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.

Dear Beat the Press Readers,

It’s that time of year again, when I hijack Dean’s blog to ask you to consider making a year-end donation to the Center for Economic and Policy Research. As many of you know, Dean pretty much gives his work away for free, which is great for the public but not so great for CEPR’s bottom line. Plus, it makes my job as CEPR’s Development Director a really difficult one. 

On the other hand, it’s inspiring that Dean lives up to the values he promotes. He doesn’t stray far from his principles, which are in line with his policy prescriptions – things like replacing patent monopolies with direct public funding for drug research, for example. So please consider donating to CEPR in Dean’s honor so that we can continue to share his work widely. As we look to recover from the economic fallout from the pandemic, Dean’s insights are needed more than ever.

Wishing you and yours a healthy and happy holiday season,

Dawn Niederhauser

PS: For the month of December you can double your impact by voting for CEPR at CREDO Mobile! CEPR is one of three progressive organizations chosen to receive a share of CREDO Mobile’s profits this month. If you are based in the US, you can help us to win a bigger share of the prize and it won’t cost you a dime. Please click here to cast your vote.

Thanks again for supporting Beat the Press. Now back to your regularly scheduled program…

Dear Beat the Press Readers,

It’s that time of year again, when I hijack Dean’s blog to ask you to consider making a year-end donation to the Center for Economic and Policy Research. As many of you know, Dean pretty much gives his work away for free, which is great for the public but not so great for CEPR’s bottom line. Plus, it makes my job as CEPR’s Development Director a really difficult one. 

On the other hand, it’s inspiring that Dean lives up to the values he promotes. He doesn’t stray far from his principles, which are in line with his policy prescriptions – things like replacing patent monopolies with direct public funding for drug research, for example. So please consider donating to CEPR in Dean’s honor so that we can continue to share his work widely. As we look to recover from the economic fallout from the pandemic, Dean’s insights are needed more than ever.

Wishing you and yours a healthy and happy holiday season,

Dawn Niederhauser

PS: For the month of December you can double your impact by voting for CEPR at CREDO Mobile! CEPR is one of three progressive organizations chosen to receive a share of CREDO Mobile’s profits this month. If you are based in the US, you can help us to win a bigger share of the prize and it won’t cost you a dime. Please click here to cast your vote.

Thanks again for supporting Beat the Press. Now back to your regularly scheduled program…

Thomas Edsall had an interesting piece last week on the politics of resentment. The gist being that a large portion of non-college-educated whites are voting based on their fear of losing their social status.

While there is undoubtedly much truth to Edsall’s argument, there is an important point that Edsall leaves out. He tells readers:

“Voters in the bottom half of the income distribution face a level of hyper-competition that has, in turn, served to elevate politicized status anxiety in a world where social and economic mobility has, for many, ground to a halt: 90 percent of the age cohort born in the 1940s looked forward to a better standard of living than their parents’, compared with 50 percent for those born since 1980.”

The key point is that this level of hyper-competition, which is driving down the living standards of large segments of the population, is by design. Politicians in both political parties have deliberately structured the market in ways to redistribute income upward.

We could have structured globalization to put doctors, dentists, and other highly paid professionals into direct competition with their much lower paid counterparts in the developing world, instead of just subjecting manufacturing workers to this competition. We also structured the rules on finance to allow great fortunes to be made in this sector at the expense of the rest of the economy. And, the government has made patent and copyright monopolies ever longer and stronger over the last four decades, giving more money to people like Bill Gates at the expense of the rest of the workforce.

Resentment likely comes not only from the actual upward redistribution of income but from the continual efforts by our elites to pretend that it was a natural development of the market, rather than deliberate design. Major news outlets continually assert things that are not true to perpetuate this lie.

Thomas Edsall had an interesting piece last week on the politics of resentment. The gist being that a large portion of non-college-educated whites are voting based on their fear of losing their social status.

While there is undoubtedly much truth to Edsall’s argument, there is an important point that Edsall leaves out. He tells readers:

“Voters in the bottom half of the income distribution face a level of hyper-competition that has, in turn, served to elevate politicized status anxiety in a world where social and economic mobility has, for many, ground to a halt: 90 percent of the age cohort born in the 1940s looked forward to a better standard of living than their parents’, compared with 50 percent for those born since 1980.”

The key point is that this level of hyper-competition, which is driving down the living standards of large segments of the population, is by design. Politicians in both political parties have deliberately structured the market in ways to redistribute income upward.

We could have structured globalization to put doctors, dentists, and other highly paid professionals into direct competition with their much lower paid counterparts in the developing world, instead of just subjecting manufacturing workers to this competition. We also structured the rules on finance to allow great fortunes to be made in this sector at the expense of the rest of the economy. And, the government has made patent and copyright monopolies ever longer and stronger over the last four decades, giving more money to people like Bill Gates at the expense of the rest of the workforce.

Resentment likely comes not only from the actual upward redistribution of income but from the continual efforts by our elites to pretend that it was a natural development of the market, rather than deliberate design. Major news outlets continually assert things that are not true to perpetuate this lie.

Margot Sanger-Katz had a very good NYT piece on the difficulty of choosing among health insurance plans. The gist of the piece is that people have a very difficult time choosing among plans, and even well-educated people often make choices that are bad for them. (The highlight is that Nobel Prize winning economist Paul Krugman could not sort through the plan options at his university job.)

After presenting evidence that most people make bad choices, and low-income people do worst, at the end of the piece she turns to Medicare and notes that over a third of the people receiving benefits choose a private Medicare Advantage plan rather than the traditional government plan. Sanger-Katz takes this to mean that people do value choice in health care plans.

However, it is inaccurate to present the issue here as the traditional Medicare plan being a vote for no-choice versus Medicare Advantage as a vote for choice. The traditional plan now involves three separate programs: Part A, Part B, and Part D. Part D is actually a set of private plans, offering prescription drug benefits, that people must choose between.

In addition, the vast majority of people in traditional Medicare (81 percent) also have a private supplemental plan. This is in large part because the traditional plan has not been modernized in many decades. It doesn’t cover dental care, hearing aids, and many other health care services that would generally be regarded as essential. It also, unlike Medicare Advantage plans, has no out-of-pocket spending cap. These gaps have likely been by design to force people to either opt for Medicare Advantage or buy a private supplemental plan.

The key point for the choice issue is that even those opting for the traditional Medicare plan still have to deal with many choices in arranging their coverage. So it is wrong to present the selection of Medicare Advantage or traditional Medicare as a choice/no-choice scenario.

Margot Sanger-Katz had a very good NYT piece on the difficulty of choosing among health insurance plans. The gist of the piece is that people have a very difficult time choosing among plans, and even well-educated people often make choices that are bad for them. (The highlight is that Nobel Prize winning economist Paul Krugman could not sort through the plan options at his university job.)

After presenting evidence that most people make bad choices, and low-income people do worst, at the end of the piece she turns to Medicare and notes that over a third of the people receiving benefits choose a private Medicare Advantage plan rather than the traditional government plan. Sanger-Katz takes this to mean that people do value choice in health care plans.

However, it is inaccurate to present the issue here as the traditional Medicare plan being a vote for no-choice versus Medicare Advantage as a vote for choice. The traditional plan now involves three separate programs: Part A, Part B, and Part D. Part D is actually a set of private plans, offering prescription drug benefits, that people must choose between.

In addition, the vast majority of people in traditional Medicare (81 percent) also have a private supplemental plan. This is in large part because the traditional plan has not been modernized in many decades. It doesn’t cover dental care, hearing aids, and many other health care services that would generally be regarded as essential. It also, unlike Medicare Advantage plans, has no out-of-pocket spending cap. These gaps have likely been by design to force people to either opt for Medicare Advantage or buy a private supplemental plan.

The key point for the choice issue is that even those opting for the traditional Medicare plan still have to deal with many choices in arranging their coverage. So it is wrong to present the selection of Medicare Advantage or traditional Medicare as a choice/no-choice scenario.

By Dean Baker and Arjun Jayadev

On Monday, we, along with Achal Prabhala, had a column in the New York Times arguing in support of a resolution put forward before the WTO by India and South Africa, which would suspend intellectual property rights related to vaccines and treatments during the pandemic. The main point is that these rights are slowing the diffusion of life-saving medicines in a crisis. Furthermore, since much or all the cost of developing these vaccines and treatments were picked up by various governments, the drug companies would still be earning back their investment, plus a healthy profit, even with this suspension.

Not surprisingly, the pharmaceutical industry is not letting this proposal go unchallenged in public debate. Thomas Cueni, the director-general of the International Federation of Pharmaceutical Manufacturers and Associations, had a column in the NYT on Thursday pushing the industry’s line. Cueni argues that it would be unfair to the industry to suspend its patent rights in the pandemic. He also argues that it wouldn’t help distribution in any case because of supply constraints and that it would be harmful in the long-run since companies would not invest in developing new drugs if they could not count on their patent rights being respected.

Starting with the issue of supply constraints, while the processes for manufacturing the leading U.S. vaccine contenders are complicated, there are sophisticated manufacturing facilities in India and elsewhere. While it clearly would take time for anyone to gear up to manufacture these vaccines, it is important to remember there were no vaccines to manufacture nine months ago.

Ideally, we would have had open-source research all along, so that any manufacturer anywhere in the world could have been preparing for large-scale production, but even if we started today it is still likely that additional facilities can be producing these vaccines well before the end of 2021. And no one thinks we will be anywhere close to having the world’s population fully vaccinated for at least several years. This means production that comes on line in six or eight months would be enormously valuable. Also, the issue is not just vaccines, but also effective treatments, like Regeneron, which are in very short supply even in the United States and other rich countries.

The pharmaceutical industry wants to be in a position to license these to whom they choose and argue that they will themselves resolve the manufacturing capacity constraints. But this is fraught with dangers. First, if the past is anything to go by, license agreements are limited to a few producers and involve costs to producers that will inevitably increase the price of the drug. The WTO proposal will do away with these restrictions and allow anyone with the know-how or capacity to produce at as low a price as possible under competitive conditions—and they can supply all over the world so that the pandemic is over sooner. If knowhow is a barrier and no one can ever develop the manufacturing capacity, countries should not worry about their IP.

An important aside here is the history that Cueni alludes to. One reason his piece is extraordinary is that it is the first time, to our knowledge that PHARMA has apologized for the role in the AIDS crisis. But what is not said is that the very same laws that allowed for that disaster and that are being challenged now, routinely prevent people from developing countries from accessing generic medicines for a whole host of other diseases (cancer for example), these are rolling and silent crises that the current system continues to perpetuate.

The next question is whether the companies are being treated fairly after their heroic efforts to develop vaccines in a record amount of time. First, while the researchers do deserve enormous credit, their performance here is not quite as exceptional as many seem to believe. China has several vaccines in the final stage of testing, one of which has already been approved in the United Arab Emirates after showing an 86 percent effectiveness rate. This doesn’t denigrate the accomplishments of the scientists who developed the leading U.S.-European vaccines, it just means that the achievement wasn’t quite as exceptional as it is often portrayed.

But getting to the issue of fairness, one of the main points we made in the piece is that Moderna and Pfizer have already been paid for their work on the vaccines. In the case of Moderna, the U.S. government paid the full cost of the research and clinical trials for the economy. If the vaccine turned out to be ineffective, the U.S. taxpayer would have been out the money, Moderna had been paid for its work.

In the case of Pfizer, the company has large advance purchase agreements with the U.S. and many other countries, which far more than cover its plausible research costs and allow for a generous profit. The German government also contributed several hundred million dollars to manufacturing facilities.

Of course, both vaccines rely heavily on taxpayer-funded research through the National Institutes of Health. So, their reliance on government support is extensive.

But what about the issue that this could affect the incentives for the development of vaccines and drugs in the future… Hopefully, these sorts of events will be rare, so the impact on expected future profits should be limited. Furthermore, in any comparable situations in the future, presumably, the government will again step in to put up the money and absorb risk, so that companies will still be able to cover their costs and make a healthy profit if such a situation arises.

It is also important to note that limiting patent rights is already in the law. The TRIPS accords in the WTO allow for governments to issue compulsory licenses. This means that a patent holder can be required to let other companies produce their patented drugs for a set fee. U.S. law also explicitly allows for such limits, as we mentioned in our piece. At the height of the Anthrax scare in 2001, President Bush threatened to invoke Section 1498 of the Commercial Code to force Bayer to lower its price for large quantities of ciprofloxacin, the most effective treatment for Anthrax. (The threat worked.)

In short, the U.S. and other governments have always had the ability to restrict the patent monopolies they issue. Presumably, the people who run the drug companies know this, so limited patent rights in a pandemic would not be an event that should have been unanticipated.

Finally, Cueni is dismissive of the idea that the government could directly fund the development of new drugs and vaccines, as it just did with Moderna. He tells us:

“Further, governments have neither the money nor the risk tolerance to take over the role of businesses in developing pharmacy-ready medicines.”

This one is a real head-scratcher. Governments don’t have the money? The U.S. government is projected to spend over $5 trillion in 2021. The Bureau of Economic Analysis puts the pharmaceutical industry’s research tab for 2019 at less than $90 billion, or 1.8 percent of the U.S. budget. Obviously, if we wanted to pick up the tab we have the money, especially since the savings from buying drugs at generic prices in government programs like Medicare and Medicaid would quickly swamp the research tab.

As far as “risk tolerance,” the U.S. government spends over $40 billion a year on basic research at the National Institutes of Health. While much of this work has huge payoffs, like the discovery of the spike protein that is the basis for both the Moderna and Pfizer vaccines, much of it leads to dead ends. Apparently, the government has the risk tolerance for spending tens of billions annually on research with distant and uncertain payoffs but somehow lacks the risk tolerance to put up the money for developing a specific drug or vaccine. Sorry, that doesn’t make sense.

If we did go the route of direct funding there would be enormous advantages in addition to having all new drugs and vaccines available as cheap generics. First, we can make open-source research a condition of the funding. This means that any contractor or subcontractor that worked on publicly funded research would have to post any findings as quickly as practical on the web. That way, other researchers would be able to promptly build on successes and learn from mistakes.

The other major advantage is that we would take away the perverse incentives created by patent monopolies. Since these monopolies allow drug companies to charge prices that can be many thousand percent above costs, they provide an incentive to promote their drugs as widely as possible. This often leads drug companies to exaggerate the effectiveness of their drugs or conceal evidence of harmful side effects. We saw this very clearly with the opioid crisis, where drug companies have paid billions of dollars in settlements over the allegation that they recklessly pushed their drugs.  

There are very good reasons for thinking that direct public funding would be a better way to support the development of new drugs than the current system of patent monopolies. There are obviously better and worse ways to structure such a system. (This issue is discussed in chapter 5 of Rigged [it’s free] and in some journal articles.) But it is absurd to argue that a system of direct funding is not a possibility, as Mr. Cueni would apparently like us to believe.

We need a serious debate on the best mechanisms for financing the development of drugs and vaccines, even if the pharmaceutical industry doesn’t want us to have one.

By Dean Baker and Arjun Jayadev

On Monday, we, along with Achal Prabhala, had a column in the New York Times arguing in support of a resolution put forward before the WTO by India and South Africa, which would suspend intellectual property rights related to vaccines and treatments during the pandemic. The main point is that these rights are slowing the diffusion of life-saving medicines in a crisis. Furthermore, since much or all the cost of developing these vaccines and treatments were picked up by various governments, the drug companies would still be earning back their investment, plus a healthy profit, even with this suspension.

Not surprisingly, the pharmaceutical industry is not letting this proposal go unchallenged in public debate. Thomas Cueni, the director-general of the International Federation of Pharmaceutical Manufacturers and Associations, had a column in the NYT on Thursday pushing the industry’s line. Cueni argues that it would be unfair to the industry to suspend its patent rights in the pandemic. He also argues that it wouldn’t help distribution in any case because of supply constraints and that it would be harmful in the long-run since companies would not invest in developing new drugs if they could not count on their patent rights being respected.

Starting with the issue of supply constraints, while the processes for manufacturing the leading U.S. vaccine contenders are complicated, there are sophisticated manufacturing facilities in India and elsewhere. While it clearly would take time for anyone to gear up to manufacture these vaccines, it is important to remember there were no vaccines to manufacture nine months ago.

Ideally, we would have had open-source research all along, so that any manufacturer anywhere in the world could have been preparing for large-scale production, but even if we started today it is still likely that additional facilities can be producing these vaccines well before the end of 2021. And no one thinks we will be anywhere close to having the world’s population fully vaccinated for at least several years. This means production that comes on line in six or eight months would be enormously valuable. Also, the issue is not just vaccines, but also effective treatments, like Regeneron, which are in very short supply even in the United States and other rich countries.

The pharmaceutical industry wants to be in a position to license these to whom they choose and argue that they will themselves resolve the manufacturing capacity constraints. But this is fraught with dangers. First, if the past is anything to go by, license agreements are limited to a few producers and involve costs to producers that will inevitably increase the price of the drug. The WTO proposal will do away with these restrictions and allow anyone with the know-how or capacity to produce at as low a price as possible under competitive conditions—and they can supply all over the world so that the pandemic is over sooner. If knowhow is a barrier and no one can ever develop the manufacturing capacity, countries should not worry about their IP.

An important aside here is the history that Cueni alludes to. One reason his piece is extraordinary is that it is the first time, to our knowledge that PHARMA has apologized for the role in the AIDS crisis. But what is not said is that the very same laws that allowed for that disaster and that are being challenged now, routinely prevent people from developing countries from accessing generic medicines for a whole host of other diseases (cancer for example), these are rolling and silent crises that the current system continues to perpetuate.

The next question is whether the companies are being treated fairly after their heroic efforts to develop vaccines in a record amount of time. First, while the researchers do deserve enormous credit, their performance here is not quite as exceptional as many seem to believe. China has several vaccines in the final stage of testing, one of which has already been approved in the United Arab Emirates after showing an 86 percent effectiveness rate. This doesn’t denigrate the accomplishments of the scientists who developed the leading U.S.-European vaccines, it just means that the achievement wasn’t quite as exceptional as it is often portrayed.

But getting to the issue of fairness, one of the main points we made in the piece is that Moderna and Pfizer have already been paid for their work on the vaccines. In the case of Moderna, the U.S. government paid the full cost of the research and clinical trials for the economy. If the vaccine turned out to be ineffective, the U.S. taxpayer would have been out the money, Moderna had been paid for its work.

In the case of Pfizer, the company has large advance purchase agreements with the U.S. and many other countries, which far more than cover its plausible research costs and allow for a generous profit. The German government also contributed several hundred million dollars to manufacturing facilities.

Of course, both vaccines rely heavily on taxpayer-funded research through the National Institutes of Health. So, their reliance on government support is extensive.

But what about the issue that this could affect the incentives for the development of vaccines and drugs in the future… Hopefully, these sorts of events will be rare, so the impact on expected future profits should be limited. Furthermore, in any comparable situations in the future, presumably, the government will again step in to put up the money and absorb risk, so that companies will still be able to cover their costs and make a healthy profit if such a situation arises.

It is also important to note that limiting patent rights is already in the law. The TRIPS accords in the WTO allow for governments to issue compulsory licenses. This means that a patent holder can be required to let other companies produce their patented drugs for a set fee. U.S. law also explicitly allows for such limits, as we mentioned in our piece. At the height of the Anthrax scare in 2001, President Bush threatened to invoke Section 1498 of the Commercial Code to force Bayer to lower its price for large quantities of ciprofloxacin, the most effective treatment for Anthrax. (The threat worked.)

In short, the U.S. and other governments have always had the ability to restrict the patent monopolies they issue. Presumably, the people who run the drug companies know this, so limited patent rights in a pandemic would not be an event that should have been unanticipated.

Finally, Cueni is dismissive of the idea that the government could directly fund the development of new drugs and vaccines, as it just did with Moderna. He tells us:

“Further, governments have neither the money nor the risk tolerance to take over the role of businesses in developing pharmacy-ready medicines.”

This one is a real head-scratcher. Governments don’t have the money? The U.S. government is projected to spend over $5 trillion in 2021. The Bureau of Economic Analysis puts the pharmaceutical industry’s research tab for 2019 at less than $90 billion, or 1.8 percent of the U.S. budget. Obviously, if we wanted to pick up the tab we have the money, especially since the savings from buying drugs at generic prices in government programs like Medicare and Medicaid would quickly swamp the research tab.

As far as “risk tolerance,” the U.S. government spends over $40 billion a year on basic research at the National Institutes of Health. While much of this work has huge payoffs, like the discovery of the spike protein that is the basis for both the Moderna and Pfizer vaccines, much of it leads to dead ends. Apparently, the government has the risk tolerance for spending tens of billions annually on research with distant and uncertain payoffs but somehow lacks the risk tolerance to put up the money for developing a specific drug or vaccine. Sorry, that doesn’t make sense.

If we did go the route of direct funding there would be enormous advantages in addition to having all new drugs and vaccines available as cheap generics. First, we can make open-source research a condition of the funding. This means that any contractor or subcontractor that worked on publicly funded research would have to post any findings as quickly as practical on the web. That way, other researchers would be able to promptly build on successes and learn from mistakes.

The other major advantage is that we would take away the perverse incentives created by patent monopolies. Since these monopolies allow drug companies to charge prices that can be many thousand percent above costs, they provide an incentive to promote their drugs as widely as possible. This often leads drug companies to exaggerate the effectiveness of their drugs or conceal evidence of harmful side effects. We saw this very clearly with the opioid crisis, where drug companies have paid billions of dollars in settlements over the allegation that they recklessly pushed their drugs.  

There are very good reasons for thinking that direct public funding would be a better way to support the development of new drugs than the current system of patent monopolies. There are obviously better and worse ways to structure such a system. (This issue is discussed in chapter 5 of Rigged [it’s free] and in some journal articles.) But it is absurd to argue that a system of direct funding is not a possibility, as Mr. Cueni would apparently like us to believe.

We need a serious debate on the best mechanisms for financing the development of drugs and vaccines, even if the pharmaceutical industry doesn’t want us to have one.

InequalityLa Desigualdad

Beating Up on Finance

When I do one of my diatribes about how our protectionist barriers allow U.S. doctors to earn twice as much as doctors in other wealthy countries, I invariably get complaints from doctors and their friends asking why I don’t go after the really big bucks people on Wall Street. The answer of course is that I do, but the bloated paychecks on Wall Street are not a reason to pay an extra $100 billion a year ($750 per household) to doctors in the United States. But it is true that I haven’t beaten up on the financial sector for a while, and with Biden now putting together his administration, this would be a great time to take a few shots. 

First, we need some important background. Finance is an intermediate good, like trucking. It does not directly provide value to people like housing or health care. Its value to the economy is allocating capital and facilitating transactions so that the sectors that do provide value are as efficient as possible.

For this reason, an efficient financial sector is a small financial sector. People need to be able to borrow money to buy a home or start a business, and businesses need to be able to get money to expand, but we want as few resources as possible employed in handing out the money.

However, rather than getting smaller and more efficient, the financial sector has expanded hugely over the last four decades. This is seen most clearly in the narrow commodities and securities trading sector, which was less than 0.4 percent of GDP in the mid-seventies and is now more than 2 percent of GDP ($400 billion a year). Other parts of finance have exploded also. We now spend over $250 billion a year (1.2 percent of GDP) on the administration of the health insurance industry, $100 billion on life insurance (0.5 percent of GDP), and hundreds of billions more on other financial services.

In addition to being a drain on the rest of the economy, the financial industry is the source of many of the country’s greatest fortunes. Folks who are concerned about inequality need to have their eyes squarely focused on the sector.

 

Financial Transactions Taxes

I have long been a huge fan of financial transactions taxes (FTT) as a great way to reduce the size of the sector and raise a large amount of money for the government.  By my calculations, a FTT could raise an amount of revenue roughly equal to 0.6 percent of GDP or $130 billion a year in the 2021 economy.

This revenue would come almost entirely at the expense of the financial industry. This needs a bit of explaining since the industry spokespeople have worked so hard to create confusion on this issue. It is true that a tax will likely be mostly passed on to investors in the form of higher trading costs. If the tax on stock trades is 0.2 percent, the cost of trading stock is likely to rise by close to 0.2 percentage points.

However, if we want to look at the costs actually borne by investors, we have to look at a fuller picture. Suppose that an increase in trading costs of 0.2 percentage points would double the cost of trading. There is a large amount of research that shows that trading volume would decline by roughly the same percentage as the increase in costs. (in other words, the elasticity of trading is close to 1.0.)

This means that the doubling of trading costs would mean that trading volume would be roughly cut in half. In that situation, investors would be paying twice as much on each trade, but trading half as much as they did previously, which means their total trading costs would be little changed.

Who pays the tax in that story? Well, the industry pays it in the form of reduced revenue. The money that investors had been paying to the industry to carry through trades is instead going to the government as tax revenue. 

What about the reduction in trading volume, won’t investors be worse off with fewer trades? This is the dirty secret that the industry doesn’t want people to know about. In general, investors will not be worse off if their portfolio turned over less frequently.

The logic here is straightforward. Every trade has a winner and a loser. There are a small number of very astute investors who are disproportionately on the winning side of trades, but the vast majority of investment managers are not that skilled. On average they win half the time and they lose half the time.

This means that on average if they reduced their trading, the direct returns on the portfolio would not suffer, and investors would save from lower fees. The losers of course are the people in the financial industry, who get money from trading.

Cutting trading volume in half means cutting their revenue in half. When we realize who is actually paying the tax, it is no longer a surprise that the financial industry screams bloody murder when anyone talks about a financial transactions tax. This is money out of their pockets and they will fight like crazy to protect their income. And, since they are very rich, we can expect a serious fight.

As a practical matter, a financial transactions tax would face an enormous uphill fight in the Senate, even if the Democrats can somehow win the two seats in Georgia that will give them control. But there are other things that can be done to attack the inefficiencies and great fortunes in the sector.

 

Private Equity

Many of the richest people in the country have made their fortunes in private equity. While the industry tries to sell a heroic image of itself as being turn around experts that give failing companies the capital and management skills they need to be successful, more typically they make their money by financial engineering, tax gaming, laying off workers, and pushing down wages. My colleagues, Eileen Appelbaum and Eleanor Eagon, have comprised a Day One agenda of measures the Biden administration can do through executive action to rein in these abuses.

But in addition to measures to rein in abusive practices, there is another side of the equation that is worth pursuing. Private equity actually has not been providing good returns to investors in recent years. While private equity funds did provide outsized returns in the 1980s and 1990s, that has not been the case since 2006.

This means that, while the general partners who run private equity firms might be getting very rich, the limited partners who put up the money are doing no better on average than if they just put their money into a stock index. And, they would face much less risk.

While we can’t keep rich people from blowing their money on bad investments, much of the money for private equity comes from pension funds and especially from public sector pension funds. In most cases, it is not possible to find the terms of the contracts that private equity companies sign with pension funds. Their standard line is that they are giving the pension fund a good deal. If they had to disclose their terms, they would have to give the same deal to everyone else, and then it wouldn’t be profitable.

Of course, the idea that everyone else is being ripped off, except our favored pension fund, is nonsense on its face. Private equity companies want their terms kept secret so that it is not clear how much money they are taking from the pension funds that invest with them.

This practice suggests a very simple and obvious reform: require full disclosure of terms. States could require that contract terms with every private equity company (for that matter any investment manager) be posted in full on their website, so that any reporter, researcher, or individual could quickly see the terms the fund had negotiated.

The pension funds should also report the returns from the private equity fund or investment manager. (In the case of private equity funds, the only returns that will typically be meaningful will be after the fund has been closed. This is generally a period of ten years.) This would allow anyone to quickly assess how much money the pension fund earned on an investment, compared to how much money the private equity fund or an investment manager made.

A little sunshine may go a long way to reducing the worst rip-offs in this sector. As things stand now, private equity partners make a big point of courting pension fund managers, who typically are not financial professionals. The pension fund managers may view the private equity partners as friends, as opposed to shrewd dealers looking to make as much money as possible from the pension fund.

Anyhow, a push for full transparency on public pension fund investments should in principle be a manageable lift. After all, it might be hard for Republicans to claim that insisting the public be able to know where public money is going is “socialism.”

Needless to say, both Republican and Democratic politicians receive large campaign contributions from private equity funds and other investment managers. They will fight like crazy to block disclosure requirements at the state or federal level. But this seems like good grounds on which to fight a battle.

When I do one of my diatribes about how our protectionist barriers allow U.S. doctors to earn twice as much as doctors in other wealthy countries, I invariably get complaints from doctors and their friends asking why I don’t go after the really big bucks people on Wall Street. The answer of course is that I do, but the bloated paychecks on Wall Street are not a reason to pay an extra $100 billion a year ($750 per household) to doctors in the United States. But it is true that I haven’t beaten up on the financial sector for a while, and with Biden now putting together his administration, this would be a great time to take a few shots. 

First, we need some important background. Finance is an intermediate good, like trucking. It does not directly provide value to people like housing or health care. Its value to the economy is allocating capital and facilitating transactions so that the sectors that do provide value are as efficient as possible.

For this reason, an efficient financial sector is a small financial sector. People need to be able to borrow money to buy a home or start a business, and businesses need to be able to get money to expand, but we want as few resources as possible employed in handing out the money.

However, rather than getting smaller and more efficient, the financial sector has expanded hugely over the last four decades. This is seen most clearly in the narrow commodities and securities trading sector, which was less than 0.4 percent of GDP in the mid-seventies and is now more than 2 percent of GDP ($400 billion a year). Other parts of finance have exploded also. We now spend over $250 billion a year (1.2 percent of GDP) on the administration of the health insurance industry, $100 billion on life insurance (0.5 percent of GDP), and hundreds of billions more on other financial services.

In addition to being a drain on the rest of the economy, the financial industry is the source of many of the country’s greatest fortunes. Folks who are concerned about inequality need to have their eyes squarely focused on the sector.

 

Financial Transactions Taxes

I have long been a huge fan of financial transactions taxes (FTT) as a great way to reduce the size of the sector and raise a large amount of money for the government.  By my calculations, a FTT could raise an amount of revenue roughly equal to 0.6 percent of GDP or $130 billion a year in the 2021 economy.

This revenue would come almost entirely at the expense of the financial industry. This needs a bit of explaining since the industry spokespeople have worked so hard to create confusion on this issue. It is true that a tax will likely be mostly passed on to investors in the form of higher trading costs. If the tax on stock trades is 0.2 percent, the cost of trading stock is likely to rise by close to 0.2 percentage points.

However, if we want to look at the costs actually borne by investors, we have to look at a fuller picture. Suppose that an increase in trading costs of 0.2 percentage points would double the cost of trading. There is a large amount of research that shows that trading volume would decline by roughly the same percentage as the increase in costs. (in other words, the elasticity of trading is close to 1.0.)

This means that the doubling of trading costs would mean that trading volume would be roughly cut in half. In that situation, investors would be paying twice as much on each trade, but trading half as much as they did previously, which means their total trading costs would be little changed.

Who pays the tax in that story? Well, the industry pays it in the form of reduced revenue. The money that investors had been paying to the industry to carry through trades is instead going to the government as tax revenue. 

What about the reduction in trading volume, won’t investors be worse off with fewer trades? This is the dirty secret that the industry doesn’t want people to know about. In general, investors will not be worse off if their portfolio turned over less frequently.

The logic here is straightforward. Every trade has a winner and a loser. There are a small number of very astute investors who are disproportionately on the winning side of trades, but the vast majority of investment managers are not that skilled. On average they win half the time and they lose half the time.

This means that on average if they reduced their trading, the direct returns on the portfolio would not suffer, and investors would save from lower fees. The losers of course are the people in the financial industry, who get money from trading.

Cutting trading volume in half means cutting their revenue in half. When we realize who is actually paying the tax, it is no longer a surprise that the financial industry screams bloody murder when anyone talks about a financial transactions tax. This is money out of their pockets and they will fight like crazy to protect their income. And, since they are very rich, we can expect a serious fight.

As a practical matter, a financial transactions tax would face an enormous uphill fight in the Senate, even if the Democrats can somehow win the two seats in Georgia that will give them control. But there are other things that can be done to attack the inefficiencies and great fortunes in the sector.

 

Private Equity

Many of the richest people in the country have made their fortunes in private equity. While the industry tries to sell a heroic image of itself as being turn around experts that give failing companies the capital and management skills they need to be successful, more typically they make their money by financial engineering, tax gaming, laying off workers, and pushing down wages. My colleagues, Eileen Appelbaum and Eleanor Eagon, have comprised a Day One agenda of measures the Biden administration can do through executive action to rein in these abuses.

But in addition to measures to rein in abusive practices, there is another side of the equation that is worth pursuing. Private equity actually has not been providing good returns to investors in recent years. While private equity funds did provide outsized returns in the 1980s and 1990s, that has not been the case since 2006.

This means that, while the general partners who run private equity firms might be getting very rich, the limited partners who put up the money are doing no better on average than if they just put their money into a stock index. And, they would face much less risk.

While we can’t keep rich people from blowing their money on bad investments, much of the money for private equity comes from pension funds and especially from public sector pension funds. In most cases, it is not possible to find the terms of the contracts that private equity companies sign with pension funds. Their standard line is that they are giving the pension fund a good deal. If they had to disclose their terms, they would have to give the same deal to everyone else, and then it wouldn’t be profitable.

Of course, the idea that everyone else is being ripped off, except our favored pension fund, is nonsense on its face. Private equity companies want their terms kept secret so that it is not clear how much money they are taking from the pension funds that invest with them.

This practice suggests a very simple and obvious reform: require full disclosure of terms. States could require that contract terms with every private equity company (for that matter any investment manager) be posted in full on their website, so that any reporter, researcher, or individual could quickly see the terms the fund had negotiated.

The pension funds should also report the returns from the private equity fund or investment manager. (In the case of private equity funds, the only returns that will typically be meaningful will be after the fund has been closed. This is generally a period of ten years.) This would allow anyone to quickly assess how much money the pension fund earned on an investment, compared to how much money the private equity fund or an investment manager made.

A little sunshine may go a long way to reducing the worst rip-offs in this sector. As things stand now, private equity partners make a big point of courting pension fund managers, who typically are not financial professionals. The pension fund managers may view the private equity partners as friends, as opposed to shrewd dealers looking to make as much money as possible from the pension fund.

Anyhow, a push for full transparency on public pension fund investments should in principle be a manageable lift. After all, it might be hard for Republicans to claim that insisting the public be able to know where public money is going is “socialism.”

Needless to say, both Republican and Democratic politicians receive large campaign contributions from private equity funds and other investment managers. They will fight like crazy to block disclosure requirements at the state or federal level. But this seems like good grounds on which to fight a battle.

I’m not sure why it is so hard for reporters to just tell us what politicians say and do, instead of telling us what they think and believe. This may be news for reporters, but politicians don’t always believe the things they say. For example, almost 90 percent of the Republicans in Congress will not say that Joe Biden won the election (two say Donald Trump won), however, I am quite certain that the overwhelming majority of these politicians understand that Biden’s 306 electoral votes give him the presidency.

Anyhow, our latest episode of reporters telling us what politicians “see” and “think” came on NPR’s Weekend Edition, where Ron Elving told us that many Republican members of Congress are opposed to another pandemic relief package because they don’t “see” the need for more money for state and local government and that they “think” the economy can get by without it. While it is possible that these politicians actually do think that further support for the economy is unnecessary, it is also possible that they see political advantage in damaging the economy as much as possible to make a Biden presidency look bad.

It would be best if Elving not assert that these Republican politicians are acting in a way that they see as being good for the country since there is no way he can know that. He should just tell us that they oppose further pandemic relief and not read their minds for us.

I’m not sure why it is so hard for reporters to just tell us what politicians say and do, instead of telling us what they think and believe. This may be news for reporters, but politicians don’t always believe the things they say. For example, almost 90 percent of the Republicans in Congress will not say that Joe Biden won the election (two say Donald Trump won), however, I am quite certain that the overwhelming majority of these politicians understand that Biden’s 306 electoral votes give him the presidency.

Anyhow, our latest episode of reporters telling us what politicians “see” and “think” came on NPR’s Weekend Edition, where Ron Elving told us that many Republican members of Congress are opposed to another pandemic relief package because they don’t “see” the need for more money for state and local government and that they “think” the economy can get by without it. While it is possible that these politicians actually do think that further support for the economy is unnecessary, it is also possible that they see political advantage in damaging the economy as much as possible to make a Biden presidency look bad.

It would be best if Elving not assert that these Republican politicians are acting in a way that they see as being good for the country since there is no way he can know that. He should just tell us that they oppose further pandemic relief and not read their minds for us.

Steve Rattner used his NYT column to tell progressives that they should not try to pressure President-Elect Biden to implement progressive policies with noisy protests. He argues that compromise with the Republicans is necessary and argues that the Clinton presidency after the 1994 Republican takeover of Congress is a good model.

“Progressive history has not treated kindly President Bill Clinton’s decision to work with Republicans after their enormous midterm victory in 1994. But taxes got cut, the budget was balanced for the first time in decades, and the late 1990s is remembered as a period of strong prosperity.”

There are several important points here that apparently Mr. Rattner has forgotten. First, the economy was driven in the late 1990s by a stock bubble that crashed in 2000-2002. While that recession is usually considered by economists to be short and mild, from the standpoint of the labor market, at the time, it was the worse recession since the Great Depression. We did not get back the jobs lost in the recession, which began in March of 2001, until almost four full years later.

The stock bubble was also the origin of the underfunding problem of many pension funds today. Pensions assumed that the market would continue to rise even in the bubble. (That’s what Clinton’s all-star economists told them.) When the market crashed, they suddenly faced serious funding shortfalls, which no one wanted to make up with increased pension contributions in the middle of a recession.

This was also the period when partial deregulation of finance (the industry always wanted their government protection against failure safety blanket) was in full bloom. We saw the fruits of the Clinton era deregulation in the housing bubble and the widespread abuses in the mortgage industry that fed it.

Rattner also touts the “free trade” of the era. Of course, Rattner does not really support free trade; he is fine with longer and stronger patent and copyright protections. And, I have never seen him object to the protections that allow our doctors to earn twice as much as their counterparts in other wealthy countries, costing us $100 billion annually in higher medical bills. Anyhow, it was the Clinton-Rattner version of free trade that cost us millions of manufacturing jobs, making large parts of the country into solid Trump territory.

Anyhow, many progressives have better memories than Rattner, which is why they are determined to not have the Biden presidency be a repeat of the Clinton presidency. We also get why people like him don’t like noisy protests, but for people who can’t attend $10,000-a-plate fundraisers, these protests are how you can hope to have an impact on politicians’ agendas.

 

Steve Rattner used his NYT column to tell progressives that they should not try to pressure President-Elect Biden to implement progressive policies with noisy protests. He argues that compromise with the Republicans is necessary and argues that the Clinton presidency after the 1994 Republican takeover of Congress is a good model.

“Progressive history has not treated kindly President Bill Clinton’s decision to work with Republicans after their enormous midterm victory in 1994. But taxes got cut, the budget was balanced for the first time in decades, and the late 1990s is remembered as a period of strong prosperity.”

There are several important points here that apparently Mr. Rattner has forgotten. First, the economy was driven in the late 1990s by a stock bubble that crashed in 2000-2002. While that recession is usually considered by economists to be short and mild, from the standpoint of the labor market, at the time, it was the worse recession since the Great Depression. We did not get back the jobs lost in the recession, which began in March of 2001, until almost four full years later.

The stock bubble was also the origin of the underfunding problem of many pension funds today. Pensions assumed that the market would continue to rise even in the bubble. (That’s what Clinton’s all-star economists told them.) When the market crashed, they suddenly faced serious funding shortfalls, which no one wanted to make up with increased pension contributions in the middle of a recession.

This was also the period when partial deregulation of finance (the industry always wanted their government protection against failure safety blanket) was in full bloom. We saw the fruits of the Clinton era deregulation in the housing bubble and the widespread abuses in the mortgage industry that fed it.

Rattner also touts the “free trade” of the era. Of course, Rattner does not really support free trade; he is fine with longer and stronger patent and copyright protections. And, I have never seen him object to the protections that allow our doctors to earn twice as much as their counterparts in other wealthy countries, costing us $100 billion annually in higher medical bills. Anyhow, it was the Clinton-Rattner version of free trade that cost us millions of manufacturing jobs, making large parts of the country into solid Trump territory.

Anyhow, many progressives have better memories than Rattner, which is why they are determined to not have the Biden presidency be a repeat of the Clinton presidency. We also get why people like him don’t like noisy protests, but for people who can’t attend $10,000-a-plate fundraisers, these protests are how you can hope to have an impact on politicians’ agendas.

 

Apparently, Donald Trump has gotten into his head that he wants to repeal Section 230 of the 1996 Communications Decency Act. Apparently, he is upset that Facebook and Twitter have pointed out that much of what he posts is not true.

It’s not clear what Trump thinks he would accomplish by repealing this provision of the law. Section 230 exempts Facebook and other Internet intermediaries from being liable for material that is passed along through their systems, either as ads or through individuals’ or groups’ posts. The loss of this protection would actually make it more likely that Facebook and Twitter would restrict false information coming from Donald Trump and his allies.

But the consequences of repealing Section 230 would go far beyond its impact on Donald Trump’s ability to spew crazy conspiracy theories over the web. It would almost certainly fundamentally restructure the Internet, as I explain here.

The basic story is that making Facebook and other intermediaries liable for defamatory material circulated over their systems would impose enormous costs on these networks. They would have to monitor hundreds of millions of posts and constantly be dealing with complaints about defamation.

This would both directly eat into their profits, since it will require a huge commitment of personnel, and also likely lead to a loss of traffic, as people got annoyed at having material pulled off the site. If Section 230 protection were left in place for true common carriers — sites that did not profit from selling ads or personal data — we would likely see a massive migration to old-fashioned bulletin boards and other sites where people could post what they wanted without review.

The net effect would be to make Facebook much smaller, so what Mark Zuckerberg chose to favor or ban would not make much difference to anyone. To my mind, this would be a fantastic outcome and the world would have been well-served by this particular Trump temper tantrum. But, has anyone ever known Trump to do anything good?

Apparently, Donald Trump has gotten into his head that he wants to repeal Section 230 of the 1996 Communications Decency Act. Apparently, he is upset that Facebook and Twitter have pointed out that much of what he posts is not true.

It’s not clear what Trump thinks he would accomplish by repealing this provision of the law. Section 230 exempts Facebook and other Internet intermediaries from being liable for material that is passed along through their systems, either as ads or through individuals’ or groups’ posts. The loss of this protection would actually make it more likely that Facebook and Twitter would restrict false information coming from Donald Trump and his allies.

But the consequences of repealing Section 230 would go far beyond its impact on Donald Trump’s ability to spew crazy conspiracy theories over the web. It would almost certainly fundamentally restructure the Internet, as I explain here.

The basic story is that making Facebook and other intermediaries liable for defamatory material circulated over their systems would impose enormous costs on these networks. They would have to monitor hundreds of millions of posts and constantly be dealing with complaints about defamation.

This would both directly eat into their profits, since it will require a huge commitment of personnel, and also likely lead to a loss of traffic, as people got annoyed at having material pulled off the site. If Section 230 protection were left in place for true common carriers — sites that did not profit from selling ads or personal data — we would likely see a massive migration to old-fashioned bulletin boards and other sites where people could post what they wanted without review.

The net effect would be to make Facebook much smaller, so what Mark Zuckerberg chose to favor or ban would not make much difference to anyone. To my mind, this would be a fantastic outcome and the world would have been well-served by this particular Trump temper tantrum. But, has anyone ever known Trump to do anything good?

It’s good to see the New York Times making the case for higher wages in an editorial. Unfortunately, they get much of the story confused.

First off, the essence of the case is that higher wages will lead to more consumption, which will spur growth. This is true, but higher pay is not the only way to generate more demand. We also get more demand with larger budget deficits, lower interest rates, and a smaller trade deficit.

But that is the less important problem with the piece. The bigger problem is the assertion that the failure of pay to keep pace with productivity growth over the last four decades is due to higher profits.

“Wages are influenced by a tug of war between employers and workers, and employers have been winning. One clear piece of evidence is the yawning divergence between productivity growth and wage growth since roughly 1970. Productivity has more than doubled; wages have lagged far behind.”

In fact, a rising profit share only explains about 10 percent of the gap between productivity growth and the median wage since 1979. The overwhelming majority of the gap is explained by rising high-end wages — the money earned by CEOs and other top execs, high pay in the financial sector, the earnings of some workers in STEM areas, and high-end professionals, like doctors and dentists.

For some reason, the NYT never wants to talk about the laws and structures that allow for the explosion of pay at the top. This would include factors like our corrupt corporate governance structure, that essentially lets CEOs determine their own pay, a bloated financial sector that uses its political power to steer ever more money in its direction, longer and stronger patent and copyright monopolies, and protectionist barriers that largely shield our most highly paid professionals from both foreign and domestic competition. (Yes, this is all covered in Rigged [it’s free].)

Readers can speculate on why these topics are almost entirely forbidden at the NYT, but if we want to be serious about addressing low wages, we have to look where the money is, and most of it is not with corporate profits. And, just to remind people why this matters, the minimum wage would be $24 an hour today if it had kept pace with productivity growth since 1968.

It’s good to see the New York Times making the case for higher wages in an editorial. Unfortunately, they get much of the story confused.

First off, the essence of the case is that higher wages will lead to more consumption, which will spur growth. This is true, but higher pay is not the only way to generate more demand. We also get more demand with larger budget deficits, lower interest rates, and a smaller trade deficit.

But that is the less important problem with the piece. The bigger problem is the assertion that the failure of pay to keep pace with productivity growth over the last four decades is due to higher profits.

“Wages are influenced by a tug of war between employers and workers, and employers have been winning. One clear piece of evidence is the yawning divergence between productivity growth and wage growth since roughly 1970. Productivity has more than doubled; wages have lagged far behind.”

In fact, a rising profit share only explains about 10 percent of the gap between productivity growth and the median wage since 1979. The overwhelming majority of the gap is explained by rising high-end wages — the money earned by CEOs and other top execs, high pay in the financial sector, the earnings of some workers in STEM areas, and high-end professionals, like doctors and dentists.

For some reason, the NYT never wants to talk about the laws and structures that allow for the explosion of pay at the top. This would include factors like our corrupt corporate governance structure, that essentially lets CEOs determine their own pay, a bloated financial sector that uses its political power to steer ever more money in its direction, longer and stronger patent and copyright monopolies, and protectionist barriers that largely shield our most highly paid professionals from both foreign and domestic competition. (Yes, this is all covered in Rigged [it’s free].)

Readers can speculate on why these topics are almost entirely forbidden at the NYT, but if we want to be serious about addressing low wages, we have to look where the money is, and most of it is not with corporate profits. And, just to remind people why this matters, the minimum wage would be $24 an hour today if it had kept pace with productivity growth since 1968.

We know that the economy is likely to get worse in the immediate future as the pandemic is spreading out of control in most parts of the country. However, the latest data on average weekly hours indicates we may be facing a longer-term issue that has not generally been anticipated.

In a normal recession, we see both a loss of jobs and a reduction in hours for those who managed to keep their jobs. The shortening of hours is a better way for employers to deal with reduced demand for labor since it keeps workers attached to their jobs. (This is the argument for work-sharing as an alternative to unemployment.) However, in this recession, we are actually seeing some lengthening of the average workweek, not the usual shortening.

The chart below compares the change in the average workweek from 2007 to 2009 and from 2019 to 2020. For 2020, I have used the most recent two months’ data (September and October) to just take the period where the economy was operating at a level somewhat close to normal.

Source: Bureau of Labor Statistics and author’s calculations.

As can be seen, we see a very different picture in the pattern of work hours between the two recessions. The average workweek for all employees fell by 1.5 percent in the Great Recession. By contrast, it increased by 1.2 percent from 2019 to September and October of this year. Some of this was undoubtedly due to composition effects. In the Great Recession, like most recessions, construction and manufacturing were the hardest hit sectors. These sectors have longer average hours than most, so job loss in these sectors will automatically reduce the length of the average workweek.

To control for this, I have compared the change in average hours in the two recessions for production and non-supervisory workers in several major sectors. Starting with the overall average, the difference is even sharper. The drop in the Great Recession was 2.0 percent, compared to a 1.6 percent increase in the Pandemic Recession.

Looking at major sectors, there was a drop in the length of the average workweek of 3.0 percent in manufacturing in the Great Recession compared to 1.0 percent in this recession. This may be explained largely by the fact that manufacturing was much harder hit in the Great Recession.

This explanation doesn’t fit for other sectors. Average hours fell by 1.1 percent in retail in the Great Recession, they rose by 2.2 percent in this recession. In the broad category of professional and business services, hours fell by 0.1 percent in the Great Recession, they have risen by 1.8 percent in this recession.

In education and health care, average hours fell by 1.0 percent in the Great Recession, they have risen by 1.9 percent in this recession. In the category leisure and hospitality, which includes hotels and restaurant workers, hours fell by 2.7 percent in the last recession, compared to a drop of just 0.2 percent in this recession. Hours in other services, which includes areas like laundry, gyms, and hair salons, fell by 1.4 percent in the Great Recession, they have risen by 1.9 percent in this recession.    

The rise in hours during this recession is a really big deal because it accentuates the unemployment problem. To take the simple arithmetic, if the average workweek is 3 percent longer because of a change in employer behavior, with our pre-pandemic employment of roughly 150 million, that means 4.5 million fewer jobs given the same demand for labor. The real world will of course always be more complicated, but the basic story would apply. Longer hours means fewer jobs.

This is likely to matter not just for the immediate future when the pandemic limits employment in large areas of the economy, but also in the longer term, as we adjust to the work structures that have been permanently altered as a result of the recession. As I have written elsewhere, the increase in telecommuting is likely to be enduring, meaning that there will be many fewer jobs serving a smaller population of commuters. 

One way of dealing with this reduction in employment opportunities is to have shorter work weeks/work years. Unfortunately, it seems we are now headed in the wrong direction.  

 

We know that the economy is likely to get worse in the immediate future as the pandemic is spreading out of control in most parts of the country. However, the latest data on average weekly hours indicates we may be facing a longer-term issue that has not generally been anticipated.

In a normal recession, we see both a loss of jobs and a reduction in hours for those who managed to keep their jobs. The shortening of hours is a better way for employers to deal with reduced demand for labor since it keeps workers attached to their jobs. (This is the argument for work-sharing as an alternative to unemployment.) However, in this recession, we are actually seeing some lengthening of the average workweek, not the usual shortening.

The chart below compares the change in the average workweek from 2007 to 2009 and from 2019 to 2020. For 2020, I have used the most recent two months’ data (September and October) to just take the period where the economy was operating at a level somewhat close to normal.

Source: Bureau of Labor Statistics and author’s calculations.

As can be seen, we see a very different picture in the pattern of work hours between the two recessions. The average workweek for all employees fell by 1.5 percent in the Great Recession. By contrast, it increased by 1.2 percent from 2019 to September and October of this year. Some of this was undoubtedly due to composition effects. In the Great Recession, like most recessions, construction and manufacturing were the hardest hit sectors. These sectors have longer average hours than most, so job loss in these sectors will automatically reduce the length of the average workweek.

To control for this, I have compared the change in average hours in the two recessions for production and non-supervisory workers in several major sectors. Starting with the overall average, the difference is even sharper. The drop in the Great Recession was 2.0 percent, compared to a 1.6 percent increase in the Pandemic Recession.

Looking at major sectors, there was a drop in the length of the average workweek of 3.0 percent in manufacturing in the Great Recession compared to 1.0 percent in this recession. This may be explained largely by the fact that manufacturing was much harder hit in the Great Recession.

This explanation doesn’t fit for other sectors. Average hours fell by 1.1 percent in retail in the Great Recession, they rose by 2.2 percent in this recession. In the broad category of professional and business services, hours fell by 0.1 percent in the Great Recession, they have risen by 1.8 percent in this recession.

In education and health care, average hours fell by 1.0 percent in the Great Recession, they have risen by 1.9 percent in this recession. In the category leisure and hospitality, which includes hotels and restaurant workers, hours fell by 2.7 percent in the last recession, compared to a drop of just 0.2 percent in this recession. Hours in other services, which includes areas like laundry, gyms, and hair salons, fell by 1.4 percent in the Great Recession, they have risen by 1.9 percent in this recession.    

The rise in hours during this recession is a really big deal because it accentuates the unemployment problem. To take the simple arithmetic, if the average workweek is 3 percent longer because of a change in employer behavior, with our pre-pandemic employment of roughly 150 million, that means 4.5 million fewer jobs given the same demand for labor. The real world will of course always be more complicated, but the basic story would apply. Longer hours means fewer jobs.

This is likely to matter not just for the immediate future when the pandemic limits employment in large areas of the economy, but also in the longer term, as we adjust to the work structures that have been permanently altered as a result of the recession. As I have written elsewhere, the increase in telecommuting is likely to be enduring, meaning that there will be many fewer jobs serving a smaller population of commuters. 

One way of dealing with this reduction in employment opportunities is to have shorter work weeks/work years. Unfortunately, it seems we are now headed in the wrong direction.  

 

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