Floyd Norris has a good discussion of the continuing hostility toward the big banks, pointing out that it has a real basis in their behavior. However, toward the ends it includes the strange line:
“We have the giant banks and must live with them.”
Actually, we don’t have to live with the big banks. The Justice Department could pursue anti-trust actions to break them up, the Financial Stability Oversight Council could act to break them up, or Congress could pass new legislation. There is no obvious reason that we need keep the big banks if there was enough political support for downsizing them.
Norris also makes the comment:
“That no top bankers went to jail may be proper — it is not a crime to make stupid mistakes, and much of what happened in the years before the financial crisis was more foolish than venal.”
It is almost certainly true that the bankers were foolish and failed to recognize the housing bubble, but that does not mean that they were not also venal. It is likely that Kenneth Lay and other top executives at Enron really believed in their business model, but that didn’t mean that they were not also committing a wide variety of crimes to keep the company going.
In the case of the banks, while they may have thought that ever rising house prices would make all mortgages good mortgages, this doesn’t mean that they didn’t knowingly pass along fraudulent mortgages in mortgage backed securities and misrepresent their quality to buyers. These acts are crimes, even if the banks may have thought they would have no consequence since the growth of the housing bubble would have ensured that any losses were minimal.
Floyd Norris has a good discussion of the continuing hostility toward the big banks, pointing out that it has a real basis in their behavior. However, toward the ends it includes the strange line:
“We have the giant banks and must live with them.”
Actually, we don’t have to live with the big banks. The Justice Department could pursue anti-trust actions to break them up, the Financial Stability Oversight Council could act to break them up, or Congress could pass new legislation. There is no obvious reason that we need keep the big banks if there was enough political support for downsizing them.
Norris also makes the comment:
“That no top bankers went to jail may be proper — it is not a crime to make stupid mistakes, and much of what happened in the years before the financial crisis was more foolish than venal.”
It is almost certainly true that the bankers were foolish and failed to recognize the housing bubble, but that does not mean that they were not also venal. It is likely that Kenneth Lay and other top executives at Enron really believed in their business model, but that didn’t mean that they were not also committing a wide variety of crimes to keep the company going.
In the case of the banks, while they may have thought that ever rising house prices would make all mortgages good mortgages, this doesn’t mean that they didn’t knowingly pass along fraudulent mortgages in mortgage backed securities and misrepresent their quality to buyers. These acts are crimes, even if the banks may have thought they would have no consequence since the growth of the housing bubble would have ensured that any losses were minimal.
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The Washington Post ran a piece implying that new rules on mortgage issuance will exclude large numbers of potential homebuyers from the market. The piece fundamentally misrepresented the issues. The rules cover the mortgages that can be placed in mortgage backed securities without banks being required to keep a 5 percent stake.
If a bank believes that a mortgage is in fact a good mortgage, in spite of not complying with the rules, then keeping a 5 percent stake carries minimal cost. Furthermore, banks have typically held 10-20 percent of their mortgages. If they consider a mortgage to be a good mortgage, then they would not mind holding it as an asset for the life of the mortgage. It is likely the case that mortgages that do not comply with the new rules will carry a higher interest rate, but that is appropriate for mortgages that face a higher risk of default.
In short the real issue here is simply that higher risk buyers are likely to pay higher interest rates on their mortgages. This is what would be expected in a market economy.
The Washington Post ran a piece implying that new rules on mortgage issuance will exclude large numbers of potential homebuyers from the market. The piece fundamentally misrepresented the issues. The rules cover the mortgages that can be placed in mortgage backed securities without banks being required to keep a 5 percent stake.
If a bank believes that a mortgage is in fact a good mortgage, in spite of not complying with the rules, then keeping a 5 percent stake carries minimal cost. Furthermore, banks have typically held 10-20 percent of their mortgages. If they consider a mortgage to be a good mortgage, then they would not mind holding it as an asset for the life of the mortgage. It is likely the case that mortgages that do not comply with the new rules will carry a higher interest rate, but that is appropriate for mortgages that face a higher risk of default.
In short the real issue here is simply that higher risk buyers are likely to pay higher interest rates on their mortgages. This is what would be expected in a market economy.
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In his Washington Post column this morning, Ezra Klein dismisses the problem of inequality and argues that progressives should instead focus on unemployment. While he will get no argument from me on the need to focus on unemployment, the idea that this is a separate issue from inequality is seriously misplaced.
Ezra gets to this spot by first dismissing the idea that inequality harms growth. He is certainly right that the evidence is less conclusive than we might like, but I would attribute that largely to the reluctance of the economic profession to even consider this possibility.
For example, Ezra notes my friend and co-author Jared Bernstein’s conclusion that it is difficult to find a link between rising inequality and weaker consumption in the data. This is true, but the obvious reason is that the decades of rising inequality have also been the decades of the stock market and housing market bubbles.
Standard economic theory predicts that these bubbles would increase consumption, a story that fits the data well. Consumption as a share of income hit highs (i.e. savings rates reached lows) at the peaks of both the stock and housing bubbles. Consumption fell sharply following the collapse of both bubbles.
If we just do some simple arithmetic we can get an idea of the size of the effect of the upward redistribution of 10 percentage points of disposable income from the bottom 80 percent to the top 1 percent. If we assume that the bottom 80 percent would have spent 95 percent of this income and the top 1 percent would only spend 75 percent, then the difference would be 20 percentage points or 2 percent of disposable income.
This would translate into a loss of demand of 1.6 percentage points of GDP. That is what would have to be made up by larger budget deficits, trade surpluses, or a flood of investment. We certainly had much larger budget deficits on average over the last three decades than we did in prior decades so that can make up the shortfall in demand, although we also had much larger trade deficits making the problem worse.
In any case, the fact that we didn’t have solid evidence on this issue should not be as surprising as Ezra suggests. While some of us have long warned of this scenario, leading economists like Paul Krugman and Larry Summers have just recently begun to take seriously the possibility of secular stagnation. For decades the profession has treated it as an article of faith that there could not be sustained shortfalls in demand so inadequate consumption due to the upward redistribution of income could not possibly be a problem.
However the other side of the unemployment inequality issue is possibly more important. One of the main points of Jared and my new book is that unemployment is a main cause of inequality. This is because when more people get hired it disproportionately benefits those in the bottom half and especially the bottom fifth of the income distribution.
These are the people who are most likely to get jobs. And those with jobs will also have the opportunity to work longer hours. And, a tight labor market will create conditions in which workers at the bottom will have more bargaining power. Walmart and McDonalds will be paying workers $15 an hour if that is the only way that they can get people to work for them.
For this reason, the high unemployment policy that Congress is pursuing with its current budget policy is a key factor in the upward redistribution of income that we have seen in the last three decades. This means that people concerned about inequality should be very angry over budgets that don’t spend enough to bring the economy to full employment (also an over-valued dollar). So Ezra is absolutely right that progressives should be yelling about unemployment, but inequality is a very big part of that picture.
In his Washington Post column this morning, Ezra Klein dismisses the problem of inequality and argues that progressives should instead focus on unemployment. While he will get no argument from me on the need to focus on unemployment, the idea that this is a separate issue from inequality is seriously misplaced.
Ezra gets to this spot by first dismissing the idea that inequality harms growth. He is certainly right that the evidence is less conclusive than we might like, but I would attribute that largely to the reluctance of the economic profession to even consider this possibility.
For example, Ezra notes my friend and co-author Jared Bernstein’s conclusion that it is difficult to find a link between rising inequality and weaker consumption in the data. This is true, but the obvious reason is that the decades of rising inequality have also been the decades of the stock market and housing market bubbles.
Standard economic theory predicts that these bubbles would increase consumption, a story that fits the data well. Consumption as a share of income hit highs (i.e. savings rates reached lows) at the peaks of both the stock and housing bubbles. Consumption fell sharply following the collapse of both bubbles.
If we just do some simple arithmetic we can get an idea of the size of the effect of the upward redistribution of 10 percentage points of disposable income from the bottom 80 percent to the top 1 percent. If we assume that the bottom 80 percent would have spent 95 percent of this income and the top 1 percent would only spend 75 percent, then the difference would be 20 percentage points or 2 percent of disposable income.
This would translate into a loss of demand of 1.6 percentage points of GDP. That is what would have to be made up by larger budget deficits, trade surpluses, or a flood of investment. We certainly had much larger budget deficits on average over the last three decades than we did in prior decades so that can make up the shortfall in demand, although we also had much larger trade deficits making the problem worse.
In any case, the fact that we didn’t have solid evidence on this issue should not be as surprising as Ezra suggests. While some of us have long warned of this scenario, leading economists like Paul Krugman and Larry Summers have just recently begun to take seriously the possibility of secular stagnation. For decades the profession has treated it as an article of faith that there could not be sustained shortfalls in demand so inadequate consumption due to the upward redistribution of income could not possibly be a problem.
However the other side of the unemployment inequality issue is possibly more important. One of the main points of Jared and my new book is that unemployment is a main cause of inequality. This is because when more people get hired it disproportionately benefits those in the bottom half and especially the bottom fifth of the income distribution.
These are the people who are most likely to get jobs. And those with jobs will also have the opportunity to work longer hours. And, a tight labor market will create conditions in which workers at the bottom will have more bargaining power. Walmart and McDonalds will be paying workers $15 an hour if that is the only way that they can get people to work for them.
For this reason, the high unemployment policy that Congress is pursuing with its current budget policy is a key factor in the upward redistribution of income that we have seen in the last three decades. This means that people concerned about inequality should be very angry over budgets that don’t spend enough to bring the economy to full employment (also an over-valued dollar). So Ezra is absolutely right that progressives should be yelling about unemployment, but inequality is a very big part of that picture.
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There is a bizarre cult in the Washington elite that insists that Social Security, Medicare, and Medicaid must be cut for our own good. Unfortunately, the NYT seems to be part of this cult.
In its piece on the House of Representatives vote to approve the budget compromise worked out this week, it told readers:
“Some conservatives feel betrayed, as they often have since the Republicans took control of the House in 2011. Representative Jim Jordan, Republican of Ohio, said the House Republican conference agreed in the spring that spending levels exacted by the sequestration cuts would not change unless Congress and the White House could strike an accord to control the long-term causes of the rising costs of the federal debt, Medicare, Medicaid and Social Security.”
It would have been useful to point out that Mr. Jones is wrong. The projected cost of Medicare and Medicaid has fallen sharply over the last five years due to slower projected growth in health care costs. The Congressional Budget Office (CBO) has already lowered projected spending on Medicare and Medicaid for 2020 by 15 percent, which is more than 1 percent of GDP (@ $170 billion in today’s economy). If CBO were to adjust its budget projections fully in accord with the slowdown in spending over the last five years the reduction in projected spending would be even larger.
The slowdown in health care costs has led to sharper reductions in spending that almost any politician likely would have advocated. This means that when someone like Mr. Jones complains about the cost of these programs they are either uninformed about current budget projections or they want to make cuts in these programs apart from any concern about the budget.
It is also worth pointing out that Social Security cannot be a driver of the deficit. Under the law, the program can only spend money from its designated trust fund. If this fund is exhausted then benefits would have to be adjusted downward to correspond to Social Security tax revenue. There is no way that Social Security can contribute to the long-term deficit unless Congress votes to change the law as it now stands.
There is a bizarre cult in the Washington elite that insists that Social Security, Medicare, and Medicaid must be cut for our own good. Unfortunately, the NYT seems to be part of this cult.
In its piece on the House of Representatives vote to approve the budget compromise worked out this week, it told readers:
“Some conservatives feel betrayed, as they often have since the Republicans took control of the House in 2011. Representative Jim Jordan, Republican of Ohio, said the House Republican conference agreed in the spring that spending levels exacted by the sequestration cuts would not change unless Congress and the White House could strike an accord to control the long-term causes of the rising costs of the federal debt, Medicare, Medicaid and Social Security.”
It would have been useful to point out that Mr. Jones is wrong. The projected cost of Medicare and Medicaid has fallen sharply over the last five years due to slower projected growth in health care costs. The Congressional Budget Office (CBO) has already lowered projected spending on Medicare and Medicaid for 2020 by 15 percent, which is more than 1 percent of GDP (@ $170 billion in today’s economy). If CBO were to adjust its budget projections fully in accord with the slowdown in spending over the last five years the reduction in projected spending would be even larger.
The slowdown in health care costs has led to sharper reductions in spending that almost any politician likely would have advocated. This means that when someone like Mr. Jones complains about the cost of these programs they are either uninformed about current budget projections or they want to make cuts in these programs apart from any concern about the budget.
It is also worth pointing out that Social Security cannot be a driver of the deficit. Under the law, the program can only spend money from its designated trust fund. If this fund is exhausted then benefits would have to be adjusted downward to correspond to Social Security tax revenue. There is no way that Social Security can contribute to the long-term deficit unless Congress votes to change the law as it now stands.
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Harold Meyerson has a good column in the Post talking about how workers in the United States have little bargaining power with employers. This explains why profits have soared and wages have stagnated.
While Meyerson focuses on the weakening of unions it would also have been worth noting that part of the reason for the decline in workers’ bargaining power is that the government has decided to run a high unemployment policy. Congress and the president have approved budgets that keep the unemployment rate high. They also support a high dollar policy that leads to large trade deficits and reduces employment. By keeping unemployment high, these policies have a substantial effect on the wages of large segments of the workforce, especially those in the bottom third of the wage distribution.
The piece also notes that Boeing wants to pay new hires $17 an hour and keep them at a below union wage for their first 16 years of employment. It notes that this pay is still well above the minimum wage. In fact, if the minimum wage had tracked productivity since 1968, as it had between its creation in 1938 and 1968, it would be almost $17 an hour at present.
Harold Meyerson has a good column in the Post talking about how workers in the United States have little bargaining power with employers. This explains why profits have soared and wages have stagnated.
While Meyerson focuses on the weakening of unions it would also have been worth noting that part of the reason for the decline in workers’ bargaining power is that the government has decided to run a high unemployment policy. Congress and the president have approved budgets that keep the unemployment rate high. They also support a high dollar policy that leads to large trade deficits and reduces employment. By keeping unemployment high, these policies have a substantial effect on the wages of large segments of the workforce, especially those in the bottom third of the wage distribution.
The piece also notes that Boeing wants to pay new hires $17 an hour and keep them at a below union wage for their first 16 years of employment. It notes that this pay is still well above the minimum wage. In fact, if the minimum wage had tracked productivity since 1968, as it had between its creation in 1938 and 1968, it would be almost $17 an hour at present.
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The Economist ran a useful piece on the minimum wage in the United States. However in making cross country comparisons it shows the minimum wage relative to the median wage. This can give a somewhat misleading impression of the relative size of the minimum wage in different countries, since the median wage itself reflects distribution.
The median wage in the United States has fallen by roughly 20 percent relative to the average wage over the last three decades. This means that if the minimum wage had kept the same relationship to the median, it would have fallen by 20 percent relative to the average wage, which roughly reflects productivity in the economy. This is also important in considering international comparisons, since the median is lower relative to the average in the United States than in other wealthy countries.
The Economist ran a useful piece on the minimum wage in the United States. However in making cross country comparisons it shows the minimum wage relative to the median wage. This can give a somewhat misleading impression of the relative size of the minimum wage in different countries, since the median wage itself reflects distribution.
The median wage in the United States has fallen by roughly 20 percent relative to the average wage over the last three decades. This means that if the minimum wage had kept the same relationship to the median, it would have fallen by 20 percent relative to the average wage, which roughly reflects productivity in the economy. This is also important in considering international comparisons, since the median is lower relative to the average in the United States than in other wealthy countries.
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Politifact apparently has given up any pretense of being a serious independent news source. It wanted so badly to trash Obama over his “keep your insurance” line that it made this the lie of the year in 2013 even though all its examples were from 2008-2010.
But, when you’re trying to push an agenda there is no reason to let reality get in the way. It also decided to hype the horrors of people losing their insurance, telling readers:
“there was no shortage of powerful anecdotes about canceled coverage.
“One example: PBS Newshour interviewed a woman from Washington, D.C., who was a supporter of the health care law and found her policy canceled. New policies had significantly higher rates. She told Newshour that the only thing the new policy covered that her old one didn’t was maternity care and pediatric services. And she was 58.
“‘The chance of me having a child at this age is zero. So, you know, I ask the president, why do I have to pay an additional $5,000 a year for maternity coverage that I will never, ever need?’ asked Deborah Persico.”
While I have personally not investigated the matter, I would be willing to bet that there are other differences between Ms. Persico’s cancelled policy and the Obamacare compliant one costing $5,000 more than coverage of maternity costs (e.g. lower co-pays and deductibles on the more expensive policy). It is likely that Ms. Persico also opted to buy one of the more expensive plans in the exchange, since low cost plans can generally be purchased for around $5,000 a year and it is likely that her previous plan did carry a positive price.
A real news outlet would have examined Ms. Persico’s claims before highlighting them as a “powerful anecdote” about canceled coverage.
Thanks to Robert Salzberg for calling this one to my attention.
Politifact apparently has given up any pretense of being a serious independent news source. It wanted so badly to trash Obama over his “keep your insurance” line that it made this the lie of the year in 2013 even though all its examples were from 2008-2010.
But, when you’re trying to push an agenda there is no reason to let reality get in the way. It also decided to hype the horrors of people losing their insurance, telling readers:
“there was no shortage of powerful anecdotes about canceled coverage.
“One example: PBS Newshour interviewed a woman from Washington, D.C., who was a supporter of the health care law and found her policy canceled. New policies had significantly higher rates. She told Newshour that the only thing the new policy covered that her old one didn’t was maternity care and pediatric services. And she was 58.
“‘The chance of me having a child at this age is zero. So, you know, I ask the president, why do I have to pay an additional $5,000 a year for maternity coverage that I will never, ever need?’ asked Deborah Persico.”
While I have personally not investigated the matter, I would be willing to bet that there are other differences between Ms. Persico’s cancelled policy and the Obamacare compliant one costing $5,000 more than coverage of maternity costs (e.g. lower co-pays and deductibles on the more expensive policy). It is likely that Ms. Persico also opted to buy one of the more expensive plans in the exchange, since low cost plans can generally be purchased for around $5,000 a year and it is likely that her previous plan did carry a positive price.
A real news outlet would have examined Ms. Persico’s claims before highlighting them as a “powerful anecdote” about canceled coverage.
Thanks to Robert Salzberg for calling this one to my attention.
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Economists like to think that they get to define the word “rationality.” They don’t. Economists tend to define a certain type of narrow behavior as “rational,” implying that anything else is “irrational.”
Binyamin Appelbaum falls into this trap at the end of an interesting piece on Stanley Fisher, when he refers to work by Janet Yellen and others which he says assumes that people are “predictably irrational.” Actually much of the behavior assumed in this work is entirely rational, even if it departs from the standard theory that economists would like to apply.
For example, it is not irrational for workers to resist a nominal wage cut from their employers, because this directly implies a reduction in relative wages, even if they would accept a cut in real wages due to inflation. This simply means that workers care about relative wages. Economists have no basis for calling this concern “irrational.” Economists are not supposed to be in the business of telling people what they should and should not value. If they care about their relative income, then this is fact that economists must accept, not condemn as irrational.
Much of Yellen’s work explores such departure’s from narrow rationality as defined by economic theory. However this points to an inadequacy of the definition of economic rationality, not the pervasiveness of irrational behavior.
Economists like to think that they get to define the word “rationality.” They don’t. Economists tend to define a certain type of narrow behavior as “rational,” implying that anything else is “irrational.”
Binyamin Appelbaum falls into this trap at the end of an interesting piece on Stanley Fisher, when he refers to work by Janet Yellen and others which he says assumes that people are “predictably irrational.” Actually much of the behavior assumed in this work is entirely rational, even if it departs from the standard theory that economists would like to apply.
For example, it is not irrational for workers to resist a nominal wage cut from their employers, because this directly implies a reduction in relative wages, even if they would accept a cut in real wages due to inflation. This simply means that workers care about relative wages. Economists have no basis for calling this concern “irrational.” Economists are not supposed to be in the business of telling people what they should and should not value. If they care about their relative income, then this is fact that economists must accept, not condemn as irrational.
Much of Yellen’s work explores such departure’s from narrow rationality as defined by economic theory. However this points to an inadequacy of the definition of economic rationality, not the pervasiveness of irrational behavior.
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A NYT blog post by Robb Mandelbaum noted the findings of a study showing that more than 40 percent of Internet sales would escape taxation if a small business exemption was put into the law. The last paragraph tells readers:
“Somewhat surprisingly, given their claims to unwavering support for small businesses, House Republican leaders appear to be leaning toward legislation that would offer no small-seller exemption at all.”
Actually, this is not the least bit surprising. The current exemption of Internet sales from the requirement to collect sales tax is comparable to exempting stores whose addresses end in the digit “3.” This rule would effectively subsidize businesses whose last digit ends with “3” at the expense of other businesses.
There is no reason to have such a subsidy even if some of the firms who might take advantage of it are small businesses. The same applies to Internet sales.
A NYT blog post by Robb Mandelbaum noted the findings of a study showing that more than 40 percent of Internet sales would escape taxation if a small business exemption was put into the law. The last paragraph tells readers:
“Somewhat surprisingly, given their claims to unwavering support for small businesses, House Republican leaders appear to be leaning toward legislation that would offer no small-seller exemption at all.”
Actually, this is not the least bit surprising. The current exemption of Internet sales from the requirement to collect sales tax is comparable to exempting stores whose addresses end in the digit “3.” This rule would effectively subsidize businesses whose last digit ends with “3” at the expense of other businesses.
There is no reason to have such a subsidy even if some of the firms who might take advantage of it are small businesses. The same applies to Internet sales.
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I’ve got to take some issue with my friend Paul Krugman over his blog post pronouncing the Trans-Pacific Partnership (TPP) no big deal. As a trade question he is undoubtedly right. The countries in the pact are ones with whom the United States already has extensive trade ties and generally low barriers. Eliminating or reducing the remaining barriers cannot possibly have much impact on the U.S. economy.
However it is a misunderstanding to see the TPP as being about trade. This is a deal that focuses on changes in regulatory structures to lock in pro-corporate rules. Using a “trade” agreement provides a mechanism to lock in rules that it would be difficult, if not impossible, to get through the normal political process.
To take a couple of examples, our drug patent policy (that’s patent protection, as in protectionism) is a seething cesspool of corruption. It increases the amount that we pay for drugs by an order of magnitude and leads to endless tales of corruption. Economic theory predicts that when you raise the price of a product 1000 percent or more above the free market price you will get all forms of illegal and unethical activity from companies pursuing patent rents.
Anyhow, the U.S. and European drug companies face a serious threat in the developing world. If these countries don’t enforce patents in the same way as we do, then the drugs that sell for hundreds or thousands of dollars per prescription in the U.S. may sell for $5 or $10 per prescription in the developing world. With drug prices going ever higher, it will be hard to maintain this sort of segmented market. Either people in the U.S. will go to the cheap drugs or the cheap drugs will come here.
For this reason, trade deals like the TPP, in which they hope to eventually incorporate India and other major suppliers of low cost generics, can be very important. The drug companies would like to bring these producers into line and impose high prices everywhere. (Yes, we need to pay for research. And yes, there are far more efficient mechanisms for financing research than government granted patent monopolies.)
For another example, our gas industry has been pursuing fracking at an ambitious clip with little regard for its environmental impact. I personally am agnostic as to whether natural gas can be a useful bridge fuel until the cost of clean energy falls further. However, I can see no justification for allowing the process in ways that let the gas companies pollute people’s drinking water and ruin their farmland.
In the Bush years the industry arranged a special exemption to the Clean Water Drinking Act so that they do not have to disclose the chemicals used in the fracking process. (They claim their mixes are industrial secrets.) If the industry got similar wording in the TPP it would both lead to open fields for fracking in the other signatories and also make the U.S. law more difficult to reverse.
There are many other areas where industry groups are seeking special treatment along these lines. No, I can’t give a list with links because the draft text is a secret. Public Citizen’s website probably is the best source available. It includes the chapter on intellectual property that was obtained through Wikileaks.
Anyhow, Krugman is on the money in his assessment of the impact of the TPP on trade. But the point is that the TPP is not really about trade, it’s about changing the regulatory process in ways that would almost certainly be opposed by the people in most of the countries included in the deal.
I’ve got to take some issue with my friend Paul Krugman over his blog post pronouncing the Trans-Pacific Partnership (TPP) no big deal. As a trade question he is undoubtedly right. The countries in the pact are ones with whom the United States already has extensive trade ties and generally low barriers. Eliminating or reducing the remaining barriers cannot possibly have much impact on the U.S. economy.
However it is a misunderstanding to see the TPP as being about trade. This is a deal that focuses on changes in regulatory structures to lock in pro-corporate rules. Using a “trade” agreement provides a mechanism to lock in rules that it would be difficult, if not impossible, to get through the normal political process.
To take a couple of examples, our drug patent policy (that’s patent protection, as in protectionism) is a seething cesspool of corruption. It increases the amount that we pay for drugs by an order of magnitude and leads to endless tales of corruption. Economic theory predicts that when you raise the price of a product 1000 percent or more above the free market price you will get all forms of illegal and unethical activity from companies pursuing patent rents.
Anyhow, the U.S. and European drug companies face a serious threat in the developing world. If these countries don’t enforce patents in the same way as we do, then the drugs that sell for hundreds or thousands of dollars per prescription in the U.S. may sell for $5 or $10 per prescription in the developing world. With drug prices going ever higher, it will be hard to maintain this sort of segmented market. Either people in the U.S. will go to the cheap drugs or the cheap drugs will come here.
For this reason, trade deals like the TPP, in which they hope to eventually incorporate India and other major suppliers of low cost generics, can be very important. The drug companies would like to bring these producers into line and impose high prices everywhere. (Yes, we need to pay for research. And yes, there are far more efficient mechanisms for financing research than government granted patent monopolies.)
For another example, our gas industry has been pursuing fracking at an ambitious clip with little regard for its environmental impact. I personally am agnostic as to whether natural gas can be a useful bridge fuel until the cost of clean energy falls further. However, I can see no justification for allowing the process in ways that let the gas companies pollute people’s drinking water and ruin their farmland.
In the Bush years the industry arranged a special exemption to the Clean Water Drinking Act so that they do not have to disclose the chemicals used in the fracking process. (They claim their mixes are industrial secrets.) If the industry got similar wording in the TPP it would both lead to open fields for fracking in the other signatories and also make the U.S. law more difficult to reverse.
There are many other areas where industry groups are seeking special treatment along these lines. No, I can’t give a list with links because the draft text is a secret. Public Citizen’s website probably is the best source available. It includes the chapter on intellectual property that was obtained through Wikileaks.
Anyhow, Krugman is on the money in his assessment of the impact of the TPP on trade. But the point is that the TPP is not really about trade, it’s about changing the regulatory process in ways that would almost certainly be opposed by the people in most of the countries included in the deal.
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