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.

After Donald Trump’s clown shows, it was nice to have a U.S. president who at least takes world issues seriously while representing the country at the various summits over the last week. But that is a low bar. While we want adults in positions of responsibility, we have to ask where those adults want to take us. It is not clear that we should all eagerly follow the path that President Biden seems to be outlining with regard to China.

Unfortunately, people in the United States (including reporter-type people) tend to have little knowledge of history. Many have no first-hand knowledge of the Cold War with the Soviet Union and have not done much reading to make up for this deficiency. In fact, they also don’t seem to have much knowledge of the Iraq War, which is probably the better place to start here.

 

Target Iraq: Bad Guy Saddam Hussein

When President George W. Bush fixed his eyes on overthrowing Saddam Hussein in the summer of 2002, he decided the rationale was going to be that Hussein possessed or was developing nuclear weapons. This complaint came in spite of the fact that UN weapons inspectors had been in place in the country ever since its defeat in the first Iraq war in 1991.   

The weapons inspectors insisted that they saw no evidence that Iraq was developing nuclear weapons. The inspectors’ assessment was dismissed by the Bush administration and to a large extent by major news outlets. They claimed that the restrictions that Iraq imposed on inspections, usually ones of timing, made it impossible for the inspectors to get an accurate assessment of the country’s nuclear capabilities.

The Bush administration then went about whipping up its own “intelligence,” supporting the administration’s claim that Iraq was far along in developing a nuclear bomb. Much of its case was complete fabrication, while other parts were very selective presentations of evidence. But they did manage to sell most of the media and the public on the threat of Iraq’s nuclear weapons.

However, the Bush administration also had a fallback to assuage many liberal types who had qualms about overthrowing a foreign government. The fallback was that Saddam Hussein was a really bad guy.

They had a very good case on this one. Hussein routinely imprisoned or executed political opponents or critics. He had invaded two of his neighbors (Iran in 1980 and Kuwait in 1990) and he persecuted domestic minorities within Iraq, most notably the Kurds and Shite population.

No one could seriously want to defend Hussein’s practices as the ruler of Iraq, but that didn’t mean that overthrowing him was a good policy. It may still be too early to pass a final judgement, and we can never know a counterfactual. At this point, it would be difficult to claim that things have changed for the better for the people of Iraq and the region as a result of the U.S. invasion.

Anyhow, the Hussein as bad guy story is important for our current policy toward China. We can point to the country’s repressive measures against internal dissidents. We can also point to the repression directed towards its Uighur population in Western China, as well as, its belligerence towards its neighbors in making claims on territorial waters. These and other actions can be used to show that China is far from a model democracy that respects the rights of its own citizens, as well as, international law.

But this issue is really beside the point. The question from the standpoint of U.S. policy is how any of our actions can be expected to improve the situation. Specifically, if we adopt a confrontational stance towards China, involving economic measures and a beefed-up military presence in the region, is there reason to believe that the country will improve its behavior in the areas that we care about?

My guess is that the answer is no. Perhaps those with more expertise on China can make a strong case that China’s government would change its behavior in response to a more confrontational approach by the United States, but that really shouldn’t be the issue. It doesn’t make sense to have confrontation as a feel-good approach.     

Unfortunately, that seems to be the current path. It is also worth noting in this respect that China was hardly a model of human rights and democracy when the Clinton administration pushed to have it admitted to the WTO at the end of the 1990s. At the time, anyone who raised human rights and labor issues as a reason not to further open trade with China was denounced as a Neanderthal protectionist. We were told that somehow, by buying clothes shoes and other items produced with low cost Chinese labor, we would turn the country into a liberal democracy. Guess that claim is no longer operative.[1]

 

Using the Cold War to Justify Otherwise Unjustifiable Policies

In the days of the first Cold War the U.S.  government pursued many policies, both foreign and domestic, that would be hard to justify without the threat of the Soviet Union. On the domestic side, we had a range of policies by both the government and private companies, to crack down on alleged communists and Soviet sympathizers.

These included loyalty oaths where people had to swear that they were not members of the Communist Party to get government jobs. This often kept not only people who were actual party members from getting jobs, but also people who sympathized with many of the party’s stated goals, like promoting civil rights and avoiding nuclear war.

The 1947 Taft-Hartley Act required unions to force all officers to sign affidavits saying that they were not communists in order to be eligible for recognition through a National Labor Relations Board certified election. Many of the most committed labor organizers were in fact members of the Communist Party, so they were thrown out of labor movement if they refused to sign this pledge. In other cases, committed organizers refused to go along with this demand even if they were not themselves actually party members. On the private side, we had the Hollywood blacklist, where a large number of screenwriters and actors were prevented from working for much of their career.

Internationally, the United States had numerous interventions around the world that had little or nothing to do with combatting the Soviet Union. Just to take two prominent ones: we overthrew the democratically elected government in Iran in 1953 and installed a brutal dictatorship. The issue was not communism or the Soviet Union. The issue was that our oil companies wanted access to Iranian oil.

In another case, the U.S. overthrew an elected government in Guatemala in 1954. Again, this had nothing really to do with the Soviet Union, the United Fruit Company was unhappy about its banana plantations being taken in a land reform program.

The list of interventions could be extended at great length, but the point is that the U.S. government used the Soviet threat to justify policies designed to serve powerful corporate interests that would be very difficult to rationalize without this threat. In addition, we spent enormous sums on the military, which meant large profits for military contractors.

A New Cold War against China could be used in the same way. Needless to say, we can justify pretty much endless military spending based on the need to meet the China threat. Many people don’t seem to realize the absurdity of trying to spend China into the ground, as some would claim we did with the Soviet Union. While the Soviet Union’s economy peaked at around half of the size of the U.S. economy, China’s economy is already almost 20 percent larger than the U.S. economy, and will be around 80 percent larger by the end of the decade.     

If the goal of arms race is to spend China into the ground, it is more likely we would spend ourselves into the ground. The burden of a major arms buildup would be much greater on the U.S. than China, although just like in the first Cold War, it would make lots of military contractors rich.

 

The Implications of the New Cold War for Domestic Policies

There are other aspects to the prospect of Cold War-type competition that are equally pernicious. Last week the Senate passed a bill that would provide $250 billion over the next decade in research spending, ostensibly to help us compete with China. (The $25 billion in annual spending comes to 0.4 percent of the total budget, which you can find out quickly with CEPR’s “It’s the Budget, Stupid” budget calculator.)

The idea of boosting public spending on R&D is a good one, but we need to ask some serious questions about who gets the benefits. Operation Warp Speed gave us a great model for the benefits of public spending, while at the same time showing us the potential for skewing of the gains.

Moderna probably shows the issue most clearly. The federal government fully funded the development and testing of its vaccine. Yet, it gave the company a patent monopoly, which allows it to restrict the distribution of the vaccine and charge prices far above the free market price. As result, Moderna’s stockholders and its top executives have made billions of dollars, effectively profiting off of the government’s investment.

We could structure public contracts differently. For example, we could require that all innovations derived from government research be placed in the public domain so that anyone could manufacture them who possessed the necessary expertise. In some cases, this could involve going deeper downstream in the development process than is intended in the bill approved by the Senate, but there is no reason that the funding could not be used to cover the full costs of developing a product, as was the case with Moderna.[2]

Unfortunately, this bill looks like the funding will follow the model of Moderna. The government puts up the money and takes the risk, while private corporations will be able to gain patent and copyright monopolies, which will allow them to garner a disproportionate share of the gains. In a context where we are supposed to be concerned about the distribution of income, this looks like a huge step in the wrong direction.

Some people have supported this sort of investment with the idea that it will bring manufacturing jobs back to the United States and therefore reduce inequality. Unfortunately, this is a view that has not kept pace with the data. Historically, manufacturing has been a source of good paying jobs for workers without college degrees. However, the wage premium in manufacturing has largely disappeared over the last three decades.

To take a very simple measure, the average hourly wage for production non-supervisory workers in manufacturing was 5.7 percent above the average for the private sector as a whole in 1990. In the most recent data (May, 2021), the wage for production workers in manufacturing was 8.1 percent lower than in the private sector as a whole. This comparison is incomplete, since it doesn’t capture the value of benefits, which tend to be higher in manufacturing, nor does it control for education, experience, and other factors, but it is clear that the premium is substantially smaller than it had been in prior decades.[3]

The reason for the deterioration in the quality of manufacturing jobs is not a secret. The unionization rate in manufacturing has plummeted, largely due to trade, as well as aggressive anti-union measures by employers. In 1990, more than 20 percent of workers in manufacturing were unionized. In 2020, just 8.5 percent of workers in manufacturing were unionized. That is only slightly higher than the 6.3 percent average for the private sector as a whole.

Furthermore, more manufacturing jobs has not meant more union jobs. Until the pandemic hit in March, we had added back more than 1.6 million manufacturing jobs from the Great Recession trough in 2010. Nonetheless, the number of union members in manufacturing had fallen by almost 900,000. As we added back jobs in the sector, they were overwhelmingly lower paying non-union jobs.

The Biden administration hopes to change this story by pressing government contractors to be neutral on workers’ decision to unionize. Hopefully this effort will prove successful, but it would have the same benefit for workers if employers in other areas, like health care, transportation, and warehousing could be pressured to be neutral in organizing drives.

The historic link between manufacturing jobs and unions has largely disappeared, and there is not an obvious reason to put any special effort into bringing it back. We want jobs to be union jobs, in every sector of the economy. When manufacturing disproportionately had union jobs, increasing manufacturing jobs might have meant increasing union jobs. This is no longer true.

In this respect it is also worth noting that manufacturing jobs continue to be overwhelmingly male. There is no obvious reason that we should focus on improving the quality of the jobs held by men, while neglecting jobs held disproportionately by women. The idea that a Cold War stance to China will be a big positive for the working class as a whole is simply wrong.

The Cooperative Alternative

As I have argued in the past, we should look to cooperate with China in the areas where it will provide both countries with clear benefits. The most obvious areas for such cooperation are health care and climate change. Both countries, and in fact the whole world, would benefit from the sharing of technology in these areas. We would all benefit from having new technology in health care and clean energy distributed as quickly and widely as possible.

This cooperation should mean open-source research where all findings are fully open. This would both allow for the most rapid possible progress and also have an equalizing effect on income distribution. Top researchers should be well-paid, but there is no reason to believe that they need to be motivated by payoffs in the tens or hundreds of millions, or even billions, of dollars.

Instead of furthering the upward redistribution of the last four decades, open-source research in major areas of the economy would likely redistribute downward. If the price of patent-copyright protected items fell to the free market price, it would effectively raise the real wages of workers.

To take the most important example, we are currently spending over $500 billion a year on prescription drugs. If these drugs sold in a free market without patents or related protections, they would likely cost us less than $100 billion. The savings of $400 billion comes to roughly $3,000 a year for every household in the country. (The actual savings would be somewhat less since we would likely have to increase public funding of research by $50 to $100 billion a year.) There would also be huge savings on medical equipment and a wide variety of other areas where public funding was substituted for patent monopoly funding.  

A policy that focuses on cooperating with China, where we can, is likely to produce the best results from both a foreign policy and domestic economic perspective. Our resources will be far better used on fighting climate change and disease than on trying to intimidate China militarily. And, if we adopt policies that almost seemed as though they are designed to redistribute income upwards, we should not be surprised that we end up with more inequality.

Unlike Trump, President Biden is a serious person, but he also can be seriously wrong. Putting us on a path towards a new Cold War with China would be a disastrous mistake. We should do everything possible to keep Biden from going this route.  

[1] For the young ones out there, “no longer operative,” was the line that Richard Nixon’s press secretary, Ronald Zeigler, used to refer to all the claims he had made proclaiming Nixon’s innocence in the Watergate coverup after the release of White House tape recordings showing that Nixon was in the middle of the coverup from the beginning.

[2] I outline a mechanism for doing this in chapter 5 of Rigged [it’s free].

[3] Larry Mishel found a 7.8 percent wage premium for non-college educated workers for the years 2010-2016 in an analysis that controlled for age, gender, education and other factors. This compares to a premium of 16.7 percent for college-educated workers. The premium would be somewhat higher if non-wage compensation was included. However, since the average hourly wage for production non-supervisory workers in manufacturing has been falling relative to the average hourly wage in the private sector as a whole, the premium would almost certainly have to be considerably smaller in 2021 than the average for 2010-2016. It is also likely that the gap in benefits has fallen, as non-unionized workers in manufacturing are less likely to have health care insurance and pensions than unionized workers.

After Donald Trump’s clown shows, it was nice to have a U.S. president who at least takes world issues seriously while representing the country at the various summits over the last week. But that is a low bar. While we want adults in positions of responsibility, we have to ask where those adults want to take us. It is not clear that we should all eagerly follow the path that President Biden seems to be outlining with regard to China.

Unfortunately, people in the United States (including reporter-type people) tend to have little knowledge of history. Many have no first-hand knowledge of the Cold War with the Soviet Union and have not done much reading to make up for this deficiency. In fact, they also don’t seem to have much knowledge of the Iraq War, which is probably the better place to start here.

 

Target Iraq: Bad Guy Saddam Hussein

When President George W. Bush fixed his eyes on overthrowing Saddam Hussein in the summer of 2002, he decided the rationale was going to be that Hussein possessed or was developing nuclear weapons. This complaint came in spite of the fact that UN weapons inspectors had been in place in the country ever since its defeat in the first Iraq war in 1991.   

The weapons inspectors insisted that they saw no evidence that Iraq was developing nuclear weapons. The inspectors’ assessment was dismissed by the Bush administration and to a large extent by major news outlets. They claimed that the restrictions that Iraq imposed on inspections, usually ones of timing, made it impossible for the inspectors to get an accurate assessment of the country’s nuclear capabilities.

The Bush administration then went about whipping up its own “intelligence,” supporting the administration’s claim that Iraq was far along in developing a nuclear bomb. Much of its case was complete fabrication, while other parts were very selective presentations of evidence. But they did manage to sell most of the media and the public on the threat of Iraq’s nuclear weapons.

However, the Bush administration also had a fallback to assuage many liberal types who had qualms about overthrowing a foreign government. The fallback was that Saddam Hussein was a really bad guy.

They had a very good case on this one. Hussein routinely imprisoned or executed political opponents or critics. He had invaded two of his neighbors (Iran in 1980 and Kuwait in 1990) and he persecuted domestic minorities within Iraq, most notably the Kurds and Shite population.

No one could seriously want to defend Hussein’s practices as the ruler of Iraq, but that didn’t mean that overthrowing him was a good policy. It may still be too early to pass a final judgement, and we can never know a counterfactual. At this point, it would be difficult to claim that things have changed for the better for the people of Iraq and the region as a result of the U.S. invasion.

Anyhow, the Hussein as bad guy story is important for our current policy toward China. We can point to the country’s repressive measures against internal dissidents. We can also point to the repression directed towards its Uighur population in Western China, as well as, its belligerence towards its neighbors in making claims on territorial waters. These and other actions can be used to show that China is far from a model democracy that respects the rights of its own citizens, as well as, international law.

But this issue is really beside the point. The question from the standpoint of U.S. policy is how any of our actions can be expected to improve the situation. Specifically, if we adopt a confrontational stance towards China, involving economic measures and a beefed-up military presence in the region, is there reason to believe that the country will improve its behavior in the areas that we care about?

My guess is that the answer is no. Perhaps those with more expertise on China can make a strong case that China’s government would change its behavior in response to a more confrontational approach by the United States, but that really shouldn’t be the issue. It doesn’t make sense to have confrontation as a feel-good approach.     

Unfortunately, that seems to be the current path. It is also worth noting in this respect that China was hardly a model of human rights and democracy when the Clinton administration pushed to have it admitted to the WTO at the end of the 1990s. At the time, anyone who raised human rights and labor issues as a reason not to further open trade with China was denounced as a Neanderthal protectionist. We were told that somehow, by buying clothes shoes and other items produced with low cost Chinese labor, we would turn the country into a liberal democracy. Guess that claim is no longer operative.[1]

 

Using the Cold War to Justify Otherwise Unjustifiable Policies

In the days of the first Cold War the U.S.  government pursued many policies, both foreign and domestic, that would be hard to justify without the threat of the Soviet Union. On the domestic side, we had a range of policies by both the government and private companies, to crack down on alleged communists and Soviet sympathizers.

These included loyalty oaths where people had to swear that they were not members of the Communist Party to get government jobs. This often kept not only people who were actual party members from getting jobs, but also people who sympathized with many of the party’s stated goals, like promoting civil rights and avoiding nuclear war.

The 1947 Taft-Hartley Act required unions to force all officers to sign affidavits saying that they were not communists in order to be eligible for recognition through a National Labor Relations Board certified election. Many of the most committed labor organizers were in fact members of the Communist Party, so they were thrown out of labor movement if they refused to sign this pledge. In other cases, committed organizers refused to go along with this demand even if they were not themselves actually party members. On the private side, we had the Hollywood blacklist, where a large number of screenwriters and actors were prevented from working for much of their career.

Internationally, the United States had numerous interventions around the world that had little or nothing to do with combatting the Soviet Union. Just to take two prominent ones: we overthrew the democratically elected government in Iran in 1953 and installed a brutal dictatorship. The issue was not communism or the Soviet Union. The issue was that our oil companies wanted access to Iranian oil.

In another case, the U.S. overthrew an elected government in Guatemala in 1954. Again, this had nothing really to do with the Soviet Union, the United Fruit Company was unhappy about its banana plantations being taken in a land reform program.

The list of interventions could be extended at great length, but the point is that the U.S. government used the Soviet threat to justify policies designed to serve powerful corporate interests that would be very difficult to rationalize without this threat. In addition, we spent enormous sums on the military, which meant large profits for military contractors.

A New Cold War against China could be used in the same way. Needless to say, we can justify pretty much endless military spending based on the need to meet the China threat. Many people don’t seem to realize the absurdity of trying to spend China into the ground, as some would claim we did with the Soviet Union. While the Soviet Union’s economy peaked at around half of the size of the U.S. economy, China’s economy is already almost 20 percent larger than the U.S. economy, and will be around 80 percent larger by the end of the decade.     

If the goal of arms race is to spend China into the ground, it is more likely we would spend ourselves into the ground. The burden of a major arms buildup would be much greater on the U.S. than China, although just like in the first Cold War, it would make lots of military contractors rich.

 

The Implications of the New Cold War for Domestic Policies

There are other aspects to the prospect of Cold War-type competition that are equally pernicious. Last week the Senate passed a bill that would provide $250 billion over the next decade in research spending, ostensibly to help us compete with China. (The $25 billion in annual spending comes to 0.4 percent of the total budget, which you can find out quickly with CEPR’s “It’s the Budget, Stupid” budget calculator.)

The idea of boosting public spending on R&D is a good one, but we need to ask some serious questions about who gets the benefits. Operation Warp Speed gave us a great model for the benefits of public spending, while at the same time showing us the potential for skewing of the gains.

Moderna probably shows the issue most clearly. The federal government fully funded the development and testing of its vaccine. Yet, it gave the company a patent monopoly, which allows it to restrict the distribution of the vaccine and charge prices far above the free market price. As result, Moderna’s stockholders and its top executives have made billions of dollars, effectively profiting off of the government’s investment.

We could structure public contracts differently. For example, we could require that all innovations derived from government research be placed in the public domain so that anyone could manufacture them who possessed the necessary expertise. In some cases, this could involve going deeper downstream in the development process than is intended in the bill approved by the Senate, but there is no reason that the funding could not be used to cover the full costs of developing a product, as was the case with Moderna.[2]

Unfortunately, this bill looks like the funding will follow the model of Moderna. The government puts up the money and takes the risk, while private corporations will be able to gain patent and copyright monopolies, which will allow them to garner a disproportionate share of the gains. In a context where we are supposed to be concerned about the distribution of income, this looks like a huge step in the wrong direction.

Some people have supported this sort of investment with the idea that it will bring manufacturing jobs back to the United States and therefore reduce inequality. Unfortunately, this is a view that has not kept pace with the data. Historically, manufacturing has been a source of good paying jobs for workers without college degrees. However, the wage premium in manufacturing has largely disappeared over the last three decades.

To take a very simple measure, the average hourly wage for production non-supervisory workers in manufacturing was 5.7 percent above the average for the private sector as a whole in 1990. In the most recent data (May, 2021), the wage for production workers in manufacturing was 8.1 percent lower than in the private sector as a whole. This comparison is incomplete, since it doesn’t capture the value of benefits, which tend to be higher in manufacturing, nor does it control for education, experience, and other factors, but it is clear that the premium is substantially smaller than it had been in prior decades.[3]

The reason for the deterioration in the quality of manufacturing jobs is not a secret. The unionization rate in manufacturing has plummeted, largely due to trade, as well as aggressive anti-union measures by employers. In 1990, more than 20 percent of workers in manufacturing were unionized. In 2020, just 8.5 percent of workers in manufacturing were unionized. That is only slightly higher than the 6.3 percent average for the private sector as a whole.

Furthermore, more manufacturing jobs has not meant more union jobs. Until the pandemic hit in March, we had added back more than 1.6 million manufacturing jobs from the Great Recession trough in 2010. Nonetheless, the number of union members in manufacturing had fallen by almost 900,000. As we added back jobs in the sector, they were overwhelmingly lower paying non-union jobs.

The Biden administration hopes to change this story by pressing government contractors to be neutral on workers’ decision to unionize. Hopefully this effort will prove successful, but it would have the same benefit for workers if employers in other areas, like health care, transportation, and warehousing could be pressured to be neutral in organizing drives.

The historic link between manufacturing jobs and unions has largely disappeared, and there is not an obvious reason to put any special effort into bringing it back. We want jobs to be union jobs, in every sector of the economy. When manufacturing disproportionately had union jobs, increasing manufacturing jobs might have meant increasing union jobs. This is no longer true.

In this respect it is also worth noting that manufacturing jobs continue to be overwhelmingly male. There is no obvious reason that we should focus on improving the quality of the jobs held by men, while neglecting jobs held disproportionately by women. The idea that a Cold War stance to China will be a big positive for the working class as a whole is simply wrong.

The Cooperative Alternative

As I have argued in the past, we should look to cooperate with China in the areas where it will provide both countries with clear benefits. The most obvious areas for such cooperation are health care and climate change. Both countries, and in fact the whole world, would benefit from the sharing of technology in these areas. We would all benefit from having new technology in health care and clean energy distributed as quickly and widely as possible.

This cooperation should mean open-source research where all findings are fully open. This would both allow for the most rapid possible progress and also have an equalizing effect on income distribution. Top researchers should be well-paid, but there is no reason to believe that they need to be motivated by payoffs in the tens or hundreds of millions, or even billions, of dollars.

Instead of furthering the upward redistribution of the last four decades, open-source research in major areas of the economy would likely redistribute downward. If the price of patent-copyright protected items fell to the free market price, it would effectively raise the real wages of workers.

To take the most important example, we are currently spending over $500 billion a year on prescription drugs. If these drugs sold in a free market without patents or related protections, they would likely cost us less than $100 billion. The savings of $400 billion comes to roughly $3,000 a year for every household in the country. (The actual savings would be somewhat less since we would likely have to increase public funding of research by $50 to $100 billion a year.) There would also be huge savings on medical equipment and a wide variety of other areas where public funding was substituted for patent monopoly funding.  

A policy that focuses on cooperating with China, where we can, is likely to produce the best results from both a foreign policy and domestic economic perspective. Our resources will be far better used on fighting climate change and disease than on trying to intimidate China militarily. And, if we adopt policies that almost seemed as though they are designed to redistribute income upwards, we should not be surprised that we end up with more inequality.

Unlike Trump, President Biden is a serious person, but he also can be seriously wrong. Putting us on a path towards a new Cold War with China would be a disastrous mistake. We should do everything possible to keep Biden from going this route.  

[1] For the young ones out there, “no longer operative,” was the line that Richard Nixon’s press secretary, Ronald Zeigler, used to refer to all the claims he had made proclaiming Nixon’s innocence in the Watergate coverup after the release of White House tape recordings showing that Nixon was in the middle of the coverup from the beginning.

[2] I outline a mechanism for doing this in chapter 5 of Rigged [it’s free].

[3] Larry Mishel found a 7.8 percent wage premium for non-college educated workers for the years 2010-2016 in an analysis that controlled for age, gender, education and other factors. This compares to a premium of 16.7 percent for college-educated workers. The premium would be somewhat higher if non-wage compensation was included. However, since the average hourly wage for production non-supervisory workers in manufacturing has been falling relative to the average hourly wage in the private sector as a whole, the premium would almost certainly have to be considerably smaller in 2021 than the average for 2010-2016. It is also likely that the gap in benefits has fallen, as non-unionized workers in manufacturing are less likely to have health care insurance and pensions than unionized workers.

In a New York Times column today, William Cohan, a writer and former investment banker, warned of impending disaster if the Federal Reserve Board does not quickly move away from its low interest rate policy. Cohan tells readers:

“But many people wonder if Jerome Powell, the chairman of the Fed, has reckoned with the power of the easy-money monster the central bank spawned all those years ago. They worry that Mr. Powell has helped inflate bubbles in housing, lumber, copper, Bitcoin and stocks, bonds and other assets. The evidence is mounting: The Consumer Price Index, a gauge of inflation, rose 5 percent in May from a severely depressed number a year earlier — the fastest rate in nearly 13 years. And that’s just one worrisome indicator.”

The piece goes on to warn of all the horrible things to come if Powell does not soon start to raise interest rates. The basic story is that we have bubbles in many markets that will collapse, costing investors in these bubbles hundreds of billions, or even trillions, of dollars. [It is worth noting that lumber prices have been plummeting in the last few weeks.]

If this sounds familiar, that might be because Mr.  Cohan had a very similar column in the NYT a couple of years ago. In August of 2019, Cohan warned that “only the Fed can save us now,” and urged Fed Chair Jerome Powell to stand up to Trump and raise interest rates. The piece begins:

“Here’s the moment I realized the next financial crisis is inevitable.”

We find out that this was the moment when he realized he was listening to a speech where Powell indicated that he had no plans to raise interest rates.

Later Cohan explains:

“But although a sense of euphoria spread through the room, as well as through debt and equity markets, I was overcome by a sense of dread. A decade of historically low interest rates has begun to warp our economy. As we learned to our collective horror during the 2008 financial crisis, a period of sustained low interest rates forces investors on a desperate search for higher yields, inflating asset prices and the risks of owning loans and debt of all kinds.”

To  be clear, there are undoubtedly many bubbles in the U.S. economy right now. Bitcoin is the most obvious example, but we also have the proliferation of non-fungible tokens, as well as many stock prices that bear no relationship to plausible estimates of future earnings.

But none of this sets the stage for a 2008-09 disaster. In the years leading up to the Great Recession, the housing bubble was driving the economy. This was easy to see for anyone who bothered to look at the GDP data the Commerce Department publishes every quarter. Residential construction had increased from its normal rate, which is around 3.5 percent of GDP, to a peak of 6.8 percent of GDP. Similarly, soaring house prices led to a consumption boom, as people spent based on the bubble created equity in their home.

When the bubble collapsed, and housing construction fell to less than 2.0 percent of GDP due to overbuilding during the bubble. There was nothing to replace the loss of 4.8 percentage points of GDP or annual demand (more than $1 trillion in today’s economy). Similarly, the bubble driven consumption boom collapsed, costing us another 3-4 percentage points in demand.

This was the story of the Great Recession. The financial crisis was just the market working its magic on the banks and other financial institutions that had been reckless in issuing and marketing loans.

If we were to see a similar collapse in asset prices today, it would have no comparable impact on the real economy. If the roughly $1 trillion market capitalization in the digital currency market went to zero tomorrow, how would that affect the real economy? Some Bitcoin millionaires and billionaires would be very unhappy, but so what? There would be no economy-wide plunge in consumption. The same is true with asset prices in other markets.

Could this tank some banks that made bad loans? Sure, that’s what markets are for. Companies that are not competent are supposed to go out of business. The idea that this will create some financial crisis where we can’t undertake normal business transactions has zero foundation in reality.

In short, Mr. Cohan’s piece is just irresponsible fearmongering. There apparently is a big market for this stuff, but this is little reason to take it seriously.

 

Addendum

I should have mentioned that William Cohan’s columns forecasting disaster are a regular feature in the NYT, see here, here, and here.

In a New York Times column today, William Cohan, a writer and former investment banker, warned of impending disaster if the Federal Reserve Board does not quickly move away from its low interest rate policy. Cohan tells readers:

“But many people wonder if Jerome Powell, the chairman of the Fed, has reckoned with the power of the easy-money monster the central bank spawned all those years ago. They worry that Mr. Powell has helped inflate bubbles in housing, lumber, copper, Bitcoin and stocks, bonds and other assets. The evidence is mounting: The Consumer Price Index, a gauge of inflation, rose 5 percent in May from a severely depressed number a year earlier — the fastest rate in nearly 13 years. And that’s just one worrisome indicator.”

The piece goes on to warn of all the horrible things to come if Powell does not soon start to raise interest rates. The basic story is that we have bubbles in many markets that will collapse, costing investors in these bubbles hundreds of billions, or even trillions, of dollars. [It is worth noting that lumber prices have been plummeting in the last few weeks.]

If this sounds familiar, that might be because Mr.  Cohan had a very similar column in the NYT a couple of years ago. In August of 2019, Cohan warned that “only the Fed can save us now,” and urged Fed Chair Jerome Powell to stand up to Trump and raise interest rates. The piece begins:

“Here’s the moment I realized the next financial crisis is inevitable.”

We find out that this was the moment when he realized he was listening to a speech where Powell indicated that he had no plans to raise interest rates.

Later Cohan explains:

“But although a sense of euphoria spread through the room, as well as through debt and equity markets, I was overcome by a sense of dread. A decade of historically low interest rates has begun to warp our economy. As we learned to our collective horror during the 2008 financial crisis, a period of sustained low interest rates forces investors on a desperate search for higher yields, inflating asset prices and the risks of owning loans and debt of all kinds.”

To  be clear, there are undoubtedly many bubbles in the U.S. economy right now. Bitcoin is the most obvious example, but we also have the proliferation of non-fungible tokens, as well as many stock prices that bear no relationship to plausible estimates of future earnings.

But none of this sets the stage for a 2008-09 disaster. In the years leading up to the Great Recession, the housing bubble was driving the economy. This was easy to see for anyone who bothered to look at the GDP data the Commerce Department publishes every quarter. Residential construction had increased from its normal rate, which is around 3.5 percent of GDP, to a peak of 6.8 percent of GDP. Similarly, soaring house prices led to a consumption boom, as people spent based on the bubble created equity in their home.

When the bubble collapsed, and housing construction fell to less than 2.0 percent of GDP due to overbuilding during the bubble. There was nothing to replace the loss of 4.8 percentage points of GDP or annual demand (more than $1 trillion in today’s economy). Similarly, the bubble driven consumption boom collapsed, costing us another 3-4 percentage points in demand.

This was the story of the Great Recession. The financial crisis was just the market working its magic on the banks and other financial institutions that had been reckless in issuing and marketing loans.

If we were to see a similar collapse in asset prices today, it would have no comparable impact on the real economy. If the roughly $1 trillion market capitalization in the digital currency market went to zero tomorrow, how would that affect the real economy? Some Bitcoin millionaires and billionaires would be very unhappy, but so what? There would be no economy-wide plunge in consumption. The same is true with asset prices in other markets.

Could this tank some banks that made bad loans? Sure, that’s what markets are for. Companies that are not competent are supposed to go out of business. The idea that this will create some financial crisis where we can’t undertake normal business transactions has zero foundation in reality.

In short, Mr. Cohan’s piece is just irresponsible fearmongering. There apparently is a big market for this stuff, but this is little reason to take it seriously.

 

Addendum

I should have mentioned that William Cohan’s columns forecasting disaster are a regular feature in the NYT, see here, here, and here.

If the waitress works in an upscale restaurant and earns a decent living, there is a good chance that she is paying a higher tax rate than a private equity partner. The reason is that private equity (PE) partners get most of their pay in the form of “carried interest.” This is money that is paid to them as a share of the returns on the money they manage. Since private equity partners are rich and powerful, their carried interest payments are taxed at the capital gains tax rate of 20 percent, instead of the 37 percent top tax rate that people earning millions a year would be paying.

The ostensible rationale for allowing PE partners to pay a lower tax rate on their carried interest is that these payments involve risk. If the funds don’t meet some threshold rate of return, then they don’t earn any money.

The New York Times had a major piece on tax avoidance and evasion by private equity partners, which gave this rationale. However, the piece neglected to point out that millions of workers take this sort of risk, since they get paid, in large part, on commission. This list would include realtors, car salespeople, and waiters and waitresses. In all of these cases, the money earned as a commission is taxed as normal income. It is only PE partners, or hedge fund and venture capital partners, that get to pay a lower tax rate.

The tax savings for PE partners are substantial. For a PE partner earning $10 million a year, the savings between the current 37 percent top marginal rate and the 20 percent capital gains rate would be roughly $1.7 million a year. That comes to more than 1,100 food stamp person years.

If the waitress works in an upscale restaurant and earns a decent living, there is a good chance that she is paying a higher tax rate than a private equity partner. The reason is that private equity (PE) partners get most of their pay in the form of “carried interest.” This is money that is paid to them as a share of the returns on the money they manage. Since private equity partners are rich and powerful, their carried interest payments are taxed at the capital gains tax rate of 20 percent, instead of the 37 percent top tax rate that people earning millions a year would be paying.

The ostensible rationale for allowing PE partners to pay a lower tax rate on their carried interest is that these payments involve risk. If the funds don’t meet some threshold rate of return, then they don’t earn any money.

The New York Times had a major piece on tax avoidance and evasion by private equity partners, which gave this rationale. However, the piece neglected to point out that millions of workers take this sort of risk, since they get paid, in large part, on commission. This list would include realtors, car salespeople, and waiters and waitresses. In all of these cases, the money earned as a commission is taxed as normal income. It is only PE partners, or hedge fund and venture capital partners, that get to pay a lower tax rate.

The tax savings for PE partners are substantial. For a PE partner earning $10 million a year, the savings between the current 37 percent top marginal rate and the 20 percent capital gains rate would be roughly $1.7 million a year. That comes to more than 1,100 food stamp person years.

There is plenty of evidence at this point that CEO pay bears little relationship to returns to shareholders. Yet, it is an article of faith in policy circles, especially progressive policy circles, that companies are being run to maximize returns to shareholders.

This is why I loved this story. According to the NYT, Chad Richison, the CEO of Paycom, had a pay package that was worth $211 million. When it came up for vote of shareholders in a say-on-pay ballot, it was voted down. The article tells readers:

“Shareholders opposing the compensation won a say-on-pay vote at the company, and a majority also withheld votes from a director on the board’s compensation committee. Under Paycom’s governance guidelines, the director had to tender his resignation. The board’s nominating and corporate governance committee did not accept it, however, instead reaffirming his appointment, according to a company filing.”

So we have a story where the shareholders explicitly rejected a CEO pay package and voted to remove the director most responsible for the pay package. But their votes on both are ignored and the director stays on the job and the CEO keeps the cash.

Can someone explain how this is maximizing shareholder value?

 

 

There is plenty of evidence at this point that CEO pay bears little relationship to returns to shareholders. Yet, it is an article of faith in policy circles, especially progressive policy circles, that companies are being run to maximize returns to shareholders.

This is why I loved this story. According to the NYT, Chad Richison, the CEO of Paycom, had a pay package that was worth $211 million. When it came up for vote of shareholders in a say-on-pay ballot, it was voted down. The article tells readers:

“Shareholders opposing the compensation won a say-on-pay vote at the company, and a majority also withheld votes from a director on the board’s compensation committee. Under Paycom’s governance guidelines, the director had to tender his resignation. The board’s nominating and corporate governance committee did not accept it, however, instead reaffirming his appointment, according to a company filing.”

So we have a story where the shareholders explicitly rejected a CEO pay package and voted to remove the director most responsible for the pay package. But their votes on both are ignored and the director stays on the job and the CEO keeps the cash.

Can someone explain how this is maximizing shareholder value?

 

 

The consumer price index (CPI) rose 0.6 percent in May, with the core index (which excludes food and energy) rising at an even more rapid 0.7 percent. This brought the increases in the overall and core index over the last year to 5.0 and 3.8 percent, respectively.

Does this mean the inflation hawks were right? Did Biden’s recovery package throw too much wood on the fire and is now setting off an inflationary spiral?

A little closer look at the numbers indicates that caution is still advised. First of all, prices plunged last April and May of last year, as the economy was shutting down in response to the pandemic. This means that the year-over-year comparison is not very informative.

To get a more honest evaluation, we should look at the rate of change of prices since February of 2020, before the pandemic was having an impact. Using this as a base, the overall CPI has increased at a 3.0 percent annual rate, while the core has increased at a 2.6 percent annual rate.

The 2.6 percent rate is somewhat above the Fed’s 2.0 percent target, but the Fed targets the personal consumption expenditure deflator (PCE), not the CPI. For coverage and methodology reasons, the core PCE is generally 0.2-0.3 percentage points lower than the core CPI.

Also, as the Fed has stated explicitly, the 2.0 percent target is an average, not a ceiling. Given that inflation has consistently run well below 2.0 percent, to maintain a 2.0 percent average the inflation rate has to be above 2.0 percent on occasion, so there is nothing in the data to indicate that we have a problem, accepting the Fed’s target.

 

The Used Car Crisis

In fact, even this above 2.0 percent inflation figure can be a bit deceptive. Used car prices have soared in recent months, rising 7.3 percent in May and 10.0 percent in April. (These are monthly increases, not annual rates of increase.) If we take the period since February of 2020, used car prices have increased at a 23.2 percent annual rate.

The weight of used cars in the core CPI is 3.8 percent. This means that this jump in used car prices alone added almost 0.9 percentage points to the rate of inflation in the core index in the months since the pandemic began. That means that if we pull used cars out of the core index, it would have been increasing at just under a 1.8 percent annual rate since the pandemic began, well below the Fed’s target.

The reason for the jump in used car prices is not a mystery. The worldwide shortage of semi-conductors has slowed auto production, leading several assembly lines to shut down for a period of time. (Most are now back up and running.) The shortage of new cars led many people to turn to buying used cars, sending their prices soaring.

This shortage of cars is a problem. People need cars for transportation and rental car companies need cars to restock their fleets, which they sold off at the start of the pandemic to conserve cash. But this is clearly a temporary problem. Semi-conductor output will increase as existing plants add capacity and new ones come back on line. When that happens, we are likely to see the price of used cars return to something comparable to their pre-pandemic levels. New car prices, which have also risen rapidly, should also fall back in line with pre-pandemic trends.

If we take the car story out of the picture, there is not much of a story of run-away inflation. The prices of some items have been rising rapidly, but this is a bounce back from price declines at the start of the pandemic. Apparel prices jumped 1.2 percent in May, car insurance 0.7 percent, and air fares 7.0 percent. These indexes are respectively 2.2 percent, 0.2 percent, and 6.3 percent below the February 2020 level.

Inflation in the rent indexes remains well contained. The rent proper index rose 0.2 percent in May, while the owners equivalent rent index rose 0.3 percent. Over the last year, they are up 1.8 percent and 2.1 percent, respectively. The medical care index, which has been a major source of inflation, has risen at just a 1.7 percent annual rate since the pandemic began. The index for college tuition has risen at less than a 0.6 percent annual rate.

We will see more erratic price movements as the economy continues to reopen. There will be some spot shortages of different items and there will be cases where strong demand gives workers the bargaining power to raise their wages, but there is not a story of an inflation crisis in these data.

 

Productivity

It is worth mentioning once again the importance of productivity growth in the inflation story. Productivity growth had been running at just a 1.0 percent annual rate in the decade before the pandemic. In the last year, it rose at a 4.1 percent rate. The data we have for the second quarter, indicates that we will see extraordinarily high productivity growth again in the current quarter.

While no one expects anything like a 4.1 percent rate of productivity growth to continue, we may well be seeing productivity growth on a faster track. Businesses were forced to find new ways to operate in the pandemic.[1] In many cases this will lead to continuing gains in productivity. Even an increase to a 2.0 percent rate of productivity growth will hugely reduce the risks of inflation.

It is important to remember that the 1970s inflation was associated with a sharp drop in productivity growth. Productivity had been increasing at 3.0 percent annual rate in the long post-war boom from 1947 to 1973. It slowed to just over 1.0 percent from 1973 to 1980. This slowdown was a major cause of inflationary pressure during the decade. If productivity growth increases instead, it will act to alleviate inflation.

Anyhow, we will certainly need more quarters’ data before we can say anything definitive about productivity growth. The series is highly erratic and we could see sharp reversals of the recent increases. But if the growth over the last year turns out not to be fluke or due to measurement error, it’s hard to see how we can have too much to worry about with inflation.

[1] Not all the increases in efficiency will show up in productivity data. For example, the savings in time and commuting expenditures for people who can now work remotely, will not appear as an increase in productivity. To take another example, my wife had to have a consultation with a medical specialist half-way across the country. In the pre-pandemic era, this likely would have required a 3-day trip, with two flights each way and two nights in a hotel. Instead, she just had to put an hour aside for a Zoom meeting. This is an enormous savings in resources, but does not show up in the productivity data at all.  

 

The consumer price index (CPI) rose 0.6 percent in May, with the core index (which excludes food and energy) rising at an even more rapid 0.7 percent. This brought the increases in the overall and core index over the last year to 5.0 and 3.8 percent, respectively.

Does this mean the inflation hawks were right? Did Biden’s recovery package throw too much wood on the fire and is now setting off an inflationary spiral?

A little closer look at the numbers indicates that caution is still advised. First of all, prices plunged last April and May of last year, as the economy was shutting down in response to the pandemic. This means that the year-over-year comparison is not very informative.

To get a more honest evaluation, we should look at the rate of change of prices since February of 2020, before the pandemic was having an impact. Using this as a base, the overall CPI has increased at a 3.0 percent annual rate, while the core has increased at a 2.6 percent annual rate.

The 2.6 percent rate is somewhat above the Fed’s 2.0 percent target, but the Fed targets the personal consumption expenditure deflator (PCE), not the CPI. For coverage and methodology reasons, the core PCE is generally 0.2-0.3 percentage points lower than the core CPI.

Also, as the Fed has stated explicitly, the 2.0 percent target is an average, not a ceiling. Given that inflation has consistently run well below 2.0 percent, to maintain a 2.0 percent average the inflation rate has to be above 2.0 percent on occasion, so there is nothing in the data to indicate that we have a problem, accepting the Fed’s target.

 

The Used Car Crisis

In fact, even this above 2.0 percent inflation figure can be a bit deceptive. Used car prices have soared in recent months, rising 7.3 percent in May and 10.0 percent in April. (These are monthly increases, not annual rates of increase.) If we take the period since February of 2020, used car prices have increased at a 23.2 percent annual rate.

The weight of used cars in the core CPI is 3.8 percent. This means that this jump in used car prices alone added almost 0.9 percentage points to the rate of inflation in the core index in the months since the pandemic began. That means that if we pull used cars out of the core index, it would have been increasing at just under a 1.8 percent annual rate since the pandemic began, well below the Fed’s target.

The reason for the jump in used car prices is not a mystery. The worldwide shortage of semi-conductors has slowed auto production, leading several assembly lines to shut down for a period of time. (Most are now back up and running.) The shortage of new cars led many people to turn to buying used cars, sending their prices soaring.

This shortage of cars is a problem. People need cars for transportation and rental car companies need cars to restock their fleets, which they sold off at the start of the pandemic to conserve cash. But this is clearly a temporary problem. Semi-conductor output will increase as existing plants add capacity and new ones come back on line. When that happens, we are likely to see the price of used cars return to something comparable to their pre-pandemic levels. New car prices, which have also risen rapidly, should also fall back in line with pre-pandemic trends.

If we take the car story out of the picture, there is not much of a story of run-away inflation. The prices of some items have been rising rapidly, but this is a bounce back from price declines at the start of the pandemic. Apparel prices jumped 1.2 percent in May, car insurance 0.7 percent, and air fares 7.0 percent. These indexes are respectively 2.2 percent, 0.2 percent, and 6.3 percent below the February 2020 level.

Inflation in the rent indexes remains well contained. The rent proper index rose 0.2 percent in May, while the owners equivalent rent index rose 0.3 percent. Over the last year, they are up 1.8 percent and 2.1 percent, respectively. The medical care index, which has been a major source of inflation, has risen at just a 1.7 percent annual rate since the pandemic began. The index for college tuition has risen at less than a 0.6 percent annual rate.

We will see more erratic price movements as the economy continues to reopen. There will be some spot shortages of different items and there will be cases where strong demand gives workers the bargaining power to raise their wages, but there is not a story of an inflation crisis in these data.

 

Productivity

It is worth mentioning once again the importance of productivity growth in the inflation story. Productivity growth had been running at just a 1.0 percent annual rate in the decade before the pandemic. In the last year, it rose at a 4.1 percent rate. The data we have for the second quarter, indicates that we will see extraordinarily high productivity growth again in the current quarter.

While no one expects anything like a 4.1 percent rate of productivity growth to continue, we may well be seeing productivity growth on a faster track. Businesses were forced to find new ways to operate in the pandemic.[1] In many cases this will lead to continuing gains in productivity. Even an increase to a 2.0 percent rate of productivity growth will hugely reduce the risks of inflation.

It is important to remember that the 1970s inflation was associated with a sharp drop in productivity growth. Productivity had been increasing at 3.0 percent annual rate in the long post-war boom from 1947 to 1973. It slowed to just over 1.0 percent from 1973 to 1980. This slowdown was a major cause of inflationary pressure during the decade. If productivity growth increases instead, it will act to alleviate inflation.

Anyhow, we will certainly need more quarters’ data before we can say anything definitive about productivity growth. The series is highly erratic and we could see sharp reversals of the recent increases. But if the growth over the last year turns out not to be fluke or due to measurement error, it’s hard to see how we can have too much to worry about with inflation.

[1] Not all the increases in efficiency will show up in productivity data. For example, the savings in time and commuting expenditures for people who can now work remotely, will not appear as an increase in productivity. To take another example, my wife had to have a consultation with a medical specialist half-way across the country. In the pre-pandemic era, this likely would have required a 3-day trip, with two flights each way and two nights in a hotel. Instead, she just had to put an hour aside for a Zoom meeting. This is an enormous savings in resources, but does not show up in the productivity data at all.  

 

I suppose trying to be unbiased is difficult when one side of a debate is certifiably loony, but the Washington Post should try a bit harder. In an article on Florida Governor Ron DeSantis’ attempt to prohibit cruise ships docking in Florida from requiring vaccines, the Post wrote:

“DeSantis’s resistance to companies’ use of so-called vaccine passports, which would certify an individual’s immunization, is just the latest rejection of corporate preferences in favor of cultural appeals that resonate with Trump voters.”

The vaccine requirement is a safety regulation, designed to protect crew and other passengers from the risk of catching the Covid. The paper is trivializing this risk by describing it simply as a “preference.”

I suppose trying to be unbiased is difficult when one side of a debate is certifiably loony, but the Washington Post should try a bit harder. In an article on Florida Governor Ron DeSantis’ attempt to prohibit cruise ships docking in Florida from requiring vaccines, the Post wrote:

“DeSantis’s resistance to companies’ use of so-called vaccine passports, which would certify an individual’s immunization, is just the latest rejection of corporate preferences in favor of cultural appeals that resonate with Trump voters.”

The vaccine requirement is a safety regulation, designed to protect crew and other passengers from the risk of catching the Covid. The paper is trivializing this risk by describing it simply as a “preference.”

We know it would be too much to expect that New York Times reporters might have some knowledge of policies that the United States had in place twenty or even ten years ago. After all, that would require some memory or some knowledge of history.

Anyhow, for those of us who do have some memory, it was rather striking to see the first paragraph of an article reporting on the expected Senate approval of measures that are explicitly protectionist:

“Faced with an urgent competitive threat from China, the Senate is poised to pass the most expansive industrial policy legislation in U.S. history, blowing past partisan divisions over government support for private industry to embrace a nearly quarter-trillion-dollar investment in building up America’s manufacturing and technological edge.”

So now the United States faces an “urgent” competitive threat from China.  Note this this is a news story, not an opinion column.

This framing contrasts sharply with what we saw in the first decade of the century, when the United States was losing millions of manufacturing jobs to China. This led to the destruction of towns and cities across the Midwest, which were overwhelmingly dependent on these manufacturing jobs. Back then, this was simply a story of free trade benefiting the economy, not a problem of an urgent competitive threat.

But now, when the jobs being subjected to competition are those of are most highly educated workers, software designers, biotech engineers and others with advanced degrees, free trade is no longer good. And, instead of U.S. companies like GE and Walmart benefiting from cheap Chinese labor, our leading tech companies are worried about going head-to-head with more efficient Chinese competitors.

We can all see why there would be urgency now. Oh well, this should help sustain the market for hand-wringing books and articles about inequality.

 

 

We know it would be too much to expect that New York Times reporters might have some knowledge of policies that the United States had in place twenty or even ten years ago. After all, that would require some memory or some knowledge of history.

Anyhow, for those of us who do have some memory, it was rather striking to see the first paragraph of an article reporting on the expected Senate approval of measures that are explicitly protectionist:

“Faced with an urgent competitive threat from China, the Senate is poised to pass the most expansive industrial policy legislation in U.S. history, blowing past partisan divisions over government support for private industry to embrace a nearly quarter-trillion-dollar investment in building up America’s manufacturing and technological edge.”

So now the United States faces an “urgent” competitive threat from China.  Note this this is a news story, not an opinion column.

This framing contrasts sharply with what we saw in the first decade of the century, when the United States was losing millions of manufacturing jobs to China. This led to the destruction of towns and cities across the Midwest, which were overwhelmingly dependent on these manufacturing jobs. Back then, this was simply a story of free trade benefiting the economy, not a problem of an urgent competitive threat.

But now, when the jobs being subjected to competition are those of are most highly educated workers, software designers, biotech engineers and others with advanced degrees, free trade is no longer good. And, instead of U.S. companies like GE and Walmart benefiting from cheap Chinese labor, our leading tech companies are worried about going head-to-head with more efficient Chinese competitors.

We can all see why there would be urgency now. Oh well, this should help sustain the market for hand-wringing books and articles about inequality.

 

 

The New York Times reported on the decision by the Food and Drug Administration to approve the drug aducanumab, as a treatment for Alzheimer’s disease. According to the piece, it is the first new treatment for the disease in almost two decades.

As the article makes clear, there is no consensus in the scientific community about the effectiveness of the drug. The clinical trials for the drug were not conclusive, according to several experts cited in the piece, and the drug has harmful side effects, the risk of which can easily outweigh any potential benefits.

As the piece points out, the drugs manufacturer Biogen, stands  to make billions of dollars from aducanumab. This gives it a strong incentive to overstate the benefits and downplay the risks. This means that it may pay physicians and patient advocacy groups to promote the drug. (I’m one of those old-fashioned economists who believe that people respond to incentives.)

If the government did not rely on patent monopolies to finance the development of drugs, it would mean that no one would have the same sort of incentive to push drugs that are not safe and effective.

The New York Times reported on the decision by the Food and Drug Administration to approve the drug aducanumab, as a treatment for Alzheimer’s disease. According to the piece, it is the first new treatment for the disease in almost two decades.

As the article makes clear, there is no consensus in the scientific community about the effectiveness of the drug. The clinical trials for the drug were not conclusive, according to several experts cited in the piece, and the drug has harmful side effects, the risk of which can easily outweigh any potential benefits.

As the piece points out, the drugs manufacturer Biogen, stands  to make billions of dollars from aducanumab. This gives it a strong incentive to overstate the benefits and downplay the risks. This means that it may pay physicians and patient advocacy groups to promote the drug. (I’m one of those old-fashioned economists who believe that people respond to incentives.)

If the government did not rely on patent monopolies to finance the development of drugs, it would mean that no one would have the same sort of incentive to push drugs that are not safe and effective.

In recent weeks there have been several articles noting the enormous wealth that a small number of people have made off of the vaccines and treatments developed to control the pandemic. Many see this as an unfortunate outcome of our efforts to contain the pandemic. In that view, containing the pandemic is an immensely important goal, if some people get incredibly rich as result, it’s a price well worth paying. After all, maybe we can even tax back some of their wealth after the fact.

The infuriating part of this story is that it is so obviously not true. But, just as followers of Donald Trump are prepared to believe any crazy story he tells about the stolen election, our intellectual types are willing to accept the idea that the only way we could have gotten vaccines as quickly as we did was by granting a small number of companies and individuals patent monopolies. And, just as no amount of evidence can dissuade Trumpers from believing their guy actually won the election, it is not possible to get most people involved in policy debates to consider the possibility that we don’t need patent monopolies to finance the development of drugs or vaccines.

This is especially disturbing in the case of the current crop of vaccines developed in the United States and Europe. The development of mRNA technology was done overwhelming on the public dime. This is hardly a secret. In fact, the NIH owns one of the key patents that Moderna used in the development of its vaccine.

The New York Times even recently featured a piece highlighting the work of Dr. Kato Kariko, who it claims spent her whole career working on government grants and never earned more than $60,000 a year. Of course, it is reasonable to pay top notch researchers like Dr. Kariko considerably more than $60,000 a year, but the point is that researchers can be motivated by money (as well, as the commitment of many to help humanity), they don’t need government-granted patent monopolies.

The development of the Oxford-AstraZeneca vaccine was also paid for almost entirely with public money. AstraZeneca was in fact brought on after the fact as a partner, at the urging of Bill Gates. The vaccine itself was developed by a team of researchers at Oxford.   

In the case of both the mRNA vaccines and the Oxford-AstraZeneca vaccine we could have just contracted with the companies to do the work, we didn’t have to give them patent monopolies. If this sounds strange, go outside and look at the street in front of your house. The company that paved the street was paid on a contract with the government, it did not get a patent monopoly on the street.

For some reason, we cannot even get a serious discussion in policy circles about alternatives to patent monopolies for financing the development of drugs and vaccines. To my view, we should be looking to alternatives to patent and copyright monopolies as government funding mechanisms everywhere, but the case for alternatives is especially compelling in the case of biomedical research.[1]

The problem with biomedical research is that the proprietary nature of the knowledge, coupled with the enormous incentive to sell products at patent protected prices, is a huge invitation to corruption. The most dramatic example of this problem is with the opioid crisis, where the leading manufacturers have billions of dollars in settlements based on the allegation that they deliberately misled doctors and the general public about the addictiveness of the new generation of opioids. If OxyContin and other opioids had been selling as cheap generics, there would have been little incentive to lie about their addictiveness. And, of course if all the clinical trial results were fully public, they would not have been able to get away with lying in any case.

There is also the issue with drugs that the government or private insurers, regulated by the government, pick up the vast majority of the tab. For this reason, we don’t have to worry about direct government funding of research over-riding individual consumer decisions, as might be the case with items like cars or smart phones. Demand for a particular drug is already not determined by individuals, so there is nothing to usurp.

The great fortunes created by patent and copyright monopolies go well beyond the current crop of Covid vaccine billionaires. There are many people who have gotten tremendously rich developing software and other information technologies, medical equipment, and genetically modified plants, as a result of patent or copyright monopolies. Bill Gates has volunteered to be the poster child here.

While many of the contributions made by these rich people have been socially valuable, we have to recognize that the rewards they received were a policy choice. We could have made their patent and copyright monopolies shorter and/or weaker. We also could have relied more on direct funding for open-source research.

That is a basic logical point. Patent and copyright monopolies are not given by god, or even the constitution (go read Article 1, Section 8). We can structure them anyway we like and we can integrate them with other mechanisms for supporting research. Our decision to structure patent and copyright monopolies in a way that allows for a small number of people to get incredibly rich is because we have politicians who like very rich people.

There is nothing inherent in the market or any requirement of technology that requires this outcome. And, this outcome is justified by economists and reporters who are too lazy or incompetent to think for themselves. Just like any good Trumper, they repeat what they are told.

Vaccine Failure in the Pandemic

In spite of the celebration of the success of our vaccines in controlling the spread of the virus among people who get them, we have done an abysmal job in vaccinating the world. At this point, Africa, which has more than 15 percent of the world’s population, has received just 1.7 percent of the world’s vaccines. The situation in much of Latin America is not much better, as is the case in some of the poorer countries in Asia. India is of course suffering terribly from a shortage of vaccines, even though it is one of the world’s leading manufacturers and has a vaccine it developed itself.

China has been able to distribute 460 million vaccines domestically, in the last month. This is in addition to providing tens of millions off doses to countries around the world. At that pace, it will be able to produce enough vaccines to cover most of the world’s unvaccinated population early in 2022. By contrast, our experts insist that we can’t possibly make the U.S.-European vaccines any more rapidly than we already are, even if we suspend patent protections and share technology. In fact. Thomas Cueni, the director general of the International Federation of Pharmaceutical Manufacturers and Associations, insists that we can’t even produce items like syringes and vials that are needed to distribute the vaccines. (This assertion can be found at 21.10 here.)  

The implication is that China’s scientists and engineers must be much more competent than the U.S. ones. (I realize the mRNA vaccines are more effective, but the Chinese vaccines have been very effective in bringing the pandemic under control in countries where they have been widely distributed, like Serbia and Hungary.) It’s too bad that we have such second-rate people in charge of our anti-pandemic efforts. (Bill Gates played a leading role with his foundation.) Maybe next time we should outsource the job to China.  

[1] I discuss this issue in Chapter 5 of Rigged (it’s free).

In recent weeks there have been several articles noting the enormous wealth that a small number of people have made off of the vaccines and treatments developed to control the pandemic. Many see this as an unfortunate outcome of our efforts to contain the pandemic. In that view, containing the pandemic is an immensely important goal, if some people get incredibly rich as result, it’s a price well worth paying. After all, maybe we can even tax back some of their wealth after the fact.

The infuriating part of this story is that it is so obviously not true. But, just as followers of Donald Trump are prepared to believe any crazy story he tells about the stolen election, our intellectual types are willing to accept the idea that the only way we could have gotten vaccines as quickly as we did was by granting a small number of companies and individuals patent monopolies. And, just as no amount of evidence can dissuade Trumpers from believing their guy actually won the election, it is not possible to get most people involved in policy debates to consider the possibility that we don’t need patent monopolies to finance the development of drugs or vaccines.

This is especially disturbing in the case of the current crop of vaccines developed in the United States and Europe. The development of mRNA technology was done overwhelming on the public dime. This is hardly a secret. In fact, the NIH owns one of the key patents that Moderna used in the development of its vaccine.

The New York Times even recently featured a piece highlighting the work of Dr. Kato Kariko, who it claims spent her whole career working on government grants and never earned more than $60,000 a year. Of course, it is reasonable to pay top notch researchers like Dr. Kariko considerably more than $60,000 a year, but the point is that researchers can be motivated by money (as well, as the commitment of many to help humanity), they don’t need government-granted patent monopolies.

The development of the Oxford-AstraZeneca vaccine was also paid for almost entirely with public money. AstraZeneca was in fact brought on after the fact as a partner, at the urging of Bill Gates. The vaccine itself was developed by a team of researchers at Oxford.   

In the case of both the mRNA vaccines and the Oxford-AstraZeneca vaccine we could have just contracted with the companies to do the work, we didn’t have to give them patent monopolies. If this sounds strange, go outside and look at the street in front of your house. The company that paved the street was paid on a contract with the government, it did not get a patent monopoly on the street.

For some reason, we cannot even get a serious discussion in policy circles about alternatives to patent monopolies for financing the development of drugs and vaccines. To my view, we should be looking to alternatives to patent and copyright monopolies as government funding mechanisms everywhere, but the case for alternatives is especially compelling in the case of biomedical research.[1]

The problem with biomedical research is that the proprietary nature of the knowledge, coupled with the enormous incentive to sell products at patent protected prices, is a huge invitation to corruption. The most dramatic example of this problem is with the opioid crisis, where the leading manufacturers have billions of dollars in settlements based on the allegation that they deliberately misled doctors and the general public about the addictiveness of the new generation of opioids. If OxyContin and other opioids had been selling as cheap generics, there would have been little incentive to lie about their addictiveness. And, of course if all the clinical trial results were fully public, they would not have been able to get away with lying in any case.

There is also the issue with drugs that the government or private insurers, regulated by the government, pick up the vast majority of the tab. For this reason, we don’t have to worry about direct government funding of research over-riding individual consumer decisions, as might be the case with items like cars or smart phones. Demand for a particular drug is already not determined by individuals, so there is nothing to usurp.

The great fortunes created by patent and copyright monopolies go well beyond the current crop of Covid vaccine billionaires. There are many people who have gotten tremendously rich developing software and other information technologies, medical equipment, and genetically modified plants, as a result of patent or copyright monopolies. Bill Gates has volunteered to be the poster child here.

While many of the contributions made by these rich people have been socially valuable, we have to recognize that the rewards they received were a policy choice. We could have made their patent and copyright monopolies shorter and/or weaker. We also could have relied more on direct funding for open-source research.

That is a basic logical point. Patent and copyright monopolies are not given by god, or even the constitution (go read Article 1, Section 8). We can structure them anyway we like and we can integrate them with other mechanisms for supporting research. Our decision to structure patent and copyright monopolies in a way that allows for a small number of people to get incredibly rich is because we have politicians who like very rich people.

There is nothing inherent in the market or any requirement of technology that requires this outcome. And, this outcome is justified by economists and reporters who are too lazy or incompetent to think for themselves. Just like any good Trumper, they repeat what they are told.

Vaccine Failure in the Pandemic

In spite of the celebration of the success of our vaccines in controlling the spread of the virus among people who get them, we have done an abysmal job in vaccinating the world. At this point, Africa, which has more than 15 percent of the world’s population, has received just 1.7 percent of the world’s vaccines. The situation in much of Latin America is not much better, as is the case in some of the poorer countries in Asia. India is of course suffering terribly from a shortage of vaccines, even though it is one of the world’s leading manufacturers and has a vaccine it developed itself.

China has been able to distribute 460 million vaccines domestically, in the last month. This is in addition to providing tens of millions off doses to countries around the world. At that pace, it will be able to produce enough vaccines to cover most of the world’s unvaccinated population early in 2022. By contrast, our experts insist that we can’t possibly make the U.S.-European vaccines any more rapidly than we already are, even if we suspend patent protections and share technology. In fact. Thomas Cueni, the director general of the International Federation of Pharmaceutical Manufacturers and Associations, insists that we can’t even produce items like syringes and vials that are needed to distribute the vaccines. (This assertion can be found at 21.10 here.)  

The implication is that China’s scientists and engineers must be much more competent than the U.S. ones. (I realize the mRNA vaccines are more effective, but the Chinese vaccines have been very effective in bringing the pandemic under control in countries where they have been widely distributed, like Serbia and Hungary.) It’s too bad that we have such second-rate people in charge of our anti-pandemic efforts. (Bill Gates played a leading role with his foundation.) Maybe next time we should outsource the job to China.  

[1] I discuss this issue in Chapter 5 of Rigged (it’s free).

That seems to be the case. A few weeks ago it ran a major piece on vaccinating the world. The article never once mentioned China’s vaccines (or Russia or India’s). It had another piece today on the topic, which again did not mention China’s vaccines.

Ignoring China’s vaccines in the context of vaccinating the world is truly bizarre. It has been by far the leading supplier of vaccines to South America, North Africa, and the countries of South Asia, excepting India. It also has administered more than 750 million shots domestically. (The NYT piece bizarrely told readers that 85 percent of the shots given have gone to the world’s wealthiest countries. This is clearly false, unless the NYT considers China one of the world’s wealthiest countries.)

China is also producing around 500 million doses a month. At this pace, it should be hitting its target vaccination rate in a bit over two months, which means it would be in a position to distribute 500 million doses a month to the rest of the world. By contrast, our pharmaceutical companies claim they can’t even figure out how to get the syringes and vials needed to distribute the volume of vaccines necessary to protect the developing world. (Thomas Cueni, the director general of the International Federation of Pharmaceutical Manufacturers and Associations, makes that assertion  here [the comment can be found at 21:10 in the exchange.])

Given that China can apparently produce and distribute 500 million doses a month, while the western industry claims to lack the competence to substantially increase production, it looks like vaccinating the world will be primarily a Chinese project. It’s too bad New York Times reporters are not allowed to talk about it.

That seems to be the case. A few weeks ago it ran a major piece on vaccinating the world. The article never once mentioned China’s vaccines (or Russia or India’s). It had another piece today on the topic, which again did not mention China’s vaccines.

Ignoring China’s vaccines in the context of vaccinating the world is truly bizarre. It has been by far the leading supplier of vaccines to South America, North Africa, and the countries of South Asia, excepting India. It also has administered more than 750 million shots domestically. (The NYT piece bizarrely told readers that 85 percent of the shots given have gone to the world’s wealthiest countries. This is clearly false, unless the NYT considers China one of the world’s wealthiest countries.)

China is also producing around 500 million doses a month. At this pace, it should be hitting its target vaccination rate in a bit over two months, which means it would be in a position to distribute 500 million doses a month to the rest of the world. By contrast, our pharmaceutical companies claim they can’t even figure out how to get the syringes and vials needed to distribute the volume of vaccines necessary to protect the developing world. (Thomas Cueni, the director general of the International Federation of Pharmaceutical Manufacturers and Associations, makes that assertion  here [the comment can be found at 21:10 in the exchange.])

Given that China can apparently produce and distribute 500 million doses a month, while the western industry claims to lack the competence to substantially increase production, it looks like vaccinating the world will be primarily a Chinese project. It’s too bad New York Times reporters are not allowed to talk about it.

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