Beat the Press

Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

Some folks may have seen articles reporting that the United Kingdom’s economy shrank by 20.4 percent in the second quarter. While this number is accurate, it is reporting the quarterly rate of decline.

We typically report GDP changes as annual rates, which implies taking the quarterly growth rate to the fourth power. In the case of the UK, its second quarter pace of decline would imply a drop of 59.9 percent at an annual rate.

It is worth making this calculation for comparative purposes. Readers may recall that the US economy contracted 32.9 percent in the second quarter. This is an annual rate of decline. The contraction in the UK was actually far worse than the contraction in the United States. 

Some folks may have seen articles reporting that the United Kingdom’s economy shrank by 20.4 percent in the second quarter. While this number is accurate, it is reporting the quarterly rate of decline.

We typically report GDP changes as annual rates, which implies taking the quarterly growth rate to the fourth power. In the case of the UK, its second quarter pace of decline would imply a drop of 59.9 percent at an annual rate.

It is worth making this calculation for comparative purposes. Readers may recall that the US economy contracted 32.9 percent in the second quarter. This is an annual rate of decline. The contraction in the UK was actually far worse than the contraction in the United States. 

Most might think that when Donald Trump proposes a tax break for the rich it is because he wants to give more money to the rich. Fortunately, the NYT has a staff of mind readers who can keep us better informed. Therefore we are told:

“Mr. Trump and his advisers have regularly considered unorthodox tax maneuvers that they believe would spur economic growth, including reducing the taxes that investors pay on profits earned from selling assets like stocks or bonds (emphasis added).”

There is a large body of research indicating that lowering the capital gains tax rate would have a minimal impact on growth. The evidence would suggest that lowering capital gains taxes, which will almost exclusively benefit the rich, is not a good way to boost growth, but the NYT knows that Trump and his advisors believe otherwise. (It is worth mentioning that most middle class people have their stock holdings in retirement accounts, which would not be affected by a reduction in the capital gains tax.)

Most might think that when Donald Trump proposes a tax break for the rich it is because he wants to give more money to the rich. Fortunately, the NYT has a staff of mind readers who can keep us better informed. Therefore we are told:

“Mr. Trump and his advisers have regularly considered unorthodox tax maneuvers that they believe would spur economic growth, including reducing the taxes that investors pay on profits earned from selling assets like stocks or bonds (emphasis added).”

There is a large body of research indicating that lowering the capital gains tax rate would have a minimal impact on growth. The evidence would suggest that lowering capital gains taxes, which will almost exclusively benefit the rich, is not a good way to boost growth, but the NYT knows that Trump and his advisors believe otherwise. (It is worth mentioning that most middle class people have their stock holdings in retirement accounts, which would not be affected by a reduction in the capital gains tax.)

We are still very much in the middle of the pandemic, with the U.S. seeing tens of thousands of new infections daily, and the world experiencing hundreds of thousands of new infections. However, it is not too early to look at areas where we need to reevaluate public policy, most importantly in financing the research and development of new drugs and vaccines.

The accepted wisdom in policy circles has been, that while the government can finance basic research, we need to rely on government-granted patent monopolies to pay for the actual development and testing of new drugs. The argument is that we want private companies to compete to develop new and better drugs, with the rents earned from their patent monopolies compensating them for the cost of research and testing, as well as compensating them for the risk that they will not develop a marketable drug.

The logic of this position relied on the claim that somehow government financing of the later stages of research and testing is essentially the same thing as throwing money in the toilet. The industry acknowledges the value of the research funded by the National Institutes of Health (NIH), and in fact, is the biggest lobbyist for it. But they say that if NIH were to move downstream and actually finance the development of drugs and do clinical trials, they would turn into a bunch of bureaucratic bozos who couldn’t do anything right.[1]

The behavior of the government in this pandemic seems to indicate that this is not the case. The government, through Operation Warp Speed, is directly funding the research on vaccines, as the research takes place. This is most visible with Moderna, the country’s leading contender to develop a vaccine. The government paid $483 million to Moderna for pre-clinical research and Phase 1 and 2 testing. It then coughed up another $472 million to cover the cost of phase 3 testing.   

If any policy types thought this direct government funding of the research and development of a vaccine was just throwing money in the toilet, they have not been very visible in expressing this view over the last four months. It is true that Moderna will also get a patent monopoly, allowing it to collect even more money for its effort, but the direct funding from the government is clearly the key here. This funding paid for the research and testing. It also meant that the government took all the risk. If Moderna’s vaccine turns out to be ineffective, the government will be out of the money, not Moderna.

Since policy types can apparently accept that when the federal government directly pays for the development and testing of new drugs and vaccines it is not the same as throwing the money into the toilet, maybe we can move forward and ask the next question as to how efficient direct public funding is relative to patent monopoly financed research. The issue here is how much the government would have to spend on advanced funding to get the same results as we see with patent monopoly financed research.

Before considering what the ratio of relative effectiveness might be, it is worth getting some idea of what is at stake. We will spend over $500 billion in 2020 for drugs that would almost certainly cost us less than $100 billion in a free market without patent monopolies or other forms of exclusivity.[2] It is rare that drugs are actually expensive to manufacture and distribute. The drugs that sell for tens of or even hundreds of thousands of dollars for a year’s treatment would typically sell for just a few hundred dollars if they were sold in a free market without patents or related protections. The potential savings of $400 billion a year come to more than $3000 per household.

In exchange for this $400 billion in higher drug prices, we get around $90 billion in research spending by the industry. These numbers are shown in the figure below, along with the $40 billion annual budget (pre-pandemic) for the National Institutes of Health. This is an understatement of federally funded biomedical research since we spend several billion more through the Biomedical Advanced Research and Development Authority (BARDA) and other government agencies. 

These figures are shown below along with the $60.4 billion that we spent on food stamps (SNAP) in 2019. The food stamp budget is included as a point of reference since many people in policy debates seem to believe that our spending on food stamps is a really big deal.

Source: Author’s calculations: see text.

 

Anyhow, the basic story is that we come out ahead with publicly funded research if it is at least one quarter as productive as patent monopoly supported the research. In other words, if four dollars of direct publicly funded research is at least good as one dollar of patent supported research, we would be better off switching to a system of publicly supported research.

There are actually good reasons for thinking that on a per-dollar basis government funding would be more efficient. First and foremost, the government could make it a condition of funding that all results are posted on the Internet as quickly as practical. This would allow researchers to quickly learn from each other’s work, building on successes and not wasting effort pursuing dead ends. This was the practice with the Bermuda Principles in the Human Genome Project. This sort of open-research in the early days after the coronavirus was first discovered led to much more rapid progress than would ordinarily be the case.

The other major reason why publicly funded, open-source, research is likely to be more efficient on a per-dollar basis is that there would be no incentive to develop copycat drugs as a way of sharing patent rents. While it is often desirable to have more than one drug to treat a specific condition since some patients may respond poorly to an initial drug or it could have harmful side effects, trying to engineer around a patent will generally not be a productive use of resources from a social standpoint. If research funding was being paid upfront, with no patent rents to compete over, there would be no incentive to develop a duplicative drug, except where there was a medical reason. 

This raises another reason for believing that direct funding of research will lead to better health outcomes than our current system of patent monopoly financing. When drug companies can sell their drugs at patent monopoly prices they have an enormous incentive to promote their drug even in circumstances where it may not be the best treatment for a specific medical condition. This means that they have a reason to conceal evidence that their drugs may not be as effective as claimed or could even be harmful.

We saw this story with the opioid crisis, where several major pharmaceutical companies are alleged to have misled doctors and the public about the addictiveness of their new generation of opioids. Unfortunately, this is not an exception. There have been many instances where drug companies paid large settlements over allegations that they deliberately misled doctors and patients about the safety and effectiveness of their drugs.

In the absence of patent monopolies, no one would have any substantial incentive to make misleading claims about the quality of drugs. Furthermore, since all the research and test results would be fully public, they would likely not be able to get away with false claims even if they tried.

There is one additional source of waste that would be eliminated if we directly funded the research and allowed drugs to be sold at free market prices. We would not need insurance to cover drug costs. When drugs can cost, hundreds, thousands, or even tens of thousands of dollars, people need insurance to cover this potential expense. However, if most drugs sold for ten or twenty dollars per prescription, insurance would not really be needed. (Lower-income people would still need assistance in paying for drugs.)

Since insurers take on average 20 to 25 percent of health care spending to cover their administrative costs and profits, having drugs sell at free market prices would save us tens of billions annually on insurance costs. This also has to be factored into any comparison of the relative efficiency of direct public funding and patent monopoly financing.

If we do consider direct public financing of research, the Trump administration has not provided us with the best model. We don’t want companies selected through a closed door process with no clear criteria. My ideal model would be to have companies contracting for large sums to pursue research in specific areas for a substantial period of time. For example, a company may get a contract for $20 billion over a twelve-year period to pursue research for new drugs to treat liver cancer.

This sort of long-term contracting should insulate companies for political pressure, since once a contract was granted, they could not lose the funding, barring outright fraud or other serious forms of malfeasance. The awarding and renewal of contracts would be based on clear and fully public criteria. (This system is described more fully in chapter 5 of Rigged.)  

It will be a long jump from where we are now to a system of open-source publicly financed biomedical research, but we opened the door for this switch with the financing of treatments and vaccines for the coronavirus. Once we acknowledge that direct public funding of the development of new drugs is not the same thing as throwing money into the toilet, then we can start asking questions about the relative effectiveness of direct public funding and patent supported research.

This seems to raise uncomfortable questions for many people in policy debates. They, and their friends and family, tend to be among the group of people who benefit from patent and copyright monopolies in drugs and other areas. However, if we want to have serious policy discussions, and not just protect existing patterns of inequality, government-granted patent and copyright monopolies have to be on the table.

[1] This view persists in spite of the fact that many important drugs have actually been developed on NIH grants and the agency has financed hundreds of clinical trials.

[2] There are a variety of mechanisms other than patent monopolies that allow drug companies to have exclusive rights to sell a drug. The most important of these is data exclusivity, which prohibits generic manufacturers from relying on the test data from a brand drug to show that a chemically equivalent drug is safe and effective.

We are still very much in the middle of the pandemic, with the U.S. seeing tens of thousands of new infections daily, and the world experiencing hundreds of thousands of new infections. However, it is not too early to look at areas where we need to reevaluate public policy, most importantly in financing the research and development of new drugs and vaccines.

The accepted wisdom in policy circles has been, that while the government can finance basic research, we need to rely on government-granted patent monopolies to pay for the actual development and testing of new drugs. The argument is that we want private companies to compete to develop new and better drugs, with the rents earned from their patent monopolies compensating them for the cost of research and testing, as well as compensating them for the risk that they will not develop a marketable drug.

The logic of this position relied on the claim that somehow government financing of the later stages of research and testing is essentially the same thing as throwing money in the toilet. The industry acknowledges the value of the research funded by the National Institutes of Health (NIH), and in fact, is the biggest lobbyist for it. But they say that if NIH were to move downstream and actually finance the development of drugs and do clinical trials, they would turn into a bunch of bureaucratic bozos who couldn’t do anything right.[1]

The behavior of the government in this pandemic seems to indicate that this is not the case. The government, through Operation Warp Speed, is directly funding the research on vaccines, as the research takes place. This is most visible with Moderna, the country’s leading contender to develop a vaccine. The government paid $483 million to Moderna for pre-clinical research and Phase 1 and 2 testing. It then coughed up another $472 million to cover the cost of phase 3 testing.   

If any policy types thought this direct government funding of the research and development of a vaccine was just throwing money in the toilet, they have not been very visible in expressing this view over the last four months. It is true that Moderna will also get a patent monopoly, allowing it to collect even more money for its effort, but the direct funding from the government is clearly the key here. This funding paid for the research and testing. It also meant that the government took all the risk. If Moderna’s vaccine turns out to be ineffective, the government will be out of the money, not Moderna.

Since policy types can apparently accept that when the federal government directly pays for the development and testing of new drugs and vaccines it is not the same as throwing the money into the toilet, maybe we can move forward and ask the next question as to how efficient direct public funding is relative to patent monopoly financed research. The issue here is how much the government would have to spend on advanced funding to get the same results as we see with patent monopoly financed research.

Before considering what the ratio of relative effectiveness might be, it is worth getting some idea of what is at stake. We will spend over $500 billion in 2020 for drugs that would almost certainly cost us less than $100 billion in a free market without patent monopolies or other forms of exclusivity.[2] It is rare that drugs are actually expensive to manufacture and distribute. The drugs that sell for tens of or even hundreds of thousands of dollars for a year’s treatment would typically sell for just a few hundred dollars if they were sold in a free market without patents or related protections. The potential savings of $400 billion a year come to more than $3000 per household.

In exchange for this $400 billion in higher drug prices, we get around $90 billion in research spending by the industry. These numbers are shown in the figure below, along with the $40 billion annual budget (pre-pandemic) for the National Institutes of Health. This is an understatement of federally funded biomedical research since we spend several billion more through the Biomedical Advanced Research and Development Authority (BARDA) and other government agencies. 

These figures are shown below along with the $60.4 billion that we spent on food stamps (SNAP) in 2019. The food stamp budget is included as a point of reference since many people in policy debates seem to believe that our spending on food stamps is a really big deal.

Source: Author’s calculations: see text.

 

Anyhow, the basic story is that we come out ahead with publicly funded research if it is at least one quarter as productive as patent monopoly supported the research. In other words, if four dollars of direct publicly funded research is at least good as one dollar of patent supported research, we would be better off switching to a system of publicly supported research.

There are actually good reasons for thinking that on a per-dollar basis government funding would be more efficient. First and foremost, the government could make it a condition of funding that all results are posted on the Internet as quickly as practical. This would allow researchers to quickly learn from each other’s work, building on successes and not wasting effort pursuing dead ends. This was the practice with the Bermuda Principles in the Human Genome Project. This sort of open-research in the early days after the coronavirus was first discovered led to much more rapid progress than would ordinarily be the case.

The other major reason why publicly funded, open-source, research is likely to be more efficient on a per-dollar basis is that there would be no incentive to develop copycat drugs as a way of sharing patent rents. While it is often desirable to have more than one drug to treat a specific condition since some patients may respond poorly to an initial drug or it could have harmful side effects, trying to engineer around a patent will generally not be a productive use of resources from a social standpoint. If research funding was being paid upfront, with no patent rents to compete over, there would be no incentive to develop a duplicative drug, except where there was a medical reason. 

This raises another reason for believing that direct funding of research will lead to better health outcomes than our current system of patent monopoly financing. When drug companies can sell their drugs at patent monopoly prices they have an enormous incentive to promote their drug even in circumstances where it may not be the best treatment for a specific medical condition. This means that they have a reason to conceal evidence that their drugs may not be as effective as claimed or could even be harmful.

We saw this story with the opioid crisis, where several major pharmaceutical companies are alleged to have misled doctors and the public about the addictiveness of their new generation of opioids. Unfortunately, this is not an exception. There have been many instances where drug companies paid large settlements over allegations that they deliberately misled doctors and patients about the safety and effectiveness of their drugs.

In the absence of patent monopolies, no one would have any substantial incentive to make misleading claims about the quality of drugs. Furthermore, since all the research and test results would be fully public, they would likely not be able to get away with false claims even if they tried.

There is one additional source of waste that would be eliminated if we directly funded the research and allowed drugs to be sold at free market prices. We would not need insurance to cover drug costs. When drugs can cost, hundreds, thousands, or even tens of thousands of dollars, people need insurance to cover this potential expense. However, if most drugs sold for ten or twenty dollars per prescription, insurance would not really be needed. (Lower-income people would still need assistance in paying for drugs.)

Since insurers take on average 20 to 25 percent of health care spending to cover their administrative costs and profits, having drugs sell at free market prices would save us tens of billions annually on insurance costs. This also has to be factored into any comparison of the relative efficiency of direct public funding and patent monopoly financing.

If we do consider direct public financing of research, the Trump administration has not provided us with the best model. We don’t want companies selected through a closed door process with no clear criteria. My ideal model would be to have companies contracting for large sums to pursue research in specific areas for a substantial period of time. For example, a company may get a contract for $20 billion over a twelve-year period to pursue research for new drugs to treat liver cancer.

This sort of long-term contracting should insulate companies for political pressure, since once a contract was granted, they could not lose the funding, barring outright fraud or other serious forms of malfeasance. The awarding and renewal of contracts would be based on clear and fully public criteria. (This system is described more fully in chapter 5 of Rigged.)  

It will be a long jump from where we are now to a system of open-source publicly financed biomedical research, but we opened the door for this switch with the financing of treatments and vaccines for the coronavirus. Once we acknowledge that direct public funding of the development of new drugs is not the same thing as throwing money into the toilet, then we can start asking questions about the relative effectiveness of direct public funding and patent supported research.

This seems to raise uncomfortable questions for many people in policy debates. They, and their friends and family, tend to be among the group of people who benefit from patent and copyright monopolies in drugs and other areas. However, if we want to have serious policy discussions, and not just protect existing patterns of inequality, government-granted patent and copyright monopolies have to be on the table.

[1] This view persists in spite of the fact that many important drugs have actually been developed on NIH grants and the agency has financed hundreds of clinical trials.

[2] There are a variety of mechanisms other than patent monopolies that allow drug companies to have exclusive rights to sell a drug. The most important of these is data exclusivity, which prohibits generic manufacturers from relying on the test data from a brand drug to show that a chemically equivalent drug is safe and effective.

The NYT had a piece on how the private equity company, Cerberus, is unhappy with the operation of the German bank Commerzbank. Cerberus has a major stake in the bank and, according to the piece, is unhappy that it has not moved more aggressively to cut costs, meaning firing people.

According to the article, Cerberus forced the resignation of two top executives at the bank. It then tells readers that it is unhappy with plans to replace them:

“But then, on Monday, the supervisory board nominated Mr. Schmittmann’s replacement: Mr. Vetter, former chief executive of Landesbank Baden-Württemberg, which is owned by state and local governments in southwestern Germany. Cerberus did not regard him as having the experience to fix Commerzbank.”

It is not clear how the paper determined that Cerberus’ objections were based on Mr. Vetter not “having the experience to fix Commerzbank.” Given what is reported in the rest of the piece, it seems at least as plausible that Cerberus is unhappy with Mr. Vetter’s selection because he might be reluctant to engage in large-scale layoffs. That may be what Cerberus regards as “fixing” Commerzbank, but that is not the standard definition of the word. 

The NYT had a piece on how the private equity company, Cerberus, is unhappy with the operation of the German bank Commerzbank. Cerberus has a major stake in the bank and, according to the piece, is unhappy that it has not moved more aggressively to cut costs, meaning firing people.

According to the article, Cerberus forced the resignation of two top executives at the bank. It then tells readers that it is unhappy with plans to replace them:

“But then, on Monday, the supervisory board nominated Mr. Schmittmann’s replacement: Mr. Vetter, former chief executive of Landesbank Baden-Württemberg, which is owned by state and local governments in southwestern Germany. Cerberus did not regard him as having the experience to fix Commerzbank.”

It is not clear how the paper determined that Cerberus’ objections were based on Mr. Vetter not “having the experience to fix Commerzbank.” Given what is reported in the rest of the piece, it seems at least as plausible that Cerberus is unhappy with Mr. Vetter’s selection because he might be reluctant to engage in large-scale layoffs. That may be what Cerberus regards as “fixing” Commerzbank, but that is not the standard definition of the word. 

Note on Non-Responses to E-Mail

I recently realized that Verizon is apparently randomly blocking e-mails to my account.  I have no idea why this would be the case, but it is. Anyhow, I generally respond to e-mails, if they raise real questions or make serious points. If anyone has sent me a note and not gotten response, I’d suggest trying Twitter. I’m at @deanbaker13.

I recently realized that Verizon is apparently randomly blocking e-mails to my account.  I have no idea why this would be the case, but it is. Anyhow, I generally respond to e-mails, if they raise real questions or make serious points. If anyone has sent me a note and not gotten response, I’d suggest trying Twitter. I’m at @deanbaker13.

Donald Trump and his supporters routinely boast about his great success in reducing the unemployment rate. While the unemployment rate did fall to low levels under Trump, this was just a continuation of the downward trend that had been in place under Obama since 2010.

Here’s the picture with the overall unemployment rate.

See the sharp drop for the Trump years? Yeah, I don’t either. By the way, I am being very polite in leaving out the impact of the pandemic, which would show unemployment soaring. That has not happened in most other countries because their leaders were better able to deal with the pandemic and the economy.

Here’s the picture for the Black unemployment rate since Trump apparently thinks his administration has been great for Blacks.

We see the same story here as with the overall unemployment rate, the continuation of a downward trend, albeit at a slower pace, than had been going on for years. Trump can take credit for not crashing the economy, until the pandemic, but that really is not all that much to boast about.

Donald Trump and his supporters routinely boast about his great success in reducing the unemployment rate. While the unemployment rate did fall to low levels under Trump, this was just a continuation of the downward trend that had been in place under Obama since 2010.

Here’s the picture with the overall unemployment rate.

See the sharp drop for the Trump years? Yeah, I don’t either. By the way, I am being very polite in leaving out the impact of the pandemic, which would show unemployment soaring. That has not happened in most other countries because their leaders were better able to deal with the pandemic and the economy.

Here’s the picture for the Black unemployment rate since Trump apparently thinks his administration has been great for Blacks.

We see the same story here as with the overall unemployment rate, the continuation of a downward trend, albeit at a slower pace, than had been going on for years. Trump can take credit for not crashing the economy, until the pandemic, but that really is not all that much to boast about.

There continues to be enormous confusion about what we should be trying to accomplish in the next pandemic relief package. This is best demonstrated by Republicans’ obsession with getting people back to work, with a mixture of cuts to unemployment benefits and return to work bonuses.

Ignoring the questionable economic logic (there is zero evidence of large numbers of jobs going unfilled), this approach also ignores the reality of the pandemic. At the start of April, both houses voted nearly unanimously to support measures that were designed to make it possible for people to stay at home rather than work. At that time, we had roughly 35,000 new infections a day. Currently, we are seeing well over 60,000 new infections a day, with the count crossing 70,000 in many recent days.

The comparison looks even worse if we pull out New York and New Jersey, both of which were overwhelmed by the pandemic at the start of April. Between them, they had roughly 15,000 new infections a day, which means the rest of the country was seeing close to 20,000. By contrast, at present both states have the virus relatively under control, which means that the new infection count in the country would still be over 60,000 a day, excluding New York and New Jersey.

This raises the obvious point: if Congress thought it made sense to allow, encourage, and possibly even require people to stay home rather than work at the start of April, how could it possibly make sense to push people to work at a time when the rate of new infections is more than three times as high, in areas outside of New York and New Jersey?

This is really a question of life and death. Tens of millions of workers have serious health conditions that mean they would be at considerable danger if they became infected. Tens of millions more workers would be putting into danger family members, with serious health conditions, if they became infected. As a result, a high percentage of the work force has very good reasons for not wanting to return to work just now.

If we face the reality of the pandemic, we should not be designing a package to get people back to work, we need to design a package to keep them whole through a period in which tens of millions of people will still not be able to work because of the pandemic. This means that we want people to have the money to pay their rent or mortgage and to buy food and other necessary items. We don’t want them to be going out to restaurants and bars, to see movies or baseball games, or to fly away on vacations or go on a cruise ship.

There was considerable confusion on this point even back in March and April where many were referring to the bills passed by Congress as stimulus. Some were even pushing types of spending that could boost the economy. There was little reason to want to boost the economy back in April, nor should there be now. We want to make it so that people endure as little hardship as possible for now, and the economy to be prepared to start up as quickly as possible, once the pandemic is under control.

Of course, we should not be in this situation. Most of the economy was shut down from the middle of March to the middle of May, with major restrictions staying in place in the hardest-hit areas well into June. These restrictions did largely bring the pandemic under control in places like New York, New Jersey, Maryland, Massachusetts, and Washington (both state and DC).

Unfortunately, many states did not take the need for restricting business seriously and began to open at the start of May. This is the reason that states like Arizona, Georgia, Florida, and Texas now have major outbreaks. California also now has a major outbreak, as a lack of financial support from the federal government, coupled with political pressure orchestrated by Donald Trump in the form of “liberate California” protests, led the state to relax restrictions sooner than it should have.[1]

It would be possible to talk about an economic reopening now, if we had been successful in bringing the pandemic under control, as is the case in Europe and East Asia, in addition to the Northeast in the United States. But we can’t make plans based on a reality that does not exist. The pandemic is more out of control than ever in most of the country. This means that we again have to plan for another period in which the economy will not be operating normally by design. We need to focus on keeping people whole.

 

The Shape of this Rescue Package

 

The centerpiece of a keeping people whole strategy should be the continuation of the $600 weekly supplements to unemployment checks.  We can debate whether $600 is the right sum, but unemployment benefits have fallen far below the levels that would allow millions of workers to sustain anything close to their normal living standards through a period of prolonged unemployment. In order for millions of workers who are unemployed due to the pandemic to be able to pay their mortgage or rent and cover other unavoidable expenses, it will be necessary to have a substantial supplement to normal benefits.

There have been numerous complaints from Republicans, and some economists, that these supplements will discourage people from working. This is undoubtedly true in some cases, but this is the point. When we have a pandemic that is out of control, we don’t want to force people to work and threaten their own health and/or the health of family members.

Some have raised the issue that it is not fair that some people who are working at low-paying jobs are getting less from their paychecks than other workers are getting from being unemployed. This isn’t fair, but there is much that is going on in this pandemic that is not fair.

For example, the government is paying the pharmaceutical company, Moderna, $955 million to develop and test a vaccine. Then, after covering the research and testing costs, Trump will also give Moderna a patent monopoly that will allow it to charge prices that are more than 2000 percent above the cost of manufacturing and delivering the vaccine. The company is getting the patents in spite of the fact that the taxpayers paid for the research and took all the risk. Several top executives of the company have already made tens of millions on stock options as a result of the government contracts. There are similar stories at other pharmaceutical and medical equipment companies.

So, the fact that some workers may be getting less money at low-paying jobs than other workers are getting from unemployment insurance is unfair. But if this is someone’s biggest concern over unfairness, they are not paying attention to the world around them.

Others have also expressed concerns that these unemployment insurance supplements are making it hard for employers to find workers. There is zero evidence that this is a problem. There are millions of unemployed workers anxious to find jobs. If employers were having difficulty getting workers we should be seeing an increase in the number of job openings for unfilled positions. In fact, openings are very low. We should also be seeing rapidly rising wages as employers compete for available workers. The most recent data on compensation, that controls for changes in the mix of the workforce, found that compensation growth slowed sharply in the second quarter.

There will be workers who fall through the cracks and don’t get unemployment insurance. To try to help as many of these workers as possible, we should expand both the size and eligibility criteria for SNAP. We also must ensure that the moratoriums on evictions and moratoriums on foreclosures remain in place throughout the rest of the year.

Some of the other items that should be in the rescue package are funding for state and local governments. The Postal Service will also need substantial additional funding to prevent large-scale layoffs. State and local governments have already laid off 1.6 million workers, additional funding will allow them to hire back many of these workers and prevent the lay off of millions of additional workers. These governments also have an essential role to play in bringing the pandemic under control, doing things like testing and tracing, providing health care to coronavirus patients, and ensuring that workplaces and businesses are safe.

In the same vein, money is needed to allow schools to reopen safely. It is very important for both children and parents that the schools be open, but plans have to be put in place to allow for safe re-openings. Unfortunately, there was no national leadership or money for this effort over the summer and now most schools are not prepared to reopen. The next rescue package must have the money to allow for schools to make the necessary arrangements so that they can have safe re-openings as soon as possible.

We also need to try to lay the groundwork for a quick recovery when the pandemic is brought under control. The Paycheck Protection Program was useful for this purpose, keeping many businesses intact through a period in which they were operating well below capacity or shutdown completely. It would be good to extend this through the next three months.

We also need to ensure that our child care facilities are up and running. Lack of affordable child care has long been a problem, but it has become much worse in the pandemic as many child care centers have closed. We will need adequate child care arrangements if we want to ensure that parents are able to go back to work when the pandemic is brought under control.

One item that is completely unnecessary is the pandemic checks that gave every adult $1,200 in the first round and seem destined to be included in the last round as well.  While these checks give Donald Trump something to put his name on, they did little to keep people whole in the shutdown and are not likely to provide much of a demand boost when we reopen.

The vast majority of these checks were saved, with the saving rate out of disposable income soaring to 25.0 percent in the second quarter. (The saving rate was hovering near 8.0 percent before the pandemic.) The overwhelming majority of people who received these checks did not suffer any substantial fall in income as a result of the pandemic, they are either still getting full pay at their job or were retired. It is difficult to understand what the purpose of these checks is supposed to be.

To be clear, at a time when the economy is operating well below its capacity there is no particular harm in adding $1,200 to everyone’s bank account. This is not about causing an inflationary spiral, in large part because people are not spending the money. But if there are political limits on the size of the pandemic package, knocking out a $300 billion item that serves no real purpose, is a very good place to start.

[1] Trump also promoted “liberate” rallies, which often involved heavily armed protestors, in New York, Michigan, Pennsylvania, and Minnesota, among other states.

There continues to be enormous confusion about what we should be trying to accomplish in the next pandemic relief package. This is best demonstrated by Republicans’ obsession with getting people back to work, with a mixture of cuts to unemployment benefits and return to work bonuses.

Ignoring the questionable economic logic (there is zero evidence of large numbers of jobs going unfilled), this approach also ignores the reality of the pandemic. At the start of April, both houses voted nearly unanimously to support measures that were designed to make it possible for people to stay at home rather than work. At that time, we had roughly 35,000 new infections a day. Currently, we are seeing well over 60,000 new infections a day, with the count crossing 70,000 in many recent days.

The comparison looks even worse if we pull out New York and New Jersey, both of which were overwhelmed by the pandemic at the start of April. Between them, they had roughly 15,000 new infections a day, which means the rest of the country was seeing close to 20,000. By contrast, at present both states have the virus relatively under control, which means that the new infection count in the country would still be over 60,000 a day, excluding New York and New Jersey.

This raises the obvious point: if Congress thought it made sense to allow, encourage, and possibly even require people to stay home rather than work at the start of April, how could it possibly make sense to push people to work at a time when the rate of new infections is more than three times as high, in areas outside of New York and New Jersey?

This is really a question of life and death. Tens of millions of workers have serious health conditions that mean they would be at considerable danger if they became infected. Tens of millions more workers would be putting into danger family members, with serious health conditions, if they became infected. As a result, a high percentage of the work force has very good reasons for not wanting to return to work just now.

If we face the reality of the pandemic, we should not be designing a package to get people back to work, we need to design a package to keep them whole through a period in which tens of millions of people will still not be able to work because of the pandemic. This means that we want people to have the money to pay their rent or mortgage and to buy food and other necessary items. We don’t want them to be going out to restaurants and bars, to see movies or baseball games, or to fly away on vacations or go on a cruise ship.

There was considerable confusion on this point even back in March and April where many were referring to the bills passed by Congress as stimulus. Some were even pushing types of spending that could boost the economy. There was little reason to want to boost the economy back in April, nor should there be now. We want to make it so that people endure as little hardship as possible for now, and the economy to be prepared to start up as quickly as possible, once the pandemic is under control.

Of course, we should not be in this situation. Most of the economy was shut down from the middle of March to the middle of May, with major restrictions staying in place in the hardest-hit areas well into June. These restrictions did largely bring the pandemic under control in places like New York, New Jersey, Maryland, Massachusetts, and Washington (both state and DC).

Unfortunately, many states did not take the need for restricting business seriously and began to open at the start of May. This is the reason that states like Arizona, Georgia, Florida, and Texas now have major outbreaks. California also now has a major outbreak, as a lack of financial support from the federal government, coupled with political pressure orchestrated by Donald Trump in the form of “liberate California” protests, led the state to relax restrictions sooner than it should have.[1]

It would be possible to talk about an economic reopening now, if we had been successful in bringing the pandemic under control, as is the case in Europe and East Asia, in addition to the Northeast in the United States. But we can’t make plans based on a reality that does not exist. The pandemic is more out of control than ever in most of the country. This means that we again have to plan for another period in which the economy will not be operating normally by design. We need to focus on keeping people whole.

 

The Shape of this Rescue Package

 

The centerpiece of a keeping people whole strategy should be the continuation of the $600 weekly supplements to unemployment checks.  We can debate whether $600 is the right sum, but unemployment benefits have fallen far below the levels that would allow millions of workers to sustain anything close to their normal living standards through a period of prolonged unemployment. In order for millions of workers who are unemployed due to the pandemic to be able to pay their mortgage or rent and cover other unavoidable expenses, it will be necessary to have a substantial supplement to normal benefits.

There have been numerous complaints from Republicans, and some economists, that these supplements will discourage people from working. This is undoubtedly true in some cases, but this is the point. When we have a pandemic that is out of control, we don’t want to force people to work and threaten their own health and/or the health of family members.

Some have raised the issue that it is not fair that some people who are working at low-paying jobs are getting less from their paychecks than other workers are getting from being unemployed. This isn’t fair, but there is much that is going on in this pandemic that is not fair.

For example, the government is paying the pharmaceutical company, Moderna, $955 million to develop and test a vaccine. Then, after covering the research and testing costs, Trump will also give Moderna a patent monopoly that will allow it to charge prices that are more than 2000 percent above the cost of manufacturing and delivering the vaccine. The company is getting the patents in spite of the fact that the taxpayers paid for the research and took all the risk. Several top executives of the company have already made tens of millions on stock options as a result of the government contracts. There are similar stories at other pharmaceutical and medical equipment companies.

So, the fact that some workers may be getting less money at low-paying jobs than other workers are getting from unemployment insurance is unfair. But if this is someone’s biggest concern over unfairness, they are not paying attention to the world around them.

Others have also expressed concerns that these unemployment insurance supplements are making it hard for employers to find workers. There is zero evidence that this is a problem. There are millions of unemployed workers anxious to find jobs. If employers were having difficulty getting workers we should be seeing an increase in the number of job openings for unfilled positions. In fact, openings are very low. We should also be seeing rapidly rising wages as employers compete for available workers. The most recent data on compensation, that controls for changes in the mix of the workforce, found that compensation growth slowed sharply in the second quarter.

There will be workers who fall through the cracks and don’t get unemployment insurance. To try to help as many of these workers as possible, we should expand both the size and eligibility criteria for SNAP. We also must ensure that the moratoriums on evictions and moratoriums on foreclosures remain in place throughout the rest of the year.

Some of the other items that should be in the rescue package are funding for state and local governments. The Postal Service will also need substantial additional funding to prevent large-scale layoffs. State and local governments have already laid off 1.6 million workers, additional funding will allow them to hire back many of these workers and prevent the lay off of millions of additional workers. These governments also have an essential role to play in bringing the pandemic under control, doing things like testing and tracing, providing health care to coronavirus patients, and ensuring that workplaces and businesses are safe.

In the same vein, money is needed to allow schools to reopen safely. It is very important for both children and parents that the schools be open, but plans have to be put in place to allow for safe re-openings. Unfortunately, there was no national leadership or money for this effort over the summer and now most schools are not prepared to reopen. The next rescue package must have the money to allow for schools to make the necessary arrangements so that they can have safe re-openings as soon as possible.

We also need to try to lay the groundwork for a quick recovery when the pandemic is brought under control. The Paycheck Protection Program was useful for this purpose, keeping many businesses intact through a period in which they were operating well below capacity or shutdown completely. It would be good to extend this through the next three months.

We also need to ensure that our child care facilities are up and running. Lack of affordable child care has long been a problem, but it has become much worse in the pandemic as many child care centers have closed. We will need adequate child care arrangements if we want to ensure that parents are able to go back to work when the pandemic is brought under control.

One item that is completely unnecessary is the pandemic checks that gave every adult $1,200 in the first round and seem destined to be included in the last round as well.  While these checks give Donald Trump something to put his name on, they did little to keep people whole in the shutdown and are not likely to provide much of a demand boost when we reopen.

The vast majority of these checks were saved, with the saving rate out of disposable income soaring to 25.0 percent in the second quarter. (The saving rate was hovering near 8.0 percent before the pandemic.) The overwhelming majority of people who received these checks did not suffer any substantial fall in income as a result of the pandemic, they are either still getting full pay at their job or were retired. It is difficult to understand what the purpose of these checks is supposed to be.

To be clear, at a time when the economy is operating well below its capacity there is no particular harm in adding $1,200 to everyone’s bank account. This is not about causing an inflationary spiral, in large part because people are not spending the money. But if there are political limits on the size of the pandemic package, knocking out a $300 billion item that serves no real purpose, is a very good place to start.

[1] Trump also promoted “liberate” rallies, which often involved heavily armed protestors, in New York, Michigan, Pennsylvania, and Minnesota, among other states.

I have written before on the post-pandemic economy and how it should actually provide enormous opportunities, but it is worth clarifying a few points. First and most importantly, there is an important measurement issue with GDP that people will need to appreciate.

It is often said that GDP is not a good measure of well-being, we see this in a very big way in the post-pandemic period. It is likely that many of the changes in behavior forced by the pandemic, first and foremost telecommuting, will be enduring.

Most immediately, this will show up as a sharp drop in GDP. We will be consuming much less of the goods and services associated with commuting to and from work. This means that we will be driving less. That means we will be buying less gas and needing fewer cars, car parts, and car repair services. We’ll also need less auto insurance. In addition, there will be many fewer taxi or Uber trips, as well as trips on busses, trains, and other forms of public transportation.

There is also an economy built up around serving the people working in downtown office buildings. This includes the offices themselves and the people who service and clean them. There are also restaurants, gyms, and other businesses that serve the people who come into the city to work each day. And, there are all the items that people have to spend money on for office work, such as business clothes and shoes and dry-cleaning services.

We will see a huge reduction in demand in all these areas if much of the work being done on-line stays online. We will also see less business travel, which means fewer airplane trips, taxi rides, and stays in hotels.

This fall into demand will translate into a large loss of GDP, but it translates into very little by way of real loss in well-being. This doesn’t mean there will not be some loss. People may miss seeing work colleagues on a daily basis, or the opportunity to meet up with friends for lunch near the office. Some people may actually enjoy business travel. But the drop in GDP will dwarf whatever losses of these sorts people may feel, and in most cases, they will be offset by gains, such as not having to spend two hours a day commuting and having more time to spend with friends and family.

So, let’s say that we see GDP drop by 3.0 percent ($660 billion a year), how should we think about this? (This is a very crude guess, not a careful calculation) On its face, that would look like a very severe downturn. In the Great Recession, GDP only fell by 4.0 percent from peak to trough, so this looks like a very serious hit to the economy.

But that really misses the story. To take an analogous situation, let’s say for some reason, such as better diet, more exercise, or an act of God, everyone’s health got hugely better. Imagine that we could have the same outcomes in terms of life expectancy and quality of overall health using half as many health care services. This would mean half as many doctors’ visits, surgeries, MRIs, prescription drugs, and everything else in health care that costs money.

This reduction in health care consumption would mean a drop in GDP of more than 8.5 percent, yet everyone’s health would be just as good as it had been previously. In this story, no one in their right mind would be concerned about the loss of GDP, what we value is health, not the number of times we see a doctor or the amount of drugs we take. The decline in the resources needed to maintain our health is effectively an increase in productivity. We have seen a jump of 8.5 percent in the level of productivity, as we can get the same output as we had previously, with 8.5 percent fewer inputs.[1]  In other words, we are much richer as a result of this remarkable improvement in the public’s health.

We should think about my hypothesized savings of 3.0 percent of GDP on work-related expenses the same way. We had been expending a large amount of resources to maintain an office work system that is no longer needed. This is effectively a huge jump in productivity. By comparison, over the last 15 years, productivity growth has averaged just 1.3 percent annually.

This matters hugely in how we think about the post-pandemic economy. If we look at the lost GDP associated with fewer work-related expenses we would think that the economy is really suffering. However, if we think of this as big jump in productivity, then it effectively means that we have extra resources to address long-neglected social needs.

And, these resources should be readily visible in the form of all the workers who are no longer employed in restaurants, gyms, dry cleaners, or the making, servicing, or driving of cars. These are people who can be instead employed providing child care, senior care, doing energy audits of buildings, installing solar panels and energy-conserving appliances, or other tasks that address neglected needs.

As I have pointed out before, we need not think that every person who lost their job waiting tables will get a job installing solar panels or as a child care provider. That’s not the way the labor market works. People in fact switch jobs frequently. In a normal pre-pandemic economy more than 5.5 million people lose or leave their job every month. If we create jobs in installing solar panels, energy audits, and child care, people will leave other jobs to fill these newly created positions, which can leave openings for laid-off restaurant and hotel workers to again get jobs in hotels and restaurants, as well as other sectors.

The fact that we have a large number of idle workers, because of this effective jump in productivity, means that we should not be shy about large amounts of government spending to address these unmet needs, even though it will mean large budget deficits. For the near-term future, we will not have to worry about deficits creating too much demand in the economy and causing inflation. In the longer term, excessive demand and the resulting inflation can be a problem, which will require addressing the factors that redistribute so much money upward (e.g. patent and copyright monopolies, a corrupt corporate governance structure, and a bloated financial sector), but that will not be a problem as we recover from the recession.

If we do let obsessions with government deficits and debt curtail spending, then we can expect to see a long and harsh recession. To set up the analogy, suppose there was a 3.0 percent jump in productivity, but there was no increase in workers’ real wages. Assume all the money went to higher corporate profits. Since profits have little relationship to investment, there is no reason to expect any notable increase in investment. Let’s assume that consumption spending out of dividends and share buybacks is limited.

In this case, the economy can produce the same output with 3 percent fewer workers, meaning that 4.8 million people will be out of jobs. And, that situation can persist for a long period of time, since there is nothing inherent to the workings of the economy to bring us back to full employment.

That would really be a disaster story, especially if the correct figure for this implicit jump in productivity is something more like 5 percent, or even more. The key to preventing this sort of disaster is to understand that the reduced spending on work-related expenses is effectively an increase in productivity.

And, we also have to recognize that when we have a serious problem of unemployment, the failure to run large deficits is incredibly damaging to the country. Millions of workers will needlessly suffer, as will their families. And the failure is increased when it means not spending in areas that will have long-term benefits for the country, like child care and slowing global warming. It is tragic that deficit hawks are able to do so much harm to our children under the guise of saving our children.

[1] For those being technical, I am not using “productivity” precisely here. A reduction equal to 8.5 percent of GDP in the value of goods or services devoted to health care, does not necessarily mean that the amount of labor used in the health care sector has fallen by an amount equal to 8.5 percent of the economy’s annual labor usage. But I’m ignoring this point for now.  

I have written before on the post-pandemic economy and how it should actually provide enormous opportunities, but it is worth clarifying a few points. First and most importantly, there is an important measurement issue with GDP that people will need to appreciate.

It is often said that GDP is not a good measure of well-being, we see this in a very big way in the post-pandemic period. It is likely that many of the changes in behavior forced by the pandemic, first and foremost telecommuting, will be enduring.

Most immediately, this will show up as a sharp drop in GDP. We will be consuming much less of the goods and services associated with commuting to and from work. This means that we will be driving less. That means we will be buying less gas and needing fewer cars, car parts, and car repair services. We’ll also need less auto insurance. In addition, there will be many fewer taxi or Uber trips, as well as trips on busses, trains, and other forms of public transportation.

There is also an economy built up around serving the people working in downtown office buildings. This includes the offices themselves and the people who service and clean them. There are also restaurants, gyms, and other businesses that serve the people who come into the city to work each day. And, there are all the items that people have to spend money on for office work, such as business clothes and shoes and dry-cleaning services.

We will see a huge reduction in demand in all these areas if much of the work being done on-line stays online. We will also see less business travel, which means fewer airplane trips, taxi rides, and stays in hotels.

This fall into demand will translate into a large loss of GDP, but it translates into very little by way of real loss in well-being. This doesn’t mean there will not be some loss. People may miss seeing work colleagues on a daily basis, or the opportunity to meet up with friends for lunch near the office. Some people may actually enjoy business travel. But the drop in GDP will dwarf whatever losses of these sorts people may feel, and in most cases, they will be offset by gains, such as not having to spend two hours a day commuting and having more time to spend with friends and family.

So, let’s say that we see GDP drop by 3.0 percent ($660 billion a year), how should we think about this? (This is a very crude guess, not a careful calculation) On its face, that would look like a very severe downturn. In the Great Recession, GDP only fell by 4.0 percent from peak to trough, so this looks like a very serious hit to the economy.

But that really misses the story. To take an analogous situation, let’s say for some reason, such as better diet, more exercise, or an act of God, everyone’s health got hugely better. Imagine that we could have the same outcomes in terms of life expectancy and quality of overall health using half as many health care services. This would mean half as many doctors’ visits, surgeries, MRIs, prescription drugs, and everything else in health care that costs money.

This reduction in health care consumption would mean a drop in GDP of more than 8.5 percent, yet everyone’s health would be just as good as it had been previously. In this story, no one in their right mind would be concerned about the loss of GDP, what we value is health, not the number of times we see a doctor or the amount of drugs we take. The decline in the resources needed to maintain our health is effectively an increase in productivity. We have seen a jump of 8.5 percent in the level of productivity, as we can get the same output as we had previously, with 8.5 percent fewer inputs.[1]  In other words, we are much richer as a result of this remarkable improvement in the public’s health.

We should think about my hypothesized savings of 3.0 percent of GDP on work-related expenses the same way. We had been expending a large amount of resources to maintain an office work system that is no longer needed. This is effectively a huge jump in productivity. By comparison, over the last 15 years, productivity growth has averaged just 1.3 percent annually.

This matters hugely in how we think about the post-pandemic economy. If we look at the lost GDP associated with fewer work-related expenses we would think that the economy is really suffering. However, if we think of this as big jump in productivity, then it effectively means that we have extra resources to address long-neglected social needs.

And, these resources should be readily visible in the form of all the workers who are no longer employed in restaurants, gyms, dry cleaners, or the making, servicing, or driving of cars. These are people who can be instead employed providing child care, senior care, doing energy audits of buildings, installing solar panels and energy-conserving appliances, or other tasks that address neglected needs.

As I have pointed out before, we need not think that every person who lost their job waiting tables will get a job installing solar panels or as a child care provider. That’s not the way the labor market works. People in fact switch jobs frequently. In a normal pre-pandemic economy more than 5.5 million people lose or leave their job every month. If we create jobs in installing solar panels, energy audits, and child care, people will leave other jobs to fill these newly created positions, which can leave openings for laid-off restaurant and hotel workers to again get jobs in hotels and restaurants, as well as other sectors.

The fact that we have a large number of idle workers, because of this effective jump in productivity, means that we should not be shy about large amounts of government spending to address these unmet needs, even though it will mean large budget deficits. For the near-term future, we will not have to worry about deficits creating too much demand in the economy and causing inflation. In the longer term, excessive demand and the resulting inflation can be a problem, which will require addressing the factors that redistribute so much money upward (e.g. patent and copyright monopolies, a corrupt corporate governance structure, and a bloated financial sector), but that will not be a problem as we recover from the recession.

If we do let obsessions with government deficits and debt curtail spending, then we can expect to see a long and harsh recession. To set up the analogy, suppose there was a 3.0 percent jump in productivity, but there was no increase in workers’ real wages. Assume all the money went to higher corporate profits. Since profits have little relationship to investment, there is no reason to expect any notable increase in investment. Let’s assume that consumption spending out of dividends and share buybacks is limited.

In this case, the economy can produce the same output with 3 percent fewer workers, meaning that 4.8 million people will be out of jobs. And, that situation can persist for a long period of time, since there is nothing inherent to the workings of the economy to bring us back to full employment.

That would really be a disaster story, especially if the correct figure for this implicit jump in productivity is something more like 5 percent, or even more. The key to preventing this sort of disaster is to understand that the reduced spending on work-related expenses is effectively an increase in productivity.

And, we also have to recognize that when we have a serious problem of unemployment, the failure to run large deficits is incredibly damaging to the country. Millions of workers will needlessly suffer, as will their families. And the failure is increased when it means not spending in areas that will have long-term benefits for the country, like child care and slowing global warming. It is tragic that deficit hawks are able to do so much harm to our children under the guise of saving our children.

[1] For those being technical, I am not using “productivity” precisely here. A reduction equal to 8.5 percent of GDP in the value of goods or services devoted to health care, does not necessarily mean that the amount of labor used in the health care sector has fallen by an amount equal to 8.5 percent of the economy’s annual labor usage. But I’m ignoring this point for now.  

Donald Trump has repeatedly complained about the crime in major U.S. cities. In fact, he just now decided that it would be clever to send U.S. law enforcement officers to major cities in swing states (Milwaukee, Detroit, and Cleveland), ostensibly because of the high crime there.

While he has been obsessed with talking about crime in cities with large minority populations, Trump has apparently not been paying much attention to the number of people dying from the pandemic (1,485 yesterday). In fact, far more people have died from the coronavirus than from homicides.

As of July 29th, 153,840 people had died from the coronavirus. By contrast, in 2018, the last year for which I could find full data, 16,214 died by homicide. Here’s the picture.

Source: Statista.com and Worldometersinfo.com.

Donald Trump has repeatedly complained about the crime in major U.S. cities. In fact, he just now decided that it would be clever to send U.S. law enforcement officers to major cities in swing states (Milwaukee, Detroit, and Cleveland), ostensibly because of the high crime there.

While he has been obsessed with talking about crime in cities with large minority populations, Trump has apparently not been paying much attention to the number of people dying from the pandemic (1,485 yesterday). In fact, far more people have died from the coronavirus than from homicides.

As of July 29th, 153,840 people had died from the coronavirus. By contrast, in 2018, the last year for which I could find full data, 16,214 died by homicide. Here’s the picture.

Source: Statista.com and Worldometersinfo.com.

Moderna, a relatively new biotech company, has generally been seen as the leading U.S. contender to develop a coronavirus vaccine, although it trails several Chinese companies. Whether or not its vaccine pans out, it should certainly get an award for milking the government.

It was the big winner in initial contracts, getting $483 million back in April for developing a vaccine. While that may have seemed adequate to get it through both the development and testing process, the company decided to go back to the trough and have the government pay $472 million for the Phase 3 testing of the vaccine.

Together these payments virtually guarantee that the company will make a substantial profit on its development and testing of the vaccine.  Yet, Moderna will still get a patent monopoly on the vaccine, which will allow it to charge people in the United States and elsewhere in the world as much as it wants for the vaccine.

Some simple arithmetic shows that Moderna almost certainly has made a profit already. The company reported having 892 employees at the end of 2019. Let’s suppose that they paid each one $20,000 a month for the three months between signing the contract and when they had their first round of clinical tests. (It was actually more like two months.) That would come to $53,520,000. If we double this for equipment and other inputs, we get $107,040,000.

The Phase 3 trials are projected to involve 30,000 people. Recent research indicates that the average per-person cost in a Phase 3 trial for vaccines is $10,000. That would come to $300 million. Let’s raise this by 50 percent because Moderna is in a hurry, that gets us $450 million.

Since the government paid $483 million for the pre-clinical research and $472 million for the Phase 3 trials, it looks like Moderna is making a healthy profit on both. Yet, the government is still giving Moderna a patent monopoly, which means that it will arrest anyone who tries to produce the vaccine without Moderna’s permission.[1]

If we go back to Econ 101, the rationale for the government granting patent monopolies to drug companies or anyone else is to give them incentives for doing research and developing new products. The monopoly will allow them to both recoup research costs and compensate them for the risk that they won’t have a successful product.

The Moderna story won’t fit here. It was already compensated for its research costs by the government. Furthermore, it has zero risks. If its vaccine turns out to be ineffective or have harmful side effects, the company has already been paid for its work.

The patent monopoly means that we are paying Moderna twice. We first picked up the tab for the research and the testing and now we are giving the company a patent monopoly so that it can charge people around the world as much as it wants for the vaccine.

 

This should be a huge scandal, but I guess everyone knows that drug companies rip us off. Besides, economists and media types are too busy worrying about unemployed workers getting too much money.

[1] To save literalists some trouble, people don’t actually get arrested for patent violations. They get served with an injunction telling them to stop violating the patent. They would then get arrested for defying the injunction if they continued to produce the vaccine without Moderna’s permission.

Moderna, a relatively new biotech company, has generally been seen as the leading U.S. contender to develop a coronavirus vaccine, although it trails several Chinese companies. Whether or not its vaccine pans out, it should certainly get an award for milking the government.

It was the big winner in initial contracts, getting $483 million back in April for developing a vaccine. While that may have seemed adequate to get it through both the development and testing process, the company decided to go back to the trough and have the government pay $472 million for the Phase 3 testing of the vaccine.

Together these payments virtually guarantee that the company will make a substantial profit on its development and testing of the vaccine.  Yet, Moderna will still get a patent monopoly on the vaccine, which will allow it to charge people in the United States and elsewhere in the world as much as it wants for the vaccine.

Some simple arithmetic shows that Moderna almost certainly has made a profit already. The company reported having 892 employees at the end of 2019. Let’s suppose that they paid each one $20,000 a month for the three months between signing the contract and when they had their first round of clinical tests. (It was actually more like two months.) That would come to $53,520,000. If we double this for equipment and other inputs, we get $107,040,000.

The Phase 3 trials are projected to involve 30,000 people. Recent research indicates that the average per-person cost in a Phase 3 trial for vaccines is $10,000. That would come to $300 million. Let’s raise this by 50 percent because Moderna is in a hurry, that gets us $450 million.

Since the government paid $483 million for the pre-clinical research and $472 million for the Phase 3 trials, it looks like Moderna is making a healthy profit on both. Yet, the government is still giving Moderna a patent monopoly, which means that it will arrest anyone who tries to produce the vaccine without Moderna’s permission.[1]

If we go back to Econ 101, the rationale for the government granting patent monopolies to drug companies or anyone else is to give them incentives for doing research and developing new products. The monopoly will allow them to both recoup research costs and compensate them for the risk that they won’t have a successful product.

The Moderna story won’t fit here. It was already compensated for its research costs by the government. Furthermore, it has zero risks. If its vaccine turns out to be ineffective or have harmful side effects, the company has already been paid for its work.

The patent monopoly means that we are paying Moderna twice. We first picked up the tab for the research and the testing and now we are giving the company a patent monopoly so that it can charge people around the world as much as it wants for the vaccine.

 

This should be a huge scandal, but I guess everyone knows that drug companies rip us off. Besides, economists and media types are too busy worrying about unemployed workers getting too much money.

[1] To save literalists some trouble, people don’t actually get arrested for patent violations. They get served with an injunction telling them to stop violating the patent. They would then get arrested for defying the injunction if they continued to produce the vaccine without Moderna’s permission.

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