Those of you who were wondering about the best way to finance drug research need look no further, the Washington Post has the answer: It’s government-granted patent monopolies. They told us in an editorial today:
“The profit-driven system in this country has its inefficiencies, including high marketing costs and the like; but on balance it has served the United States, and the world, well, by promoting more innovation than a state-dominated system of research probably would have.”
It would have been useful if the Post had given some hint as to what evidence it might be relying on to make this assertion. The claim doesn’t start well with the phrase “profit-driven,” since there is no reason that alternative funding mechanisms might not also be profit-driven. For example, military contractors are profit-driven, last time I checked. These alternative systems also would not create the same sort of perverse incentives that are likely to lead to enormous waste and bad medicine.
But hey, since we got the word from the Post, there is no reason to look further. (I suppose it is rude to mention that the Post gets lots of advertising revenue from drug companies.)
Those of you who were wondering about the best way to finance drug research need look no further, the Washington Post has the answer: It’s government-granted patent monopolies. They told us in an editorial today:
“The profit-driven system in this country has its inefficiencies, including high marketing costs and the like; but on balance it has served the United States, and the world, well, by promoting more innovation than a state-dominated system of research probably would have.”
It would have been useful if the Post had given some hint as to what evidence it might be relying on to make this assertion. The claim doesn’t start well with the phrase “profit-driven,” since there is no reason that alternative funding mechanisms might not also be profit-driven. For example, military contractors are profit-driven, last time I checked. These alternative systems also would not create the same sort of perverse incentives that are likely to lead to enormous waste and bad medicine.
But hey, since we got the word from the Post, there is no reason to look further. (I suppose it is rude to mention that the Post gets lots of advertising revenue from drug companies.)
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That’s pretty much what the headline and article said, telling readers that Clinton wants to spend $350 billion “to make college affordable.” Is that a lot of money?
Well, the article doesn’t tell us whether the spending is over one year or twenty years, which would make some difference. If we assume that it is over ten years, the standard budget horizon, that comes to $35 billion a year. With total government spending a bit over $5 trillion in a 2017-2026 budget horizon, this would come to roughly 0.7 percent of projected spending. Alternatively, with a bit more than 20 million students enrolled in college (including community colleges), this would amount to roughly $1,700 per student per year.
Anyhow, it might have been useful to provide a little context on this one.
That’s pretty much what the headline and article said, telling readers that Clinton wants to spend $350 billion “to make college affordable.” Is that a lot of money?
Well, the article doesn’t tell us whether the spending is over one year or twenty years, which would make some difference. If we assume that it is over ten years, the standard budget horizon, that comes to $35 billion a year. With total government spending a bit over $5 trillion in a 2017-2026 budget horizon, this would come to roughly 0.7 percent of projected spending. Alternatively, with a bit more than 20 million students enrolled in college (including community colleges), this would amount to roughly $1,700 per student per year.
Anyhow, it might have been useful to provide a little context on this one.
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That is the implication of comments by John Myers, a reporter with KQED radio in San Francisco. Myers was interviewed on the occasion of California paying off the last of $15 billion of bonds issued in 2004 to cover a large deficit. When Myers was asked how the bond issue worked out for the state, he responded:
“Well, certainly, the state got through the worst times. But again, in that million dollars a day, every day, for 11 years, that’s a lot of interest. I don’t think that the voters really understood that. Schwarzenegger did not sell that part of the plan when he was out campaigning for the deficit bond that it was going to cost all of this in interest. I think there are definitely lessons learned.
“The politics of California were so polarized back then. And of course, we have seen that now on a national level. There are, you know, some lessons about what happens that the political system can’t resolve at some point. And I think, too, there’s probably a lesson for voters that borrowing money in state bonds is not free money and that it does come at a cost. All of those interest payments could have gone for something else in California.
“That money – just as an example – could have paid for the state’s share of the University of California system for like 15 or 16 months. I mean, it is a lot of money. And these were choices that the voters were making. I think that might be the real lesson learned.”
The state could have only saved the interest to pay for its share of the University of California system for 15 or 16 months if it had found some combination of tax increases and spending cuts to fill a $15 billion gap in 2004. Since the state had already done both, and was still feeling the effects of the collapse of the tech bubble on its economy at the time, it does not follow that a further set of tax increases and spending cuts would have been wise policy at the time.
Of course the state could have made very large cuts to its contributions to the University of California and K-12 education in 2004, then it would not have been forced to pay so much interest in later years, but it’s hard to see why that would have been a better route for the state to take. In addition to the direct effect of these cuts, given the weakness of the economy at the time, it is likely there would have been an additional effect due to loss of purchasing power and therefore further job loss.
That is the implication of comments by John Myers, a reporter with KQED radio in San Francisco. Myers was interviewed on the occasion of California paying off the last of $15 billion of bonds issued in 2004 to cover a large deficit. When Myers was asked how the bond issue worked out for the state, he responded:
“Well, certainly, the state got through the worst times. But again, in that million dollars a day, every day, for 11 years, that’s a lot of interest. I don’t think that the voters really understood that. Schwarzenegger did not sell that part of the plan when he was out campaigning for the deficit bond that it was going to cost all of this in interest. I think there are definitely lessons learned.
“The politics of California were so polarized back then. And of course, we have seen that now on a national level. There are, you know, some lessons about what happens that the political system can’t resolve at some point. And I think, too, there’s probably a lesson for voters that borrowing money in state bonds is not free money and that it does come at a cost. All of those interest payments could have gone for something else in California.
“That money – just as an example – could have paid for the state’s share of the University of California system for like 15 or 16 months. I mean, it is a lot of money. And these were choices that the voters were making. I think that might be the real lesson learned.”
The state could have only saved the interest to pay for its share of the University of California system for 15 or 16 months if it had found some combination of tax increases and spending cuts to fill a $15 billion gap in 2004. Since the state had already done both, and was still feeling the effects of the collapse of the tech bubble on its economy at the time, it does not follow that a further set of tax increases and spending cuts would have been wise policy at the time.
Of course the state could have made very large cuts to its contributions to the University of California and K-12 education in 2004, then it would not have been forced to pay so much interest in later years, but it’s hard to see why that would have been a better route for the state to take. In addition to the direct effect of these cuts, given the weakness of the economy at the time, it is likely there would have been an additional effect due to loss of purchasing power and therefore further job loss.
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Apparently pay increases aren’t on the list of ways to address a teacher shortage according to the New York Times. The paper had an interesting piece reporting on a nationwide shortage of applicants for open teaching positions. The article described a number of ways in which schools are attempting to address this shortage, including lowering standards and recruiting overseas.
It does not indicate any plans to raise wages, which would be the textbook way to address a shortage of workers. Lack of job security could also be a factor making it difficult to attract qualified teachers, since some people have gained celebrity status as a result of the pleasure they take in firing teachers.
Apparently pay increases aren’t on the list of ways to address a teacher shortage according to the New York Times. The paper had an interesting piece reporting on a nationwide shortage of applicants for open teaching positions. The article described a number of ways in which schools are attempting to address this shortage, including lowering standards and recruiting overseas.
It does not indicate any plans to raise wages, which would be the textbook way to address a shortage of workers. Lack of job security could also be a factor making it difficult to attract qualified teachers, since some people have gained celebrity status as a result of the pleasure they take in firing teachers.
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Of course it would, since deception is the only way to get large cuts in this incredibly popular program. This is why we find the Post applauding New Jersey Governor Chris Christie for his:
“cogent defense of his plan to trim old-age entitlement benefits for wealthy seniors, explaining that the system must be shored up for the poor.”
Of course what Christie said was far from cogent. Christie first totally misrepresented the program’s finances by saying that it held nothing by “IOUs.” Actually, the program holds more than $2.8 trillion of government bonds. Mr. Christie may call government bonds “IOUs” but that is not the common term for them. In any case, the financial markets consider government bonds to be a very valuable asset which is why they pay a low interest rate. Unless the U.S. government defaults on its debt, the program would be able to pay all scheduled benefits through 2033 with no changes whatsoever.
After that date it could pay more than 75 percent of scheduled benefits indefinitely. If we imposed the same sort of tax increases as President Reagan did in the 1980s it would also be sufficient to keep the program solvent indefinitely.
Christie’s proposal about taking away Social Security for people who earn above $200,000 a year was close to complete nonsense. There are very few people in this category. While this group does make lots of money, they do not collect much more Social Security than the rest of us. This is because the program has an income cap and a progressive payback structure.
In order to have any noticeable impact on the program’s finances it would be necessary to redefine “wealthy” to something like $40,000. This is likely Mr. Christie’s intention and the Post apparently wants to help him in that cause.
Of course it would, since deception is the only way to get large cuts in this incredibly popular program. This is why we find the Post applauding New Jersey Governor Chris Christie for his:
“cogent defense of his plan to trim old-age entitlement benefits for wealthy seniors, explaining that the system must be shored up for the poor.”
Of course what Christie said was far from cogent. Christie first totally misrepresented the program’s finances by saying that it held nothing by “IOUs.” Actually, the program holds more than $2.8 trillion of government bonds. Mr. Christie may call government bonds “IOUs” but that is not the common term for them. In any case, the financial markets consider government bonds to be a very valuable asset which is why they pay a low interest rate. Unless the U.S. government defaults on its debt, the program would be able to pay all scheduled benefits through 2033 with no changes whatsoever.
After that date it could pay more than 75 percent of scheduled benefits indefinitely. If we imposed the same sort of tax increases as President Reagan did in the 1980s it would also be sufficient to keep the program solvent indefinitely.
Christie’s proposal about taking away Social Security for people who earn above $200,000 a year was close to complete nonsense. There are very few people in this category. While this group does make lots of money, they do not collect much more Social Security than the rest of us. This is because the program has an income cap and a progressive payback structure.
In order to have any noticeable impact on the program’s finances it would be necessary to redefine “wealthy” to something like $40,000. This is likely Mr. Christie’s intention and the Post apparently wants to help him in that cause.
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Catherine Rampell seems to want to turn trade issues between China and the United States into a he said/she said in a column citing complaints by Chinese businesses over U.S. practices. While there are undoubtedly many instances of U.S. practices that are protectionist, the overall picture is very clear.
China continues to run a large trade surplus. We usually expect fast growing developing countries to run trade deficits. The logic is that they offer a return on capital, leading to large inflows, which drive up the price of their currency. This makes their goods and services less competitive, causing them to run trade deficits.
China’s central bank has bought trillions of dollars of foreign exchange in order to keep its currency from rising. This is why the country continues to run trade surpluses in spite of having a growth that far exceeds that of almost all of its trading partners.
Holding $4 trillion in reserves is not a subtle point. It is not affected by the fact that the United States may have unfair protections in a small number of industries.
Catherine Rampell seems to want to turn trade issues between China and the United States into a he said/she said in a column citing complaints by Chinese businesses over U.S. practices. While there are undoubtedly many instances of U.S. practices that are protectionist, the overall picture is very clear.
China continues to run a large trade surplus. We usually expect fast growing developing countries to run trade deficits. The logic is that they offer a return on capital, leading to large inflows, which drive up the price of their currency. This makes their goods and services less competitive, causing them to run trade deficits.
China’s central bank has bought trillions of dollars of foreign exchange in order to keep its currency from rising. This is why the country continues to run trade surpluses in spite of having a growth that far exceeds that of almost all of its trading partners.
Holding $4 trillion in reserves is not a subtle point. It is not affected by the fact that the United States may have unfair protections in a small number of industries.
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Paul Krugman makes a good point comparing the economy’s performance under President Reagan and Obama. He shows the path of unemployment was actually worse under Reagan than Obama. This is to show there is no real basis for praising the Reagan record. Krugman then concludes the piece by saying, “anyway, I’m surprised that this chart isn’t more widely discussed.”
Actually there is a good reason the record is not more widely discussed. The employment to population ratio is still much lower now than it was before the downturn. This is true even if we restrict the analysis to prime age (ages 25-54) workers to reduce the impact of demographic change.
Employment to Population Ratio: Prime Age Workers
Source: Bureau of Labor Statistics.
If we focus on the EPOP rather than unemployment rates, then the economy still has a long way to go before it recovers. Since it is implausible that millions of prime age workers suddenly decided they don’t feel like working, we need to do much more to get back to something like full employment and a labor market that is tight enough for workers to achieve wage gains.
For this reason many of us are focusing on emphasizing the problems with the labor market rather than trumpeting the comparisons with Reagan, although Krugman is right that the Reagan record is nothing to boast about.
Paul Krugman makes a good point comparing the economy’s performance under President Reagan and Obama. He shows the path of unemployment was actually worse under Reagan than Obama. This is to show there is no real basis for praising the Reagan record. Krugman then concludes the piece by saying, “anyway, I’m surprised that this chart isn’t more widely discussed.”
Actually there is a good reason the record is not more widely discussed. The employment to population ratio is still much lower now than it was before the downturn. This is true even if we restrict the analysis to prime age (ages 25-54) workers to reduce the impact of demographic change.
Employment to Population Ratio: Prime Age Workers
Source: Bureau of Labor Statistics.
If we focus on the EPOP rather than unemployment rates, then the economy still has a long way to go before it recovers. Since it is implausible that millions of prime age workers suddenly decided they don’t feel like working, we need to do much more to get back to something like full employment and a labor market that is tight enough for workers to achieve wage gains.
For this reason many of us are focusing on emphasizing the problems with the labor market rather than trumpeting the comparisons with Reagan, although Krugman is right that the Reagan record is nothing to boast about.
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In case you were wondering whether we can substantially improve the financing of Social Security by means-testing benefits, as Governor Christie advocated in the Republican candidate debate, CEPR has the answer for you. We did a paper a few years back on this very issue.
The key point is that, while the rich have a large share of the income, they don’t have a large share of Social Security benefits. That is what we would expect with a progressive payback structure in a program with a cap on taxable income. When we did the paper, less than 0.6 percent of benefits went to individuals with non-Social Security income over $200,000. Since incomes have risen somewhat in the last five years, it would be around 1.1 percent of benefits today.
However we’re not going to be able to zero out benefits for everyone who has non-Social Security income over $200,000, otherwise we would find lots of people with incomes of $199,900. As a practical matter, we would have to phase out benefits. A rapid phase out would be losing 20 cents of benefits for each dollar that the person’s income exceeds $200,000.
This would mean, for example, that if a person had an income of $220,000, they would see their benefits reduced by $4,000. This creates a very high marginal tax rate (people are also paying income tax), which would presumably mean some response in that people adjust their behavior since they are paying well over 50 cents of an additional dollar of income in taxes. If this was a person who was still working and paying Social Security taxes, the effective marginal tax rate would be over 70 percent.
By our calculations, this 20 percent phase out would reduce Social Security payouts by roughly 0.6 percent of payouts, the equivalent of an increase in the payroll tax of around 0.09 percentage point. That’s not zero, but it does not hugely change the finances of the program.
In case you were wondering whether we can substantially improve the financing of Social Security by means-testing benefits, as Governor Christie advocated in the Republican candidate debate, CEPR has the answer for you. We did a paper a few years back on this very issue.
The key point is that, while the rich have a large share of the income, they don’t have a large share of Social Security benefits. That is what we would expect with a progressive payback structure in a program with a cap on taxable income. When we did the paper, less than 0.6 percent of benefits went to individuals with non-Social Security income over $200,000. Since incomes have risen somewhat in the last five years, it would be around 1.1 percent of benefits today.
However we’re not going to be able to zero out benefits for everyone who has non-Social Security income over $200,000, otherwise we would find lots of people with incomes of $199,900. As a practical matter, we would have to phase out benefits. A rapid phase out would be losing 20 cents of benefits for each dollar that the person’s income exceeds $200,000.
This would mean, for example, that if a person had an income of $220,000, they would see their benefits reduced by $4,000. This creates a very high marginal tax rate (people are also paying income tax), which would presumably mean some response in that people adjust their behavior since they are paying well over 50 cents of an additional dollar of income in taxes. If this was a person who was still working and paying Social Security taxes, the effective marginal tax rate would be over 70 percent.
By our calculations, this 20 percent phase out would reduce Social Security payouts by roughly 0.6 percent of payouts, the equivalent of an increase in the payroll tax of around 0.09 percentage point. That’s not zero, but it does not hugely change the finances of the program.
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Everyone has heard about Donald Trump’s soaring poll numbers as the current leader in the race for the Republican presidential nomination. Many have also heard the explanation that he appeals to those who feel left behind by the economy. Unfortunately the way the media often tell this story has little to do with reality.
We got a great example of creative analysis yesterday in the Post’s Wonkblog section. It tells us:
“Non-college grads have struggled since the turn of the century: Economist Robert Shapiro estimates that incomes stagnated or declined from 2002 to 2013 for American households headed by workers without a degree, a marked departure from prior decades.”
Both parts of this are seriously misleading. First, it is not just non-college grads who have struggled since the turn of the century. Most college grads have seen little or no wage gains since the turn of the century. The second part is wrong also, since wages for non-college grads had also been stagnant since 1980, so the experience of the last 15 years has not been “a marked departure from prior decades.”
Later the piece doubles down on this misleading picture:
“Trump is selling an economic message that unifies growing concerns among liberals and conservatives alike, ‘which is that growing GDP doesn’t necessarily help people on the bottom,’ said Mickey Kaus, the author of the Kausfiles blog… .”
The data clearly show that most people have been seeing little or none of the gains from economic growth over the last decade, not just people on the bottom.
Everyone has heard about Donald Trump’s soaring poll numbers as the current leader in the race for the Republican presidential nomination. Many have also heard the explanation that he appeals to those who feel left behind by the economy. Unfortunately the way the media often tell this story has little to do with reality.
We got a great example of creative analysis yesterday in the Post’s Wonkblog section. It tells us:
“Non-college grads have struggled since the turn of the century: Economist Robert Shapiro estimates that incomes stagnated or declined from 2002 to 2013 for American households headed by workers without a degree, a marked departure from prior decades.”
Both parts of this are seriously misleading. First, it is not just non-college grads who have struggled since the turn of the century. Most college grads have seen little or no wage gains since the turn of the century. The second part is wrong also, since wages for non-college grads had also been stagnant since 1980, so the experience of the last 15 years has not been “a marked departure from prior decades.”
Later the piece doubles down on this misleading picture:
“Trump is selling an economic message that unifies growing concerns among liberals and conservatives alike, ‘which is that growing GDP doesn’t necessarily help people on the bottom,’ said Mickey Kaus, the author of the Kausfiles blog… .”
The data clearly show that most people have been seeing little or none of the gains from economic growth over the last decade, not just people on the bottom.
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This is the question that Neil Irwin raised in a discussion of efforts to reduce inequality by constraining C.E.O. pay. Irwin comments that Walmart CEO Douglas McMillion:
“makes more than $19 million a year (including unvested stock grants) to run Walmart, a company with 2.2 million employees and half a trillion dollars in revenue. That’s a lot of money, no doubt. But 26 Major League Baseball players make more than that. It is a safe bet that the future of the United States economy depends more heavily on how well Mr. McMillon does his job than how well Albert Pujols does his, even if Los Angeles Angels fans might disagree.”
Asking whether the work of a CEO or a great athlete is more important to the country actually misrepresents the issues involved in the determination of CEO pay. We can grant the ensuring that Walmart is well-run is more important, but that is really beside the point. The question is how much to we have to pay to get someone to do a good job running Walmart.
If the New England Patriots did not have Tom Brady, there are few, if any, other people who could do a comparable job as quarterback. This means that they would either have to pay the Tom Brady substitute a comparable salary or get by with a quarterback who would not be nearly as effective in scoring points for the team. (We’re ignoring the deflation problem here.)
By contrast, it is not clear that if Mr. McMillion left Walmart that the company could not find a comparably talented person to run the company. In this case, Walmart need only pay Mr. McMillion the amount that would be needed to attract another comparably talented person.
The example of firefighters can be seen as presenting a similar situation. Firefighters do incredibly important work, often at great personal danger. Certainly pulling people out of burning buildings has to be seen as more important than winning a football game. However firefighters do not receive multimillion dollar salaries because there are other people who are prepared to do this work at a relatively modest salary. This means that if any individual firefighter were to insist on a multimillion dollar paycheck, they could be replaced by someone who could do a comparable job at a far lower salary.
The argument on CEO pay is that the corporate governance system in the United States does not lead to the same sort of market pressures. Board members have little incentive to pressure CEOs to take pay cuts even when it is quite likely that they could get equally comparable replacements at a much lower wage.
Board members can count on six figure paychecks for attending a small number of meetings every year, even if they allow the CEO to be paid far more than is necessary. The fact that well-run and highly profitable companies in Europe and Asia typically pay their CEO’s far less than companies in the United States suggests that it is not necessary to have such exorbitant CEO pay to attract competent managers.
Note: Brady’s first name has been corrected to be “Tom” rather than Jim. Thanks to those who called my attention to this one.
This is the question that Neil Irwin raised in a discussion of efforts to reduce inequality by constraining C.E.O. pay. Irwin comments that Walmart CEO Douglas McMillion:
“makes more than $19 million a year (including unvested stock grants) to run Walmart, a company with 2.2 million employees and half a trillion dollars in revenue. That’s a lot of money, no doubt. But 26 Major League Baseball players make more than that. It is a safe bet that the future of the United States economy depends more heavily on how well Mr. McMillon does his job than how well Albert Pujols does his, even if Los Angeles Angels fans might disagree.”
Asking whether the work of a CEO or a great athlete is more important to the country actually misrepresents the issues involved in the determination of CEO pay. We can grant the ensuring that Walmart is well-run is more important, but that is really beside the point. The question is how much to we have to pay to get someone to do a good job running Walmart.
If the New England Patriots did not have Tom Brady, there are few, if any, other people who could do a comparable job as quarterback. This means that they would either have to pay the Tom Brady substitute a comparable salary or get by with a quarterback who would not be nearly as effective in scoring points for the team. (We’re ignoring the deflation problem here.)
By contrast, it is not clear that if Mr. McMillion left Walmart that the company could not find a comparably talented person to run the company. In this case, Walmart need only pay Mr. McMillion the amount that would be needed to attract another comparably talented person.
The example of firefighters can be seen as presenting a similar situation. Firefighters do incredibly important work, often at great personal danger. Certainly pulling people out of burning buildings has to be seen as more important than winning a football game. However firefighters do not receive multimillion dollar salaries because there are other people who are prepared to do this work at a relatively modest salary. This means that if any individual firefighter were to insist on a multimillion dollar paycheck, they could be replaced by someone who could do a comparable job at a far lower salary.
The argument on CEO pay is that the corporate governance system in the United States does not lead to the same sort of market pressures. Board members have little incentive to pressure CEOs to take pay cuts even when it is quite likely that they could get equally comparable replacements at a much lower wage.
Board members can count on six figure paychecks for attending a small number of meetings every year, even if they allow the CEO to be paid far more than is necessary. The fact that well-run and highly profitable companies in Europe and Asia typically pay their CEO’s far less than companies in the United States suggests that it is not necessary to have such exorbitant CEO pay to attract competent managers.
Note: Brady’s first name has been corrected to be “Tom” rather than Jim. Thanks to those who called my attention to this one.
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