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.

As I understand it, there are many folks out there who think that we saw some major sleaze by the Wall Street big boys, screwing the little guy, when Robinhood stopped taking buy orders on GameStop, as the stock was soaring to record highs. They resumed taking buy orders after a pause of a day or so.

The story is that this allowed for Robinhood’s hedge fund friends to get out of their short positions, thereby saving themselves from huge losses. Yet another case of the big money Wall Street crew ripping off ordinary investors.

I have to admit, I don’t quite see the scandal here. First, the official story from Robinhood was that they needed to raise capital to met SEC leverage requirements. That seems to me to be outwardly plausible, since the company did in fact raise a substantial amount of capital during this brief period.

As far as the claim that they were giving the hedge fund boys time to close out their positions, that is possible, but the stock price fell precipitously during this period. If the hedgies were getting out, this would have meant they were buying to cover their shorts. That should have driven the stock price up, not down. My guess is that most of the hedge funds had closed out their positions when the stock was at $40 or $50, I doubt they still had big bucks in their shorts at the point where it hit $400.

But more importantly, what exactly is the Robinhood/GameStop crew complaining about? During the period of the buying moratorium they still had the opportunity to buy the stock through another platform if they were really dying to do it. But more importantly, the stock price fell by more than $100 a share during this period. If this was due to Robinhood’s moratorium, then the company allowed its clients to buy shares at a huge discount compared to the pre-moratorium price. What is the problem here?

Anyhow, I hate to ruin a good Wall Street scandal, but I would rather focus on real ones.

 

More on the FTT and the GameStop Game

In an earlier post I had said that I didn’t think that a financial transactions tax, of the size generally proposed, would have much impact on the sort of frenzy we saw around GameStop. A friend pointed out to me that Robinhood’s business model depends on passing its order to its partners, who profit by front-running trades and then making kickbacks to Robinhood. In this context, a tax of 0.1 percent (the amount proposed in a bill just put forward by Representative Peter DeFazio) may put Robinhood out of business, since it would likely absorb the full profit on a trade.

That is very plausible, but if we envision people using a platform like Robinhood and trading with low fees, it is still very possible that we could see the same sort of frenzy that we saw last week. In other words, I doubt raising the cost of trades by 0.1 percentage point could stop this sort of mania, although it could slow it down a bit.

Anyhow, as I said in my prior post, there is no reason the government shouldn’t get a few bucks out of the deal. We tax other forms of gambling, why not tax gambling on Wall Street?

 

As I understand it, there are many folks out there who think that we saw some major sleaze by the Wall Street big boys, screwing the little guy, when Robinhood stopped taking buy orders on GameStop, as the stock was soaring to record highs. They resumed taking buy orders after a pause of a day or so.

The story is that this allowed for Robinhood’s hedge fund friends to get out of their short positions, thereby saving themselves from huge losses. Yet another case of the big money Wall Street crew ripping off ordinary investors.

I have to admit, I don’t quite see the scandal here. First, the official story from Robinhood was that they needed to raise capital to met SEC leverage requirements. That seems to me to be outwardly plausible, since the company did in fact raise a substantial amount of capital during this brief period.

As far as the claim that they were giving the hedge fund boys time to close out their positions, that is possible, but the stock price fell precipitously during this period. If the hedgies were getting out, this would have meant they were buying to cover their shorts. That should have driven the stock price up, not down. My guess is that most of the hedge funds had closed out their positions when the stock was at $40 or $50, I doubt they still had big bucks in their shorts at the point where it hit $400.

But more importantly, what exactly is the Robinhood/GameStop crew complaining about? During the period of the buying moratorium they still had the opportunity to buy the stock through another platform if they were really dying to do it. But more importantly, the stock price fell by more than $100 a share during this period. If this was due to Robinhood’s moratorium, then the company allowed its clients to buy shares at a huge discount compared to the pre-moratorium price. What is the problem here?

Anyhow, I hate to ruin a good Wall Street scandal, but I would rather focus on real ones.

 

More on the FTT and the GameStop Game

In an earlier post I had said that I didn’t think that a financial transactions tax, of the size generally proposed, would have much impact on the sort of frenzy we saw around GameStop. A friend pointed out to me that Robinhood’s business model depends on passing its order to its partners, who profit by front-running trades and then making kickbacks to Robinhood. In this context, a tax of 0.1 percent (the amount proposed in a bill just put forward by Representative Peter DeFazio) may put Robinhood out of business, since it would likely absorb the full profit on a trade.

That is very plausible, but if we envision people using a platform like Robinhood and trading with low fees, it is still very possible that we could see the same sort of frenzy that we saw last week. In other words, I doubt raising the cost of trades by 0.1 percentage point could stop this sort of mania, although it could slow it down a bit.

Anyhow, as I said in my prior post, there is no reason the government shouldn’t get a few bucks out of the deal. We tax other forms of gambling, why not tax gambling on Wall Street?

 

The Wall Street crew is furious over the masses at Robinhood and Reddit ruining their games with their mass buying of GameStop, which wiped out the short position of a big hedge fund. The Robinhood/Reddit masses are touting this as a victory over Wall Street. The Wall Street insiders are decrying this effort to turn the market into a casino. It’s worth sorting this one out a bit and answering the question everyone is asking (or should be): would a financial transactions tax fix this problem?

First of all, much has been made of the fact that the hedge fund Melvin Capital was shorting GameStop, as though there is something illicit about shorting a company’s stock. This one requires some closing thinking. In principle, a major purpose of the stock market (we will come back to this) is to assess the true value of a company based on the information that investors collectively bring to the market.

Often this leads people to buy stock with the idea that the price will rise. However, an analysis can also lead investors to conclude that a stock is over-valued. In that case, if they are correct, they will make money by shorting the stock.

Their shorting provides information to the market and brings the price closer to its “true” value (yes, we’re coming back to this) in the same way that an investor’s decision to buy stock brings its price closer to its true value. There is no more reason to be upset about a short position than an investor buying stock.

A short position carries a large inherent risk in a way that buying the stock doesn’t. If an investor buys a stock, the most they can lose is the money they spent on the stock. By contrast, a short position means that an investor has sold a stock with a commitment to buy back the shares at some future point. If the stock price soars, as happened with GameStop, then they can lose many times their initial investment.

For this reason, most investors taking short positions cover their bet in some way. For example, they could purchase a call option at a price that is substantially higher than the price they shorted. This would allow them to limit their losses by exercising the call option.[1]

Covering their bet however also means that they will make less money from their short, if it pays off, since they had to also spend money on this insurance. As a result, some investors don’t cover their short and take the full risk themselves. This seems to have been the case with Melvin Capital.

Holding an uncovered short position leaves an investor exposed to the sort of risk posed by the Robinhood-Reddit gang. When they started buying GameStop, the price began to rise rapidly. This put Melvin Capital more in the hole.

The hedge fund’s creditors wanted them to limit their losses, which meant that they had to rush out and buy shares, covering their position. This sent the price still higher. The net result was that the price rose by more than 1500 percent, from just under $20 a share earlier this month to a peak of over $400 on Wednesday. The price has since fallen some, but it is still hugely above its levels from earlier this month.

What Does It Mean?

Let’s assume that Melvin Capital was right in its assessment of the stock. (I have not studied the market prospects for GameStop, but the attraction of a brick and mortar store selling video games does seem limited.) In effect, we saw a group of small investors manipulating the stock price to the detriment of a high-flying hedge fund.

It’s hard to shed any tears for Melvin Capital. They are supposed to be the grownups in the room. They should have understood the risk of an uncovered short position. If for some reason they chose to take the risk and lost, well them’s the breaks.

What about the idea of people acting collectively to manipulate stock prices? Well, this is bad, but it needs some additional context.

First, the point about it being bad is that there are smaller investors out there who buy and sell stock all the time (e.g. people with 401(k)s), and if they happen to get into the market at a bad time because of this manipulation, this will be bad news for them. To be concrete, suppose some sucker put $10,000 in GameStop when it was at $400 and at this time next month its is back down to $20. They lost 95 percent of their money.

As a practical matter, small investors should never be buying individual stocks, but you can still have a story where the not very sharp manager of a fund held by small investors buys into GameStop at $400. Presumably, that didn’t happen in this case, but it is easy to imagine investors being the victim of smaller manipulations of say 5 or 10 percent.

The GameStop case shows us an example of a large group of small investors acting collectively to manipulate stock prices. We can say this is bad, but what about when a large single investor, who controls billions of dollars of assets, does it themselves?

This is clearly illegal, but it nonetheless happens. In principle an investor can be fined and even imprisoned, but stock manipulation is difficult to detect and prove. The cases that are prosecuted are surely a small subset of the cases that actually occur.

There are also variations of what the Robinhood and Reddit gang pulled. For example, a prominent stock commentator may invest in stocks they tout (or get kickbacks). This was the accusation against Henry Blodget, a prominent stock analyst in the dotcom bubble. It is very hard to distinguish a situation where a commentator is making a pronouncement about a company because it is what they actually believe, from a situation where the comment is due to some carefully concealed financial interest.

Anyhow, long and short, the Robinhood/Reddit gang basically got into the game of stock manipulation. This is not especially to be applauded. They did catch a big hedge fund with its pants down, but many of the people involved are likely to end up losers – the people who bought GameStop at a grossly inflated price.

 

How Do We Fix It and Do We Need To?

It would be good if we could crack down on efforts to manipulate stock prices, whether they come from big actors like hedge funds, corporate CEOs timing their options, or the collective action of small investors. This will always be a difficult task, but unfortunately it is easiest when it is on open display, as appears to have been the case with the Robinhood/Reddit deal.

To be clear, if a group of people debate a company’s value and decide that a stock is grossly under-valued, there is no issue. But, if a group of people collectively say “hey, let’s try to drive up the price of GameStop,” you have a clear case of manipulation.

I’m not advocating a massive crackdown on the Robinhood/Reddit crew, but there should be consequences for this action. And, it would be reasonable to make the companies involved, Robinhood and Reddit, pay the costs. They should not allow their platforms to be used for stock manipulation.

A Financial Transactions Tax to the Rescue?

As a huge fan of financial transactions taxes (FTT), I would love to be able to say that a FTT would stop this sort of game-playing. Unfortunately, this isn’t true. FTTs of the size being discussed would barely place a dent in what we saw with GameStop.

The FTT just introduced by Representative Peter DeFazio is a tax of 0.1 percent. This means that an investor playing with $10,000 would pay $10 in taxes.[2] That isn’t likely to discourage a person determined to get rich while sinking a hedge fund. FTTs are great at limiting high frequency trading, which operates on very low margins, and will reduce the volume of trading more generally, eliminating waste in the financial sector, but they will not have much impact on those looking to make big bets.

One thing that they will do is ensure that the government gets a cut. In this sense, we should think of it as a tax on gambling. Other forms of gambling, like casinos or state lotteries, are subject to very high taxes. It shouldn’t be a big deal to impose a tax of 0.1 percent on Wall Street gambles.

If the Robinhood/Reddit deal ends up leading to an extra $50 billion in trades (a very crude guess), that would net the government $50 million in revenue with the DeFazio FTT in place. That is not big bucks compared to a $5 trillion federal budget (it comes to 0.001 percent), but it is substantial compared to some of the items that are occasionally subject to big political debates.

For example, it’s more than 10 percent of the $450 million that the Federal government is currently spending on the Corporation for Public Broadcasting. It’s roughly 30 percent of the National Endowment for the Arts $170 million annual budget. In short, the money raised by a FTT from this deal would at least allow us to pay for some nice things.

 

The Message of the GameStop Affair for Financial Transactions Taxes

One argument that opponents of FTTs like to make is that they will inhibit the process of “price discovery,” so that the market price of stocks and other assets will be further removed from their true price. In this story, the distortions will cause capital to be more poorly allocated and therefore lead to a less productive economy.

This argument suffers from the fact that relatively little money for investment is raised through the stock market. Usually, initial public offerings are done to allow the original investors to cash out. Established companies raise only small a portion of their investment funds through issuing shares.

However, this episode shows us all the craziness that can have a huge impact on stock prices. Should GameStop be worth $20 a share or $400 a share? That is a huge difference. Let’s imagine that the DeFazio tax could result in GameStop’s price being 5 percent too high or too low for limited period of time. (That would be a huge effect for a tax of 0.1 percent.) We would be talking about a range between $19 and $21. Does anyone still want to tell us that that a FTT will undermine the process of price discovery?

In short, this episode should help us to see the stock market with open eyes. Much of what takes place there is clearly gambling. We let people gamble in other contexts, but we tax it. There is no reason we shouldn’t tax it on Wall Street.

And the idea that it will distort market prices; do you want to tell me how Donald Trump really won the election?

[1] A call option gives an investor the right to buy a stock at a specified price on a specific date. For example, if a stock is currently priced at $20, I can buy a call option that gives me the right to buy the stock at $25 a share on March 31. This means that, if I am shorting the stock, the most I can lose is $5 a share, plus the cost of the call option.  

[2] Senator Bernie Sanders has proposed a tax of 0.5 percent, but that still would likely not have been a major hindrance to the Robinhood/Reddit folks.

The Wall Street crew is furious over the masses at Robinhood and Reddit ruining their games with their mass buying of GameStop, which wiped out the short position of a big hedge fund. The Robinhood/Reddit masses are touting this as a victory over Wall Street. The Wall Street insiders are decrying this effort to turn the market into a casino. It’s worth sorting this one out a bit and answering the question everyone is asking (or should be): would a financial transactions tax fix this problem?

First of all, much has been made of the fact that the hedge fund Melvin Capital was shorting GameStop, as though there is something illicit about shorting a company’s stock. This one requires some closing thinking. In principle, a major purpose of the stock market (we will come back to this) is to assess the true value of a company based on the information that investors collectively bring to the market.

Often this leads people to buy stock with the idea that the price will rise. However, an analysis can also lead investors to conclude that a stock is over-valued. In that case, if they are correct, they will make money by shorting the stock.

Their shorting provides information to the market and brings the price closer to its “true” value (yes, we’re coming back to this) in the same way that an investor’s decision to buy stock brings its price closer to its true value. There is no more reason to be upset about a short position than an investor buying stock.

A short position carries a large inherent risk in a way that buying the stock doesn’t. If an investor buys a stock, the most they can lose is the money they spent on the stock. By contrast, a short position means that an investor has sold a stock with a commitment to buy back the shares at some future point. If the stock price soars, as happened with GameStop, then they can lose many times their initial investment.

For this reason, most investors taking short positions cover their bet in some way. For example, they could purchase a call option at a price that is substantially higher than the price they shorted. This would allow them to limit their losses by exercising the call option.[1]

Covering their bet however also means that they will make less money from their short, if it pays off, since they had to also spend money on this insurance. As a result, some investors don’t cover their short and take the full risk themselves. This seems to have been the case with Melvin Capital.

Holding an uncovered short position leaves an investor exposed to the sort of risk posed by the Robinhood-Reddit gang. When they started buying GameStop, the price began to rise rapidly. This put Melvin Capital more in the hole.

The hedge fund’s creditors wanted them to limit their losses, which meant that they had to rush out and buy shares, covering their position. This sent the price still higher. The net result was that the price rose by more than 1500 percent, from just under $20 a share earlier this month to a peak of over $400 on Wednesday. The price has since fallen some, but it is still hugely above its levels from earlier this month.

What Does It Mean?

Let’s assume that Melvin Capital was right in its assessment of the stock. (I have not studied the market prospects for GameStop, but the attraction of a brick and mortar store selling video games does seem limited.) In effect, we saw a group of small investors manipulating the stock price to the detriment of a high-flying hedge fund.

It’s hard to shed any tears for Melvin Capital. They are supposed to be the grownups in the room. They should have understood the risk of an uncovered short position. If for some reason they chose to take the risk and lost, well them’s the breaks.

What about the idea of people acting collectively to manipulate stock prices? Well, this is bad, but it needs some additional context.

First, the point about it being bad is that there are smaller investors out there who buy and sell stock all the time (e.g. people with 401(k)s), and if they happen to get into the market at a bad time because of this manipulation, this will be bad news for them. To be concrete, suppose some sucker put $10,000 in GameStop when it was at $400 and at this time next month its is back down to $20. They lost 95 percent of their money.

As a practical matter, small investors should never be buying individual stocks, but you can still have a story where the not very sharp manager of a fund held by small investors buys into GameStop at $400. Presumably, that didn’t happen in this case, but it is easy to imagine investors being the victim of smaller manipulations of say 5 or 10 percent.

The GameStop case shows us an example of a large group of small investors acting collectively to manipulate stock prices. We can say this is bad, but what about when a large single investor, who controls billions of dollars of assets, does it themselves?

This is clearly illegal, but it nonetheless happens. In principle an investor can be fined and even imprisoned, but stock manipulation is difficult to detect and prove. The cases that are prosecuted are surely a small subset of the cases that actually occur.

There are also variations of what the Robinhood and Reddit gang pulled. For example, a prominent stock commentator may invest in stocks they tout (or get kickbacks). This was the accusation against Henry Blodget, a prominent stock analyst in the dotcom bubble. It is very hard to distinguish a situation where a commentator is making a pronouncement about a company because it is what they actually believe, from a situation where the comment is due to some carefully concealed financial interest.

Anyhow, long and short, the Robinhood/Reddit gang basically got into the game of stock manipulation. This is not especially to be applauded. They did catch a big hedge fund with its pants down, but many of the people involved are likely to end up losers – the people who bought GameStop at a grossly inflated price.

 

How Do We Fix It and Do We Need To?

It would be good if we could crack down on efforts to manipulate stock prices, whether they come from big actors like hedge funds, corporate CEOs timing their options, or the collective action of small investors. This will always be a difficult task, but unfortunately it is easiest when it is on open display, as appears to have been the case with the Robinhood/Reddit deal.

To be clear, if a group of people debate a company’s value and decide that a stock is grossly under-valued, there is no issue. But, if a group of people collectively say “hey, let’s try to drive up the price of GameStop,” you have a clear case of manipulation.

I’m not advocating a massive crackdown on the Robinhood/Reddit crew, but there should be consequences for this action. And, it would be reasonable to make the companies involved, Robinhood and Reddit, pay the costs. They should not allow their platforms to be used for stock manipulation.

A Financial Transactions Tax to the Rescue?

As a huge fan of financial transactions taxes (FTT), I would love to be able to say that a FTT would stop this sort of game-playing. Unfortunately, this isn’t true. FTTs of the size being discussed would barely place a dent in what we saw with GameStop.

The FTT just introduced by Representative Peter DeFazio is a tax of 0.1 percent. This means that an investor playing with $10,000 would pay $10 in taxes.[2] That isn’t likely to discourage a person determined to get rich while sinking a hedge fund. FTTs are great at limiting high frequency trading, which operates on very low margins, and will reduce the volume of trading more generally, eliminating waste in the financial sector, but they will not have much impact on those looking to make big bets.

One thing that they will do is ensure that the government gets a cut. In this sense, we should think of it as a tax on gambling. Other forms of gambling, like casinos or state lotteries, are subject to very high taxes. It shouldn’t be a big deal to impose a tax of 0.1 percent on Wall Street gambles.

If the Robinhood/Reddit deal ends up leading to an extra $50 billion in trades (a very crude guess), that would net the government $50 million in revenue with the DeFazio FTT in place. That is not big bucks compared to a $5 trillion federal budget (it comes to 0.001 percent), but it is substantial compared to some of the items that are occasionally subject to big political debates.

For example, it’s more than 10 percent of the $450 million that the Federal government is currently spending on the Corporation for Public Broadcasting. It’s roughly 30 percent of the National Endowment for the Arts $170 million annual budget. In short, the money raised by a FTT from this deal would at least allow us to pay for some nice things.

 

The Message of the GameStop Affair for Financial Transactions Taxes

One argument that opponents of FTTs like to make is that they will inhibit the process of “price discovery,” so that the market price of stocks and other assets will be further removed from their true price. In this story, the distortions will cause capital to be more poorly allocated and therefore lead to a less productive economy.

This argument suffers from the fact that relatively little money for investment is raised through the stock market. Usually, initial public offerings are done to allow the original investors to cash out. Established companies raise only small a portion of their investment funds through issuing shares.

However, this episode shows us all the craziness that can have a huge impact on stock prices. Should GameStop be worth $20 a share or $400 a share? That is a huge difference. Let’s imagine that the DeFazio tax could result in GameStop’s price being 5 percent too high or too low for limited period of time. (That would be a huge effect for a tax of 0.1 percent.) We would be talking about a range between $19 and $21. Does anyone still want to tell us that that a FTT will undermine the process of price discovery?

In short, this episode should help us to see the stock market with open eyes. Much of what takes place there is clearly gambling. We let people gamble in other contexts, but we tax it. There is no reason we shouldn’t tax it on Wall Street.

And the idea that it will distort market prices; do you want to tell me how Donald Trump really won the election?

[1] A call option gives an investor the right to buy a stock at a specified price on a specific date. For example, if a stock is currently priced at $20, I can buy a call option that gives me the right to buy the stock at $25 a share on March 31. This means that, if I am shorting the stock, the most I can lose is $5 a share, plus the cost of the call option.  

[2] Senator Bernie Sanders has proposed a tax of 0.5 percent, but that still would likely not have been a major hindrance to the Robinhood/Reddit folks.

This is a Twitter thread from a couple of months back. I thought I would post it here since there may be some interest.

Someone sent me a diatribe from some progressive about the evil of share buybacks. I have a few thoughts.

First the claims: they allow companies to inflate share prices, top management to manipulate share prices to maximize the value of options, divert money from long-term investment, and allow for tax avoidance. I’ll start with the tax story.

Buybacks, as opposed to dividends, do allow shareholders to avoid paying taxes as long as they hold their stock. This is a gift to rich people, but let’s not get carried away on the size of the gift.

First, as many progressives (including me) complain, shares typically turn over very quickly. That is one reason many of us support a financial transactions tax – to reduce the volume of pointless trading.

You don’t get to both complain about shares turning over all the time and that rich people never pay taxes because they hold their shares forever.

It’s true that some rich people do hold their shares until death, but even the Waltons must occasionally sell some shares to cover their living expenses. Anyhow, this is a real issue (could be addressed by taxing unrealized capital gains), but let’s not exaggerate its size.

On the question of long-term investment, I’m not at all impressed with the evidence. Do we think that companies would invest more if they paid out money to shareholders as dividends?

If the point is that the more money companies pay out to shareholders (as either dividends or buybacks), the less they invest, sure that is almost definitionally true. But this begs the question.

Are they paying out money to shareholders because they don’t see good investment opportunities or whether they aren’t taking advantage of good investment opportunities because they are paying out so much money to shareholders? I am strongly inclined to believe the former is the case.

Now let’s ask about inflating the share price. Suppose a stock sells for $100 and it is expected to earn $5 a share until the end of time. What happens if the company uses its full $5 in earnings to buy back stock.

The buyback critics tell us this would drive up the share price. In a limited sense, this will almost certainly be true. Suppose that we now have 5 percent fewer shares outstanding. This means that if we have the same price-to-earnings ratio, then the price per share will be 5 percent higher.

But how is this “inflating” the share price? The price to earnings ratio would be exactly the same after the buyback as before. What’s the problem?

We can tell a story that buybacks actually increase the price-to-earnings ratio. PEs have been unusually high in the last two decades, so this is not an implausible story on its face, even though believers in efficient market theory would say it’s impossible.

If buybacks do in fact drive up PEs, it would benefit top management, who will get more money for their options, and disadvantage future shareholders who will have to pay more money for each dollar of earnings, meaning that they will lower returns on the stock buy.

Current shareholders will be largely indifferent to a rise in PE since they have little reason (apart from tax considerations) to prefer money paid to them in higher share prices as opposed to dividends.

In this story, buybacks are effectively a tool used by top management to gain at the expense of future shareholders, with current shareholders being indifferent.

This raises the last point, top management using buybacks to manipulate stock prices to maximize the value of their options. This strikes me as a very plausible story, but it has important implications.

If top management is manipulating stock prices to increase the value of their options, it implies they are ripping off their companies. After all, if the shareholders wanted the CEO and other top executives to get more money, they could have just paid them more money.

The manipulation story implies that they are taking money that the shareholders, or their agent, the board of directors, did not intend them to have.

The manipulation story also means that the claim that the company is being run to maximize returns to shareholders is not true. In this case, the shareholders should be allies in efforts to rein in CEO pay.

To my view, reining in CEO pay is very important because of the distorting effect it has on pay structures throughout the economy. A world where CEOs get paid $2M (like in the good old days) is very different than today’s world where they get paid $20 M.

This leaves the moral of the evil buyback story as being that we need to crack down on CEOs ripping off their companies and bring their pay down to earth.

This is a Twitter thread from a couple of months back. I thought I would post it here since there may be some interest.

Someone sent me a diatribe from some progressive about the evil of share buybacks. I have a few thoughts.

First the claims: they allow companies to inflate share prices, top management to manipulate share prices to maximize the value of options, divert money from long-term investment, and allow for tax avoidance. I’ll start with the tax story.

Buybacks, as opposed to dividends, do allow shareholders to avoid paying taxes as long as they hold their stock. This is a gift to rich people, but let’s not get carried away on the size of the gift.

First, as many progressives (including me) complain, shares typically turn over very quickly. That is one reason many of us support a financial transactions tax – to reduce the volume of pointless trading.

You don’t get to both complain about shares turning over all the time and that rich people never pay taxes because they hold their shares forever.

It’s true that some rich people do hold their shares until death, but even the Waltons must occasionally sell some shares to cover their living expenses. Anyhow, this is a real issue (could be addressed by taxing unrealized capital gains), but let’s not exaggerate its size.

On the question of long-term investment, I’m not at all impressed with the evidence. Do we think that companies would invest more if they paid out money to shareholders as dividends?

If the point is that the more money companies pay out to shareholders (as either dividends or buybacks), the less they invest, sure that is almost definitionally true. But this begs the question.

Are they paying out money to shareholders because they don’t see good investment opportunities or whether they aren’t taking advantage of good investment opportunities because they are paying out so much money to shareholders? I am strongly inclined to believe the former is the case.

Now let’s ask about inflating the share price. Suppose a stock sells for $100 and it is expected to earn $5 a share until the end of time. What happens if the company uses its full $5 in earnings to buy back stock.

The buyback critics tell us this would drive up the share price. In a limited sense, this will almost certainly be true. Suppose that we now have 5 percent fewer shares outstanding. This means that if we have the same price-to-earnings ratio, then the price per share will be 5 percent higher.

But how is this “inflating” the share price? The price to earnings ratio would be exactly the same after the buyback as before. What’s the problem?

We can tell a story that buybacks actually increase the price-to-earnings ratio. PEs have been unusually high in the last two decades, so this is not an implausible story on its face, even though believers in efficient market theory would say it’s impossible.

If buybacks do in fact drive up PEs, it would benefit top management, who will get more money for their options, and disadvantage future shareholders who will have to pay more money for each dollar of earnings, meaning that they will lower returns on the stock buy.

Current shareholders will be largely indifferent to a rise in PE since they have little reason (apart from tax considerations) to prefer money paid to them in higher share prices as opposed to dividends.

In this story, buybacks are effectively a tool used by top management to gain at the expense of future shareholders, with current shareholders being indifferent.

This raises the last point, top management using buybacks to manipulate stock prices to maximize the value of their options. This strikes me as a very plausible story, but it has important implications.

If top management is manipulating stock prices to increase the value of their options, it implies they are ripping off their companies. After all, if the shareholders wanted the CEO and other top executives to get more money, they could have just paid them more money.

The manipulation story implies that they are taking money that the shareholders, or their agent, the board of directors, did not intend them to have.

The manipulation story also means that the claim that the company is being run to maximize returns to shareholders is not true. In this case, the shareholders should be allies in efforts to rein in CEO pay.

To my view, reining in CEO pay is very important because of the distorting effect it has on pay structures throughout the economy. A world where CEOs get paid $2M (like in the good old days) is very different than today’s world where they get paid $20 M.

This leaves the moral of the evil buyback story as being that we need to crack down on CEOs ripping off their companies and bring their pay down to earth.

President Biden’s proposal to raise the minimum wage to $15 an hour by 2025 is prompting a backlash from the usual suspects. As we hear the cries about how this will be the end of the world for small businesses and lead to massive unemployment, especially for young workers, minorities, and the less-educated, there are a few points worth keeping in mind.

While $15 an hour is a large increase from the current $7.25 an hour, this is because we’ve allowed so much time to pass since the last minimum wage hike. The 12 years since the last increase in the minimum wage is the longest period without a hike since the federal minimum wage was first established in 1938. Few workers are now earning the national minimum wage, both because of market conditions and because many states and cities now have considerably higher minimum wages.

If the minimum wage had just kept pace with prices since its peak value in 1968 it would be over $12 an hour today and around $13.50 by 2025. Keeping the minimum wage rising in step with prices is actually a very modest target. It means that low-wage workers are not sharing in the benefits of economic growth.

From 1938 to 1968 the minimum wage rose in step with productivity growth. This means that as the economy grew and the country became richer, workers at the bottom of the ladder shared in this growth. If the minimum wage had continued to keep pace with productivity growth it would have been over $24 an hour last year and would be close to $30 an hour in 2025.

There has been considerable research on the extent to which the minimum wage leads to job loss. Much recent research finds that even substantial increases in the minimum, such as the $15 an hour minimum wage that is already in place in Seattle, have no effect on employment.[1]

It is worth noting that even the research that finds the minimum wage reduces employment generally finds a relatively modest effect. A recent review article by prominent opponents of the minimum wage found that the median estimate of elasticity was -0.12 for affected workers. This estimate means, for example, that a 10 percent increase in the minimum wage would lead to a reduction in employment among affected workers (e.g. workers with less education or young workers) of 1.2 percent.

It is important to realize that even in this case we are not talking about 1.2 percent of affected workers going unemployed. Low-wage jobs turn over rapidly. For example, in a typical month before the pandemic hit, more than 6.0 percent of the workers in the hotel and restaurant industries lost or left their jobs. If we take the elasticity estimate of -0.12, it would mean that at a point in time we have 1.2 percent fewer people working in the sector as a result of a ten percent increase in the minimum wage.[2]

Carrying out the arithmetic, this means that an average low-wage worker would be putting in 1.2 percent fewer hours in a year, but getting 10 percent more money for each hour they worked. That would mean that they would be pocketing roughly 9.0 percent more in wages each year. And, this calculation assumes there is an employment effect, ignoring considerable evidence that there is none.

A higher minimum wage also has positive societal effects. A recent review of the literature found that a 10 percent increase in the minimum wage would reduce the poverty rate by 5.3 percent. Another study found that a 50 cent increase in the minimum wage reduced the likelihood that formerly incarcerated people would return to prison within a year by 2.8 percent. The long-term effects of these and other benefits are likely to be quite large.

Finally, it is worth remembering that there is a lot of money on the side of those looking to stop minimum wage hikes. This can affect the research on the topic. While few researchers may deliberately cook their results to favor the fast-food industry, they know they can get funding for research that finds a higher minimum wage leads to job loss. There is much less money available for supporting research that finds no effect. (I know that first-hand in my former capacity as co-director of CEPR.)

Probably the clearest case of such bias affecting research findings was a paper by David Neumark and William Wascher, two of the most prominent opponents of higher minimum wages. Neumark and Wascher analyzed data given to them by the Employment Policies Institute (a.k.a. “the evil EPI”), a lobbying group for the restaurant industry. They used this data to replicate a pathbreaking study by economists David Card and Alan Krueger, which found no job loss associated with a minimum wage hike in New Jersey.

Neumark and Wascher’s study found that there was in fact a significant loss of jobs in fast-food restaurants in New Jersey following the minimum wage hike. However, an analysis of the Neumark and Wascher data by John Schmitt found patterns that were not plausible. It was subsequently revealed that an owner of a number of fast-food restaurants in New Jersey and Pennsylvania (the control state) had submitted fake payroll data to the Employment Policy Institute to be used in the study. (There is no reason to believe that Neumark and Wascher realized they were working with fraudulent data.) If the faked data was removed from the analysis, the finding of minimum-wage induced job loss disappeared.

This story should be seen as a warning. Most researchers are honest and will accurately report what they find in their analysis. However, we should realize that there are some pretty big thumbs on the scale in the minimum wage battle, and those thumbs want to show that minimum wage hikes will cause job loss.  

[1] A paper by John Schmitt explains why it could be the case that, contrary to the textbook story, a higher minimum wage may have no effect on employment.

[2] The actual story is a bit more complicated since typically these studies look at a specific type of worker, such as young people or workers with less education. It could be the case that employment in an industry has not changed, but we have seen older or more educated workers replacing younger and less-educated workers.

President Biden’s proposal to raise the minimum wage to $15 an hour by 2025 is prompting a backlash from the usual suspects. As we hear the cries about how this will be the end of the world for small businesses and lead to massive unemployment, especially for young workers, minorities, and the less-educated, there are a few points worth keeping in mind.

While $15 an hour is a large increase from the current $7.25 an hour, this is because we’ve allowed so much time to pass since the last minimum wage hike. The 12 years since the last increase in the minimum wage is the longest period without a hike since the federal minimum wage was first established in 1938. Few workers are now earning the national minimum wage, both because of market conditions and because many states and cities now have considerably higher minimum wages.

If the minimum wage had just kept pace with prices since its peak value in 1968 it would be over $12 an hour today and around $13.50 by 2025. Keeping the minimum wage rising in step with prices is actually a very modest target. It means that low-wage workers are not sharing in the benefits of economic growth.

From 1938 to 1968 the minimum wage rose in step with productivity growth. This means that as the economy grew and the country became richer, workers at the bottom of the ladder shared in this growth. If the minimum wage had continued to keep pace with productivity growth it would have been over $24 an hour last year and would be close to $30 an hour in 2025.

There has been considerable research on the extent to which the minimum wage leads to job loss. Much recent research finds that even substantial increases in the minimum, such as the $15 an hour minimum wage that is already in place in Seattle, have no effect on employment.[1]

It is worth noting that even the research that finds the minimum wage reduces employment generally finds a relatively modest effect. A recent review article by prominent opponents of the minimum wage found that the median estimate of elasticity was -0.12 for affected workers. This estimate means, for example, that a 10 percent increase in the minimum wage would lead to a reduction in employment among affected workers (e.g. workers with less education or young workers) of 1.2 percent.

It is important to realize that even in this case we are not talking about 1.2 percent of affected workers going unemployed. Low-wage jobs turn over rapidly. For example, in a typical month before the pandemic hit, more than 6.0 percent of the workers in the hotel and restaurant industries lost or left their jobs. If we take the elasticity estimate of -0.12, it would mean that at a point in time we have 1.2 percent fewer people working in the sector as a result of a ten percent increase in the minimum wage.[2]

Carrying out the arithmetic, this means that an average low-wage worker would be putting in 1.2 percent fewer hours in a year, but getting 10 percent more money for each hour they worked. That would mean that they would be pocketing roughly 9.0 percent more in wages each year. And, this calculation assumes there is an employment effect, ignoring considerable evidence that there is none.

A higher minimum wage also has positive societal effects. A recent review of the literature found that a 10 percent increase in the minimum wage would reduce the poverty rate by 5.3 percent. Another study found that a 50 cent increase in the minimum wage reduced the likelihood that formerly incarcerated people would return to prison within a year by 2.8 percent. The long-term effects of these and other benefits are likely to be quite large.

Finally, it is worth remembering that there is a lot of money on the side of those looking to stop minimum wage hikes. This can affect the research on the topic. While few researchers may deliberately cook their results to favor the fast-food industry, they know they can get funding for research that finds a higher minimum wage leads to job loss. There is much less money available for supporting research that finds no effect. (I know that first-hand in my former capacity as co-director of CEPR.)

Probably the clearest case of such bias affecting research findings was a paper by David Neumark and William Wascher, two of the most prominent opponents of higher minimum wages. Neumark and Wascher analyzed data given to them by the Employment Policies Institute (a.k.a. “the evil EPI”), a lobbying group for the restaurant industry. They used this data to replicate a pathbreaking study by economists David Card and Alan Krueger, which found no job loss associated with a minimum wage hike in New Jersey.

Neumark and Wascher’s study found that there was in fact a significant loss of jobs in fast-food restaurants in New Jersey following the minimum wage hike. However, an analysis of the Neumark and Wascher data by John Schmitt found patterns that were not plausible. It was subsequently revealed that an owner of a number of fast-food restaurants in New Jersey and Pennsylvania (the control state) had submitted fake payroll data to the Employment Policy Institute to be used in the study. (There is no reason to believe that Neumark and Wascher realized they were working with fraudulent data.) If the faked data was removed from the analysis, the finding of minimum-wage induced job loss disappeared.

This story should be seen as a warning. Most researchers are honest and will accurately report what they find in their analysis. However, we should realize that there are some pretty big thumbs on the scale in the minimum wage battle, and those thumbs want to show that minimum wage hikes will cause job loss.  

[1] A paper by John Schmitt explains why it could be the case that, contrary to the textbook story, a higher minimum wage may have no effect on employment.

[2] The actual story is a bit more complicated since typically these studies look at a specific type of worker, such as young people or workers with less education. It could be the case that employment in an industry has not changed, but we have seen older or more educated workers replacing younger and less-educated workers.

Donald Trump is a person who glories in his own ignorance. He seems to know little about anything and clearly doesn’t care. Any evidence that contradicts his pronouncements is simply “FAKE NEWS.”

Thomas Friedman seems to have the same attitude as he makes grand pronouncements about the economy that are transparently absurd. I discovered this in his latest column, which carried the promising headline, “Made in the U.S.A.: Socialism for the Rich. Capitalism for the Rest.”

It turns out that the gist of Friedman’s “socialism for the rich” is low-interest rates. Following Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, Friedman is upset that we don’t have recessions and have more businesses fail. I am not kidding, he literally says this:

“Meanwhile, he added, as governments keep stepping in to eliminate recessions, downturns no longer play their role of purging the economy of inefficient companies, and recoveries have grown weaker and weaker, with lower productivity growth.”

This statement is bizarre for two reasons. First, productivity growth has been slow since 1973, with the exception of the decade from 1995 to 2005. Interest rates were actually quite high in the 1970s and 1980s, so it seems pretty difficult to blame slow productivity growth on low-interest rates. We also had a very bad recession in both the decade of the 1970s and 1980s. That didn’t seem to do much to boost productivity growth.

The other problem is that productivity has actually soared in the last year, rising 4.0 percent from the third quarter of 2019 to the third quarter of 2020. That’s against a long term trend of growth of less than 1.5 percent. I am always the first to point out that these data are highly erratic, and the last year was obviously an extraordinary one, but it is a bit odd to be yelling about weak productivity growth at a time when we are seeing an extraordinary boom in productivity.

Other parts of the piece make equally little sense. It’s true that low-interest rates generally support higher stock prices, but they have also allowed millions of people to pay less money on their home mortgages and car loans. We have millions of very middle-class homeowners who were able to knock 1-2 percentage points off their mortgage when they refinanced. For someone with a $200,000 mortgage, this comes to $2,000 to $4,000 a year. Maybe that isn’t real money to Thomas Friedman, but that is a very big deal to a family earning $60,000 or $70,000 a year. (Btw, if we are upset that high stock prices lead to greater inequality of wealth, how come no one celebrates the reduction in inequality when stock prices fall?)

Lower rates also allowed for millions of people to buy cars, which also provided a huge boost to the auto industry, creating jobs for workers in the auto industry. And, lower rates allowed for state and local governments to borrow at lower costs, freeing up money for a wide range of social services. Small businesses were also able to borrow at lower rates, either to expand or just survive the pandemic. None of that sounds like socialism for the rich to me.

And, Friedman also gives us this Trumpian gem of illogic:

“Now that so many countries, led by the U.S., have massively increased their debt loads, if we got even a small burst of inflation that drove interest on the 10-year Treasury to 3 percent from 1 percent, the amount of money the U.S. would have to devote to debt servicing would be so enormous that little money might be left for discretionary spending on research, infrastructure or education — or another rainy day.”

Hmmm, the amount devoted to debt service “would be so enormous that little money might be left for discretionary spending on research, infrastructure or education — or another rainy day.”

Let’s bring in Mr. Arithmetic here. Our debt to GDP ratio is roughly 100 percent, give or take a few percentage points. Let’s suppose that the interest rate suddenly rose to 3.0 percent. That would mean that the amount of interest we were paying was equal to 3 percent of GDP. That would make the burden of our debt service a bit less than it was in the early 1990s, which folks may recall was a very prosperous decade.

Furthermore, the interest on our bonds won’t jump all at once, since we have locked in low rates on the long-term bonds we have already issued. Also, more rapid inflation means that the debt to GDP ratio will be falling. Ignoring the effect of compounding, if we see inflation that is two percentage points higher than expected for a decade, that means nominal GDP will be 20 percent higher at the end of this period, and the debt to GDP ratio and the interest burden will be 20 percent lower.

In short, Friedman and his source at Morgan Stanley have no case. But in the Trumpian section of the New York Times, evidence and logic have no place.

 

 

Donald Trump is a person who glories in his own ignorance. He seems to know little about anything and clearly doesn’t care. Any evidence that contradicts his pronouncements is simply “FAKE NEWS.”

Thomas Friedman seems to have the same attitude as he makes grand pronouncements about the economy that are transparently absurd. I discovered this in his latest column, which carried the promising headline, “Made in the U.S.A.: Socialism for the Rich. Capitalism for the Rest.”

It turns out that the gist of Friedman’s “socialism for the rich” is low-interest rates. Following Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, Friedman is upset that we don’t have recessions and have more businesses fail. I am not kidding, he literally says this:

“Meanwhile, he added, as governments keep stepping in to eliminate recessions, downturns no longer play their role of purging the economy of inefficient companies, and recoveries have grown weaker and weaker, with lower productivity growth.”

This statement is bizarre for two reasons. First, productivity growth has been slow since 1973, with the exception of the decade from 1995 to 2005. Interest rates were actually quite high in the 1970s and 1980s, so it seems pretty difficult to blame slow productivity growth on low-interest rates. We also had a very bad recession in both the decade of the 1970s and 1980s. That didn’t seem to do much to boost productivity growth.

The other problem is that productivity has actually soared in the last year, rising 4.0 percent from the third quarter of 2019 to the third quarter of 2020. That’s against a long term trend of growth of less than 1.5 percent. I am always the first to point out that these data are highly erratic, and the last year was obviously an extraordinary one, but it is a bit odd to be yelling about weak productivity growth at a time when we are seeing an extraordinary boom in productivity.

Other parts of the piece make equally little sense. It’s true that low-interest rates generally support higher stock prices, but they have also allowed millions of people to pay less money on their home mortgages and car loans. We have millions of very middle-class homeowners who were able to knock 1-2 percentage points off their mortgage when they refinanced. For someone with a $200,000 mortgage, this comes to $2,000 to $4,000 a year. Maybe that isn’t real money to Thomas Friedman, but that is a very big deal to a family earning $60,000 or $70,000 a year. (Btw, if we are upset that high stock prices lead to greater inequality of wealth, how come no one celebrates the reduction in inequality when stock prices fall?)

Lower rates also allowed for millions of people to buy cars, which also provided a huge boost to the auto industry, creating jobs for workers in the auto industry. And, lower rates allowed for state and local governments to borrow at lower costs, freeing up money for a wide range of social services. Small businesses were also able to borrow at lower rates, either to expand or just survive the pandemic. None of that sounds like socialism for the rich to me.

And, Friedman also gives us this Trumpian gem of illogic:

“Now that so many countries, led by the U.S., have massively increased their debt loads, if we got even a small burst of inflation that drove interest on the 10-year Treasury to 3 percent from 1 percent, the amount of money the U.S. would have to devote to debt servicing would be so enormous that little money might be left for discretionary spending on research, infrastructure or education — or another rainy day.”

Hmmm, the amount devoted to debt service “would be so enormous that little money might be left for discretionary spending on research, infrastructure or education — or another rainy day.”

Let’s bring in Mr. Arithmetic here. Our debt to GDP ratio is roughly 100 percent, give or take a few percentage points. Let’s suppose that the interest rate suddenly rose to 3.0 percent. That would mean that the amount of interest we were paying was equal to 3 percent of GDP. That would make the burden of our debt service a bit less than it was in the early 1990s, which folks may recall was a very prosperous decade.

Furthermore, the interest on our bonds won’t jump all at once, since we have locked in low rates on the long-term bonds we have already issued. Also, more rapid inflation means that the debt to GDP ratio will be falling. Ignoring the effect of compounding, if we see inflation that is two percentage points higher than expected for a decade, that means nominal GDP will be 20 percent higher at the end of this period, and the debt to GDP ratio and the interest burden will be 20 percent lower.

In short, Friedman and his source at Morgan Stanley have no case. But in the Trumpian section of the New York Times, evidence and logic have no place.

 

 

The vaccine rollout process has been painfully slow in the United States. More than 40 days after the first vaccine was approved for emergency use by the Food and Drug Administration, just over 6.0 percent of our population has been vaccinated. And that is with just the first shot, very few having gotten the two shots needed to hit the targeted levels of immunity. Thankfully the pace of the vaccination program is picking up, both as kinks are worked out and now that we have an administration that cares about getting people vaccinated.

But we still have to ask why the process has been so slow. We have an obvious answer in the United States, the Trump administration basically said that distribution wasn’t its problem. As Donald Trump once tweeted, he considered the distribution process the responsibility of the states and gave the order “get it done.”

If we can explain the failure to have more rapid distribution in the United States on Trump’s Keystone Cops crew, what explains the failures in other wealthy countries? As bad as the U.S. has done so far, we have vaccinated a larger share of our population than any country in Europe with the exception of the United Kingdom. That’s right, countries like Denmark, France, and even Germany have done worse in vaccinating their populations than the United States. And these countries ostensibly have competent leaders and all have national health care systems. Nonetheless, they have done worse far worse in the case of France and Germany, than Donald Trump’s clown show.

 

The Vaccine Agenda if Saving Lives Was the Priority

The pandemic is a worldwide crisis, that requires a worldwide solution. This is a classic case where there are enormous benefits from collective action and few downsides. This is not a case, like seizing oil or other natural resources, where if the United States gets more, everyone else gets less and vice-versa. Sharing knowledge about vaccines, treatments, and best practices for prevention is costless and the whole world benefits if the pandemic can be contained as quickly as possible. This point is being driven home as new strains develop through mutation, which may spread more quickly and possibly be more deadly and vaccine-resistant.

The logical path would have been to open-source all research on treatments and vaccines, both so that progress could be made as quickly as possible, and also intellectual property rights would not be an obstacle to large-scale production throughout the world. This would have required some collective agreement where countries agreed to both put up some amount of research funding, presumably based on size and per capita income, and also that all findings, including results from clinical trials, would be quickly posted on the web. This way, the information would be quickly shared so that researchers and public health experts everywhere could benefit.

This sort of international cooperation was obviously not on Donald Trump’s agenda. Mr. “America First!” was not interested in the possibility that we might better be able to tame the pandemic if we acted in cooperation with other countries. But it wasn’t just Donald Trump who rejected the idea of open research and international cooperation, it really wasn’t on the agenda of any prominent politician, including progressives like Bernie Sanders and Elizabeth Warren. It was an issue in the scientific community, but as we know, people in policy circles don’t take science seriously. (I describe a mechanism for advanced funding of open-source research in chapter 5 of Rigged [it’s free].)  

The big problem, of course, is that going this route of open-source research and international cooperation could call into question the merits of patent monopoly financing of prescription drug research. After all, if publicly funded open-source research proved to be the best mechanism for financing the development of drugs and vaccines in a pandemic, maybe this would be the case more generally. And, no one in a position of power in American politics wanted to take this risk of a bad example.  

 

Making the Best of the Single Country Route

If we had gone the route of publicly funded open-source research, then the scientific community would have access to all the clinical trial results of all the vaccines as they become available. This would mean that countries could decide which vaccines they wanted to use based on the data.[1] They could also begin to produce and stockpile large quantities of vaccines, as soon as they entered Phase 3 trials. Incredibly, it seems no country has done this.

While we could not know that a vaccine entering Phase 3 trials will subsequently be shown to be safe and effective, the advantages of having a large stockpile available that can be quickly distributed swamp the potential costs of buying large quantities of a vaccine that is not approved. Suppose the United States had produced 400 million doses of a vaccine that turned out not to be effective. With the production costs of a vaccine at around $2 per shot, this would mean that we had wasted $800 million. With the country seeing more than 4,000 deaths a day at the peak of the pandemic and the economic losses from the pandemic running into the trillions, the risk of spending $800 million on an ineffective vaccine seems rather trivial.  

For whatever reason, no country went this stockpile route. Just to be clear, there was no physical obstacle to producing billions of vaccines by the end of 2020. If we can build one factory to produce these vaccines, we can build ten factories. If some of the inputs are in short supply, we can build more factories to produce the inputs. There may be questions of patent rights, but that is different than a question of physical limitations.

But apart from the physical availability of the vaccines, there is also the issue of distributing the vaccine and actually getting the shots in peoples’ arms. It seems that, rather than making preparations in advance, most governments acted like the approval of the vaccine was a surprise and only began to make plans for distribution after the fact.

This is really mind-boggling. While we could not know the exact date a vaccine would be approved, it was known that several vaccines were approaching the endpoints of their Phase 3 trials. In that situation, it is hard to understand why governments would not have been crafting detailed plans for how they would get the vaccines to people as quickly as possible, once the authorization had been made.

This would have meant pre-positioning stockpiles as close as possible to inoculation locations. These locations should also have been selected in advance, with plans to have the necessary personnel available to oversee and administer the shots. There are reports that there are shortages of people trained in administering the shots. The fall would have been a great time to train enough people to administer the vaccine.

In a normal flu season, close to 2 million shots are given every day, without any heroic efforts by the government. Given the urgency of getting the pandemic under control, it is hard to understand why we could not have administered shots at this pace, if not considerably faster. The fact that it wasn’t just the United States that missed this standard, but also every country in Europe, indicates an enormous failure of public health systems.  

As a result of these failures, we will see millions of preventable infections and tens of thousands of avoidable deaths. We will also see hundreds of billions of dollars of lost economic output, as the pandemic will disrupt the economy for longer than necessary.

 

Will There be a Penalty for Failure?

I raise this issue primarily because I’m fairly confident the answer is no. To be clear, my point is that not being prepared for the mass distribution of vaccines as soon as they were approved was a massive policy failure both in the United States and Europe. I have no idea who was responsible for the failure, but it was presumably several high-level people in each country. In any reasonable world, these people would suffer serious career consequences for not getting the vaccines out quickly.

I am not making this point out of any vindictiveness—I don’t know any of these people—I just want to see high-end workers held to the same job performance standards as those lower down the ladder. The dishwasher that breaks the dishes gets fired. The custodian who doesn’t clean the toilet gets fired. Why doesn’t the person who messes up vaccine distribution pay a price?

Unfortunately, the lack of accountability at the top is the rule, not the exception. To take my favorite example in economics, to my knowledge Carmen Reinhart and Ken Rogoff suffered no consequences (other than embarrassment) for their famous Excel spreadsheet error. To remind people, this was when they produced a paper that purported to show that countries with debt-GDP ratios above 90 percent took a huge hit to GDP growth. It turned out that this result was driven entirely by an error in a spreadsheet. When the error was corrected, the result went away.

Reinhart and Rogoff’s paper was used to justify austerity policies in Europe and the United States. As a result of these policies millions of people needlessly went unemployed and many important areas of social spending, like education and health care, saw serious cuts.

Reinhart and Rogoff’s error was surely an honest mistake (they are both competent economists, who could have come up with much better ways to fake results if that was their intention), but their failure to check their numbers was inexcusable. As they explained after the error was uncovered, the mistake was the result of rushing to finish a paper for a conference presentation.

Mistakes like that happen, and most of us have committed similar errors. That is not a big deal. The big deal was that, as their work was being cited by members of Congress, finance ministers, and central bankers, that it never occurred to them to review their rushed work.  

Should Reinhart and Rogoff have lost their tenured positions at Harvard? Perhaps this would have been appropriate. At the very least, they should have lost their named chairs, after all, many people had their lives ruined in part because they couldn’t be bothered to check their numbers.

 

Accountability for Our Elites

As I have written endlessly, we have seen a massive upward redistribution of income in the United States over the last four decades. Other countries have also seen increases in inequality over this period, although not as large. I have argued that this upward redistribution was by design, not the natural development of the economy, but for this issue, the question of causes is beside the point.

The people who have been able to enjoy rising incomes and financial security over the last four decades ostensibly justify their better position by their greater contribution to the economy and society. But when you mess up in your job in big ways that lead to major costs to the economy and society, that claim doesn’t hold water.

We have seen a massive rise in right-wing populism where large numbers of less-educated workers reject the elites and all their claims about the world. When we have massive elite mess-ups, as we now see with vaccine distribution, and there are zero consequences for those responsible, this has to contribute to the resentment of the less advantaged.

It is appalling that we have structured the economy in such a way that the elites can be protected from consequences for even the most extreme failures. The fact so few elite types even see this as a problem (seen any columns in the NYT calling for firing?) shows that the populists have a real case. The economy is rigged against the left behind, and the people that control major news outlets, which include many self-described liberals or progressives, won’t even talk about it.

[1] China and Russia have not been open with the clinical trial data for their vaccines. Presumably, if they had committed to transparency in an agreement, they would abide by their commitment, but obviously, we cannot be certain this would be the case.

The vaccine rollout process has been painfully slow in the United States. More than 40 days after the first vaccine was approved for emergency use by the Food and Drug Administration, just over 6.0 percent of our population has been vaccinated. And that is with just the first shot, very few having gotten the two shots needed to hit the targeted levels of immunity. Thankfully the pace of the vaccination program is picking up, both as kinks are worked out and now that we have an administration that cares about getting people vaccinated.

But we still have to ask why the process has been so slow. We have an obvious answer in the United States, the Trump administration basically said that distribution wasn’t its problem. As Donald Trump once tweeted, he considered the distribution process the responsibility of the states and gave the order “get it done.”

If we can explain the failure to have more rapid distribution in the United States on Trump’s Keystone Cops crew, what explains the failures in other wealthy countries? As bad as the U.S. has done so far, we have vaccinated a larger share of our population than any country in Europe with the exception of the United Kingdom. That’s right, countries like Denmark, France, and even Germany have done worse in vaccinating their populations than the United States. And these countries ostensibly have competent leaders and all have national health care systems. Nonetheless, they have done worse far worse in the case of France and Germany, than Donald Trump’s clown show.

 

The Vaccine Agenda if Saving Lives Was the Priority

The pandemic is a worldwide crisis, that requires a worldwide solution. This is a classic case where there are enormous benefits from collective action and few downsides. This is not a case, like seizing oil or other natural resources, where if the United States gets more, everyone else gets less and vice-versa. Sharing knowledge about vaccines, treatments, and best practices for prevention is costless and the whole world benefits if the pandemic can be contained as quickly as possible. This point is being driven home as new strains develop through mutation, which may spread more quickly and possibly be more deadly and vaccine-resistant.

The logical path would have been to open-source all research on treatments and vaccines, both so that progress could be made as quickly as possible, and also intellectual property rights would not be an obstacle to large-scale production throughout the world. This would have required some collective agreement where countries agreed to both put up some amount of research funding, presumably based on size and per capita income, and also that all findings, including results from clinical trials, would be quickly posted on the web. This way, the information would be quickly shared so that researchers and public health experts everywhere could benefit.

This sort of international cooperation was obviously not on Donald Trump’s agenda. Mr. “America First!” was not interested in the possibility that we might better be able to tame the pandemic if we acted in cooperation with other countries. But it wasn’t just Donald Trump who rejected the idea of open research and international cooperation, it really wasn’t on the agenda of any prominent politician, including progressives like Bernie Sanders and Elizabeth Warren. It was an issue in the scientific community, but as we know, people in policy circles don’t take science seriously. (I describe a mechanism for advanced funding of open-source research in chapter 5 of Rigged [it’s free].)  

The big problem, of course, is that going this route of open-source research and international cooperation could call into question the merits of patent monopoly financing of prescription drug research. After all, if publicly funded open-source research proved to be the best mechanism for financing the development of drugs and vaccines in a pandemic, maybe this would be the case more generally. And, no one in a position of power in American politics wanted to take this risk of a bad example.  

 

Making the Best of the Single Country Route

If we had gone the route of publicly funded open-source research, then the scientific community would have access to all the clinical trial results of all the vaccines as they become available. This would mean that countries could decide which vaccines they wanted to use based on the data.[1] They could also begin to produce and stockpile large quantities of vaccines, as soon as they entered Phase 3 trials. Incredibly, it seems no country has done this.

While we could not know that a vaccine entering Phase 3 trials will subsequently be shown to be safe and effective, the advantages of having a large stockpile available that can be quickly distributed swamp the potential costs of buying large quantities of a vaccine that is not approved. Suppose the United States had produced 400 million doses of a vaccine that turned out not to be effective. With the production costs of a vaccine at around $2 per shot, this would mean that we had wasted $800 million. With the country seeing more than 4,000 deaths a day at the peak of the pandemic and the economic losses from the pandemic running into the trillions, the risk of spending $800 million on an ineffective vaccine seems rather trivial.  

For whatever reason, no country went this stockpile route. Just to be clear, there was no physical obstacle to producing billions of vaccines by the end of 2020. If we can build one factory to produce these vaccines, we can build ten factories. If some of the inputs are in short supply, we can build more factories to produce the inputs. There may be questions of patent rights, but that is different than a question of physical limitations.

But apart from the physical availability of the vaccines, there is also the issue of distributing the vaccine and actually getting the shots in peoples’ arms. It seems that, rather than making preparations in advance, most governments acted like the approval of the vaccine was a surprise and only began to make plans for distribution after the fact.

This is really mind-boggling. While we could not know the exact date a vaccine would be approved, it was known that several vaccines were approaching the endpoints of their Phase 3 trials. In that situation, it is hard to understand why governments would not have been crafting detailed plans for how they would get the vaccines to people as quickly as possible, once the authorization had been made.

This would have meant pre-positioning stockpiles as close as possible to inoculation locations. These locations should also have been selected in advance, with plans to have the necessary personnel available to oversee and administer the shots. There are reports that there are shortages of people trained in administering the shots. The fall would have been a great time to train enough people to administer the vaccine.

In a normal flu season, close to 2 million shots are given every day, without any heroic efforts by the government. Given the urgency of getting the pandemic under control, it is hard to understand why we could not have administered shots at this pace, if not considerably faster. The fact that it wasn’t just the United States that missed this standard, but also every country in Europe, indicates an enormous failure of public health systems.  

As a result of these failures, we will see millions of preventable infections and tens of thousands of avoidable deaths. We will also see hundreds of billions of dollars of lost economic output, as the pandemic will disrupt the economy for longer than necessary.

 

Will There be a Penalty for Failure?

I raise this issue primarily because I’m fairly confident the answer is no. To be clear, my point is that not being prepared for the mass distribution of vaccines as soon as they were approved was a massive policy failure both in the United States and Europe. I have no idea who was responsible for the failure, but it was presumably several high-level people in each country. In any reasonable world, these people would suffer serious career consequences for not getting the vaccines out quickly.

I am not making this point out of any vindictiveness—I don’t know any of these people—I just want to see high-end workers held to the same job performance standards as those lower down the ladder. The dishwasher that breaks the dishes gets fired. The custodian who doesn’t clean the toilet gets fired. Why doesn’t the person who messes up vaccine distribution pay a price?

Unfortunately, the lack of accountability at the top is the rule, not the exception. To take my favorite example in economics, to my knowledge Carmen Reinhart and Ken Rogoff suffered no consequences (other than embarrassment) for their famous Excel spreadsheet error. To remind people, this was when they produced a paper that purported to show that countries with debt-GDP ratios above 90 percent took a huge hit to GDP growth. It turned out that this result was driven entirely by an error in a spreadsheet. When the error was corrected, the result went away.

Reinhart and Rogoff’s paper was used to justify austerity policies in Europe and the United States. As a result of these policies millions of people needlessly went unemployed and many important areas of social spending, like education and health care, saw serious cuts.

Reinhart and Rogoff’s error was surely an honest mistake (they are both competent economists, who could have come up with much better ways to fake results if that was their intention), but their failure to check their numbers was inexcusable. As they explained after the error was uncovered, the mistake was the result of rushing to finish a paper for a conference presentation.

Mistakes like that happen, and most of us have committed similar errors. That is not a big deal. The big deal was that, as their work was being cited by members of Congress, finance ministers, and central bankers, that it never occurred to them to review their rushed work.  

Should Reinhart and Rogoff have lost their tenured positions at Harvard? Perhaps this would have been appropriate. At the very least, they should have lost their named chairs, after all, many people had their lives ruined in part because they couldn’t be bothered to check their numbers.

 

Accountability for Our Elites

As I have written endlessly, we have seen a massive upward redistribution of income in the United States over the last four decades. Other countries have also seen increases in inequality over this period, although not as large. I have argued that this upward redistribution was by design, not the natural development of the economy, but for this issue, the question of causes is beside the point.

The people who have been able to enjoy rising incomes and financial security over the last four decades ostensibly justify their better position by their greater contribution to the economy and society. But when you mess up in your job in big ways that lead to major costs to the economy and society, that claim doesn’t hold water.

We have seen a massive rise in right-wing populism where large numbers of less-educated workers reject the elites and all their claims about the world. When we have massive elite mess-ups, as we now see with vaccine distribution, and there are zero consequences for those responsible, this has to contribute to the resentment of the less advantaged.

It is appalling that we have structured the economy in such a way that the elites can be protected from consequences for even the most extreme failures. The fact so few elite types even see this as a problem (seen any columns in the NYT calling for firing?) shows that the populists have a real case. The economy is rigged against the left behind, and the people that control major news outlets, which include many self-described liberals or progressives, won’t even talk about it.

[1] China and Russia have not been open with the clinical trial data for their vaccines. Presumably, if they had committed to transparency in an agreement, they would abide by their commitment, but obviously, we cannot be certain this would be the case.

It is more than a bit bizarre that the New York Times can run a major piece about the lack of access of developing countries to Covid vaccines and never once mention the vaccines developed by China, Russia, or India. The piece is very useful in highlighting the fact that the United States and Europe have secured the vast majority of the 2021 production of the vaccines developed by western drug companies, leaving relatively few doses for the developing world. As a result, developing countries may continue to be afflicted by the pandemic well into 2022, with enormous human and economic costs.

That is an important story that needs to be told, but another aspect of this picture is that China, Russia, and India are making vaccines available to many countries in the developing world. China is the leader, with two vaccines that have been approved in at least one country for emergency use. Indonesia, the Philippines, Brazil, and Mexico are some of the countries that are already receiving one of the Chinese vaccines. The country has made broader commitments to provide the vaccine to poor countries in Sub-Saharan Africa but has not yet made large amounts available. 

Similarly, Russia and India have both developed vaccines that they have pledged to share with other countries. Neither has completed Phase 3 trials yet, although they are already being used in Russia, India, and elsewhere under an emergency use authorization.

All three countries have been reluctant to share data from clinical trials, which makes it impossible to know how effective they are in preventing the spread of the pandemic and the risks of side-effects. Nonetheless, if developing countries are unable to get access to the vaccines developed by western drug companies, it is likely that they will turn to the vaccines developed by these three countries. This is a very important part of the reality for developing countries and it is striking that the NYT piece never mentioned the prospect of them turning to China, Russia, and India for vaccines.

It is more than a bit bizarre that the New York Times can run a major piece about the lack of access of developing countries to Covid vaccines and never once mention the vaccines developed by China, Russia, or India. The piece is very useful in highlighting the fact that the United States and Europe have secured the vast majority of the 2021 production of the vaccines developed by western drug companies, leaving relatively few doses for the developing world. As a result, developing countries may continue to be afflicted by the pandemic well into 2022, with enormous human and economic costs.

That is an important story that needs to be told, but another aspect of this picture is that China, Russia, and India are making vaccines available to many countries in the developing world. China is the leader, with two vaccines that have been approved in at least one country for emergency use. Indonesia, the Philippines, Brazil, and Mexico are some of the countries that are already receiving one of the Chinese vaccines. The country has made broader commitments to provide the vaccine to poor countries in Sub-Saharan Africa but has not yet made large amounts available. 

Similarly, Russia and India have both developed vaccines that they have pledged to share with other countries. Neither has completed Phase 3 trials yet, although they are already being used in Russia, India, and elsewhere under an emergency use authorization.

All three countries have been reluctant to share data from clinical trials, which makes it impossible to know how effective they are in preventing the spread of the pandemic and the risks of side-effects. Nonetheless, if developing countries are unable to get access to the vaccines developed by western drug companies, it is likely that they will turn to the vaccines developed by these three countries. This is a very important part of the reality for developing countries and it is striking that the NYT piece never mentioned the prospect of them turning to China, Russia, and India for vaccines.

I wonder if the Washington Post lists mind-reading abilities as a requirement for its economic reporters. They so often feel the need to do it.

The latest is a piece about the response of Republicans in Congress to President Biden’s proposed rescue package. At one point the piece tells us:

“But when Biden’s relief plan rang in at nearly $2 trillion this month, and included liberal priorities like an increase in the federal minimum wage to $15 an hour, some Republicans saw it as a sign that Biden wasn’t really serious about getting their support.”

Really, the Washington Post knows how Republicans “saw” the relief package? While all politicians stretch the truth to some extent, in recent years Republicans have made a point of saying things that are, at best, orthogonal to the truth. I’m sure many Republicans in Congress have complained that the rescue package cannot be seen as an effort to get bipartisan cooperation, but it would require some serious mind-reading to know that this is how they actually see the package.

It’s a good thing that the Washington Post’s reporters have skills in this area.

I wonder if the Washington Post lists mind-reading abilities as a requirement for its economic reporters. They so often feel the need to do it.

The latest is a piece about the response of Republicans in Congress to President Biden’s proposed rescue package. At one point the piece tells us:

“But when Biden’s relief plan rang in at nearly $2 trillion this month, and included liberal priorities like an increase in the federal minimum wage to $15 an hour, some Republicans saw it as a sign that Biden wasn’t really serious about getting their support.”

Really, the Washington Post knows how Republicans “saw” the relief package? While all politicians stretch the truth to some extent, in recent years Republicans have made a point of saying things that are, at best, orthogonal to the truth. I’m sure many Republicans in Congress have complained that the rescue package cannot be seen as an effort to get bipartisan cooperation, but it would require some serious mind-reading to know that this is how they actually see the package.

It’s a good thing that the Washington Post’s reporters have skills in this area.

It’s hard not to be appalled and scared by the reality denial of Donald Trump’s followers. Their willingness to insist an election was stolen, with no evidence whatsoever, is difficult to understand for those of us who like to think that people respond to facts and logic.

I don’t have any easy answers to get these people to start thinking clearly, but I will point out that it is not just ignorant and/or crazed Trumpers who have trouble dealing with reality. Many of our leading intellectuals and our major media outlets have similar difficulty dealing with reality when it doesn’t fit their conceptions of the world.

In particular, I am referring to my standard complaint about the unwillingness to acknowledge the ways in which the economy has been structured to redistribute income upward. I will focus on the two simplest routes, which are often described as “technology” and “globalization.”

 

The Technology and Inequality Lie

Sorry to get harsh on this, but after what we saw on January 6th, I am not in a mood for being polite. I realize that it is very convenient for people who are doing relatively well in the current economy to believe that it is just a result of the way that technology happened to develop. In this story, it just happened to turn out that the progress in areas like software, artificial intelligence, and biotechnology have made advanced skills in science and math more valuable and less-skilled physical labor less valuable.

This line is repeated endlessly in media outlets and academic circles with zero reflection. As I endlessly point out, the ability to get returns from these innovations in our economy depends almost entirely on government-granted patent and copyright monopolies. Without Microsoft’s patents and copyrights on software, Bill Gates would almost certainly not be one of the richest people in the world. The same applies to Larry Ellison and hundreds of other software tycoons, as well as tens of thousands of others who have made lesser fortunes in software, biotech, and other areas.

It is certainly possible that our current system of patents and copyrights is optimal for promoting innovation (to my mind that seems absurd), but what is inescapable is that patent and copyrights are public policies, not facts of nature. We can (and have) make patent and copyrights stronger and longer. We can also make them shorter and weaker. We can also rely, as we already do to a substantial extent, on alternative mechanisms for financing innovation and creative work.[1]

Structuring patents and copyrights in ways that redistribute an enormous amount of income to people with skills in math and science was a policy choice. It was not the blind path of technology. Yet, there is virtually zero recognition of this fact in policy debates.

 

The Globalization Lie

Globalization is the other major force routinely cited as a cause of upward redistribution over the last four decades. The story is that there are hundreds of millions of people in the developing world who are willing to do the same work as our manufacturing workers for a small fraction of the pay. The result is that we have lost millions of manufacturing jobs in the United States, and the ones that remain pay far less than they had in the past. Since manufacturing has historically been a source of relatively high-paying jobs for workers without college degrees, the loss of good-paying jobs in manufacturing has put downward pressure on the pay of workers without college degrees more generally.

While this story is true as far as it goes, it ignores the obvious corollary. There are also millions of workers in the developing world who would be willing to work in highly paid professions, for example as doctors and dentists, at a fraction of the pay that our doctors and dentists receive.  

This point is usually met with the response that doctors and dentists and other professionals in the developing world don’t train to U.S. standards. That is true, but only because training to our standards still does not allow them to practice in the United States. In the case of both doctors and dentists, rather than requiring specific standards, we literally require training in the United States. In the case of doctors, we require the completion of a U.S. residency program. In the case of dentists, we require graduating from a U.S. dentistry program.

It is absurd to argue that training in the United States is the only way that these professionals can attain acceptable standards of competence. While there is a clear public interest in ensuring that these professionals are well-qualified, we surely could set up an accreditation system where doctors in India, China, and elsewhere could train to our standards and then pass a test (our test) to demonstrate sufficient proficiency to practice in the United States.[2]

This is something that would have to be negotiated as part of trade agreements. That we did not choose to negotiate a mechanism to facilitate trade in physicians’ services, but instead focused on removing barriers to trade in manufactured goods, was a policy choice. It was not some inevitable process of globalization.  

The result of our policy of protecting doctors and dentists is that they are paid far more in the United States than in other wealthy countries, with the average being approximately twice as high in the United States. The average physician in the United States earns close to $300,000 a year, close to the cutoff for the top one percent of all wage earners.

This is not the case with other occupations. For example, the Bureau of Labor Statistics reports that hourly compensation in manufacturing in the United States was only a bit more than 70 percent as high as in Germany or Denmark.

So, it is simply a lie to say that globalization led to the downward pressure on the pay of workers without college degrees. It was how our policy elites chose to structure globalization.

 

Fighting the Twin Lies of Inequality

Just as it is hard to figure out how to get Donald Trump’s followers to accept the reality about his election defeat by Joe Biden, it is very difficult to get policy types to acknowledge the reality that it was public policy, not the blind forces of technology and globalization, that led to the surge in inequality over the last four decades. In principle, this should be an easier task since policy types like to think that they can be swayed by evidence and logic. In reality, it’s not clear they live up to their self-understanding.

At the most basic level, anyone in a policy position is almost always, by definition, on the winning side of the inequality gap. Most of these people are highly educated and earn far more than the average worker. Given their status as winners, it is convenient for them to think that their success is due to their ability and/or hard work rather than the fact the deck was rigged. This is true even for liberals, who in their generosity support progressive taxes to redistribute from the winners to the losers. It is nicer to think of oneself as a charitable person, rather than a beneficiary of theft who is willing to give back some of the haul.

But the view that inequality is something that happened, as opposed to something that was designed, also fits in with the standard story that liberals like to tell about the market and government. This story is that the unfettered market (Note: a fictional character) leads to bad outcomes, but good liberals recognize the need for the government to rein in it in for the good of society. The idea that the government and the market are thoroughly intertwined, so that the notion of unfettered market makes zero sense, complicates the thinking of liberals. Therefore, they choose to ignore reality.

The same is true even for people who are more left. They want to decry the evils of capitalism, arguing for a better socialist future. If all the identifiable evils of capitalism can be shown to be contingent on specific ways in which we have structured the market, it undermines the story.

But I would say the biggest obstacle is simply the incentive structure for people who write on these issues or control newspapers and other outlets. No one will ever lose their job for repeating the standard wisdom over and over again. If that seems like a strong claim, look the at the list of columnists at the country’s leading newspapers.

By contrast, pushing ideas that are radically at odds with the accepted wisdom can be hazardous to your career. Unless someone has great confidence in an alternative perspective, it’s best to stick to the conventional wisdom, which is why it persists.

This is, of course, not the first time I have found myself combatting the mainstream perspective, and sometimes I have ended up on the winning side. The view that I, along with others, pushed for decades, that full employment is hugely important for combatting poverty and inequality, is now the accepted wisdom in policy circles.  

The dangers posed by the housing bubble is an issue where I clearly lost, even as events eventually proved me right. The pre-collapse debate was interesting because it was a simple case where the mainstream of the profession simply chose to ridicule and/or ignore the position that the housing bubble posed a serious risk to the economy. This attitude persisted even though I was joined in my warnings by Yale University Professor Robert Shiller, who subsequently won a Nobel Prize.

The idea that the collapse of a bubble could lead to a major economic disruption was just too unfashionable to be seriously considered. This is in spite of the fact that residential construction was hitting record shares of GDP, with the savings rate plummeting to record lows, as bubble-generated housing wealth led to a consumption boom.

After the collapse, the deniers got a collective “who could have known?” amnesty, as the problem was attributed to the mysterious ways of finance, as opposed to bubble-driven demand that could easily be recognized by examining quarterly GDP data.  The lesson of the housing bubble is that there is little reason for those who spout mainstream positions in policy debates to ever consider alternatives. They suffer no professional consequences even when shown to have been wrong in a very big way. That doesn’t mean there is never any movement – the huge shift in the debate on the impact of minimum wages on employment is a great example – but logic and evidence have far less force in policy debates than we would like to believe.

 

The Policy Elites and the Trumpers

By any standard, the sight of the Trump mob looking to kill Mike Pence and Nancy Pelosi, and overturn a democratic election, was horrifying. It would be great if there were some simple way to explain to these people that their guy lost and they were trying to destroy democracy in the United States.

Unfortunately, I don’t have that magic formula. But it is important to recognize that it is not just ignorant Trump backers that can have difficulty dealing with reality.

[1] I calculate the amount of income redistributed upward through patent and copyright monopolies here. I sketch out alternatives in Rigged, chapter 5 [it’s free].

[2] Many have raised the concern that we would be taking away doctors from the developing world, where they are badly needed. We actually can set up a system where we compensate developing countries for doctors and other professionals who come to the United States so that they can train two or three for every one that comes here. I discuss this issue in Chapter 7 of Rigged. It is also worth noting on this point that many doctors and other professionals from the developing world already come to the United States. Under the current system, they get zero compensation. Developing countries would almost certainly be far better off under a system where more professionals leave to the United States, but they are compensated for the loss of highly educated workers.

It’s hard not to be appalled and scared by the reality denial of Donald Trump’s followers. Their willingness to insist an election was stolen, with no evidence whatsoever, is difficult to understand for those of us who like to think that people respond to facts and logic.

I don’t have any easy answers to get these people to start thinking clearly, but I will point out that it is not just ignorant and/or crazed Trumpers who have trouble dealing with reality. Many of our leading intellectuals and our major media outlets have similar difficulty dealing with reality when it doesn’t fit their conceptions of the world.

In particular, I am referring to my standard complaint about the unwillingness to acknowledge the ways in which the economy has been structured to redistribute income upward. I will focus on the two simplest routes, which are often described as “technology” and “globalization.”

 

The Technology and Inequality Lie

Sorry to get harsh on this, but after what we saw on January 6th, I am not in a mood for being polite. I realize that it is very convenient for people who are doing relatively well in the current economy to believe that it is just a result of the way that technology happened to develop. In this story, it just happened to turn out that the progress in areas like software, artificial intelligence, and biotechnology have made advanced skills in science and math more valuable and less-skilled physical labor less valuable.

This line is repeated endlessly in media outlets and academic circles with zero reflection. As I endlessly point out, the ability to get returns from these innovations in our economy depends almost entirely on government-granted patent and copyright monopolies. Without Microsoft’s patents and copyrights on software, Bill Gates would almost certainly not be one of the richest people in the world. The same applies to Larry Ellison and hundreds of other software tycoons, as well as tens of thousands of others who have made lesser fortunes in software, biotech, and other areas.

It is certainly possible that our current system of patents and copyrights is optimal for promoting innovation (to my mind that seems absurd), but what is inescapable is that patent and copyrights are public policies, not facts of nature. We can (and have) make patent and copyrights stronger and longer. We can also make them shorter and weaker. We can also rely, as we already do to a substantial extent, on alternative mechanisms for financing innovation and creative work.[1]

Structuring patents and copyrights in ways that redistribute an enormous amount of income to people with skills in math and science was a policy choice. It was not the blind path of technology. Yet, there is virtually zero recognition of this fact in policy debates.

 

The Globalization Lie

Globalization is the other major force routinely cited as a cause of upward redistribution over the last four decades. The story is that there are hundreds of millions of people in the developing world who are willing to do the same work as our manufacturing workers for a small fraction of the pay. The result is that we have lost millions of manufacturing jobs in the United States, and the ones that remain pay far less than they had in the past. Since manufacturing has historically been a source of relatively high-paying jobs for workers without college degrees, the loss of good-paying jobs in manufacturing has put downward pressure on the pay of workers without college degrees more generally.

While this story is true as far as it goes, it ignores the obvious corollary. There are also millions of workers in the developing world who would be willing to work in highly paid professions, for example as doctors and dentists, at a fraction of the pay that our doctors and dentists receive.  

This point is usually met with the response that doctors and dentists and other professionals in the developing world don’t train to U.S. standards. That is true, but only because training to our standards still does not allow them to practice in the United States. In the case of both doctors and dentists, rather than requiring specific standards, we literally require training in the United States. In the case of doctors, we require the completion of a U.S. residency program. In the case of dentists, we require graduating from a U.S. dentistry program.

It is absurd to argue that training in the United States is the only way that these professionals can attain acceptable standards of competence. While there is a clear public interest in ensuring that these professionals are well-qualified, we surely could set up an accreditation system where doctors in India, China, and elsewhere could train to our standards and then pass a test (our test) to demonstrate sufficient proficiency to practice in the United States.[2]

This is something that would have to be negotiated as part of trade agreements. That we did not choose to negotiate a mechanism to facilitate trade in physicians’ services, but instead focused on removing barriers to trade in manufactured goods, was a policy choice. It was not some inevitable process of globalization.  

The result of our policy of protecting doctors and dentists is that they are paid far more in the United States than in other wealthy countries, with the average being approximately twice as high in the United States. The average physician in the United States earns close to $300,000 a year, close to the cutoff for the top one percent of all wage earners.

This is not the case with other occupations. For example, the Bureau of Labor Statistics reports that hourly compensation in manufacturing in the United States was only a bit more than 70 percent as high as in Germany or Denmark.

So, it is simply a lie to say that globalization led to the downward pressure on the pay of workers without college degrees. It was how our policy elites chose to structure globalization.

 

Fighting the Twin Lies of Inequality

Just as it is hard to figure out how to get Donald Trump’s followers to accept the reality about his election defeat by Joe Biden, it is very difficult to get policy types to acknowledge the reality that it was public policy, not the blind forces of technology and globalization, that led to the surge in inequality over the last four decades. In principle, this should be an easier task since policy types like to think that they can be swayed by evidence and logic. In reality, it’s not clear they live up to their self-understanding.

At the most basic level, anyone in a policy position is almost always, by definition, on the winning side of the inequality gap. Most of these people are highly educated and earn far more than the average worker. Given their status as winners, it is convenient for them to think that their success is due to their ability and/or hard work rather than the fact the deck was rigged. This is true even for liberals, who in their generosity support progressive taxes to redistribute from the winners to the losers. It is nicer to think of oneself as a charitable person, rather than a beneficiary of theft who is willing to give back some of the haul.

But the view that inequality is something that happened, as opposed to something that was designed, also fits in with the standard story that liberals like to tell about the market and government. This story is that the unfettered market (Note: a fictional character) leads to bad outcomes, but good liberals recognize the need for the government to rein in it in for the good of society. The idea that the government and the market are thoroughly intertwined, so that the notion of unfettered market makes zero sense, complicates the thinking of liberals. Therefore, they choose to ignore reality.

The same is true even for people who are more left. They want to decry the evils of capitalism, arguing for a better socialist future. If all the identifiable evils of capitalism can be shown to be contingent on specific ways in which we have structured the market, it undermines the story.

But I would say the biggest obstacle is simply the incentive structure for people who write on these issues or control newspapers and other outlets. No one will ever lose their job for repeating the standard wisdom over and over again. If that seems like a strong claim, look the at the list of columnists at the country’s leading newspapers.

By contrast, pushing ideas that are radically at odds with the accepted wisdom can be hazardous to your career. Unless someone has great confidence in an alternative perspective, it’s best to stick to the conventional wisdom, which is why it persists.

This is, of course, not the first time I have found myself combatting the mainstream perspective, and sometimes I have ended up on the winning side. The view that I, along with others, pushed for decades, that full employment is hugely important for combatting poverty and inequality, is now the accepted wisdom in policy circles.  

The dangers posed by the housing bubble is an issue where I clearly lost, even as events eventually proved me right. The pre-collapse debate was interesting because it was a simple case where the mainstream of the profession simply chose to ridicule and/or ignore the position that the housing bubble posed a serious risk to the economy. This attitude persisted even though I was joined in my warnings by Yale University Professor Robert Shiller, who subsequently won a Nobel Prize.

The idea that the collapse of a bubble could lead to a major economic disruption was just too unfashionable to be seriously considered. This is in spite of the fact that residential construction was hitting record shares of GDP, with the savings rate plummeting to record lows, as bubble-generated housing wealth led to a consumption boom.

After the collapse, the deniers got a collective “who could have known?” amnesty, as the problem was attributed to the mysterious ways of finance, as opposed to bubble-driven demand that could easily be recognized by examining quarterly GDP data.  The lesson of the housing bubble is that there is little reason for those who spout mainstream positions in policy debates to ever consider alternatives. They suffer no professional consequences even when shown to have been wrong in a very big way. That doesn’t mean there is never any movement – the huge shift in the debate on the impact of minimum wages on employment is a great example – but logic and evidence have far less force in policy debates than we would like to believe.

 

The Policy Elites and the Trumpers

By any standard, the sight of the Trump mob looking to kill Mike Pence and Nancy Pelosi, and overturn a democratic election, was horrifying. It would be great if there were some simple way to explain to these people that their guy lost and they were trying to destroy democracy in the United States.

Unfortunately, I don’t have that magic formula. But it is important to recognize that it is not just ignorant Trump backers that can have difficulty dealing with reality.

[1] I calculate the amount of income redistributed upward through patent and copyright monopolies here. I sketch out alternatives in Rigged, chapter 5 [it’s free].

[2] Many have raised the concern that we would be taking away doctors from the developing world, where they are badly needed. We actually can set up a system where we compensate developing countries for doctors and other professionals who come to the United States so that they can train two or three for every one that comes here. I discuss this issue in Chapter 7 of Rigged. It is also worth noting on this point that many doctors and other professionals from the developing world already come to the United States. Under the current system, they get zero compensation. Developing countries would almost certainly be far better off under a system where more professionals leave to the United States, but they are compensated for the loss of highly educated workers.

I have repeatedly raised the point that media accounts routinely use the term “free trade” when they can more accurately say simply “trade” or trade policy. It is amazing to me that this practice continues.

We saw it yet again in a NYT article on how many Republicans continue to be faithful to Trump even after last week’s coup attempt. The article told readers:

“Anthony Sabatini, a Florida state representative, described Ms. Cheney and other Republicans who voted for impeachment as ‘artifacts,’ saying they were out of step in a party that has embraced a more populist platform opposed to foreign interventions and skeptical of free trade.”

As I have pointed out endlessly, we do not have a policy of “free trade.” We do not allow foreign trained professionals, such as doctors and dentists, to freely practice in the United States. Our trade policy has been focused on reducing barriers to trade in manufactured goods, while leaving in place the barriers that protect the most highly paid professionals.

This has the effect of putting U.S. manufacturing workers in direct competition with low-paid workers in the developing world. This has the predicted and actual effect of lowering the pay of manufacturing workers in the United States. Since manufacturing has historically been a source of relatively high-paying jobs for workers without college degrees, the loss of good-paying jobs in manufacturing has put downward pressure on the pay of non-college educated workers more generally. This distributional impact has nothing to do with “free trade,” it is due to a policy of selective protectionism.

In the same vein, much of our trade policy has been focused on making our patent and copyright protections longer and stronger and imposing these rules on our trading partners. These protections are 180 degrees at odds with free trade; they are government granted monopolies. They also have the effect of redistributing income upward, to drug and software companies and people with skills in the relevant fields. Very few dishwashers and custodians benefit from patent rents or royalties from copyrights.

It would be helpful if the NYT and other media outlets could stop trying to pretend that the upward redistribution from globalization was some sort of natural process involving free trade. That is a Trumpian lie, and it would be good if the media stopped repeating it. 

I have repeatedly raised the point that media accounts routinely use the term “free trade” when they can more accurately say simply “trade” or trade policy. It is amazing to me that this practice continues.

We saw it yet again in a NYT article on how many Republicans continue to be faithful to Trump even after last week’s coup attempt. The article told readers:

“Anthony Sabatini, a Florida state representative, described Ms. Cheney and other Republicans who voted for impeachment as ‘artifacts,’ saying they were out of step in a party that has embraced a more populist platform opposed to foreign interventions and skeptical of free trade.”

As I have pointed out endlessly, we do not have a policy of “free trade.” We do not allow foreign trained professionals, such as doctors and dentists, to freely practice in the United States. Our trade policy has been focused on reducing barriers to trade in manufactured goods, while leaving in place the barriers that protect the most highly paid professionals.

This has the effect of putting U.S. manufacturing workers in direct competition with low-paid workers in the developing world. This has the predicted and actual effect of lowering the pay of manufacturing workers in the United States. Since manufacturing has historically been a source of relatively high-paying jobs for workers without college degrees, the loss of good-paying jobs in manufacturing has put downward pressure on the pay of non-college educated workers more generally. This distributional impact has nothing to do with “free trade,” it is due to a policy of selective protectionism.

In the same vein, much of our trade policy has been focused on making our patent and copyright protections longer and stronger and imposing these rules on our trading partners. These protections are 180 degrees at odds with free trade; they are government granted monopolies. They also have the effect of redistributing income upward, to drug and software companies and people with skills in the relevant fields. Very few dishwashers and custodians benefit from patent rents or royalties from copyrights.

It would be helpful if the NYT and other media outlets could stop trying to pretend that the upward redistribution from globalization was some sort of natural process involving free trade. That is a Trumpian lie, and it would be good if the media stopped repeating it. 

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