as out MMT friends remind us), the problem is that we are creating too much demand in the economy.
This can be a concern, but it seems as though that is not the case just now. We did have a bought of inflation in the last two and a half years, but that was largely driven by the pandemic and the fallout from Russia’s invasion of Ukraine. The rate of inflation is now dropping by almost every measure and we are moving back towards the Fed 2.0 percent target, even if the pace of the decline may not be fast enough for some people. This suggests that deficits may not be too large.
It is also worth noting that when we look at deficits as a share of GDP, they are projected to be below 6.0 percent of GDP for the rest of this decade, with the exception of a projected deficit of 6.2 percent in 2025. That is high by historic standards, but not hugely out of line with what we have seen in the past. The deficit was 4.6 percent of GDP in 2019, when inflation was still at the Fed’s target, with no evidence of inflation rising out of control.
Many prominent economists, like Larry Summers, argued that the economy faced a problem of “secular stagnation” meaning there was too little demand in the economy to keep it running near its capacity. This was due to the fact that huge amount of income had been shifted upward to people who were less likely to spend it, and also that slower labor force growth meant less need for companies to invest to accommodate a growing workforce. In that context, large deficits were actually needed to keep the economy near full employment.
As a practical matter, we don’t know exactly how large those deficits have to be. Before the pandemic, a deficit near 5.0 percent of GDP seemed fine. Is a deficit near 6.0 percent of GDP also fine? Given the recent course of inflation data, it seems that it might be, but we can at least acknowledge it is an open question.
Reducing the Deficit Versus Reducing Demand in the Economy
Let’s assume for the moment that we really do have a problem with inflation. The issue is not the deficit per se, but rather too much demand in the economy. So, we should be asking the larger question of how we can reduce demand in the economy, not just the narrow question of how we can reduce the government deficit.
One way the government creates demand in the economy is through its granting of patent and copyright monopolies. While discussion of these government-granted monopolies seems to be strictly forbidden in the pages of the New York Times, they are actually a huge deal in terms of the economy. These monopolies cost us on the order of $450 billion a year (1.8 percent of GDP) in the case of prescription drugs alone. We will spend over $550 billion this year on prescription drugs that would likely cost less than $100 billion in a free market.
Drugs would almost invariably be cheap if they were sold in a free market without patents or other related protections. Instead, drugs that might sell for $20 or $30 a prescription as generics, will instead sell for thousands or even tens of thousands of dollars with a government-granted monopoly. If we want to get serious about reducing inflationary pressures in the economy, we could talk about scaling back these monopolies, which inflate prices not only for drugs, but also medical equipment, computers, software, and a wide range of other items.
Unfortunately, this possibility never gets raised in the context of deficit reduction. Perhaps it hits too close to home for the people who control major news outlets, since the beneficiaries of these monopolies likely include many of their friends and relatives. It’s possible to talk tough about cutting Social Security and Medicare, but not the payments that those at the top end of the income distribution get as a result of these government-granted monopolies.
There are of course many other areas where changing the rules can lead to large reductions in demand. If we were as determined to have free trade for doctors’ services (a possibility enhanced with telemedicine) and the services of other highly paid professionals, as we were with cars and clothes, we could save hundreds of billons annually in payments for a wide range of services.
A financial transactions tax, comparable to the sales taxes that we pay on most items we buy, could reduce the resources wasted in the financial sector by well over $100 billion a year (0.5 percent of GDP). But again, the industry is so powerful that this is not discussed in polite circles.
Anyhow, I could go on (see Rigged, it’s free), but the point here should be clear. For whatever reason, the NYT editorial board decided it had to show it’s tough by putting Social Security and Medicare on the table, programs that working people depend on to protect them in their old age and in the event of disability. However, when it comes to the rules the government has put in place that are responsible for the massive inequality we see in the economy today, well, the NYT editorial board is not that tough.
The New York Times editorial board came to a shocking realization this week: we are living on borrowed money. That was the headline of an editorial it ran calling for deficit reduction.
Having discovered the deficit, the piece then went on to call for a combination of increased revenue and reduced spending to reduce the need to borrow. In this process, it insisted that cuts to Social Security and Medicare must be on the table.
Needless to say, this insistence caught the eye of many people. Republicans, and many Democrats, have been looking to cut and/or privatize these programs for decades. Beating back these efforts has been a major victory against the drive to give all the money to the rich.
Seeing the NYT join the ranks of those demanding cuts is more than a bit disturbing. Of course, this is not the first time the NYT’s editorial board has joined with those on the right. Back in the 1980s the paper famously told readers that the “right minimum wage” was $0.00.
But let’s step back for a moment and look at the bigger picture. The NYT is indisputably correct in saying that we are running unusually large annual deficits. However, the piece is more than a bit off the mark in focusing on the debt, rather than these deficits.
Here it spends a lot of time getting into the “really big number” game, telling us:
“Over the next decade, the Congressional Budget Office projects that annual federal budget deficits will average around $2 trillion per year, adding to the $25.4 trillion in debt the government already owes to investors.”
The NYT has a very educated readership, but I am fairly certain that almost none of its readers has any idea what $2 trillion a year means, nor do they have a good idea how large $25.4 trillion is over the course of a decade. And, I am also pretty sure the NYT editorial board knows that its readers don’t know what these really big numbers mean. But hey, this is a good way to scare people.
The piece does tell us the debt is projected to hit 115 percent of GDP by the end of this period. If that’s scary, consider that Japan’s debt is over 250 percent of GDP, and its economy has yet to collapse.
But, there is potentially a real issue here, if we get beyond the really big number silliness. Deficits can get so large that they raise inflation to unacceptable rates. Here the problem is not that we are borrowing (we can always print money, as out MMT friends remind us), the problem is that we are creating too much demand in the economy.
This can be a concern, but it seems as though that is not the case just now. We did have a bought of inflation in the last two and a half years, but that was largely driven by the pandemic and the fallout from Russia’s invasion of Ukraine. The rate of inflation is now dropping by almost every measure and we are moving back towards the Fed 2.0 percent target, even if the pace of the decline may not be fast enough for some people. This suggests that deficits may not be too large.
It is also worth noting that when we look at deficits as a share of GDP, they are projected to be below 6.0 percent of GDP for the rest of this decade, with the exception of a projected deficit of 6.2 percent in 2025. That is high by historic standards, but not hugely out of line with what we have seen in the past. The deficit was 4.6 percent of GDP in 2019, when inflation was still at the Fed’s target, with no evidence of inflation rising out of control.
Many prominent economists, like Larry Summers, argued that the economy faced a problem of “secular stagnation” meaning there was too little demand in the economy to keep it running near its capacity. This was due to the fact that huge amount of income had been shifted upward to people who were less likely to spend it, and also that slower labor force growth meant less need for companies to invest to accommodate a growing workforce. In that context, large deficits were actually needed to keep the economy near full employment.
As a practical matter, we don’t know exactly how large those deficits have to be. Before the pandemic, a deficit near 5.0 percent of GDP seemed fine. Is a deficit near 6.0 percent of GDP also fine? Given the recent course of inflation data, it seems that it might be, but we can at least acknowledge it is an open question.
Reducing the Deficit Versus Reducing Demand in the Economy
Let’s assume for the moment that we really do have a problem with inflation. The issue is not the deficit per se, but rather too much demand in the economy. So, we should be asking the larger question of how we can reduce demand in the economy, not just the narrow question of how we can reduce the government deficit.
One way the government creates demand in the economy is through its granting of patent and copyright monopolies. While discussion of these government-granted monopolies seems to be strictly forbidden in the pages of the New York Times, they are actually a huge deal in terms of the economy. These monopolies cost us on the order of $450 billion a year (1.8 percent of GDP) in the case of prescription drugs alone. We will spend over $550 billion this year on prescription drugs that would likely cost less than $100 billion in a free market.
Drugs would almost invariably be cheap if they were sold in a free market without patents or other related protections. Instead, drugs that might sell for $20 or $30 a prescription as generics, will instead sell for thousands or even tens of thousands of dollars with a government-granted monopoly. If we want to get serious about reducing inflationary pressures in the economy, we could talk about scaling back these monopolies, which inflate prices not only for drugs, but also medical equipment, computers, software, and a wide range of other items.
Unfortunately, this possibility never gets raised in the context of deficit reduction. Perhaps it hits too close to home for the people who control major news outlets, since the beneficiaries of these monopolies likely include many of their friends and relatives. It’s possible to talk tough about cutting Social Security and Medicare, but not the payments that those at the top end of the income distribution get as a result of these government-granted monopolies.
There are of course many other areas where changing the rules can lead to large reductions in demand. If we were as determined to have free trade for doctors’ services (a possibility enhanced with telemedicine) and the services of other highly paid professionals, as we were with cars and clothes, we could save hundreds of billons annually in payments for a wide range of services.
A financial transactions tax, comparable to the sales taxes that we pay on most items we buy, could reduce the resources wasted in the financial sector by well over $100 billion a year (0.5 percent of GDP). But again, the industry is so powerful that this is not discussed in polite circles.
Anyhow, I could go on (see Rigged, it’s free), but the point here should be clear. For whatever reason, the NYT editorial board decided it had to show it’s tough by putting Social Security and Medicare on the table, programs that working people depend on to protect them in their old age and in the event of disability. However, when it comes to the rules the government has put in place that are responsible for the massive inequality we see in the economy today, well, the NYT editorial board is not that tough.
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Remember all those stories in the New York Times, Washington Post, National Public Radio, and elsewhere telling us about the looming disaster facing China because of its declining population. The problem was that the declining population meant a smaller workforce, which would be a drag on the economy.
It turns out that things in China are even worse than we were previously told. Not only is the country running out of workers, it turns out that it is also running out of jobs. At least that is what a New York Times article told readers. According to the piece, there is a serious shortage of jobs, which is making it hard for older workers to get employed. Apparently, employers would prefer to higher younger workers when they have a choice.
If it seems contradictory that a country could both face a labor shortage and have a shortage of jobs for the people seeking employment, then you are far too committed to logic and common sense to ever be taken seriously in Washington policy debates.
There are situations where an economy can have too few jobs, which is a situation of inadequate demand like the United States faced in the Great Depression or the Great Recession. It can also face a situation where it has a shortage of workers, like the U.S. arguably did in 2022.
Of course, that is likely to be a mixed picture from a social standpoint, since a shortage of workers means that workers have their choice of jobs. Anyhow, it is only in Washington policy debates, not in the real world, that both these problems can be hitting a country at the same time.
There is one other point worth noting in this article. It tells readers:
“It’s hard to trust employment data from the Chinese government, which counts anyone who has worked one hour a week. That low bar has kept the urban unemployment rate at a little over 5 percent for much of this year, better than in 2019.”
The Bureau of Labor Statistics also counts a person as being employed if they worked at least one hour in the reference week for the monthly Current Population Survey.
Remember all those stories in the New York Times, Washington Post, National Public Radio, and elsewhere telling us about the looming disaster facing China because of its declining population. The problem was that the declining population meant a smaller workforce, which would be a drag on the economy.
It turns out that things in China are even worse than we were previously told. Not only is the country running out of workers, it turns out that it is also running out of jobs. At least that is what a New York Times article told readers. According to the piece, there is a serious shortage of jobs, which is making it hard for older workers to get employed. Apparently, employers would prefer to higher younger workers when they have a choice.
If it seems contradictory that a country could both face a labor shortage and have a shortage of jobs for the people seeking employment, then you are far too committed to logic and common sense to ever be taken seriously in Washington policy debates.
There are situations where an economy can have too few jobs, which is a situation of inadequate demand like the United States faced in the Great Depression or the Great Recession. It can also face a situation where it has a shortage of workers, like the U.S. arguably did in 2022.
Of course, that is likely to be a mixed picture from a social standpoint, since a shortage of workers means that workers have their choice of jobs. Anyhow, it is only in Washington policy debates, not in the real world, that both these problems can be hitting a country at the same time.
There is one other point worth noting in this article. It tells readers:
“It’s hard to trust employment data from the Chinese government, which counts anyone who has worked one hour a week. That low bar has kept the urban unemployment rate at a little over 5 percent for much of this year, better than in 2019.”
The Bureau of Labor Statistics also counts a person as being employed if they worked at least one hour in the reference week for the monthly Current Population Survey.
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