Beat the Press

Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

As Donald Trump tries to whip up anti-Chinese sentiment as part of his re-election campaign, many have joined in by complaining about our Chinese supply lines. The NYT joined this effort by highlighting the extent to which the U.S. and the rest of the world relies on China for medical supplies.

While it is arguable whether the reliance on China for medical supplies or anything else is a big problem, that was not the main issue when it came to shortfalls of protective gear and other medical supplies at the start of the pandemic. Those shortages stemmed from the government’s failure to maintain adequate stockpiles of essential equipment.

Even if all this equipment was produced in the United States, our factories could not immediately ramp up production by a factor of five to meet the demand the country was facing in March and April. The only way this demand could have been met quickly was if the stockpiles were already in place. This was the major failure in the crisis and it obscures the issue to complain about supply chains going through China.

As a practical matter, it is striking how little production has been disrupted in response to a once in a century pandemic and totally incompetent leadership at the national level. That would seem to imply that our supply chains are not a big problem.

As Donald Trump tries to whip up anti-Chinese sentiment as part of his re-election campaign, many have joined in by complaining about our Chinese supply lines. The NYT joined this effort by highlighting the extent to which the U.S. and the rest of the world relies on China for medical supplies.

While it is arguable whether the reliance on China for medical supplies or anything else is a big problem, that was not the main issue when it came to shortfalls of protective gear and other medical supplies at the start of the pandemic. Those shortages stemmed from the government’s failure to maintain adequate stockpiles of essential equipment.

Even if all this equipment was produced in the United States, our factories could not immediately ramp up production by a factor of five to meet the demand the country was facing in March and April. The only way this demand could have been met quickly was if the stockpiles were already in place. This was the major failure in the crisis and it obscures the issue to complain about supply chains going through China.

As a practical matter, it is striking how little production has been disrupted in response to a once in a century pandemic and totally incompetent leadership at the national level. That would seem to imply that our supply chains are not a big problem.

Apparently Steven Rattner, a regular columnist at the New York Times, is unable to get government data on corporate profits. That is what readers must conclude from his column on the strength of the stock market in spite of a plunging economy. While Rattner rightly points to the fact that interest rates on bonds are extremely low, which makes stocks seem like an attractive alternative, he never once mentions the likely shift from wages to profits that we can expect in a weak labor market.

The bulk of the widely touted shift from wages to profits occurred in the weak labor market following the Great Recession. (There was also a shift in the housing bubble years, but this was largely fake profits as banks and other financial institutions booked large profits on loans that subsequently went bad. This would be like recorded profits on fictitious sales.) Workers were regaining their share in the tight labor market of the last five years. 

With the coronavirus recession likely to lead to a weak labor market for years to come, especially if the Republicans and deficit hawks can dictate policy, the profit share is likely to rise back to post-Great Recession peaks. This would mean that profits will soar, even if the economy is very weak. 

Apparently Steven Rattner, a regular columnist at the New York Times, is unable to get government data on corporate profits. That is what readers must conclude from his column on the strength of the stock market in spite of a plunging economy. While Rattner rightly points to the fact that interest rates on bonds are extremely low, which makes stocks seem like an attractive alternative, he never once mentions the likely shift from wages to profits that we can expect in a weak labor market.

The bulk of the widely touted shift from wages to profits occurred in the weak labor market following the Great Recession. (There was also a shift in the housing bubble years, but this was largely fake profits as banks and other financial institutions booked large profits on loans that subsequently went bad. This would be like recorded profits on fictitious sales.) Workers were regaining their share in the tight labor market of the last five years. 

With the coronavirus recession likely to lead to a weak labor market for years to come, especially if the Republicans and deficit hawks can dictate policy, the profit share is likely to rise back to post-Great Recession peaks. This would mean that profits will soar, even if the economy is very weak. 

One of the recurring items in the news that infuriates progressives and fans of economic logic everywhere is discussions of the stock market that treat it as a measure of economic well-being. Donald Trump carries this to an extreme, with seemingly no understanding that there are other important economic measures, but he is hardly alone. In fact, many economic commentators seem hard-pressed to explain the continued strength of the stock market, when most projections show the unemployment rate remaining extraordinarily high for the foreseeable future.

The reason why this is infuriating is that there is no direct link between the growth in the stock market and the health of the economy. This is not a leftist criticism of the evils of capitalism, it is the Finance 101 explanation of stock prices.

The stock market is supposed to reflect the present value of future after-tax corporate profits. (“Present value” means that we apply a discount rate so that profits anticipated five or ten years out are considered to be of less value than profits expected next month.) This means that events in the world that are likely to lead to higher future profits should raise stock prices, regardless of whether or not they are good for the economy as a whole.

This could mean that the stock market will rise when the economy is strong, since other things equal, a stronger economy is likely to mean higher corporate profits. But, the stock market could rise simply because corporate profits are expected to increase at the expense of everyone else’s income.

Just to take an example from recent policy changes, a big cut in the corporate income tax should lead to higher stock prices, since it should mean higher after-tax profits. There is little reason to believe that a cut in corporate income taxes would have a substantial effect in boosting growth (it didn’t), but since after-tax profits will be higher as a result of the tax cut, the stock market should also be higher.

The stock market does generally track the economy for the simple reason that stronger growth will usually mean higher profits, but this is hardly a tight connection. The price of corn will generally track the overall economy too since stronger growth will be mean more demand for corn, but no one in their right mind would treat the price of corn as an indicator of economic well-being.

So why do people insist on treating the stock market as a measure of economic well-being when it clearly is not?  That probably is attributable to the people who benefit from a rising stock market. That would be the people who own lots of stock, in other words, rich people. Rich people are also the ones who own and control major news outlets. For this reason, they are not bothered when people writing news stories or columns say that the stock market is a measure of economic well-being, as opposed to being a measure of how much money rich people have.

To be clear, I doubt anyone in an ownership position at a newspaper or broadcast or Internet outlet ever told a reporter or columnist to write a piece saying that the stock market is a measure of economic well-being. Rather, this is one of those wrong things that a reporter or columnist can say over and over again and never be called on the carpet for it. By contrast, if a reporter tried to tell their audience that the price of corn is a measure of economic well-being, they would probably have some serious explaining to do to their editor and other higher-ups. If they continued to assert that the price of corn was a measure of economic well-being, they would probably be looking for a new job.

The point here is that power has a large influence on what arguments appear in news outlets. Because people with money benefit from higher stock prices, we are likely to continue to see the claim that stock prices are a measure of economic well-being long into the future, even though it is not true.

 

Power and Government-Granted Patent Monopolies

The story of the stock market as a measure of economic well-being is important to keep in mind when we consider the media’s decision to almost completely ignore the issue of patent and copyright monopolies as government policies that redistribute income upward.  Just as the myth of the stock market metric of well-being is perpetuated because of who it benefits, the analysis of patents and copyrights as policies leading to upward redistribution is not ever mentioned because of who would potentially be harmed.

In the case of patent and copyright monopolies, the beneficiaries go beyond the relatively small group of people who own large amounts of stock in pharmaceutical companies, medical equipment manufacturers, or software developers. It includes the bulk of the highly educated workforce, including the people who edit, write, and report for major news outlets. Even if many of these people are not especially highly paid, they almost certainly have friends and relatives who benefit from patent and copyright monopolies. 

There is a very widespread belief that trends in technology and globalization are major factors in the upward redistribution of income over the last four decades. The basic story is that developments in computers, biotechnology, and other areas have hugely increased the value of education (especially in the STEM fields) and reduce the value of unskilled (their term) manual labor. Many people who consider themselves quite progressive hold this view. They just feel that they should give back some of their good fortune by paying higher taxes to benefit the less fortunate.

However, if it is acknowledged that it is government policy, specifically patent and copyright monopolies, that is behind this upward redistribution, and not technology or globalization, then it means inequality was the result of deliberate policy, not the natural workings of the market.[1] This is a much less flattering view, both for those who want to keep the benefits from this upward redistribution and even for those progressives who would willingly pay higher taxes.

For this reason, the argument that upward redistribution was the result of deliberate policy, is not one that is welcome in most media outlets, including progressive ones. The idea that patents and copyrights are simply facts of nature persists, even though it is obviously absurd on its face.

It is unfortunate that power relations preclude serious debate on an issue that is so central to reducing inequality. But it is important to recognize the obstacles to having this debate if we are ever to overcome them.

[1] I have made this argument in a number of different places, for example here, here, and here. But to illustrate the issue as simply as possible, consider a world where there are no patent or copyright monopolies. How many people would be paid to research new drugs and develop new medical equipment in a context where any manufacturers could immediately copy anything developed and sell it at a price that would recoup manufacturing costs and a normal profit? How many people would be paid to design software for computers, smartphones, and other products if anyone could immediately copy the software without sending the developer a dime? While these are valuable services, how many people are employed doing them, and how much they get paid are quite clearly the result of policy decisions, not the technology itself.  

One of the recurring items in the news that infuriates progressives and fans of economic logic everywhere is discussions of the stock market that treat it as a measure of economic well-being. Donald Trump carries this to an extreme, with seemingly no understanding that there are other important economic measures, but he is hardly alone. In fact, many economic commentators seem hard-pressed to explain the continued strength of the stock market, when most projections show the unemployment rate remaining extraordinarily high for the foreseeable future.

The reason why this is infuriating is that there is no direct link between the growth in the stock market and the health of the economy. This is not a leftist criticism of the evils of capitalism, it is the Finance 101 explanation of stock prices.

The stock market is supposed to reflect the present value of future after-tax corporate profits. (“Present value” means that we apply a discount rate so that profits anticipated five or ten years out are considered to be of less value than profits expected next month.) This means that events in the world that are likely to lead to higher future profits should raise stock prices, regardless of whether or not they are good for the economy as a whole.

This could mean that the stock market will rise when the economy is strong, since other things equal, a stronger economy is likely to mean higher corporate profits. But, the stock market could rise simply because corporate profits are expected to increase at the expense of everyone else’s income.

Just to take an example from recent policy changes, a big cut in the corporate income tax should lead to higher stock prices, since it should mean higher after-tax profits. There is little reason to believe that a cut in corporate income taxes would have a substantial effect in boosting growth (it didn’t), but since after-tax profits will be higher as a result of the tax cut, the stock market should also be higher.

The stock market does generally track the economy for the simple reason that stronger growth will usually mean higher profits, but this is hardly a tight connection. The price of corn will generally track the overall economy too since stronger growth will be mean more demand for corn, but no one in their right mind would treat the price of corn as an indicator of economic well-being.

So why do people insist on treating the stock market as a measure of economic well-being when it clearly is not?  That probably is attributable to the people who benefit from a rising stock market. That would be the people who own lots of stock, in other words, rich people. Rich people are also the ones who own and control major news outlets. For this reason, they are not bothered when people writing news stories or columns say that the stock market is a measure of economic well-being, as opposed to being a measure of how much money rich people have.

To be clear, I doubt anyone in an ownership position at a newspaper or broadcast or Internet outlet ever told a reporter or columnist to write a piece saying that the stock market is a measure of economic well-being. Rather, this is one of those wrong things that a reporter or columnist can say over and over again and never be called on the carpet for it. By contrast, if a reporter tried to tell their audience that the price of corn is a measure of economic well-being, they would probably have some serious explaining to do to their editor and other higher-ups. If they continued to assert that the price of corn was a measure of economic well-being, they would probably be looking for a new job.

The point here is that power has a large influence on what arguments appear in news outlets. Because people with money benefit from higher stock prices, we are likely to continue to see the claim that stock prices are a measure of economic well-being long into the future, even though it is not true.

 

Power and Government-Granted Patent Monopolies

The story of the stock market as a measure of economic well-being is important to keep in mind when we consider the media’s decision to almost completely ignore the issue of patent and copyright monopolies as government policies that redistribute income upward.  Just as the myth of the stock market metric of well-being is perpetuated because of who it benefits, the analysis of patents and copyrights as policies leading to upward redistribution is not ever mentioned because of who would potentially be harmed.

In the case of patent and copyright monopolies, the beneficiaries go beyond the relatively small group of people who own large amounts of stock in pharmaceutical companies, medical equipment manufacturers, or software developers. It includes the bulk of the highly educated workforce, including the people who edit, write, and report for major news outlets. Even if many of these people are not especially highly paid, they almost certainly have friends and relatives who benefit from patent and copyright monopolies. 

There is a very widespread belief that trends in technology and globalization are major factors in the upward redistribution of income over the last four decades. The basic story is that developments in computers, biotechnology, and other areas have hugely increased the value of education (especially in the STEM fields) and reduce the value of unskilled (their term) manual labor. Many people who consider themselves quite progressive hold this view. They just feel that they should give back some of their good fortune by paying higher taxes to benefit the less fortunate.

However, if it is acknowledged that it is government policy, specifically patent and copyright monopolies, that is behind this upward redistribution, and not technology or globalization, then it means inequality was the result of deliberate policy, not the natural workings of the market.[1] This is a much less flattering view, both for those who want to keep the benefits from this upward redistribution and even for those progressives who would willingly pay higher taxes.

For this reason, the argument that upward redistribution was the result of deliberate policy, is not one that is welcome in most media outlets, including progressive ones. The idea that patents and copyrights are simply facts of nature persists, even though it is obviously absurd on its face.

It is unfortunate that power relations preclude serious debate on an issue that is so central to reducing inequality. But it is important to recognize the obstacles to having this debate if we are ever to overcome them.

[1] I have made this argument in a number of different places, for example here, here, and here. But to illustrate the issue as simply as possible, consider a world where there are no patent or copyright monopolies. How many people would be paid to research new drugs and develop new medical equipment in a context where any manufacturers could immediately copy anything developed and sell it at a price that would recoup manufacturing costs and a normal profit? How many people would be paid to design software for computers, smartphones, and other products if anyone could immediately copy the software without sending the developer a dime? While these are valuable services, how many people are employed doing them, and how much they get paid are quite clearly the result of policy decisions, not the technology itself.  

The Washington Post ran a piece on how patterns of globalization may be changed due to the pandemic. It is more than a bit confused in not distinguishing short-term effects from long-term effects and its inability to distinguish between problems caused by fiscal policy and policies caused by the fallout from the pandemic.

The headline for the piece on the Post’s homepage is “Covid-19 is erasing decades of economic gains achieved through globalization.” The subhead is “The way we travel, work, consume, invest, interact, migrate, cooperate on global problems and pursue prosperity has likely been changed for years to come.”

Literally nothing in the piece supports the claim in the headline and insofar as items in the piece support the subhead it is at least as likely to be positive as negative. The gist of the piece is that we have seen a massive reduction in trade and travel as a result of the pandemic. While some of this may prove to be permanent, the piece gives us no reason to believe that the bulk of trade will not return to normal once the pandemic has been brought under control, either with effective treatments or with a vaccine.

In terms of travel, any enduring effect is likely to be largely positive. An enormous amount of resources is now wasted on business travel and conventions that can be just as effectively performed on-line. This realization will free up a large number of resources for more productive uses, such as health care, child care, and stopping global warming. Of course, less travel by itself will be a big help in reducing worldwide greenhouse gas emissions.

In addition, the increased use of telecommuting will allow tens of millions of people to avoid unnecessary trips to their offices, leading to both an enormous saving of both time and energy. This will also free up resources for more productive purposes. This change should also help reduce inequality since so much wealth and income that had been concentrated in major cities like New York and San Francisco will now be dispersed more widely across the country. There will undoubtedly be similar patterns in other countries. 

At one point the piece warns of restrictions on foreign investment being considered in Italy and then offers the warning:

“The new restrictions have raised an alarm among Italian industrialists, who say their country’s long-stagnant economy will need more foreign capital, not less, to emerge from this crisis.”

While Italy does need more investment, the problem is that European leaders have chosen to limit the ability of eurozone countries like Italy to finance investment by running budget deficits. The problem here is that Europe’s leaders, most importantly the government of Germany, have insisted on policies to slow investment and growth, not an inherent lack of investment capital in Italy.

Incredibly, while the piece complains repeatedly about protectionism, it does not mention the most important forms of protectionism of all, patent and copyright monopolies. This is especially bizarre in the context of the pandemic since one of the big questions is whether any treatments or vaccines that are developed will be widely available or whether companies will use government-granted patent monopolies to charge high prices.

If China paves the way in developing a vaccine (it has as many vaccines in Phase III testing as the rest of the world combined) and carries through with its commitment to making any vaccine freely available to the whole world, then this will both be enormously important in and of itself, but also an incredibly valuable precedent. If a vaccine against the coronavirus can be distributed in a free market as a cheap generic, it is reasonable to ask why this should not be the case with all new drugs.

If this were to lead to new mechanisms for financing pharmaceutical research and a worldwide free market in prescription drugs, it would imply a huge increase in globalization and an enormous gain for developing countries. The gains would be even larger if we moved beyond patent monopoly financing of research in areas like medical equipment, pesticides and fertilizers, and software.

This sort of globalization would be bad news for many U.S. corporations and many highly paid employees of these corporations, which is perhaps why the Washington Post never talks about it. But if we want to seriously discuss prospects for the future in a post-pandemic world, moving beyond patent and copyright monopolies has to be on the agenda.

 

The Washington Post ran a piece on how patterns of globalization may be changed due to the pandemic. It is more than a bit confused in not distinguishing short-term effects from long-term effects and its inability to distinguish between problems caused by fiscal policy and policies caused by the fallout from the pandemic.

The headline for the piece on the Post’s homepage is “Covid-19 is erasing decades of economic gains achieved through globalization.” The subhead is “The way we travel, work, consume, invest, interact, migrate, cooperate on global problems and pursue prosperity has likely been changed for years to come.”

Literally nothing in the piece supports the claim in the headline and insofar as items in the piece support the subhead it is at least as likely to be positive as negative. The gist of the piece is that we have seen a massive reduction in trade and travel as a result of the pandemic. While some of this may prove to be permanent, the piece gives us no reason to believe that the bulk of trade will not return to normal once the pandemic has been brought under control, either with effective treatments or with a vaccine.

In terms of travel, any enduring effect is likely to be largely positive. An enormous amount of resources is now wasted on business travel and conventions that can be just as effectively performed on-line. This realization will free up a large number of resources for more productive uses, such as health care, child care, and stopping global warming. Of course, less travel by itself will be a big help in reducing worldwide greenhouse gas emissions.

In addition, the increased use of telecommuting will allow tens of millions of people to avoid unnecessary trips to their offices, leading to both an enormous saving of both time and energy. This will also free up resources for more productive purposes. This change should also help reduce inequality since so much wealth and income that had been concentrated in major cities like New York and San Francisco will now be dispersed more widely across the country. There will undoubtedly be similar patterns in other countries. 

At one point the piece warns of restrictions on foreign investment being considered in Italy and then offers the warning:

“The new restrictions have raised an alarm among Italian industrialists, who say their country’s long-stagnant economy will need more foreign capital, not less, to emerge from this crisis.”

While Italy does need more investment, the problem is that European leaders have chosen to limit the ability of eurozone countries like Italy to finance investment by running budget deficits. The problem here is that Europe’s leaders, most importantly the government of Germany, have insisted on policies to slow investment and growth, not an inherent lack of investment capital in Italy.

Incredibly, while the piece complains repeatedly about protectionism, it does not mention the most important forms of protectionism of all, patent and copyright monopolies. This is especially bizarre in the context of the pandemic since one of the big questions is whether any treatments or vaccines that are developed will be widely available or whether companies will use government-granted patent monopolies to charge high prices.

If China paves the way in developing a vaccine (it has as many vaccines in Phase III testing as the rest of the world combined) and carries through with its commitment to making any vaccine freely available to the whole world, then this will both be enormously important in and of itself, but also an incredibly valuable precedent. If a vaccine against the coronavirus can be distributed in a free market as a cheap generic, it is reasonable to ask why this should not be the case with all new drugs.

If this were to lead to new mechanisms for financing pharmaceutical research and a worldwide free market in prescription drugs, it would imply a huge increase in globalization and an enormous gain for developing countries. The gains would be even larger if we moved beyond patent monopoly financing of research in areas like medical equipment, pesticides and fertilizers, and software.

This sort of globalization would be bad news for many U.S. corporations and many highly paid employees of these corporations, which is perhaps why the Washington Post never talks about it. But if we want to seriously discuss prospects for the future in a post-pandemic world, moving beyond patent and copyright monopolies has to be on the agenda.

 

I hate to be nitpicky when the NYT writes a very strong editorial arguing that we need more money going to ordinary workers and less to the rich, but it is important to get the story right. Unfortunately, the editorial misses much of it.

First and foremost, there has not been a major shift from wages to profits during the period of wage stagnation. Most of the shift from wages to profits took place in the weak labor market following the Great Recession. It was being reversed in the last five years until the recession hit. If we use the data from 2019, the median wage would have been 4.2 percent higher than it actually was if the wage share was back at its 1979 level. This is a bit more than 10 percent of the gap between productivity growth and wage growth over the last four decades.

Rather than going to profits, the upward redistribution went to high-end workers like CEOs and other top executives, Wall Street traders and other high flyers in the financial sector, and doctors and other highly paid professionals. If we want to reverse this upward redistribution, these should be the focus of efforts at redistribution.

The piece also implies that stock returns have been extraordinarily high through the last four decades. This is clearly wrong. While returns were very high in the 1980s and 1990s, they actually have been well below long-term averages for the last two decades.

In this vein, the piece also proposes banning share buybacks as a way to reduce returns to shareholders. It is not clear what it hopes this would accomplish. It is hardly better for workers or anyone else if companies pay out money to shareholders through dividends rather than share buybacks. (There are tax issues, that make buybacks preferable for shareholders, but since shares turn over frequently, the tax consequences are limited.) For some reason, share buybacks have become a big cause in some circles, but it is difficult to see why the form of payments to shareholders would be a big deal. 

The piece also is very modest in suggesting that the minimum wage should be raised to $15 an hour. While this is a good near-term target, if the minimum wage had kept pace with productivity growth since 1968, it would be over $24 an hour today. The country would look very different if the lowest-paid worker was getting $24 an hour today. This comes to $48,000 a year for a full-time, full-year worker. A couple with two full-time minimum wage earners would have an income of $96,000 a year.

In order to be able to raise the minimum wage back to its productivity-adjusted level from 1968, and not see excessive inflation, we would have to take steps to reduce high-end wages. This would mean things like fixing the corporate governance structures so CEOs could not ripoff the companies for which they work. This would mean they might get $2 million to $3 million a year, instead of $20 million. We would have to eliminate the waste in the financial sector, thereby ending the exorbitant pay in this sector. We would also have to weaken the importance of patent and copyright monopolies, making it less likely that Bill Gates types could get $100 billion. And, we would have to subject doctors and other highly paid professionals to competition, bringing their pay in line with their counterparts in other wealthy countries.

Anyhow, this is a big agenda, but if we want to bring about real change we have to understand the nature of the problem, and for the most part, it is not high corporate profits. Yeah, this is the story in Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer (it’s free).

I hate to be nitpicky when the NYT writes a very strong editorial arguing that we need more money going to ordinary workers and less to the rich, but it is important to get the story right. Unfortunately, the editorial misses much of it.

First and foremost, there has not been a major shift from wages to profits during the period of wage stagnation. Most of the shift from wages to profits took place in the weak labor market following the Great Recession. It was being reversed in the last five years until the recession hit. If we use the data from 2019, the median wage would have been 4.2 percent higher than it actually was if the wage share was back at its 1979 level. This is a bit more than 10 percent of the gap between productivity growth and wage growth over the last four decades.

Rather than going to profits, the upward redistribution went to high-end workers like CEOs and other top executives, Wall Street traders and other high flyers in the financial sector, and doctors and other highly paid professionals. If we want to reverse this upward redistribution, these should be the focus of efforts at redistribution.

The piece also implies that stock returns have been extraordinarily high through the last four decades. This is clearly wrong. While returns were very high in the 1980s and 1990s, they actually have been well below long-term averages for the last two decades.

In this vein, the piece also proposes banning share buybacks as a way to reduce returns to shareholders. It is not clear what it hopes this would accomplish. It is hardly better for workers or anyone else if companies pay out money to shareholders through dividends rather than share buybacks. (There are tax issues, that make buybacks preferable for shareholders, but since shares turn over frequently, the tax consequences are limited.) For some reason, share buybacks have become a big cause in some circles, but it is difficult to see why the form of payments to shareholders would be a big deal. 

The piece also is very modest in suggesting that the minimum wage should be raised to $15 an hour. While this is a good near-term target, if the minimum wage had kept pace with productivity growth since 1968, it would be over $24 an hour today. The country would look very different if the lowest-paid worker was getting $24 an hour today. This comes to $48,000 a year for a full-time, full-year worker. A couple with two full-time minimum wage earners would have an income of $96,000 a year.

In order to be able to raise the minimum wage back to its productivity-adjusted level from 1968, and not see excessive inflation, we would have to take steps to reduce high-end wages. This would mean things like fixing the corporate governance structures so CEOs could not ripoff the companies for which they work. This would mean they might get $2 million to $3 million a year, instead of $20 million. We would have to eliminate the waste in the financial sector, thereby ending the exorbitant pay in this sector. We would also have to weaken the importance of patent and copyright monopolies, making it less likely that Bill Gates types could get $100 billion. And, we would have to subject doctors and other highly paid professionals to competition, bringing their pay in line with their counterparts in other wealthy countries.

Anyhow, this is a big agenda, but if we want to bring about real change we have to understand the nature of the problem, and for the most part, it is not high corporate profits. Yeah, this is the story in Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer (it’s free).

I have long been a big fan of a vacant property tax. As the old saying goes, you tax what you want less of, and why would we want vacant properties. This is especially likely to be relevant in many high-priced cities where the demand for commercial real estate is likely to go through the floor due to an increase in telecommuting.

As cities mull many types of tax increases to deal with pandemic caused budget shortfalls, a vacant property tax should stand out as a productive alternative. The economy would be best served by having landlords quickly recognize that their property is not worth as much as it used to be, and therefore lower rents to keep it occupied. This will be good for keeping old businesses and supporting new ones since rent is the major expense for most businesses, especially small businesses.

At the end of the day, recognizing reality is likely to be good for landlords, since they don’t make money on vacant property.  Of course, landlords are often not very good at economics. Both Donald Trump and Jared Kushner are major property owners.

I have long been a big fan of a vacant property tax. As the old saying goes, you tax what you want less of, and why would we want vacant properties. This is especially likely to be relevant in many high-priced cities where the demand for commercial real estate is likely to go through the floor due to an increase in telecommuting.

As cities mull many types of tax increases to deal with pandemic caused budget shortfalls, a vacant property tax should stand out as a productive alternative. The economy would be best served by having landlords quickly recognize that their property is not worth as much as it used to be, and therefore lower rents to keep it occupied. This will be good for keeping old businesses and supporting new ones since rent is the major expense for most businesses, especially small businesses.

At the end of the day, recognizing reality is likely to be good for landlords, since they don’t make money on vacant property.  Of course, landlords are often not very good at economics. Both Donald Trump and Jared Kushner are major property owners.

It turns out that it is not just Donald Trump and economics reporters, but airline executives also have trouble with basic arithmetic. We learn this from a Washington Post piece discussing the extent to which airlines are changing their practices to allow passengers to maintain some distance on flights.

The piece discusses various airlines policies and then concludes with some wisdom from the CEO of Jet Blue:

“‘You’re going to definitely have to sit next to a stranger again, I’m afraid, on a plane,’ JetBlue chief executive Robin Hayes said during a Washington Post Live discussion in late May. ‘Because [of] the economics of our industry, most airlines have a break-even load factor of 75 to 80 percent, so clearly capping flights at 55 to 60 percent, which is what we’re doing right now … is not sustainable.'”

The problem with Mr. Hayes assertion, as fans of arithmetic everywhere know, is that the “break-even load factor”depends on the price passengers are willing to pay. In the event that passengers are willing to pay a premium to not get a case of coronavirus with their flight, then an airline can break even with a lower percentage of its seats filled.

It may be the case that Hayes has evidence that people will not pay more to ensure their safety, but that is the central issue here. The piece is written as though people would not pay extra money for their safety, if this is really the case, then there should have been some discussion of the evidence.

It turns out that it is not just Donald Trump and economics reporters, but airline executives also have trouble with basic arithmetic. We learn this from a Washington Post piece discussing the extent to which airlines are changing their practices to allow passengers to maintain some distance on flights.

The piece discusses various airlines policies and then concludes with some wisdom from the CEO of Jet Blue:

“‘You’re going to definitely have to sit next to a stranger again, I’m afraid, on a plane,’ JetBlue chief executive Robin Hayes said during a Washington Post Live discussion in late May. ‘Because [of] the economics of our industry, most airlines have a break-even load factor of 75 to 80 percent, so clearly capping flights at 55 to 60 percent, which is what we’re doing right now … is not sustainable.'”

The problem with Mr. Hayes assertion, as fans of arithmetic everywhere know, is that the “break-even load factor”depends on the price passengers are willing to pay. In the event that passengers are willing to pay a premium to not get a case of coronavirus with their flight, then an airline can break even with a lower percentage of its seats filled.

It may be the case that Hayes has evidence that people will not pay more to ensure their safety, but that is the central issue here. The piece is written as though people would not pay extra money for their safety, if this is really the case, then there should have been some discussion of the evidence.

As we get more data in, it seems increasingly likely that we are looking at a horrible and prolonged recession, not a complete economic collapse of Great Depression proportions. The May employment report showed a substantial bounce back in employment, with jobs up by more than 2.5 million from the April level. Retail sales had a huge 17.7 percent jump in May, by far the largest on record, although they are still 6.1 percent below the May 2019 level.

Mortgage applications also show a considerable degree of confidence about the future, with both refinancing and purchase mortgages soaring. Mortgage applications for refinancing are up more than ten-fold from year-ago levels, while purchase applications are up 268.6 percent to the highest level in more than 11 years. The latter is far more important for the economy since it implies people are buying homes, which typically lead to the purchase of new appliances and spending on renovations.

These data, and a variety of surveys of consumers and businesses, do not show an economy in collapse. At the same time, there is little reason to believe that we will see a robust rebound to anything resembling normal. We lost 22 million jobs between February and April. Even if we had seven more months adding jobs back at the May rate, we would still be down by more than 2 million jobs from the pre-pandemic level. And, we are not likely to see seven more months with job growth anything like May’s pace, without some very serious fiscal stimulus.

A new paper from Raj Chetty and co-authors provides some interesting insights on the problem the economy faces. Using real-time data from a number of private sources, it finds that there has been a sharp fall in consumption by people in the top income quartile of households, with relatively little change in consumption from the other three quartiles.

This drop is overwhelmingly associated with a sharp drop in demand for services, like restaurant meals, hair salons, and other personal services. Interestingly, the size of the drop is not affected to any substantial extent by laws on shutdowns. Areas where these services were fully available saw comparable declines in spending as areas where these services were still subject to lockdowns.

There are two major takeaways from these findings. First, the drop in demand that we have seen to date has little to do with declines in income. The top quartile has reduced its spending not because it lacks the income to spend, it has reduced spending because it is scared to spend in the areas where it would ordinarily be spending its money.

An implication is that any further efforts at boosting the economy should be better targeted than the first rounds. For example, giving $1,200 to every adult in the country was not a very effective way to boost the economy. While this was payment was phased out for very high-end earners, the phase out only affected the top 2-3 percent of the income distribution, the bulk of the top quartile received their checks even though they were not suffering any income loss as a result of the pandemic.

The other major take away is that if we want people to use restaurants, hair salons, gyms, and other services, the issue of legal shutdowns matters far less important than ensuring their safety. This means actually getting the pandemic under control. While virtually every wealthy country has been able to do this, outside of the Northeast corridor, new infections are higher than ever in the United States. This means that without a vaccine and/or effective treatment, we are likely to see demand for a wide range of services badly depressed for the foreseeable future.

This matters in a big way because these industries provide tens of millions of jobs largely to less-educated workers. These sectors also disproportionately employ women and people of color. If they continue to see demand at far below pre-pandemic levels, it will mean a massive and persistent increase in unemployment for the less-educated segments of the workforce. This will quickly reverse all the gains that lower-paid workers were able to make as the labor market tightened in the prior five years.

 

Shaping the Stimulus

The most immediate need in the next round of a rescue package to come from Congress is for money for state and local governments. Their budgets have been devastated by the loss of tax revenue due to the shutdown and the additional demand for services. The Center on Budget and Policy Priorities calculated that the shortfalls could be as high as $500 billion.

They have already laid off 1.6 million workers and this number will hugely increase if Congress does not provide a large chunk of money to make up for their shortfalls. Some people have pointed out that the laid-off workers were largely teachers, who were not paid for the period in which schools were shut down. This is true, but if state and local governments cannot get the money to make up shortfalls, many of these teachers may not be called back in the fall and other workers are likely to be laid off to make up the cost of paying the teachers who are called back. Cutbacks at the state and local level were one of the main reasons that the recovery from the Great Recession was so slow. We should not make an even larger mistake now.

The Post Office will also need substantial funding to stay in business, as it has seen both a sharp decline in revenue and sharp increase in spending due to efforts to keep its workers safe. As with state and local governments, the employees of the Post Office are disproportionately Black. This is due to the fact that Black workers in the public sector have faced less discrimination than Black workers in the private sector. As a result, the public sector has historically been an important source of middle-class jobs for Black workers. This will be threatened if the fallout from the pandemic forces large cutbacks in employment.

There has been a peculiar debate over the extension of the $600 weekly supplements to unemployment benefits that are scheduled to end next month. It is important to remember the reason these were included. We gave people this supplement because we did not want them to work. The point was to keep people whole through a period in which the economy was largely shut down in an effort to contain the virus.

In this context, the question we should be asking in deciding whether to continue the supplement is whether it is safe to work. This depends on our progress on containing the virus. One obvious way to determine the extent to which the pandemic has been contained is the positive rate on new tests. If the positive rate is below some low level, say 3 percent, then it would be reasonable to remove the supplement in that area (this can be county specific), however, if we are seeing high positive rates, then as a matter of policy it would make more sense to encourage people to stay at home than to work.

For the areas where the virus is under control, it would still be desirable to have some supplement to the standard benefit. Benefits in many states have been eroded in recent decades so that it would be very difficult for unemployed workers to survive on them. In a context where the nationwide unemployment rate is virtually certain to be in double digits through the rest of the year, most of the unemployed are not going to be able to find work. For these reasons, a smaller supplement, perhaps $200 a week, should be left in place until the economy has recovered more.

In addition, we should also increase SNAP benefits to protect those at the bottom of the income ladder. Food prices have risen sharply since the pandemic hit. These increases may be reversed in the months ahead, but for now, low-income families have to cope with high food prices, with no increase in benefits. It is also important to remember that SNAP spending is a small share of the total budget. At $70 billion a year, it is just 1.6 percent of total spending. It is less than one-fifth of the premium we pay each year for prescription drugs because of government-granted patent monopolies.

 

Longer Term Recovery

 

At the point where we have developed effective treatments and/or a vaccine, many people will go back to eating at restaurants and flying for vacations. However, there are some changes in spending patterns that are likely to be enduring.

It is likely that much of the increase in telecommuting will be permanent. This means that many fewer people will be going to downturn offices and taking advantage of restaurants, bars, gyms, and other services in central cities at lunch and after work. People are also likely to be taking many fewer business trips, as meetings will take place on Zoom. Also, many colleges and universities will likely be downsized, as more instruction takes place on the web, decreasing retail sales in college towns.

While there will be other long-term changes resulting from the pandemic (maybe even some questioning of government-granted patent monopolies for prescription drugs), the basic point is that large numbers of workers are likely to still be displaced even after the immediate impact of the pandemic is over.

This actually presents a great opportunity. If the private sector is not spending enough to fully employ the workforce, then the public sector has to fill the gap. In this case, we don’t need to have make-work jobs, we have enormous unmet needs.

Most obviously we need people to increase our capacity for clean energy and conservation. This can mean millions of jobs for people installing solar panels, insulation, and other energy-saving measures. We also need to ramp up our child care capacity. The lack of adequate child care was driven home in the pandemic as many health care and other essential workers had difficulty making arrangements when child care facilities shut down. We also need more health care workers as we move towards establishing a universal Medicare system. This will likely mean many more nurses, nurses’ assistants, and other health care professionals. And we will need social workers or other trained professionals who can be the first responders in many non-violent situations where the police are currently called in.   

We can’t imagine that all the people who lose their jobs in restaurants and hotels will be able to work installing solar panels or train to be nurses, but that is not how the labor market functions. In a normal pre-pandemic month, more than five and a half million workers lost or left their job every month. As jobs are generated in these new areas, many currently employed people will look to fill them. That will create job openings that former restaurant and hotel workers can fill. The story is not as simple as this, as we know there is considerable discrimination in the labor market and many pockets of high unemployment, but we don’t have to imagine that we need to match up displaced workers directly with the newly created jobs in clean energy, child care and health care. The labor market is far more flexible than this story implies.

Anyhow, a full discussion of the post-pandemic economy is a much longer story, but the basic picture is actually a positive one. More telecommuting will mean a more productive and less polluting economy. It will also lead to more dispersion of higher paid jobs, benefiting many of the areas that have been left behind in the last four decades and lowering rents and house prices in places like New York City and San Francisco. If we can get through a very bad stretch for the country and the economy, the future could actually be quite bright. 

As we get more data in, it seems increasingly likely that we are looking at a horrible and prolonged recession, not a complete economic collapse of Great Depression proportions. The May employment report showed a substantial bounce back in employment, with jobs up by more than 2.5 million from the April level. Retail sales had a huge 17.7 percent jump in May, by far the largest on record, although they are still 6.1 percent below the May 2019 level.

Mortgage applications also show a considerable degree of confidence about the future, with both refinancing and purchase mortgages soaring. Mortgage applications for refinancing are up more than ten-fold from year-ago levels, while purchase applications are up 268.6 percent to the highest level in more than 11 years. The latter is far more important for the economy since it implies people are buying homes, which typically lead to the purchase of new appliances and spending on renovations.

These data, and a variety of surveys of consumers and businesses, do not show an economy in collapse. At the same time, there is little reason to believe that we will see a robust rebound to anything resembling normal. We lost 22 million jobs between February and April. Even if we had seven more months adding jobs back at the May rate, we would still be down by more than 2 million jobs from the pre-pandemic level. And, we are not likely to see seven more months with job growth anything like May’s pace, without some very serious fiscal stimulus.

A new paper from Raj Chetty and co-authors provides some interesting insights on the problem the economy faces. Using real-time data from a number of private sources, it finds that there has been a sharp fall in consumption by people in the top income quartile of households, with relatively little change in consumption from the other three quartiles.

This drop is overwhelmingly associated with a sharp drop in demand for services, like restaurant meals, hair salons, and other personal services. Interestingly, the size of the drop is not affected to any substantial extent by laws on shutdowns. Areas where these services were fully available saw comparable declines in spending as areas where these services were still subject to lockdowns.

There are two major takeaways from these findings. First, the drop in demand that we have seen to date has little to do with declines in income. The top quartile has reduced its spending not because it lacks the income to spend, it has reduced spending because it is scared to spend in the areas where it would ordinarily be spending its money.

An implication is that any further efforts at boosting the economy should be better targeted than the first rounds. For example, giving $1,200 to every adult in the country was not a very effective way to boost the economy. While this was payment was phased out for very high-end earners, the phase out only affected the top 2-3 percent of the income distribution, the bulk of the top quartile received their checks even though they were not suffering any income loss as a result of the pandemic.

The other major take away is that if we want people to use restaurants, hair salons, gyms, and other services, the issue of legal shutdowns matters far less important than ensuring their safety. This means actually getting the pandemic under control. While virtually every wealthy country has been able to do this, outside of the Northeast corridor, new infections are higher than ever in the United States. This means that without a vaccine and/or effective treatment, we are likely to see demand for a wide range of services badly depressed for the foreseeable future.

This matters in a big way because these industries provide tens of millions of jobs largely to less-educated workers. These sectors also disproportionately employ women and people of color. If they continue to see demand at far below pre-pandemic levels, it will mean a massive and persistent increase in unemployment for the less-educated segments of the workforce. This will quickly reverse all the gains that lower-paid workers were able to make as the labor market tightened in the prior five years.

 

Shaping the Stimulus

The most immediate need in the next round of a rescue package to come from Congress is for money for state and local governments. Their budgets have been devastated by the loss of tax revenue due to the shutdown and the additional demand for services. The Center on Budget and Policy Priorities calculated that the shortfalls could be as high as $500 billion.

They have already laid off 1.6 million workers and this number will hugely increase if Congress does not provide a large chunk of money to make up for their shortfalls. Some people have pointed out that the laid-off workers were largely teachers, who were not paid for the period in which schools were shut down. This is true, but if state and local governments cannot get the money to make up shortfalls, many of these teachers may not be called back in the fall and other workers are likely to be laid off to make up the cost of paying the teachers who are called back. Cutbacks at the state and local level were one of the main reasons that the recovery from the Great Recession was so slow. We should not make an even larger mistake now.

The Post Office will also need substantial funding to stay in business, as it has seen both a sharp decline in revenue and sharp increase in spending due to efforts to keep its workers safe. As with state and local governments, the employees of the Post Office are disproportionately Black. This is due to the fact that Black workers in the public sector have faced less discrimination than Black workers in the private sector. As a result, the public sector has historically been an important source of middle-class jobs for Black workers. This will be threatened if the fallout from the pandemic forces large cutbacks in employment.

There has been a peculiar debate over the extension of the $600 weekly supplements to unemployment benefits that are scheduled to end next month. It is important to remember the reason these were included. We gave people this supplement because we did not want them to work. The point was to keep people whole through a period in which the economy was largely shut down in an effort to contain the virus.

In this context, the question we should be asking in deciding whether to continue the supplement is whether it is safe to work. This depends on our progress on containing the virus. One obvious way to determine the extent to which the pandemic has been contained is the positive rate on new tests. If the positive rate is below some low level, say 3 percent, then it would be reasonable to remove the supplement in that area (this can be county specific), however, if we are seeing high positive rates, then as a matter of policy it would make more sense to encourage people to stay at home than to work.

For the areas where the virus is under control, it would still be desirable to have some supplement to the standard benefit. Benefits in many states have been eroded in recent decades so that it would be very difficult for unemployed workers to survive on them. In a context where the nationwide unemployment rate is virtually certain to be in double digits through the rest of the year, most of the unemployed are not going to be able to find work. For these reasons, a smaller supplement, perhaps $200 a week, should be left in place until the economy has recovered more.

In addition, we should also increase SNAP benefits to protect those at the bottom of the income ladder. Food prices have risen sharply since the pandemic hit. These increases may be reversed in the months ahead, but for now, low-income families have to cope with high food prices, with no increase in benefits. It is also important to remember that SNAP spending is a small share of the total budget. At $70 billion a year, it is just 1.6 percent of total spending. It is less than one-fifth of the premium we pay each year for prescription drugs because of government-granted patent monopolies.

 

Longer Term Recovery

 

At the point where we have developed effective treatments and/or a vaccine, many people will go back to eating at restaurants and flying for vacations. However, there are some changes in spending patterns that are likely to be enduring.

It is likely that much of the increase in telecommuting will be permanent. This means that many fewer people will be going to downturn offices and taking advantage of restaurants, bars, gyms, and other services in central cities at lunch and after work. People are also likely to be taking many fewer business trips, as meetings will take place on Zoom. Also, many colleges and universities will likely be downsized, as more instruction takes place on the web, decreasing retail sales in college towns.

While there will be other long-term changes resulting from the pandemic (maybe even some questioning of government-granted patent monopolies for prescription drugs), the basic point is that large numbers of workers are likely to still be displaced even after the immediate impact of the pandemic is over.

This actually presents a great opportunity. If the private sector is not spending enough to fully employ the workforce, then the public sector has to fill the gap. In this case, we don’t need to have make-work jobs, we have enormous unmet needs.

Most obviously we need people to increase our capacity for clean energy and conservation. This can mean millions of jobs for people installing solar panels, insulation, and other energy-saving measures. We also need to ramp up our child care capacity. The lack of adequate child care was driven home in the pandemic as many health care and other essential workers had difficulty making arrangements when child care facilities shut down. We also need more health care workers as we move towards establishing a universal Medicare system. This will likely mean many more nurses, nurses’ assistants, and other health care professionals. And we will need social workers or other trained professionals who can be the first responders in many non-violent situations where the police are currently called in.   

We can’t imagine that all the people who lose their jobs in restaurants and hotels will be able to work installing solar panels or train to be nurses, but that is not how the labor market functions. In a normal pre-pandemic month, more than five and a half million workers lost or left their job every month. As jobs are generated in these new areas, many currently employed people will look to fill them. That will create job openings that former restaurant and hotel workers can fill. The story is not as simple as this, as we know there is considerable discrimination in the labor market and many pockets of high unemployment, but we don’t have to imagine that we need to match up displaced workers directly with the newly created jobs in clean energy, child care and health care. The labor market is far more flexible than this story implies.

Anyhow, a full discussion of the post-pandemic economy is a much longer story, but the basic picture is actually a positive one. More telecommuting will mean a more productive and less polluting economy. It will also lead to more dispersion of higher paid jobs, benefiting many of the areas that have been left behind in the last four decades and lowering rents and house prices in places like New York City and San Francisco. If we can get through a very bad stretch for the country and the economy, the future could actually be quite bright. 

For some reason, reporters feel it is part of their job to read politicians’ minds. We got another taste of this in a Washington Post news story pushing the idea of sending out another big check as a stimulus. The piece begins by telling readers:

“President Trump has told aides he is largely supportive of sending Americans another round of stimulus checks, believing the payments will boost the economy and help his chances at reelection in November, according to three people aware of internal administration deliberations.”

Of course, the Post has no idea what Trump believes about the economic impact of stimulus checks. It knows what he says about the economic impact. If Trump “believes” that the checks will boost his re-election chances then he is likely to say that he thinks they will boost the economy, regardless of what he really believes.

As a practical matter, these checks are likely a very poor form of stimulus. The point of another round of spending is first and foremost to help the people who have lost their jobs or in other ways have been hurt by the pandemic. The vast majority of people getting another round of pandemic checks will not be in this category.

The other motive for a stimulus is to increase demand in the economy. Sending checks to people who have not lost their jobs or seen a large decline in their income is likely to have little impact on spending, as shown by the record saving rate seen in April. The saving rate will be lower in May, but likely still extraordinarily high. Many potential check recipients are hesitant to spend money because they are worried about the pandemic, not because they don’t have it.

Incredibly, the Post does not give the view of any economists who have this perspective, even though they would not be hard to find. The only reservations about another round of stimulus mentioned in the piece come from Republicans concerned about the size of the budget deficit.

For some reason, reporters feel it is part of their job to read politicians’ minds. We got another taste of this in a Washington Post news story pushing the idea of sending out another big check as a stimulus. The piece begins by telling readers:

“President Trump has told aides he is largely supportive of sending Americans another round of stimulus checks, believing the payments will boost the economy and help his chances at reelection in November, according to three people aware of internal administration deliberations.”

Of course, the Post has no idea what Trump believes about the economic impact of stimulus checks. It knows what he says about the economic impact. If Trump “believes” that the checks will boost his re-election chances then he is likely to say that he thinks they will boost the economy, regardless of what he really believes.

As a practical matter, these checks are likely a very poor form of stimulus. The point of another round of spending is first and foremost to help the people who have lost their jobs or in other ways have been hurt by the pandemic. The vast majority of people getting another round of pandemic checks will not be in this category.

The other motive for a stimulus is to increase demand in the economy. Sending checks to people who have not lost their jobs or seen a large decline in their income is likely to have little impact on spending, as shown by the record saving rate seen in April. The saving rate will be lower in May, but likely still extraordinarily high. Many potential check recipients are hesitant to spend money because they are worried about the pandemic, not because they don’t have it.

Incredibly, the Post does not give the view of any economists who have this perspective, even though they would not be hard to find. The only reservations about another round of stimulus mentioned in the piece come from Republicans concerned about the size of the budget deficit.

Bankruptcy typically means that shareholders are largely or totally wiped out. This should raise the question of why CEOs of companies that went bankrupt are getting large bonuses from these companies, as this NYT article points out.

These payments are consistent with a story where corporate boards primarily owe their  allegiance to top management, not to shareholders. It would have been worth noting this fact.

Bankruptcy typically means that shareholders are largely or totally wiped out. This should raise the question of why CEOs of companies that went bankrupt are getting large bonuses from these companies, as this NYT article points out.

These payments are consistent with a story where corporate boards primarily owe their  allegiance to top management, not to shareholders. It would have been worth noting this fact.

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