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.

For decades I have harangued reporters about writing down really big numbers, most often budget numbers, without providing any context that would make them meaningful for their audience. Even though leading news outlets, like the New York Times (NYT), Washington Post (WaPo), and National Public Radio (NPR), have well-educated audiences, most readers/listeners have no idea what $250 billion, or some other huge sum, over the next decade means. (Often the time period over which money will be spent is not even specified in a piece – it does matter.)

Few reporters have ever tried to tell me that their audience actually did know the meaning of the very large sums of money that are often discussed in budget stories, when no context is provided. This was explicitly acknowledged some years back in a column by Margaret Sullivan, who was the NYT’s Public Editor at the time. The column includes comments by David Leonhardt, then the NYT’s Washington Bureau Chief, who completely accepted the point.

The piece indicated a commitment to putting numbers in a context that would make them understandable to readers. There’s not much evidence of any follow-up on that one. It is still standard to see budget articles that report the millions, billions, or trillions, with no context whatsoever. It is a safe bet that for most readers, this is the same thing, as David Leonhardt put it, as if they just wrote “really big number.”

The latest item that caught my attention in this respect is a NYT article on the bipartisan infrastructure bill.  The article made a really big deal out of the fact that the Congressional Budget Office (CBO) had scored the bill as adding $256 billion to the debt over the agency’s 10-year budget horizon.

From its treatment in the piece, readers were obviously supposed to believe that this $256 billion is a really big deal. But is it?

If we want some basis of comparison, we can look at CBO’s projection for GDP over this 10-year period. CBO projects that GDP will be a bit over $290 trillion, which means that the addition to the debt it projects will be equal to a bit less than 0.09 percent of GDP over this period.

Alternatively, we can say that 0.09 percent of GDP will be the size of the boost to the annual deficit. If we want a per person figure, the total boost to the debt is projected at a bit less than $800 a head.

We can also express the increment to the debt as a share of current projected spending. That can be found either by going to the CBO budget projections or using CEPR’s “It’s the Budget Stupid” Federal Budget Calculator. That tells us that the increase to the deficit is equal to 0.42 percent of projected spending.

People may disagree on which comparison provides the best context. That is fine, we can experiment with different metrics. Perhaps after some time there will be agreement on what should be the standard, but any of these are clearly much better than just writing down $256 billion.

It is more than a bit mind-boggling that our leading news outlets would insist on a practice that everyone knows is not meaningful to the vast majority of their audience. After all, the purpose of reporting is supposed to be to provide information. Using a really big number with no context, is not providing information. It’s just as if they wrote an article in an obscure language that almost no one in the country spoke. That is not a way to provide information.

Why Confusion on Budget Numbers Matters

We should want budget numbers to be expressed in a way that is meaningful as an end in itself; we want the public to be informed. But getting a clearer understanding also matters for how people view various programs.

Polls have consistently shown that the public hugely overestimates the amount of money going to a wide range of programs, such as food stamps, TANF (Temporary Assistance for Needy Families – the reformed welfare program), and foreign aid. It’s hard to imagine that the public’s support for these programs is not affected by its perception of the amount of money going to them.

If people believe that food stamps take up 20 percent of the budget, they are likely to think very differently about the program than if they realized that it costs roughly 1.4 percent of the budget ($63 billion this year). If the food stamp program actually cost 20 percent of the budget, then people might reasonably think that they could pay lower taxes if we cut it down to size. They might also reasonably think that the program is not very effective, if we could spend this much money and still have serious issues of malnutrition and hunger. The same story would apply to a wide range of other programs.

When I have raised this point with other progressives they almost invariably tell me that people want to believe that these programs cost hugely more than is actually the case because they are racist and want to believe that all their tax dollars are going to undeserving Blacks and Hispanics.

While there are many people who fit this story, exaggerations on the cost of these programs go well beyond the Trump base. There are many people who consider themselves centrists, or even liberals, who also hugely over-estimate the amount of money spent on social programs. Many of these people vote for Democrats and progressive candidates.

It would take a highly-paid DC political strategist to try to claim that these sorts of misconceptions did not affect people’s attitudes towards these programs. In fact, you would have something seriously wrong with your thought processes if you had the same attitude to a program if you believed it was spending $1 trillion a year instead of $63 billion.

Yet, almost none of the liberal/progressive policy groups or funders has ever thought to take on the misconceptions spread by the media. Having worked at and co-directed one of the poorer policy shops in this category, I know that time and resources are scarce, but it is a bit incredible to me that these groups could claim that all the papers, conferences, or workshops they have done over the last three decades have been more important than trying to change the way the media covers budget numbers.

I realize this is asking them to do something new. After all, they all have been writing forever on why the food stamp or TANF budget should be protected or expanded, trying to influence media coverage means doing something different. And, for many of these people doing something different is scary.

Margaret Sullivan wrote her piece as public editor, acknowledging the NYT’s failure to write big numbers in a way that is meaningful to its readers, in response to a petition/e-mail campaign organized by CEPR, Fairness and Accuracy in Reporting, Media Matters, and Just Foreign Policy. You may notice some big- name liberal Washington policy shops missing from the list.

Needless to say, we got zero funding. Changing budget reporting and how people see the world just is not on the agenda of big liberal funders. Anyhow, I don’t think it is impossible to change the way the media talk about the budget. Everyone knows their current reporting is incredibly irresponsible. It just takes some pressure to force the issue.

Why Worry About Government Deficit/Debt?

The media largely take it as a given that we should view government deficits and debt as a bad thing. I imagine most of the reporters writing this stuff would struggle to come up with an answer if anyone asked them “why?”

There is a classic Econ 101 story that we can tell about the evils of budget deficits. The story runs that when the government borrows money, it puts upward pressure on interest rates. Higher interest rates then crowd out investment (and net exports – slightly longer story). And less investment means less productivity growth, which means that we will be poorer in the future because of our deficits today.

The big problem with this story is that interest rates have been extraordinarily low during the last year and a half as the deficit has exploded. The interest rate on 10-year Treasury bonds has been under 2.0 percent for the whole period, and in recent weeks it has been under 1.5 percent. By contrast, in the glory days of budget surpluses in the late 1990s, the 10-year Treasury rate was over 4.0 percent and sometimes over 5.0 percent. The story of deficits leading to high interest rates doesn’t appear very credible just now.

There is a story about budget deficits causing inflation. That clearly can be an issue, and there is some evidence inflation could be a problem now. But, at this point it is difficult to sort out the effects of disruptions associated with an economy reopening after a pandemic from the effects of an overheating economy. Most of the uptick in inflation that we have seen thus far has been due to rising new and used car prices, which in turn are largely the result of a semi-conductor shortage due to a fire at a major plant in Japan.

But most of the complaints get to the burden of the debt on our children. The idea is that we are passing on this massive debt, which will be a crushing burden on our children as they attempt to live their lives and raise their own kids. This story usually comes with emphasizing the size of the debt in trillions, which is of course a very big number, but one that has almost no meaning for anyone.

If we’re being serious about the burden of the debt, the first thing to note is that we don’t have to pay off the debt. We just have to pay the annual interest on the debt. This debt service is the actual burden of the debt.

By this measure we don’t have much to worry about at the moment. Our net interest on the debt is currently around $230 billion a year, or roughly 1.0 percent of GDP. (This takes out the $80 billion that the Federal Reserve Board refunds to the Treasury each year from the interest on the bonds it holds.)[1] By comparison, the debt service burden was over 3.0 percent of GDP in the early and mid-1990s.

The deficit hawks usually respond that this story could change if interest rates were to rise to more typical historical levels. That is true, although it’s not clear that a sharp rise in interest rates is very likely. Furthermore, even if we did see interest rates rise to something like 4-5 percent, it’s far from clear this is any sort of disaster story. Remember, the 1990s was a very prosperous decade, in spite of relatively high debt service burden.

Also, we have to remember that the bulk of interest payments are made to other people of the same generation. If we think of some distant future, all of us who are building up the debt today will be dead. The people who hold the bonds and collect interest will be the children and grandchildren of people alive today. If the debt service is placing a burden on the budget, we can just increase the taxes on these lucky people who are collecting the interest payments. That is not a burden across generations, this is a question of intra-generational equity.[2]  

If Payments on Government Debt Are Bad, How About Rents on Government-Granted Patent Monopolies?

I realize that I am just about the only economist who ever makes this point, but I am more interested in being right than agreeing with other economists. Direct payments are only one way the government pays for things, it can also pay for things by granting patent and copyright monopolies.

The deal with these monopolies is that the government tells individuals or companies to innovate or do creative work, and then we will give you a monopoly. The government will arrest anyone who competes with you, allowing you to charge a far higher price than in a free market.

The difference between the patent (or copyright) monopoly price and the free market price is the rent that the company is able to charge as a result of this government-granted monopoly. The gap is often quite large. In the case of prescription drugs, the patent protected price may be more than a hundred times the free market price. Drugs are almost invariably cheap to manufacture and distribute, it is patent monopolies that make them expensive.[3]  

The amount of money that we pay out each year as a result of patent and copyright rents is enormous. I calculated that it is over $400 billion annually in the case of prescription drugs alone, almost twice the debt service burden. Adding in medical equipment, computer software, and other areas where these rents can be a large share of the price, the total can easily come to more than $1 trillion annually, more than $3,000 for every person in the country.  

It makes zero sense that we would worry about the burden created by government debt, and the resulting debt service, but pay zero attention to the burdens created by government-granted patent and copyright monopolies. As noted above, direct spending and the granting of monopolies are alternative modes of payment by the government. The deficit hawks only want us to look at the costs from the first one.

In some cases, the trade-offs are made explicitly. The Food and Drug Administration wanted more drug companies to perform pediatric clinical trials to ensure that their drugs were safe and effective for children. Rather than having the government pay for these trials directly, drug companies can extend the length of their patents by six months if they conduct a pediatric trial.

If the government just paid the companies to conduct the trials, there would be an item in the budget that would add to the deficit and debt that we are then supposed to be concerned about. But when the government just says that we will give you a longer patent monopoly, the deficit hawks say this is fine – no cost.

That sort of thinking may make sense at the New York Times, Washington Post and other high-end news outlets, but it makes zero sense in reality land. I opt to continue to live in the latter.

The Debt and the Planet

As I’m sitting here in Southern Utah, we are facing a multi-year drought, hundred degree temperatures, severe water shortages (also our source of power), and are inundated with thick haze from the forest fires in California. It’s a bit hard for me to see the debt as the major injustice facing future generations. We are destroying so much of the nature that makes this country and the world beautiful or even livable.

I keep envisioning the following scenario for 2050: one of today’s leading deficit hawks, now up in years, boasting to a group of young people about how we paid off the national debt. The world outside is scorched, with few trees or any other plant life. Most of the animals that are alive today have gone extinct. Coral reefs are ancient history.

Somehow, I can’t imagine the kids being grateful. This again is not a complex concept. We will hand down a whole natural and social world to our children and grandchildren. The burden of the debt and the debt service is such a trivial part of this picture, it’s hard to believe serious people would waste their time on it.

[1] Arguably, we should be looking at the real interest burden of the debt, which would subtract out the extent to which the real value of the debt is reduced by inflation. If we applied this standard, the real debt service burden would be negative, since the inflation rate current exceeds the interest rate.  (The real interest rate is the nominal interest rate minus the inflation rate.)

[2] There is an issue of foreign holders of government debt. The interest on this debt is a burden on the country, but that goes well beyond government debt. Insofar as foreigners hold any U.S. financial asset – stock, real estate, the bonds of private corporations – the payments create a burden for the country. In the late 1990s, even as we had large budget surpluses, foreigners were buying up large amounts of U.S. financial assets. There is no direct relationship between the size of our government debt or deficit and the amount of U.S. financial assets being purchased by foreigners.  

[3] Patent monopolies also create perverse incentives. The high mark-ups created by these monopolies give companies incentive to mislead doctors and the public about the safety and effectiveness of their drugs in order to maximize sales, as happened with the opioid crisis.

For decades I have harangued reporters about writing down really big numbers, most often budget numbers, without providing any context that would make them meaningful for their audience. Even though leading news outlets, like the New York Times (NYT), Washington Post (WaPo), and National Public Radio (NPR), have well-educated audiences, most readers/listeners have no idea what $250 billion, or some other huge sum, over the next decade means. (Often the time period over which money will be spent is not even specified in a piece – it does matter.)

Few reporters have ever tried to tell me that their audience actually did know the meaning of the very large sums of money that are often discussed in budget stories, when no context is provided. This was explicitly acknowledged some years back in a column by Margaret Sullivan, who was the NYT’s Public Editor at the time. The column includes comments by David Leonhardt, then the NYT’s Washington Bureau Chief, who completely accepted the point.

The piece indicated a commitment to putting numbers in a context that would make them understandable to readers. There’s not much evidence of any follow-up on that one. It is still standard to see budget articles that report the millions, billions, or trillions, with no context whatsoever. It is a safe bet that for most readers, this is the same thing, as David Leonhardt put it, as if they just wrote “really big number.”

The latest item that caught my attention in this respect is a NYT article on the bipartisan infrastructure bill.  The article made a really big deal out of the fact that the Congressional Budget Office (CBO) had scored the bill as adding $256 billion to the debt over the agency’s 10-year budget horizon.

From its treatment in the piece, readers were obviously supposed to believe that this $256 billion is a really big deal. But is it?

If we want some basis of comparison, we can look at CBO’s projection for GDP over this 10-year period. CBO projects that GDP will be a bit over $290 trillion, which means that the addition to the debt it projects will be equal to a bit less than 0.09 percent of GDP over this period.

Alternatively, we can say that 0.09 percent of GDP will be the size of the boost to the annual deficit. If we want a per person figure, the total boost to the debt is projected at a bit less than $800 a head.

We can also express the increment to the debt as a share of current projected spending. That can be found either by going to the CBO budget projections or using CEPR’s “It’s the Budget Stupid” Federal Budget Calculator. That tells us that the increase to the deficit is equal to 0.42 percent of projected spending.

People may disagree on which comparison provides the best context. That is fine, we can experiment with different metrics. Perhaps after some time there will be agreement on what should be the standard, but any of these are clearly much better than just writing down $256 billion.

It is more than a bit mind-boggling that our leading news outlets would insist on a practice that everyone knows is not meaningful to the vast majority of their audience. After all, the purpose of reporting is supposed to be to provide information. Using a really big number with no context, is not providing information. It’s just as if they wrote an article in an obscure language that almost no one in the country spoke. That is not a way to provide information.

Why Confusion on Budget Numbers Matters

We should want budget numbers to be expressed in a way that is meaningful as an end in itself; we want the public to be informed. But getting a clearer understanding also matters for how people view various programs.

Polls have consistently shown that the public hugely overestimates the amount of money going to a wide range of programs, such as food stamps, TANF (Temporary Assistance for Needy Families – the reformed welfare program), and foreign aid. It’s hard to imagine that the public’s support for these programs is not affected by its perception of the amount of money going to them.

If people believe that food stamps take up 20 percent of the budget, they are likely to think very differently about the program than if they realized that it costs roughly 1.4 percent of the budget ($63 billion this year). If the food stamp program actually cost 20 percent of the budget, then people might reasonably think that they could pay lower taxes if we cut it down to size. They might also reasonably think that the program is not very effective, if we could spend this much money and still have serious issues of malnutrition and hunger. The same story would apply to a wide range of other programs.

When I have raised this point with other progressives they almost invariably tell me that people want to believe that these programs cost hugely more than is actually the case because they are racist and want to believe that all their tax dollars are going to undeserving Blacks and Hispanics.

While there are many people who fit this story, exaggerations on the cost of these programs go well beyond the Trump base. There are many people who consider themselves centrists, or even liberals, who also hugely over-estimate the amount of money spent on social programs. Many of these people vote for Democrats and progressive candidates.

It would take a highly-paid DC political strategist to try to claim that these sorts of misconceptions did not affect people’s attitudes towards these programs. In fact, you would have something seriously wrong with your thought processes if you had the same attitude to a program if you believed it was spending $1 trillion a year instead of $63 billion.

Yet, almost none of the liberal/progressive policy groups or funders has ever thought to take on the misconceptions spread by the media. Having worked at and co-directed one of the poorer policy shops in this category, I know that time and resources are scarce, but it is a bit incredible to me that these groups could claim that all the papers, conferences, or workshops they have done over the last three decades have been more important than trying to change the way the media covers budget numbers.

I realize this is asking them to do something new. After all, they all have been writing forever on why the food stamp or TANF budget should be protected or expanded, trying to influence media coverage means doing something different. And, for many of these people doing something different is scary.

Margaret Sullivan wrote her piece as public editor, acknowledging the NYT’s failure to write big numbers in a way that is meaningful to its readers, in response to a petition/e-mail campaign organized by CEPR, Fairness and Accuracy in Reporting, Media Matters, and Just Foreign Policy. You may notice some big- name liberal Washington policy shops missing from the list.

Needless to say, we got zero funding. Changing budget reporting and how people see the world just is not on the agenda of big liberal funders. Anyhow, I don’t think it is impossible to change the way the media talk about the budget. Everyone knows their current reporting is incredibly irresponsible. It just takes some pressure to force the issue.

Why Worry About Government Deficit/Debt?

The media largely take it as a given that we should view government deficits and debt as a bad thing. I imagine most of the reporters writing this stuff would struggle to come up with an answer if anyone asked them “why?”

There is a classic Econ 101 story that we can tell about the evils of budget deficits. The story runs that when the government borrows money, it puts upward pressure on interest rates. Higher interest rates then crowd out investment (and net exports – slightly longer story). And less investment means less productivity growth, which means that we will be poorer in the future because of our deficits today.

The big problem with this story is that interest rates have been extraordinarily low during the last year and a half as the deficit has exploded. The interest rate on 10-year Treasury bonds has been under 2.0 percent for the whole period, and in recent weeks it has been under 1.5 percent. By contrast, in the glory days of budget surpluses in the late 1990s, the 10-year Treasury rate was over 4.0 percent and sometimes over 5.0 percent. The story of deficits leading to high interest rates doesn’t appear very credible just now.

There is a story about budget deficits causing inflation. That clearly can be an issue, and there is some evidence inflation could be a problem now. But, at this point it is difficult to sort out the effects of disruptions associated with an economy reopening after a pandemic from the effects of an overheating economy. Most of the uptick in inflation that we have seen thus far has been due to rising new and used car prices, which in turn are largely the result of a semi-conductor shortage due to a fire at a major plant in Japan.

But most of the complaints get to the burden of the debt on our children. The idea is that we are passing on this massive debt, which will be a crushing burden on our children as they attempt to live their lives and raise their own kids. This story usually comes with emphasizing the size of the debt in trillions, which is of course a very big number, but one that has almost no meaning for anyone.

If we’re being serious about the burden of the debt, the first thing to note is that we don’t have to pay off the debt. We just have to pay the annual interest on the debt. This debt service is the actual burden of the debt.

By this measure we don’t have much to worry about at the moment. Our net interest on the debt is currently around $230 billion a year, or roughly 1.0 percent of GDP. (This takes out the $80 billion that the Federal Reserve Board refunds to the Treasury each year from the interest on the bonds it holds.)[1] By comparison, the debt service burden was over 3.0 percent of GDP in the early and mid-1990s.

The deficit hawks usually respond that this story could change if interest rates were to rise to more typical historical levels. That is true, although it’s not clear that a sharp rise in interest rates is very likely. Furthermore, even if we did see interest rates rise to something like 4-5 percent, it’s far from clear this is any sort of disaster story. Remember, the 1990s was a very prosperous decade, in spite of relatively high debt service burden.

Also, we have to remember that the bulk of interest payments are made to other people of the same generation. If we think of some distant future, all of us who are building up the debt today will be dead. The people who hold the bonds and collect interest will be the children and grandchildren of people alive today. If the debt service is placing a burden on the budget, we can just increase the taxes on these lucky people who are collecting the interest payments. That is not a burden across generations, this is a question of intra-generational equity.[2]  

If Payments on Government Debt Are Bad, How About Rents on Government-Granted Patent Monopolies?

I realize that I am just about the only economist who ever makes this point, but I am more interested in being right than agreeing with other economists. Direct payments are only one way the government pays for things, it can also pay for things by granting patent and copyright monopolies.

The deal with these monopolies is that the government tells individuals or companies to innovate or do creative work, and then we will give you a monopoly. The government will arrest anyone who competes with you, allowing you to charge a far higher price than in a free market.

The difference between the patent (or copyright) monopoly price and the free market price is the rent that the company is able to charge as a result of this government-granted monopoly. The gap is often quite large. In the case of prescription drugs, the patent protected price may be more than a hundred times the free market price. Drugs are almost invariably cheap to manufacture and distribute, it is patent monopolies that make them expensive.[3]  

The amount of money that we pay out each year as a result of patent and copyright rents is enormous. I calculated that it is over $400 billion annually in the case of prescription drugs alone, almost twice the debt service burden. Adding in medical equipment, computer software, and other areas where these rents can be a large share of the price, the total can easily come to more than $1 trillion annually, more than $3,000 for every person in the country.  

It makes zero sense that we would worry about the burden created by government debt, and the resulting debt service, but pay zero attention to the burdens created by government-granted patent and copyright monopolies. As noted above, direct spending and the granting of monopolies are alternative modes of payment by the government. The deficit hawks only want us to look at the costs from the first one.

In some cases, the trade-offs are made explicitly. The Food and Drug Administration wanted more drug companies to perform pediatric clinical trials to ensure that their drugs were safe and effective for children. Rather than having the government pay for these trials directly, drug companies can extend the length of their patents by six months if they conduct a pediatric trial.

If the government just paid the companies to conduct the trials, there would be an item in the budget that would add to the deficit and debt that we are then supposed to be concerned about. But when the government just says that we will give you a longer patent monopoly, the deficit hawks say this is fine – no cost.

That sort of thinking may make sense at the New York Times, Washington Post and other high-end news outlets, but it makes zero sense in reality land. I opt to continue to live in the latter.

The Debt and the Planet

As I’m sitting here in Southern Utah, we are facing a multi-year drought, hundred degree temperatures, severe water shortages (also our source of power), and are inundated with thick haze from the forest fires in California. It’s a bit hard for me to see the debt as the major injustice facing future generations. We are destroying so much of the nature that makes this country and the world beautiful or even livable.

I keep envisioning the following scenario for 2050: one of today’s leading deficit hawks, now up in years, boasting to a group of young people about how we paid off the national debt. The world outside is scorched, with few trees or any other plant life. Most of the animals that are alive today have gone extinct. Coral reefs are ancient history.

Somehow, I can’t imagine the kids being grateful. This again is not a complex concept. We will hand down a whole natural and social world to our children and grandchildren. The burden of the debt and the debt service is such a trivial part of this picture, it’s hard to believe serious people would waste their time on it.

[1] Arguably, we should be looking at the real interest burden of the debt, which would subtract out the extent to which the real value of the debt is reduced by inflation. If we applied this standard, the real debt service burden would be negative, since the inflation rate current exceeds the interest rate.  (The real interest rate is the nominal interest rate minus the inflation rate.)

[2] There is an issue of foreign holders of government debt. The interest on this debt is a burden on the country, but that goes well beyond government debt. Insofar as foreigners hold any U.S. financial asset – stock, real estate, the bonds of private corporations – the payments create a burden for the country. In the late 1990s, even as we had large budget surpluses, foreigners were buying up large amounts of U.S. financial assets. There is no direct relationship between the size of our government debt or deficit and the amount of U.S. financial assets being purchased by foreigners.  

[3] Patent monopolies also create perverse incentives. The high mark-ups created by these monopolies give companies incentive to mislead doctors and the public about the safety and effectiveness of their drugs in order to maximize sales, as happened with the opioid crisis.

Another jobs report, another cheap shot at the former guy. As I always say, this sort of comparison is silly because so many things beyond the president’s control affect job growth and the economy. But, you know that if the situation were reversed, we would be hearing this comparison endlessly.  Donald Trump Jr. would probably even have the graph tattooed on his forehead.

So, here’s where we stand now. After yesterday’s big jobs number, Biden has now created 4.1 million jobs in the first six months of his presidency.  Trump lost 2.9 million jobs over his four years in office.

 

Source:  Bureau of Labor Statistics.

Another jobs report, another cheap shot at the former guy. As I always say, this sort of comparison is silly because so many things beyond the president’s control affect job growth and the economy. But, you know that if the situation were reversed, we would be hearing this comparison endlessly.  Donald Trump Jr. would probably even have the graph tattooed on his forehead.

So, here’s where we stand now. After yesterday’s big jobs number, Biden has now created 4.1 million jobs in the first six months of his presidency.  Trump lost 2.9 million jobs over his four years in office.

 

Source:  Bureau of Labor Statistics.

This is a very serious question, even if I’m using a bit of clickbait here. I’m not out to get Dr. Fauci, who deserves some sort of Nobel Prize for trying to give straight information to the public, even as Donald Trump was doing everything he could to minimize the pandemic. But there is an important issue of both, our current failings in vaccinating the world, and a system that almost always allows those at the top to escape responsibility for their failures.

I have gone on at length before about the need to vaccinate the world. The spread of the Delta variant should make the point obvious to everyone. The more the virus spreads, the more it has opportunities to mutate.

We are actually fortunate with the Delta variant since it seems our vaccines are still effective in reducing the risk of infection and very effective in reducing the risk of severe illness or death. But this is just luck. If the pandemic spreads enough, we will see more mutations. It is entirely possible that a new strain will develop against which our vaccines provide us little or no protection.

It may be the case, as Pfizer and Moderna claim, that it will be possible to quickly design an effective mRNA vaccine against a new strain. But even in a best case scenario, where it takes just a few weeks to develop a new vaccine, it will still be many months before it can be tested, produced, and distributed to hundreds of millions of people across the country and billions across the world.  

In the meantime, we will be seeing a whole new round of infections and deaths, as well as trillions of dollars of lost economic output. And, just to be clear, these trillions in lost output is not just an issue of stacks of dollar bills in a vault, this translates into people going without food, medical care, shelter and other basic needs. Rich countries have the resources to largely protect their populations from most of the economic impact of the pandemic, developing countries in Asia, Africa, and Latin America do not.

Of course, even for the rich countries it will mean trillions more in government debt. That means a lot of to some people when a Democrat is in the White House.

The Open-Source Alternative

The drug companies will tell us that they are actually doing the best they can in getting the world vaccinated. They have in fact ramped up production considerably, although the bulk of their vaccines is still going to wealthy countries.

But the real question is whether we could be producing more vaccines, taking advantage of capacity not only in rich countries but in countries like India, Brazil, South Africa, Pakistan and other developing countries with potential manufacturing capacity. Our friends in the pharmaceutical industry tell us that manufacturing these vaccines is a complex process and can’t just be done overnight.

Of course, everyone in the world understands that it can’t be done overnight, which is why many of us were advocating ramping up capacity a year and a half ago. The pharmaceutical industry has been engaged in a filibuster, at least since October, when South Africa and India introduced their WTO resolution for suspending intellectual property rules for the duration of the pandemic, telling us it takes time to increase production. And, if we had focused on increasing production at the time they began their filibuster, we could have produced many more vaccines by now.

The logic of open-sourcing vaccines is that we would put the details of the manufacturing process for the vaccines on the web, allowing engineers around the world to study them as the basis for new facilities or converting existing ones. Ideally, the engineers for the Pfizer, Moderna, AstraZeneca and the rest (including the Chinese, Russian, and Indian vaccines) would also be available to conduct webinars and to provide in-person guidance.

Last month I was on a panel with someone from the pharmaceutical industry who questioned how this sort of transfer could be legally required. I pointed out that we (the U.S. and other rich country governments) should offer to pay a reasonable price for this expertise. If the drug companies refused, then we should go directly to their top engineers and offer them exorbitant pay (e.g. $1-2 million a month) for sharing their knowledge. Since they are undoubtedly bound by non-disclosure agreements, so governments would also have to commit to cover their legal expenses and any payments resulting from lawsuits. (The drug industry lawsuits, for sharing life-saving information in a pandemic, should at least help to clear up any ambiguity about their reason for existence.)

If vaccinating the world was treated as a real emergency, does anyone doubt something like this would happen? If GE or Lockheed had developed a new sonar in World War II that made it easier to detect German submarines, does anyone think we would just sit there and say that this is proprietary knowledge, and nothing can be done, if the companies chose not to share it with the government?

In addition to sharing existing knowledge, open-sourcing the production process should also allow for innovations that would increase production. The official position of the industry is that they have mastered the process for manufacturing their vaccines and it cannot possibly be improved. This claim is absurd on its face.

In February, Pfizer announced that it had discovered a way to cut its production time in half. Pfizer also discovered that its vaccine did not have to be super-frozen at temperatures of less than minus 90 degrees Fahrenheit, but instead could be stored in a normal freezer for up to two weeks. This makes a huge difference in transporting its vaccine, especially in developing countries. Pfizer also discovered that its standard vial contained enough material for six doses, rather than just five. As a result of this mistake, one sixth of the Pfizer vaccines were being thrown down the toilet for the first couple of months after it was approved.

Given this history, it’s hard to believe that there is no way to further improve on the production processes of Pfizer or the other vaccine manufacturers. If engineers all around the world had the opportunity to inspect their methods, surely many would be able to come up with innovations that could speed up the production and distribution of vaccines.

Does Making Deadly Mistakes Carry Consequences?

As much as the industry and politicians might want to pretend there was/is no way to accelerate the production of vaccines, that story is not credible. We had an alternative path that would have required the sharing of knowledge and expertise, and overriding patent rights. We did not go this path. Thus far, we have been very fortunate. No vaccine resistant strain has yet developed and spread widely.

Hopefully, the world’s good luck in this respect will continue, as we vaccinate the developing world, however slowly. It is worth noting that even with the spread of the Delta variant, the number of new cases in former hotspots like India and Brazil, has fallen sharply in recent weeks. This is presumably the result of many people enjoying some immunity from previous infections, as well as increasing levels of vaccinations.

But we certainly can’t take for granted that a vaccine resistant strain will not develop. And, if that happens, and we face the horror story of having to go through a whole new round of infections and shutdowns, the question is whether anyone will be held accountable?

My guess is that the answer will be no. (Who ended up unemployed because of the war in Iraq or the housing bubble?) The major media outlets will likely pretend that there was nothing that could have been done. They may acknowledge that we could have been somewhat quicker in getting out our vaccines to developing countries, but they will not acknowledge even the possibility that open-sourced technology could have sped up the production process for vaccines in both rich and developing countries. The idea that millions of people will needlessly die because our political leaders did not want to jeopardize the profits of the pharmaceutical industry is too horrible to be aired in places like the New York Times, Washington Post, and National Public Radio.

The long and short is that, in our high-tech globalized economy, accountability is only something that those at the bottom have to worry about. Dishwashers and truck drivers get fired when they mess up on the job. Top public health officials, and indeed the whole public health profession, are largely immune from this sort of accountability for infinitely bigger mess-ups.

This is a very serious question, even if I’m using a bit of clickbait here. I’m not out to get Dr. Fauci, who deserves some sort of Nobel Prize for trying to give straight information to the public, even as Donald Trump was doing everything he could to minimize the pandemic. But there is an important issue of both, our current failings in vaccinating the world, and a system that almost always allows those at the top to escape responsibility for their failures.

I have gone on at length before about the need to vaccinate the world. The spread of the Delta variant should make the point obvious to everyone. The more the virus spreads, the more it has opportunities to mutate.

We are actually fortunate with the Delta variant since it seems our vaccines are still effective in reducing the risk of infection and very effective in reducing the risk of severe illness or death. But this is just luck. If the pandemic spreads enough, we will see more mutations. It is entirely possible that a new strain will develop against which our vaccines provide us little or no protection.

It may be the case, as Pfizer and Moderna claim, that it will be possible to quickly design an effective mRNA vaccine against a new strain. But even in a best case scenario, where it takes just a few weeks to develop a new vaccine, it will still be many months before it can be tested, produced, and distributed to hundreds of millions of people across the country and billions across the world.  

In the meantime, we will be seeing a whole new round of infections and deaths, as well as trillions of dollars of lost economic output. And, just to be clear, these trillions in lost output is not just an issue of stacks of dollar bills in a vault, this translates into people going without food, medical care, shelter and other basic needs. Rich countries have the resources to largely protect their populations from most of the economic impact of the pandemic, developing countries in Asia, Africa, and Latin America do not.

Of course, even for the rich countries it will mean trillions more in government debt. That means a lot of to some people when a Democrat is in the White House.

The Open-Source Alternative

The drug companies will tell us that they are actually doing the best they can in getting the world vaccinated. They have in fact ramped up production considerably, although the bulk of their vaccines is still going to wealthy countries.

But the real question is whether we could be producing more vaccines, taking advantage of capacity not only in rich countries but in countries like India, Brazil, South Africa, Pakistan and other developing countries with potential manufacturing capacity. Our friends in the pharmaceutical industry tell us that manufacturing these vaccines is a complex process and can’t just be done overnight.

Of course, everyone in the world understands that it can’t be done overnight, which is why many of us were advocating ramping up capacity a year and a half ago. The pharmaceutical industry has been engaged in a filibuster, at least since October, when South Africa and India introduced their WTO resolution for suspending intellectual property rules for the duration of the pandemic, telling us it takes time to increase production. And, if we had focused on increasing production at the time they began their filibuster, we could have produced many more vaccines by now.

The logic of open-sourcing vaccines is that we would put the details of the manufacturing process for the vaccines on the web, allowing engineers around the world to study them as the basis for new facilities or converting existing ones. Ideally, the engineers for the Pfizer, Moderna, AstraZeneca and the rest (including the Chinese, Russian, and Indian vaccines) would also be available to conduct webinars and to provide in-person guidance.

Last month I was on a panel with someone from the pharmaceutical industry who questioned how this sort of transfer could be legally required. I pointed out that we (the U.S. and other rich country governments) should offer to pay a reasonable price for this expertise. If the drug companies refused, then we should go directly to their top engineers and offer them exorbitant pay (e.g. $1-2 million a month) for sharing their knowledge. Since they are undoubtedly bound by non-disclosure agreements, so governments would also have to commit to cover their legal expenses and any payments resulting from lawsuits. (The drug industry lawsuits, for sharing life-saving information in a pandemic, should at least help to clear up any ambiguity about their reason for existence.)

If vaccinating the world was treated as a real emergency, does anyone doubt something like this would happen? If GE or Lockheed had developed a new sonar in World War II that made it easier to detect German submarines, does anyone think we would just sit there and say that this is proprietary knowledge, and nothing can be done, if the companies chose not to share it with the government?

In addition to sharing existing knowledge, open-sourcing the production process should also allow for innovations that would increase production. The official position of the industry is that they have mastered the process for manufacturing their vaccines and it cannot possibly be improved. This claim is absurd on its face.

In February, Pfizer announced that it had discovered a way to cut its production time in half. Pfizer also discovered that its vaccine did not have to be super-frozen at temperatures of less than minus 90 degrees Fahrenheit, but instead could be stored in a normal freezer for up to two weeks. This makes a huge difference in transporting its vaccine, especially in developing countries. Pfizer also discovered that its standard vial contained enough material for six doses, rather than just five. As a result of this mistake, one sixth of the Pfizer vaccines were being thrown down the toilet for the first couple of months after it was approved.

Given this history, it’s hard to believe that there is no way to further improve on the production processes of Pfizer or the other vaccine manufacturers. If engineers all around the world had the opportunity to inspect their methods, surely many would be able to come up with innovations that could speed up the production and distribution of vaccines.

Does Making Deadly Mistakes Carry Consequences?

As much as the industry and politicians might want to pretend there was/is no way to accelerate the production of vaccines, that story is not credible. We had an alternative path that would have required the sharing of knowledge and expertise, and overriding patent rights. We did not go this path. Thus far, we have been very fortunate. No vaccine resistant strain has yet developed and spread widely.

Hopefully, the world’s good luck in this respect will continue, as we vaccinate the developing world, however slowly. It is worth noting that even with the spread of the Delta variant, the number of new cases in former hotspots like India and Brazil, has fallen sharply in recent weeks. This is presumably the result of many people enjoying some immunity from previous infections, as well as increasing levels of vaccinations.

But we certainly can’t take for granted that a vaccine resistant strain will not develop. And, if that happens, and we face the horror story of having to go through a whole new round of infections and shutdowns, the question is whether anyone will be held accountable?

My guess is that the answer will be no. (Who ended up unemployed because of the war in Iraq or the housing bubble?) The major media outlets will likely pretend that there was nothing that could have been done. They may acknowledge that we could have been somewhat quicker in getting out our vaccines to developing countries, but they will not acknowledge even the possibility that open-sourced technology could have sped up the production process for vaccines in both rich and developing countries. The idea that millions of people will needlessly die because our political leaders did not want to jeopardize the profits of the pharmaceutical industry is too horrible to be aired in places like the New York Times, Washington Post, and National Public Radio.

The long and short is that, in our high-tech globalized economy, accountability is only something that those at the bottom have to worry about. Dishwashers and truck drivers get fired when they mess up on the job. Top public health officials, and indeed the whole public health profession, are largely immune from this sort of accountability for infinitely bigger mess-ups.

An important item in the GDP report released this week, that received little attention, is that the saving rate is still well above the pre-pandemic level. For the second quarter as a whole the saving rate was 10.9 percent. If we just look at the month of June alone, the last month in the quarter, the rate was still 9.4 percent. This compares to an average saving rate of 7.5 percent in the three years prior to the pandemic.

For those not familiar with this economic concept, the saving rate is the percent of after-tax income that is not spent. To be clear, not spent means literally that people did not use it on consumption. If they used their income to pay for rent, buy a car, pay for their college, this would all be counted as consumption.

By comparison, if they put their money in their checking account or savings account, bought a government bond or shares of stock, this would be counted as saving. It would also be counted as savings if they used some of their money to pay down credit card or student loan debt.

Saving doesn’t even have to involve a conscious decision to put money aside in some way. Someone may cash their paycheck and have $1,000 sitting around their house, which they plan to spend, but have not done so yet. This would also count as savings. Savings just means after-tax income that is not spent on consumption.

There are two reasons this rise in the saving rate is a big deal. The first is that it indicates that the money the government paid out over the course of the pandemic is not now leading to a big surge in spending. There have been economists, most notably former Treasury Secretary Larry Summers, who have argued that the Biden recovery package was so large that it was likely to set off a wage-price inflationary spiral comparable to what we saw in the 1970s.

A big part of that story was that the money many households accumulated, as a result of the government payments made over the course of the pandemic, would lead to a huge surge in spending once the economy had recovered. While it’s still early, and the threat of the pandemic is still present, the vast majority of businesses have now reopened and most pandemic restrictions have been removed in most areas.

The fact that we are still seeing a saving rate that is well above the pre-pandemic level goes against the view that people would rush out and spend as soon as they had the opportunity. If we did see this flood of spending it would mean that the saving rate is below its normal level, that would mean that it would have to be considerably below the 7.5 percent rate we were seeing before the pandemic, rather than being almost 2.0 percentage points higher, as was the case in June.

A higher than normal saving rate also implies that there will be a gap in demand that needs to be filled by some other component of GDP, such as increased government spending, if the economy is to operate at close to its full employment level of output. In this context, a large government deficit may be essential for supporting demand.

Of course, the story may be different in a couple of months. Perhaps people still feel uncomfortable about going to restaurants, seeing movies, or engaging in other activities that could expose themselves to infections. If that’s true, we may still see the flood of spending, but it will take place a bit later than we might have expected, but for now, the data don’t support the huge spending surge story.

How the Pandemic Changed the Economy and Society

The other interesting issue in the latest consumption data is that it may provide us with more insights into the post-pandemic economy. We know that many more people worked from home during the pandemic than had previously. In many cases, businesses are now putting in place their plans for operating in a post-pandemic world. This will surely include more opportunities for people to work from home, although obviously fewer than at the peak of the pandemic.

Consistent with this story, spending (all figures are adjusted for inflation) on services in June was still 2.6 percent below the pre-pandemic level. By comparison, spending on durable goods (largely cars) was 23.8 percent higher and spending on non-durables was 12.4 percent above its pre-pandemic level.

The services where we see the sharpest falloffs are not a surprise. Spending on transportation services were 20.6 percent below their pre-pandemic level in June. Air transportation was down 24.8 percent, while spending on forms of transportation associated with commuting, such as busses and taxies, was down even more, with declines of close to 50 percent.

We will likely see air transportation rise back towards its pre-pandemic level as people come to feel more comfortable about flying, but much of the falloff in spending on commuting is likely to be permanent. (Spending on gas [gallons purchased] was 2.2 percent below its pre-pandemic level.) Consistent with the decline in commuting, spending on dry cleaning was 2.8 percent below its pre-pandemic level.

Spending on child care is down 21.7 percent. This is partly due to less commuting, but also in part due to less supply, as many child care centers closed in the downturn. The Biden administration is trying to make increased federal support for child care a priority. If additional funding does come through in the bills currently before Congress it will likely mean a large increase in usage, even above pre-pandemic levels. This would be the case even if we continue to see an increase in working from home. There are many parents working from home who would still welcome child care for at least part of the day.

Interestingly, spending on restaurant meals overall (including food at colleges and K-12 schools) is up 3.5 percent from before the pandemic. This indicates that any reduction in restaurant meals by people who used to work in offices or other places, is being offset by an increase in meals purchased by people who are not commuting.

This increase is also striking because restaurant employment is still 10.3 percent below the pre-pandemic level. This indicates a large increase in productivity at restaurants. Part of this story is likely an increase in the percentage of carry out meals, although many employers may have found ways to use their staff more efficiently.   

Spending at hotels and motels is still down 21.9 percent. This presumably reflects both fears about the pandemic and also that people had not planned trips for the month. Spending on housing at schools was down 44.7 percent, reflecting the fact that many schools did not have in person classes this spring.

Spending in the category of recreational services, which includes live music, movies, sports events, and a variety of other activities that were largely shut down during the pandemic, was still down 19.2 percent. This likely reflects the fact that many of these venues had not fully opened by the start of the month. One notable exception is casino gambling, where spending is up 8.5 percent. We will probably need a few more months to see what the longer-term post-pandemic picture is likely to be in this area. In some cases, such as movie theaters (spending was down 83.1 percent), behavior patterns may have been permanently altered by the pandemic.  

Spending on health care services, which accounts for more than 15 percent of consumption expenditures, was still down 4.1 percent in June. This primarily reflects people still putting off non-urgent care. That is best seen in the case of dental services, where spending was down 11.9 percent from the pre-pandemic level.

The other, more dismal, outlier in this sector is nursing homes, which also had an 11.9 percent decline in services. This likely reflects many patients leaving the care of nursing homes because they or their families feared for their well-being. It also reflects the fact that many nursing home residents died from the pandemic.

It seems clear that in many areas of consumption we were still very much seeing the impact of the pandemic in June. We will have to see how consumption patterns change when the case numbers fall back to levels where the pandemic is no longer a major concern. Some important changes may not be clearly visible in the GDP data. For example, the replacement of in-person university classes by remote learning will not be immediately apparent in the data. The increased use of tele-medicine also will not show up in GDP data. But it is likely that many consumption patterns will be permanently altered by the pandemic.

 

Productivity in the Pandemic

One hugely important point that has not gotten nearly enough attention is the sharp uptick in productivity since the pandemic began. GDP in the second quarter was 0.8 percent higher than in the fourth quarter of 2019. On average, we had 4.4 percent fewer people employed in the second quarter of 2021. If there was no change in average hours worked, that would imply an increase in productivity of more than 5.0 percent, almost 3.4 percent on annual basis.

Of course, there was some increase in average hours and other factors, like the self-employed and the government sector, which complicate the calculation. However, productivity clearly grew far more rapidly than the 1.0 percent annual rate for the decade prior to the pandemic.   

This is a huge deal in the context of inflation fears. The 1970s stagflation was associated with a sharp slowing in the rate of productivity growth, from an average annual rate of 3.0 percent in the period from 1947 to 1973, to just over 1.0 percent from 1973 to 1980. If we can sustain even a modest uptick in productivity growth from the pre-pandemic pace, it will go far towards eliminating the risk of inflation.

It’s also worth noting the latest GDP data, which include the comprehensive revisions to data from 2019 and 2020, shows a sharp increase in the profit share of corporate income in the first quarter of 2021. The profit share rose to 25.5 percent in the first quarter of 2021, compared to an average of 23.9 percent in 2020.

This rise in profit shares goes directly at odds with the idea that excessive wage growth will lead to higher prices, producing a wage-price inflationary spiral like we saw in the 1970s. In the 1970s, the profit share of income fell.

An important item in the GDP report released this week, that received little attention, is that the saving rate is still well above the pre-pandemic level. For the second quarter as a whole the saving rate was 10.9 percent. If we just look at the month of June alone, the last month in the quarter, the rate was still 9.4 percent. This compares to an average saving rate of 7.5 percent in the three years prior to the pandemic.

For those not familiar with this economic concept, the saving rate is the percent of after-tax income that is not spent. To be clear, not spent means literally that people did not use it on consumption. If they used their income to pay for rent, buy a car, pay for their college, this would all be counted as consumption.

By comparison, if they put their money in their checking account or savings account, bought a government bond or shares of stock, this would be counted as saving. It would also be counted as savings if they used some of their money to pay down credit card or student loan debt.

Saving doesn’t even have to involve a conscious decision to put money aside in some way. Someone may cash their paycheck and have $1,000 sitting around their house, which they plan to spend, but have not done so yet. This would also count as savings. Savings just means after-tax income that is not spent on consumption.

There are two reasons this rise in the saving rate is a big deal. The first is that it indicates that the money the government paid out over the course of the pandemic is not now leading to a big surge in spending. There have been economists, most notably former Treasury Secretary Larry Summers, who have argued that the Biden recovery package was so large that it was likely to set off a wage-price inflationary spiral comparable to what we saw in the 1970s.

A big part of that story was that the money many households accumulated, as a result of the government payments made over the course of the pandemic, would lead to a huge surge in spending once the economy had recovered. While it’s still early, and the threat of the pandemic is still present, the vast majority of businesses have now reopened and most pandemic restrictions have been removed in most areas.

The fact that we are still seeing a saving rate that is well above the pre-pandemic level goes against the view that people would rush out and spend as soon as they had the opportunity. If we did see this flood of spending it would mean that the saving rate is below its normal level, that would mean that it would have to be considerably below the 7.5 percent rate we were seeing before the pandemic, rather than being almost 2.0 percentage points higher, as was the case in June.

A higher than normal saving rate also implies that there will be a gap in demand that needs to be filled by some other component of GDP, such as increased government spending, if the economy is to operate at close to its full employment level of output. In this context, a large government deficit may be essential for supporting demand.

Of course, the story may be different in a couple of months. Perhaps people still feel uncomfortable about going to restaurants, seeing movies, or engaging in other activities that could expose themselves to infections. If that’s true, we may still see the flood of spending, but it will take place a bit later than we might have expected, but for now, the data don’t support the huge spending surge story.

How the Pandemic Changed the Economy and Society

The other interesting issue in the latest consumption data is that it may provide us with more insights into the post-pandemic economy. We know that many more people worked from home during the pandemic than had previously. In many cases, businesses are now putting in place their plans for operating in a post-pandemic world. This will surely include more opportunities for people to work from home, although obviously fewer than at the peak of the pandemic.

Consistent with this story, spending (all figures are adjusted for inflation) on services in June was still 2.6 percent below the pre-pandemic level. By comparison, spending on durable goods (largely cars) was 23.8 percent higher and spending on non-durables was 12.4 percent above its pre-pandemic level.

The services where we see the sharpest falloffs are not a surprise. Spending on transportation services were 20.6 percent below their pre-pandemic level in June. Air transportation was down 24.8 percent, while spending on forms of transportation associated with commuting, such as busses and taxies, was down even more, with declines of close to 50 percent.

We will likely see air transportation rise back towards its pre-pandemic level as people come to feel more comfortable about flying, but much of the falloff in spending on commuting is likely to be permanent. (Spending on gas [gallons purchased] was 2.2 percent below its pre-pandemic level.) Consistent with the decline in commuting, spending on dry cleaning was 2.8 percent below its pre-pandemic level.

Spending on child care is down 21.7 percent. This is partly due to less commuting, but also in part due to less supply, as many child care centers closed in the downturn. The Biden administration is trying to make increased federal support for child care a priority. If additional funding does come through in the bills currently before Congress it will likely mean a large increase in usage, even above pre-pandemic levels. This would be the case even if we continue to see an increase in working from home. There are many parents working from home who would still welcome child care for at least part of the day.

Interestingly, spending on restaurant meals overall (including food at colleges and K-12 schools) is up 3.5 percent from before the pandemic. This indicates that any reduction in restaurant meals by people who used to work in offices or other places, is being offset by an increase in meals purchased by people who are not commuting.

This increase is also striking because restaurant employment is still 10.3 percent below the pre-pandemic level. This indicates a large increase in productivity at restaurants. Part of this story is likely an increase in the percentage of carry out meals, although many employers may have found ways to use their staff more efficiently.   

Spending at hotels and motels is still down 21.9 percent. This presumably reflects both fears about the pandemic and also that people had not planned trips for the month. Spending on housing at schools was down 44.7 percent, reflecting the fact that many schools did not have in person classes this spring.

Spending in the category of recreational services, which includes live music, movies, sports events, and a variety of other activities that were largely shut down during the pandemic, was still down 19.2 percent. This likely reflects the fact that many of these venues had not fully opened by the start of the month. One notable exception is casino gambling, where spending is up 8.5 percent. We will probably need a few more months to see what the longer-term post-pandemic picture is likely to be in this area. In some cases, such as movie theaters (spending was down 83.1 percent), behavior patterns may have been permanently altered by the pandemic.  

Spending on health care services, which accounts for more than 15 percent of consumption expenditures, was still down 4.1 percent in June. This primarily reflects people still putting off non-urgent care. That is best seen in the case of dental services, where spending was down 11.9 percent from the pre-pandemic level.

The other, more dismal, outlier in this sector is nursing homes, which also had an 11.9 percent decline in services. This likely reflects many patients leaving the care of nursing homes because they or their families feared for their well-being. It also reflects the fact that many nursing home residents died from the pandemic.

It seems clear that in many areas of consumption we were still very much seeing the impact of the pandemic in June. We will have to see how consumption patterns change when the case numbers fall back to levels where the pandemic is no longer a major concern. Some important changes may not be clearly visible in the GDP data. For example, the replacement of in-person university classes by remote learning will not be immediately apparent in the data. The increased use of tele-medicine also will not show up in GDP data. But it is likely that many consumption patterns will be permanently altered by the pandemic.

 

Productivity in the Pandemic

One hugely important point that has not gotten nearly enough attention is the sharp uptick in productivity since the pandemic began. GDP in the second quarter was 0.8 percent higher than in the fourth quarter of 2019. On average, we had 4.4 percent fewer people employed in the second quarter of 2021. If there was no change in average hours worked, that would imply an increase in productivity of more than 5.0 percent, almost 3.4 percent on annual basis.

Of course, there was some increase in average hours and other factors, like the self-employed and the government sector, which complicate the calculation. However, productivity clearly grew far more rapidly than the 1.0 percent annual rate for the decade prior to the pandemic.   

This is a huge deal in the context of inflation fears. The 1970s stagflation was associated with a sharp slowing in the rate of productivity growth, from an average annual rate of 3.0 percent in the period from 1947 to 1973, to just over 1.0 percent from 1973 to 1980. If we can sustain even a modest uptick in productivity growth from the pre-pandemic pace, it will go far towards eliminating the risk of inflation.

It’s also worth noting the latest GDP data, which include the comprehensive revisions to data from 2019 and 2020, shows a sharp increase in the profit share of corporate income in the first quarter of 2021. The profit share rose to 25.5 percent in the first quarter of 2021, compared to an average of 23.9 percent in 2020.

This rise in profit shares goes directly at odds with the idea that excessive wage growth will lead to higher prices, producing a wage-price inflationary spiral like we saw in the 1970s. In the 1970s, the profit share of income fell.

The New York Times had an article about how Dr. Fauci wants the government to spend several billion dollars developing what he calls “prototype” vaccines. According to the article, the idea is that the vaccine would be developed against a family of viruses. In principle, they could then be quickly modified to protect against specific virus within the family that posed a serious health risk to the world.

Incredibly, the piece literally says nothing about who would own rights to the vaccines. The companies that have gained rights to the coronavirus vaccines, such as Moderna, Pfizer, and AstraZenca, have already made billions in profits from these vaccines. They may make tens of billions more in future years, if people need regular booster shots. 

Since Dr. Fauci’s proposal seems to imply that the government would be putting up the money to develop these vaccines, and taking the risk of failure, it might be reasonable for the government to have rights to the vaccines. Ideally it would place patent rights in the public domain, both so that scientists around the world can quickly build on the new innovations produced by this research, and so that any vaccines developed can be sold as cheap generics.

If the New York Times took income inequality seriously, it would have spent at least a paragraph or two discussing ownership of this research. Unfortunately, the paper only regards income inequality as a cause for hand-wringing, not a serious policy issue.

The New York Times had an article about how Dr. Fauci wants the government to spend several billion dollars developing what he calls “prototype” vaccines. According to the article, the idea is that the vaccine would be developed against a family of viruses. In principle, they could then be quickly modified to protect against specific virus within the family that posed a serious health risk to the world.

Incredibly, the piece literally says nothing about who would own rights to the vaccines. The companies that have gained rights to the coronavirus vaccines, such as Moderna, Pfizer, and AstraZenca, have already made billions in profits from these vaccines. They may make tens of billions more in future years, if people need regular booster shots. 

Since Dr. Fauci’s proposal seems to imply that the government would be putting up the money to develop these vaccines, and taking the risk of failure, it might be reasonable for the government to have rights to the vaccines. Ideally it would place patent rights in the public domain, both so that scientists around the world can quickly build on the new innovations produced by this research, and so that any vaccines developed can be sold as cheap generics.

If the New York Times took income inequality seriously, it would have spent at least a paragraph or two discussing ownership of this research. Unfortunately, the paper only regards income inequality as a cause for hand-wringing, not a serious policy issue.

Ever since Fed Chair Jerome Powell announced the Fed’s rescue package at the start of the pandemic, many progressives have criticized it for favoring the rich. The idea was that, in addition to pushing the short-term federal funds rate to zero, Powell also engaged in large-scale purchases of long-term bonds. These bonds included government bonds, mortgage-backed securities, and for the first time, it also bought packages of highly-rated corporate debt.

These purchases of longer-term bonds, known as “quantitative easing” (QE), had the effect of raising bond prices. The vast majority of bonds are held by the wealthy, with close to half being held by the richest one percent. This has the effect of increasing wealth inequality. Lower interest rates also have the effect of raising stock prices, other things being equal.

The Fed’s QE policy was surely a factor in the sharp run-up in stock prices since the start of the pandemic. Since the ownership of stock is also enormously skewed toward the wealthy, the effect on stock prices also worsens the inequality of wealth. For these reasons, some progressives have argued that QE is a regressive policy which should be abandoned.  

The Origins of QE

In order to understand the impact of QE on the economy, it is helpful to understand its origins. While the Fed did buy long-term government bonds in the Great Depression and World War II, it shifted its actions to the short-term federal funds market for most of the post-World War II era. This is the interest rate that banks charge for lending overnight reserves to each other, to allow them to meet their reserve requirements.

In the decades preceding the collapse of the housing bubble and Great Recession, the Fed sought to influence the rate of economic growth by pushing the federal funds rate higher or lower. While the federal funds rate does not directly affect the level of demand in the economy at all, the logic of the Fed’s policy was that the federal funds rate influences the longer-term rates that actually do affect demand in the economy.

If the federal funds rate drops, then banks will be willing to make car loans, mortgage loans, and business loans at lower interest rates. They also will lower the interest rate they charge on credit card debt. In addition, lower short-term interest rates should also spillover into the market for corporate and government debt. This means that corporations and state and local governments should be able to borrow at lower interest rates. The federal government will also pay lower interest rates on its debt.

By lowering interest rates throughout the economy, the Fed hopes to increase demand in interest-sensitive sectors, like car buying, homebuilding, and the purchase of big-ticket items like refrigerators and washing machines, which are often bought on credit. Lower interest rates also allow homeowners to refinance their mortgages at lower interest rates, potentially freeing up thousands of dollars annually to be spent on other consumption, or saved. (Increases in the federal funds rate worked in the opposite direction, leading to higher long-term rates and slower economic growth.)

The impact of the federal funds rate on the economy was always limited by the fact that its effect was always indirect. Longer term interest rates never moved one-to-one with changes in the federal funds rate. A drop of two or three percentage points in the federal funds rate may only lower 30-year mortgage rates by a percentage point, or even less. There also can be complicating factors that lead markets to disregard changes in the federal funds rate, minimizing its impact on the economy.[1]

Regardless of the merits of relying on the federal funds rate as a tool for influencing the economy, the Fed lost this option in the Great Recession. It pushed the federal funds rate down to zero, which is pretty much as low as it can go.[2]

Since this reduction in the federal funds rate was clearly inadequate to boost the economy to anything close to full employment, the Fed turned to other tools. Specifically, it turned to directly purchasing longer-term federal government debt, as well as mortgage-backed securities issued by Fannie Mae and Freddie Mac. (These securities were considered acceptable assets for the Fed because they were already guaranteed by the government, which meant that they carried no risk of default.)

By most accounts, the Fed’s quantitative easing policy following the Great Recession lowered longer term interest rates by 0.5 to 1.0 percentage points. This added between 2.0 to 3.0 percent to GDP, which implies 3 million and 4.5 million jobs. There is considerable uncertainty on both sides of these estimates, but few people who have analyzed the impact of QE following the Great Recession would dispute that it was responsible for several million jobs.

With this as a backdrop, is there any progressive who seriously wants to argue that we should end QE when the unemployment rate is 5.9 percent and we are still down 6.5 million jobs from the pre-pandemic level (9.2 million below trend)? The story looks even worse when we consider that the people who are losing out in the current labor market are disproportionately the most disadvantaged: Blacks, Hispanics, workers without high school degrees, and people with criminal records.

Also, as Jared Bernstein and I pointed out, a tight labor market not only gives those on the lower portion of the wage distribution the opportunity to get jobs, it also gives them the bargaining power to secure wage increases. The last five years saw a consistent shift in income from profits to wages, reversing part of the shift to capital we saw in the weak labor market during and immediately after the Great Recession.

 

Wealth Inequality: Should It Trouble Us?

I have long argued that wealth inequality should not be a primary focus of policy, in part because of the fluctuations in the value of stocks, bonds, and other assets in response to interest rates and other factors. I gather that those focused on wealth inequality were celebrating the great move to equality as the stock market plummeted in 2008 and 2009 at the start of the Great Recession. For some reason, their voices were not very audible back then.

But apart from that issue, many of the reasons that middle-income households would need wealth are often met alternatively by social insurance. If a country has a good Social Security and/or employer pension system, workers don’t need to accumulate large amounts of money to support themselves in retirement.

The same applies to health care. In the United States workers can expect to have large health care expenses in both their working years and retirement (even with Medicare). By contrast, in countries with good national health care insurance systems, like France, Canada, or Denmark, they would have little reason to accumulate wealth to cover health care expenses. Education is another example. In countries that provide free or low-cost college and advanced education, families do not need to accumulate assets to put their children through school.

We don’t generally include the value of socially provided goods and services in measures of wealth. We could devise measures that do assign values to these items, but they would look very different from the ones conventionally cited. Unless we do incorporate the value of socially provided items, it’s not clear we have a meaningful measure of wealth inequality either across countries or through time.

There is one issue often raised about wealth inequality that is very real: wealth inequality leads to enormous inequality in political power. The country’s billionaires can all pretty much count on open doors to the country’s most important politicians, and it is not because of their wisdom. This is an outrageous situation in a democracy, but it is also not one that can be addressed at this point with plausible changes in policy.

If we cut the wealth of our hundred richest people in half, they would still have a ridiculously outsized influence on policy. Reducing wealth at the top is not going to be an effective route to restoring anything like political balance. The more plausible path is going in the opposite direction; providing those at the middle and bottom with the means to have an effective voice.

I have advocated an individual tax credit for this purpose, but there are other mechanisms that can accomplish the same purpose, such as super-matches for small campaign contributions. We can try different mechanisms in different states and cities where progressives have the ability to affect policy, but increasing the political power of those at the middle and bottom offers far better prospects than directly reducing the power of those at the top.

 

What Would We Gain by Ending QE Now?

Suppose that there was a coup at the Fed and the opponents of QE were able to stop it tomorrow. As I wrote above, this would almost certainly slow economic growth and reduce the rate of job creation. That’s hard to see as a good story.

The sector that would probably be hardest and most immediately hit is housing. We were starting new housing units at an annual rate of more than 1.7 million during the first half of this year. That’s up from a bit more than 1.3 million in 2019. If we ended QE, and long-term rates rose by 1-2 percentage points, we would probably see the rate of construction fall back to something close to the 2019 level. The cost of housing has been a serious and real cause for concern. There is no more effective way to bring down the cost of housing than to build more housing. Ending QE goes the wrong way on this one.

People have also raised concerns about low interest rates causing bubbles. Low interest rates are clearly more conducive to bubbles than high interest rates, but we need to look at the issue with clear eyes. I’m going to claim a little authority on this one since I warned about both the stock bubble in the 1990s and the housing bubble in the 00s.

The issue with bubbles is not just that they exist, the issue is when they are driving the economy. Suppose Bitcoin were to fall to zero tomorrow, destroying somewhere close to $1 trillion in paper (okay, cyber) wealth. While we would have lots of unhappy crypto investors, the impact on the economy would be almost undetectable. The same holds true with the explosion in the prices of non-fungible tokens, rare art, baseball cards, and a wide array of other assets.

By contrast, the stock market bubble was clearly driving the economy in the late 1990s, leading to booms in both investment and consumption. The same was true in the 00s with the housing bubble. Residential construction was hitting record shares of GDP, while bubble generated housing wealth was leading to an enormous consumption boom. These booms disappeared when the housing bubble burst.

Anyhow, there is no coherent story about the collapse of any current bubbles leading to a serious economic downturn. If the bubble is not having a major economic impact, its collapse will not have a major economic impact.

There is one final point to keep in mind for those troubled by the wealth inequality resulting from QE: interest rates will eventually rise. The whole point of QE is to keep interest rates low when the economy needs a boost. When it is back near full employment, then we expect QE to end and interest rates to rise.

The Congressional Budget Office projects that the 10-year Treasury rate will rise to 2.0 percent in 2023 and to 2.3 percent in 2024, the same as the level in 2017. If we are concerned about the wealth created by the low interest rates caused by QE, we can be comfortable knowing that this wealth should disappear in two or three years when the economy recovers.

In short, the tradeoff here is a temporary increase in wealth inequality for more rapid economic growth and job creation, with the latter disproportionately benefitting the most disadvantaged in the labor market. This really doesn’t look like a close call.     

[1] One story, that was (is?) believed by many economists, is that reductions in the federal funds rate could actually lead to increases in longer-term rates because they will lead investors to expect more inflation. This could mean, for example, that if investors expect that inflation in future years will be one percentage point higher due to the Fed lowering interest rates, they will demand an additional return of one percentage point on long-term bonds to compensate for this expected inflation. In this story, a lower federal funds rate raises long-term interest rates.

[2] Several central banks have pushed their federal funds equivalent interest rate into negative territory in the years following the Great Recession. This can provide a bit more room to try to boost the economy, but generally this has just been a few tenths of a percentage point. There are structural factors that could make a similar move into negative territory difficult in the United States.

Ever since Fed Chair Jerome Powell announced the Fed’s rescue package at the start of the pandemic, many progressives have criticized it for favoring the rich. The idea was that, in addition to pushing the short-term federal funds rate to zero, Powell also engaged in large-scale purchases of long-term bonds. These bonds included government bonds, mortgage-backed securities, and for the first time, it also bought packages of highly-rated corporate debt.

These purchases of longer-term bonds, known as “quantitative easing” (QE), had the effect of raising bond prices. The vast majority of bonds are held by the wealthy, with close to half being held by the richest one percent. This has the effect of increasing wealth inequality. Lower interest rates also have the effect of raising stock prices, other things being equal.

The Fed’s QE policy was surely a factor in the sharp run-up in stock prices since the start of the pandemic. Since the ownership of stock is also enormously skewed toward the wealthy, the effect on stock prices also worsens the inequality of wealth. For these reasons, some progressives have argued that QE is a regressive policy which should be abandoned.  

The Origins of QE

In order to understand the impact of QE on the economy, it is helpful to understand its origins. While the Fed did buy long-term government bonds in the Great Depression and World War II, it shifted its actions to the short-term federal funds market for most of the post-World War II era. This is the interest rate that banks charge for lending overnight reserves to each other, to allow them to meet their reserve requirements.

In the decades preceding the collapse of the housing bubble and Great Recession, the Fed sought to influence the rate of economic growth by pushing the federal funds rate higher or lower. While the federal funds rate does not directly affect the level of demand in the economy at all, the logic of the Fed’s policy was that the federal funds rate influences the longer-term rates that actually do affect demand in the economy.

If the federal funds rate drops, then banks will be willing to make car loans, mortgage loans, and business loans at lower interest rates. They also will lower the interest rate they charge on credit card debt. In addition, lower short-term interest rates should also spillover into the market for corporate and government debt. This means that corporations and state and local governments should be able to borrow at lower interest rates. The federal government will also pay lower interest rates on its debt.

By lowering interest rates throughout the economy, the Fed hopes to increase demand in interest-sensitive sectors, like car buying, homebuilding, and the purchase of big-ticket items like refrigerators and washing machines, which are often bought on credit. Lower interest rates also allow homeowners to refinance their mortgages at lower interest rates, potentially freeing up thousands of dollars annually to be spent on other consumption, or saved. (Increases in the federal funds rate worked in the opposite direction, leading to higher long-term rates and slower economic growth.)

The impact of the federal funds rate on the economy was always limited by the fact that its effect was always indirect. Longer term interest rates never moved one-to-one with changes in the federal funds rate. A drop of two or three percentage points in the federal funds rate may only lower 30-year mortgage rates by a percentage point, or even less. There also can be complicating factors that lead markets to disregard changes in the federal funds rate, minimizing its impact on the economy.[1]

Regardless of the merits of relying on the federal funds rate as a tool for influencing the economy, the Fed lost this option in the Great Recession. It pushed the federal funds rate down to zero, which is pretty much as low as it can go.[2]

Since this reduction in the federal funds rate was clearly inadequate to boost the economy to anything close to full employment, the Fed turned to other tools. Specifically, it turned to directly purchasing longer-term federal government debt, as well as mortgage-backed securities issued by Fannie Mae and Freddie Mac. (These securities were considered acceptable assets for the Fed because they were already guaranteed by the government, which meant that they carried no risk of default.)

By most accounts, the Fed’s quantitative easing policy following the Great Recession lowered longer term interest rates by 0.5 to 1.0 percentage points. This added between 2.0 to 3.0 percent to GDP, which implies 3 million and 4.5 million jobs. There is considerable uncertainty on both sides of these estimates, but few people who have analyzed the impact of QE following the Great Recession would dispute that it was responsible for several million jobs.

With this as a backdrop, is there any progressive who seriously wants to argue that we should end QE when the unemployment rate is 5.9 percent and we are still down 6.5 million jobs from the pre-pandemic level (9.2 million below trend)? The story looks even worse when we consider that the people who are losing out in the current labor market are disproportionately the most disadvantaged: Blacks, Hispanics, workers without high school degrees, and people with criminal records.

Also, as Jared Bernstein and I pointed out, a tight labor market not only gives those on the lower portion of the wage distribution the opportunity to get jobs, it also gives them the bargaining power to secure wage increases. The last five years saw a consistent shift in income from profits to wages, reversing part of the shift to capital we saw in the weak labor market during and immediately after the Great Recession.

 

Wealth Inequality: Should It Trouble Us?

I have long argued that wealth inequality should not be a primary focus of policy, in part because of the fluctuations in the value of stocks, bonds, and other assets in response to interest rates and other factors. I gather that those focused on wealth inequality were celebrating the great move to equality as the stock market plummeted in 2008 and 2009 at the start of the Great Recession. For some reason, their voices were not very audible back then.

But apart from that issue, many of the reasons that middle-income households would need wealth are often met alternatively by social insurance. If a country has a good Social Security and/or employer pension system, workers don’t need to accumulate large amounts of money to support themselves in retirement.

The same applies to health care. In the United States workers can expect to have large health care expenses in both their working years and retirement (even with Medicare). By contrast, in countries with good national health care insurance systems, like France, Canada, or Denmark, they would have little reason to accumulate wealth to cover health care expenses. Education is another example. In countries that provide free or low-cost college and advanced education, families do not need to accumulate assets to put their children through school.

We don’t generally include the value of socially provided goods and services in measures of wealth. We could devise measures that do assign values to these items, but they would look very different from the ones conventionally cited. Unless we do incorporate the value of socially provided items, it’s not clear we have a meaningful measure of wealth inequality either across countries or through time.

There is one issue often raised about wealth inequality that is very real: wealth inequality leads to enormous inequality in political power. The country’s billionaires can all pretty much count on open doors to the country’s most important politicians, and it is not because of their wisdom. This is an outrageous situation in a democracy, but it is also not one that can be addressed at this point with plausible changes in policy.

If we cut the wealth of our hundred richest people in half, they would still have a ridiculously outsized influence on policy. Reducing wealth at the top is not going to be an effective route to restoring anything like political balance. The more plausible path is going in the opposite direction; providing those at the middle and bottom with the means to have an effective voice.

I have advocated an individual tax credit for this purpose, but there are other mechanisms that can accomplish the same purpose, such as super-matches for small campaign contributions. We can try different mechanisms in different states and cities where progressives have the ability to affect policy, but increasing the political power of those at the middle and bottom offers far better prospects than directly reducing the power of those at the top.

 

What Would We Gain by Ending QE Now?

Suppose that there was a coup at the Fed and the opponents of QE were able to stop it tomorrow. As I wrote above, this would almost certainly slow economic growth and reduce the rate of job creation. That’s hard to see as a good story.

The sector that would probably be hardest and most immediately hit is housing. We were starting new housing units at an annual rate of more than 1.7 million during the first half of this year. That’s up from a bit more than 1.3 million in 2019. If we ended QE, and long-term rates rose by 1-2 percentage points, we would probably see the rate of construction fall back to something close to the 2019 level. The cost of housing has been a serious and real cause for concern. There is no more effective way to bring down the cost of housing than to build more housing. Ending QE goes the wrong way on this one.

People have also raised concerns about low interest rates causing bubbles. Low interest rates are clearly more conducive to bubbles than high interest rates, but we need to look at the issue with clear eyes. I’m going to claim a little authority on this one since I warned about both the stock bubble in the 1990s and the housing bubble in the 00s.

The issue with bubbles is not just that they exist, the issue is when they are driving the economy. Suppose Bitcoin were to fall to zero tomorrow, destroying somewhere close to $1 trillion in paper (okay, cyber) wealth. While we would have lots of unhappy crypto investors, the impact on the economy would be almost undetectable. The same holds true with the explosion in the prices of non-fungible tokens, rare art, baseball cards, and a wide array of other assets.

By contrast, the stock market bubble was clearly driving the economy in the late 1990s, leading to booms in both investment and consumption. The same was true in the 00s with the housing bubble. Residential construction was hitting record shares of GDP, while bubble generated housing wealth was leading to an enormous consumption boom. These booms disappeared when the housing bubble burst.

Anyhow, there is no coherent story about the collapse of any current bubbles leading to a serious economic downturn. If the bubble is not having a major economic impact, its collapse will not have a major economic impact.

There is one final point to keep in mind for those troubled by the wealth inequality resulting from QE: interest rates will eventually rise. The whole point of QE is to keep interest rates low when the economy needs a boost. When it is back near full employment, then we expect QE to end and interest rates to rise.

The Congressional Budget Office projects that the 10-year Treasury rate will rise to 2.0 percent in 2023 and to 2.3 percent in 2024, the same as the level in 2017. If we are concerned about the wealth created by the low interest rates caused by QE, we can be comfortable knowing that this wealth should disappear in two or three years when the economy recovers.

In short, the tradeoff here is a temporary increase in wealth inequality for more rapid economic growth and job creation, with the latter disproportionately benefitting the most disadvantaged in the labor market. This really doesn’t look like a close call.     

[1] One story, that was (is?) believed by many economists, is that reductions in the federal funds rate could actually lead to increases in longer-term rates because they will lead investors to expect more inflation. This could mean, for example, that if investors expect that inflation in future years will be one percentage point higher due to the Fed lowering interest rates, they will demand an additional return of one percentage point on long-term bonds to compensate for this expected inflation. In this story, a lower federal funds rate raises long-term interest rates.

[2] Several central banks have pushed their federal funds equivalent interest rate into negative territory in the years following the Great Recession. This can provide a bit more room to try to boost the economy, but generally this has just been a few tenths of a percentage point. There are structural factors that could make a similar move into negative territory difficult in the United States.

The New York Times had a piece that told readers about the resistance of Republicans to increased enforcement funding for the IRS because of “years of G.O.P. resentment toward the agency.” This line appeared in the article’s subhead.

In addition to complaints about forcing people to pay the taxes required under the law, the piece also tells people:

“For conservative activists, who have harbored enmity toward the I.R.S. for more than a decade, the agency is considered a threat that is beyond reclamation.”

As the article subsequently explains, the IRS investigated many conservative groups for inappropriately claiming tax exempt status if they used terms like “Tea Party” or “patriot” in their names. It goes on to note that a report by the agency’s inspector general found that it used similar shorthand in selecting progressive groups for investigation. In other words, the IRS was carrying through its responsibility to enforce the law, not targeted right-wing groups because they were conservative.

There is absolutely nothing in this piece to support the view that Republicans have any reason to distrust the IRS other than it tries to make people pay their taxes. The piece implies that Republicans in Congress would be happy to go along with increased funding for tax enforcement if it were done by someone other than the IRS. There is absolutely zero reason to believe this is true.

 

The New York Times had a piece that told readers about the resistance of Republicans to increased enforcement funding for the IRS because of “years of G.O.P. resentment toward the agency.” This line appeared in the article’s subhead.

In addition to complaints about forcing people to pay the taxes required under the law, the piece also tells people:

“For conservative activists, who have harbored enmity toward the I.R.S. for more than a decade, the agency is considered a threat that is beyond reclamation.”

As the article subsequently explains, the IRS investigated many conservative groups for inappropriately claiming tax exempt status if they used terms like “Tea Party” or “patriot” in their names. It goes on to note that a report by the agency’s inspector general found that it used similar shorthand in selecting progressive groups for investigation. In other words, the IRS was carrying through its responsibility to enforce the law, not targeted right-wing groups because they were conservative.

There is absolutely nothing in this piece to support the view that Republicans have any reason to distrust the IRS other than it tries to make people pay their taxes. The piece implies that Republicans in Congress would be happy to go along with increased funding for tax enforcement if it were done by someone other than the IRS. There is absolutely zero reason to believe this is true.

 

Suppose that the average amount that people paid for their rent or mortgage fell by 10 percent, but our index for shelter costs in the Consumer Price Index (CPI) jumped by the same amount. That may sound nutty, but given the way we measure inflation, that sort of story is possible, even if the size of the difference is unlikely to be this extreme.

Inflation, as economists measure it, often differs a great deal from what most people would perceive as their cost of living. As we are entering unusual times with the recovery from the pandemic, it is worth getting a better sense of what these differences are, since they are likely to be important in how we view economic data in the months ahead.

Housing Inflation – It’s Not What You Pay

To start with the housing case, it is important to realize that the cost of housing in our price indices measures the change in the rent paid on the same house. This matters because it means that if people move to lower priced housing, that does not show up in the CPI or other price indices as a reduction in the cost of housing.

To take my own case as an example, a few years ago I moved from a house in Washington, DC, to a house in Southern Utah. The house we bought in Utah cost less than one-third of the price for which we sold our house in Washington, yet is somewhat larger and has far more land. This does not get picked up as a decline in housing costs.

In fact, if enough assholes like me move from expensive cities on the East Coast to low-priced areas in the middle of the country, it can actually show up as an increase in housing costs, since we will be driving up prices in the places we move to. There may be some offsetting reduction in prices in Washington and other expensive cities, but there is no reason to think these reductions will necessarily counterbalance the price increases in the interior.

The situation is further complicated by the fact that for owner-occupied housing (a bit less than two-thirds of all units), the indexes use a measure of imputed rent. To get this, the Bureau of Labor Statistics tries to match an owner-occupied unit with an equivalent rental unit. It then assumes that the increase in rents in the equivalent unit corresponds to the rise in implicit rent in the owner-occupied unit – in effect what the owner would be paying if they rented their house.

This measure excludes cost directly related to ownership, most importantly mortgage interest. In the pandemic, tens of millions of homeowners have been able to save thousands of dollars a year by refinancing their mortgages at lower interest rates. These savings are not picked up at all in the CPI or other indices.

The measure of price increases for housing is a big part of the overall inflation picture. The rent and owners’ equivalent rent components together account for 32.7 percent of the overall CPI. (More than three quarters is attributable to the owners’ equivalent rent component.) They account for more than 41 percent of the core index (excluding food and energy), which economists tend to focus on since it is less volatile.

To date, the inflation rate in the rent indexes have shown relatively little upward movement. The rent proper index (for actual renters) has risen by just 1.9 percent over the last twelve months. The owners’ equivalent rent index has gone up by 2.3 percent. Both are considerably below the pre-pandemic rates, which 3.7 percent for rent proper and 3.3 percent for owners’ equivalent rent.

It’s hard to predict whether rental increases will remain restrained. There has been an enormous increase in house sale prices since the start of the pandemic. This has been driven both by a plunge in mortgage interest rates and the decision by many people to move. Millions more people are now able to work from home, either part of the week or full-time. This means both that they don’t have to be close to downtown offices and that they likely need more space to create a comfortable work environment.    

It’s a bit too early to know whether this trend will lead to large increases in rents nationwide. While increased demand for housing should, other things equal, mean that prices will rise, there are some countervailing factors. First, there has been a huge increase in the construction of new units since the start of the pandemic. We were building new units at the rate of roughly 1.2 million a year before the pandemic. We have been adding housing at a rate of 1.6 million units annually over the last year.

Second, in many areas the housing stock was hugely underutilized. Many smaller cities had large numbers of vacant units, or commercial properties that can easily be converted into residential property. These converted units do not count in our data on housing starts.

Third, we will be ending the federal moratorium on evictions at the end of this month. There were many landlords who found ways around this moratorium, and there are some cities and states that are looking to find ways to protect tenants, but there clearly will be a large number of people facing eviction soon. This is not a good story for these people, but if we are trying to assess the near-term prospects for the housing market, the prospect of several hundred thousand (perhaps well over a million) newly vacant units coming on the market has to have a substantial impact in lowering rents.

To sum up the housing story, I’m not convinced that we will see a sharp rise in rents in the months ahead. The rise in house prices will make it more difficult for renters to become homeowners, due to the large down payments needed. The sharp drop in mortgage interest rates (now averaging close to 3.0 percent for a 30-year mortgage) means that monthly payments in many cases will still be lower than they would have been two years ago for a comparable house. (In other words, this is not a bubble.)

Insofar as we do see increases in our price indexes, it is important to recognize the impact on different groups. For the people moving from expensive cities to cheaper places, it will look like a decline in housing costs. For the homeowners in the cheaper places who see prices driven up by newcomers, it will mean a rise in their house price. That doesn’t help if you’re not selling. Nor does it help if you sell but the place you buy has gone up by a similar amount, but these people are not especially hurt by the increase in prices.

The one group that is hurt are tenants who must pay more in rent. This is a group that is younger and poorer on average. For them, higher inflation in rents is not a good story.  

Commuting Costs

I wanted to take a moment to comment on commuting costs because the way these appear in our price indices bear little relationship to how people experience them. With few exceptions, people do not enjoy their commute. The money (and time) spent commuting are a necessary cost of working. This means that for most people the total amount they spend on commuting and related expenses (e.g. dry cleaning, business clothes, work lunches) are a cost, they don’t care about the expense of individual items.

For example, if busses increased their fares by 50 percent, but people only had to travel to work half as much, they would be saving a large amount of money on their commutes. But our price indices would only pick up the fare increase, there would be no accounting of the reduced need for commuting.

I have written on this point before. Insofar as many more people are now able to work largely or entirely from home, this will be a gain in living standards that will not be picked up in conventional measures of GDP. If the individual components of commuting costs rise in price, but people are able to spend less money in total on commuting due to fewer commutes, we would be recording this as a rise in the cost of living, even though people are actually saving money and time on their commutes.

We will have to see the extent to which the increased opportunities to work from home will endure once the pandemic has ended, but it is virtually certain that several million more people will have this option.[1] This opportunity is a really big deal for them.[2]  

Health care

The measure of health care inflation in our price indices is likely to bear almost no relation to how people perceive health care costs. The indices look to measure the price of individual products or treatments, not what people are spending on health care costs. To take the case where the difference is probably clearest, the indices measuring drug prices measure the pricing of existing drugs. The prices of new drugs do not affect the index at all.

This would mean, for example, if most doctors recommended that their patients switch to a new and very expensive medication for lowering blood pressure, the higher cost of this drug compared to the previous drug, would never appear in the index. In fact, if the introduction of this new drug led to a fall in the price of the older drugs, the index would show a decline in the price of heart medications, even though most people were actually paying out more money.

We are actually seeing this sort of story with drug prices now. The CPI shows that prescription drug prices fell by 2.5 percent between June of 2020 and June of 2021. Yet, we spent 2.7 percent more on prescription drugs in May of this year than in May of 2020. (We don’t have June spending data yet.)

With health care people are likely to care about the total amount they spend and the state of their health, the fact that they spend more or less on a specific item is not going to be of much concern. This is especially true since most people have little direct knowledge of the value of specific drugs or procedures, but rather rely on the recommendation of their doctors.

Spending on health care actually has fallen sharply in the pandemic. In the first quarter of 2021, spending on health care services, which accounts for more than 80 percent of total spending, was 1.4 percent lower than in the fourth quarter of 2019. Clearly, much of this drop was due to people deferring procedures because of the pandemic, however some of this drop may reflect savings due to the increased use of telemedicine instead of in person doctor visits. We will need more time to see whether this slowing continues, but the savings from telemedicine is another gain that will not show up in the CPI.

Food Price and Global Warming

There actually is nothing especially unusual about how food prices are measured, and global warming doesn’t change the basic story. However, it is important to point out that higher prices that we will likely see for many products are due to the effects of global warming. Just to take one that has gotten some attention recent, it seems that much of the blueberry crop in the Northwest was destroyed by the extraordinary heat wave the region experienced earlier in this summer.

We are likely to see many cases where crops fail due to excessive heat, droughts, flooding or other climate change related weather events. It will be important to point out the cause, when we see price increases as a result. We can take it as a given that Republican politicians will be screaming bloody murder in response to price increase of any food product, or anything else. It will be important to point out these increases are their work, as the primary supporters of global warming. (I know plenty of Dems have been complicit, but the Republicans have ensured that almost nothing got done over the last quarter century.)

Inflation and Well-Being

We all know that economic measures cannot fully capture the state of people’s well-being. A big part of that picture is the inadequacy of the CPI as a measure of the cost of living in any real sense. If people find they can live in a cheaper town or city, and be every bit as happy or even happier, this is a gain not picked up in the CPI. Similarly, money saved on work related commuting expenses are also not picked up.

These, and other issues, are taking special importance now as millions of people are likely to qualitatively change their way of life in response to the pandemic. This is a big deal, and our standard economic measures of GDP and real income will not capture it.

[1] In the June Current Population Survey, more than 22 million people reported they worked from home ate least part of the month due to the pandemic.

[2] I realize that not everyone likes working from home. There will be a sorting process where these people look for jobs where they are expected to be physically present, while others seek out jobs that allow them to work from home. This doesn’t mean that everyone will be able to get the work arrangement they prefer, but we will almost certainly end up with more workers being satisfied with their situation than before the pandemic.

Suppose that the average amount that people paid for their rent or mortgage fell by 10 percent, but our index for shelter costs in the Consumer Price Index (CPI) jumped by the same amount. That may sound nutty, but given the way we measure inflation, that sort of story is possible, even if the size of the difference is unlikely to be this extreme.

Inflation, as economists measure it, often differs a great deal from what most people would perceive as their cost of living. As we are entering unusual times with the recovery from the pandemic, it is worth getting a better sense of what these differences are, since they are likely to be important in how we view economic data in the months ahead.

Housing Inflation – It’s Not What You Pay

To start with the housing case, it is important to realize that the cost of housing in our price indices measures the change in the rent paid on the same house. This matters because it means that if people move to lower priced housing, that does not show up in the CPI or other price indices as a reduction in the cost of housing.

To take my own case as an example, a few years ago I moved from a house in Washington, DC, to a house in Southern Utah. The house we bought in Utah cost less than one-third of the price for which we sold our house in Washington, yet is somewhat larger and has far more land. This does not get picked up as a decline in housing costs.

In fact, if enough assholes like me move from expensive cities on the East Coast to low-priced areas in the middle of the country, it can actually show up as an increase in housing costs, since we will be driving up prices in the places we move to. There may be some offsetting reduction in prices in Washington and other expensive cities, but there is no reason to think these reductions will necessarily counterbalance the price increases in the interior.

The situation is further complicated by the fact that for owner-occupied housing (a bit less than two-thirds of all units), the indexes use a measure of imputed rent. To get this, the Bureau of Labor Statistics tries to match an owner-occupied unit with an equivalent rental unit. It then assumes that the increase in rents in the equivalent unit corresponds to the rise in implicit rent in the owner-occupied unit – in effect what the owner would be paying if they rented their house.

This measure excludes cost directly related to ownership, most importantly mortgage interest. In the pandemic, tens of millions of homeowners have been able to save thousands of dollars a year by refinancing their mortgages at lower interest rates. These savings are not picked up at all in the CPI or other indices.

The measure of price increases for housing is a big part of the overall inflation picture. The rent and owners’ equivalent rent components together account for 32.7 percent of the overall CPI. (More than three quarters is attributable to the owners’ equivalent rent component.) They account for more than 41 percent of the core index (excluding food and energy), which economists tend to focus on since it is less volatile.

To date, the inflation rate in the rent indexes have shown relatively little upward movement. The rent proper index (for actual renters) has risen by just 1.9 percent over the last twelve months. The owners’ equivalent rent index has gone up by 2.3 percent. Both are considerably below the pre-pandemic rates, which 3.7 percent for rent proper and 3.3 percent for owners’ equivalent rent.

It’s hard to predict whether rental increases will remain restrained. There has been an enormous increase in house sale prices since the start of the pandemic. This has been driven both by a plunge in mortgage interest rates and the decision by many people to move. Millions more people are now able to work from home, either part of the week or full-time. This means both that they don’t have to be close to downtown offices and that they likely need more space to create a comfortable work environment.    

It’s a bit too early to know whether this trend will lead to large increases in rents nationwide. While increased demand for housing should, other things equal, mean that prices will rise, there are some countervailing factors. First, there has been a huge increase in the construction of new units since the start of the pandemic. We were building new units at the rate of roughly 1.2 million a year before the pandemic. We have been adding housing at a rate of 1.6 million units annually over the last year.

Second, in many areas the housing stock was hugely underutilized. Many smaller cities had large numbers of vacant units, or commercial properties that can easily be converted into residential property. These converted units do not count in our data on housing starts.

Third, we will be ending the federal moratorium on evictions at the end of this month. There were many landlords who found ways around this moratorium, and there are some cities and states that are looking to find ways to protect tenants, but there clearly will be a large number of people facing eviction soon. This is not a good story for these people, but if we are trying to assess the near-term prospects for the housing market, the prospect of several hundred thousand (perhaps well over a million) newly vacant units coming on the market has to have a substantial impact in lowering rents.

To sum up the housing story, I’m not convinced that we will see a sharp rise in rents in the months ahead. The rise in house prices will make it more difficult for renters to become homeowners, due to the large down payments needed. The sharp drop in mortgage interest rates (now averaging close to 3.0 percent for a 30-year mortgage) means that monthly payments in many cases will still be lower than they would have been two years ago for a comparable house. (In other words, this is not a bubble.)

Insofar as we do see increases in our price indexes, it is important to recognize the impact on different groups. For the people moving from expensive cities to cheaper places, it will look like a decline in housing costs. For the homeowners in the cheaper places who see prices driven up by newcomers, it will mean a rise in their house price. That doesn’t help if you’re not selling. Nor does it help if you sell but the place you buy has gone up by a similar amount, but these people are not especially hurt by the increase in prices.

The one group that is hurt are tenants who must pay more in rent. This is a group that is younger and poorer on average. For them, higher inflation in rents is not a good story.  

Commuting Costs

I wanted to take a moment to comment on commuting costs because the way these appear in our price indices bear little relationship to how people experience them. With few exceptions, people do not enjoy their commute. The money (and time) spent commuting are a necessary cost of working. This means that for most people the total amount they spend on commuting and related expenses (e.g. dry cleaning, business clothes, work lunches) are a cost, they don’t care about the expense of individual items.

For example, if busses increased their fares by 50 percent, but people only had to travel to work half as much, they would be saving a large amount of money on their commutes. But our price indices would only pick up the fare increase, there would be no accounting of the reduced need for commuting.

I have written on this point before. Insofar as many more people are now able to work largely or entirely from home, this will be a gain in living standards that will not be picked up in conventional measures of GDP. If the individual components of commuting costs rise in price, but people are able to spend less money in total on commuting due to fewer commutes, we would be recording this as a rise in the cost of living, even though people are actually saving money and time on their commutes.

We will have to see the extent to which the increased opportunities to work from home will endure once the pandemic has ended, but it is virtually certain that several million more people will have this option.[1] This opportunity is a really big deal for them.[2]  

Health care

The measure of health care inflation in our price indices is likely to bear almost no relation to how people perceive health care costs. The indices look to measure the price of individual products or treatments, not what people are spending on health care costs. To take the case where the difference is probably clearest, the indices measuring drug prices measure the pricing of existing drugs. The prices of new drugs do not affect the index at all.

This would mean, for example, if most doctors recommended that their patients switch to a new and very expensive medication for lowering blood pressure, the higher cost of this drug compared to the previous drug, would never appear in the index. In fact, if the introduction of this new drug led to a fall in the price of the older drugs, the index would show a decline in the price of heart medications, even though most people were actually paying out more money.

We are actually seeing this sort of story with drug prices now. The CPI shows that prescription drug prices fell by 2.5 percent between June of 2020 and June of 2021. Yet, we spent 2.7 percent more on prescription drugs in May of this year than in May of 2020. (We don’t have June spending data yet.)

With health care people are likely to care about the total amount they spend and the state of their health, the fact that they spend more or less on a specific item is not going to be of much concern. This is especially true since most people have little direct knowledge of the value of specific drugs or procedures, but rather rely on the recommendation of their doctors.

Spending on health care actually has fallen sharply in the pandemic. In the first quarter of 2021, spending on health care services, which accounts for more than 80 percent of total spending, was 1.4 percent lower than in the fourth quarter of 2019. Clearly, much of this drop was due to people deferring procedures because of the pandemic, however some of this drop may reflect savings due to the increased use of telemedicine instead of in person doctor visits. We will need more time to see whether this slowing continues, but the savings from telemedicine is another gain that will not show up in the CPI.

Food Price and Global Warming

There actually is nothing especially unusual about how food prices are measured, and global warming doesn’t change the basic story. However, it is important to point out that higher prices that we will likely see for many products are due to the effects of global warming. Just to take one that has gotten some attention recent, it seems that much of the blueberry crop in the Northwest was destroyed by the extraordinary heat wave the region experienced earlier in this summer.

We are likely to see many cases where crops fail due to excessive heat, droughts, flooding or other climate change related weather events. It will be important to point out the cause, when we see price increases as a result. We can take it as a given that Republican politicians will be screaming bloody murder in response to price increase of any food product, or anything else. It will be important to point out these increases are their work, as the primary supporters of global warming. (I know plenty of Dems have been complicit, but the Republicans have ensured that almost nothing got done over the last quarter century.)

Inflation and Well-Being

We all know that economic measures cannot fully capture the state of people’s well-being. A big part of that picture is the inadequacy of the CPI as a measure of the cost of living in any real sense. If people find they can live in a cheaper town or city, and be every bit as happy or even happier, this is a gain not picked up in the CPI. Similarly, money saved on work related commuting expenses are also not picked up.

These, and other issues, are taking special importance now as millions of people are likely to qualitatively change their way of life in response to the pandemic. This is a big deal, and our standard economic measures of GDP and real income will not capture it.

[1] In the June Current Population Survey, more than 22 million people reported they worked from home ate least part of the month due to the pandemic.

[2] I realize that not everyone likes working from home. There will be a sorting process where these people look for jobs where they are expected to be physically present, while others seek out jobs that allow them to work from home. This doesn’t mean that everyone will be able to get the work arrangement they prefer, but we will almost certainly end up with more workers being satisfied with their situation than before the pandemic.

It seems that no one in policy circles believes that people respond to incentives. How else can we explain this lengthy piece in the New York Times on the process by which the Food and Drug Administration (FDA) approved Aduhelm, a drug for treating Alzheimer’s disease.

The piece details how the clinical trials designed to determine its effectiveness were aborted, since it did not appear to be helping patients. Nonetheless, the FDA worked close with Biogen, the drug’s manufacturer, to find evidence that it might be effective in slowing cognitive decline. The FDA ended up approving the drug over the unanimous objection of its advisory panel. (There was one abstention.)

Incredibly, the piece never once mentions the role of government-granted patent monopolies in this outcome. Biogen was very anxious to get the drug approved because it intends to take advantage of this monopoly and charge $56,000 for a year’s treatment. If the drug would be available as a generic, which anyone could manufacture, the price would be far lower and there would be much less incentive to pressure the FDA to approve a drug of questionable effectiveness.

Obviously, we need to pay drug companies to research and develop new drugs. But patent monopolies are only one mechanism, and because of the perverse incentives they create, often not a very good one. (The opioid crisis is another example of the harm resulting from the perverse incentives created by patent monopolies.) My preferred route is direct government contracting for research, as we did with Moderna in the development of a coronavirus vaccine. (We also let them get patent monopolies, since some folks feel you can never give drug companies too much money.)

In addition to getting lower priced drugs, and eliminating the perverse incentives created by patent monopolies, direct funding would also allow for open-source research. This means that all researchers could quickly learn from the successes and failures of others doing similar work. In the case of coronavirus vaccines, this might have prevented Pfizer from throwing out one sixth of its vaccines because it did not realize that its standard vial contained six doses rather than five. It may also have allowed it to realize more quickly that its vaccine did not need to be super-frozen but instead could stored in a normal freezer for up to two weeks. (I outline a mechanism for funding research in chapter 5 of Rigged [it’s free].)

Anyhow, it would be nice if we could one day have a serious discussion of alternative mechanisms for financing research  instead of acting as though the patent system came down to us from god. Apparently, the NYT is not even willing to acknowledge the corruption that results from the incentives it creates. That is not good.

 

It seems that no one in policy circles believes that people respond to incentives. How else can we explain this lengthy piece in the New York Times on the process by which the Food and Drug Administration (FDA) approved Aduhelm, a drug for treating Alzheimer’s disease.

The piece details how the clinical trials designed to determine its effectiveness were aborted, since it did not appear to be helping patients. Nonetheless, the FDA worked close with Biogen, the drug’s manufacturer, to find evidence that it might be effective in slowing cognitive decline. The FDA ended up approving the drug over the unanimous objection of its advisory panel. (There was one abstention.)

Incredibly, the piece never once mentions the role of government-granted patent monopolies in this outcome. Biogen was very anxious to get the drug approved because it intends to take advantage of this monopoly and charge $56,000 for a year’s treatment. If the drug would be available as a generic, which anyone could manufacture, the price would be far lower and there would be much less incentive to pressure the FDA to approve a drug of questionable effectiveness.

Obviously, we need to pay drug companies to research and develop new drugs. But patent monopolies are only one mechanism, and because of the perverse incentives they create, often not a very good one. (The opioid crisis is another example of the harm resulting from the perverse incentives created by patent monopolies.) My preferred route is direct government contracting for research, as we did with Moderna in the development of a coronavirus vaccine. (We also let them get patent monopolies, since some folks feel you can never give drug companies too much money.)

In addition to getting lower priced drugs, and eliminating the perverse incentives created by patent monopolies, direct funding would also allow for open-source research. This means that all researchers could quickly learn from the successes and failures of others doing similar work. In the case of coronavirus vaccines, this might have prevented Pfizer from throwing out one sixth of its vaccines because it did not realize that its standard vial contained six doses rather than five. It may also have allowed it to realize more quickly that its vaccine did not need to be super-frozen but instead could stored in a normal freezer for up to two weeks. (I outline a mechanism for funding research in chapter 5 of Rigged [it’s free].)

Anyhow, it would be nice if we could one day have a serious discussion of alternative mechanisms for financing research  instead of acting as though the patent system came down to us from god. Apparently, the NYT is not even willing to acknowledge the corruption that results from the incentives it creates. That is not good.

 

I get to say this about the drug companies, now that President Biden has said that Facebook is killing people because it was allowing people to use its system to spread lies about the vaccines. There is actually a better case against the drug companies.

After all, they are using their government-granted patent monopolies, and their control over technical information about the production of vaccines, to limit the supply of vaccines available to the world. As a result, most of the population in the developing world is not yet vaccinated. And, unlike the followers of Donald Trump, people in developing countries are not vaccinated because they can’t get vaccines.

The TRIPS Waiver Charade

The central item in the story about speeding vaccine distribution in the developing world is the proposal put forward at the WTO last October (yes, that would be nine months ago), by India and South Africa, to suspend patents and other intellectual property rules related to vaccines, tests, and treatments for the duration of the pandemic. Since that time, the rich countries have been engaged in a massive filibuster, continually delaying any WTO action on the measure, presumably with the hope that it will become largely irrelevant at some point.

The Biden administration breathed new life into the proposal when it endorsed suspending patent rights, albeit just for vaccines. This is the easiest sell for people in the United States and other rich countries, since it is not just about humanitarian concerns for the developing world. If the pandemic is allowed to spread unchecked in the developing world it is likely only a matter of time before a vaccine resistant strain develops. This could mean a whole new round of disease, death, and shutdowns in the rich countries, until a new vaccine can be developed and widely distributed.

After the Biden administration indicated its support for this limited waiver, many other rich countries signed on as well. Germany, under longtime chancellor Angela Merkel, has been largely left alone to carry water for the pharmaceutical industry in opposing the vaccine waiver.

I had the chance to confront the industry arguments directly last week in a web panel sponsored by the International Association for the Protection of Intellectual Property. It’s always educational to see these arguments up close and real people actually making them.

The first line of defense is that the waiver of patent rights by itself does not lead to any increase in vaccine production. This is of course true. Vaccines have to be manufactured, eliminating patent rights is not the same thing as manufacturing vaccines.

But once we get serious, the point is that many potential manufacturers of vaccines are being prevented from getting into the business by the threat of patent infringement suits. In some cases, this might mean reverse engineering the process, something that might be more feasible with the adenovirus vaccines produced by Johnson and Johnson and AstraZeneca, than with the mRNA vaccines. The manufacturing process for these vaccines is similar to ones already used by manufacturers in several countries in the developing world, as well as several in the rich countries that are not currently producing vaccines against the pandemic.

Another possible outcome from eliminating patent rights is that the drug companies may opt to do more voluntary licensing agreements under the logic that it is better to get something than nothing. If manufacturers are using reverse engineering to produce vaccines, the patent holders get nothing. They would be much better off with a limited royalty on a licensing agreement, even if it is less than they could have expected if they had been able to maintain an unchecked patent monopoly.

The other route that suspending patent monopolies may open is one where former employees of the pharmaceutical companies may choose to share their expertise with vaccine manufacturers around the world. In almost all cases these employees would be bound by non-disclosure agreements. This means that sharing their knowledge would subject them to substantial legal liability. But some of them may be willing to take this risk. From the standpoint of potential manufacturers, the patent waiver would mean that they would not face direct liability if they were to go this route, and the countries in which they are based would not face trade sanctions.

Open-Sourcing Technology

While suspending patent rights by itself could lead to a substantial increase in vaccine production, if we took the pandemic seriously, we would want to go much further. We would want to see the technology for producing vaccines fully open-sourced. This would mean posting the details of the manufacturing process on the web, so that engineers all over the world could benefit from them. Ideally, the engineers from the pharmaceutical companies would also be available to do webinars and even in-person visits to factories around the world, with the goal of assisting them in getting their facilities up-to-speed as quickly as possible.

The industry person on my panel didn’t seem to understand how governments could even arrange to have this technology open-sourced. He asked rhetorically whether governments can force a company to disclose information.

As a legal matter, governments probably cannot force a company to disclose information that it chooses to keep secret. However, governments can offer to pay companies to share this information. This could mean, for example, that the U.S. government (or some set of rich country governments) offer Pfizer $1-$2 billion to fully open-source its manufacturing technology.

Suppose Pfizer and the other manufacturers refuse reasonable offers. There is another recourse. The governments can make their offers directly to the company’s engineers who have developed the technology. They can offer the engineers say $1-$2 million a month for making their knowledge available to the world.

This sharing would almost certainly violate non-disclosure agreements these engineers have signed with their employers. The companies would almost certainly sue engineers for making public disclosures of protected information. Governments can offer to cover all legal expenses and any settlements or penalties that they faced as a result of the disclosure.

The key point is that we want the information available as soon as possible. We can worry about the proper level of compensation later. This again gets back to whether we see the pandemic as a real emergency.

Suppose that during World War II Lockheed, General Electric, or some other military contractor developed a new sonar system that made it easier to detect the presence of German submarines. What would we do if this company refused to share the technology with the U.S. government so that it was better able to defend its military and merchant vessels against German attacks?

While that scenario would have been almost unimaginable – no U.S. corporation would have withheld valuable military technology from the government during the war – it is also almost inconceivable that the government would have just shrugged and said “oh well, I guess there is nothing we can do.”  (That’s especially hard to imagine since so much public money went into developing the technology.) The point is that the war was seen as a national emergency and the belief that we had to do everything possible to win the war as quickly as possible was widely shared. If we see the pandemic as a similar emergency it would be reasonable to treat it in the same way as World War II.

Perhaps the most interesting part of this story is what the industry representative saw as the downside of making their technology widely available. The argument was that the mRNA technology was not actually developed to be used against Covid. Its value against the pandemic was just a fortunate coincidence. The technology was actually intended to be used for vaccines against cancer and other diseases.

From the industry perspective, the downside is that if they made their technology more widely available, then other companies may be able to step in and use it to develop their own vaccines against cancer and other diseases. In other words, the big fear is that we will see more advances in health care if the technology is widely available, pretty much the exact opposite of the story about how this would impede further innovation.  

I gather most of us do not share the industry’s concerns that open-sourcing technology could lead to a proliferation of new vaccines against deadly diseases, but it is worth taking a moment to think about the innovation process. The industry has long pushed the line that the way to promote more innovation is to make patent and related monopolies longer and stronger. The idea is that by increasing potential profits, we will see more investment in developing new vaccines, cures, and treatments.

But these monopolies are only one way to provide incentives, and even now they are not the only mechanism we use. We also spend over $40 billion a year in the United States alone on supporting biomedical research, primarily through the National Institutes of Health. Most of this money goes to more basic research, but many drugs and vaccines have been developed largely on the government dime, most notably the Moderna vaccine, which was paid for entirely through Operation Warp Speed.

If we put up more public money, then we need less private money. I have argued that we would be best off relying pretty much entirely on public money.[1] This would take away the perverse incentives created by patent monopoly pricing, like the pushing of opioids that was a major factor in the country’s opioid crisis. It would also allow for the open-sourcing of research, which should be a condition of public funding. This could create the world the industry fears, as many companies could jump ahead and take advantage of developments in mRNA technology to develop vaccines against a variety of diseases.  

But even if we don’t go the full public funding route, it is pretty much definitional that more public funding reduces the need for strong patent monopolies to provide incentives. If we put up more dollars for research, clinical testing, or other aspects of the development process, then we can provide the same incentive to the pharmaceutical industry with shorter and/or weaker monopoly protections.  

In the vaccine context, open-source means not only sharing existing technology, but creating the opportunity for improving it by allowing engineers all of the world to inspect production techniques. While the industry would like to pretend that it has perfected the production process and possibilities for improvement do not exist, this is hardly plausible based on what is publicly known.

To take a few examples, Pfizer announced back in February that it found that changing its production techniques could cut production time in half. It also discovered that its vaccine did not require super-cold storage. Rather, it could be kept in a normal freezer for up to two weeks. In fact, Pfizer did not even realize that its standard vial contained six doses of the vaccine rather than five. This meant that one sixth of its vaccines were being thrown into the toilet at a time when they were in very short supply.

Given this history, it is hard to believe that Pfizer and the other pharmaceutical companies now have an optimal production system that will allow for no further improvements. As the saying goes, when did the drug companies stop making mistakes about their production technology?

 

Has Anyone Heard of China?

It is remarkable how discussions of vaccinating the world so often leave out the Chinese vaccines. They are clearly not as effective as the mRNA vaccines, but they are nonetheless hugely more effective in preventing death and serious illness than no vaccines.[2] And, in a context where our drug companies insist that they couldn’t possible produce enough vaccines to cover the developing world this year, and possibly not even next year, we should be looking to the Chinese vaccines to fill the gap.

China was able to distribute more than 560 million vaccines internally, in the month of June, in addition to the doses it supplied to other countries. Unless the country had a truly massive stockpile at the start of the month, this presumably reflects capacity in the range of 500 million vaccines a month. The Chinese vaccines account for close to 50 percent of the doses given around the world to date.

It would be bizarre not to try to take advantage of China’s capacity. There obviously are political issues in dealing with China, but the U.S. and other Western countries should try to put these aside, if we are going to be serious about vaccinating the world as quickly as possible.

 

“Mistakes Were Made,” Should not be Our National Motto

If a vaccine resistant strain of the coronavirus develops, and we have to go through a whole new round of disease, deaths, and shutdowns, it will be an enormous disaster from any perspective. The worst part of the story is that it is a fully avoidable disaster.

We could have had the whole world vaccinated by now, if the United States and other major powers had made it a priority. Unfortunately, we were too concerned about pharmaceutical industry profits and scoring points against China to go this route.

Nonetheless, we may get lucky. Current infection rates worldwide are down sharply from the peaks hit in April, but they are rising again due to the Delta variant. It is essential to do everything possible to accelerate the distribution of vaccines. It is long past time that we started taking the pandemic seriously.

[1] I discuss a mechanism for public funding of drug development in chapter of 5 of Rigged (it’s free).

[2] The NYT had a peculiar article last month celebrating Covid illnesses and death in Seychelles, where most of the population has been vaccinated with one of the Chinese vaccines. Seychelles largely avoided the pandemic until the point where it began large-scale vaccinations. If we take the whole period since the pandemic began, the percent of the population that has died from Covid in Seychelles is 0.08 percent, less than half the 0.19 percent in the United States.  

I get to say this about the drug companies, now that President Biden has said that Facebook is killing people because it was allowing people to use its system to spread lies about the vaccines. There is actually a better case against the drug companies.

After all, they are using their government-granted patent monopolies, and their control over technical information about the production of vaccines, to limit the supply of vaccines available to the world. As a result, most of the population in the developing world is not yet vaccinated. And, unlike the followers of Donald Trump, people in developing countries are not vaccinated because they can’t get vaccines.

The TRIPS Waiver Charade

The central item in the story about speeding vaccine distribution in the developing world is the proposal put forward at the WTO last October (yes, that would be nine months ago), by India and South Africa, to suspend patents and other intellectual property rules related to vaccines, tests, and treatments for the duration of the pandemic. Since that time, the rich countries have been engaged in a massive filibuster, continually delaying any WTO action on the measure, presumably with the hope that it will become largely irrelevant at some point.

The Biden administration breathed new life into the proposal when it endorsed suspending patent rights, albeit just for vaccines. This is the easiest sell for people in the United States and other rich countries, since it is not just about humanitarian concerns for the developing world. If the pandemic is allowed to spread unchecked in the developing world it is likely only a matter of time before a vaccine resistant strain develops. This could mean a whole new round of disease, death, and shutdowns in the rich countries, until a new vaccine can be developed and widely distributed.

After the Biden administration indicated its support for this limited waiver, many other rich countries signed on as well. Germany, under longtime chancellor Angela Merkel, has been largely left alone to carry water for the pharmaceutical industry in opposing the vaccine waiver.

I had the chance to confront the industry arguments directly last week in a web panel sponsored by the International Association for the Protection of Intellectual Property. It’s always educational to see these arguments up close and real people actually making them.

The first line of defense is that the waiver of patent rights by itself does not lead to any increase in vaccine production. This is of course true. Vaccines have to be manufactured, eliminating patent rights is not the same thing as manufacturing vaccines.

But once we get serious, the point is that many potential manufacturers of vaccines are being prevented from getting into the business by the threat of patent infringement suits. In some cases, this might mean reverse engineering the process, something that might be more feasible with the adenovirus vaccines produced by Johnson and Johnson and AstraZeneca, than with the mRNA vaccines. The manufacturing process for these vaccines is similar to ones already used by manufacturers in several countries in the developing world, as well as several in the rich countries that are not currently producing vaccines against the pandemic.

Another possible outcome from eliminating patent rights is that the drug companies may opt to do more voluntary licensing agreements under the logic that it is better to get something than nothing. If manufacturers are using reverse engineering to produce vaccines, the patent holders get nothing. They would be much better off with a limited royalty on a licensing agreement, even if it is less than they could have expected if they had been able to maintain an unchecked patent monopoly.

The other route that suspending patent monopolies may open is one where former employees of the pharmaceutical companies may choose to share their expertise with vaccine manufacturers around the world. In almost all cases these employees would be bound by non-disclosure agreements. This means that sharing their knowledge would subject them to substantial legal liability. But some of them may be willing to take this risk. From the standpoint of potential manufacturers, the patent waiver would mean that they would not face direct liability if they were to go this route, and the countries in which they are based would not face trade sanctions.

Open-Sourcing Technology

While suspending patent rights by itself could lead to a substantial increase in vaccine production, if we took the pandemic seriously, we would want to go much further. We would want to see the technology for producing vaccines fully open-sourced. This would mean posting the details of the manufacturing process on the web, so that engineers all over the world could benefit from them. Ideally, the engineers from the pharmaceutical companies would also be available to do webinars and even in-person visits to factories around the world, with the goal of assisting them in getting their facilities up-to-speed as quickly as possible.

The industry person on my panel didn’t seem to understand how governments could even arrange to have this technology open-sourced. He asked rhetorically whether governments can force a company to disclose information.

As a legal matter, governments probably cannot force a company to disclose information that it chooses to keep secret. However, governments can offer to pay companies to share this information. This could mean, for example, that the U.S. government (or some set of rich country governments) offer Pfizer $1-$2 billion to fully open-source its manufacturing technology.

Suppose Pfizer and the other manufacturers refuse reasonable offers. There is another recourse. The governments can make their offers directly to the company’s engineers who have developed the technology. They can offer the engineers say $1-$2 million a month for making their knowledge available to the world.

This sharing would almost certainly violate non-disclosure agreements these engineers have signed with their employers. The companies would almost certainly sue engineers for making public disclosures of protected information. Governments can offer to cover all legal expenses and any settlements or penalties that they faced as a result of the disclosure.

The key point is that we want the information available as soon as possible. We can worry about the proper level of compensation later. This again gets back to whether we see the pandemic as a real emergency.

Suppose that during World War II Lockheed, General Electric, or some other military contractor developed a new sonar system that made it easier to detect the presence of German submarines. What would we do if this company refused to share the technology with the U.S. government so that it was better able to defend its military and merchant vessels against German attacks?

While that scenario would have been almost unimaginable – no U.S. corporation would have withheld valuable military technology from the government during the war – it is also almost inconceivable that the government would have just shrugged and said “oh well, I guess there is nothing we can do.”  (That’s especially hard to imagine since so much public money went into developing the technology.) The point is that the war was seen as a national emergency and the belief that we had to do everything possible to win the war as quickly as possible was widely shared. If we see the pandemic as a similar emergency it would be reasonable to treat it in the same way as World War II.

Perhaps the most interesting part of this story is what the industry representative saw as the downside of making their technology widely available. The argument was that the mRNA technology was not actually developed to be used against Covid. Its value against the pandemic was just a fortunate coincidence. The technology was actually intended to be used for vaccines against cancer and other diseases.

From the industry perspective, the downside is that if they made their technology more widely available, then other companies may be able to step in and use it to develop their own vaccines against cancer and other diseases. In other words, the big fear is that we will see more advances in health care if the technology is widely available, pretty much the exact opposite of the story about how this would impede further innovation.  

I gather most of us do not share the industry’s concerns that open-sourcing technology could lead to a proliferation of new vaccines against deadly diseases, but it is worth taking a moment to think about the innovation process. The industry has long pushed the line that the way to promote more innovation is to make patent and related monopolies longer and stronger. The idea is that by increasing potential profits, we will see more investment in developing new vaccines, cures, and treatments.

But these monopolies are only one way to provide incentives, and even now they are not the only mechanism we use. We also spend over $40 billion a year in the United States alone on supporting biomedical research, primarily through the National Institutes of Health. Most of this money goes to more basic research, but many drugs and vaccines have been developed largely on the government dime, most notably the Moderna vaccine, which was paid for entirely through Operation Warp Speed.

If we put up more public money, then we need less private money. I have argued that we would be best off relying pretty much entirely on public money.[1] This would take away the perverse incentives created by patent monopoly pricing, like the pushing of opioids that was a major factor in the country’s opioid crisis. It would also allow for the open-sourcing of research, which should be a condition of public funding. This could create the world the industry fears, as many companies could jump ahead and take advantage of developments in mRNA technology to develop vaccines against a variety of diseases.  

But even if we don’t go the full public funding route, it is pretty much definitional that more public funding reduces the need for strong patent monopolies to provide incentives. If we put up more dollars for research, clinical testing, or other aspects of the development process, then we can provide the same incentive to the pharmaceutical industry with shorter and/or weaker monopoly protections.  

In the vaccine context, open-source means not only sharing existing technology, but creating the opportunity for improving it by allowing engineers all of the world to inspect production techniques. While the industry would like to pretend that it has perfected the production process and possibilities for improvement do not exist, this is hardly plausible based on what is publicly known.

To take a few examples, Pfizer announced back in February that it found that changing its production techniques could cut production time in half. It also discovered that its vaccine did not require super-cold storage. Rather, it could be kept in a normal freezer for up to two weeks. In fact, Pfizer did not even realize that its standard vial contained six doses of the vaccine rather than five. This meant that one sixth of its vaccines were being thrown into the toilet at a time when they were in very short supply.

Given this history, it is hard to believe that Pfizer and the other pharmaceutical companies now have an optimal production system that will allow for no further improvements. As the saying goes, when did the drug companies stop making mistakes about their production technology?

 

Has Anyone Heard of China?

It is remarkable how discussions of vaccinating the world so often leave out the Chinese vaccines. They are clearly not as effective as the mRNA vaccines, but they are nonetheless hugely more effective in preventing death and serious illness than no vaccines.[2] And, in a context where our drug companies insist that they couldn’t possible produce enough vaccines to cover the developing world this year, and possibly not even next year, we should be looking to the Chinese vaccines to fill the gap.

China was able to distribute more than 560 million vaccines internally, in the month of June, in addition to the doses it supplied to other countries. Unless the country had a truly massive stockpile at the start of the month, this presumably reflects capacity in the range of 500 million vaccines a month. The Chinese vaccines account for close to 50 percent of the doses given around the world to date.

It would be bizarre not to try to take advantage of China’s capacity. There obviously are political issues in dealing with China, but the U.S. and other Western countries should try to put these aside, if we are going to be serious about vaccinating the world as quickly as possible.

 

“Mistakes Were Made,” Should not be Our National Motto

If a vaccine resistant strain of the coronavirus develops, and we have to go through a whole new round of disease, deaths, and shutdowns, it will be an enormous disaster from any perspective. The worst part of the story is that it is a fully avoidable disaster.

We could have had the whole world vaccinated by now, if the United States and other major powers had made it a priority. Unfortunately, we were too concerned about pharmaceutical industry profits and scoring points against China to go this route.

Nonetheless, we may get lucky. Current infection rates worldwide are down sharply from the peaks hit in April, but they are rising again due to the Delta variant. It is essential to do everything possible to accelerate the distribution of vaccines. It is long past time that we started taking the pandemic seriously.

[1] I discuss a mechanism for public funding of drug development in chapter of 5 of Rigged (it’s free).

[2] The NYT had a peculiar article last month celebrating Covid illnesses and death in Seychelles, where most of the population has been vaccinated with one of the Chinese vaccines. Seychelles largely avoided the pandemic until the point where it began large-scale vaccinations. If we take the whole period since the pandemic began, the percent of the population that has died from Covid in Seychelles is 0.08 percent, less than half the 0.19 percent in the United States.  

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