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.

That may seem like a silly question. Of course they will know because there are a number of well-funded policy shops that will be spewing out endless papers and columns telling them that they are facing a crushing debt burden. And, because these policy shops are well-funded and well-connected we can be sure that major media outlets, like the New York Times, Washington Post, and National Public Radio, will give their complaints plenty of space.

But let’s imagine a world where our children weren’t constantly being told that they face a crushing debt burden, how would they know? It might be hard if the latest budget projects are close to the mark. The Congressional Budget Office (CBO) just released new projections for the budget and the economy. They show in 2031, the last year in their budget horizon, the interest burden on our debt will be 2.4 percent of GDP. That’s up from current interest costs of 1.4 percent of GDP.[1] That implies an increase in the debt burden, measured by interest costs, of 1.0 percentage points of GDP.

Will an interest burden of 2.4 percent of GDP crush our children? On the face of it, the deficit hawks have a hard case here. The interest burden was over 3.0 percent of GDP for most the early and mid-1990s. And for those who were not around or have forgotten, the 1990s, or at least the second half, was a very prosperous decade. It’s a bit hard to see how an interest burden of 2.4 percent of GDP can be crushing, if burdens of more than 3.0 percent of GDP were not a big problem.

But, the debt burden may be higher than the current projections show. After all, President Biden has proposed a $1.9 trillion pandemic rescue package. He also will have other spending initiatives, and the CBO baseline includes tax increases in current law that may not actually go into effect.

CBO’s latest projections put the debt at $35.3 trillion in 2031. Let’s assume that the rescue package and other issues raise the debt for that year by 10 percent, or $3.5 trillion. This brings the interest burden to 2.7 percent of GDP. That’s still below the 1990s level. Furthermore, insofar as the rescue package and other initiatives are successful in boosting growth, GDP, the denominator in this calculation, will be larger, which will at least partially offset the higher interest burden.

One point the deficit hawks add to this calculation is that interest rates are extraordinarily low at present. CBO does project that interest rates will rise, but in 2031 they still project an interest rate on 10-year Treasury bonds of just 3.0 percent. This is up from 1.1 percent at present but still well below the rates we saw over the 40 years before the Great Recession. It certainly is not impossible that interest rates will rise to 4.0 percent or even 5.0 percent.

Higher rates will mean that the debt poses a greater interest burden, but there are couple of important qualifications that need to be made. First, much of our debt is long-term. The 30-year bond issued in 2021 at a 2.0 percent interest rate doesn’t have to be refinanced until 2051. That means that even if interest rates do rise substantially they will only gradually lead to a substantially higher interest burden.

The other point is that we have to ask about the reason interest rates are rising. It is possible that interest rates will be rising even as the inflation rate remains more or less in line with CBO’s latest projection of around 2.0 percent. In that case, higher interest rates mean a greater burden through time.

However, interest rates may also rise because we see higher than projected inflation. Suppose the inflation rate rises to 3.0 percent, roughly a percentage point higher than projected. If interest rates also rise by a percentage point, so that the interest rate on a 10-year Treasury bond in 2031 is 4.0 percent, instead of 3.0 percent, we would still be looking at the same real interest rate. In that case, the value of the bond would be eroded by an extra 1.0 percentage point annually, due to the impact of higher inflation.

In the case where higher inflation is the reason for higher interest rates, the actual burden of the debt does not change. With nominal GDP growing more rapidly due to the higher inflation, the ratio of debt to GDP would be lower than in the case with lower inflation.[2]  This means that we only need to worry about a higher interest burden if interest rates rise without a corresponding increase in the rate of inflation.

 

What would an additional interest burden of 1.0 percentage point of GDP look like?

 

Suppose that the CBO projections prove to be exactly right. At first glance, this higher interest burden implies that, if the economy is operating near its capacity, we would have to get by having the government spend roughly 1.0 percentage point less of GDP on various programs. This could mean, for example, cuts to spending on education and infrastructure, or the military. Alternatively, it would need to raise taxes by roughly 1.0 percentage point of GDP, or some combination in order to offset the additional interest payments on the debt.

In fact, the first glance story is likely to substantially overstate the impact of this debt burden. The reason we would need to cut spending and/or raise taxes is to keep the economy from overheating. The interest burden increases this risk by increasing the income of bondholders, who then spend more money because of their higher income.

But the bondholders don’t spend all of the interest income they receive, in fact, they might spend a relatively small share. Remember, the people who hold government bonds are disproportionately higher income households, that’s why it is possible to say there is burden from interest payments. If the interest was paid out to all of us equally, then we would just be paying ourselves, as was the case with the pandemic checks, and there would be no burden.[3]

With a large share of interest payments going to the wealthiest households, perhaps 70 cents on a dollar ends up being spent. This is what we have to offset with spending cuts or higher taxes. That means we need to come up with a combination of spending cuts and tax increases that will reduce demand in the economy by 0.7 percent of GDP.

If we did this on the spending side, we would need to cut an amount of spending roughly equal to this amount. In the current economy, 0.7 percent of GDP would come to around $150 billion in spending cuts, roughly 20 percent of the military budget or twice the annual for Food Stamps.

On the tax side, we might be tempted to take it from the wealthy, but we then come to back to the same issue, that the wealthy save much of their income. If we want to reduce the consumption of the wealthy by an amount equal to 0.7 percent, we may have to raise taxes on them by something close to twice this amount, or 1.4 percent of GDP.

Suppose this proves politically impossible, so we end up having to share the higher tax burden more or less evenly across households. This means a tax increase equal to roughly 0.7 percent of people’s incomes. Is this a big deal?

 

Source: Author’s calculations, see text.

The figure above shows the impact of CBO’s projected increase in productivity over the next decade on wages, assuming productivity growth is fully passed on in higher wages. It also shows the 0.7 percent hit from debt burden taxes. As can be seen, the projected wage gains from higher productivity growth are roughly twenty times the “crushing” burden of the debt calculated above. This means that even with a higher tax burden due to the debt we are now building up, workers ten years out should enjoy substantially higher living standards than they do today.

There is the obvious issue that productivity growth does not automatically translate in higher wage growth. While wage growth for the typical worker did track productivity growth from 1947 to 1973, that has not been the case since 1979. Average wage growth did continue to track productivity growth reasonably well in the last four decades, but most of the gains went to high end workers, such as top- level corporate executives and Wall Street types. Typical workers saw little benefit.  

This pattern of upward redistribution of before-tax income could continue for the next decade, which would mean that most workers cannot offset an increased tax burden with higher pay. That would be a very serious problem, but the problem would be the upward redistribution blocking wage growth, not the relatively minor tax increase they might see due to the debt. Anyone generally concerned about the well-being of workers ten years out, or further in the future, should be focused on what is happening to before-tax income, not the relatively modest burden that taxes may pose due to the debt.

This brings up a final issue about burdens. As I have often pointed out, direct spending is only one way the government pays for services. It also grants patent and copyright monopolies to provide incentive for innovation and creative work. By my calculations, these monopolies add more than $1 trillion a year (4.8 percent of GDP) to the cost of a wide range of items, such as prescription drugs, medical equipment, and computer software. The higher prices charged by the companies that own these monopolies are effectively a private tax that the government allows them to impose in exchange for their work. No honest discussion of the burden of government debt can exclude the implicit debt that the government creates with these monopolies.

At the end of the day, we hand down a whole economy and society to future generations. Anyone seriously asking about the well-being of future generations must look at the education and training we have given our children, the physical and social infrastructure, and, of course, the state of the natural environment. The government debt is such a trivial part of this story that is hard to believe that would even be raised in the context of generational equity, if not for the big money folks who want to keep it front and center.

[1] The true debt burden is actually somewhat less than these numbers indicate. Last year the Federal Reserve Board refunded $88 billion, roughly 0.4 percent of GDP, to the Treasury. This was based on interest that it had collected on the bonds it held. In effect, this means that the Treasury paid an amount of interest equal to 0.4 percentage points of GDP to the Fed, which then handed the money right back to the Treasury. That leaves the actual interest burden around 1.0 percent of GDP.

[2] If the economy grows at a 2.0 percent real rate over the next decade, and the inflation rate averages 2.0 percent, then nominal GDP will be 48 percent larger in 2031 than it is today. If it grows at a 2.0 percent real rate and the inflation rate averages 3.0 percent, nominal GDP will be 63 percent larger in 2031 than it is today. With nominal GDP 10 percent larger in 2031 in the case with higher inflation than the case with lower inflation, the same amount of interest would imply a 10 percent lower burden, relative to GDP. Alternatively, to have the same burden relative to GDP, interest payments would have to be 10 percent higher.   

[3] There is an argument that because of the higher levels of government spending that created the debt, we had higher interest rates than would otherwise have been the case. The higher interest rates reduce investment, which means that productivity growth is slower than would otherwise be. Slower productivity would translate into slower GDP growth which would mean the economy is smaller in 2031 than would have been the case if we had lower deficits in 2021. With interest rates at extraordinarily low levels, even as we run very large deficits, it is not clear that many people would want to make this argument.

That may seem like a silly question. Of course they will know because there are a number of well-funded policy shops that will be spewing out endless papers and columns telling them that they are facing a crushing debt burden. And, because these policy shops are well-funded and well-connected we can be sure that major media outlets, like the New York Times, Washington Post, and National Public Radio, will give their complaints plenty of space.

But let’s imagine a world where our children weren’t constantly being told that they face a crushing debt burden, how would they know? It might be hard if the latest budget projects are close to the mark. The Congressional Budget Office (CBO) just released new projections for the budget and the economy. They show in 2031, the last year in their budget horizon, the interest burden on our debt will be 2.4 percent of GDP. That’s up from current interest costs of 1.4 percent of GDP.[1] That implies an increase in the debt burden, measured by interest costs, of 1.0 percentage points of GDP.

Will an interest burden of 2.4 percent of GDP crush our children? On the face of it, the deficit hawks have a hard case here. The interest burden was over 3.0 percent of GDP for most the early and mid-1990s. And for those who were not around or have forgotten, the 1990s, or at least the second half, was a very prosperous decade. It’s a bit hard to see how an interest burden of 2.4 percent of GDP can be crushing, if burdens of more than 3.0 percent of GDP were not a big problem.

But, the debt burden may be higher than the current projections show. After all, President Biden has proposed a $1.9 trillion pandemic rescue package. He also will have other spending initiatives, and the CBO baseline includes tax increases in current law that may not actually go into effect.

CBO’s latest projections put the debt at $35.3 trillion in 2031. Let’s assume that the rescue package and other issues raise the debt for that year by 10 percent, or $3.5 trillion. This brings the interest burden to 2.7 percent of GDP. That’s still below the 1990s level. Furthermore, insofar as the rescue package and other initiatives are successful in boosting growth, GDP, the denominator in this calculation, will be larger, which will at least partially offset the higher interest burden.

One point the deficit hawks add to this calculation is that interest rates are extraordinarily low at present. CBO does project that interest rates will rise, but in 2031 they still project an interest rate on 10-year Treasury bonds of just 3.0 percent. This is up from 1.1 percent at present but still well below the rates we saw over the 40 years before the Great Recession. It certainly is not impossible that interest rates will rise to 4.0 percent or even 5.0 percent.

Higher rates will mean that the debt poses a greater interest burden, but there are couple of important qualifications that need to be made. First, much of our debt is long-term. The 30-year bond issued in 2021 at a 2.0 percent interest rate doesn’t have to be refinanced until 2051. That means that even if interest rates do rise substantially they will only gradually lead to a substantially higher interest burden.

The other point is that we have to ask about the reason interest rates are rising. It is possible that interest rates will be rising even as the inflation rate remains more or less in line with CBO’s latest projection of around 2.0 percent. In that case, higher interest rates mean a greater burden through time.

However, interest rates may also rise because we see higher than projected inflation. Suppose the inflation rate rises to 3.0 percent, roughly a percentage point higher than projected. If interest rates also rise by a percentage point, so that the interest rate on a 10-year Treasury bond in 2031 is 4.0 percent, instead of 3.0 percent, we would still be looking at the same real interest rate. In that case, the value of the bond would be eroded by an extra 1.0 percentage point annually, due to the impact of higher inflation.

In the case where higher inflation is the reason for higher interest rates, the actual burden of the debt does not change. With nominal GDP growing more rapidly due to the higher inflation, the ratio of debt to GDP would be lower than in the case with lower inflation.[2]  This means that we only need to worry about a higher interest burden if interest rates rise without a corresponding increase in the rate of inflation.

 

What would an additional interest burden of 1.0 percentage point of GDP look like?

 

Suppose that the CBO projections prove to be exactly right. At first glance, this higher interest burden implies that, if the economy is operating near its capacity, we would have to get by having the government spend roughly 1.0 percentage point less of GDP on various programs. This could mean, for example, cuts to spending on education and infrastructure, or the military. Alternatively, it would need to raise taxes by roughly 1.0 percentage point of GDP, or some combination in order to offset the additional interest payments on the debt.

In fact, the first glance story is likely to substantially overstate the impact of this debt burden. The reason we would need to cut spending and/or raise taxes is to keep the economy from overheating. The interest burden increases this risk by increasing the income of bondholders, who then spend more money because of their higher income.

But the bondholders don’t spend all of the interest income they receive, in fact, they might spend a relatively small share. Remember, the people who hold government bonds are disproportionately higher income households, that’s why it is possible to say there is burden from interest payments. If the interest was paid out to all of us equally, then we would just be paying ourselves, as was the case with the pandemic checks, and there would be no burden.[3]

With a large share of interest payments going to the wealthiest households, perhaps 70 cents on a dollar ends up being spent. This is what we have to offset with spending cuts or higher taxes. That means we need to come up with a combination of spending cuts and tax increases that will reduce demand in the economy by 0.7 percent of GDP.

If we did this on the spending side, we would need to cut an amount of spending roughly equal to this amount. In the current economy, 0.7 percent of GDP would come to around $150 billion in spending cuts, roughly 20 percent of the military budget or twice the annual for Food Stamps.

On the tax side, we might be tempted to take it from the wealthy, but we then come to back to the same issue, that the wealthy save much of their income. If we want to reduce the consumption of the wealthy by an amount equal to 0.7 percent, we may have to raise taxes on them by something close to twice this amount, or 1.4 percent of GDP.

Suppose this proves politically impossible, so we end up having to share the higher tax burden more or less evenly across households. This means a tax increase equal to roughly 0.7 percent of people’s incomes. Is this a big deal?

 

Source: Author’s calculations, see text.

The figure above shows the impact of CBO’s projected increase in productivity over the next decade on wages, assuming productivity growth is fully passed on in higher wages. It also shows the 0.7 percent hit from debt burden taxes. As can be seen, the projected wage gains from higher productivity growth are roughly twenty times the “crushing” burden of the debt calculated above. This means that even with a higher tax burden due to the debt we are now building up, workers ten years out should enjoy substantially higher living standards than they do today.

There is the obvious issue that productivity growth does not automatically translate in higher wage growth. While wage growth for the typical worker did track productivity growth from 1947 to 1973, that has not been the case since 1979. Average wage growth did continue to track productivity growth reasonably well in the last four decades, but most of the gains went to high end workers, such as top- level corporate executives and Wall Street types. Typical workers saw little benefit.  

This pattern of upward redistribution of before-tax income could continue for the next decade, which would mean that most workers cannot offset an increased tax burden with higher pay. That would be a very serious problem, but the problem would be the upward redistribution blocking wage growth, not the relatively minor tax increase they might see due to the debt. Anyone generally concerned about the well-being of workers ten years out, or further in the future, should be focused on what is happening to before-tax income, not the relatively modest burden that taxes may pose due to the debt.

This brings up a final issue about burdens. As I have often pointed out, direct spending is only one way the government pays for services. It also grants patent and copyright monopolies to provide incentive for innovation and creative work. By my calculations, these monopolies add more than $1 trillion a year (4.8 percent of GDP) to the cost of a wide range of items, such as prescription drugs, medical equipment, and computer software. The higher prices charged by the companies that own these monopolies are effectively a private tax that the government allows them to impose in exchange for their work. No honest discussion of the burden of government debt can exclude the implicit debt that the government creates with these monopolies.

At the end of the day, we hand down a whole economy and society to future generations. Anyone seriously asking about the well-being of future generations must look at the education and training we have given our children, the physical and social infrastructure, and, of course, the state of the natural environment. The government debt is such a trivial part of this story that is hard to believe that would even be raised in the context of generational equity, if not for the big money folks who want to keep it front and center.

[1] The true debt burden is actually somewhat less than these numbers indicate. Last year the Federal Reserve Board refunded $88 billion, roughly 0.4 percent of GDP, to the Treasury. This was based on interest that it had collected on the bonds it held. In effect, this means that the Treasury paid an amount of interest equal to 0.4 percentage points of GDP to the Fed, which then handed the money right back to the Treasury. That leaves the actual interest burden around 1.0 percent of GDP.

[2] If the economy grows at a 2.0 percent real rate over the next decade, and the inflation rate averages 2.0 percent, then nominal GDP will be 48 percent larger in 2031 than it is today. If it grows at a 2.0 percent real rate and the inflation rate averages 3.0 percent, nominal GDP will be 63 percent larger in 2031 than it is today. With nominal GDP 10 percent larger in 2031 in the case with higher inflation than the case with lower inflation, the same amount of interest would imply a 10 percent lower burden, relative to GDP. Alternatively, to have the same burden relative to GDP, interest payments would have to be 10 percent higher.   

[3] There is an argument that because of the higher levels of government spending that created the debt, we had higher interest rates than would otherwise have been the case. The higher interest rates reduce investment, which means that productivity growth is slower than would otherwise be. Slower productivity would translate into slower GDP growth which would mean the economy is smaller in 2031 than would have been the case if we had lower deficits in 2021. With interest rates at extraordinarily low levels, even as we run very large deficits, it is not clear that many people would want to make this argument.

I just read Nicholas Kristof’s column about his childhood friend Mike Stepp. The piece is actually very moving.

Mr. Stepp grew up next door to Kristof. As he explains in the column, he grew up with an abusive father. Their family didn’t value education, so neither Mike or his brother ever finished high school. While previous generations of workers (white male workers) could work in a factory job without a high school degree and still enjoy a middle class standard of living, this was no longer a possibility for Mike. As a result, he struggled with periods of unemployment, low-paying jobs, drug addiction, mental health problems, and homelessness. He ended up dying last year at age 55.

Kristof tells us that Mike was a decent intelligent person who was let down by society. As he explains, we took away the opportunities that had existed for a large segment of the workforce, and did nothing to fill in the gaps:

“Witnessing the torment of people I grew up with, like Mike, has led me to conclude that I was wrong in many of my own views. Like many liberals with a university education and a reliable paycheck, I was too scornful of labor unions, too unreservedly enthusiastic about international trade, too glib about “creative destruction,” too heartless about its toll.”

I would strongly agree with the basic thrust of Kristof’s argument, but I want to ask about what happens to all the people like Kristof who now admits, “I was wrong in many of my own views.”

Just to be clear, I’m not looking for a jihad against Kristof who is both honest enough to admit his error and appears to have genuine compassion for the people who have been victimized by our policies of the last four decades. But Kristof is just one of a very long list of public intellectuals who made this same mistake. They openly, and often belligerently, pushed policies that had very serious negative effects for large segments of the population. While others have also come to recognize their mistake, many still don’t, and continue to blame the victims of their policies for the difficulties they face in life.

I am not going to rehash the arguments about the policies here (see my book Rigged [it’s free], if you want my account), rather I want to make a different point about accountability. Failing to recognize that the devastating impact of the economic policies promoted in the last four decades was a very serious mistake. But is anyone anywhere losing their job for it?

There is no shortage of economists, policy types, and columnists (e.g. Kristof’s colleague at the NYT, Thomas Friedman) who have made this mistake. However, the idea that any of them would face serious career consequences for this sort of massive failure is viewed as absurd. Even to suggest it is seen as mean-spirited vindictiveness.

So, we live in a society where the dishwasher can get fired in a minute for breaking the dishes. The same is the case for the custodian that doesn’t clean the toilet. But the highly paid workers at the top of their profession face no career risk from making huge mistakes with massive consequences for society.

Can I hear the story about meritocracy again?

 

 

I just read Nicholas Kristof’s column about his childhood friend Mike Stepp. The piece is actually very moving.

Mr. Stepp grew up next door to Kristof. As he explains in the column, he grew up with an abusive father. Their family didn’t value education, so neither Mike or his brother ever finished high school. While previous generations of workers (white male workers) could work in a factory job without a high school degree and still enjoy a middle class standard of living, this was no longer a possibility for Mike. As a result, he struggled with periods of unemployment, low-paying jobs, drug addiction, mental health problems, and homelessness. He ended up dying last year at age 55.

Kristof tells us that Mike was a decent intelligent person who was let down by society. As he explains, we took away the opportunities that had existed for a large segment of the workforce, and did nothing to fill in the gaps:

“Witnessing the torment of people I grew up with, like Mike, has led me to conclude that I was wrong in many of my own views. Like many liberals with a university education and a reliable paycheck, I was too scornful of labor unions, too unreservedly enthusiastic about international trade, too glib about “creative destruction,” too heartless about its toll.”

I would strongly agree with the basic thrust of Kristof’s argument, but I want to ask about what happens to all the people like Kristof who now admits, “I was wrong in many of my own views.”

Just to be clear, I’m not looking for a jihad against Kristof who is both honest enough to admit his error and appears to have genuine compassion for the people who have been victimized by our policies of the last four decades. But Kristof is just one of a very long list of public intellectuals who made this same mistake. They openly, and often belligerently, pushed policies that had very serious negative effects for large segments of the population. While others have also come to recognize their mistake, many still don’t, and continue to blame the victims of their policies for the difficulties they face in life.

I am not going to rehash the arguments about the policies here (see my book Rigged [it’s free], if you want my account), rather I want to make a different point about accountability. Failing to recognize that the devastating impact of the economic policies promoted in the last four decades was a very serious mistake. But is anyone anywhere losing their job for it?

There is no shortage of economists, policy types, and columnists (e.g. Kristof’s colleague at the NYT, Thomas Friedman) who have made this mistake. However, the idea that any of them would face serious career consequences for this sort of massive failure is viewed as absurd. Even to suggest it is seen as mean-spirited vindictiveness.

So, we live in a society where the dishwasher can get fired in a minute for breaking the dishes. The same is the case for the custodian that doesn’t clean the toilet. But the highly paid workers at the top of their profession face no career risk from making huge mistakes with massive consequences for society.

Can I hear the story about meritocracy again?

 

 

I already weighed in on Larry Summers’ complaint that the Biden rescue package may overstimulate the economy. As I said, I thought that while he could be right, the risks of going too small were so much greater than the risks of going too big, that it was worth going forward with the Biden package.

One of the points I made in that post was that excessive demand could be siphoned off in the form of a larger trade deficit, thereby limiting the extent to which it creates inflationary pressures in the United States. I  thought I would show the fourth-quarter data on the growth in GDP and the growth in the trade deficit to make this point.

Source: Bureau of Economic Analysis and author’s calculations.

As can be seen, the increase in the trade deficit in the fourth quarter was over 55 percent of the size of the growth in GDP. The point is that excessive GDP growth can quickly be siphoned off in the form of a trade deficit. This is of course not ideal, we would rather see growth in the U.S., but if the economy is really seeing excess demand that it can’t meet, an increased deficit is preferable to an inflationary spiral.

To understand how this can work, imagine that the economy of a particular state is really booming, with extraordinarily low unemployment. We see this on occasion, as for example when a state has an oil boom pushing its unemployment rate to very low levels, and pulling in workers from other states. In such situations, we may see an increase in house prices and the prices of a limited number of services, but we don’t see a wage-price inflationary spiral.

Given our high degree of globalization, even if we did push the economy too far, we are more likely to see something like what happens in a state experiencing an oil boom, rather than the U.S. economy in the 1970s. This supports the case that the downside risks of pushing too far are much smaller than the risk of not pushing far enough. 

I already weighed in on Larry Summers’ complaint that the Biden rescue package may overstimulate the economy. As I said, I thought that while he could be right, the risks of going too small were so much greater than the risks of going too big, that it was worth going forward with the Biden package.

One of the points I made in that post was that excessive demand could be siphoned off in the form of a larger trade deficit, thereby limiting the extent to which it creates inflationary pressures in the United States. I  thought I would show the fourth-quarter data on the growth in GDP and the growth in the trade deficit to make this point.

Source: Bureau of Economic Analysis and author’s calculations.

As can be seen, the increase in the trade deficit in the fourth quarter was over 55 percent of the size of the growth in GDP. The point is that excessive GDP growth can quickly be siphoned off in the form of a trade deficit. This is of course not ideal, we would rather see growth in the U.S., but if the economy is really seeing excess demand that it can’t meet, an increased deficit is preferable to an inflationary spiral.

To understand how this can work, imagine that the economy of a particular state is really booming, with extraordinarily low unemployment. We see this on occasion, as for example when a state has an oil boom pushing its unemployment rate to very low levels, and pulling in workers from other states. In such situations, we may see an increase in house prices and the prices of a limited number of services, but we don’t see a wage-price inflationary spiral.

Given our high degree of globalization, even if we did push the economy too far, we are more likely to see something like what happens in a state experiencing an oil boom, rather than the U.S. economy in the 1970s. This supports the case that the downside risks of pushing too far are much smaller than the risk of not pushing far enough. 

My diatribe in the Nation — the risk of a new Cold War gives us yet another good reason not to be fans of intellectual property.

My diatribe in the Nation — the risk of a new Cold War gives us yet another good reason not to be fans of intellectual property.

I have been dismissive of many of the folks, mostly progressives, who highlight wealth inequality as a measure of overall inequality. As most of us know, the richest people in the country have gotten a lot richer since the start of the pandemic. (Of course, the story isn’t quite as dramatic if we use February of 2020, before the hit from the pandemic, as the base of comparison.) As much as I am not a fan of rich people, this doesn’t especially trouble me.

I have never considered wealth a very good measure of inequality for several reasons.

  • Wealth depends on financial asset values (e.g. stocks and bonds) that fluctuate wildly;
  • Wealth can be a very bad measure of people’s economic circumstances;
  • Wealth and social insurance are very direct substitutes.

There is also the very important issue of wealth translating into political power. I will get into that at the end of this essay.

 

The Fluctuating Value of Wealth

We have seen a sharp run-up in the price of stocks, bonds, and other financial assets in the pandemic, as the Federal Reserve Board pushed short-term interest rates to zero and also sought to lower long-term rates. Since the majority of these assets are held by the richest ten percent of households and close to half are held by the richest one percent, this meant there was a huge rise in wealth inequality. Should this bother us?

I would argue no, first because it is hard to disagree with the merits of the policy. The economy went into a steep recession last spring. Low interest rates have helped sustain demand in the economy since the onset of the pandemic. They have encouraged home buying and new construction. They also encouraged car buying. And millions of people are now saving thousands of dollars in interest payments each year because they were able to refinance their mortgage.

Lower rates also eased the financial situation of state and local governments, who were able to borrow at lower interest rates. They also likely led to somewhat more investment in both the public and private sectors. This is exactly the sort of increase in demand we needed in the economy.

Turning more directly to the wealth issue, Jeff Bezos and Elon Musk have more wealth now than would otherwise be the case, because the short-term interest rate is zero and the long-term rate on U.S. government bonds is around 1.0 percent. Let’s say that’s bad.

Suppose in a year or two, the economy has recovered and the interest rate on long-term bonds is up to something like 3.0 percent. Let’s imagine this knocks stock prices down by 20 percent and the price of bonds by even more.[1] Is everyone happy now?

If wealth inequality is the big evil that we want to combat, then we should be celebrating a drop in the stock market that lessens inequality. Perhaps the opponents of inequality will be out there dancing in the street if the market plunges, but somehow I doubt it. Just as a logical matter, you don’t get to be upset about a rise in the stock market increasing inequality and not then be happy with a fall in the stock market reducing inequality.

For my part, I find it hard to get too upset about fluctuations in wealth that are likely to be temporary. There was not a fundamental change in the structure of the economy that caused the soaring wealth of the last ten months. In all probability, it is a temporary fluctuation that will be reversed. (I’m not making stock market predictions, so I’m not advising everyone to go short.)

 

Wealth as a Measure of Well-Being

If we stacked everyone in the world by wealth, going from richest to poorest, those at the very bottom would be recent graduates of Harvard business and medical school. I’m not kidding. Many of these people have borrowed hundreds of thousands of dollars to pay for their education. Most of them have few if any assets. This means that on net, they are hundreds of thousands of dollars in the hole.

Should we be concerned about these very poor people? Since they are likely to be earning well over $100,000 a year and quite possibly over $200,000 a year, as soon as they start work, it is hard to feel terribly sorry for them.

In fact, many of the poorest people by this wealth measure, both internationally and nationally, are recent graduates who have taken out student loans. While many of these recent grads will have trouble paying off their debts, most won’t.

The number of people with large negative wealth creates silly scenarios where we can say that Jeff Bezos or Elon Musk has more wealth than the bottom 40 percent (or whatever) of the world’s population. That is dramatic, but it also doesn’t mean much.

I probably have more wealth than the bottom 20 percent of the world’s population. That isn’t because of my great wealth, it is simply due to the fact that I have some positive wealth and the bottom 20 percent taken as a whole does not.

Even beyond these theatrics, there is still the problem that student debt makes for calculating well-being. Is a 30-year-old college grad with $20,000 in debt worse off than a high school grad with no debt? The college grad almost certainly has much better earnings prospects, with the difference swamping the $20,000 debt, but if we just looked at wealth, the high school grad is much better off.

But even besides this issue, there is also a more general problem of what counts as wealth. Forty years ago, most middle-income workers (especially men), had traditionally defined benefit pensions. These pensions could typically guarantee these workers a middle-class standard of living in retirement.

Traditional pensions have largely disappeared, especially in the private sector. This means that if a worker hopes to maintain a middle-class standard of living in retirement, they have to accumulate assets in a 401(k) or some other retirement account.

The money in a retirement account is included in standard calculations of wealth. Traditional pensions generally are not. (We can impute values for these pensions, but this is generally not done in most wealth calculations.) This leads to a story where we would say that a person with a 401(k) is much wealthier than a person with a traditional pension, even if they have no better prospects for retirement income.

 

Social Insurance as a Substitute for Wealth

The pension issue is only part of the story, social insurance more generally can be seen as a substitute for wealth. In addition to needing wealth to support income in retirement, we also might need wealth to deal with spells of unemployment, unexpected medical expenses, to pay for their children’s college and to buy a house. Some people also have aspirations of starting a business, which also requires some wealth.

The extent to which wealth is needed in each of these areas depends on how we structure our system of social supports. As noted, a good Social Security and pension system make it unnecessary to accumulate a substantial amount of wealth in retirement. In the case of unemployment, if we have a healthy system of unemployment insurance, most workers can be kept whole through stretches of unemployment.

It’s also worth noting that the wealth accumulated by middle-class people is primarily in their homes. This matters because this wealth is not easily accessible during spells of unemployment. Banks will be reluctant to issue a mortgage or home equity loan to someone who is unemployed. If an unemployed worker is able to borrow at all, they will pay a substantial interest premium on what would be viewed as a risky loan. They would generally be far better off with a strong system of unemployment insurance.  

The same story applies to medical expenses. Bankruptcies due to medical expenses are virtually unheard of in Europe. The reason is these countries have national health insurance systems, which protect the vast majority of the population against major medical expenses.

The provision of a free or low-cost college education also makes it unnecessary to accumulate large amounts of money to pay for their children’s education. Even in a system with largely free public education, some people may still choose to pay the additional cost to send their kids to elite private schools. This sort of inequality in educational opportunity is unfortunate, but the better focus for public policy is ensuring that the public system is high quality and affordable.

In the United States, the vast majority of middle-class households are homeowners. While this does typically allow them to accumulate some wealth, the fact that ownership is a superior form of housing is largely due to our laws that effectively make renters a type of second-class citizen. In countries with stronger protections for renters, most notably Germany, homeownership rates are far lower.

There is nothing intrinsically desirable about homeownership. People want the security of tenure, so they know they can’t just be thrown out of their home on the whim of a landlord. They also want protection against unexpected jumps in rents. Both of these protections can be provided in a legal system that treats renters as full citizens. We actually see this to a limited extent in the United States, where some cities, most notably New York, provide strong rental protections. In these cases, we do see many solidly middle-class (and even affluent) people remain tenants for most of their life.

Beyond just making the point that strong systems of public support reduce the need for wealth in many areas, there is also the concrete matter that the instruments for accumulating wealth tend to divert large amounts of money to the financial sector. To just take the most obvious case, the annual fees on 401(k)s are often over 1.0 percent of the fund’s value.[2] When the fees from managing individual funds within an account are added in, many people pay close to 2.0 percent of their fund’s value to the financial industry each year.

This could mean that a person earning $60,000 a year, who has managed to accumulate $100,000 in a 401(k), is paying $2,000 a year to the financial industry, or more than 3.0 percent of their income. This is money and resources that would be saved if the Social Security system were instead designed to provide them with an adequate retirement income. There is a similar story with wealth being accumulated to meet other needs, such as health care costs and college tuition.

Homeownership may actually be the worst in this respect. The costs associated with buying and then selling a home can easily exceed ten percent of the purchase price. These costs may not be a big deal for a person that stays in the same house for twenty or thirty years, but they are enormous for someone who only lives in a house for two or three years.

If someone buys a house for $300,000 and then sells it two years later for roughly the same price, they will likely pay over $30,000 in realtor commissions, closing costs on a mortgage, title searches and insurance, and other expenses. This comes to $15,000 a year, for expenses that would be completely unnecessary if they had remained a renter through this period. In a society that is structured to favor homeownership, it is understandable that most people would want to be homeowners, but we must recognize that homeownership is not inherently good, and it can be very costly for people who are not in a stable employment or family situation.

It is also worth noting that house prices do sometimes fall, as folks who lived through the collapse of the housing bubble should know well. The idea that the wealth people have in a house will inevitably increase is simply wrong.

Policies to support the accumulation of wealth for low- and middle-income families will almost always be seen as alternatives to policies for better systems of social support. It is clear that the wealth accumulation track is better for the financial industry. The track of stronger social supports is likely to be better for almost everyone else.

Okay, I left out the need for wealth to start a business. This is a case where it is hard to see a system of social supports providing an alternative, although the opportunity for stable employment and protection from unexpected medical expenses and the need to save for retirement and children’s education, should provide opportunities to accumulate some wealth. And, the vast majority of people will actually never try to start their own business.

 

Taxing Wealth

The huge sums accumulated by the country’s wealthiest people have led many progressives to have dreams of the amount of social spending that could be supported with a wealth tax. As I have argued elsewhere, there are serious political, practical, and legal obstacles to implementing a wealth tax. But on this question, there is a more fundamental economic issue.

At the federal level, we need taxes to restrict consumption, not to literally pay the bills. As the Modern Monetary Theory crew reminds us, the government can print as much money as it wants. The limit is that if we create too much demand in the economy, it will lead to inflation. So, we tax to reduce consumption, by reducing the amount of money in people’s pockets.

If we think of the prospects of reducing consumption with a wealth tax, they don’t look very promising. Consider our latest round of incredibly rich people, like Elon Musk, Jeff Bezos, and Mark Zuckerberg, all of whom have over $100 billion in wealth. While I am sure these people all live very well, I doubt they spend substantially more on their own consumption in a year than your typical single-digit billionaire. There are only so many homes you can live in, cars you can drive, trips you take, etc.

This means that if we taxed away 10 percent, 20 percent, or even 50 percent of their wealth, it will have very little impact on their consumption. This means that it will not get us very far in freeing up resources for an expanded social welfare state. We will not be able to pay for Medicare for All or free college by taxing away these people’s wealth, we will have to focus on policies that reduce the consumption of a far larger group of people.

 

Wealth and Political Power

Many of the critics of extreme wealth point out the enormous political power that someone like the Koch brothers can wield because of their immense wealth. The point is well-taken. There can be no doubt that extreme wealth is horribly corrupting of the democratic process. This corruption takes place not only, or even primarily, through the political candidates whose campaigns they support, but through the academic institutions and think tanks they establish or support, and the media outlets they own.  Many intellectually bankrupt ideas, like trickle-down economics, have survived and even thrived because deep-pocketed people were willing to support them in academia, policy circles, and the media.

But this diagnosis of the problem doesn’t mean that an attack on extreme wealth is the best solution. Suppose we cut the wealth of the richest 1,000 people in half. They would still be able to exercise a ridiculously outsize influence on the country’s politics.

The Koch brothers (or the surviving brother) with $25 billion would still have enough money to support all sorts of right-wing think tanks and issue groups. The same is true for the rest of this group. We don’t have a plausible path where we can hope to seriously limit their influence by reducing their wealth in any reasonable time-frame.

To my mind, a much more plausible route is to go in the opposite direction by increasing the voice of ordinary people. There are concrete steps that can be taken that go far here. The super-matches for campaign contributions that several cities have put in place and are part of the last Congress’s HR1 political rights bill are a great start. These proposals match small-dollar contributions by many multiples (HR1 puts the match at six to one) in exchange for candidates limiting their big-dollar contributions.

Seattle has gone a step further in giving its residents $75 “democracy vouchers” that can be donated to any candidate who agrees to limits on big-dollar contributions. The Seattle model can actually be taken a step further in providing tax credits for people to support journalism and creative work more generally. A modest tax credit applied nationwide, can provide an enormous amount of money to support creative work, including newspapers, radio, and television outlets, as well as think tanks and unaffiliated academics. This credit would ideally be put in place nationally but can be done at the state or even local level, as Seattle has done with its democracy voucher.

This will not allow for average people to outspend the billionaires, but it can ensure that they can have a serious voice in public debates. That is probably the best that we can hope for in the foreseeable future.

 

Big Wealth is a Big Distraction

To sum up, I would argue that the focus on the enormous fortunes of Elon Musk, Jeff Bezos, and others is an enormous distraction. It certainly is not good news to see the already incredibly rich get even richer, but wealth inequality should not be the main focus of progressives. The extent to which they actually drain resources from the economy is not well-measured by their wealth. And, we don’t have a plausible path for reining in their political power by reducing their wealth. The more promising path is by increasing the voice of everyone else.   

[1] Bond prices move inversely with interest rates.

[2] Typically, the insurance company or brokerage house managing a 401(k) charges a fee just to hold your money. That averages around 1.0 percent. However, the individual funds in which people invest their money, such as a stock fund or a bond fund, also have fees. For index funds, these fees tend to be low, usually between 0.1-0.2 percent. However, some actively traded funds charge considerably higher fees, sometimes exceeding 1.0 percent.   

I have been dismissive of many of the folks, mostly progressives, who highlight wealth inequality as a measure of overall inequality. As most of us know, the richest people in the country have gotten a lot richer since the start of the pandemic. (Of course, the story isn’t quite as dramatic if we use February of 2020, before the hit from the pandemic, as the base of comparison.) As much as I am not a fan of rich people, this doesn’t especially trouble me.

I have never considered wealth a very good measure of inequality for several reasons.

  • Wealth depends on financial asset values (e.g. stocks and bonds) that fluctuate wildly;
  • Wealth can be a very bad measure of people’s economic circumstances;
  • Wealth and social insurance are very direct substitutes.

There is also the very important issue of wealth translating into political power. I will get into that at the end of this essay.

 

The Fluctuating Value of Wealth

We have seen a sharp run-up in the price of stocks, bonds, and other financial assets in the pandemic, as the Federal Reserve Board pushed short-term interest rates to zero and also sought to lower long-term rates. Since the majority of these assets are held by the richest ten percent of households and close to half are held by the richest one percent, this meant there was a huge rise in wealth inequality. Should this bother us?

I would argue no, first because it is hard to disagree with the merits of the policy. The economy went into a steep recession last spring. Low interest rates have helped sustain demand in the economy since the onset of the pandemic. They have encouraged home buying and new construction. They also encouraged car buying. And millions of people are now saving thousands of dollars in interest payments each year because they were able to refinance their mortgage.

Lower rates also eased the financial situation of state and local governments, who were able to borrow at lower interest rates. They also likely led to somewhat more investment in both the public and private sectors. This is exactly the sort of increase in demand we needed in the economy.

Turning more directly to the wealth issue, Jeff Bezos and Elon Musk have more wealth now than would otherwise be the case, because the short-term interest rate is zero and the long-term rate on U.S. government bonds is around 1.0 percent. Let’s say that’s bad.

Suppose in a year or two, the economy has recovered and the interest rate on long-term bonds is up to something like 3.0 percent. Let’s imagine this knocks stock prices down by 20 percent and the price of bonds by even more.[1] Is everyone happy now?

If wealth inequality is the big evil that we want to combat, then we should be celebrating a drop in the stock market that lessens inequality. Perhaps the opponents of inequality will be out there dancing in the street if the market plunges, but somehow I doubt it. Just as a logical matter, you don’t get to be upset about a rise in the stock market increasing inequality and not then be happy with a fall in the stock market reducing inequality.

For my part, I find it hard to get too upset about fluctuations in wealth that are likely to be temporary. There was not a fundamental change in the structure of the economy that caused the soaring wealth of the last ten months. In all probability, it is a temporary fluctuation that will be reversed. (I’m not making stock market predictions, so I’m not advising everyone to go short.)

 

Wealth as a Measure of Well-Being

If we stacked everyone in the world by wealth, going from richest to poorest, those at the very bottom would be recent graduates of Harvard business and medical school. I’m not kidding. Many of these people have borrowed hundreds of thousands of dollars to pay for their education. Most of them have few if any assets. This means that on net, they are hundreds of thousands of dollars in the hole.

Should we be concerned about these very poor people? Since they are likely to be earning well over $100,000 a year and quite possibly over $200,000 a year, as soon as they start work, it is hard to feel terribly sorry for them.

In fact, many of the poorest people by this wealth measure, both internationally and nationally, are recent graduates who have taken out student loans. While many of these recent grads will have trouble paying off their debts, most won’t.

The number of people with large negative wealth creates silly scenarios where we can say that Jeff Bezos or Elon Musk has more wealth than the bottom 40 percent (or whatever) of the world’s population. That is dramatic, but it also doesn’t mean much.

I probably have more wealth than the bottom 20 percent of the world’s population. That isn’t because of my great wealth, it is simply due to the fact that I have some positive wealth and the bottom 20 percent taken as a whole does not.

Even beyond these theatrics, there is still the problem that student debt makes for calculating well-being. Is a 30-year-old college grad with $20,000 in debt worse off than a high school grad with no debt? The college grad almost certainly has much better earnings prospects, with the difference swamping the $20,000 debt, but if we just looked at wealth, the high school grad is much better off.

But even besides this issue, there is also a more general problem of what counts as wealth. Forty years ago, most middle-income workers (especially men), had traditionally defined benefit pensions. These pensions could typically guarantee these workers a middle-class standard of living in retirement.

Traditional pensions have largely disappeared, especially in the private sector. This means that if a worker hopes to maintain a middle-class standard of living in retirement, they have to accumulate assets in a 401(k) or some other retirement account.

The money in a retirement account is included in standard calculations of wealth. Traditional pensions generally are not. (We can impute values for these pensions, but this is generally not done in most wealth calculations.) This leads to a story where we would say that a person with a 401(k) is much wealthier than a person with a traditional pension, even if they have no better prospects for retirement income.

 

Social Insurance as a Substitute for Wealth

The pension issue is only part of the story, social insurance more generally can be seen as a substitute for wealth. In addition to needing wealth to support income in retirement, we also might need wealth to deal with spells of unemployment, unexpected medical expenses, to pay for their children’s college and to buy a house. Some people also have aspirations of starting a business, which also requires some wealth.

The extent to which wealth is needed in each of these areas depends on how we structure our system of social supports. As noted, a good Social Security and pension system make it unnecessary to accumulate a substantial amount of wealth in retirement. In the case of unemployment, if we have a healthy system of unemployment insurance, most workers can be kept whole through stretches of unemployment.

It’s also worth noting that the wealth accumulated by middle-class people is primarily in their homes. This matters because this wealth is not easily accessible during spells of unemployment. Banks will be reluctant to issue a mortgage or home equity loan to someone who is unemployed. If an unemployed worker is able to borrow at all, they will pay a substantial interest premium on what would be viewed as a risky loan. They would generally be far better off with a strong system of unemployment insurance.  

The same story applies to medical expenses. Bankruptcies due to medical expenses are virtually unheard of in Europe. The reason is these countries have national health insurance systems, which protect the vast majority of the population against major medical expenses.

The provision of a free or low-cost college education also makes it unnecessary to accumulate large amounts of money to pay for their children’s education. Even in a system with largely free public education, some people may still choose to pay the additional cost to send their kids to elite private schools. This sort of inequality in educational opportunity is unfortunate, but the better focus for public policy is ensuring that the public system is high quality and affordable.

In the United States, the vast majority of middle-class households are homeowners. While this does typically allow them to accumulate some wealth, the fact that ownership is a superior form of housing is largely due to our laws that effectively make renters a type of second-class citizen. In countries with stronger protections for renters, most notably Germany, homeownership rates are far lower.

There is nothing intrinsically desirable about homeownership. People want the security of tenure, so they know they can’t just be thrown out of their home on the whim of a landlord. They also want protection against unexpected jumps in rents. Both of these protections can be provided in a legal system that treats renters as full citizens. We actually see this to a limited extent in the United States, where some cities, most notably New York, provide strong rental protections. In these cases, we do see many solidly middle-class (and even affluent) people remain tenants for most of their life.

Beyond just making the point that strong systems of public support reduce the need for wealth in many areas, there is also the concrete matter that the instruments for accumulating wealth tend to divert large amounts of money to the financial sector. To just take the most obvious case, the annual fees on 401(k)s are often over 1.0 percent of the fund’s value.[2] When the fees from managing individual funds within an account are added in, many people pay close to 2.0 percent of their fund’s value to the financial industry each year.

This could mean that a person earning $60,000 a year, who has managed to accumulate $100,000 in a 401(k), is paying $2,000 a year to the financial industry, or more than 3.0 percent of their income. This is money and resources that would be saved if the Social Security system were instead designed to provide them with an adequate retirement income. There is a similar story with wealth being accumulated to meet other needs, such as health care costs and college tuition.

Homeownership may actually be the worst in this respect. The costs associated with buying and then selling a home can easily exceed ten percent of the purchase price. These costs may not be a big deal for a person that stays in the same house for twenty or thirty years, but they are enormous for someone who only lives in a house for two or three years.

If someone buys a house for $300,000 and then sells it two years later for roughly the same price, they will likely pay over $30,000 in realtor commissions, closing costs on a mortgage, title searches and insurance, and other expenses. This comes to $15,000 a year, for expenses that would be completely unnecessary if they had remained a renter through this period. In a society that is structured to favor homeownership, it is understandable that most people would want to be homeowners, but we must recognize that homeownership is not inherently good, and it can be very costly for people who are not in a stable employment or family situation.

It is also worth noting that house prices do sometimes fall, as folks who lived through the collapse of the housing bubble should know well. The idea that the wealth people have in a house will inevitably increase is simply wrong.

Policies to support the accumulation of wealth for low- and middle-income families will almost always be seen as alternatives to policies for better systems of social support. It is clear that the wealth accumulation track is better for the financial industry. The track of stronger social supports is likely to be better for almost everyone else.

Okay, I left out the need for wealth to start a business. This is a case where it is hard to see a system of social supports providing an alternative, although the opportunity for stable employment and protection from unexpected medical expenses and the need to save for retirement and children’s education, should provide opportunities to accumulate some wealth. And, the vast majority of people will actually never try to start their own business.

 

Taxing Wealth

The huge sums accumulated by the country’s wealthiest people have led many progressives to have dreams of the amount of social spending that could be supported with a wealth tax. As I have argued elsewhere, there are serious political, practical, and legal obstacles to implementing a wealth tax. But on this question, there is a more fundamental economic issue.

At the federal level, we need taxes to restrict consumption, not to literally pay the bills. As the Modern Monetary Theory crew reminds us, the government can print as much money as it wants. The limit is that if we create too much demand in the economy, it will lead to inflation. So, we tax to reduce consumption, by reducing the amount of money in people’s pockets.

If we think of the prospects of reducing consumption with a wealth tax, they don’t look very promising. Consider our latest round of incredibly rich people, like Elon Musk, Jeff Bezos, and Mark Zuckerberg, all of whom have over $100 billion in wealth. While I am sure these people all live very well, I doubt they spend substantially more on their own consumption in a year than your typical single-digit billionaire. There are only so many homes you can live in, cars you can drive, trips you take, etc.

This means that if we taxed away 10 percent, 20 percent, or even 50 percent of their wealth, it will have very little impact on their consumption. This means that it will not get us very far in freeing up resources for an expanded social welfare state. We will not be able to pay for Medicare for All or free college by taxing away these people’s wealth, we will have to focus on policies that reduce the consumption of a far larger group of people.

 

Wealth and Political Power

Many of the critics of extreme wealth point out the enormous political power that someone like the Koch brothers can wield because of their immense wealth. The point is well-taken. There can be no doubt that extreme wealth is horribly corrupting of the democratic process. This corruption takes place not only, or even primarily, through the political candidates whose campaigns they support, but through the academic institutions and think tanks they establish or support, and the media outlets they own.  Many intellectually bankrupt ideas, like trickle-down economics, have survived and even thrived because deep-pocketed people were willing to support them in academia, policy circles, and the media.

But this diagnosis of the problem doesn’t mean that an attack on extreme wealth is the best solution. Suppose we cut the wealth of the richest 1,000 people in half. They would still be able to exercise a ridiculously outsize influence on the country’s politics.

The Koch brothers (or the surviving brother) with $25 billion would still have enough money to support all sorts of right-wing think tanks and issue groups. The same is true for the rest of this group. We don’t have a plausible path where we can hope to seriously limit their influence by reducing their wealth in any reasonable time-frame.

To my mind, a much more plausible route is to go in the opposite direction by increasing the voice of ordinary people. There are concrete steps that can be taken that go far here. The super-matches for campaign contributions that several cities have put in place and are part of the last Congress’s HR1 political rights bill are a great start. These proposals match small-dollar contributions by many multiples (HR1 puts the match at six to one) in exchange for candidates limiting their big-dollar contributions.

Seattle has gone a step further in giving its residents $75 “democracy vouchers” that can be donated to any candidate who agrees to limits on big-dollar contributions. The Seattle model can actually be taken a step further in providing tax credits for people to support journalism and creative work more generally. A modest tax credit applied nationwide, can provide an enormous amount of money to support creative work, including newspapers, radio, and television outlets, as well as think tanks and unaffiliated academics. This credit would ideally be put in place nationally but can be done at the state or even local level, as Seattle has done with its democracy voucher.

This will not allow for average people to outspend the billionaires, but it can ensure that they can have a serious voice in public debates. That is probably the best that we can hope for in the foreseeable future.

 

Big Wealth is a Big Distraction

To sum up, I would argue that the focus on the enormous fortunes of Elon Musk, Jeff Bezos, and others is an enormous distraction. It certainly is not good news to see the already incredibly rich get even richer, but wealth inequality should not be the main focus of progressives. The extent to which they actually drain resources from the economy is not well-measured by their wealth. And, we don’t have a plausible path for reining in their political power by reducing their wealth. The more promising path is by increasing the voice of everyone else.   

[1] Bond prices move inversely with interest rates.

[2] Typically, the insurance company or brokerage house managing a 401(k) charges a fee just to hold your money. That averages around 1.0 percent. However, the individual funds in which people invest their money, such as a stock fund or a bond fund, also have fees. For index funds, these fees tend to be low, usually between 0.1-0.2 percent. However, some actively traded funds charge considerably higher fees, sometimes exceeding 1.0 percent.   

It seems that Larry Summers is worried that the stimulus proposed by President Biden is too large. I will say at the onset that he could be right. However, at the most fundamental level, we have to ask what the relative risks are of too much relative to too little.

If we actually are pushing the economy too hard, the argument would be that we would see serious inflationary pressures, which could result in the sort of wage-price spiral we saw in the 1970s. As someone who lived through the 1970s, it actually wasn’t that horrible.

Okay, the fashions and hairstyles might have been horrible, and I was never a fan of disco, but the period as a whole wasn’t that bad. We didn’t have mass starvation and homelessness, but yes, the inflation of the decade was definitely a problem and we would not want to see something similar in this decade. 

But will the Biden stimulus really cause us to see a 1970s-type wage-price spiral? That seems hard to imagine. We have not seen serious problems with inflation for many decades. Here’s the picture going back to the late 1990s using the personal consumption expenditure deflator, the Fed’s preferred index.

As can be seen, the only period where it is above the Fed’s 2.0 percent target (remember, this target is an average) is 2006 and 2007, and even then it is only modestly above 2.0 percent, with no clear upward trend. There is zero evidence of anything like an inflationary spiral in these data. Again, that doesn’t mean it is impossible, just that we haven’t seen anything like it for a long time.

It is also is worth noting that the Congressional Budget Office has consistently underestimated the economy’s potential level of output. Back in the early days of the recovery from the Great Recession, it had put the non-accelerating inflation rate of unemployment (NAIRU) — effectively the floor on sustainable unemployment — at more than 5.0 percent. We had the unemployment rate down to 3.5 percent in 2019, before the pandemic hit, and there was zero evidence of accelerating inflation. In fact, wage growth actually slowed slightly in the months immediately before the pandemic hit.

Next, it is worth asking a few questions about Summers’ calculations. He seems to be treating the $1.9 trillion as spending that will all take place this year. That is clearly not the case. For example, the $120 billion for the expanded child tax credit likely will not be paid out until 2022, when people file their tax returns unless Congress alters the way these credits are paid. The same is true of the expanded Earned Income Tax Credit. State and local governments surely will not spend the full $350 billion allocated to make up for their recession hit in 2021.

It is also worth noting that a large portion of the pandemic checks are likely to be saved, at least insofar as they go to higher-income households. And, much of the spending on expanded unemployment benefits won’t be paid out at all, if the economy recovers quickly as Summers suggests and we all hope. So, there is much less by way of stimulus there than meets the eye.

Another point arguing against excessive stimulus is the story with our trade deficit. Summers oddly points to the “weakness of the dollar.” This is a strange point since the dollar is actually stronger than it was in 2009, his point of comparison. Furthermore, with our trading partners much less interested in stimulus than President Biden, it is likely that the trade deficit will expand in 2021, dampening growth, as the U.S. economy grows more rapidly than the economies of our trading partners.

Finally, Summers is rightly concerned about long-term prospects and complains that this package lacks money for investment. While Biden has pledged a rebuilding package that will be focused on investment, in fact, much of this spending can rightly be thought of as investment. The $350 billion for state and local governments is not designated as investment, but surely much of this money will go for infrastructure and education, spending that should be counted as investment. Also, we have enough evidence about poverty and children’s educational outcomes and subsequent labor market experience that we should think of the child tax credit, at least for lower-income families, as investment.

In short, Summer’s does raise a very reasonable concern, but there is so much upside to this package, with comparatively small downside risk, that it definitely seems worth the gamble.

It seems that Larry Summers is worried that the stimulus proposed by President Biden is too large. I will say at the onset that he could be right. However, at the most fundamental level, we have to ask what the relative risks are of too much relative to too little.

If we actually are pushing the economy too hard, the argument would be that we would see serious inflationary pressures, which could result in the sort of wage-price spiral we saw in the 1970s. As someone who lived through the 1970s, it actually wasn’t that horrible.

Okay, the fashions and hairstyles might have been horrible, and I was never a fan of disco, but the period as a whole wasn’t that bad. We didn’t have mass starvation and homelessness, but yes, the inflation of the decade was definitely a problem and we would not want to see something similar in this decade. 

But will the Biden stimulus really cause us to see a 1970s-type wage-price spiral? That seems hard to imagine. We have not seen serious problems with inflation for many decades. Here’s the picture going back to the late 1990s using the personal consumption expenditure deflator, the Fed’s preferred index.

As can be seen, the only period where it is above the Fed’s 2.0 percent target (remember, this target is an average) is 2006 and 2007, and even then it is only modestly above 2.0 percent, with no clear upward trend. There is zero evidence of anything like an inflationary spiral in these data. Again, that doesn’t mean it is impossible, just that we haven’t seen anything like it for a long time.

It is also is worth noting that the Congressional Budget Office has consistently underestimated the economy’s potential level of output. Back in the early days of the recovery from the Great Recession, it had put the non-accelerating inflation rate of unemployment (NAIRU) — effectively the floor on sustainable unemployment — at more than 5.0 percent. We had the unemployment rate down to 3.5 percent in 2019, before the pandemic hit, and there was zero evidence of accelerating inflation. In fact, wage growth actually slowed slightly in the months immediately before the pandemic hit.

Next, it is worth asking a few questions about Summers’ calculations. He seems to be treating the $1.9 trillion as spending that will all take place this year. That is clearly not the case. For example, the $120 billion for the expanded child tax credit likely will not be paid out until 2022, when people file their tax returns unless Congress alters the way these credits are paid. The same is true of the expanded Earned Income Tax Credit. State and local governments surely will not spend the full $350 billion allocated to make up for their recession hit in 2021.

It is also worth noting that a large portion of the pandemic checks are likely to be saved, at least insofar as they go to higher-income households. And, much of the spending on expanded unemployment benefits won’t be paid out at all, if the economy recovers quickly as Summers suggests and we all hope. So, there is much less by way of stimulus there than meets the eye.

Another point arguing against excessive stimulus is the story with our trade deficit. Summers oddly points to the “weakness of the dollar.” This is a strange point since the dollar is actually stronger than it was in 2009, his point of comparison. Furthermore, with our trading partners much less interested in stimulus than President Biden, it is likely that the trade deficit will expand in 2021, dampening growth, as the U.S. economy grows more rapidly than the economies of our trading partners.

Finally, Summers is rightly concerned about long-term prospects and complains that this package lacks money for investment. While Biden has pledged a rebuilding package that will be focused on investment, in fact, much of this spending can rightly be thought of as investment. The $350 billion for state and local governments is not designated as investment, but surely much of this money will go for infrastructure and education, spending that should be counted as investment. Also, we have enough evidence about poverty and children’s educational outcomes and subsequent labor market experience that we should think of the child tax credit, at least for lower-income families, as investment.

In short, Summer’s does raise a very reasonable concern, but there is so much upside to this package, with comparatively small downside risk, that it definitely seems worth the gamble.

Neil Irwin had an interesting piece reporting on returns to investors who just held stock index funds over long periods of time. The point of the piece is that people who just held an index, rather than trying to speculate on individual stocks, have seen very healthy returns over the last three decades.

While the basic point is well-taken (most people will lose money by trading, both because they tend not to make the right calls on average and because of the fees associated with trading), there is an important qualification that should be made. Future returns over any long period will depend on the market’s current valuation relative to corporate earnings. This means that in periods where price-to-earnings ratios are high, we can anticipate lower future returns.

Irwin sort of notes this point when he comments that the real (inflation-adjusted) returns for someone who bought in at the peak of the 1990s stock bubble would have averaged just 5.0 percent. This point was not widely recognized at the time. Many of the great minds of the economics profession (e.g. Larry Summers and Martin Feldstein) wanted to put Social Security money in the stock market with an expectation of getting 7.0 percent real returns. (Some of us at the time tried to show why this was not possible given the stock valuations at the time.)

Even the 5.0 percent real return was only possible because of a shift in income from labor to capital during the weak labor market of the Great Recession and a large cut in corporate taxes. The Trump tax cut in 2017 effectively increased after-tax profits by 12 percent. This means, at the same price-to-earnings ratio, stock prices are 12 percent higher than would otherwise be the case, which translates into an increase in stock returns over a 20-year period of roughly 0.5 percentage points annually.

This story is relevant today since price-to-earnings ratios are again extraordinarily high. Robert Shiller’s cyclically adjusted price-to-earnings ratio is now at 33.7. This is below the peak of 45.5 hit in 2000, but still close to twice the long-term average. It is also worth noting that his cyclical adjustment, which compares current market capitalization to the prior ten years’ profits, will understate the PE in a period of slow growth relative to a period of rapid growth. From 1990 to 2000 the economy grew at an average nominal rate of  5.6 percent. By contrast, it has grown at just a 3.5 percent average nominal rate over the last decade. (Nominal GDP is the appropriate measure here since Shiller’s ratio is calculated using nominal numbers.) Adjusting for this difference in growth, the PE today would be very comparable to what it was at the peak of the 1990s stock bubble (in 2000).

This means that investors in stock indexes can expect relatively low returns going forward, especially if some or all of the corporate tax cut put in place under Donald Trump is repealed. That doesn’t mean it is necessarily bad to invest in a stock index, but the returns may not be quite what some people would expect.

Neil Irwin had an interesting piece reporting on returns to investors who just held stock index funds over long periods of time. The point of the piece is that people who just held an index, rather than trying to speculate on individual stocks, have seen very healthy returns over the last three decades.

While the basic point is well-taken (most people will lose money by trading, both because they tend not to make the right calls on average and because of the fees associated with trading), there is an important qualification that should be made. Future returns over any long period will depend on the market’s current valuation relative to corporate earnings. This means that in periods where price-to-earnings ratios are high, we can anticipate lower future returns.

Irwin sort of notes this point when he comments that the real (inflation-adjusted) returns for someone who bought in at the peak of the 1990s stock bubble would have averaged just 5.0 percent. This point was not widely recognized at the time. Many of the great minds of the economics profession (e.g. Larry Summers and Martin Feldstein) wanted to put Social Security money in the stock market with an expectation of getting 7.0 percent real returns. (Some of us at the time tried to show why this was not possible given the stock valuations at the time.)

Even the 5.0 percent real return was only possible because of a shift in income from labor to capital during the weak labor market of the Great Recession and a large cut in corporate taxes. The Trump tax cut in 2017 effectively increased after-tax profits by 12 percent. This means, at the same price-to-earnings ratio, stock prices are 12 percent higher than would otherwise be the case, which translates into an increase in stock returns over a 20-year period of roughly 0.5 percentage points annually.

This story is relevant today since price-to-earnings ratios are again extraordinarily high. Robert Shiller’s cyclically adjusted price-to-earnings ratio is now at 33.7. This is below the peak of 45.5 hit in 2000, but still close to twice the long-term average. It is also worth noting that his cyclical adjustment, which compares current market capitalization to the prior ten years’ profits, will understate the PE in a period of slow growth relative to a period of rapid growth. From 1990 to 2000 the economy grew at an average nominal rate of  5.6 percent. By contrast, it has grown at just a 3.5 percent average nominal rate over the last decade. (Nominal GDP is the appropriate measure here since Shiller’s ratio is calculated using nominal numbers.) Adjusting for this difference in growth, the PE today would be very comparable to what it was at the peak of the 1990s stock bubble (in 2000).

This means that investors in stock indexes can expect relatively low returns going forward, especially if some or all of the corporate tax cut put in place under Donald Trump is repealed. That doesn’t mean it is necessarily bad to invest in a stock index, but the returns may not be quite what some people would expect.

I have written repeatedly on how we should have been looking for a collective solution to the pandemic, where countries open-source their research and allow anyone with manufacturing capacity to produce any treatment, test, or vaccine. (We pay upfront, like with Moderna, for those wondering why anyone would do the work.) Anyhow, we obviously did not go that route under Donald Trump.

Along with many others, I have argued that we should still go this route, sharing all our technology freely, as has been proposed in a WTO resolution put forward by India and South Africa. The U.S. and most European countries have vigorously opposed this measure thus far.

A main argument in the case of vaccines is that the mRNA vaccines (Pfizer and Moderna — the only two approved thus far in the U.S.) involve complex manufacturing processes that cannot easily be replicated. While this is undoubtedly in part true, these vaccines did not exist back in March, yet the companies were able to produce large quantities of their vaccines by October, which suggests that if we started today, we could hugely increase output by October or sooner. Since few people think the worldwide pandemic will be over this year, that still sounds like something worth doing, even if does take eight months to get up and running.

Let’s take the claims about the complexity of the production process for the mRNA vaccines at face value. There is a huge urgency to getting the pandemic under control as quickly as possible. The more the virus spreads, the more it has the opportunity to mutate. It is entirely possible that it will mutate into a strain that is either resistant to the current vaccines, more deadly, or both.

This means that even apart from humanitarian concerns, we have a very strong interest in getting the world vaccinated as quickly as possible to minimize the spread. If our team can’t produce enough vaccines to do the job, as they so energetically insist, then we should turn elsewhere. The obvious alternative would be the two Chinese vaccines, which rely on the old-fashioned dead virus approach. Additional facilities to manufacture these vaccines can presumably be built relatively quickly.

While these vaccines appear to be less effective (they need to be more open with their data), the effectiveness rates reported would still hugely slow the spread. They also would radically reduce the number of severe cases, hospitalizations, and deaths. 

Given the urgency in getting people vaccinated, it seems we should be paying these Chinese manufacturers to ramp up production as quickly as possible. One of the Chinese manufacturers contracted with Brazil to sell its vaccine at a bit more than $2 a dose. Suppose we needed 10 billion doses to vaccinate 5 billion people in the developing world. That would come to $20 billion. That is chump change compared to the trillions of dollars of lost output suffered by the U.S., Europe, and the rest of the world as a result of the pandemic. That is in addition to the millions of lives.

The bottom line is that we need to get people throughout the world vaccinated as quickly as possible. If our manufacturers are not up to the task, we should pay China or anyone else who is. Given the relative cost and benefits, this really should not be a hard call.

I have written repeatedly on how we should have been looking for a collective solution to the pandemic, where countries open-source their research and allow anyone with manufacturing capacity to produce any treatment, test, or vaccine. (We pay upfront, like with Moderna, for those wondering why anyone would do the work.) Anyhow, we obviously did not go that route under Donald Trump.

Along with many others, I have argued that we should still go this route, sharing all our technology freely, as has been proposed in a WTO resolution put forward by India and South Africa. The U.S. and most European countries have vigorously opposed this measure thus far.

A main argument in the case of vaccines is that the mRNA vaccines (Pfizer and Moderna — the only two approved thus far in the U.S.) involve complex manufacturing processes that cannot easily be replicated. While this is undoubtedly in part true, these vaccines did not exist back in March, yet the companies were able to produce large quantities of their vaccines by October, which suggests that if we started today, we could hugely increase output by October or sooner. Since few people think the worldwide pandemic will be over this year, that still sounds like something worth doing, even if does take eight months to get up and running.

Let’s take the claims about the complexity of the production process for the mRNA vaccines at face value. There is a huge urgency to getting the pandemic under control as quickly as possible. The more the virus spreads, the more it has the opportunity to mutate. It is entirely possible that it will mutate into a strain that is either resistant to the current vaccines, more deadly, or both.

This means that even apart from humanitarian concerns, we have a very strong interest in getting the world vaccinated as quickly as possible to minimize the spread. If our team can’t produce enough vaccines to do the job, as they so energetically insist, then we should turn elsewhere. The obvious alternative would be the two Chinese vaccines, which rely on the old-fashioned dead virus approach. Additional facilities to manufacture these vaccines can presumably be built relatively quickly.

While these vaccines appear to be less effective (they need to be more open with their data), the effectiveness rates reported would still hugely slow the spread. They also would radically reduce the number of severe cases, hospitalizations, and deaths. 

Given the urgency in getting people vaccinated, it seems we should be paying these Chinese manufacturers to ramp up production as quickly as possible. One of the Chinese manufacturers contracted with Brazil to sell its vaccine at a bit more than $2 a dose. Suppose we needed 10 billion doses to vaccinate 5 billion people in the developing world. That would come to $20 billion. That is chump change compared to the trillions of dollars of lost output suffered by the U.S., Europe, and the rest of the world as a result of the pandemic. That is in addition to the millions of lives.

The bottom line is that we need to get people throughout the world vaccinated as quickly as possible. If our manufacturers are not up to the task, we should pay China or anyone else who is. Given the relative cost and benefits, this really should not be a hard call.

The stock market tells us about the expected value of future after-tax corporate profits. At least, that is when it tells us anything at all.

That is not radical lefty ranting, that is from the Econ textbook. If the economy is expected to boom next year, because Joe Biden is going to use the revenue from a big corporate profits tax to finance huge investment in green projects, there is no reason to expect the stock market to rise. People will not pay more money for shares of Microsoft, GE, or any other stock because they expect the economy to boom. They will pay more money for shares of the stock in these companies if they expect their after-tax profits to be higher. And if Biden’s tax increase on profits is going to more than offset any plausible increase in profits due to higher sales, then share prices will fall.

Read that again if it is too simple to understand. If the economy booms, but the after-tax profits fall because of higher corporate taxes (or higher wages) the stock market will fall. (This is when the market reflects fundamental values. Often it doesn’t, as in the late 1990s stock bubble.) There is no, as in zero, necessary connection between stock prices and the health of the economy. They do often move together, just like the price of wheat tends to rise with a strong economy, but the stock market is not designed to tell us about the economy. It tells us about after-tax corporate profits: Full Stop.

The reason for this tirade is a NYT column by Farhad Manjoo in which he breaks the news that the stock market no longer tells us about the health of the economy in reference to the GameStop nonsense.

“Indeed, a story that was almost proudly disconnected from the real world, telling us so little about the larger economic forces shaping our lives?

“I’m not just talking about GameStop’s bubbly stock price. I’m talking about the entire bubbly stock market, whose gyrations during the last few decades have made it less and less of a reliable proxy for understanding the health of the economy at large — even if presidents and pundits still point to it as a benchmark that makes a difference in people’s lives.”

Someone has to break the news to Mr. Manjoo, and perhaps the opinion editors at the NYT, that the stock market never told us about the economic well-being of the vast majority of people in the country. Again, think of the stock market like the price of wheat. A strong economy will tend to cause both to rise, but there are plenty of other factors that can rises as well. In the case of the price of wheat, a severe drought or crop failure in a major wheat producer elsewhere in the world will lead to a big jump in the price of wheat. Similarly, a cut in corporate taxes or a weakening of workers’ bargaining power, will typically lead to a rise in stock prices.

The former story is good for wheat farmers, the latter is good news for the small segment of the population that has lots of money in stocks. Neither is good news for the country as a whole. Why is this simple point so hard to understand for people who write about economic issues? 

The stock market tells us about the expected value of future after-tax corporate profits. At least, that is when it tells us anything at all.

That is not radical lefty ranting, that is from the Econ textbook. If the economy is expected to boom next year, because Joe Biden is going to use the revenue from a big corporate profits tax to finance huge investment in green projects, there is no reason to expect the stock market to rise. People will not pay more money for shares of Microsoft, GE, or any other stock because they expect the economy to boom. They will pay more money for shares of the stock in these companies if they expect their after-tax profits to be higher. And if Biden’s tax increase on profits is going to more than offset any plausible increase in profits due to higher sales, then share prices will fall.

Read that again if it is too simple to understand. If the economy booms, but the after-tax profits fall because of higher corporate taxes (or higher wages) the stock market will fall. (This is when the market reflects fundamental values. Often it doesn’t, as in the late 1990s stock bubble.) There is no, as in zero, necessary connection between stock prices and the health of the economy. They do often move together, just like the price of wheat tends to rise with a strong economy, but the stock market is not designed to tell us about the economy. It tells us about after-tax corporate profits: Full Stop.

The reason for this tirade is a NYT column by Farhad Manjoo in which he breaks the news that the stock market no longer tells us about the health of the economy in reference to the GameStop nonsense.

“Indeed, a story that was almost proudly disconnected from the real world, telling us so little about the larger economic forces shaping our lives?

“I’m not just talking about GameStop’s bubbly stock price. I’m talking about the entire bubbly stock market, whose gyrations during the last few decades have made it less and less of a reliable proxy for understanding the health of the economy at large — even if presidents and pundits still point to it as a benchmark that makes a difference in people’s lives.”

Someone has to break the news to Mr. Manjoo, and perhaps the opinion editors at the NYT, that the stock market never told us about the economic well-being of the vast majority of people in the country. Again, think of the stock market like the price of wheat. A strong economy will tend to cause both to rise, but there are plenty of other factors that can rises as well. In the case of the price of wheat, a severe drought or crop failure in a major wheat producer elsewhere in the world will lead to a big jump in the price of wheat. Similarly, a cut in corporate taxes or a weakening of workers’ bargaining power, will typically lead to a rise in stock prices.

The former story is good for wheat farmers, the latter is good news for the small segment of the population that has lots of money in stocks. Neither is good news for the country as a whole. Why is this simple point so hard to understand for people who write about economic issues? 

It’s fair to say that the U.S. performance in dealing with the pandemic has been disastrous. With the effort led by Donald Trump, this is not surprising. His main, if not only, concern was keeping up appearances. Preventing the spread of the pandemic, and needless death, was obviously not part of his agenda.

Unfortunately, many other wealthy countries, like France, Belgium, and Sweden, have not done much better. They don’t have the excuse of having a saboteur in charge who was actively trying to prevent the relevant government agencies from doing their jobs.

Anyhow, I thought it would be worth throwing out a few points about how we should have approached the pandemic. While some of this is 20-20 hindsight, I was making most of these points many months ago. I should add, I claim zero expertise in public health, but I do have some common sense, in spite of my training in economics. Of course, if anyone with expertise in public health wants to correct or expand on any points here, I welcome the opportunity to be educated.

I will break down the discussion into three key areas:

  • Measures to reduce spread;
  • Efforts to develop effective testing, vaccines, and treatments;
  • The distribution of vaccines

The United States has failed horribly in all three areas, but many other countries have not done much better.

 

Containing the Spread

When I look back at what I have been wrong about since the pandemic started, my biggest mistake was in thinking that we could get the pandemic under control after a two or three month shutdown. (I also expected that we would make more progress in treatment. Unfortunately, the ratio of deaths to infections has not changed much since the summer.)

The idea that the shutdowns, followed by effective containment measures, could control the spread should not seem far-fetched. Several European countries did get their infection rates down to very manageable levels after their shutdowns. For example, Denmark, a country with a population of a bit less than 6 million people, had their daily infections below 20 in the summer. At this level, it is possible to do effective contact tracing and arranging for those who have been exposed to be quarantined and/or tested. Several countries in East Asia, such as Japan and South Korea, did even better.

Unfortunately, Denmark, like other European countries, allowed its people to travel freely over the summer. This resulted in many people becoming infected and then spreading the virus when they returned.  

Anyhow, the idea that we would have shutdowns (which can be much better targeted with what we now know) and then have containment measures and testing in place to prevent large-scale spread is clearly a possibility. We completely failed in this effort in the United States, both because we did not implement containment policies and also because we had grossly inadequate testing.

As far as containment, this would require the Centers for Disease Control (CDC), the Occupational Safety and Health Administration (OSHA) and other agencies giving clear guidance and ideally being able to enforce their rules. This mostly did not happen because the Trump administration did not want it to happen. The most important example here was when the CDC tried to produce rules for safe school re-openings, which Trump administration officials then rewrote because they complained that they required too much work.  

In a similar vein, OSHA produced guidance for safe practices in meatpacking plants only after widespread reports of infections and deaths in a number of facilities. Incredibly, it was only last week that OSHA issued general guidance for workplace safety in dealing with the pandemic.

Going along with better guidance on the safe operation of workplaces and businesses, we should have had more aggressive efforts at testing and contact tracing. While some states have taken this effort seriously, the Trump administration was often openly hostile to the idea of more frequent testing. As Donald Trump said on several occasions, if we have less testing, we will identify fewer cases. In an administration in which public appearance was the main priority, not controlling the pandemic, there was little interest in pursuing a policy that would show the problem to be bigger.

In terms of what difference better control can make, Germany has had just over half the death rate (relative to its population) from the pandemic as the United States. Denmark has had less than one third the death rate. Governments that knew what they were doing and took the pandemic seriously kept people from dying.

 

Open-Sourcing Research on Testing, Vaccines, and Treatments

To my view, the biggest failure of policy in the pandemic has been the fact that we gave patent monopolies to the companies developing new tests, treatments, and vaccines. This has led to higher prices and needless shortages of the essential tools for containing the pandemic. This practice is even more frustrating since, in many cases, the government picked up the tab for much or all of the development costs.

I argued, beginning back in March, that we should see the pandemic as a great opportunity for experimenting with open-source research in a context of international cooperation. The idea is that we would negotiate some commitment of funding from each country, based on their GDP and wealth, which would go to support research on developing tests, treatments, and vaccines. All the research findings would be fully open, as would be the results of clinical trials. And, all patents would be in the public domain so that anyone with the necessary manufacturing facilities could produce any of the items developed.[1]

In principle, this would allow for the most rapid progress possible. It also would remove the incentives that patent monopolies give companies to lie about the safety and effectiveness of their products. And, it means that everything that was developed – new tests, treatments, and vaccines – would be cheap. These items are rarely expensive to manufacture, they are only expensive because drug companies have patent monopolies or other types of government protection.

The failure to go this route is hitting home now that much of the world, including the United States and Europe, are facing shortages of vaccines. In the wake of these shortages, we are hearing the response that there is limited manufacturing capacity. This is true, but that is precisely the problem.

If Moderna or Pfizer can each build one or two factories to produce their vaccines, then it was possible to build ten or twenty. If there were inputs in short supply, we could have ramped up production of these inputs. This is why we have the Defense Production Act.

There is no reason that the United States could not have had stockpiles of 300 or 400 million of any vaccine that went into Phase 3 testing, by the time that it was approved. If we had capacity to produce another 100 million or so per month, we could ensure that supply would never be the limit on our ability to vaccinate people.

There is of course the risk that we would have produced 400 million doses of a vaccine that was not approved by the Food and Drug Administration, but so what? With the cost of production around $2 per shot, this would mean throwing $800 million in the garbage. In a context where the pandemic has cost us close to 500,000 lives, and trillions of dollars of lost output, the risk of wasting $800 million looks pretty trivial.

In fact, we should be thinking about the issue on a world scale. That means that we should have been looking to have 1-2 billion doses available when vaccines first were approved by regulatory authorities. This is where international cooperation really would be hugely valuable. In addition to the U.S.-European manufacturers, China, Russia, and India have also developed vaccines.

Two of China’s vaccines have been approved by other countries’ regulatory authorities. Russia’s vaccine has also been approved by regulatory authorities in a number of countries and a recently published article shows it to be highly effective. Russia is currently submitting for approval by the European Union’s regulatory agency. Germany has already expressed a willingness to use the Russian vaccine, if it is approved. Russia indicated it could provide 100 million doses to Europe in the spring.

It is great that these other countries have developed vaccines, but unfortunately, they have not been very forthcoming with their results. The Chinese vaccines seem to be less effective than the vaccines developed by Pfizer and Moderna, but they may nonetheless still be very useful in slowing the spread of pandemic, and perhaps even more importantly, preventing severe cases requiring hospitalization and possibly leading to death.

If we had gone the route of full open-source research, the trial data for these vaccines would be freely available to researchers and clinicians throughout the world. This would both allow governments to make informed choices about which vaccines might be best for their populations (several of the vaccines have the advantage of not requiring freezing, which makes delivery and storage far easier, especially in developing countries) and also for doctors and patients to weigh the relative risks and benefits of the available vaccines.

It is also important to point out in this context that we have a very concrete reason for wanting a quick and successful worldwide vaccine program. We know that the more the virus spreads, the more it mutates. There is a great risk that if the pandemic is allowed to spread unchecked in large parts of the world, that there will be mutations for which the current vaccines are not effective. Even if the vaccines can be adjusted to make them effective, as some scientists have claimed, this would still require the production and distribution of hundreds of millions of new doses of a revised vaccine, with the pandemic spreading widely in the meantime.

We really really do not want to be in a situation where we have to go through this thing a second time. That means we should be very serious about getting the whole world inoculated as quickly as possible, even apart from the humanitarian interest that we should not want to see preventable illness and death anywhere.

 

Distributing the Vaccines

Perhaps the most mind-boggling aspect of the policy response to the pandemic has been the failure of the vaccine distribution process. In the United States we have a fairly straightforward explanation: Donald Trump. Trump made it clear that, under his leadership, the federal government was taking no responsibility for distributing the vaccine. However, even without the leadership of the federal government, it is disturbing that states have not been better in stepping up and filling in the gap.

Even more striking is the fact that United States is actually doing better in its vaccine rollout than countries like France and Germany, which do have national health care systems and generally competent governments. It is astounding that they seem to have been unprepared to deliver vaccines once they had been approved by regulatory authorities. It is striking that these countries did not seem to have plans in place to quickly deliver whatever vaccines they had available.

This means having concrete plans to distribute the vaccine immediately after the regulatory authorities gave the green light. That would mean having stockpiles available near distribution centers. It means picking locations – nursing homes, hospitals, pharmacies, or mass inoculation points at sports stadiums or other facilities – and then ensuring that the necessary personnel are at the site.

We have heard reports of shortages of everything from syringes to personnel trained in giving the shots. We had all fall to ensure that we had plenty of syringes. If enough people had not been trained to administer the shots (we give two million flu shots a day during flu season), then we should have trained more people.[2]

It is truly incredible that states did not make these preparations. Again, having a federal government that was completely AWOL on the vaccine distribution effort was a big handicap, but it is still surprising how most states seem to have fallen down so badly.[3] And, it is very hard to understand how competent governments in Europe seem to have also been unprepared to quickly deliver the vaccine doses that were available.

Conclusion – The World Has Messed Up Big Time in Dealing with the Pandemic

It is hard to look at the track record over the last year and not conclude that governments failed badly in their efforts to control the pandemic. This is partly due to corruption and a failure of imagination, as in the decision not to open-source the development of vaccines, treatments and tests, and partly to a lack of competence, as in the failure to prepare in advance for the distribution of vaccines.

Some countries, especially those in East Asia, have done very well in limiting the spread of the virus and thereby minimizing deaths and economic damage. But few countries elsewhere have much to brag about. Donald Trump is of course a big part of the problem in the United States, but the failure goes well beyond Trump. There should be some real accountability once the pandemic is contained, which hopefully will be soon, if we start doing things right.  

[1] I outline a system of publicly funded drug research in chapter 5 of Rigged.

[2] One of the amazing stories I’ve heard from public health people is that the coronavirus shots take longer to deliver because the shot giver has to make arrangements for a second appointment. If this is actually true, it is incredible that we would waste the time of a person giving shots, by having them make these arrangements, rather than having a separate person who checks people in doing this work.  

[3] One explanation that I have heard is that states delayed making plans because they assumed there would be money for distribution logistics in the second pandemic rescue package that eventually passed at the end of December. The idea was that if they spent funds before the bill passed, they wouldn’t be reimbursed, but if they waited, they could then have the Feds pick up the tab. If this explanation is right, then it shows the enormous cost of the long delay in passing this bill.

It’s fair to say that the U.S. performance in dealing with the pandemic has been disastrous. With the effort led by Donald Trump, this is not surprising. His main, if not only, concern was keeping up appearances. Preventing the spread of the pandemic, and needless death, was obviously not part of his agenda.

Unfortunately, many other wealthy countries, like France, Belgium, and Sweden, have not done much better. They don’t have the excuse of having a saboteur in charge who was actively trying to prevent the relevant government agencies from doing their jobs.

Anyhow, I thought it would be worth throwing out a few points about how we should have approached the pandemic. While some of this is 20-20 hindsight, I was making most of these points many months ago. I should add, I claim zero expertise in public health, but I do have some common sense, in spite of my training in economics. Of course, if anyone with expertise in public health wants to correct or expand on any points here, I welcome the opportunity to be educated.

I will break down the discussion into three key areas:

  • Measures to reduce spread;
  • Efforts to develop effective testing, vaccines, and treatments;
  • The distribution of vaccines

The United States has failed horribly in all three areas, but many other countries have not done much better.

 

Containing the Spread

When I look back at what I have been wrong about since the pandemic started, my biggest mistake was in thinking that we could get the pandemic under control after a two or three month shutdown. (I also expected that we would make more progress in treatment. Unfortunately, the ratio of deaths to infections has not changed much since the summer.)

The idea that the shutdowns, followed by effective containment measures, could control the spread should not seem far-fetched. Several European countries did get their infection rates down to very manageable levels after their shutdowns. For example, Denmark, a country with a population of a bit less than 6 million people, had their daily infections below 20 in the summer. At this level, it is possible to do effective contact tracing and arranging for those who have been exposed to be quarantined and/or tested. Several countries in East Asia, such as Japan and South Korea, did even better.

Unfortunately, Denmark, like other European countries, allowed its people to travel freely over the summer. This resulted in many people becoming infected and then spreading the virus when they returned.  

Anyhow, the idea that we would have shutdowns (which can be much better targeted with what we now know) and then have containment measures and testing in place to prevent large-scale spread is clearly a possibility. We completely failed in this effort in the United States, both because we did not implement containment policies and also because we had grossly inadequate testing.

As far as containment, this would require the Centers for Disease Control (CDC), the Occupational Safety and Health Administration (OSHA) and other agencies giving clear guidance and ideally being able to enforce their rules. This mostly did not happen because the Trump administration did not want it to happen. The most important example here was when the CDC tried to produce rules for safe school re-openings, which Trump administration officials then rewrote because they complained that they required too much work.  

In a similar vein, OSHA produced guidance for safe practices in meatpacking plants only after widespread reports of infections and deaths in a number of facilities. Incredibly, it was only last week that OSHA issued general guidance for workplace safety in dealing with the pandemic.

Going along with better guidance on the safe operation of workplaces and businesses, we should have had more aggressive efforts at testing and contact tracing. While some states have taken this effort seriously, the Trump administration was often openly hostile to the idea of more frequent testing. As Donald Trump said on several occasions, if we have less testing, we will identify fewer cases. In an administration in which public appearance was the main priority, not controlling the pandemic, there was little interest in pursuing a policy that would show the problem to be bigger.

In terms of what difference better control can make, Germany has had just over half the death rate (relative to its population) from the pandemic as the United States. Denmark has had less than one third the death rate. Governments that knew what they were doing and took the pandemic seriously kept people from dying.

 

Open-Sourcing Research on Testing, Vaccines, and Treatments

To my view, the biggest failure of policy in the pandemic has been the fact that we gave patent monopolies to the companies developing new tests, treatments, and vaccines. This has led to higher prices and needless shortages of the essential tools for containing the pandemic. This practice is even more frustrating since, in many cases, the government picked up the tab for much or all of the development costs.

I argued, beginning back in March, that we should see the pandemic as a great opportunity for experimenting with open-source research in a context of international cooperation. The idea is that we would negotiate some commitment of funding from each country, based on their GDP and wealth, which would go to support research on developing tests, treatments, and vaccines. All the research findings would be fully open, as would be the results of clinical trials. And, all patents would be in the public domain so that anyone with the necessary manufacturing facilities could produce any of the items developed.[1]

In principle, this would allow for the most rapid progress possible. It also would remove the incentives that patent monopolies give companies to lie about the safety and effectiveness of their products. And, it means that everything that was developed – new tests, treatments, and vaccines – would be cheap. These items are rarely expensive to manufacture, they are only expensive because drug companies have patent monopolies or other types of government protection.

The failure to go this route is hitting home now that much of the world, including the United States and Europe, are facing shortages of vaccines. In the wake of these shortages, we are hearing the response that there is limited manufacturing capacity. This is true, but that is precisely the problem.

If Moderna or Pfizer can each build one or two factories to produce their vaccines, then it was possible to build ten or twenty. If there were inputs in short supply, we could have ramped up production of these inputs. This is why we have the Defense Production Act.

There is no reason that the United States could not have had stockpiles of 300 or 400 million of any vaccine that went into Phase 3 testing, by the time that it was approved. If we had capacity to produce another 100 million or so per month, we could ensure that supply would never be the limit on our ability to vaccinate people.

There is of course the risk that we would have produced 400 million doses of a vaccine that was not approved by the Food and Drug Administration, but so what? With the cost of production around $2 per shot, this would mean throwing $800 million in the garbage. In a context where the pandemic has cost us close to 500,000 lives, and trillions of dollars of lost output, the risk of wasting $800 million looks pretty trivial.

In fact, we should be thinking about the issue on a world scale. That means that we should have been looking to have 1-2 billion doses available when vaccines first were approved by regulatory authorities. This is where international cooperation really would be hugely valuable. In addition to the U.S.-European manufacturers, China, Russia, and India have also developed vaccines.

Two of China’s vaccines have been approved by other countries’ regulatory authorities. Russia’s vaccine has also been approved by regulatory authorities in a number of countries and a recently published article shows it to be highly effective. Russia is currently submitting for approval by the European Union’s regulatory agency. Germany has already expressed a willingness to use the Russian vaccine, if it is approved. Russia indicated it could provide 100 million doses to Europe in the spring.

It is great that these other countries have developed vaccines, but unfortunately, they have not been very forthcoming with their results. The Chinese vaccines seem to be less effective than the vaccines developed by Pfizer and Moderna, but they may nonetheless still be very useful in slowing the spread of pandemic, and perhaps even more importantly, preventing severe cases requiring hospitalization and possibly leading to death.

If we had gone the route of full open-source research, the trial data for these vaccines would be freely available to researchers and clinicians throughout the world. This would both allow governments to make informed choices about which vaccines might be best for their populations (several of the vaccines have the advantage of not requiring freezing, which makes delivery and storage far easier, especially in developing countries) and also for doctors and patients to weigh the relative risks and benefits of the available vaccines.

It is also important to point out in this context that we have a very concrete reason for wanting a quick and successful worldwide vaccine program. We know that the more the virus spreads, the more it mutates. There is a great risk that if the pandemic is allowed to spread unchecked in large parts of the world, that there will be mutations for which the current vaccines are not effective. Even if the vaccines can be adjusted to make them effective, as some scientists have claimed, this would still require the production and distribution of hundreds of millions of new doses of a revised vaccine, with the pandemic spreading widely in the meantime.

We really really do not want to be in a situation where we have to go through this thing a second time. That means we should be very serious about getting the whole world inoculated as quickly as possible, even apart from the humanitarian interest that we should not want to see preventable illness and death anywhere.

 

Distributing the Vaccines

Perhaps the most mind-boggling aspect of the policy response to the pandemic has been the failure of the vaccine distribution process. In the United States we have a fairly straightforward explanation: Donald Trump. Trump made it clear that, under his leadership, the federal government was taking no responsibility for distributing the vaccine. However, even without the leadership of the federal government, it is disturbing that states have not been better in stepping up and filling in the gap.

Even more striking is the fact that United States is actually doing better in its vaccine rollout than countries like France and Germany, which do have national health care systems and generally competent governments. It is astounding that they seem to have been unprepared to deliver vaccines once they had been approved by regulatory authorities. It is striking that these countries did not seem to have plans in place to quickly deliver whatever vaccines they had available.

This means having concrete plans to distribute the vaccine immediately after the regulatory authorities gave the green light. That would mean having stockpiles available near distribution centers. It means picking locations – nursing homes, hospitals, pharmacies, or mass inoculation points at sports stadiums or other facilities – and then ensuring that the necessary personnel are at the site.

We have heard reports of shortages of everything from syringes to personnel trained in giving the shots. We had all fall to ensure that we had plenty of syringes. If enough people had not been trained to administer the shots (we give two million flu shots a day during flu season), then we should have trained more people.[2]

It is truly incredible that states did not make these preparations. Again, having a federal government that was completely AWOL on the vaccine distribution effort was a big handicap, but it is still surprising how most states seem to have fallen down so badly.[3] And, it is very hard to understand how competent governments in Europe seem to have also been unprepared to quickly deliver the vaccine doses that were available.

Conclusion – The World Has Messed Up Big Time in Dealing with the Pandemic

It is hard to look at the track record over the last year and not conclude that governments failed badly in their efforts to control the pandemic. This is partly due to corruption and a failure of imagination, as in the decision not to open-source the development of vaccines, treatments and tests, and partly to a lack of competence, as in the failure to prepare in advance for the distribution of vaccines.

Some countries, especially those in East Asia, have done very well in limiting the spread of the virus and thereby minimizing deaths and economic damage. But few countries elsewhere have much to brag about. Donald Trump is of course a big part of the problem in the United States, but the failure goes well beyond Trump. There should be some real accountability once the pandemic is contained, which hopefully will be soon, if we start doing things right.  

[1] I outline a system of publicly funded drug research in chapter 5 of Rigged.

[2] One of the amazing stories I’ve heard from public health people is that the coronavirus shots take longer to deliver because the shot giver has to make arrangements for a second appointment. If this is actually true, it is incredible that we would waste the time of a person giving shots, by having them make these arrangements, rather than having a separate person who checks people in doing this work.  

[3] One explanation that I have heard is that states delayed making plans because they assumed there would be money for distribution logistics in the second pandemic rescue package that eventually passed at the end of December. The idea was that if they spent funds before the bill passed, they wouldn’t be reimbursed, but if they waited, they could then have the Feds pick up the tab. If this explanation is right, then it shows the enormous cost of the long delay in passing this bill.

Want to search in the archives?

¿Quieres buscar en los archivos?

Click Here Haga clic aquí