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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.

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You can get the story here.

You can get the story here.

I keep asking this question because whining over the government debt looks to be a huge growth sector in the next year or two, or perhaps until Republicans retake the White House. I regularly ridicule debt whining, because, unlike its cousin, deficit whining, it has no basis in economic reality.

Before again showing why the debt is a meaningless number, let me contrast it with the budget deficit, which can be a real cause for concern. The way in which deficits can pose a problem is that a large deficit can push the economy beyond its ability to produce goods and services.

This is a textbook story that happens to be accurate. The point at which the economy is being pushed too far by a budget deficit is not easy to determine and it varies hugely over the course of the business cycle.

When the economy is in a severe slump, there is plenty of excess capacity and unemployed workers, and therefore little basis for concern that a deficit is creating more demand than the economy can supply. However, near the peak of a business cycle, when the unemployment rate is already low, a large budget deficit can create demand that the economy is unable to meet.

The consequences of excessive demand are hard to know at this point. One possible consequence is that the Federal Reserve Board decides to raise interest rates. This will reduce demand by reducing housing construction and to a lesser extent lowering public and private investment. It also is likely to raise the value of the dollar, which leads to a larger trade deficit, which will also lower demand.

But suppose the Fed doesn’t raise the rate. Fed Chair Jay Powell indicated that he plans to keep short-term rates near zero for the immediate future. In the old days, we would have thought that would create serious problems with inflation, but that is less clear now.

First, the economy is far more internationalized, which means that is easier for excess demand in the United States to simply spill over to increased demand for imports, rather than driving up domestic prices. This is pretty much the story that we see if a single state has very strong demand.

If Ohio were to have a booming economy, it would mostly translate into higher demand for a wide range of goods and services from neighboring states, not an inflationary spiral in Ohio. This is likely to be the case with any excess demand that results from large budget deficits here.

The other major difference between the economy of today and the economy of the 1970s, the last time we saw an inflationary spiral, is that unions are much weaker today. This means workers have far less bargaining power.

While this is a big part of the story of the growth of wage inequality over the last four decades, it does mean that we are less likely to see the sort of wage-price spiral we saw in the 1970s. If we do see a rise in prices due to excess demand, it is unlikely that workers today will be able to respond by demanding higher wages.  

For these reasons, whether or not the large budget deficits that we are now seeing will lead to problems with inflation is an open question. I have argued that it is worth pressing the economy to try to get back to full employment quickly, as well as do many of the positive things included in the American Recovery Act, such as increasing the child tax credit and enhancing the subsidies in the health care exchanges. But there is a real basis for concern about inflation.

 

The Debt Is Not a Measure of Anything

While deficits are potentially a problem, the debt is not, first and foremost because it doesn’t really measure anything. The debt whiners are fond of telling stories about how the debt is a burden on our children, or how the debt can lead to financial crisis and other bad things, but these claims are inventions, not economic realities.[1]

Interest that we pay on the debt can be a burden, but it is dwarfed by other factors like productivity growth. (The impact of ten years of even modest productivity growth swamps an increment to debt service that we pass onto to our kids from higher deficits today.) Furthermore, debt service burdens at present and the near-term future will almost certainly be much smaller than what we saw in the 1990s.

But there is another aspect to this story that our debt whiners desperately do not want anyone to talk about. Direct spending is only one way in which the government pays for things. We also pay for things, like coronavirus vaccines, by giving out patents or copyright monopolies.

These monopolies can be very costly. In the case of the coronavirus vaccines, they mean that we are paying roughly ten times as much for each vaccine as we would in a free market. Vaccines that would likely cost around $2 a shot instead cost us $20. And, they may cost us even more in future years if we need boosters after the pandemic is over.

These government-granted monopolies are effectively a form of government debt. Incredibly, I have literally never seen any of the debt whiners ever mention the hundreds of billions of dollars in rents paid out each year to drug companies, medical equipment suppliers, software companies, or other beneficiaries of these monopolies as part of the burden of the debt. This in spite of the fact that the rents from these monopolies are several times larger than the debt service that we pay out on the official debt.

But let’s flip the story over in the hope of teaching something to the debt whiners. Suppose that we looked to replace much or all of the debt that troubles them with new patent monopolies. Imagine that we sold off trillions of dollars worth of patent monopolies to pay off a large chunk of the debt.

If this sounds strange it is important to step back for a second and think of the logic of a patent or a copyright monopoly. While we ostensibly link the award of these monopolies to innovation or creative work, there is no necessary link.

At the point where the rents are being collected, a patent or copyright monopoly is simply a monopoly on a particular item. It doesn’t matter one iota whether the monopoly was awarded due to some brilliant innovation or whether it was awarded due to a payoff to a Trump friend or family member. The monopoly means that the holder gets to charge a price far above the free market price.

With this in mind, suppose the government decided to auction off monopoly selling rights to a number of goods and services. (We can even call them “patents” to make people feel better.) We surely could raise enough to pay off the national debt.

Just to take my favorite example, patent rents on prescription drugs will be over $400 billion this year. (I explain how I get this figure here.)  Patents have a limited lifespan, but let’s imagine the ones we auction off to continue in perpetuity. The current interest rate on thirty-year Treasury bonds is roughly 3 percent. This means that to generate the $400 billion in rents earned on prescription drugs, we would need $12 trillion in Treasury bonds.

Therefore, the claim to patent right on prescription drugs lasting in perpetuity should be worth roughly $12 trillion. If we had this auction and got $12 trillion, we could reduce our national debt by an amount equal to 60 percent of GDP. That should make the debt whiners very happy.

In fact, we can go further. I calculated that total patent rents in the economy come to over $1 trillion a year. If we auctioned off these rights (again being carried on in perpetuity) it should raise more than $30 trillion, more than enough to eliminate the national debt altogether.

And, we aren’t limited to just auctioning off patent rents on the items where companies currently get them. We can auction off monopoly rights on anything, on selling cars, computers, bread, haircuts, anything. We can raise vast amounts of money through this route and make the debt whiners very happy.

Of course, these rents do have real economic costs. They create large economic distortions (think of tariffs of many thousand percent) and they create perverse incentives. We see this with the patent rents we currently have. For example, pharmaceutical companies misled physicians about the addictiveness of the new generation of opioids to maximize their sales. As economic theory predicts, patent monopolies give drug companies incentives to push their products as widely as possible, even if it means misleading doctors and the public about their safety and effectiveness.

But the debt whiners only care about the debt issued by the national government, they don’t care at all about the burden of patent and copyright monopolies. So, we can answer their concerns simply by issuing enough of these monopolies to bring the debt down to a level that makes them happy.

 

The National Debt is a Meaningless Number

Perhaps some folks will read the prior section and decide that we need to auction off a large number of monopolies to reduce the national debt. The sane ones will instead recognize that the debt is a largely meaningless number. It can imply larger debt service burdens, and that can be a problem, but this is a very small part of the economic picture, especially compared to items like patent rents that get almost no attention at all from economists. What really matters is the underlying strength of the economy and society that we pass on to future generations.

I have no idea if the debt whiners understand this point and try to obfuscate reality, or are just confused. As the old saying goes, “economists are not very good at economics.”  But anyhow, the rest of the country need not take their debt whining seriously.  

[1] One famous instance of debt mongering turned out to be literally an invention. The claim promoted by Carmen Reinhart and Ken Rogoff, that growth slowed when the debt-to-GDP ratio crossed 90 percent, turned out to based on an Excel spreadsheet error.

I keep asking this question because whining over the government debt looks to be a huge growth sector in the next year or two, or perhaps until Republicans retake the White House. I regularly ridicule debt whining, because, unlike its cousin, deficit whining, it has no basis in economic reality.

Before again showing why the debt is a meaningless number, let me contrast it with the budget deficit, which can be a real cause for concern. The way in which deficits can pose a problem is that a large deficit can push the economy beyond its ability to produce goods and services.

This is a textbook story that happens to be accurate. The point at which the economy is being pushed too far by a budget deficit is not easy to determine and it varies hugely over the course of the business cycle.

When the economy is in a severe slump, there is plenty of excess capacity and unemployed workers, and therefore little basis for concern that a deficit is creating more demand than the economy can supply. However, near the peak of a business cycle, when the unemployment rate is already low, a large budget deficit can create demand that the economy is unable to meet.

The consequences of excessive demand are hard to know at this point. One possible consequence is that the Federal Reserve Board decides to raise interest rates. This will reduce demand by reducing housing construction and to a lesser extent lowering public and private investment. It also is likely to raise the value of the dollar, which leads to a larger trade deficit, which will also lower demand.

But suppose the Fed doesn’t raise the rate. Fed Chair Jay Powell indicated that he plans to keep short-term rates near zero for the immediate future. In the old days, we would have thought that would create serious problems with inflation, but that is less clear now.

First, the economy is far more internationalized, which means that is easier for excess demand in the United States to simply spill over to increased demand for imports, rather than driving up domestic prices. This is pretty much the story that we see if a single state has very strong demand.

If Ohio were to have a booming economy, it would mostly translate into higher demand for a wide range of goods and services from neighboring states, not an inflationary spiral in Ohio. This is likely to be the case with any excess demand that results from large budget deficits here.

The other major difference between the economy of today and the economy of the 1970s, the last time we saw an inflationary spiral, is that unions are much weaker today. This means workers have far less bargaining power.

While this is a big part of the story of the growth of wage inequality over the last four decades, it does mean that we are less likely to see the sort of wage-price spiral we saw in the 1970s. If we do see a rise in prices due to excess demand, it is unlikely that workers today will be able to respond by demanding higher wages.  

For these reasons, whether or not the large budget deficits that we are now seeing will lead to problems with inflation is an open question. I have argued that it is worth pressing the economy to try to get back to full employment quickly, as well as do many of the positive things included in the American Recovery Act, such as increasing the child tax credit and enhancing the subsidies in the health care exchanges. But there is a real basis for concern about inflation.

 

The Debt Is Not a Measure of Anything

While deficits are potentially a problem, the debt is not, first and foremost because it doesn’t really measure anything. The debt whiners are fond of telling stories about how the debt is a burden on our children, or how the debt can lead to financial crisis and other bad things, but these claims are inventions, not economic realities.[1]

Interest that we pay on the debt can be a burden, but it is dwarfed by other factors like productivity growth. (The impact of ten years of even modest productivity growth swamps an increment to debt service that we pass onto to our kids from higher deficits today.) Furthermore, debt service burdens at present and the near-term future will almost certainly be much smaller than what we saw in the 1990s.

But there is another aspect to this story that our debt whiners desperately do not want anyone to talk about. Direct spending is only one way in which the government pays for things. We also pay for things, like coronavirus vaccines, by giving out patents or copyright monopolies.

These monopolies can be very costly. In the case of the coronavirus vaccines, they mean that we are paying roughly ten times as much for each vaccine as we would in a free market. Vaccines that would likely cost around $2 a shot instead cost us $20. And, they may cost us even more in future years if we need boosters after the pandemic is over.

These government-granted monopolies are effectively a form of government debt. Incredibly, I have literally never seen any of the debt whiners ever mention the hundreds of billions of dollars in rents paid out each year to drug companies, medical equipment suppliers, software companies, or other beneficiaries of these monopolies as part of the burden of the debt. This in spite of the fact that the rents from these monopolies are several times larger than the debt service that we pay out on the official debt.

But let’s flip the story over in the hope of teaching something to the debt whiners. Suppose that we looked to replace much or all of the debt that troubles them with new patent monopolies. Imagine that we sold off trillions of dollars worth of patent monopolies to pay off a large chunk of the debt.

If this sounds strange it is important to step back for a second and think of the logic of a patent or a copyright monopoly. While we ostensibly link the award of these monopolies to innovation or creative work, there is no necessary link.

At the point where the rents are being collected, a patent or copyright monopoly is simply a monopoly on a particular item. It doesn’t matter one iota whether the monopoly was awarded due to some brilliant innovation or whether it was awarded due to a payoff to a Trump friend or family member. The monopoly means that the holder gets to charge a price far above the free market price.

With this in mind, suppose the government decided to auction off monopoly selling rights to a number of goods and services. (We can even call them “patents” to make people feel better.) We surely could raise enough to pay off the national debt.

Just to take my favorite example, patent rents on prescription drugs will be over $400 billion this year. (I explain how I get this figure here.)  Patents have a limited lifespan, but let’s imagine the ones we auction off to continue in perpetuity. The current interest rate on thirty-year Treasury bonds is roughly 3 percent. This means that to generate the $400 billion in rents earned on prescription drugs, we would need $12 trillion in Treasury bonds.

Therefore, the claim to patent right on prescription drugs lasting in perpetuity should be worth roughly $12 trillion. If we had this auction and got $12 trillion, we could reduce our national debt by an amount equal to 60 percent of GDP. That should make the debt whiners very happy.

In fact, we can go further. I calculated that total patent rents in the economy come to over $1 trillion a year. If we auctioned off these rights (again being carried on in perpetuity) it should raise more than $30 trillion, more than enough to eliminate the national debt altogether.

And, we aren’t limited to just auctioning off patent rents on the items where companies currently get them. We can auction off monopoly rights on anything, on selling cars, computers, bread, haircuts, anything. We can raise vast amounts of money through this route and make the debt whiners very happy.

Of course, these rents do have real economic costs. They create large economic distortions (think of tariffs of many thousand percent) and they create perverse incentives. We see this with the patent rents we currently have. For example, pharmaceutical companies misled physicians about the addictiveness of the new generation of opioids to maximize their sales. As economic theory predicts, patent monopolies give drug companies incentives to push their products as widely as possible, even if it means misleading doctors and the public about their safety and effectiveness.

But the debt whiners only care about the debt issued by the national government, they don’t care at all about the burden of patent and copyright monopolies. So, we can answer their concerns simply by issuing enough of these monopolies to bring the debt down to a level that makes them happy.

 

The National Debt is a Meaningless Number

Perhaps some folks will read the prior section and decide that we need to auction off a large number of monopolies to reduce the national debt. The sane ones will instead recognize that the debt is a largely meaningless number. It can imply larger debt service burdens, and that can be a problem, but this is a very small part of the economic picture, especially compared to items like patent rents that get almost no attention at all from economists. What really matters is the underlying strength of the economy and society that we pass on to future generations.

I have no idea if the debt whiners understand this point and try to obfuscate reality, or are just confused. As the old saying goes, “economists are not very good at economics.”  But anyhow, the rest of the country need not take their debt whining seriously.  

[1] One famous instance of debt mongering turned out to be literally an invention. The claim promoted by Carmen Reinhart and Ken Rogoff, that growth slowed when the debt-to-GDP ratio crossed 90 percent, turned out to based on an Excel spreadsheet error.

The industry needs some good PR right now. After all, its refusal to share its vaccine technology could end up costing millions of lives in the developing world. In addition, it could mean trillions of dollars of lost output as countries need to shut down large segments of their economy.

But the NYT is there to help. It ran a lengthy article about the issue, which contains much useful information, but it maintains a framing favorable to the pharmaceutical industry. At the end of the piece, after giving the argument for broader sharing of technology and over-riding the industry’s government-granted patent monopolies, the piece tells readers:

“But governments cannot afford to sabotage companies that need profit to survive.”

If the reporters/editors had read their piece, they would know that the companies in question had already made large profits, through being paid directly for their research and building manufacturing facilities, as was the case with Moderna and BioNtech (Pfizer’s German partner), or with advance purchase agreements. No one is suggesting that these companies should not make a profit, so it is not clear on what planet this assertion originated.

It is possible to make profits directly on government contracts, as major military contractors like Lockheed and Boeing could explain to the New York Times. The advantage of having direct contracts for biomedical research is that a requirement of the contract could be that all findings are fully open-source so that researchers all over the world can benefit from them. (I discuss a mechanism for direct funding in chapter 5 of Rigged [it’s free].)

If the U.S. had gone this route with Operation Warp Speed, any manufacturer anywhere in the world with the necessary expertise (all production technology would also be freely available), would be able to freely produce vaccines, as well as tests and treatments for the coronavirus. This would almost certainly allow the world to be vaccinated more quickly.

The piece also included another important assertion unsupported by any evidence. It told readers:

“But in Brussels and Washington, leaders are still worried about undermining innovation.”

It does not indicate how it knows what leaders in Brussels and Washington are actually “worried” about. It is certainly possible that politicians are concerned about keeping their pharmaceutical companies happy since they are powerful political actors. As the piece notes, these companies are concerned about profits, not innovation as an end in itself.  

It is probably worth mentioning inequality in this piece. The NYT, like most intellectual types, has done considerable hand-wringing over inequality in recent years, both overall and racial inequality. It is a safe bet that giving more money to pharmaceutical companies will mean more inequality and certainly benefit whites far more than Blacks. It might be useful if the paper paid a little attention to the policies that create inequality instead of just bemoaning it as an unfortunate feature of the economy.

 

Addendum

I should have also mentioned some of the ways in which we can see the potential value of open-sourcing technology as a way to foster innovation in the pandemic. Last month Pfizer announced that it had discovered a way to cut the production time of its vaccines in half.  It also discovered that its vaccines don’t require super-cold storage, but can instead be kept at normal freezer temperatures for up to two weeks.

These are great discoveries that will allow more vaccines to be produced and make them easier to store and transport. However, unless we think that Pfizer’s engineers are the only people in the world who can innovate around the production and distribution of its vaccine, it is likely these discoveries would have come sooner if the technology had been open-sourced. Also, there are undoubtedly other ways to speed the manufacture and distribution of the vaccine that have not yet occurred to Pfizer’s engineers.

The industry needs some good PR right now. After all, its refusal to share its vaccine technology could end up costing millions of lives in the developing world. In addition, it could mean trillions of dollars of lost output as countries need to shut down large segments of their economy.

But the NYT is there to help. It ran a lengthy article about the issue, which contains much useful information, but it maintains a framing favorable to the pharmaceutical industry. At the end of the piece, after giving the argument for broader sharing of technology and over-riding the industry’s government-granted patent monopolies, the piece tells readers:

“But governments cannot afford to sabotage companies that need profit to survive.”

If the reporters/editors had read their piece, they would know that the companies in question had already made large profits, through being paid directly for their research and building manufacturing facilities, as was the case with Moderna and BioNtech (Pfizer’s German partner), or with advance purchase agreements. No one is suggesting that these companies should not make a profit, so it is not clear on what planet this assertion originated.

It is possible to make profits directly on government contracts, as major military contractors like Lockheed and Boeing could explain to the New York Times. The advantage of having direct contracts for biomedical research is that a requirement of the contract could be that all findings are fully open-source so that researchers all over the world can benefit from them. (I discuss a mechanism for direct funding in chapter 5 of Rigged [it’s free].)

If the U.S. had gone this route with Operation Warp Speed, any manufacturer anywhere in the world with the necessary expertise (all production technology would also be freely available), would be able to freely produce vaccines, as well as tests and treatments for the coronavirus. This would almost certainly allow the world to be vaccinated more quickly.

The piece also included another important assertion unsupported by any evidence. It told readers:

“But in Brussels and Washington, leaders are still worried about undermining innovation.”

It does not indicate how it knows what leaders in Brussels and Washington are actually “worried” about. It is certainly possible that politicians are concerned about keeping their pharmaceutical companies happy since they are powerful political actors. As the piece notes, these companies are concerned about profits, not innovation as an end in itself.  

It is probably worth mentioning inequality in this piece. The NYT, like most intellectual types, has done considerable hand-wringing over inequality in recent years, both overall and racial inequality. It is a safe bet that giving more money to pharmaceutical companies will mean more inequality and certainly benefit whites far more than Blacks. It might be useful if the paper paid a little attention to the policies that create inequality instead of just bemoaning it as an unfortunate feature of the economy.

 

Addendum

I should have also mentioned some of the ways in which we can see the potential value of open-sourcing technology as a way to foster innovation in the pandemic. Last month Pfizer announced that it had discovered a way to cut the production time of its vaccines in half.  It also discovered that its vaccines don’t require super-cold storage, but can instead be kept at normal freezer temperatures for up to two weeks.

These are great discoveries that will allow more vaccines to be produced and make them easier to store and transport. However, unless we think that Pfizer’s engineers are the only people in the world who can innovate around the production and distribution of its vaccine, it is likely these discoveries would have come sooner if the technology had been open-sourced. Also, there are undoubtedly other ways to speed the manufacture and distribution of the vaccine that have not yet occurred to Pfizer’s engineers.

That seems to be the implication of a David Sanger piece commenting on the state of U.S. relations with Russia and China. At one point Sanger notes that China is a rising economic power:

“Economists debate when the Chinese will have the world’s largest gross domestic product — perhaps toward the end of this decade”

Actually, China already has the world’s largest economy using purchasing power parity measures of GDP, which is what most economists view as the best basis of comparison.

Here is what that well-known source of Chinese propaganda, the CIA World Factbook, has to say on the topic.

 “From 2013 to 2017, China had one of the fastest growing economies in the world, averaging slightly more than 7% real growth per year. Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in 2017 stood as the largest economy in the world, surpassing the US in 2014 for the first time in modern history. China became the world’s largest exporter in 2010, and the largest trading nation in 2013. Still, China’s per capita income is below the world average.”

Since China has four times as many people as the United States, it is still much poorer on a per person basis, but its economy is already considerably larger than the U.S. economy and is likely to be close to twice as large as the U.S. economy by the end of the decade.

That seems to be the implication of a David Sanger piece commenting on the state of U.S. relations with Russia and China. At one point Sanger notes that China is a rising economic power:

“Economists debate when the Chinese will have the world’s largest gross domestic product — perhaps toward the end of this decade”

Actually, China already has the world’s largest economy using purchasing power parity measures of GDP, which is what most economists view as the best basis of comparison.

Here is what that well-known source of Chinese propaganda, the CIA World Factbook, has to say on the topic.

 “From 2013 to 2017, China had one of the fastest growing economies in the world, averaging slightly more than 7% real growth per year. Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in 2017 stood as the largest economy in the world, surpassing the US in 2014 for the first time in modern history. China became the world’s largest exporter in 2010, and the largest trading nation in 2013. Still, China’s per capita income is below the world average.”

Since China has four times as many people as the United States, it is still much poorer on a per person basis, but its economy is already considerably larger than the U.S. economy and is likely to be close to twice as large as the U.S. economy by the end of the decade.

Okay, I’ll admit that this is stupid, but you know damn well if the situation were reversed the Republicans would have this comparison all over the place. We don’t even have to speculate. When President Obama assumed office with an economy in free fall from the collapse of the housing bubble, the Republicans were quick to blame him for the job loss from the crash he had inherited.

So, in the spirit of reciprocity, here’s the picture.

 


As can be seen, after four years in the White House, Donald Trump had a net loss of 2,943,000 jobs. After one month, Joe Biden has a net gain of 379,000. Looks pretty damn MAGA to me.

Okay, I’ll admit that this is stupid, but you know damn well if the situation were reversed the Republicans would have this comparison all over the place. We don’t even have to speculate. When President Obama assumed office with an economy in free fall from the collapse of the housing bubble, the Republicans were quick to blame him for the job loss from the crash he had inherited.

So, in the spirit of reciprocity, here’s the picture.

 


As can be seen, after four years in the White House, Donald Trump had a net loss of 2,943,000 jobs. After one month, Joe Biden has a net gain of 379,000. Looks pretty damn MAGA to me.

Okay, those were not exactly Mr. Cueni’s words, and they weren’t specifically directed at Bill Gates, but that is the gist of an assertion that Cueni made about the international effort to vaccinate the world against the Coronavirus.

In a debate last week, Cueni asserted that at a conference held this month, everyone agreed that the major obstacle to vaccinations in the developing world was not the availability of vaccines, but rather the availability of vials, syringes, and other items needed for transporting and administering the vaccines. (Listen to his comments starting at about 21:10 minutes.)

Note that this is March of 2021 that he was talking about, not March of 2020. If we accept Mr. Cueni’s assertion at face value, we must believe that Bill Gates, and the highly credentialed public health experts at his foundation, COVAX, the WHO and elsewhere, didn’t realize that we would need billions of syringes and huge volumes of other ancillary items to administer the billions of vaccines that would be needed. Alternatively, we would have to believe that even with a year of preparation, and billions of dollars at their disposal, they were not able to arrange the manufacture of these mundane items.

If either of these happens to be true, then “moron” would certainly be the right description. Of course, there is another possibility. Mr. Cueni may be trying to deflect attention from the fact that his organization is trying to block efforts to override the government-granted patent monopolies held by the members of his organization.

Okay, those were not exactly Mr. Cueni’s words, and they weren’t specifically directed at Bill Gates, but that is the gist of an assertion that Cueni made about the international effort to vaccinate the world against the Coronavirus.

In a debate last week, Cueni asserted that at a conference held this month, everyone agreed that the major obstacle to vaccinations in the developing world was not the availability of vaccines, but rather the availability of vials, syringes, and other items needed for transporting and administering the vaccines. (Listen to his comments starting at about 21:10 minutes.)

Note that this is March of 2021 that he was talking about, not March of 2020. If we accept Mr. Cueni’s assertion at face value, we must believe that Bill Gates, and the highly credentialed public health experts at his foundation, COVAX, the WHO and elsewhere, didn’t realize that we would need billions of syringes and huge volumes of other ancillary items to administer the billions of vaccines that would be needed. Alternatively, we would have to believe that even with a year of preparation, and billions of dollars at their disposal, they were not able to arrange the manufacture of these mundane items.

If either of these happens to be true, then “moron” would certainly be the right description. Of course, there is another possibility. Mr. Cueni may be trying to deflect attention from the fact that his organization is trying to block efforts to override the government-granted patent monopolies held by the members of his organization.

(This post first appeared on my Patreon page.)

One item in President Biden’s recovery package that deserves more attention is the increased subsidies for people buying health insurance through the exchanges created by the Affordable Care Act (ACA). These subsides will make insurance purchased on the exchanges far more affordable, by capping the cost at 8 percent of income. It also removes the current income cap on subsidies, so that even upper middle-income people can benefit under this proposal.

The increased subsidies will lower the cost of insurance purchased in the exchanges for most people but will likely have the largest impact for older middle-income people. Before the American Recovery Act (ARA) was passed, there were no subsides available for anyone earning more than four times the poverty level. For a single individual, this cutoff was just under $50,000 last year.

This meant that a person earning $50,000 a year had to pay the full price for whatever insurance plan they purchased in the exchanges. For a person in the oldest age group (55 to 64), the average cost of a silver plan without the ARA subsidies would be $12,900 a year. However, the ARA caps the payment at 8.5 percent of income, which means this person would pay just $4,250 for a silver plan, a savings of $8,650 a year.

Even a person earning $100,000 would only pay $8,500 a year for a silver plan under the ARA, a savings of $4,400 a year. In short, for the vast majority of people, the ARA makes health care far more affordable than the subsidy schedule in the ACA.

Under the ARA, these expanded subsidies only apply to the remainder of 2021 and 2022, but many hope that they can be made permanent. This would be great if it could be done, but the cost will likely be far higher than is immediately apparent.

The Congressional Budget Office (CBO) put the cost of the expanded subsidies in the ARA at $35.5 billion, with most of that cost being in 2022, since the larger subsidies will be in place for the full year. This cost comes to less than 0.8 percent of the federal budget, an amount that should be easily doable, whether it means a larger deficit or finding some tax increases and spending cuts as offsets.

However, the cost of sustaining subsidies of this size over a longer period of time will almost certainly be considerably higher than this $35.5 billion figure. The reason is that, for a single year of a subsidy, most people are not likely to change their health insurance arrangements.

The vast majority of the pre-Medicare age population gets health insurance through their employer. Workers are not likely to leave an employer who offers a plan they like, in order to take advantage of the lower cost of insurance on the exchanges, if the subsidies will only be there for a year. But, if they expect the enhanced subsidies to be in place indefinitely, then getting insurance through the exchanges becomes a far more attractive option.

Employers are likely also in many cases to stop offering insurance in order to effectively share the savings with their workers. The pattern of subsidies in the ACA, which cut off altogether for workers earning more than four times the poverty level, meant that employers would effectively be giving upper middle-income workers a substantial pay cut if they handed them the money previously paid towards their premiums, and then told them to buy insurance on the exchange. (The real world generally does not work this way, but the point is that we can envision employers doing this sort of calculation.)

However, the expansion of subsidies in the ARA puts out a large pot of money that employers can effectively look to share with their workers. In most cases, employers could probably increase pay by an amount equal to half of their current health care premiums, and still leave workers purchasing insurance through the exchanges far better off, since the subsidies would make plans relatively cheap for most workers.

This sort of move away from employer-provided insurance would be a great thing. There is no reason to want an employer to be an intermediary in workers’ insurance. Also, the link between employment and insurance creates the difficult situation we saw during the pandemic, where people who lose their job also lose their insurance. So, if enhanced subsidies in the exchanges substantially lessen the reliance on employer-provided insurance, that should be seen as a positive development.

The flip side of increased reliance on the exchanges is that the cost of the subsidies will increase substantially. If we are subsidizing policies by $7,000 or $8,000 a piece and then see tens of millions more people getting their insurance through the exchanges, then we could be seeing the annual cost of the subsidies rise by hundreds of billions of dollars. This is not an expense that can be easily swept under the rug. If we end up paying another 2 percent or so of GDP ($420 billion in today’s economy) in subsidies, then we almost certainly need to raise some serious taxes to offset the increased expenses.

 

Getting Costs Down: The Alternative to Large Tax Increases

Needless to say, large tax increases are not likely to be popular, even if they are structured to be relatively progressive. As an alternative we can try to get our costs more in line with the costs in other wealthy countries. The OECD put per capita health care spending in the United States at $11,100 in 2019. That compares to $6,600 in Germany, $5,400 in France, and $4,700 in the United Kingdom. The latter two are less than the $6,100 in public per capita public health care expenditures that the Center for Medicare and Medicaid Services reported for the United States for 2019, and Germany’s spending is only modestly higher. In other words, if health care cost the same here as in other wealthy countries, the government would already be spending enough to provide universal health care.

As I’ve written elsewhere, the reasons for the higher costs in the United States are not a big secret: we pay twice as much for our drugs, our doctors, and our medical equipment. In addition, we face $400 billion to $500 billion annually in excessive administrative costs due to our system of private insurance, that can be avoided with a simpler Medicare type system.

I go through prospects for potential savings in each of these areas here and here. The basic story is that with drugs and medical equipment we have to move away from the current system where research and development is supported by government-granted patent monopolies. The point that needs to be endlessly emphasized is that drugs are cheap; it is patent monopolies that make them expensive. The same is true for medical equipment.

But it is also important for Biden to start making progress in reducing the waste in excessive administrative costs due to our system of private health insurance. The problem here is a fairly basic one: insurers can best increase their profits by not insuring people who are likely to have major medical bills and to avoid paying those bills when they do get sick. This is not consistent with ensuring that people have adequate access to health care.

Of course, we do regulate insurers. This limits the extent to which they can avoid insuring people with health conditions or paying the bills for which they are supposed to be responsible, but people who believe in the ingenuity of the private sector know that government efforts to prevent insurers from screwing patients will never be completely successful.  

If those last two paragraphs sound like vague ideological accusations, then you have never heard of surprise medical billing. This is the story where out-of-network providers, like anesthesiologists or testing services, hit patients with huge bills for medical procedures that should have been covered by their insurers. The insurers get off the hook with these by saying that they are not responsible because the patient chose (not really the right word for someone getting an emergency medical procedures) a provider that is not in their network. Anyhow, insurers have a thousand and one ways to screw patients, and they use them all the time.

 

Improving and Expanding Medicare

The best way for Biden to start to squeeze out the waste from the insurance sector is to carry through on one of his campaign promises. He should offer a Medicare buy-in option to everyone. This would save a huge amount of money on administrative fees for the people who took advantage of this option.

Since this option would be available through the exchanges, it could reduce the cost of providing insurance for those already in the exchanges, in addition to making it possible to add people at lower cost. The potential savings are substantial, since the overhead costs (administration and profit) of private insurers are between 20 and 25 percent of the medical expenses they pay, while the administrative costs for Medicare are close to 2.0 percent.

However, there is a further issue that has to be addressed to make a Medicare option attractive; the traditional Medicare program has to be modernized. I have written about this elsewhere, but the key points are to have a cap on out-of-pocket spending (e.g. $6,000) and to combine at least Part A and Part D to make the program simpler. Ideally, Part B could be folded in as well, but since this division dates back to the creation of the program, it would be more complicated to end it. Also, Medicare must be expanded to include essential items like hearing aids in its coverage.

As it stands, nearly 40 percent of new beneficiaries opt for private Medicare Advantage plans rather than the traditional Medicare program. If we offer the option to buy into an unreformed Medicare program, most people would likely still go with private insurance. That would rule out the possibility of large savings on administrative costs.

If Biden did offer a buy-in option to a reformed Medicare program, there would likely be a large number of people switching from private insurers. There could well be a snowballing effect, where instead of doctors and other providers refusing to take Medicare because of the lower rates, they refuse to take private insurance to avoid the additional paper work. There are real advantages for providers from only having to deal with one insurance system rather than the dozens now operating, each with its own forms and coverage rules.

As a political matter, improving the existing Medicare program should be quite popular. Currently, most people in the traditional program have to pay for supplemental private plans. If the program was improved so that these private plans were no longer necessary, it will be a very real and visible gain for millions of beneficiaries.

As important as it is to reduce the waste on administrative costs associated with private insurers, the Biden administration should be aggressive in taking steps to reduce prices for drugs and medical equipment and increase competition to bring the pay of our doctors more in line with pay in other wealthy countries.

It is also worth noting that lower prices for medical inputs also makes insurance issues easier. We would want our insurers, whether public or private, to be careful in authorizing drugs that cost several hundred thousand dollars a year. We would want to be very sure that these drugs were medically necessary. However, if these drugs were selling for a few hundred dollars, as cheap generics, there would be less reason to scrutinize the decision made by a doctor in prescribing them. Bringing the cost of drugs and other items under control makes everything else in health care much easier.  

 

Making the Exchanges Affordable Is Only the First Part of the Problem

While progressives have almost universally applauded the expanded subsidies that are part of Biden’s rescue package and have called for making them permanent, we must recognize that this is only the beginning of what is likely to be a major transformation of the U.S. health care system. If health insurance is much cheaper in the exchanges than in the private health care system for most people, it will be only a matter of time before people migrate to the exchanges.

This will be a positive development, since it will move us away from a system where people’s insurance depended on their employment. But it also means that the cost of the subsidies will grow much larger through time. It is essential to have measures in place that will contain costs so that health care does not become an unaffordable burden for the country. The routes for containing costs are well-known, but the affected industry groups are very powerful. This will be a difficult battle.

(This post first appeared on my Patreon page.)

One item in President Biden’s recovery package that deserves more attention is the increased subsidies for people buying health insurance through the exchanges created by the Affordable Care Act (ACA). These subsides will make insurance purchased on the exchanges far more affordable, by capping the cost at 8 percent of income. It also removes the current income cap on subsidies, so that even upper middle-income people can benefit under this proposal.

The increased subsidies will lower the cost of insurance purchased in the exchanges for most people but will likely have the largest impact for older middle-income people. Before the American Recovery Act (ARA) was passed, there were no subsides available for anyone earning more than four times the poverty level. For a single individual, this cutoff was just under $50,000 last year.

This meant that a person earning $50,000 a year had to pay the full price for whatever insurance plan they purchased in the exchanges. For a person in the oldest age group (55 to 64), the average cost of a silver plan without the ARA subsidies would be $12,900 a year. However, the ARA caps the payment at 8.5 percent of income, which means this person would pay just $4,250 for a silver plan, a savings of $8,650 a year.

Even a person earning $100,000 would only pay $8,500 a year for a silver plan under the ARA, a savings of $4,400 a year. In short, for the vast majority of people, the ARA makes health care far more affordable than the subsidy schedule in the ACA.

Under the ARA, these expanded subsidies only apply to the remainder of 2021 and 2022, but many hope that they can be made permanent. This would be great if it could be done, but the cost will likely be far higher than is immediately apparent.

The Congressional Budget Office (CBO) put the cost of the expanded subsidies in the ARA at $35.5 billion, with most of that cost being in 2022, since the larger subsidies will be in place for the full year. This cost comes to less than 0.8 percent of the federal budget, an amount that should be easily doable, whether it means a larger deficit or finding some tax increases and spending cuts as offsets.

However, the cost of sustaining subsidies of this size over a longer period of time will almost certainly be considerably higher than this $35.5 billion figure. The reason is that, for a single year of a subsidy, most people are not likely to change their health insurance arrangements.

The vast majority of the pre-Medicare age population gets health insurance through their employer. Workers are not likely to leave an employer who offers a plan they like, in order to take advantage of the lower cost of insurance on the exchanges, if the subsidies will only be there for a year. But, if they expect the enhanced subsidies to be in place indefinitely, then getting insurance through the exchanges becomes a far more attractive option.

Employers are likely also in many cases to stop offering insurance in order to effectively share the savings with their workers. The pattern of subsidies in the ACA, which cut off altogether for workers earning more than four times the poverty level, meant that employers would effectively be giving upper middle-income workers a substantial pay cut if they handed them the money previously paid towards their premiums, and then told them to buy insurance on the exchange. (The real world generally does not work this way, but the point is that we can envision employers doing this sort of calculation.)

However, the expansion of subsidies in the ARA puts out a large pot of money that employers can effectively look to share with their workers. In most cases, employers could probably increase pay by an amount equal to half of their current health care premiums, and still leave workers purchasing insurance through the exchanges far better off, since the subsidies would make plans relatively cheap for most workers.

This sort of move away from employer-provided insurance would be a great thing. There is no reason to want an employer to be an intermediary in workers’ insurance. Also, the link between employment and insurance creates the difficult situation we saw during the pandemic, where people who lose their job also lose their insurance. So, if enhanced subsidies in the exchanges substantially lessen the reliance on employer-provided insurance, that should be seen as a positive development.

The flip side of increased reliance on the exchanges is that the cost of the subsidies will increase substantially. If we are subsidizing policies by $7,000 or $8,000 a piece and then see tens of millions more people getting their insurance through the exchanges, then we could be seeing the annual cost of the subsidies rise by hundreds of billions of dollars. This is not an expense that can be easily swept under the rug. If we end up paying another 2 percent or so of GDP ($420 billion in today’s economy) in subsidies, then we almost certainly need to raise some serious taxes to offset the increased expenses.

 

Getting Costs Down: The Alternative to Large Tax Increases

Needless to say, large tax increases are not likely to be popular, even if they are structured to be relatively progressive. As an alternative we can try to get our costs more in line with the costs in other wealthy countries. The OECD put per capita health care spending in the United States at $11,100 in 2019. That compares to $6,600 in Germany, $5,400 in France, and $4,700 in the United Kingdom. The latter two are less than the $6,100 in public per capita public health care expenditures that the Center for Medicare and Medicaid Services reported for the United States for 2019, and Germany’s spending is only modestly higher. In other words, if health care cost the same here as in other wealthy countries, the government would already be spending enough to provide universal health care.

As I’ve written elsewhere, the reasons for the higher costs in the United States are not a big secret: we pay twice as much for our drugs, our doctors, and our medical equipment. In addition, we face $400 billion to $500 billion annually in excessive administrative costs due to our system of private insurance, that can be avoided with a simpler Medicare type system.

I go through prospects for potential savings in each of these areas here and here. The basic story is that with drugs and medical equipment we have to move away from the current system where research and development is supported by government-granted patent monopolies. The point that needs to be endlessly emphasized is that drugs are cheap; it is patent monopolies that make them expensive. The same is true for medical equipment.

But it is also important for Biden to start making progress in reducing the waste in excessive administrative costs due to our system of private health insurance. The problem here is a fairly basic one: insurers can best increase their profits by not insuring people who are likely to have major medical bills and to avoid paying those bills when they do get sick. This is not consistent with ensuring that people have adequate access to health care.

Of course, we do regulate insurers. This limits the extent to which they can avoid insuring people with health conditions or paying the bills for which they are supposed to be responsible, but people who believe in the ingenuity of the private sector know that government efforts to prevent insurers from screwing patients will never be completely successful.  

If those last two paragraphs sound like vague ideological accusations, then you have never heard of surprise medical billing. This is the story where out-of-network providers, like anesthesiologists or testing services, hit patients with huge bills for medical procedures that should have been covered by their insurers. The insurers get off the hook with these by saying that they are not responsible because the patient chose (not really the right word for someone getting an emergency medical procedures) a provider that is not in their network. Anyhow, insurers have a thousand and one ways to screw patients, and they use them all the time.

 

Improving and Expanding Medicare

The best way for Biden to start to squeeze out the waste from the insurance sector is to carry through on one of his campaign promises. He should offer a Medicare buy-in option to everyone. This would save a huge amount of money on administrative fees for the people who took advantage of this option.

Since this option would be available through the exchanges, it could reduce the cost of providing insurance for those already in the exchanges, in addition to making it possible to add people at lower cost. The potential savings are substantial, since the overhead costs (administration and profit) of private insurers are between 20 and 25 percent of the medical expenses they pay, while the administrative costs for Medicare are close to 2.0 percent.

However, there is a further issue that has to be addressed to make a Medicare option attractive; the traditional Medicare program has to be modernized. I have written about this elsewhere, but the key points are to have a cap on out-of-pocket spending (e.g. $6,000) and to combine at least Part A and Part D to make the program simpler. Ideally, Part B could be folded in as well, but since this division dates back to the creation of the program, it would be more complicated to end it. Also, Medicare must be expanded to include essential items like hearing aids in its coverage.

As it stands, nearly 40 percent of new beneficiaries opt for private Medicare Advantage plans rather than the traditional Medicare program. If we offer the option to buy into an unreformed Medicare program, most people would likely still go with private insurance. That would rule out the possibility of large savings on administrative costs.

If Biden did offer a buy-in option to a reformed Medicare program, there would likely be a large number of people switching from private insurers. There could well be a snowballing effect, where instead of doctors and other providers refusing to take Medicare because of the lower rates, they refuse to take private insurance to avoid the additional paper work. There are real advantages for providers from only having to deal with one insurance system rather than the dozens now operating, each with its own forms and coverage rules.

As a political matter, improving the existing Medicare program should be quite popular. Currently, most people in the traditional program have to pay for supplemental private plans. If the program was improved so that these private plans were no longer necessary, it will be a very real and visible gain for millions of beneficiaries.

As important as it is to reduce the waste on administrative costs associated with private insurers, the Biden administration should be aggressive in taking steps to reduce prices for drugs and medical equipment and increase competition to bring the pay of our doctors more in line with pay in other wealthy countries.

It is also worth noting that lower prices for medical inputs also makes insurance issues easier. We would want our insurers, whether public or private, to be careful in authorizing drugs that cost several hundred thousand dollars a year. We would want to be very sure that these drugs were medically necessary. However, if these drugs were selling for a few hundred dollars, as cheap generics, there would be less reason to scrutinize the decision made by a doctor in prescribing them. Bringing the cost of drugs and other items under control makes everything else in health care much easier.  

 

Making the Exchanges Affordable Is Only the First Part of the Problem

While progressives have almost universally applauded the expanded subsidies that are part of Biden’s rescue package and have called for making them permanent, we must recognize that this is only the beginning of what is likely to be a major transformation of the U.S. health care system. If health insurance is much cheaper in the exchanges than in the private health care system for most people, it will be only a matter of time before people migrate to the exchanges.

This will be a positive development, since it will move us away from a system where people’s insurance depended on their employment. But it also means that the cost of the subsidies will grow much larger through time. It is essential to have measures in place that will contain costs so that health care does not become an unaffordable burden for the country. The routes for containing costs are well-known, but the affected industry groups are very powerful. This will be a difficult battle.

I mention this because the implication seems to have been missed by news outlets reporting on the 3.0 percent decline reported for February. The Post told us that the 3.0 percent decline was considerably larger than the 0.5 percent drop expected by economists.

But unless these economists were expecting an upward revision to the January data, their expectation for the February number would have been 0.5 percent lower than the number previously reported for January. As it turned out, the February figure was 0.7 percent lower than the number previously reported for February, which is pretty close to right on the mark.

I mention this because the implication seems to have been missed by news outlets reporting on the 3.0 percent decline reported for February. The Post told us that the 3.0 percent decline was considerably larger than the 0.5 percent drop expected by economists.

But unless these economists were expecting an upward revision to the January data, their expectation for the February number would have been 0.5 percent lower than the number previously reported for January. As it turned out, the February figure was 0.7 percent lower than the number previously reported for February, which is pretty close to right on the mark.

The Federal Reserve Board released an item of good news that might be missed. The Financial Accounts for the fourth quarter showed a decline in profit share of national income to 12.0 percent, the lowest annual share since 2009. It is far too early to know if this shift will be enduring, but it is encouraging in any case. On the plus side, wages have been growing rapidly in recent months, so this shift to wages may continue for the immediate future.

 

Source: Bureau of Economic Analysis, National Income Product Accounts, Table 1.13.

 

The Federal Reserve Board released an item of good news that might be missed. The Financial Accounts for the fourth quarter showed a decline in profit share of national income to 12.0 percent, the lowest annual share since 2009. It is far too early to know if this shift will be enduring, but it is encouraging in any case. On the plus side, wages have been growing rapidly in recent months, so this shift to wages may continue for the immediate future.

 

Source: Bureau of Economic Analysis, National Income Product Accounts, Table 1.13.

 

In his New York Times column Neil Irwin gave 17 reasons why we should be optimistic about the economy’s near and medium-term prospects. He raises good and important points, but I would add one more that he and others have largely overlooked.

More than 20 percent of workers now report that they are working from home at least part-time as a result of the pandemic. While many of these workers may end up returning to their offices when the pandemic is under control, or at least going in more frequently, there is little doubt that we will be seeing substantially more telecommuting even when the pandemic is fully under control. This implies a large gain in well-being that is not picked up in GDP.

As I have pointed out before, there are two issues involved here. First there are substantial work-related expenses that these workers will no longer be making. The most obvious are the costs associated directly with the commute to work. This means paying for the wear and tear on a car, the gas for the trip, parking, or money spent on trains and busses. These are counted as consumption in GDP, but they provide little benefit to the commuter, apart from getting them to work.

There are always expenses associated with spending a day at the office that may provide some benefit, but can be largely avoided for people working at home. This would include restaurant meals bought before, during, or just after work, clothes needed for work, trips to a hair salon, and other expenses that are higher due to having to be in a work environment.

Child care is a very large expenditure in this category, although it is somewhat ambiguous. People working at home may also need someone to care for their young children to give them the time needed to get work done, however they will almost certainly need fewer hours of childcare for the simple reason that they are spending less time commuting.

This brings up the second source of unmeasured gain from working at home. If people are spending less time commuting, they have more time for other activities. To take a simple case, if someone had a daily commute that averaged one hour each way, and they are now able to work from home, they effectively have another ten hours of week of free time.

This is effectively a reduction of ten hours in the length of their workweek, which comes to 20 percent if a 40-hour work-week was the starting point (10 hours saved commuting measured against a combined 50 hours spent working and commuting). This is a very substantial benefit to these workers.

In short, we are likely to see large benefits from increased telecommuting that are not picked up in GDP. These take the form of substantial reductions in work-related expenses (these will appear as a drop in GDP) and an increase in leisure time. To be clear, these are not complete saving – many people value being able to have lunch with work colleagues and not all commutes are unenjoyable (I usually rode my bike in DC) – but there can be little doubt that most people would be happy to save the money they previously spent on dry cleaning bills and the time they no longer spend in rush hour traffic jams.

If we are thinking about making people’s lives better, and not just higher GDP, a permanent increase in telecommuting is likely to be a big deal. However, there is an important qualification. This will also increase inequality. It will tend to be higher paying office jobs that allow telecommuting.  

People who work in construction, manufacturing, serving foods in restaurants, or cleaning up in stores and offices will not have the option to work at home. This point about inequality in work environments should already have been driven home during the pandemic, as most lower paid workers had to risk exposure at their workplace, while higher paid workers largely had the luxury of remaining at home.

This issue will remain, even if the consequences are less severe, after the pandemic is contained. The time higher paid workers are compensated for will reflect the time they have to commit to their jobs. Lower paid workers must also spend hours commuting each week, and pay additional expenses associated with working away from home. This is an important factor to consider in issues like setting the minimum wage or public support for child care.

Anyhow, we should recognize the gains associated with increased telecommuting as a large increase in well-being that will not show up in our GDP measures. And, we should also recognize these benefits will accrue to a large number of people but still a minority of the workforce. The option to telecommute is yet another factor setting a large segment of the population further behind.  

In his New York Times column Neil Irwin gave 17 reasons why we should be optimistic about the economy’s near and medium-term prospects. He raises good and important points, but I would add one more that he and others have largely overlooked.

More than 20 percent of workers now report that they are working from home at least part-time as a result of the pandemic. While many of these workers may end up returning to their offices when the pandemic is under control, or at least going in more frequently, there is little doubt that we will be seeing substantially more telecommuting even when the pandemic is fully under control. This implies a large gain in well-being that is not picked up in GDP.

As I have pointed out before, there are two issues involved here. First there are substantial work-related expenses that these workers will no longer be making. The most obvious are the costs associated directly with the commute to work. This means paying for the wear and tear on a car, the gas for the trip, parking, or money spent on trains and busses. These are counted as consumption in GDP, but they provide little benefit to the commuter, apart from getting them to work.

There are always expenses associated with spending a day at the office that may provide some benefit, but can be largely avoided for people working at home. This would include restaurant meals bought before, during, or just after work, clothes needed for work, trips to a hair salon, and other expenses that are higher due to having to be in a work environment.

Child care is a very large expenditure in this category, although it is somewhat ambiguous. People working at home may also need someone to care for their young children to give them the time needed to get work done, however they will almost certainly need fewer hours of childcare for the simple reason that they are spending less time commuting.

This brings up the second source of unmeasured gain from working at home. If people are spending less time commuting, they have more time for other activities. To take a simple case, if someone had a daily commute that averaged one hour each way, and they are now able to work from home, they effectively have another ten hours of week of free time.

This is effectively a reduction of ten hours in the length of their workweek, which comes to 20 percent if a 40-hour work-week was the starting point (10 hours saved commuting measured against a combined 50 hours spent working and commuting). This is a very substantial benefit to these workers.

In short, we are likely to see large benefits from increased telecommuting that are not picked up in GDP. These take the form of substantial reductions in work-related expenses (these will appear as a drop in GDP) and an increase in leisure time. To be clear, these are not complete saving – many people value being able to have lunch with work colleagues and not all commutes are unenjoyable (I usually rode my bike in DC) – but there can be little doubt that most people would be happy to save the money they previously spent on dry cleaning bills and the time they no longer spend in rush hour traffic jams.

If we are thinking about making people’s lives better, and not just higher GDP, a permanent increase in telecommuting is likely to be a big deal. However, there is an important qualification. This will also increase inequality. It will tend to be higher paying office jobs that allow telecommuting.  

People who work in construction, manufacturing, serving foods in restaurants, or cleaning up in stores and offices will not have the option to work at home. This point about inequality in work environments should already have been driven home during the pandemic, as most lower paid workers had to risk exposure at their workplace, while higher paid workers largely had the luxury of remaining at home.

This issue will remain, even if the consequences are less severe, after the pandemic is contained. The time higher paid workers are compensated for will reflect the time they have to commit to their jobs. Lower paid workers must also spend hours commuting each week, and pay additional expenses associated with working away from home. This is an important factor to consider in issues like setting the minimum wage or public support for child care.

Anyhow, we should recognize the gains associated with increased telecommuting as a large increase in well-being that will not show up in our GDP measures. And, we should also recognize these benefits will accrue to a large number of people but still a minority of the workforce. The option to telecommute is yet another factor setting a large segment of the population further behind.  

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