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.

That is the takeaway readers of this piece on efforts to reform Section 230 would likely get. Section 230 is the provision of the Communications Decency Act, which protects Internet intermediaries from liability for third-party content. While the New York Times or CNN could get sued if they ran an ad or ran a letter or commentary that defamed an individual or corporation, because of Section 230, Facebook would face no risk from carrying the same material. Repealing Section 230 would mean that Facebook would be subject to the same liability rules as its print and broadcast competitors. (Here’s my longer discussion of the issue.)

While the piece begins by noting that both Trump and Biden called for the repeal of Section 230, there is no one cited in the piece who advocates this position. It does include a quote from Representative Anna G. Eshoo telling readers:

“When someone says eliminate Section 230, the first thing it says to me is that they don’t really understand it.”

People who can remember back to the 2020 election may recall appeals to Mark Zuckerberg and Jack Dorsey to take steps to limit the amount of disinformation spread over Facebook and Twitter. Both of them actually did make efforts to block false claims from being carried over their networks. However, they had no legal obligation to do so. If, for example, someone decided to spend a billion dollars on ads asserting that Joe Biden was a pedophile, Mark Zuckerberg would have every legal right to pocket the cash.

Apparently, Representative Eshoo thinks it is fine to have a political system that relies on the goodwill of billionaires, but people who believe in democracy are troubled by this, and many of them do know what they are talking about.

That is the takeaway readers of this piece on efforts to reform Section 230 would likely get. Section 230 is the provision of the Communications Decency Act, which protects Internet intermediaries from liability for third-party content. While the New York Times or CNN could get sued if they ran an ad or ran a letter or commentary that defamed an individual or corporation, because of Section 230, Facebook would face no risk from carrying the same material. Repealing Section 230 would mean that Facebook would be subject to the same liability rules as its print and broadcast competitors. (Here’s my longer discussion of the issue.)

While the piece begins by noting that both Trump and Biden called for the repeal of Section 230, there is no one cited in the piece who advocates this position. It does include a quote from Representative Anna G. Eshoo telling readers:

“When someone says eliminate Section 230, the first thing it says to me is that they don’t really understand it.”

People who can remember back to the 2020 election may recall appeals to Mark Zuckerberg and Jack Dorsey to take steps to limit the amount of disinformation spread over Facebook and Twitter. Both of them actually did make efforts to block false claims from being carried over their networks. However, they had no legal obligation to do so. If, for example, someone decided to spend a billion dollars on ads asserting that Joe Biden was a pedophile, Mark Zuckerberg would have every legal right to pocket the cash.

Apparently, Representative Eshoo thinks it is fine to have a political system that relies on the goodwill of billionaires, but people who believe in democracy are troubled by this, and many of them do know what they are talking about.

A friend sent me a new study showing that the top five executives of major corporations pocketed between 15 and 19 cents of every dollar their companies gained from two recent tax cuts. This paper, by Eric Ohrn at Grinnell College, should be a really big deal.

The basic point is one that I, and others, have been making for a long time. CEOs and other top executives rip off the companies they work for. They are not worth the $20 million or more that many of them pocket each year. Again, this is not a moral judgment about their value to society. It is a simple dollars-and-cents calculation about how much money they produce for shareholders, and this piece suggests that it is nothing close to what they pocket.

The reason why this finding is a big deal is that it is yet another piece of evidence that executives are able to pocket money that they did nothing to earn. In the case of these tax cuts, company profits increased because of a change in government policy, not because their management had developed new products, increased market share, or reduced production costs. (Some of them presumably paid for lobbyists to push for the tax breaks, so their contribution to higher profits may not have been exactly nothing.)

There is much other work along similar lines. An analysis of the pay of oil company CEOs found that they got large increases in compensation when oil prices rose. Since the CEOs were not responsible for the rise in world oil prices, this meant they were getting compensated for factors that had little to do with their work. A more recent study found the same result. Another study found that CEO pay soared in the 1990s because it seemed that corporate boards did not understand the value of the options they were issuing.

A few years ago, Jessica Schieder and I did a paper showing that the loss of the tax deduction for CEO pay in the health insurance industry, which was part of the Affordable Care Act, had no impact on CEO pay. The loss of this deduction effectively raised the cost of CEO pay to firms by more than 50 percent. If CEO pay was closely related to the value they added to the company’s bottom line, we should have unambiguously expected to see some decline in CEO pay in the industry relative to other sectors. In a wide variety of specifications, we found no negative effect. (Bebchuk and Fried’s book, Pay Without Performance, presents a wide range of evidence on this issue.)

 

It Matters for Inequality if Top Executives are Ripping Off Their Companies

As can be easily shown the bulk of the upward redistribution from the 1970s was not due to a shift from wages to profits, it was due to an upward redistribution among wage earners. Instead of money going to ordinary workers, it was going to those at the top end of the wage distribution, such as doctors and dentists, STEM workers, and especially to Wall Street trader types and top corporate management. If we want to reverse this upward redistribution then we have to take back the money from those who got it.

If top management actually earned their pay, in the sense of increasing profits for the companies they worked for, then there would be at least some sort of trade-off. Reducing their pay would mean a corresponding loss in profit for these companies. It still might be desirable to see top executives pocket less money, but shareholders would be unhappy in this story since they will have fewer profits as a result.

But if CEOs and other top management are not increasing profits in a way that is commensurate with their pay, their excess pay is a direct drain on the companies that employ them. From the standpoint of the shareholders, it is no more desirable to pay a CEO $20 million, if someone just as effective can be hired for $2 million than to pay an extra $18 million for rent, utilities, or any other input. It is money thrown in the garbage.

As I have argued in the past, the excess pay for CEOs is not just an issue because of a relatively small number of very highly paid top executives. It matters because of its impact on pay structures throughout the economy. When the CEO gets paid more, it means more money for those next to the CEO in the corporate hierarchy and even the third-tier corporate executives. That leaves less money for everyone else.

The Ohrn study found that 15 to 19 percent of the benefits of the tax breaks he examined went to the top five executives. If half this amount went to the next twenty or thirty people in the corporate hierarchy, it would imply between 22 and 37 percent of the money gained from a tax break went to twenty-five or thirty-five highest paid people in the corporate hierarchy.

To throw some numbers around, if the CEO is getting $20 million, then the rest of the top five executives are likely making close to $10 million, with the next echelon making $1 to $2 million. If we envision pay structures comparable to what we had in the 1960s and 1970s, CEOs would be getting $2 to $3 million. The next four executives likely earning between $1 to $2 million, and the third tier getting paid in the high six figures. With the pay structures from the corporate sector carrying over to other sectors, such as government, universities, and non-profits, we would be looking at a very different economy.

 

Why Do CEOs Walk Away with the Store?

If CEOs really don’t earn their pay, the obvious question is how do they get away with it? The answer is easy to see, they largely control the boards of directors that determine their pay. Top management typically plays a large role in getting people appointed to the board, and once there, the best way to remain on the board is to avoid pissing off your colleagues. More than 99 percent of the directors nominated for re-election by the board win their elections.

Being a corporate director is great work if you can get it. As Steven Clifford documents in his book, the CEO Pay Machine, which is largely based on his experience at several corporate boards, being a director can pay several hundred thousand dollars a year for 200 to 400 hours of work. Directors typically want to keep their jobs, and the best way to do this is by avoiding asking pesky questions like, “can we get a CEO who is just as good for half the money?”

While many people seem to recognize that CEOs rip off their companies, they fail to see the obvious implication, that shareholders have a direct interest in lowering CEO pay. For example, a common complaint about share buybacks is that they allow top management to manipulate stock prices to increase the value of their options.

If this is true, then shareholders should want buybacks to be more tightly restricted, since they are allowing top management to steal from the company. If shareholders actually wanted CEOs to get more money from their options, they would simply give them more options, not allow them to manipulate share prices. Yet, somehow buybacks in their current form are still seen as serving shareholders.

As a practical matter, it is easy to show that the last two decades have not been a period of especially high returns for shareholders. This is in spite of the large cut in corporate taxes under the Trump administration.

There seems to be confusion on this point because there has been a large run-up in stock prices over this period. Much of this story is that shareholders are increasingly getting their returns in the form of higher share prices rather than dividends.

Before 1980, dividends were typically 3-4 percent of the share price, providing close to half of the return to shareholders. In recent years, dividend yields have dropped to not much over 1 percent, with the rest of the return coming from a rise in share prices. If we only look at the share price, the story looks very good for shareholders, but if we look at the total return, the opposite is the case.[1]

 

Stockholders as Allies in Containing CEO Pay

If CEOs really are ripping off the companies they lead, then shareholders should be allies in the effort to contain CEO pay. This would mean that giving shareholders more ability to control corporate boards would result in lower CEO pay. (As with much past work, Ohrn’s study found that better corporate governance reduced the portion of the tax breaks the CEO and other top executives were able to pocket.)

There are many ways to increase the ability of shareholders to contain CEO pay, but my favorite is to build on the “Say on Pay,” provision of the Dodd-Frank financial reform law. This provision required companies to submit their CEO compensation package to an up or down vote of the shareholders every three years. The vote is nonbinding, but it allows for direct input from shareholders. As it is, the vast majority of pay packages are approved with less than 3.0 percent being voted down.

I would take the Say on Pay provision a step further by imposing a serious penalty on corporate boards when a pay package gets voted down. My penalty would be that they lose their own pay if the shareholders vote down the CEO pay package.

While a small share of pay packages get voted down, my guess is that if just one or two corporate boards lost their pay through this route, it would radically transform the way boards view CEO pay. They suddenly would take very seriously the question of whether they could get away with paying their CEO less money.   

I also like this approach because it is no more socialistic than the current system of corporate governance. It would be hard to make an argument that giving shareholders more control over CEO pay is a step towards communism.

The basic point here is a simple one: the rules of corporate governance are unavoidably set by the government. There is no single way to structure these rules. As we have now structured them, they make it easy for CEOs to rip off the companies they work for. We can make rules that make it harder for CEOs to take advantage of their employers and easier for shareholders to contain pay.

Progressives should strongly favor mechanisms that contain CEO pay because of the impact that high CEO pay has on wage inequality more generally. And, shareholders should be allies in this effort. There is no reason for us to feel sorry for shareholders, who are the richest people in the country, but they can help us contain CEO pay and we should welcome their assistance.   

 

 

 

[1] There is an interesting question as to whether paying money to shareholders through buybacks, rather than as dividends, has led to a rise in price-to-earnings ratios. If we believe in efficient markets, the form of the payout should not matter (ignoring possible information effects), but given the extraordinary runups in price-to-earnings ratios in the last three decades, the possibility that buybacks have played a role cannot be ruled out. If this is in fact the case, it creates a scenario in which management would prefer the buyback route to maximize the value of their options, current shareholders are largely indifferent between getting payouts as buybacks or dividends, but future shareholders are disadvantaged by having to buy stock at a higher price-to-earnings ratio.   

A friend sent me a new study showing that the top five executives of major corporations pocketed between 15 and 19 cents of every dollar their companies gained from two recent tax cuts. This paper, by Eric Ohrn at Grinnell College, should be a really big deal.

The basic point is one that I, and others, have been making for a long time. CEOs and other top executives rip off the companies they work for. They are not worth the $20 million or more that many of them pocket each year. Again, this is not a moral judgment about their value to society. It is a simple dollars-and-cents calculation about how much money they produce for shareholders, and this piece suggests that it is nothing close to what they pocket.

The reason why this finding is a big deal is that it is yet another piece of evidence that executives are able to pocket money that they did nothing to earn. In the case of these tax cuts, company profits increased because of a change in government policy, not because their management had developed new products, increased market share, or reduced production costs. (Some of them presumably paid for lobbyists to push for the tax breaks, so their contribution to higher profits may not have been exactly nothing.)

There is much other work along similar lines. An analysis of the pay of oil company CEOs found that they got large increases in compensation when oil prices rose. Since the CEOs were not responsible for the rise in world oil prices, this meant they were getting compensated for factors that had little to do with their work. A more recent study found the same result. Another study found that CEO pay soared in the 1990s because it seemed that corporate boards did not understand the value of the options they were issuing.

A few years ago, Jessica Schieder and I did a paper showing that the loss of the tax deduction for CEO pay in the health insurance industry, which was part of the Affordable Care Act, had no impact on CEO pay. The loss of this deduction effectively raised the cost of CEO pay to firms by more than 50 percent. If CEO pay was closely related to the value they added to the company’s bottom line, we should have unambiguously expected to see some decline in CEO pay in the industry relative to other sectors. In a wide variety of specifications, we found no negative effect. (Bebchuk and Fried’s book, Pay Without Performance, presents a wide range of evidence on this issue.)

 

It Matters for Inequality if Top Executives are Ripping Off Their Companies

As can be easily shown the bulk of the upward redistribution from the 1970s was not due to a shift from wages to profits, it was due to an upward redistribution among wage earners. Instead of money going to ordinary workers, it was going to those at the top end of the wage distribution, such as doctors and dentists, STEM workers, and especially to Wall Street trader types and top corporate management. If we want to reverse this upward redistribution then we have to take back the money from those who got it.

If top management actually earned their pay, in the sense of increasing profits for the companies they worked for, then there would be at least some sort of trade-off. Reducing their pay would mean a corresponding loss in profit for these companies. It still might be desirable to see top executives pocket less money, but shareholders would be unhappy in this story since they will have fewer profits as a result.

But if CEOs and other top management are not increasing profits in a way that is commensurate with their pay, their excess pay is a direct drain on the companies that employ them. From the standpoint of the shareholders, it is no more desirable to pay a CEO $20 million, if someone just as effective can be hired for $2 million than to pay an extra $18 million for rent, utilities, or any other input. It is money thrown in the garbage.

As I have argued in the past, the excess pay for CEOs is not just an issue because of a relatively small number of very highly paid top executives. It matters because of its impact on pay structures throughout the economy. When the CEO gets paid more, it means more money for those next to the CEO in the corporate hierarchy and even the third-tier corporate executives. That leaves less money for everyone else.

The Ohrn study found that 15 to 19 percent of the benefits of the tax breaks he examined went to the top five executives. If half this amount went to the next twenty or thirty people in the corporate hierarchy, it would imply between 22 and 37 percent of the money gained from a tax break went to twenty-five or thirty-five highest paid people in the corporate hierarchy.

To throw some numbers around, if the CEO is getting $20 million, then the rest of the top five executives are likely making close to $10 million, with the next echelon making $1 to $2 million. If we envision pay structures comparable to what we had in the 1960s and 1970s, CEOs would be getting $2 to $3 million. The next four executives likely earning between $1 to $2 million, and the third tier getting paid in the high six figures. With the pay structures from the corporate sector carrying over to other sectors, such as government, universities, and non-profits, we would be looking at a very different economy.

 

Why Do CEOs Walk Away with the Store?

If CEOs really don’t earn their pay, the obvious question is how do they get away with it? The answer is easy to see, they largely control the boards of directors that determine their pay. Top management typically plays a large role in getting people appointed to the board, and once there, the best way to remain on the board is to avoid pissing off your colleagues. More than 99 percent of the directors nominated for re-election by the board win their elections.

Being a corporate director is great work if you can get it. As Steven Clifford documents in his book, the CEO Pay Machine, which is largely based on his experience at several corporate boards, being a director can pay several hundred thousand dollars a year for 200 to 400 hours of work. Directors typically want to keep their jobs, and the best way to do this is by avoiding asking pesky questions like, “can we get a CEO who is just as good for half the money?”

While many people seem to recognize that CEOs rip off their companies, they fail to see the obvious implication, that shareholders have a direct interest in lowering CEO pay. For example, a common complaint about share buybacks is that they allow top management to manipulate stock prices to increase the value of their options.

If this is true, then shareholders should want buybacks to be more tightly restricted, since they are allowing top management to steal from the company. If shareholders actually wanted CEOs to get more money from their options, they would simply give them more options, not allow them to manipulate share prices. Yet, somehow buybacks in their current form are still seen as serving shareholders.

As a practical matter, it is easy to show that the last two decades have not been a period of especially high returns for shareholders. This is in spite of the large cut in corporate taxes under the Trump administration.

There seems to be confusion on this point because there has been a large run-up in stock prices over this period. Much of this story is that shareholders are increasingly getting their returns in the form of higher share prices rather than dividends.

Before 1980, dividends were typically 3-4 percent of the share price, providing close to half of the return to shareholders. In recent years, dividend yields have dropped to not much over 1 percent, with the rest of the return coming from a rise in share prices. If we only look at the share price, the story looks very good for shareholders, but if we look at the total return, the opposite is the case.[1]

 

Stockholders as Allies in Containing CEO Pay

If CEOs really are ripping off the companies they lead, then shareholders should be allies in the effort to contain CEO pay. This would mean that giving shareholders more ability to control corporate boards would result in lower CEO pay. (As with much past work, Ohrn’s study found that better corporate governance reduced the portion of the tax breaks the CEO and other top executives were able to pocket.)

There are many ways to increase the ability of shareholders to contain CEO pay, but my favorite is to build on the “Say on Pay,” provision of the Dodd-Frank financial reform law. This provision required companies to submit their CEO compensation package to an up or down vote of the shareholders every three years. The vote is nonbinding, but it allows for direct input from shareholders. As it is, the vast majority of pay packages are approved with less than 3.0 percent being voted down.

I would take the Say on Pay provision a step further by imposing a serious penalty on corporate boards when a pay package gets voted down. My penalty would be that they lose their own pay if the shareholders vote down the CEO pay package.

While a small share of pay packages get voted down, my guess is that if just one or two corporate boards lost their pay through this route, it would radically transform the way boards view CEO pay. They suddenly would take very seriously the question of whether they could get away with paying their CEO less money.   

I also like this approach because it is no more socialistic than the current system of corporate governance. It would be hard to make an argument that giving shareholders more control over CEO pay is a step towards communism.

The basic point here is a simple one: the rules of corporate governance are unavoidably set by the government. There is no single way to structure these rules. As we have now structured them, they make it easy for CEOs to rip off the companies they work for. We can make rules that make it harder for CEOs to take advantage of their employers and easier for shareholders to contain pay.

Progressives should strongly favor mechanisms that contain CEO pay because of the impact that high CEO pay has on wage inequality more generally. And, shareholders should be allies in this effort. There is no reason for us to feel sorry for shareholders, who are the richest people in the country, but they can help us contain CEO pay and we should welcome their assistance.   

 

 

 

[1] There is an interesting question as to whether paying money to shareholders through buybacks, rather than as dividends, has led to a rise in price-to-earnings ratios. If we believe in efficient markets, the form of the payout should not matter (ignoring possible information effects), but given the extraordinary runups in price-to-earnings ratios in the last three decades, the possibility that buybacks have played a role cannot be ruled out. If this is in fact the case, it creates a scenario in which management would prefer the buyback route to maximize the value of their options, current shareholders are largely indifferent between getting payouts as buybacks or dividends, but future shareholders are disadvantaged by having to buy stock at a higher price-to-earnings ratio.   

The Washington Post had an article on concerns among unions about job loss due to various measures from the Biden administration to promote clean energy. The article noted concerns that Biden’s agenda may lead to the loss of good-paying jobs in the fossil fuel sector.

It would have been helpful to point out how many jobs are potentially at stake. According to the Bureau of Labor Statistics, fossil fuel-powered electric plants and the pipeline industry, the two sectors discussed in the piece employ 78,700 and 48,200 workers, respectively.

The workers employed in fossil fuel power generation are a bit more than 0.05 percent of total employment, while employment in the pipeline industry is just over 0.03 percent. Employment in fossil fuel power generation was already falling rapidly under the Trump administration, declining by 16,800, or 18.0 percent, over the last four years.

It is also worth noting that in a typical (pre-pandemic) month, roughly 1.8 million workers lose their jobs. Over the course of a year, this would come to 27 million. (Some workers lose a job more than once in a year, so this does not mean 27 million workers lose their job.) The job loss in these industries due to the promotion of clean energy would presumably take place over many years, not all at once.

The fact that other workers frequently lose their jobs does not reduce the hardship for workers losing relatively good-paying jobs in the fossil fuel industry. But it is important to place the potential size of the job loss in some context. And, in the case of the fossil fuel power generation sector, it is important to note that there was already substantial job loss under Trump, so job loss is not a new problem that will be created by Biden’s policies, even if it may be accelerated.

The Washington Post had an article on concerns among unions about job loss due to various measures from the Biden administration to promote clean energy. The article noted concerns that Biden’s agenda may lead to the loss of good-paying jobs in the fossil fuel sector.

It would have been helpful to point out how many jobs are potentially at stake. According to the Bureau of Labor Statistics, fossil fuel-powered electric plants and the pipeline industry, the two sectors discussed in the piece employ 78,700 and 48,200 workers, respectively.

The workers employed in fossil fuel power generation are a bit more than 0.05 percent of total employment, while employment in the pipeline industry is just over 0.03 percent. Employment in fossil fuel power generation was already falling rapidly under the Trump administration, declining by 16,800, or 18.0 percent, over the last four years.

It is also worth noting that in a typical (pre-pandemic) month, roughly 1.8 million workers lose their jobs. Over the course of a year, this would come to 27 million. (Some workers lose a job more than once in a year, so this does not mean 27 million workers lose their job.) The job loss in these industries due to the promotion of clean energy would presumably take place over many years, not all at once.

The fact that other workers frequently lose their jobs does not reduce the hardship for workers losing relatively good-paying jobs in the fossil fuel industry. But it is important to place the potential size of the job loss in some context. And, in the case of the fossil fuel power generation sector, it is important to note that there was already substantial job loss under Trump, so job loss is not a new problem that will be created by Biden’s policies, even if it may be accelerated.

I guess it is hard to get news at the world’s leading newspapers, but this lengthy podcast on Bill Gates and his efforts to make vaccines available to the developing world never once mentioned the vaccines developed by China or Russia. This is more than a bit incredible because at this point, far more of the Russian and Chinese vaccines are going to developing countries than the vaccines supplied by Western countries through COVAX, the international consortium set up the WHO and supported by the Gates Foundation.

Are New York Times reporters prohibited from talking about the Chinese and Russian vaccines? 

This piece is also incredible in that it explicitly says that because Gates doesn’t want the government-granted patent monopoly system of financing from being challenged, there is no alternative. That could well be true, but it speaks to the incredible corruption of our politics and our economy, that because one incredibly rich person is opposed to having a corrupt, inefficient, and antiquated system reformed, it will not be reformed.

I guess it is hard to get news at the world’s leading newspapers, but this lengthy podcast on Bill Gates and his efforts to make vaccines available to the developing world never once mentioned the vaccines developed by China or Russia. This is more than a bit incredible because at this point, far more of the Russian and Chinese vaccines are going to developing countries than the vaccines supplied by Western countries through COVAX, the international consortium set up the WHO and supported by the Gates Foundation.

Are New York Times reporters prohibited from talking about the Chinese and Russian vaccines? 

This piece is also incredible in that it explicitly says that because Gates doesn’t want the government-granted patent monopoly system of financing from being challenged, there is no alternative. That could well be true, but it speaks to the incredible corruption of our politics and our economy, that because one incredibly rich person is opposed to having a corrupt, inefficient, and antiquated system reformed, it will not be reformed.

Washington Post columnist Steven Pearlstein had his final column today, and it is quite explicitly an attack on current progressive economic priorities. I will make three points, but first let me say that I have appreciated Pearlstein’s columns over the years. I have often criticized them, but I have also learned from them. And, I will give Pearlstein credit for talking to a diverse range of voices and not just repeating centrist claptrap, like some other economic commentators.

Okay, so getting to the beef:

  • Pearlstein ignores the political context for the big Biden ask;
  • The $15 minimum wage target is based on solid economic analysis;
  • The financial bubbles that worry Pearlstein do not threaten the economy.

Political Context of the Pandemic Recovery Package
Starting with political context, any serious person must recognize that the Republican Party is now committed to obstruction of anything Democrats do, regardless of its cost to the economy and the country. This is not a question of ideological differences, the Republicans simply want to regain power and are happy to see people lose their jobs, their businesses, and even their lives if it will advance that goal.

We saw the indifference to the country’s economic well-being in the Obama presidency where they did everything they could to slow the economy and limit job gains so that they would be better positioned in challenging Obama and the Democrats. The indifference to human lives has been clear in their response to the pandemic. They have vigorously fought efforts to limit the pandemic’s spread in order to get talking points that apparently sell with their base.

In this context, the risks for Biden and the Democrats of going too low hugely outweigh the risks of going too high. We know with absolute certainty that if the Biden recovery package is inadequate enough to restore strong growth, the Republicans will do everything they can to prevent Biden from having another bite at the apple. Like most economists, I recognize that the package may be too large and lead to inflationary pressures, but we have the tools to contain inflation, if it proves to be a problem. We don’t have any tools to overcome deliberate economic sabotage by Republicans if they end up with a majority of either house.

The $15 Minimum Wage Is Based on Solid Analysis
The $15 minimum wage target did originate as an alliteration (Fight for $15), not a carefully thought out economic analysis, but time has brought the two together. Back in 2015, John Schmitt from CEPR and Larry Mishel and David Cooper from EPI, carefully reviewed the evidence to determine a plausible minimum wage target for 2020. They concluded that a $12.00 minimum wage for 2020 would allow for substantial improvements in living standards for low wage workers, with little risk of large-scale job loss.

If we look out to 2025, the combined impact of inflation and productivity growth would imply a minimum wage target that is roughly 20 percent higher than the $12 target for 2020. That would put as $14.40 an hour, a stone’s throw away from the $15 target proposed by Biden.

To be clear, the job loss from a $15 an hour minimum wage in 2025 will not be zero. Some businesses will cut back employment. And, small businesses go under every day of the week. In some cases, paying workers more could be the straw that broke the camel’s back. But a great deal of recent research indicates that we will not see large-scale job loss from a $15 minimum wage. (It’s also worth noting that if the minimum wage had kept pace with productivity growth since 1968, as it did in the three decades prior to 1968, it would be close to $30 an hour by 2025.)

In short, it is Pearlstein, not progressive advocates of a $15 minimum wage, who is being sloppy. The research indicates that a wage hike of this size will have enormous benefits for low-wage workers and their families. It will not lead to substantial job loss.

Not All Bubbles Are Created Equal
I was one of the few economists warning about the risks to the economy from the housing bubble from 2002 until it started to deflate in the second half of 2006. I also warned about the risks of the stock bubble in the prior decade. In both cases, the collapse of the bubble led to recessions. The recession was the worst since the Great Depression in the case of the housing bubble.

From a labor market perspective, the stock crash recession was also severe. We didn’t get back the jobs lost in the recession, which began in March of 2001, until January of 2005. At the time, this was the longest period without positive job growth since the Great Depression.

I am saying this just to make the point that I take asset bubbles seriously. However, I think Pearlstein is off the mark in arguing that current bubbles in the stock market and bond market pose a major threat to the economy.

The history of the Great Recession has been rewritten to make it a story of the financial crisis. While the financial crisis undoubtedly worsened the recession, the real story of the Great Recession was simply that the bubble that had been driving the economy in the years 2002-2007 had deflated. Residential construction fell from a peak of 6.7 percent of GDP to less than 2.0 percent of GDP. Consumption had boomed as people spent based on the bubble-generated equity in their homes. Soaring consumption pushed the savings rate to a record low 2.0 percent in 2006. After the collapse, it rose to a more normal 8.0 percent.

The combined impact of the lost construction and consumption was more than 8.0 percentage points of GDP, which would come to around $1.7 trillion in lost annual demand in today’s economy. This huge loss of demand would have led to a severe recession even if the financial system was operating perfectly.

This is all straightforward arithmetic. It is also supported by the obvious fact that by 2010, the financial system was pretty much back to normal, but the unemployment rate remained high and the economy was operating well below its potential.

Like many other analysts, Pearlstein has fallen into the trap of obsessing on the financial side of the story and ignoring the real side. I agree completely that the stock market is extraordinarily high by almost any measure. But suppose it falls by 20 or 30 percent, what bad thing will happen?

Unlike the 1990s stock bubble, the high stock market has not led to any investment boom. In fact, companies are spending far more money buying back shares than they are getting from issuing new shares. The high stock prices also have not led to any consumption boom, unlike in the 1990s when the savings rate was hitting then record lows. Saving rates were at very normal levels even before the pandemic hit. In short, unlike the earlier stock bubble or the housing bubble, this stock market is not driving the economy.

The same is true for what is arguably a bond bubble. Suppose the bond market loses $2-$4 trillion in value as bond prices tumble and some bonds default. We would have some very unhappy investors and perhaps some bankrupt hedge funds, but why would this sink the economy? The same is true for other bubbles, like Bitcoin and baseball cards. The collapse of these bubbles can leave a lot of people unhappy, but it is hard to see the economic disaster story.

In short, Pearlstein is right to worry about bubbles, but we have to focus on the bubbles that are actually driving the economy. The bubbles that have concerned him in recent years are clearly not driving the economy, even if their collapse will cause serious pain to true believers.

Anyhow, I wish Pearlstein a long and productive retirement.

Washington Post columnist Steven Pearlstein had his final column today, and it is quite explicitly an attack on current progressive economic priorities. I will make three points, but first let me say that I have appreciated Pearlstein’s columns over the years. I have often criticized them, but I have also learned from them. And, I will give Pearlstein credit for talking to a diverse range of voices and not just repeating centrist claptrap, like some other economic commentators.

Okay, so getting to the beef:

  • Pearlstein ignores the political context for the big Biden ask;
  • The $15 minimum wage target is based on solid economic analysis;
  • The financial bubbles that worry Pearlstein do not threaten the economy.

Political Context of the Pandemic Recovery Package
Starting with political context, any serious person must recognize that the Republican Party is now committed to obstruction of anything Democrats do, regardless of its cost to the economy and the country. This is not a question of ideological differences, the Republicans simply want to regain power and are happy to see people lose their jobs, their businesses, and even their lives if it will advance that goal.

We saw the indifference to the country’s economic well-being in the Obama presidency where they did everything they could to slow the economy and limit job gains so that they would be better positioned in challenging Obama and the Democrats. The indifference to human lives has been clear in their response to the pandemic. They have vigorously fought efforts to limit the pandemic’s spread in order to get talking points that apparently sell with their base.

In this context, the risks for Biden and the Democrats of going too low hugely outweigh the risks of going too high. We know with absolute certainty that if the Biden recovery package is inadequate enough to restore strong growth, the Republicans will do everything they can to prevent Biden from having another bite at the apple. Like most economists, I recognize that the package may be too large and lead to inflationary pressures, but we have the tools to contain inflation, if it proves to be a problem. We don’t have any tools to overcome deliberate economic sabotage by Republicans if they end up with a majority of either house.

The $15 Minimum Wage Is Based on Solid Analysis
The $15 minimum wage target did originate as an alliteration (Fight for $15), not a carefully thought out economic analysis, but time has brought the two together. Back in 2015, John Schmitt from CEPR and Larry Mishel and David Cooper from EPI, carefully reviewed the evidence to determine a plausible minimum wage target for 2020. They concluded that a $12.00 minimum wage for 2020 would allow for substantial improvements in living standards for low wage workers, with little risk of large-scale job loss.

If we look out to 2025, the combined impact of inflation and productivity growth would imply a minimum wage target that is roughly 20 percent higher than the $12 target for 2020. That would put as $14.40 an hour, a stone’s throw away from the $15 target proposed by Biden.

To be clear, the job loss from a $15 an hour minimum wage in 2025 will not be zero. Some businesses will cut back employment. And, small businesses go under every day of the week. In some cases, paying workers more could be the straw that broke the camel’s back. But a great deal of recent research indicates that we will not see large-scale job loss from a $15 minimum wage. (It’s also worth noting that if the minimum wage had kept pace with productivity growth since 1968, as it did in the three decades prior to 1968, it would be close to $30 an hour by 2025.)

In short, it is Pearlstein, not progressive advocates of a $15 minimum wage, who is being sloppy. The research indicates that a wage hike of this size will have enormous benefits for low-wage workers and their families. It will not lead to substantial job loss.

Not All Bubbles Are Created Equal
I was one of the few economists warning about the risks to the economy from the housing bubble from 2002 until it started to deflate in the second half of 2006. I also warned about the risks of the stock bubble in the prior decade. In both cases, the collapse of the bubble led to recessions. The recession was the worst since the Great Depression in the case of the housing bubble.

From a labor market perspective, the stock crash recession was also severe. We didn’t get back the jobs lost in the recession, which began in March of 2001, until January of 2005. At the time, this was the longest period without positive job growth since the Great Depression.

I am saying this just to make the point that I take asset bubbles seriously. However, I think Pearlstein is off the mark in arguing that current bubbles in the stock market and bond market pose a major threat to the economy.

The history of the Great Recession has been rewritten to make it a story of the financial crisis. While the financial crisis undoubtedly worsened the recession, the real story of the Great Recession was simply that the bubble that had been driving the economy in the years 2002-2007 had deflated. Residential construction fell from a peak of 6.7 percent of GDP to less than 2.0 percent of GDP. Consumption had boomed as people spent based on the bubble-generated equity in their homes. Soaring consumption pushed the savings rate to a record low 2.0 percent in 2006. After the collapse, it rose to a more normal 8.0 percent.

The combined impact of the lost construction and consumption was more than 8.0 percentage points of GDP, which would come to around $1.7 trillion in lost annual demand in today’s economy. This huge loss of demand would have led to a severe recession even if the financial system was operating perfectly.

This is all straightforward arithmetic. It is also supported by the obvious fact that by 2010, the financial system was pretty much back to normal, but the unemployment rate remained high and the economy was operating well below its potential.

Like many other analysts, Pearlstein has fallen into the trap of obsessing on the financial side of the story and ignoring the real side. I agree completely that the stock market is extraordinarily high by almost any measure. But suppose it falls by 20 or 30 percent, what bad thing will happen?

Unlike the 1990s stock bubble, the high stock market has not led to any investment boom. In fact, companies are spending far more money buying back shares than they are getting from issuing new shares. The high stock prices also have not led to any consumption boom, unlike in the 1990s when the savings rate was hitting then record lows. Saving rates were at very normal levels even before the pandemic hit. In short, unlike the earlier stock bubble or the housing bubble, this stock market is not driving the economy.

The same is true for what is arguably a bond bubble. Suppose the bond market loses $2-$4 trillion in value as bond prices tumble and some bonds default. We would have some very unhappy investors and perhaps some bankrupt hedge funds, but why would this sink the economy? The same is true for other bubbles, like Bitcoin and baseball cards. The collapse of these bubbles can leave a lot of people unhappy, but it is hard to see the economic disaster story.

In short, Pearlstein is right to worry about bubbles, but we have to focus on the bubbles that are actually driving the economy. The bubbles that have concerned him in recent years are clearly not driving the economy, even if their collapse will cause serious pain to true believers.

Anyhow, I wish Pearlstein a long and productive retirement.

As the vaccination campaign picks up steam, we have many public health experts warning us about a possible resurgence of the pandemic due to the spread of new vaccine-resistant strains. The logic is that, as more people are protected against the predominant strain for which the vaccines were designed, it will allow room for mutations to spread, for which the current vaccines may not be effective. This can leave us in a whack-a-mole situation, where we have to constantly alter our vaccines and do new rounds of inoculations to limit the death and suffering from the pandemic.

This situation would seem to make the urgency for open-sourcing our research on vaccines even greater than in the past. The point is that we would want evidence on new strains to be shared as quickly as possible. We also would want the evidence on the effectiveness of the current batch of vaccines against each new strain to be quickly shared.

The Problem of Patent Monopolies

That is not likely to happen as long as drug companies are trying to maximize the profits from their government-granted patent monopolies. They have little incentive to share evidence that their vaccines may not be effective against particular strains. Regulatory agencies may make this determination and publicly disclose their findings, but it is not in the interest of, for example, Pfizer, to make this determination and widely disseminate its findings.

The issue of protecting intellectual property claims in the pandemic has gotten considerable attention in the rest of the world, if not in the United States, as a result of a resolution put forward at the World Trade Organization by India and South Africa. This resolution would suspend patent and other intellectual property claims on vaccines, treatments, and tests for the duration of the pandemic. While it enjoys overwhelming support in the developing world, the United States and other wealthy countries stand nearly united in opposition.

After the resolution was put forward a number of analysts argued that ending intellectual property protections would not speed the diffusion of vaccines (They generally did not address the issue of treatments and tests.). Their argument was that producing the vaccines involved sophisticated manufacturing processes, which other producers could not replicate even if not blocked by patent monopolies. They also argued that there were intrinsic limits to how rapidly production could proceed and that these limits would not be affected by the removal of patent monopolies.

As far as the first point, there is no dispute. Pfizer, Moderna, and other vaccine manufacturers have specific knowledge of manufacturing processes that is not widely available. While producers elsewhere could probably in time replicate their processes, we would want these companies to directly share their manufacturing expertise.

This can be done in two ways. We can pay them for transferring their knowledge. This would mean having seminars and consultations with engineers at other manufacturers to allow them to get up to speed as quickly as possible. Ideally, we could negotiate terms that would be acceptable to these companies.

But suppose Pfizer, Moderna, and the rest insist they are not selling, or at least not at a reasonable price. Then we go route two. We offer big bucks directly to the people who have this knowledge. Suppose we offer $5-$10 million to key engineers for a couple of months to work with engineers around the world. Yeah, Pfizer and Moderna can sue them. We’ll pick up the tab for their legal fees and any money they could lose in settlements. The sums involved are trivial relative to lives that could be saved and the damage prevented by more rapid diffusion of the vaccines.

If these companies actually pursued lawsuits it would also be a great teaching opportunity. It would show the world how single-mindedly these companies pursue profits and how incredibly corrupting the current system of patent monopoly financing is.

Okay, but let’s say we can overcome the obstacles and get the knowledge from these companies freely dispensed around the world. We still have the claim that there are physical limits to how rapidly vaccines can be produced.

There are two points here. First, while there clearly are limits, we can still move more quickly in the relevant time frame. No one had vaccines in March of 2020, but the leading producers had the capacity to produce tens of millions of doses a month by November, a period of less than eight months.

Unfortunately, the pandemic is still likely to be a serious problem in much of the world in October of this year. This means that if we replicated the facilities of Pfizer, Moderna, and the other leading manufacturers, we would be able to have additional supplies in a time frame where it would still be enormously helpful, and the October target assumes no learning that speeds up the process.

On this point, Pfizer recently announced that it had discovered changes in its production process that could nearly double its production rate. This is of course great news, but it means that the authoritative voices who assured us that there was no way to accelerate the production process, were not exactly right.

Pfizer’s discovery of production efficiencies also raised the obvious question as to whether Pfizer’s engineers are the only people in the world with the ability to uncover ways to speed the production of vaccines. In other words, if knowledge of Pfizer’s production process was freely shared with engineers throughout the world, do we really believe that no one else could come up with further improvements?

Fighting the Variants

This gets us back to the value of going full open-source to combat the spread of new vaccine-resistant variants. At this point, we have more than a half dozen vaccines that are being widely distributed in countries around the world. In addition to the U.S. and European vaccines, there are at least two from China (the country has apparently just approved a third), a vaccine from India, and a vaccine from Russia. These vaccines have varying effectiveness rates and undoubtedly will also have different rates against different strains.

As it stands, there are serious complaints about the lack of transparency on results from the non-U.S.-European manufacturers, however, even the U.S. and European manufacturers have not been fully open with their trial results. It would be ideal if all these companies fully disclosed their clinical trial results so that researchers throughout the world could see which groups of people each vaccine was most effective with, and how it fared in protecting against the various strains.

Getting full disclosure is something that would have to be negotiated, but this is why god created governments. In principle, this should be a doable lift. After all, it is to everyone’s benefit to have the pandemic controlled as quickly as possible. And the specific task involved does not require great effort. The manufacturers of the vaccines have the data, we just need to have them post it on the web.

If we had full information on the effectiveness of each vaccine and we freely allowed manufacturers everywhere to produce any vaccine, without regard to intellectual property claims, we would be best situated to contain the pandemic and quickly respond to the development of new strains. Of course, this will raise questions about whether our current system of patent monopoly financing is the best way to support the development of new drugs and vaccines, but that seems a risk worth taking.           

As the vaccination campaign picks up steam, we have many public health experts warning us about a possible resurgence of the pandemic due to the spread of new vaccine-resistant strains. The logic is that, as more people are protected against the predominant strain for which the vaccines were designed, it will allow room for mutations to spread, for which the current vaccines may not be effective. This can leave us in a whack-a-mole situation, where we have to constantly alter our vaccines and do new rounds of inoculations to limit the death and suffering from the pandemic.

This situation would seem to make the urgency for open-sourcing our research on vaccines even greater than in the past. The point is that we would want evidence on new strains to be shared as quickly as possible. We also would want the evidence on the effectiveness of the current batch of vaccines against each new strain to be quickly shared.

The Problem of Patent Monopolies

That is not likely to happen as long as drug companies are trying to maximize the profits from their government-granted patent monopolies. They have little incentive to share evidence that their vaccines may not be effective against particular strains. Regulatory agencies may make this determination and publicly disclose their findings, but it is not in the interest of, for example, Pfizer, to make this determination and widely disseminate its findings.

The issue of protecting intellectual property claims in the pandemic has gotten considerable attention in the rest of the world, if not in the United States, as a result of a resolution put forward at the World Trade Organization by India and South Africa. This resolution would suspend patent and other intellectual property claims on vaccines, treatments, and tests for the duration of the pandemic. While it enjoys overwhelming support in the developing world, the United States and other wealthy countries stand nearly united in opposition.

After the resolution was put forward a number of analysts argued that ending intellectual property protections would not speed the diffusion of vaccines (They generally did not address the issue of treatments and tests.). Their argument was that producing the vaccines involved sophisticated manufacturing processes, which other producers could not replicate even if not blocked by patent monopolies. They also argued that there were intrinsic limits to how rapidly production could proceed and that these limits would not be affected by the removal of patent monopolies.

As far as the first point, there is no dispute. Pfizer, Moderna, and other vaccine manufacturers have specific knowledge of manufacturing processes that is not widely available. While producers elsewhere could probably in time replicate their processes, we would want these companies to directly share their manufacturing expertise.

This can be done in two ways. We can pay them for transferring their knowledge. This would mean having seminars and consultations with engineers at other manufacturers to allow them to get up to speed as quickly as possible. Ideally, we could negotiate terms that would be acceptable to these companies.

But suppose Pfizer, Moderna, and the rest insist they are not selling, or at least not at a reasonable price. Then we go route two. We offer big bucks directly to the people who have this knowledge. Suppose we offer $5-$10 million to key engineers for a couple of months to work with engineers around the world. Yeah, Pfizer and Moderna can sue them. We’ll pick up the tab for their legal fees and any money they could lose in settlements. The sums involved are trivial relative to lives that could be saved and the damage prevented by more rapid diffusion of the vaccines.

If these companies actually pursued lawsuits it would also be a great teaching opportunity. It would show the world how single-mindedly these companies pursue profits and how incredibly corrupting the current system of patent monopoly financing is.

Okay, but let’s say we can overcome the obstacles and get the knowledge from these companies freely dispensed around the world. We still have the claim that there are physical limits to how rapidly vaccines can be produced.

There are two points here. First, while there clearly are limits, we can still move more quickly in the relevant time frame. No one had vaccines in March of 2020, but the leading producers had the capacity to produce tens of millions of doses a month by November, a period of less than eight months.

Unfortunately, the pandemic is still likely to be a serious problem in much of the world in October of this year. This means that if we replicated the facilities of Pfizer, Moderna, and the other leading manufacturers, we would be able to have additional supplies in a time frame where it would still be enormously helpful, and the October target assumes no learning that speeds up the process.

On this point, Pfizer recently announced that it had discovered changes in its production process that could nearly double its production rate. This is of course great news, but it means that the authoritative voices who assured us that there was no way to accelerate the production process, were not exactly right.

Pfizer’s discovery of production efficiencies also raised the obvious question as to whether Pfizer’s engineers are the only people in the world with the ability to uncover ways to speed the production of vaccines. In other words, if knowledge of Pfizer’s production process was freely shared with engineers throughout the world, do we really believe that no one else could come up with further improvements?

Fighting the Variants

This gets us back to the value of going full open-source to combat the spread of new vaccine-resistant variants. At this point, we have more than a half dozen vaccines that are being widely distributed in countries around the world. In addition to the U.S. and European vaccines, there are at least two from China (the country has apparently just approved a third), a vaccine from India, and a vaccine from Russia. These vaccines have varying effectiveness rates and undoubtedly will also have different rates against different strains.

As it stands, there are serious complaints about the lack of transparency on results from the non-U.S.-European manufacturers, however, even the U.S. and European manufacturers have not been fully open with their trial results. It would be ideal if all these companies fully disclosed their clinical trial results so that researchers throughout the world could see which groups of people each vaccine was most effective with, and how it fared in protecting against the various strains.

Getting full disclosure is something that would have to be negotiated, but this is why god created governments. In principle, this should be a doable lift. After all, it is to everyone’s benefit to have the pandemic controlled as quickly as possible. And the specific task involved does not require great effort. The manufacturers of the vaccines have the data, we just need to have them post it on the web.

If we had full information on the effectiveness of each vaccine and we freely allowed manufacturers everywhere to produce any vaccine, without regard to intellectual property claims, we would be best situated to contain the pandemic and quickly respond to the development of new strains. Of course, this will raise questions about whether our current system of patent monopoly financing is the best way to support the development of new drugs and vaccines, but that seems a risk worth taking.           

If you were worried that you had a drinking problem, you probably would not ask your neighborhood bartender for advice (Let’s assume the bartender owns the bar, so they pocket the cash from the drinks.) The bartender may be a very nice person, and may actually be your friend, but they obviously have a material interest in keeping you coming back to the bar.

It is the same story for pension funds when it comes to their various pension advisers. The pension funds’ boards (the people who actually are in charge of running the fund) are often on good terms with the people who manage their money. In many cases, they have used the same group of advisers for years or even decades.

Nonetheless, the fund’s investment advisers are in the same relationship to the pension fund as the bartender is to the person worried about their drinking problem. The advisers are making money off the fund.

This simple point is important to keep in mind in considering the reactions of pension fund advisers to proposals for financial transactions tax. The goal of a financial transactions tax is to raise revenue for the government while reducing the volume of excess trading.

The idea is that a modest tax (0.1 percent is the rate proposed in a recent bill introduced by Representative Peter DeFazio) will have little impact on the ability of financial markets to effectively allocate capital, but it would substantially reduce the resources devoted to high-frequency and other short-term trading.

According to the Congressional Budget Office, this tax could raise more than $700 billion over a decade, or $70 billion a year. This is roughly equal to the size of the food stamp budget, an amount equal to 1.5 percent of total spending.

This money would come almost entirely out of the pockets of the financial industry. Research shows that when trading costs go up, trading volume declines by roughly the same percent. If the DeFazio tax raises the average cost of a trade by 40 percent, we should expect that trading volume will also decline by roughly 40 percent.

This means that, from the standpoint of a pension fund, they can expect to be paying 40 percent more on each trade, but since they are doing 40 percent less trading, they will spend no more on their trading with the tax than they did before the tax. In other words, for the pension fund, the tax is a wash.

But aren’t they hurt because they are doing less trading? The evidence is that they are not. Every trade has a winner and a loser, and most people end up in each camp roughly half the time. This means that pension funds do not typically benefit from the amount of trading they are currently doing. (Yes, every investment adviser tells us they are a star and always beat the market. They aren’t.)

So why do investment advisers tell pension funds that a financial transactions tax is bad news for the pension? They say this for the same reason the bartender tells their customer they don’t have a drinking problem.

They want the business.  

If you were worried that you had a drinking problem, you probably would not ask your neighborhood bartender for advice (Let’s assume the bartender owns the bar, so they pocket the cash from the drinks.) The bartender may be a very nice person, and may actually be your friend, but they obviously have a material interest in keeping you coming back to the bar.

It is the same story for pension funds when it comes to their various pension advisers. The pension funds’ boards (the people who actually are in charge of running the fund) are often on good terms with the people who manage their money. In many cases, they have used the same group of advisers for years or even decades.

Nonetheless, the fund’s investment advisers are in the same relationship to the pension fund as the bartender is to the person worried about their drinking problem. The advisers are making money off the fund.

This simple point is important to keep in mind in considering the reactions of pension fund advisers to proposals for financial transactions tax. The goal of a financial transactions tax is to raise revenue for the government while reducing the volume of excess trading.

The idea is that a modest tax (0.1 percent is the rate proposed in a recent bill introduced by Representative Peter DeFazio) will have little impact on the ability of financial markets to effectively allocate capital, but it would substantially reduce the resources devoted to high-frequency and other short-term trading.

According to the Congressional Budget Office, this tax could raise more than $700 billion over a decade, or $70 billion a year. This is roughly equal to the size of the food stamp budget, an amount equal to 1.5 percent of total spending.

This money would come almost entirely out of the pockets of the financial industry. Research shows that when trading costs go up, trading volume declines by roughly the same percent. If the DeFazio tax raises the average cost of a trade by 40 percent, we should expect that trading volume will also decline by roughly 40 percent.

This means that, from the standpoint of a pension fund, they can expect to be paying 40 percent more on each trade, but since they are doing 40 percent less trading, they will spend no more on their trading with the tax than they did before the tax. In other words, for the pension fund, the tax is a wash.

But aren’t they hurt because they are doing less trading? The evidence is that they are not. Every trade has a winner and a loser, and most people end up in each camp roughly half the time. This means that pension funds do not typically benefit from the amount of trading they are currently doing. (Yes, every investment adviser tells us they are a star and always beat the market. They aren’t.)

So why do investment advisers tell pension funds that a financial transactions tax is bad news for the pension? They say this for the same reason the bartender tells their customer they don’t have a drinking problem.

They want the business.  

I saw this piece last week on the soaring price of baseball cards and naturally started thinking about Bitcoin. The article begins with a story about how a rare LeBron James trading card (it’s all sports cards, not just baseball cards) would now sell for over $3 million, more than ten times its price in 2016. It then reports on how the prices for rare cards of other famous players have also gone through the roof, with even cards of less great players selling for several million dollars.

The reason this got me thinking about Bitcoin is that the price of Bitcoin has also been soaring. In fact, it has risen considerably faster than the price of baseball cards, increasing more than a hundredfold over the last five years.

 

Bitcoin as a Currency

Bitcoin proponents see this soaring price as vindication. After all, if the price of a Bitcoin has risen more than a hundred times in just five years, then this digital currency must be extremely valuable.

There is no doubt that Bitcoin investors could have become rich through their investment. A $10,000 Bitcoin investment in 2016 would be worth more than $1.4 million today. If they had made their Bitcoin investment earlier, they would be even richer today. In that sense, at least for now, we can say that someone would have been right to buy Bitcoin as an investment.

But does this mean Bitcoin is establishing itself as a currency? In fact, Bitcoin’s soaring price argues the opposite.

One of the main features that we value in a currency is stability. This is the basis for the obsession of the Federal Reserve Board and other central banks with inflation. While they have often carried their concerns about inflation too far, needlessly slowing the economy and throwing people out of work at the first vague hint of accelerating inflation, there is a real logic to their concern.

Inflation can be a seriously disrupting force in the economy. In the most extreme cases, such as the German hyperinflation after World War I or the more recent episode of hyperinflation in Zimbabwe, the currency becomes worthless as a medium of exchange. There are famous stories in Weimar Germany of people taking wheelbarrows full of money to the bakery to buy a loaf of bread. An economy cannot function with a currency whose value plunges by the minute.

Even less serious rates of inflation can be a problem. Certainly, the inflation the United States saw in the 1970s was a problem. It peaked at just over 10 percent at the end of the decade. This inflation did not cause the economy to collapse or even stop growth altogether, but it definitely made planning more difficult, and perhaps more importantly, led people to believe they were being cheated as their pay increases were quickly offset by rapid rises in prices.

The story with Bitcoin is the exact opposite. The value of Bitcoin has been soaring, not plummeting. But if we think of Bitcoin as a currency, this means that we are seeing massive deflation. The price of items measured in Bitcoin is going through the floor.

To make this concrete, suppose someone signed a five-year lease in Bitcoin, where they agreed to pay two Bitcoins a month for office space. (Five-year leases are common for commercial properties.) At the start of their lease in 2016, they would be paying an amount equal to less than $800 a month. Today, they would be paying over $100,000 a month for the same space. Anyone who committed to this rent would either have been forced into bankruptcy or renegotiated the lease.

Imagine the same story with a wage contract. Suppose a union had negotiated a contract where its members were paid two Bitcoins a week in 2016 with an inflation clause that provided for 2 percent raises a year. If this had been a five-year contract, these workers would now be earning well over $100,000 a week.

Suppose someone had arranged loan terms where they borrowed in Bitcoin and agreed to pay 3.0 percent interest annually. If they had taken out a thousand Bitcoin loans in 2016 (just under $400,000), their annual interest payment would be almost $1.7 million today. Again, any business that had signed a contract like this would have been forced to either renegotiate or face bankruptcy.

If this sounds like I’m making up irrelevant stories, think more closely. If Bitcoin is supposed to be a currency then it has to be possible to use it as a currency. That means being able to sign contracts that work for the parties involved. A currency that soars in value is no more useful for conducting normal economic activity than a currency that plunges in values.

 

The Elon Musk Embrace

But Elon Musk announced that he will start allowing people to buy a Tesla with Bitcoin. The Bitcoin celebrants may see this as a big deal, but there is much less here than meets the eye.

First, it’s not clear what Musk’s motive would be in accepting Bitcoin rather than standard currencies for his cars. Perhaps he thinks that Bitcoin is a good investment for his company.

That may be the case, but if he thinks buying Bitcoin is a better investment than expanding Tesla’s production capacities, he has the option to do this whether or not he sells his cars for Bitcoins. It should be little problem for Tesla to buy a few hundred million dollars of Bitcoin any day of the week if Musk thinks this is a good use of Tesla’s funds.

In short, the Bitcoin as investment story really doesn’t make any sense. The decision for Tesla to invest in Bitcoin has nothing to do with whether it sells its cars for Bitcoin.

It is certainly possible that Musk wants to accept Bitcoin just because he thinks it is a cool thing to do. I would never get in the business of trying to read Musk’s mind, but he clearly says many things off the cuff, and it is certainly possible that he has no well-thought-out motive in accepting Bitcoin.

Of course, there is one obvious, less flattering, motive for selling Teslas for Bitcoin. One of the main attractions of Bitcoin is that it allows people to make untraceable transactions. Unlike transfers through bank accounts or credit cards, there is no traceable record of Bitcoin transactions. For this reason, Bitcoin has become very popular among drug dealers and others engaged in illegal activities.

By selling Teslas for Bitcoins, Musk will be allowing these criminals to buy his cars without going through the intermediate step of trading their Bitcoins for traditional currencies. This should make Teslas especially attractive for successful criminals around the world.

Again, I would not try to read Musk’s mind, but an unavoidable implication of his decision to accept Bitcoin is that it makes Tesla far more attractive to criminals than other high-end cars. Assuming that Musk carries through with this move, it may lead to an interesting scenario.

If Tesla becomes a popular car with drug dealers and other criminals, driving a Tesla could become grounds for suspecting someone of criminal activity. It probably wouldn’t be sufficient grounds for police to get a search warrant, but it would be a big red flag for law enforcement agencies. (I suppose the government can require that Tesla turn over information on anyone who buys a car with Bitcoin in the same way that it requires banks to report large cash deposits.)

 

The Future of Bitcoin

I am not going to try to make a price projection for Bitcoin. I personally wouldn’t make a bet on it, but that was true ten years ago also when it sold for less than one percent of its current price. Of course. I also wouldn’t put a lot of money in baseball cards, but who knows, the LeBron James card may sell for $30 million in a decade.

It’s still hard to not see these prices as the result of bubbles, since it is difficult to see anything like this much intrinsic value in other a sports trading card or Bitcoin. The sports trading card has the advantage in this area, since at least it is something, whereas Bitcoin is quite literally nothing.

A lesson I learned from the stock bubble of the 1990s and the housing bubble of the next decade, is that bubbles can go on much longer than seems plausible. When the stock market was hitting record levels in 1998, I felt pretty confident that it was in a bubble and that it would likely burst within six months or so. It kept going another two years.

I first wrote about the housing bubble in the summer of 2002. I again thought it was likely to burst within six months or so, but I was smart enough not to say this at the time. It didn’t finally start to deflate until 2006, with the decline first gaining serious momentum in 2007. (In fairness, I never imagined banks issuing and securitizing some of the crazy loans that propelled the later stages of the housing bubble.)

Anyhow, I have no idea how high the Bitcoin enthusiasts will push up its price. The one prediction in which I feel very confident is that it is not about to become a currency that will replace traditional currencies.

I saw this piece last week on the soaring price of baseball cards and naturally started thinking about Bitcoin. The article begins with a story about how a rare LeBron James trading card (it’s all sports cards, not just baseball cards) would now sell for over $3 million, more than ten times its price in 2016. It then reports on how the prices for rare cards of other famous players have also gone through the roof, with even cards of less great players selling for several million dollars.

The reason this got me thinking about Bitcoin is that the price of Bitcoin has also been soaring. In fact, it has risen considerably faster than the price of baseball cards, increasing more than a hundredfold over the last five years.

 

Bitcoin as a Currency

Bitcoin proponents see this soaring price as vindication. After all, if the price of a Bitcoin has risen more than a hundred times in just five years, then this digital currency must be extremely valuable.

There is no doubt that Bitcoin investors could have become rich through their investment. A $10,000 Bitcoin investment in 2016 would be worth more than $1.4 million today. If they had made their Bitcoin investment earlier, they would be even richer today. In that sense, at least for now, we can say that someone would have been right to buy Bitcoin as an investment.

But does this mean Bitcoin is establishing itself as a currency? In fact, Bitcoin’s soaring price argues the opposite.

One of the main features that we value in a currency is stability. This is the basis for the obsession of the Federal Reserve Board and other central banks with inflation. While they have often carried their concerns about inflation too far, needlessly slowing the economy and throwing people out of work at the first vague hint of accelerating inflation, there is a real logic to their concern.

Inflation can be a seriously disrupting force in the economy. In the most extreme cases, such as the German hyperinflation after World War I or the more recent episode of hyperinflation in Zimbabwe, the currency becomes worthless as a medium of exchange. There are famous stories in Weimar Germany of people taking wheelbarrows full of money to the bakery to buy a loaf of bread. An economy cannot function with a currency whose value plunges by the minute.

Even less serious rates of inflation can be a problem. Certainly, the inflation the United States saw in the 1970s was a problem. It peaked at just over 10 percent at the end of the decade. This inflation did not cause the economy to collapse or even stop growth altogether, but it definitely made planning more difficult, and perhaps more importantly, led people to believe they were being cheated as their pay increases were quickly offset by rapid rises in prices.

The story with Bitcoin is the exact opposite. The value of Bitcoin has been soaring, not plummeting. But if we think of Bitcoin as a currency, this means that we are seeing massive deflation. The price of items measured in Bitcoin is going through the floor.

To make this concrete, suppose someone signed a five-year lease in Bitcoin, where they agreed to pay two Bitcoins a month for office space. (Five-year leases are common for commercial properties.) At the start of their lease in 2016, they would be paying an amount equal to less than $800 a month. Today, they would be paying over $100,000 a month for the same space. Anyone who committed to this rent would either have been forced into bankruptcy or renegotiated the lease.

Imagine the same story with a wage contract. Suppose a union had negotiated a contract where its members were paid two Bitcoins a week in 2016 with an inflation clause that provided for 2 percent raises a year. If this had been a five-year contract, these workers would now be earning well over $100,000 a week.

Suppose someone had arranged loan terms where they borrowed in Bitcoin and agreed to pay 3.0 percent interest annually. If they had taken out a thousand Bitcoin loans in 2016 (just under $400,000), their annual interest payment would be almost $1.7 million today. Again, any business that had signed a contract like this would have been forced to either renegotiate or face bankruptcy.

If this sounds like I’m making up irrelevant stories, think more closely. If Bitcoin is supposed to be a currency then it has to be possible to use it as a currency. That means being able to sign contracts that work for the parties involved. A currency that soars in value is no more useful for conducting normal economic activity than a currency that plunges in values.

 

The Elon Musk Embrace

But Elon Musk announced that he will start allowing people to buy a Tesla with Bitcoin. The Bitcoin celebrants may see this as a big deal, but there is much less here than meets the eye.

First, it’s not clear what Musk’s motive would be in accepting Bitcoin rather than standard currencies for his cars. Perhaps he thinks that Bitcoin is a good investment for his company.

That may be the case, but if he thinks buying Bitcoin is a better investment than expanding Tesla’s production capacities, he has the option to do this whether or not he sells his cars for Bitcoins. It should be little problem for Tesla to buy a few hundred million dollars of Bitcoin any day of the week if Musk thinks this is a good use of Tesla’s funds.

In short, the Bitcoin as investment story really doesn’t make any sense. The decision for Tesla to invest in Bitcoin has nothing to do with whether it sells its cars for Bitcoin.

It is certainly possible that Musk wants to accept Bitcoin just because he thinks it is a cool thing to do. I would never get in the business of trying to read Musk’s mind, but he clearly says many things off the cuff, and it is certainly possible that he has no well-thought-out motive in accepting Bitcoin.

Of course, there is one obvious, less flattering, motive for selling Teslas for Bitcoin. One of the main attractions of Bitcoin is that it allows people to make untraceable transactions. Unlike transfers through bank accounts or credit cards, there is no traceable record of Bitcoin transactions. For this reason, Bitcoin has become very popular among drug dealers and others engaged in illegal activities.

By selling Teslas for Bitcoins, Musk will be allowing these criminals to buy his cars without going through the intermediate step of trading their Bitcoins for traditional currencies. This should make Teslas especially attractive for successful criminals around the world.

Again, I would not try to read Musk’s mind, but an unavoidable implication of his decision to accept Bitcoin is that it makes Tesla far more attractive to criminals than other high-end cars. Assuming that Musk carries through with this move, it may lead to an interesting scenario.

If Tesla becomes a popular car with drug dealers and other criminals, driving a Tesla could become grounds for suspecting someone of criminal activity. It probably wouldn’t be sufficient grounds for police to get a search warrant, but it would be a big red flag for law enforcement agencies. (I suppose the government can require that Tesla turn over information on anyone who buys a car with Bitcoin in the same way that it requires banks to report large cash deposits.)

 

The Future of Bitcoin

I am not going to try to make a price projection for Bitcoin. I personally wouldn’t make a bet on it, but that was true ten years ago also when it sold for less than one percent of its current price. Of course. I also wouldn’t put a lot of money in baseball cards, but who knows, the LeBron James card may sell for $30 million in a decade.

It’s still hard to not see these prices as the result of bubbles, since it is difficult to see anything like this much intrinsic value in other a sports trading card or Bitcoin. The sports trading card has the advantage in this area, since at least it is something, whereas Bitcoin is quite literally nothing.

A lesson I learned from the stock bubble of the 1990s and the housing bubble of the next decade, is that bubbles can go on much longer than seems plausible. When the stock market was hitting record levels in 1998, I felt pretty confident that it was in a bubble and that it would likely burst within six months or so. It kept going another two years.

I first wrote about the housing bubble in the summer of 2002. I again thought it was likely to burst within six months or so, but I was smart enough not to say this at the time. It didn’t finally start to deflate until 2006, with the decline first gaining serious momentum in 2007. (In fairness, I never imagined banks issuing and securitizing some of the crazy loans that propelled the later stages of the housing bubble.)

Anyhow, I have no idea how high the Bitcoin enthusiasts will push up its price. The one prediction in which I feel very confident is that it is not about to become a currency that will replace traditional currencies.

Naomi Klein has an interesting piece in the New York Times on the implications of the Texas disaster. I would disagree with some parts, which attack the Texas approach to energy as “free market.” To my view, this is far too generous.

Even Texas’ deregulated energy market is still highly regulated. It is possible to have hugely different outcomes and incentives by structuring the market in slightly different ways. For example, since the supply of electricity to individual homes is inherently a monopoly relationship (no one will have two electrical hookups), the burden can be placed on the provider to ensure electricity in a specified price range, rather than structuring the market so the risk lies entirely with consumers.

The latter makes little sense for free-market types, since consumers both have no ability to assess the risk that their providers are taking, nor the ability to take steps to reduce the risk. If contracts were written so that the risks fell to the providers, this would provide the sort of market incentives that fans of the “free market” claim they value.

But beyond this issue, Klein correctly notes that Texas Republicans and Republicans more generally see the Green New Deal as a huge threat, which she argues is because it is a challenger in the battle of ideas:

“Because for the first time in a long time, Republicans face the very thing that they claim to revere but never actually wanted: competition — in the battle of ideas.”

I see the challenge as being even stronger. The Green New Deal is a huge challenge to major financial backers of the Republican Party. The fossil fuel industry has long been a major backer of the Republican Party and right-wing causes. Many major right-wing funders, most notoriously the Koch brothers, got a substantial portion of their fortunes from fossil fuels. If this industry is whacked by policies to limit global warming, it will be a serious hit to these funders.

Looking at politics this way mirrors the strategy that Republicans have used successfully for decades to undermine the basis for progressive politics. They weren’t just arguing in the battle place of ideas, they did things like appoint judges and National Labor Relations Board officials who would do everything they could to weaken unions and undermine the ability of workers to organize. And, they (along with leading Democrats) pushed trade and regulation policies that seriously weakened unions in sectors like manufacturing, transportation, and communications. After weakening unions in the private sector, they then designed a strategy for undermining them in the public sector as well.

They also looked to undermine other bases of support for progressive policies. For example, Reagan gutted federal support for legal services, which was a secure base from which many progressive lawyers pursued suits to benefit the working-class and the poor. They also radically cut back support for programs like the National Endowments for the Arts and Humanities, and the Corporation for Public Broadcasting.

Basically, the Republicans were more interested in destroying the financial bases for support for progressives than winning battles of ideas. It would be great if progressives could turn the table and destroy a major source of right-wing funding while creating good-paying jobs and saving the environment.  

Naomi Klein has an interesting piece in the New York Times on the implications of the Texas disaster. I would disagree with some parts, which attack the Texas approach to energy as “free market.” To my view, this is far too generous.

Even Texas’ deregulated energy market is still highly regulated. It is possible to have hugely different outcomes and incentives by structuring the market in slightly different ways. For example, since the supply of electricity to individual homes is inherently a monopoly relationship (no one will have two electrical hookups), the burden can be placed on the provider to ensure electricity in a specified price range, rather than structuring the market so the risk lies entirely with consumers.

The latter makes little sense for free-market types, since consumers both have no ability to assess the risk that their providers are taking, nor the ability to take steps to reduce the risk. If contracts were written so that the risks fell to the providers, this would provide the sort of market incentives that fans of the “free market” claim they value.

But beyond this issue, Klein correctly notes that Texas Republicans and Republicans more generally see the Green New Deal as a huge threat, which she argues is because it is a challenger in the battle of ideas:

“Because for the first time in a long time, Republicans face the very thing that they claim to revere but never actually wanted: competition — in the battle of ideas.”

I see the challenge as being even stronger. The Green New Deal is a huge challenge to major financial backers of the Republican Party. The fossil fuel industry has long been a major backer of the Republican Party and right-wing causes. Many major right-wing funders, most notoriously the Koch brothers, got a substantial portion of their fortunes from fossil fuels. If this industry is whacked by policies to limit global warming, it will be a serious hit to these funders.

Looking at politics this way mirrors the strategy that Republicans have used successfully for decades to undermine the basis for progressive politics. They weren’t just arguing in the battle place of ideas, they did things like appoint judges and National Labor Relations Board officials who would do everything they could to weaken unions and undermine the ability of workers to organize. And, they (along with leading Democrats) pushed trade and regulation policies that seriously weakened unions in sectors like manufacturing, transportation, and communications. After weakening unions in the private sector, they then designed a strategy for undermining them in the public sector as well.

They also looked to undermine other bases of support for progressive policies. For example, Reagan gutted federal support for legal services, which was a secure base from which many progressive lawyers pursued suits to benefit the working-class and the poor. They also radically cut back support for programs like the National Endowments for the Arts and Humanities, and the Corporation for Public Broadcasting.

Basically, the Republicans were more interested in destroying the financial bases for support for progressives than winning battles of ideas. It would be great if progressives could turn the table and destroy a major source of right-wing funding while creating good-paying jobs and saving the environment.  

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