An NYT article, headlined “Minnesota finds way to slow soaring health premiums,” reported on how the state is now paying insurers $270 million in each of the next two years to keep down the cost of premiums in the health care exchanges. It may not have been entirely clear from reading the piece that the reduction in premiums is the result of a state subsidy of $1,700 per patient per year.
Thanks to Robert Salzberg for calling this to my attention.
An NYT article, headlined “Minnesota finds way to slow soaring health premiums,” reported on how the state is now paying insurers $270 million in each of the next two years to keep down the cost of premiums in the health care exchanges. It may not have been entirely clear from reading the piece that the reduction in premiums is the result of a state subsidy of $1,700 per patient per year.
Thanks to Robert Salzberg for calling this to my attention.
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That seems to be the argument by Rana Foroohar in a Financial Times column (sorry, behind paywall). The argument is that because recent changes to the patent law have made it easier to challenge inappropriately granted patents, inventors are unable to benefit from their inventions. She argues that this is causing companies to shift their research to other countries where their patents enjoy more protection.
There are two problems with this story. The first is that the United States has a notoriously lax patent system. In 1999, a patent was granted for a peanut butter and jelly sandwich. Unlike many countries, the United States does not allow pre-patent challenges from other parties. While recent reforms have made it easier for competitors to challenge a patent, the system in the U.S. is almost certainly still more patent-friendly than in almost any other country.
However, the more important point is that there is no connection between the strength of patent protection and where research is conducted. Under a wide variety of treaty commitments, the United States and other major countries are prohibited from discriminating in patent issuance and enforcement based on the country in which the research was conducted. This means that, contrary to the claim in the column, a lessening of patent strength in the United States would provide absolutely zero incentive for a company to shift its research to Europe or China.
If the people running the company are familiar with arithmetic, they would do their research in the low-cost country regardless of its level of patent enforcement. In other words, there could be reasons to worry about our patent laws not sufficiently protecting innovation (unlikely), but the threat of moving research is not one of them.
Addendum
jconroy4989 points out in his comment that as of September 2012 there has been a mechanism, “pre-issuance patent submissions” through which third parties can submit information arguing against the granting of a patent. In this way, the United States was getting more in line with most other countries which had long allowed for pre-issuance challenges.
That seems to be the argument by Rana Foroohar in a Financial Times column (sorry, behind paywall). The argument is that because recent changes to the patent law have made it easier to challenge inappropriately granted patents, inventors are unable to benefit from their inventions. She argues that this is causing companies to shift their research to other countries where their patents enjoy more protection.
There are two problems with this story. The first is that the United States has a notoriously lax patent system. In 1999, a patent was granted for a peanut butter and jelly sandwich. Unlike many countries, the United States does not allow pre-patent challenges from other parties. While recent reforms have made it easier for competitors to challenge a patent, the system in the U.S. is almost certainly still more patent-friendly than in almost any other country.
However, the more important point is that there is no connection between the strength of patent protection and where research is conducted. Under a wide variety of treaty commitments, the United States and other major countries are prohibited from discriminating in patent issuance and enforcement based on the country in which the research was conducted. This means that, contrary to the claim in the column, a lessening of patent strength in the United States would provide absolutely zero incentive for a company to shift its research to Europe or China.
If the people running the company are familiar with arithmetic, they would do their research in the low-cost country regardless of its level of patent enforcement. In other words, there could be reasons to worry about our patent laws not sufficiently protecting innovation (unlikely), but the threat of moving research is not one of them.
Addendum
jconroy4989 points out in his comment that as of September 2012 there has been a mechanism, “pre-issuance patent submissions” through which third parties can submit information arguing against the granting of a patent. In this way, the United States was getting more in line with most other countries which had long allowed for pre-issuance challenges.
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This is an important point that Neil Irwin slips up on in an otherwise excellent piece on the growing practice of outsourcing among major corporations. The piece contrasts the experience of Gail Evans, a black woman working as a custodian for Eastman Kodak in the 1980s, with the experience of Marta Ramos, a Hispanic woman who is currently employed doing custodial work at Apple’s headquarters. While the woman working at Kodak was actually an employee of Kodak, the woman working at Apple is employed by a company that contracts with Apple.
Irwin notes the growing practice of outsourcing many tasks and in the third paragraph writes:
“The approach has made companies more nimble and more productive, and delivered huge profits for shareholders.”
As the piece subsequently explains, it is not at all clear that this outsourcing of jobs had made companies more productive. It has almost certainly made them more profitable since there is considerable evidence that workers employed by contractors are paid less than they would be if employed by the parent organization. But this is just shifting the location of a relatively low productivity job from the company to the contractor, it does nothing to increase economy wide productivity.
In fact, from an economy wide perspective, it may well do the opposite. As the piece points out, Kodak employees enjoyed considerable job security. If there was no need for their work in one part of the company, it would look to transfer them to another part where they could be used. This meant that the company was effectively preventing workers from suffering unemployment and turning to government services during a downturn or shift in demand.
The piece also describes how Kodak created an internal job ladder through which Ms. Evans was able to rise into managerial and eventually executive positions. There are no comparable job ladders for Ms. Ramos. This also shifts a responsibility from the company to the government. While Kodak was prepared to devote resources towards training and developing the skills of its lower level employees, Apple is leaving this to the government. This may improve Apple’s profitability, but there is no reason to believe that this shift in responsibility leads to any productivity gains for the economy as a whole.
Essentially Apple and other leading tech companies have profited in part from being able to shift to the government responsibilities to workers that major companies had carried themselves in prior decades. This is to a large extent the point of Irwin’s piece, but it is important to be careful about wording. There is no evidence that this shift has led to any gains in productivity, even if it has increased profits at a small number of giant firms.
This is an important point that Neil Irwin slips up on in an otherwise excellent piece on the growing practice of outsourcing among major corporations. The piece contrasts the experience of Gail Evans, a black woman working as a custodian for Eastman Kodak in the 1980s, with the experience of Marta Ramos, a Hispanic woman who is currently employed doing custodial work at Apple’s headquarters. While the woman working at Kodak was actually an employee of Kodak, the woman working at Apple is employed by a company that contracts with Apple.
Irwin notes the growing practice of outsourcing many tasks and in the third paragraph writes:
“The approach has made companies more nimble and more productive, and delivered huge profits for shareholders.”
As the piece subsequently explains, it is not at all clear that this outsourcing of jobs had made companies more productive. It has almost certainly made them more profitable since there is considerable evidence that workers employed by contractors are paid less than they would be if employed by the parent organization. But this is just shifting the location of a relatively low productivity job from the company to the contractor, it does nothing to increase economy wide productivity.
In fact, from an economy wide perspective, it may well do the opposite. As the piece points out, Kodak employees enjoyed considerable job security. If there was no need for their work in one part of the company, it would look to transfer them to another part where they could be used. This meant that the company was effectively preventing workers from suffering unemployment and turning to government services during a downturn or shift in demand.
The piece also describes how Kodak created an internal job ladder through which Ms. Evans was able to rise into managerial and eventually executive positions. There are no comparable job ladders for Ms. Ramos. This also shifts a responsibility from the company to the government. While Kodak was prepared to devote resources towards training and developing the skills of its lower level employees, Apple is leaving this to the government. This may improve Apple’s profitability, but there is no reason to believe that this shift in responsibility leads to any productivity gains for the economy as a whole.
Essentially Apple and other leading tech companies have profited in part from being able to shift to the government responsibilities to workers that major companies had carried themselves in prior decades. This is to a large extent the point of Irwin’s piece, but it is important to be careful about wording. There is no evidence that this shift has led to any gains in productivity, even if it has increased profits at a small number of giant firms.
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As a result of the fact that he vacations at Mar-a-Lago and his New Jersey golf club, demands protection for his adult children, and had his wife and youngest son stay in New York for the first five months of his presidency, Donald Trump has added $120 million to the annual cost of providing protection for the president compared with what a normal president would require. The New York Times reported that he pledged to contribute 0.8 percent of this amount ($1 million) to help the victims of Hurricane Harvey. If he follows through on this pledge, it means the public will only be down $119.0 million ($119.4 million, after taking account of the tax deduction).
As a result of the fact that he vacations at Mar-a-Lago and his New Jersey golf club, demands protection for his adult children, and had his wife and youngest son stay in New York for the first five months of his presidency, Donald Trump has added $120 million to the annual cost of providing protection for the president compared with what a normal president would require. The New York Times reported that he pledged to contribute 0.8 percent of this amount ($1 million) to help the victims of Hurricane Harvey. If he follows through on this pledge, it means the public will only be down $119.0 million ($119.4 million, after taking account of the tax deduction).
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Washington Post columnist Thomas Heath discussed a plan being considered by Republicans to end the tax deductibility of contributions to IRAs and 401(k)s. Under the proposal, the contributions would be subject to taxes, but all withdrawals would be tax free. This would in effect make all retirement accounts like Roth IRAs, which many people now contribute to voluntarily.
Incredibly, Heath did not make the obvious point, this change doesn’t actually save the government any money, it just changes the timing of tax collections. The government will collect more tax revenue now, as people place money into retirement accounts, but less money in the future when people are pulling the money out.
Mandating this change is a cheap trick that only makes sense as a way to hide the cost of a tax cut. This would have been worth pointing out to readers who might otherwise think that this switch serves a real purpose.
In discussing the debate over IRAs and 401(k)s as policy, it would have also been worth mentioning the argument of critics that they rip people off. The actual cost for the financial industry of maintaining and IRA or 401(k) is very low. (Vanguard doesn’t charge anything, getting its costs covered by the fees on individual funds.) Nonetheless, the average fee for an account (on top of the cost of individual funds) is close to 1.0 percent annually, with many companies charging more than 1.5 percent.
This means that someone with $120,000 in an IRA is paying $1,200 to a bank or insurance company each year for nothing. This is a great welfare program for the financial industry, but it is a needless tax on savings. These fees can be reduced with better regulation. Also, states like California, Oregon, and Illinois are making their government-run programs for public employees, which have much lower fees, available to workers in the private sector.
The Trump administration has attempted to block these state programs and efforts at better regulation. It argues that people in the financial industry are too incompetent to make an honest living so that they need the government to stack the rules in their favor so that can get the six and seven figure salaries they have come to expect.
Washington Post columnist Thomas Heath discussed a plan being considered by Republicans to end the tax deductibility of contributions to IRAs and 401(k)s. Under the proposal, the contributions would be subject to taxes, but all withdrawals would be tax free. This would in effect make all retirement accounts like Roth IRAs, which many people now contribute to voluntarily.
Incredibly, Heath did not make the obvious point, this change doesn’t actually save the government any money, it just changes the timing of tax collections. The government will collect more tax revenue now, as people place money into retirement accounts, but less money in the future when people are pulling the money out.
Mandating this change is a cheap trick that only makes sense as a way to hide the cost of a tax cut. This would have been worth pointing out to readers who might otherwise think that this switch serves a real purpose.
In discussing the debate over IRAs and 401(k)s as policy, it would have also been worth mentioning the argument of critics that they rip people off. The actual cost for the financial industry of maintaining and IRA or 401(k) is very low. (Vanguard doesn’t charge anything, getting its costs covered by the fees on individual funds.) Nonetheless, the average fee for an account (on top of the cost of individual funds) is close to 1.0 percent annually, with many companies charging more than 1.5 percent.
This means that someone with $120,000 in an IRA is paying $1,200 to a bank or insurance company each year for nothing. This is a great welfare program for the financial industry, but it is a needless tax on savings. These fees can be reduced with better regulation. Also, states like California, Oregon, and Illinois are making their government-run programs for public employees, which have much lower fees, available to workers in the private sector.
The Trump administration has attempted to block these state programs and efforts at better regulation. It argues that people in the financial industry are too incompetent to make an honest living so that they need the government to stack the rules in their favor so that can get the six and seven figure salaries they have come to expect.
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Donald Trump can boast at least a little bit about the return of manufacturing jobs during his presidency. Employment in the sector is up by 125,000 since January. It’s not exactly a boom, after all, we are still down by almost 1.3 million jobs from the pre-recession level and 4.8 million from where we were in 2000, but at least it is movement in a positive direction.
In an NYT Upshot piece, Neil Irwin sorts out the reasons for this modest uptick in manufacturing jobs. He points to a small increase in oil prices and a drop in the dollar, both of which are likely factors. (He also points to weak growth in government employment. I’m not sure how that matters here.)
However, Irwin left out what might be the most important reason for the increase in manufacturing jobs: weak productivity growth. According to the Bureau of Labor Statistics, output in manufacturing has increased at 2.0 percent annual rate in the first half of 2017. This would mean that if we had a modest 2.0 percent rate of increase in productivity in the sector (manufacturing productivity usually grows faster than the rest of the economy), we would have no need for more labor, and presumably no new jobs.
But now America is great again, manufacturing productivity has slowed to a crawl, increasing at just a 1.4 percent annual rate in the first half of the year. So, there we have it, extraordinarily weak productivity has translated into 125,000 new manufacturing jobs under President Trump.
Donald Trump can boast at least a little bit about the return of manufacturing jobs during his presidency. Employment in the sector is up by 125,000 since January. It’s not exactly a boom, after all, we are still down by almost 1.3 million jobs from the pre-recession level and 4.8 million from where we were in 2000, but at least it is movement in a positive direction.
In an NYT Upshot piece, Neil Irwin sorts out the reasons for this modest uptick in manufacturing jobs. He points to a small increase in oil prices and a drop in the dollar, both of which are likely factors. (He also points to weak growth in government employment. I’m not sure how that matters here.)
However, Irwin left out what might be the most important reason for the increase in manufacturing jobs: weak productivity growth. According to the Bureau of Labor Statistics, output in manufacturing has increased at 2.0 percent annual rate in the first half of 2017. This would mean that if we had a modest 2.0 percent rate of increase in productivity in the sector (manufacturing productivity usually grows faster than the rest of the economy), we would have no need for more labor, and presumably no new jobs.
But now America is great again, manufacturing productivity has slowed to a crawl, increasing at just a 1.4 percent annual rate in the first half of the year. So, there we have it, extraordinarily weak productivity has translated into 125,000 new manufacturing jobs under President Trump.
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Fans of economic policy are used to the old “night is day,” “down is up,” approach to economic policy. After all, much of the media are worried about robots taking all the jobs even as the data from the Bureau of Labor Statistics show that productivity growth (the rate at which robots are taking jobs) is at a record slow pace.
That’s why it is hardly surprising to hear the argument being taken seriously that reducing corporate taxes will lead to more investment and thereby greater wage growth in the future. The data from the last seventy years show there is no relationship between aggregate profits and investment.
As can be seen, there is no evidence that higher corporate profits are associated with an increase in investment. In fact, the peak investment share of GDP was reached in the early 1980s when the after-tax profit share was near its post war low. Investment hit a second peak in 2000, even as the profit share was falling through the second half of the decade. The profit share rose sharply in the 2000s, even as the investment share stagnated. In short, you need a pretty good imagination to look at this data and think that increasing after-tax profits will somehow cause firms to invest more.
Having said this, there is a good argument for reforming the tax code in a way the reduces the opportunities for gaming. The tax avoidance industry is both an enormous waste and an important source of inequality. The resources spent on avoiding taxes, in the form of lawyers, accountants, and corporate engineering, are a complete waste from an economic standpoint. Also running tax avoidance scams allows some people to get very rich. The private equity industry is to a large extent a tax avoidance scam.
So it would be a big gain for the country if the tax code could be restructured in a way that eliminates most of the opportunities for gaming. As I have written before, my preferred approach is requiring companies to turn over a percentage of their stock in the form of non-voting shares, which would be treated exactly like voting shares in terms of dividends and buybacks. This would make it impossible for companies to cheat the government unless it was also cheating its stockholders.
Anyhow, that my preferred route, but it’s probably too simple to get anywhere.
Fans of economic policy are used to the old “night is day,” “down is up,” approach to economic policy. After all, much of the media are worried about robots taking all the jobs even as the data from the Bureau of Labor Statistics show that productivity growth (the rate at which robots are taking jobs) is at a record slow pace.
That’s why it is hardly surprising to hear the argument being taken seriously that reducing corporate taxes will lead to more investment and thereby greater wage growth in the future. The data from the last seventy years show there is no relationship between aggregate profits and investment.
As can be seen, there is no evidence that higher corporate profits are associated with an increase in investment. In fact, the peak investment share of GDP was reached in the early 1980s when the after-tax profit share was near its post war low. Investment hit a second peak in 2000, even as the profit share was falling through the second half of the decade. The profit share rose sharply in the 2000s, even as the investment share stagnated. In short, you need a pretty good imagination to look at this data and think that increasing after-tax profits will somehow cause firms to invest more.
Having said this, there is a good argument for reforming the tax code in a way the reduces the opportunities for gaming. The tax avoidance industry is both an enormous waste and an important source of inequality. The resources spent on avoiding taxes, in the form of lawyers, accountants, and corporate engineering, are a complete waste from an economic standpoint. Also running tax avoidance scams allows some people to get very rich. The private equity industry is to a large extent a tax avoidance scam.
So it would be a big gain for the country if the tax code could be restructured in a way that eliminates most of the opportunities for gaming. As I have written before, my preferred approach is requiring companies to turn over a percentage of their stock in the form of non-voting shares, which would be treated exactly like voting shares in terms of dividends and buybacks. This would make it impossible for companies to cheat the government unless it was also cheating its stockholders.
Anyhow, that my preferred route, but it’s probably too simple to get anywhere.
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One of the ways in which the government pays for things it wants done is to grant patent and copyright monopolies. This is not a statement about the merits of patents and copyrights as mechanisms for financing research and creative work; it is a definition. The government grants these monopolies to allow companies to charge prices that are far above the free market price as a reward for its past innovation or creative work.
In this way, patent or copyright monopoly can be thought as being like a privately imposed tax. If a drug company like Gilead Sciences can charge $84,000 for a Sovaldi, when the free market price would be something like $300, it has the same effect on the public as if the government imposed a tax of 28,000 percent on Sovaldi. It is the same amount of money out of people’s pockets.
We can argue about the merits of patent and copyright monopolies (see chapter 5 in Rigged [it’s free]), but the fact that they are alternative mechanisms that the government uses to finance research and creative work is not an arguable point. If we spent another $400 billion a year on research (roughly 20 percent of annual income tax collections), this would show up in the deficit and add to the debt. Yet somehow we are supposed to not pay attention when the government grants patents and copyrights that add hundreds of billions of dollars to what we pay for drugs, medical equipment, software and other protected items. (By my calculation, drug patents and related protections add close to $400 billion to what we spend each year on prescription drugs alone.)
This obvious point is missing from almost all the whining about the debt and deficit (see here for today’s example). The additional costs the public pays for items as a result of granting patent and copyright monopolies are never mentioned as burdens imposed on future generations. Somehow, we are not supposed to be concerned about making our kids pay huge amounts of money to Pfizer and Microsoft, it’s only a burden when the money has to be paid to the government.
That might fly as cheap political rhetoric, but it doesn’t make sense. And the people who talk about debts and deficits without mentioning patent monopolies deserve only ridicule, they should not be taken seriously.
One of the ways in which the government pays for things it wants done is to grant patent and copyright monopolies. This is not a statement about the merits of patents and copyrights as mechanisms for financing research and creative work; it is a definition. The government grants these monopolies to allow companies to charge prices that are far above the free market price as a reward for its past innovation or creative work.
In this way, patent or copyright monopoly can be thought as being like a privately imposed tax. If a drug company like Gilead Sciences can charge $84,000 for a Sovaldi, when the free market price would be something like $300, it has the same effect on the public as if the government imposed a tax of 28,000 percent on Sovaldi. It is the same amount of money out of people’s pockets.
We can argue about the merits of patent and copyright monopolies (see chapter 5 in Rigged [it’s free]), but the fact that they are alternative mechanisms that the government uses to finance research and creative work is not an arguable point. If we spent another $400 billion a year on research (roughly 20 percent of annual income tax collections), this would show up in the deficit and add to the debt. Yet somehow we are supposed to not pay attention when the government grants patents and copyrights that add hundreds of billions of dollars to what we pay for drugs, medical equipment, software and other protected items. (By my calculation, drug patents and related protections add close to $400 billion to what we spend each year on prescription drugs alone.)
This obvious point is missing from almost all the whining about the debt and deficit (see here for today’s example). The additional costs the public pays for items as a result of granting patent and copyright monopolies are never mentioned as burdens imposed on future generations. Somehow, we are not supposed to be concerned about making our kids pay huge amounts of money to Pfizer and Microsoft, it’s only a burden when the money has to be paid to the government.
That might fly as cheap political rhetoric, but it doesn’t make sense. And the people who talk about debts and deficits without mentioning patent monopolies deserve only ridicule, they should not be taken seriously.
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The NYT had a piece on efforts to reduce loopholes to ensure the government actually collects in taxes something close to the targeted rate. The piece likely left readers with the belief that it was not possible to establish such a system.
Actually, it is not hard. If the government required companies to turn over a percentage of its stock in the form of non-voting shares, which are treated exactly like voting shares in terms of dividends and buybacks, it would be impossible for companies to cheat the government unless it was also cheating its stockholders. This means that if the targeted tax rate is 25 percent, companies turn over an amount of shares equal to 25 percent of the total. If the company pays a $2 dividend to its other shares, it also pays a $2 dividend to the government. If it buys back 10 percent of its shares at $100 each, it also buys back 10 percent of the government’s shares at $100 each.
Anyhow, we could construct this sort of share system to ensure the government gets its share of corporate profits, but it’s probably too simple for policy types to understand.
Addendum
An important point that is often missed in this debate is that the tax avoidance industry is both an enormous waste and an important source of inequality. The resources spent on avoiding taxes, in the form of lawyers, accountants, and corporate engineering, are a complete waste from an economic standpoint. Also, running tax avoidance scams allows some people to get very rich. The private equity industry is to a large extent a tax avoidance scam. It has produced some of the very richest people in the country. For this reason, a reform to the tax code that substantially reduced the opportunities for gaming would be a big gain from a progressive perspective even if led to a small loss of tax revenue from the corporate sector.
The NYT had a piece on efforts to reduce loopholes to ensure the government actually collects in taxes something close to the targeted rate. The piece likely left readers with the belief that it was not possible to establish such a system.
Actually, it is not hard. If the government required companies to turn over a percentage of its stock in the form of non-voting shares, which are treated exactly like voting shares in terms of dividends and buybacks, it would be impossible for companies to cheat the government unless it was also cheating its stockholders. This means that if the targeted tax rate is 25 percent, companies turn over an amount of shares equal to 25 percent of the total. If the company pays a $2 dividend to its other shares, it also pays a $2 dividend to the government. If it buys back 10 percent of its shares at $100 each, it also buys back 10 percent of the government’s shares at $100 each.
Anyhow, we could construct this sort of share system to ensure the government gets its share of corporate profits, but it’s probably too simple for policy types to understand.
Addendum
An important point that is often missed in this debate is that the tax avoidance industry is both an enormous waste and an important source of inequality. The resources spent on avoiding taxes, in the form of lawyers, accountants, and corporate engineering, are a complete waste from an economic standpoint. Also, running tax avoidance scams allows some people to get very rich. The private equity industry is to a large extent a tax avoidance scam. It has produced some of the very richest people in the country. For this reason, a reform to the tax code that substantially reduced the opportunities for gaming would be a big gain from a progressive perspective even if led to a small loss of tax revenue from the corporate sector.
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