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.

It was a very bizarre choice of words. In a useful and lengthy article on Republican efforts to cut food stamp benefits, we are told:

“The Republican distrust of food stamps has now collided with a monumental crisis. Cars outside food banks have lined up for miles in places as different as San Antonio, Pittsburgh and Miami Beach.”

The piece gives no evidence whatsoever that Republicans “distrust” food stamps. It provides plenty of evidence that they dislike food stamps, just as they dislike anything that helps low and moderate-income people.

It would be good if the paper stopped its mind-reading and just told readers that the Republicans have continually tried to cut food stamps and not imply that there is any question of trust at issue.

It was a very bizarre choice of words. In a useful and lengthy article on Republican efforts to cut food stamp benefits, we are told:

“The Republican distrust of food stamps has now collided with a monumental crisis. Cars outside food banks have lined up for miles in places as different as San Antonio, Pittsburgh and Miami Beach.”

The piece gives no evidence whatsoever that Republicans “distrust” food stamps. It provides plenty of evidence that they dislike food stamps, just as they dislike anything that helps low and moderate-income people.

It would be good if the paper stopped its mind-reading and just told readers that the Republicans have continually tried to cut food stamps and not imply that there is any question of trust at issue.

I know the media are prohibited from stating this obvious truth, but it seemed a good time to remind folks. The NYT posted an article about how Japan’s prime minister, Shinzo Abe, is promoting a drug produced by a subsidiary of Fujifilm, a large Japanese company, as a treatment for the coronavirus. According to the piece, there is little evidence that the drug, Avigan, is an effective treatment, although the drug is known to cause birth defects. The piece also reports that Fujifilm has been aggressive in touting the drug, in spite of the lack of evidence and its known side effects.

If the drug were available as a cheap generic, so it sold at prices comparable to generic aspirin, it is unlikely that Fujifilm would be anxious to promote it, unless its benefits were clearer. Economists usually believe that people respond to incentives, but for some reason, they never point out that the high prices resulting from government-granted patent monopolies give drug companies incentive to lie about the safety and effectiveness of their drugs.  

 

I know the media are prohibited from stating this obvious truth, but it seemed a good time to remind folks. The NYT posted an article about how Japan’s prime minister, Shinzo Abe, is promoting a drug produced by a subsidiary of Fujifilm, a large Japanese company, as a treatment for the coronavirus. According to the piece, there is little evidence that the drug, Avigan, is an effective treatment, although the drug is known to cause birth defects. The piece also reports that Fujifilm has been aggressive in touting the drug, in spite of the lack of evidence and its known side effects.

If the drug were available as a cheap generic, so it sold at prices comparable to generic aspirin, it is unlikely that Fujifilm would be anxious to promote it, unless its benefits were clearer. Economists usually believe that people respond to incentives, but for some reason, they never point out that the high prices resulting from government-granted patent monopolies give drug companies incentive to lie about the safety and effectiveness of their drugs.  

 

Daniel W. Drezner used his Washington Post column to contribute to the confusion around the stock market and the economy. He picks up from prior pieces by Paul Krugman and Desmond Lachman as to whether the recent run-up in the economy means investors are expecting a strong recovery.

(Drezner unfortunately refers to the question of a V-shaped recovery. The Congressional Budget Office projects that the economy will shrink at a 39.6 percent annual rate in this quarter, and then grow at 23.5 percent and 10.5 percent annual rates in the third and fourth quarters, respectively. It would be hard not to view the projected 3rd and 4th quarter growth rates as “V-shaped,” but they would still leave the economy more than five percent smaller than it was in the fourth quarter of 2019. The question is not really the shape, as opposed to the size of the right side of the “V.”) 

Anyhow, in his subsequent discussion Drezner focuses on projections for the state of the economy, ignoring what the stock market is supposed to price — the value of future after-tax profits. If a change in policy has zero positive impact on economic growth, like a cut in corporate income taxes or a strong anti-union measure, but is expected to increase after-tax profits, we would expect it to lead to a rise in stock prices.

The willingness of Congress and the president to give a massive bailout that looks very favorable to corporate interests likely was viewed by investors as a signal that the politicians in Washington were determined to limit the damage that corporations faced as a result of the pandemic. There is little reason to believe that they were looking at how well the economy would do. (Krugman’s line, that they expect a very weak economy and therefore very low interest rates, is an exception to this view.)

Anyhow, no reasonable person would make a serious economic projection based on the Yankees prospects for winning the World Series, nor should they make economic projections based on fluctuations in the stock market.

Daniel W. Drezner used his Washington Post column to contribute to the confusion around the stock market and the economy. He picks up from prior pieces by Paul Krugman and Desmond Lachman as to whether the recent run-up in the economy means investors are expecting a strong recovery.

(Drezner unfortunately refers to the question of a V-shaped recovery. The Congressional Budget Office projects that the economy will shrink at a 39.6 percent annual rate in this quarter, and then grow at 23.5 percent and 10.5 percent annual rates in the third and fourth quarters, respectively. It would be hard not to view the projected 3rd and 4th quarter growth rates as “V-shaped,” but they would still leave the economy more than five percent smaller than it was in the fourth quarter of 2019. The question is not really the shape, as opposed to the size of the right side of the “V.”) 

Anyhow, in his subsequent discussion Drezner focuses on projections for the state of the economy, ignoring what the stock market is supposed to price — the value of future after-tax profits. If a change in policy has zero positive impact on economic growth, like a cut in corporate income taxes or a strong anti-union measure, but is expected to increase after-tax profits, we would expect it to lead to a rise in stock prices.

The willingness of Congress and the president to give a massive bailout that looks very favorable to corporate interests likely was viewed by investors as a signal that the politicians in Washington were determined to limit the damage that corporations faced as a result of the pandemic. There is little reason to believe that they were looking at how well the economy would do. (Krugman’s line, that they expect a very weak economy and therefore very low interest rates, is an exception to this view.)

Anyhow, no reasonable person would make a serious economic projection based on the Yankees prospects for winning the World Series, nor should they make economic projections based on fluctuations in the stock market.

No one wants to die, but hey, who wouldn’t be willing to sacrifice their life to protect someone’s patent monopoly? That is a question that is implicitly raised in this New York Times piece on the race to develop an effective vaccine against the coronavirus. Near the beginning the piece tells readers:

“In an era of intense nationalism, the geopolitics of the vaccine race are growing as complex as the medicine. The months of mutual vilification between the United States and China over the origins of the virus have poisoned most efforts at cooperation between them. The U.S. government is already warning that American innovations must be protected from theft — chiefly from Beijing.”

Okay, what does “theft” by China, or anyone else, mean in this context? Would China be preventing U.S. scientists from moving ahead with the development of a vaccine? Would it be preventing drug companies from manufacturing and distributing the vaccine?

Of course, neither of these possibilities makes any sense. Nothing China might do with knowledge gained from U.S. researchers would obstruct our own development of a vaccine. The only “risk” here is that China might jump ahead and be able to vaccinate its own people, and possibly people in other countries (including the U.S.) before a U.S. produced vaccine is available. This could be an embarrassment to Donald Trump and may also reduce the potential profits of U.S. drug companies, but it could mean that hundreds of thousands of lives are saved.

Apparently the New York Times didn’t think it was worth mentioning that the Trump administration’s policies might lead to massive loss of life to protect his ego and industry profits, but that is the unavoidable implication of the information in the article.

No one wants to die, but hey, who wouldn’t be willing to sacrifice their life to protect someone’s patent monopoly? That is a question that is implicitly raised in this New York Times piece on the race to develop an effective vaccine against the coronavirus. Near the beginning the piece tells readers:

“In an era of intense nationalism, the geopolitics of the vaccine race are growing as complex as the medicine. The months of mutual vilification between the United States and China over the origins of the virus have poisoned most efforts at cooperation between them. The U.S. government is already warning that American innovations must be protected from theft — chiefly from Beijing.”

Okay, what does “theft” by China, or anyone else, mean in this context? Would China be preventing U.S. scientists from moving ahead with the development of a vaccine? Would it be preventing drug companies from manufacturing and distributing the vaccine?

Of course, neither of these possibilities makes any sense. Nothing China might do with knowledge gained from U.S. researchers would obstruct our own development of a vaccine. The only “risk” here is that China might jump ahead and be able to vaccinate its own people, and possibly people in other countries (including the U.S.) before a U.S. produced vaccine is available. This could be an embarrassment to Donald Trump and may also reduce the potential profits of U.S. drug companies, but it could mean that hundreds of thousands of lives are saved.

Apparently the New York Times didn’t think it was worth mentioning that the Trump administration’s policies might lead to massive loss of life to protect his ego and industry profits, but that is the unavoidable implication of the information in the article.

There has been some discussion of whether we should anticipate deflation or inflation as a result of the impact of the pandemic. I have been in the camp arguing the latter, based on the idea that precautionary measures will raise costs in major areas of the economy while reducing supply. (This is not an argument against stimulatory policies that are needed to restore employment. The inflation is a one-time price rise that will be reversed when we get effective treatments and/or a vaccine. It is not an inflationary spiral story.)

However, it did occur to me that there is an important measurement issue that could affect how we view higher prices. To see the issue, let’s imagine we had Donald Trump’s bar and grill. As Trump has advocated, we have people tightly packed together, eating their burgers and fries. There are also long lines at the door, with no one practicing social distancing.

Now, imagine that Dr. Fauci takes over the restaurant after it goes bankrupt (this is a Trump business) because so many of the customers were getting sick. Under Dr. Fauci, the restaurant adopts safe practices. This means operating at only one quarter capacity, having sufficient time between parties to ensure that the tables, chairs, and surrounding areas are fully sanitized, and having checkers at the door taking people’s temperatures and asking about their health and contacts. To cover his higher costs, Dr. Fauci raises prices by 50 percent.

So, the question for inflation hawks everywhere is whether this 50 percent price increase should be treated as inflation? The counterargument is that Dr. Fauci’s restaurant is providing a better product than Donald Trump’s restaurant. Customers can eat their dinner with a much lower risk of catching the coronavirus. This should be worth a premium, just like people are willing to pay more money for a car with automatic braking or other safety features. In effect, this is a quality improvement, not an increase in price.

My guess is that the folks at the Bureau of Labor Statistics will not see it that way and treat safety-related price increases as inflation. I’m not knocking them, they would have to develop the methodologies to make the adjustments. That takes time and we’re seeing the price increases now. I’m just trying to call attention to a conceptual problem here.

While the problem is extraordinarily stark in this case, it is not a new one. I used to point out that AIDS led to a reduction in the measured rate of inflation. The reason is that when expensive new treatments came into use, their price was not picked up as an increase in the CPI or other price indices. (We only measure the change in price of existing drugs, not the cost of new drugs.) When these drugs came off patent, and their prices plunge, their price decline would be included in the CPI, lowering the overall rate of inflation.

There is no real solution to this sort of problem. The CPI is inherently individualistic. It measures the change in quality-adjusted prices as though the world around us is unchanging. However, we know it does change constantly and the value assigned to goods and services changes enormously as a result. (Hey, does anyone want a lava lamp or a bean bag chair?) And it’s not just fashions. Our need for major items like cars, cell phones, and Internet access depends hugely on the social environment.

For this reason, we can’t really say that the CPI is measuring changes in the cost of living. It is a price index. Oddities, like the treatment of safety-related price increases that are a result of the pandemic, may bring this point home, but the problem is always there even if we choose to ignore it.

There has been some discussion of whether we should anticipate deflation or inflation as a result of the impact of the pandemic. I have been in the camp arguing the latter, based on the idea that precautionary measures will raise costs in major areas of the economy while reducing supply. (This is not an argument against stimulatory policies that are needed to restore employment. The inflation is a one-time price rise that will be reversed when we get effective treatments and/or a vaccine. It is not an inflationary spiral story.)

However, it did occur to me that there is an important measurement issue that could affect how we view higher prices. To see the issue, let’s imagine we had Donald Trump’s bar and grill. As Trump has advocated, we have people tightly packed together, eating their burgers and fries. There are also long lines at the door, with no one practicing social distancing.

Now, imagine that Dr. Fauci takes over the restaurant after it goes bankrupt (this is a Trump business) because so many of the customers were getting sick. Under Dr. Fauci, the restaurant adopts safe practices. This means operating at only one quarter capacity, having sufficient time between parties to ensure that the tables, chairs, and surrounding areas are fully sanitized, and having checkers at the door taking people’s temperatures and asking about their health and contacts. To cover his higher costs, Dr. Fauci raises prices by 50 percent.

So, the question for inflation hawks everywhere is whether this 50 percent price increase should be treated as inflation? The counterargument is that Dr. Fauci’s restaurant is providing a better product than Donald Trump’s restaurant. Customers can eat their dinner with a much lower risk of catching the coronavirus. This should be worth a premium, just like people are willing to pay more money for a car with automatic braking or other safety features. In effect, this is a quality improvement, not an increase in price.

My guess is that the folks at the Bureau of Labor Statistics will not see it that way and treat safety-related price increases as inflation. I’m not knocking them, they would have to develop the methodologies to make the adjustments. That takes time and we’re seeing the price increases now. I’m just trying to call attention to a conceptual problem here.

While the problem is extraordinarily stark in this case, it is not a new one. I used to point out that AIDS led to a reduction in the measured rate of inflation. The reason is that when expensive new treatments came into use, their price was not picked up as an increase in the CPI or other price indices. (We only measure the change in price of existing drugs, not the cost of new drugs.) When these drugs came off patent, and their prices plunge, their price decline would be included in the CPI, lowering the overall rate of inflation.

There is no real solution to this sort of problem. The CPI is inherently individualistic. It measures the change in quality-adjusted prices as though the world around us is unchanging. However, we know it does change constantly and the value assigned to goods and services changes enormously as a result. (Hey, does anyone want a lava lamp or a bean bag chair?) And it’s not just fashions. Our need for major items like cars, cell phones, and Internet access depends hugely on the social environment.

For this reason, we can’t really say that the CPI is measuring changes in the cost of living. It is a price index. Oddities, like the treatment of safety-related price increases that are a result of the pandemic, may bring this point home, but the problem is always there even if we choose to ignore it.

The NYT had its second piece in a week on how business owners can’t use the money from the paycheck protection program (PPP) to build their businesses. While it is understandable that business owners would like a handout from the government, that is not the purpose of the PPP.

The point of the PPP is to get workers their paychecks, or at least a large fraction thereof, not to support businesses. The businesses are essentially an intermediary. It should be a large help to these businesses to be able to keep workers on their payroll and have their rent covered, but the program is not designed to get businesses through the crisis, it’s designed to get their workers through.

For some reason, the NYT and much of the rest of the media can’t seem to understand this point. Obviously many businesses will struggle to get through this crisis, and a lot won’t make it, but the PPP is not designed for this purpose. This is not news.

The NYT had its second piece in a week on how business owners can’t use the money from the paycheck protection program (PPP) to build their businesses. While it is understandable that business owners would like a handout from the government, that is not the purpose of the PPP.

The point of the PPP is to get workers their paychecks, or at least a large fraction thereof, not to support businesses. The businesses are essentially an intermediary. It should be a large help to these businesses to be able to keep workers on their payroll and have their rent covered, but the program is not designed to get businesses through the crisis, it’s designed to get their workers through.

For some reason, the NYT and much of the rest of the media can’t seem to understand this point. Obviously many businesses will struggle to get through this crisis, and a lot won’t make it, but the PPP is not designed for this purpose. This is not news.

(This post first appeared on my Patreon page.)

Last week the Boston Review (BR) published an exchange on a wealth tax that included a proposal from Berkeley economists Emmanuel Saez and Gabriel Zucman, with a number of responses, including one from me. I was critical of the proposal for both political reasons and because I think avoidance and evasion will be massive problems.

On the political side, in addition to the difficulty of getting a wealth tax through Congress, there is the virtual certainty that the current Supreme Court will rule it unconstitutional. This is not an abstract question of whether a wealth tax should be viewed as constitutional. I realize that many legal scholars have argued that such a tax is not inconsistent with the power to tax granted to Congress by the constitution. This is a very concrete question as to whether the current Supreme Court would rule that a wealth tax is constitutional. I don’t think anyone with a straight face could argue that it would.

We can of course talk about various plans to pack the court, either by adding new justices or through some rotation scheme of judges across federal courts. These may be interesting and worthwhile strategies to pursue against a corrupt court, but if we’re thinking of a timeline of a presidential term in which we hope to get important legislation passed, they are not likely to be helpful. 

Even if we can implement an effective strategy for ending the right-wing lock on the court, it is not likely to be quick enough to allow a measure like a wealth tax to be implemented in the same presidential term. If this is at the center of a progressive president’s agenda, they will have to find a way to get re-elected without passing this important measure. 

My other reason for objecting is that I think a wealth tax will prove very difficult to enforce. We have experience with income taxes and estate taxes. The enforcement of these is far from perfect, but at least the apparatus is in place. We would be starting from scratch with a wealth tax and the rich will have a very strong incentive to avoid or evade it. My guess is that they would be fairly successful, undermining the goal of the tax as well as confidence in the tax system. 

As I pointed in the BR piece, one foolproof mechanism for avoidance is renouncing citizenship. While Saez and Zucman have a 47 percent exit tax as part of their proposal, this would not apply to people who renounce their citizenship before the tax is enacted. In their response, Saez and Zucman suggest that the tax could be imposed even on those who have already left. While they have a good moral argument, as a practical matter, the probability of collecting large amounts of retroactive taxes from someone who has fled to a tax haven does not seem very high. 

Stopping Extreme Wealth at Its Source

While I don’t think a wealth tax is an effective mechanism to contain excessive wealth, I strongly agree with Saez and Zucman that it is a serious problem for both economic and political reasons. However, I have focused my own work on changing the economic structures that allow for the accumulation of extreme wealth. 

I won’t go through the whole story here (this is the point of Rigged [it’s free]), but the basic argument is that over the last four decades we have structured the economy in ways that allow for the accumulation of massive amounts of wealth. There is nothing inevitable about this structuring, we can structure the economy differently so that its benefits are more broadly shared instead of flowing so disproportionately to those at the top.  

My poster child for the impact of the structuring of the economy is Bill Gates. Gates is one of the richest people in the world because we have patent and copyright monopolies. If the government didn’t grant these monopolies, and anyone who wanted to could freely copy Microsoft’s software, Bill Gates would probably still be working for a living.

Patents and copyrights serve a purpose, they provide an incentive for innovation and creative work, but there are other ways to provide these incentives. And even if we decide to use patent and copyright monopolies, they could be shorter and weaker, so that they don’t redistribute so much income to their holders. 

The place where I have spent the most effort combatting these government-granted monopolies is with prescription drugs. This is both where they cause the greatest amount of corruption — think of the opioid crisis, a direct result of the incentive created by patent monopoly prices to push drugs — and where they lead to the most obscene outcomes: people being unable to afford cheap drugs because patent monopolies make them expensive.

The pandemic should provide a great opportunity to challenge patent monopolies in prescription drugs. There is an unprecedented amount of international cooperation, as well as public funding, in the efforts to develop treatments and an effective vaccine against the coronavirus. Given this collective effort, it would be utterly absurd to give the company that happened to be the first to the patent office a monopoly on a treatment or vaccine. 

The only sensible solution is that the drugs and vaccines that are developed through this collective effort be in the public domain so that they can be sold as cheap generics, where the price is the cost of manufacturing and distribution, and a normal profit. We should not be in the position of begging a patent holder to make a drug or vaccine available at an affordable price.

If we could go this route with the coronavirus then it should raise the obvious question of why this should not be the standard practice – publicly funded, open-source research with everything placed in the public domain. And, what is really neat about this approach is that we don’t even have to stop drug companies from pursuing patent-supported research. They would just face the risk that any drugs they do develop will face competition from a drug that is as good or better and selling as a generic at one percent of the price they planned to charge. That risk would likely shut down most patent-supported research very quickly.

The amount at stake here is enormous, as I continually point out. In the case of prescription drugs alone, it is close to $400 billion a year, roughly 20 percent of all corporate profits.

I could be wrong, but it strikes me as a far smaller political lift to say that the government should increase its funding for the development of prescription drugs (we already spend $40 billion a year through NIH), and have everything developed in the public domain, than imposing a wealth tax. And there is no issue of its constitutionality. 

As I point out in Rigged, there are also measures we can do to radically reduce the big fortunes built-in finance, most obviously by imposing a modest financial transaction tax. We can hugely reduce Mark Zuckerberg’s fortune by repealing Section 230 of the Communications Decency Act, thereby subjecting Facebook and other Internet intermediaries to the same legal liabilities as their competitors in traditional media. 

We don’t need to structure our economy in a way that leads to massive inequality. There has been a conscious choice made by those designing policy in the last four decades. Our top priority should be to change this design.

Leveling the Political Playing Field

Saez and Zucman are entirely correct in pointing out that the enormous amount of wealth at the top gives these people hugely outsized political influence. While this is true, we are not going to be able to easily reverse this, even with a wealth tax. Jeff Bezos and Bill Gates could still wield ridiculous amounts of political influence if we managed to tax away half of their wealth.

Our efforts can’t be focused just on bringing the top down, we have to bring everyone else up. Fortunately, there are models for doing this. Seattle gives every voter a $75 voucher to support the candidate(s) of their choice in city council elections. Several cities now have super-matches, where small campaign contributions are matched three or four to one. I have outlined a plan where everyone would have a $100 voucher to support journalism or any other creative work they choose.  

There are many other directions in which these sorts of proposals can be developed, but the point is that, with a relatively small amount of public funds, we can hugely democratize politics, as well as journalism and creative work more generally. Getting more input from those at the middle and bottom is likely to be a far more productive path towards counterbalancing the influence of the rich than trying to take away their money. And, this can be done piecemeal, one city or state at a time. 

Keeping Our Eye on the Ball

In contrast to the right, progressives get relatively few bites at the apple. The right can have a George W. Bush, who lied us into a pointless war in Iraq and then allowed the economy to collapse under his watch and then get back in control of the White House and both houses of Congress eight years later. If a progressive presidency had led to similar foreign policy and domestic disasters, the left could look forward to a half-century in the wilderness, maybe longer. 

For this reason, we have to make sure our bites at the apple are all good ones. A huge political battle for a wealth tax that ultimately ended in defeat in Congress or a loss at the Supreme Court would be a disaster. We need battles that are winnable and produce tangible near-term results. There are an infinite number of ways that we can turn to reverse the upward redistribution of the last four decades. This should be the focus of progressive economic policy. 

 
 
 
 

(This post first appeared on my Patreon page.)

Last week the Boston Review (BR) published an exchange on a wealth tax that included a proposal from Berkeley economists Emmanuel Saez and Gabriel Zucman, with a number of responses, including one from me. I was critical of the proposal for both political reasons and because I think avoidance and evasion will be massive problems.

On the political side, in addition to the difficulty of getting a wealth tax through Congress, there is the virtual certainty that the current Supreme Court will rule it unconstitutional. This is not an abstract question of whether a wealth tax should be viewed as constitutional. I realize that many legal scholars have argued that such a tax is not inconsistent with the power to tax granted to Congress by the constitution. This is a very concrete question as to whether the current Supreme Court would rule that a wealth tax is constitutional. I don’t think anyone with a straight face could argue that it would.

We can of course talk about various plans to pack the court, either by adding new justices or through some rotation scheme of judges across federal courts. These may be interesting and worthwhile strategies to pursue against a corrupt court, but if we’re thinking of a timeline of a presidential term in which we hope to get important legislation passed, they are not likely to be helpful. 

Even if we can implement an effective strategy for ending the right-wing lock on the court, it is not likely to be quick enough to allow a measure like a wealth tax to be implemented in the same presidential term. If this is at the center of a progressive president’s agenda, they will have to find a way to get re-elected without passing this important measure. 

My other reason for objecting is that I think a wealth tax will prove very difficult to enforce. We have experience with income taxes and estate taxes. The enforcement of these is far from perfect, but at least the apparatus is in place. We would be starting from scratch with a wealth tax and the rich will have a very strong incentive to avoid or evade it. My guess is that they would be fairly successful, undermining the goal of the tax as well as confidence in the tax system. 

As I pointed in the BR piece, one foolproof mechanism for avoidance is renouncing citizenship. While Saez and Zucman have a 47 percent exit tax as part of their proposal, this would not apply to people who renounce their citizenship before the tax is enacted. In their response, Saez and Zucman suggest that the tax could be imposed even on those who have already left. While they have a good moral argument, as a practical matter, the probability of collecting large amounts of retroactive taxes from someone who has fled to a tax haven does not seem very high. 

Stopping Extreme Wealth at Its Source

While I don’t think a wealth tax is an effective mechanism to contain excessive wealth, I strongly agree with Saez and Zucman that it is a serious problem for both economic and political reasons. However, I have focused my own work on changing the economic structures that allow for the accumulation of extreme wealth. 

I won’t go through the whole story here (this is the point of Rigged [it’s free]), but the basic argument is that over the last four decades we have structured the economy in ways that allow for the accumulation of massive amounts of wealth. There is nothing inevitable about this structuring, we can structure the economy differently so that its benefits are more broadly shared instead of flowing so disproportionately to those at the top.  

My poster child for the impact of the structuring of the economy is Bill Gates. Gates is one of the richest people in the world because we have patent and copyright monopolies. If the government didn’t grant these monopolies, and anyone who wanted to could freely copy Microsoft’s software, Bill Gates would probably still be working for a living.

Patents and copyrights serve a purpose, they provide an incentive for innovation and creative work, but there are other ways to provide these incentives. And even if we decide to use patent and copyright monopolies, they could be shorter and weaker, so that they don’t redistribute so much income to their holders. 

The place where I have spent the most effort combatting these government-granted monopolies is with prescription drugs. This is both where they cause the greatest amount of corruption — think of the opioid crisis, a direct result of the incentive created by patent monopoly prices to push drugs — and where they lead to the most obscene outcomes: people being unable to afford cheap drugs because patent monopolies make them expensive.

The pandemic should provide a great opportunity to challenge patent monopolies in prescription drugs. There is an unprecedented amount of international cooperation, as well as public funding, in the efforts to develop treatments and an effective vaccine against the coronavirus. Given this collective effort, it would be utterly absurd to give the company that happened to be the first to the patent office a monopoly on a treatment or vaccine. 

The only sensible solution is that the drugs and vaccines that are developed through this collective effort be in the public domain so that they can be sold as cheap generics, where the price is the cost of manufacturing and distribution, and a normal profit. We should not be in the position of begging a patent holder to make a drug or vaccine available at an affordable price.

If we could go this route with the coronavirus then it should raise the obvious question of why this should not be the standard practice – publicly funded, open-source research with everything placed in the public domain. And, what is really neat about this approach is that we don’t even have to stop drug companies from pursuing patent-supported research. They would just face the risk that any drugs they do develop will face competition from a drug that is as good or better and selling as a generic at one percent of the price they planned to charge. That risk would likely shut down most patent-supported research very quickly.

The amount at stake here is enormous, as I continually point out. In the case of prescription drugs alone, it is close to $400 billion a year, roughly 20 percent of all corporate profits.

I could be wrong, but it strikes me as a far smaller political lift to say that the government should increase its funding for the development of prescription drugs (we already spend $40 billion a year through NIH), and have everything developed in the public domain, than imposing a wealth tax. And there is no issue of its constitutionality. 

As I point out in Rigged, there are also measures we can do to radically reduce the big fortunes built-in finance, most obviously by imposing a modest financial transaction tax. We can hugely reduce Mark Zuckerberg’s fortune by repealing Section 230 of the Communications Decency Act, thereby subjecting Facebook and other Internet intermediaries to the same legal liabilities as their competitors in traditional media. 

We don’t need to structure our economy in a way that leads to massive inequality. There has been a conscious choice made by those designing policy in the last four decades. Our top priority should be to change this design.

Leveling the Political Playing Field

Saez and Zucman are entirely correct in pointing out that the enormous amount of wealth at the top gives these people hugely outsized political influence. While this is true, we are not going to be able to easily reverse this, even with a wealth tax. Jeff Bezos and Bill Gates could still wield ridiculous amounts of political influence if we managed to tax away half of their wealth.

Our efforts can’t be focused just on bringing the top down, we have to bring everyone else up. Fortunately, there are models for doing this. Seattle gives every voter a $75 voucher to support the candidate(s) of their choice in city council elections. Several cities now have super-matches, where small campaign contributions are matched three or four to one. I have outlined a plan where everyone would have a $100 voucher to support journalism or any other creative work they choose.  

There are many other directions in which these sorts of proposals can be developed, but the point is that, with a relatively small amount of public funds, we can hugely democratize politics, as well as journalism and creative work more generally. Getting more input from those at the middle and bottom is likely to be a far more productive path towards counterbalancing the influence of the rich than trying to take away their money. And, this can be done piecemeal, one city or state at a time. 

Keeping Our Eye on the Ball

In contrast to the right, progressives get relatively few bites at the apple. The right can have a George W. Bush, who lied us into a pointless war in Iraq and then allowed the economy to collapse under his watch and then get back in control of the White House and both houses of Congress eight years later. If a progressive presidency had led to similar foreign policy and domestic disasters, the left could look forward to a half-century in the wilderness, maybe longer. 

For this reason, we have to make sure our bites at the apple are all good ones. A huge political battle for a wealth tax that ultimately ended in defeat in Congress or a loss at the Supreme Court would be a disaster. We need battles that are winnable and produce tangible near-term results. There are an infinite number of ways that we can turn to reverse the upward redistribution of the last four decades. This should be the focus of progressive economic policy. 

 
 
 
 

(I have corrected the numbers in this post in response to a comment by Joe pointing out my mistake.)

Apparently the New York Times thinks we should give this person lots of money or at least that we should hear her argument that we should give her lots of money. Jackie Victor, the owner of a bakery that had employed 135 people is unhappy that the loan she got through the Paycheck Protection Program will only be forgiven for the portion spent on wages, rent, and other limited categories of expenses.

Ms. Victor complains that this money must be spent within 60 days, which apparently is finding difficult to do. The portion not spent on designated expenses over this period is a near zero interest loan that must be paid back over the next 18 months. Ms. Victor thinks this is too short a period of time she wants it to be ten years.

Let’s see how much money Ms. Victor gets under this program. If her workers’ compensation averaged $40,000 a year, then she would be eligible for a loan of $1,225,000 under the program. Let’s say that she is not able to maintain her full staff (she indicates that some do not want to come back to work because of health or family considerations, also demand has fallen sharply).

Suppose she only spends $1 million on salary and the other allowable expenses. This $1 million is then forgiven. It’s a grant. The other $225,000 is a loan on which she will pay 1.0 percent annual interest over the 18 month term of the loan. Let’s say, generously, that she otherwise could have borrowed money at a 4.0 percent interest. This means that we have effectively given her another $6,750 as an interest rate subsidy. That makes the total amount given to Ms. Victor to maintain her business is $1,006,750 or a bit less than 630 food stamp person years.

This may be a reasonable payment in order to keep 135 people employed through this crisis, but if Ms. Victor is not going to keep anywhere near this number of people employed, then perhaps we are paying too much. We have a clear public interest in keeping these bakery workers employed, we have no obvious interest in ensuring that Ms. Victor is able to maintain a profitable business.

The paycheck protection program is appropriately designed to keep workers employed through the crisis. If it doesn’t meet Ms. Victor’s needs for restructuring her business, it is hard to see that as a problem.

 

 

(I have corrected the numbers in this post in response to a comment by Joe pointing out my mistake.)

Apparently the New York Times thinks we should give this person lots of money or at least that we should hear her argument that we should give her lots of money. Jackie Victor, the owner of a bakery that had employed 135 people is unhappy that the loan she got through the Paycheck Protection Program will only be forgiven for the portion spent on wages, rent, and other limited categories of expenses.

Ms. Victor complains that this money must be spent within 60 days, which apparently is finding difficult to do. The portion not spent on designated expenses over this period is a near zero interest loan that must be paid back over the next 18 months. Ms. Victor thinks this is too short a period of time she wants it to be ten years.

Let’s see how much money Ms. Victor gets under this program. If her workers’ compensation averaged $40,000 a year, then she would be eligible for a loan of $1,225,000 under the program. Let’s say that she is not able to maintain her full staff (she indicates that some do not want to come back to work because of health or family considerations, also demand has fallen sharply).

Suppose she only spends $1 million on salary and the other allowable expenses. This $1 million is then forgiven. It’s a grant. The other $225,000 is a loan on which she will pay 1.0 percent annual interest over the 18 month term of the loan. Let’s say, generously, that she otherwise could have borrowed money at a 4.0 percent interest. This means that we have effectively given her another $6,750 as an interest rate subsidy. That makes the total amount given to Ms. Victor to maintain her business is $1,006,750 or a bit less than 630 food stamp person years.

This may be a reasonable payment in order to keep 135 people employed through this crisis, but if Ms. Victor is not going to keep anywhere near this number of people employed, then perhaps we are paying too much. We have a clear public interest in keeping these bakery workers employed, we have no obvious interest in ensuring that Ms. Victor is able to maintain a profitable business.

The paycheck protection program is appropriately designed to keep workers employed through the crisis. If it doesn’t meet Ms. Victor’s needs for restructuring her business, it is hard to see that as a problem.

 

 

I have seen several accounts where people have warned that the recovery of the economy from the shutdown period will be very slow, with China being used as a major point of reference. For example, see this piece in the New York Times. I won’t claim expertise on China’s economy, but the evidence seems to suggest the opposite.

The highlight of this piece is the weak recovery of retail sales which, if I’m reading the chart right, are still 16 percent below year-ago levels, one month after a shutdown ended. Industrial production has almost fully recovered to year-ago levels, although it had been running about 7 percent above year ago levels, so it still has a way to go before getting back to its pre-crisis trend.

The retail sales story actually is not as bleak as indicated. The one-month growth rate was around 6 percent, which would be more than 80 percent on an annual basis. I have no idea if China’s sales will continue to grow at anything like this pace, but recovering 6 percent in a month when many restrictions were still in place does not seem like a bad story.

Also, according to the piece, China did not provide any special stimulus associated with the crisis. In the US, most people are getting $1,200 checks, in addition to $600 weekly bonuses attached to unemployment insurance checks. This should leave consumers in the United States better situated to buy things after a period of shutdown ends.

To be clear, I still expect the economy to be badly hit after the shutdown period is over. As I’ve said, I think the Congressional Budget Office projections that show a 12 percent unemployment rate in the fourth quarter look plausible. But this is still a sharp bounce back from the data that we are likely to see for the current quarter.

I have seen several accounts where people have warned that the recovery of the economy from the shutdown period will be very slow, with China being used as a major point of reference. For example, see this piece in the New York Times. I won’t claim expertise on China’s economy, but the evidence seems to suggest the opposite.

The highlight of this piece is the weak recovery of retail sales which, if I’m reading the chart right, are still 16 percent below year-ago levels, one month after a shutdown ended. Industrial production has almost fully recovered to year-ago levels, although it had been running about 7 percent above year ago levels, so it still has a way to go before getting back to its pre-crisis trend.

The retail sales story actually is not as bleak as indicated. The one-month growth rate was around 6 percent, which would be more than 80 percent on an annual basis. I have no idea if China’s sales will continue to grow at anything like this pace, but recovering 6 percent in a month when many restrictions were still in place does not seem like a bad story.

Also, according to the piece, China did not provide any special stimulus associated with the crisis. In the US, most people are getting $1,200 checks, in addition to $600 weekly bonuses attached to unemployment insurance checks. This should leave consumers in the United States better situated to buy things after a period of shutdown ends.

To be clear, I still expect the economy to be badly hit after the shutdown period is over. As I’ve said, I think the Congressional Budget Office projections that show a 12 percent unemployment rate in the fourth quarter look plausible. But this is still a sharp bounce back from the data that we are likely to see for the current quarter.

Jim Tankersley had a very good piece in the NYT pointing out that those being forced back to work as the economy reopens are mostly lower paid workers, who don’t have the option to telecommute and disproportionately people of color. One important point that was left out is that these workers are also more likely on average to have health conditions, such as diabetes, which hugely increase the risks they face from the coronavirus.

While even relatively healthy people face serious risks from the coronavirus, it poses far greater risks to those who already have health issues. For this reason, the people who are being forced back to work face even greater risk to their health than the virus would pose to the people who have the luxury of being able to stay home.

Jim Tankersley had a very good piece in the NYT pointing out that those being forced back to work as the economy reopens are mostly lower paid workers, who don’t have the option to telecommute and disproportionately people of color. One important point that was left out is that these workers are also more likely on average to have health conditions, such as diabetes, which hugely increase the risks they face from the coronavirus.

While even relatively healthy people face serious risks from the coronavirus, it poses far greater risks to those who already have health issues. For this reason, the people who are being forced back to work face even greater risk to their health than the virus would pose to the people who have the luxury of being able to stay home.

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