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.

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

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

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

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

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

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

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

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

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

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

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

The Origins of QE

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

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

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

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

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

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

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

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

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

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

 

Wealth Inequality: Should It Trouble Us?

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

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

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

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

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

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

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

 

What Would We Gain by Ending QE Now?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Origins of QE

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

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

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

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

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

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

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

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

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

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

 

Wealth Inequality: Should It Trouble Us?

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

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

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

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

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

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

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

 

What Would We Gain by Ending QE Now?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

 

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

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

Housing Inflation – It’s Not What You Pay

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Commuting Costs

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

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

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

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

Health care

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

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

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

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

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

Food Price and Global Warming

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

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

Inflation and Well-Being

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

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

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

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

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

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

Housing Inflation – It’s Not What You Pay

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Commuting Costs

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

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

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

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

Health care

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

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

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

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

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

Food Price and Global Warming

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

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

Inflation and Well-Being

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

 

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

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

The TRIPS Waiver Charade

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

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

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

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

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

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

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

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

Open-Sourcing Technology

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Has Anyone Heard of China?

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

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

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

 

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

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

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

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

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

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

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

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

The TRIPS Waiver Charade

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

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

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

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

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

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

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

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

Open-Sourcing Technology

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Has Anyone Heard of China?

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

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

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

 

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

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

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

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

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

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

I get why the Right likes to make it seem that the huge upward redistribution of the last four decades was just the result of the market working its magic, but why do so many liberals feel the need to play along? We got yet another example of this bizarre behavior in a column by Washington Post columnist E.J. Dionne, which tells us:

“But the far-right surge [e.g., Donald Trump] also worked in tandem with the pandemic’s challenges to bring to a close the era of austerity and unconstrained globalized capitalism. The way opened for a new wave of government activism.”

The idea that global capitalism in the last four decades has been in any sense “unconstrained” is frankly so laughable that no serious newspaper or magazine should ever print anything making such an absurd claim. In this period, the importance of government-granted patent and copyright monopolies has exploded. They may redistribute more than $1 trillion annually from the rest of us to those in a position to benefit from these monopolies. That comes to almost $8,000 a year for every family in the country. It is close to half of all pre-tax corporate profits. It’s hard to believe that anyone who has been alive and awake over this period could have missed the importance of this massive government intervention in the economy.

Similarly, the push for free trade has been very one-sided. While our trade negotiators worked hard to eliminate barriers to trade in manufactured goods, thereby pushing down the wages of workers in the manufacturing sector and workers without college degrees more generally, they did almost nothing to eliminate the protectionist barriers that allow our doctors and dentists to earn roughly twice as much as their counterparts in other wealthy countries. This transfers roughly $100 billion annually, or $700 per family, from the rest of us to doctors earning an average of $300k a year and dentists earning an average of more than $200k. 

I totally understand why the beneficiaries of this upward redistribution would want to pretend it is just the natural working of the market, but why the hell would people who claim to be opposed to it, like Dionne, go along with this farce? And perhaps even worse, why do media outlets with pretenses of being serious print it?

I get why the Right likes to make it seem that the huge upward redistribution of the last four decades was just the result of the market working its magic, but why do so many liberals feel the need to play along? We got yet another example of this bizarre behavior in a column by Washington Post columnist E.J. Dionne, which tells us:

“But the far-right surge [e.g., Donald Trump] also worked in tandem with the pandemic’s challenges to bring to a close the era of austerity and unconstrained globalized capitalism. The way opened for a new wave of government activism.”

The idea that global capitalism in the last four decades has been in any sense “unconstrained” is frankly so laughable that no serious newspaper or magazine should ever print anything making such an absurd claim. In this period, the importance of government-granted patent and copyright monopolies has exploded. They may redistribute more than $1 trillion annually from the rest of us to those in a position to benefit from these monopolies. That comes to almost $8,000 a year for every family in the country. It is close to half of all pre-tax corporate profits. It’s hard to believe that anyone who has been alive and awake over this period could have missed the importance of this massive government intervention in the economy.

Similarly, the push for free trade has been very one-sided. While our trade negotiators worked hard to eliminate barriers to trade in manufactured goods, thereby pushing down the wages of workers in the manufacturing sector and workers without college degrees more generally, they did almost nothing to eliminate the protectionist barriers that allow our doctors and dentists to earn roughly twice as much as their counterparts in other wealthy countries. This transfers roughly $100 billion annually, or $700 per family, from the rest of us to doctors earning an average of $300k a year and dentists earning an average of more than $200k. 

I totally understand why the beneficiaries of this upward redistribution would want to pretend it is just the natural working of the market, but why the hell would people who claim to be opposed to it, like Dionne, go along with this farce? And perhaps even worse, why do media outlets with pretenses of being serious print it?

We are so fortunate that we have reporters at the Washington Post who can tell us the true motives of politicians. In a piece on the decision by Republican Senators to refuse to go along with increased I.R.S. funding for enforcement, the Post told readers:

“Senators had hoped to raise about $100 billion by empowering the Internal Revenue Service to pursue unpaid federal taxes, but Republicans balked at the idea out of a concern it would give the tax-collection agency too much power to scrutinize families’ and corporations’ finances.”

It’s really great that the Post can tell us that the Republicans concern here was that the I.R.S. would be too powerful. Those of us who are unable to read politicians’ minds might have thought that the Republicans didn’t want to increase I.R.S. enforcement because it would allow it to collect more taxes from rich people who cheat on their taxes. Since many of these rich people contribute to Republican politicians, this would be in effect a service to the people who help to keep them in office.

Thankfully we have the Washington Post to tell us that the Republican effort to block a crackdown on rich tax cheats had nothing to do with serving their campaign contributors. It was all about a principled commitment to an ineffectual tax authority.  

We are so fortunate that we have reporters at the Washington Post who can tell us the true motives of politicians. In a piece on the decision by Republican Senators to refuse to go along with increased I.R.S. funding for enforcement, the Post told readers:

“Senators had hoped to raise about $100 billion by empowering the Internal Revenue Service to pursue unpaid federal taxes, but Republicans balked at the idea out of a concern it would give the tax-collection agency too much power to scrutinize families’ and corporations’ finances.”

It’s really great that the Post can tell us that the Republicans concern here was that the I.R.S. would be too powerful. Those of us who are unable to read politicians’ minds might have thought that the Republicans didn’t want to increase I.R.S. enforcement because it would allow it to collect more taxes from rich people who cheat on their taxes. Since many of these rich people contribute to Republican politicians, this would be in effect a service to the people who help to keep them in office.

Thankfully we have the Washington Post to tell us that the Republican effort to block a crackdown on rich tax cheats had nothing to do with serving their campaign contributors. It was all about a principled commitment to an ineffectual tax authority.  

That data point probably should have been mentioned in a NYT article reporting that relatively few of the jobs created in the clean energy sector are high-paying union jobs. The piece tells readers that this means that the shift to clean energy could end up increasing inequality:

“While Mr. Biden has proposed higher wage floors for such work, the Senate prospects for this approach are murky. And absent such protections — or even with them — there’s a nagging concern among worker advocates that the shift to green jobs may reinforce inequality rather than alleviate it.”

Last year, there were 219,000 union members employed by utilities. Even if these jobs were eliminated over night it would have a small impact on inequality in a workforce of 150 million. As a practical matter, even an aggressive push towards clean energy would likely still mean phasing out these jobs over a 20 year period. That would mean losing an average of 22,000 jobs a year.

The impact of this pace of job loss in the utility sector would be dwarfed by other factors, like government-granted patent and copyright monopolies or the overall unemployment rate, in determining the extent of inequality in the country. The impact of the explosion of the trade deficit in the first decade of this century was an order of magnitude larger, yet it received almost no attention from the media at the time it was happening. 

If we are concerned about inequality, we still should try to promote union jobs in the clean energy sector as much as possible. However, union employment in the sector is simply too small to have a major impact on economy-wide measures of inequality. 

 

That data point probably should have been mentioned in a NYT article reporting that relatively few of the jobs created in the clean energy sector are high-paying union jobs. The piece tells readers that this means that the shift to clean energy could end up increasing inequality:

“While Mr. Biden has proposed higher wage floors for such work, the Senate prospects for this approach are murky. And absent such protections — or even with them — there’s a nagging concern among worker advocates that the shift to green jobs may reinforce inequality rather than alleviate it.”

Last year, there were 219,000 union members employed by utilities. Even if these jobs were eliminated over night it would have a small impact on inequality in a workforce of 150 million. As a practical matter, even an aggressive push towards clean energy would likely still mean phasing out these jobs over a 20 year period. That would mean losing an average of 22,000 jobs a year.

The impact of this pace of job loss in the utility sector would be dwarfed by other factors, like government-granted patent and copyright monopolies or the overall unemployment rate, in determining the extent of inequality in the country. The impact of the explosion of the trade deficit in the first decade of this century was an order of magnitude larger, yet it received almost no attention from the media at the time it was happening. 

If we are concerned about inequality, we still should try to promote union jobs in the clean energy sector as much as possible. However, union employment in the sector is simply too small to have a major impact on economy-wide measures of inequality. 

 

The New York Times had a bizarre piece by Karen Petrou attacking the Fed for its low interest rate policy. The column title tells the story, “Only the Rich Could Love This Economic Recovery.”

This is bizarre, because people who read the news section of the NYT would know that workers have more bargaining power in the economy right now than at any point since at least the late 1990s. The quit rate hit a record level in April, and even with a drop in May, it is still at a 20-year peak. Workers, especially at the bottom end of the wage ladder, are seeing substantial wage gains.

The pandemic payments have also allowed many families to pay down debt, leaving their finances in much better shape than before the recession. Also, the expanded subsidies in the health care exchanges have allowed many people to get health care insurance who could not previously afford it. The NYT had a very good column earlier this month by Julia Coronado laying out many of the measures showing the improved economic plight of low and middle class families. 

It’s very hard to understand Petrou’s case. It’s true that low interest rates tend to raise asset prices, and since the rich own a hugely disproportionate share of assets, this means that they will get richer if rates are low, but it is hard to see how low and middle class people would benefit from higher interest rates.

Petrou tells readers in a section headlined “What Is the Fed For”:

“The Fed’s role is spelled out under its statutory charter, which establishes the road map for unraveling the inequality it helped create. 

“The charter’s first goal is “full employment,” meaning pretty much everyone who wants a job has one. This would get a meaningful, immediate boost if the Fed reversed its cheap-debt policies that lead companies to take out debt to fund investor profits, instead of funding new plants or products.

“Another goal is “price stability,” best measured by what it costs for a middle-class household to make ends meet. The measure the Fed uses misses the cost increases obscuring a household-to-debt build-up for all but the wealthiest. The Fed thus misses the long-term risks this debt poses to financial security, home ownership, and a secure retirement.

“The law has a third Fed goal: “moderate” interest rates. Rates below zero after taking inflation into account are anything but moderate, so they must be gradually raised, starting now.”

The first claim basically turns reality on its head. There is no plausible story whereby raising interest rates will lead businesses to increase spending on new plants and products.

How could that possibly work? Ford sees that its borrowing costs have risen by two percentage points so it then says, “let’s build new factories and start new car lines.” This is absurd on its face. It is possible to exaggerate the impact of interest rates on investment, but there is no doubt that lower rates, not higher rates, lead to more investment.

Low rates also make it easier for people to buy homes. We have seen a huge building boom since the early days of the pandemic when the Fed pushed interest rates to new lows. Millions of homeowners also took advantage of low interest rates to refinance their homes, saving thousands of dollars a year in mortgage payments. State and local governments were also able to take advantage of low interest rates to reduce their borrowing costs, freeing up money for other needs.

The second complaint, that low interest rates somehow harm ordinary people’s finances is also 180 degrees at odds with reality. And the third complaint is simply that Petrou would like higher interest rates.

In short, this tirade against the Fed’s low interest rate policy and the dismal state of the economy makes absolutely zero sense. Given the horrors of the pandemic, the economy is remarkably good shape, and the Fed’s interest rate policy has been a big factor in sustaining the economy through the recession and now boosting its recovery. 

The New York Times had a bizarre piece by Karen Petrou attacking the Fed for its low interest rate policy. The column title tells the story, “Only the Rich Could Love This Economic Recovery.”

This is bizarre, because people who read the news section of the NYT would know that workers have more bargaining power in the economy right now than at any point since at least the late 1990s. The quit rate hit a record level in April, and even with a drop in May, it is still at a 20-year peak. Workers, especially at the bottom end of the wage ladder, are seeing substantial wage gains.

The pandemic payments have also allowed many families to pay down debt, leaving their finances in much better shape than before the recession. Also, the expanded subsidies in the health care exchanges have allowed many people to get health care insurance who could not previously afford it. The NYT had a very good column earlier this month by Julia Coronado laying out many of the measures showing the improved economic plight of low and middle class families. 

It’s very hard to understand Petrou’s case. It’s true that low interest rates tend to raise asset prices, and since the rich own a hugely disproportionate share of assets, this means that they will get richer if rates are low, but it is hard to see how low and middle class people would benefit from higher interest rates.

Petrou tells readers in a section headlined “What Is the Fed For”:

“The Fed’s role is spelled out under its statutory charter, which establishes the road map for unraveling the inequality it helped create. 

“The charter’s first goal is “full employment,” meaning pretty much everyone who wants a job has one. This would get a meaningful, immediate boost if the Fed reversed its cheap-debt policies that lead companies to take out debt to fund investor profits, instead of funding new plants or products.

“Another goal is “price stability,” best measured by what it costs for a middle-class household to make ends meet. The measure the Fed uses misses the cost increases obscuring a household-to-debt build-up for all but the wealthiest. The Fed thus misses the long-term risks this debt poses to financial security, home ownership, and a secure retirement.

“The law has a third Fed goal: “moderate” interest rates. Rates below zero after taking inflation into account are anything but moderate, so they must be gradually raised, starting now.”

The first claim basically turns reality on its head. There is no plausible story whereby raising interest rates will lead businesses to increase spending on new plants and products.

How could that possibly work? Ford sees that its borrowing costs have risen by two percentage points so it then says, “let’s build new factories and start new car lines.” This is absurd on its face. It is possible to exaggerate the impact of interest rates on investment, but there is no doubt that lower rates, not higher rates, lead to more investment.

Low rates also make it easier for people to buy homes. We have seen a huge building boom since the early days of the pandemic when the Fed pushed interest rates to new lows. Millions of homeowners also took advantage of low interest rates to refinance their homes, saving thousands of dollars a year in mortgage payments. State and local governments were also able to take advantage of low interest rates to reduce their borrowing costs, freeing up money for other needs.

The second complaint, that low interest rates somehow harm ordinary people’s finances is also 180 degrees at odds with reality. And the third complaint is simply that Petrou would like higher interest rates.

In short, this tirade against the Fed’s low interest rate policy and the dismal state of the economy makes absolutely zero sense. Given the horrors of the pandemic, the economy is remarkably good shape, and the Fed’s interest rate policy has been a big factor in sustaining the economy through the recession and now boosting its recovery. 

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