Beat the Press

Beat the press por Dean Baker

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

The New York Times had an interesting piece about how developers of antibiotics are finding it impossible to make a profit, which most abandoning the field or going bankrupt. Incredibly, no one the piece talked with seems to have thought of a solution that does not rely on government-granted patent monopolies as the main financing mechanism for research.

“Public health experts say the crisis calls for government intervention. Among the ideas that have wide backing are increased reimbursements for new antibiotics, federal funding to stockpile drugs effective against resistant germs and financial incentives that would offer much needed aid to start-ups and lure back the pharmaceutical giants.”

The possibility that is excluded here is simply having the government pay for the development of new antibiotics up front, under contract, as it already does now with more than $40 billion in research that goes though the National Institutes of Health and other public agencies. If this funding mechanism were used all new antibiotics would be cheap, since they would be available as generics from the day they were approved by the Food and Drug Administration. (The piece tells us that the industry charges up to $2,000 per prescription for some of the new antibiotics.)

If the government was directly financing the research, as opposed to indirectly through patent monopolies, it could also require that all research be fully public as soon as practical. This would mean posting findings on the Internet as soon as practical, as was done with the Human Genome Project. This would allow the science to advance more quickly.

People should not die because we rely on the antiquated patent system as our main mechanism for financing the development of new drugs. I talk about this issue more in chapter 5 of Rigged (it’s free). Maybe we will see some new thinking in the new decade.

The New York Times had an interesting piece about how developers of antibiotics are finding it impossible to make a profit, which most abandoning the field or going bankrupt. Incredibly, no one the piece talked with seems to have thought of a solution that does not rely on government-granted patent monopolies as the main financing mechanism for research.

“Public health experts say the crisis calls for government intervention. Among the ideas that have wide backing are increased reimbursements for new antibiotics, federal funding to stockpile drugs effective against resistant germs and financial incentives that would offer much needed aid to start-ups and lure back the pharmaceutical giants.”

The possibility that is excluded here is simply having the government pay for the development of new antibiotics up front, under contract, as it already does now with more than $40 billion in research that goes though the National Institutes of Health and other public agencies. If this funding mechanism were used all new antibiotics would be cheap, since they would be available as generics from the day they were approved by the Food and Drug Administration. (The piece tells us that the industry charges up to $2,000 per prescription for some of the new antibiotics.)

If the government was directly financing the research, as opposed to indirectly through patent monopolies, it could also require that all research be fully public as soon as practical. This would mean posting findings on the Internet as soon as practical, as was done with the Human Genome Project. This would allow the science to advance more quickly.

People should not die because we rely on the antiquated patent system as our main mechanism for financing the development of new drugs. I talk about this issue more in chapter 5 of Rigged (it’s free). Maybe we will see some new thinking in the new decade.

That is the inevitable conclusion for readers of a NYT article on Putin and Russia that had the headline, “Russia is a mess. Why is Putin such a formidable enemy.” While the article notes the recent economic stagnation in Russia, it misses the extraordinary turnaround that took place under Putin.

According to I.M.F. data, Russia’s per capita income fell by almost 50 percent between 1990 and 1998.

Book2 5961 image001

Source: International Monetary Fund.

 

This unprecedented peace time collapse took place largely under Boris Yeltsin, who was regarded as a hero by the leaders of both political parties in the United States. In the first decade of Putin’s rule it’s per capita income doubled, which translated into enormous improvements in living standards for most of Russia’s population.

The economic collapse and chaos that preceded Putin’s tenure, and the subsequent reversal in his first ten years in office likely has a lot to do with Putin’s current standing in Russia. It is unfortunate that the NYT apparently does not have access to economic data on Russia.

That is the inevitable conclusion for readers of a NYT article on Putin and Russia that had the headline, “Russia is a mess. Why is Putin such a formidable enemy.” While the article notes the recent economic stagnation in Russia, it misses the extraordinary turnaround that took place under Putin.

According to I.M.F. data, Russia’s per capita income fell by almost 50 percent between 1990 and 1998.

Book2 5961 image001

Source: International Monetary Fund.

 

This unprecedented peace time collapse took place largely under Boris Yeltsin, who was regarded as a hero by the leaders of both political parties in the United States. In the first decade of Putin’s rule it’s per capita income doubled, which translated into enormous improvements in living standards for most of Russia’s population.

The economic collapse and chaos that preceded Putin’s tenure, and the subsequent reversal in his first ten years in office likely has a lot to do with Putin’s current standing in Russia. It is unfortunate that the NYT apparently does not have access to economic data on Russia.

(This post originally appeared on my Patreon page.)

In debates over protecting the environment, and especially global warming, it is standard practice to refer to the pro-protection side as being in favor of government regulation and the anti-protection side as being pro-free market. This is nonsense and it is nonsense in a way that strongly benefits the enemies of environmental protection.

There is a simple way to think about environmental protection. If I build a home and want to dispose of my sewage in the cheapest possible way, I will just dump it on my neighbor’s lawn. Environmental regulation means having the government say that I can’t do this.

It is bizarre that somehow the prohibition of dumping my sewage on my neighbor’s lawn is treated as government regulation interfering in the market. The government is protecting my neighbor’s property. Prohibiting me from dumping sewage on her lawn is not really different from prohibiting me from building an addition that takes up half of her lot. In both cases, the government is not acting to interfere with the market, it is acting to protect the property rights that are the foundation of the market.

Somehow this basic logic has gotten lost in discussions of environmental regulation and in particular with respect to policies designed to curb global warming. The right routinely gets away with the idea that its opposition is grounded in a commitment to the free market and that those who want to protect the environment are proponents of big government bureaucracy telling everyone what they can and can’t do.

At this point, the fact that greenhouse gas (GHG) emissions are warming the planet and leading to a wide variety of disastrous climate outcomes is no longer debatable. The decision by some politicians to insist ignorance on the issue changes nothing. We know that spewing greenhouse gases into the atmosphere is imposing damage on people in the present and will do much more in the future. Restricting these emissions is effectively telling people that they can’t dump their sewage on their neighbor’s lawns. 

In this context, there is no defense to regulations restricting GHG emissions. There are no philosophical or ideological points at issue. The only question is how best to limit GHG emissions and how much we should be willing to pay to do so.

In terms of how much we should be willing to pay, a recent analysis from the I.M.F. not usually known as a place for whacky tree-hugging environmentalists, placed the global cost of the implicit subsidies for fossil fuels at 6.5 percent of GDP in 2017. That would come to around $5.7 trillion this year. You can retrofit a huge number of buildings, build many million electric powered cars, and install an awful lot of solar and wind power for $5.7 trillion.

Just as an example, if an electric powered car costs on average $40,000, we can build more than 140 million cars with this money. That is twice the world’s annual production. And this figure is an annual figure, the study projects that the size of the subsidy is growing year by year.

In fairness, there is a huge amount of uncertainty around the estimate produced in this study. It is certainly plausible that it could be $2 trillion a year lower. Of course a plausible estimate could put the subsidy $2 trillion higher as well. The point is that we are incurring massive costs in the form of rising oceans, droughts, floods, and other extraordinary weather events as a result of GHG gas emissions. This occurs because we don’t require the emitters to pay the price of the damage they are doing to the planet.

There is another important point in the debate on global warming that is largely absent from current discussions. It is widely accepted, even by many proponents of aggressive steps to reduce GHG emissions, that the effort will impose an enormous economic burden. (I’ll qualify this discussion shortly.) Clearly the money needed on a worldwide basis to quickly reduce GHG emissions through energy conservation, clean energy production, and electric vehicle production is substantial. An effort on the scale of the problem will almost certainly require at least 2.0 percent of world GDP ($1.8 trillion in 2019), and possibly quite a bit more.

While many are quick to pronounce this an unaffordable burden, it is worth noting energy prices have fallen sharply in recent years. As a result, we are paying far less for energy today than was generally predicted ten or fifteen years ago.

For example, in 2010 the OECD projected that the price of oil today would be close to $120 a barrel in 2009 dollars. That would come to more than $140 a barrel in current dollars. With oil at less than $60 a barrel and world oil consumption at more than 93 million barrels a day, the savings between the oil price projected from 2010 and the actual price of oil today comes to more than $2.7 trillion a year. If we add in savings from lower priced natural gas and coal, which would be at least comparable, the total would be in the neighborhood of $5.4 trillion a year.

The reason this number is significant is because it shows the savings relative to a baseline that our major economic forecasters were expecting that we would be spending on fossil fuels in 2019. All of their growth projections from 2010 had this much higher baseline of fossil fuel costs included as an assumption, and their projections still showed healthy rates of growth of GDP and employment.

That matters because it is utterly absurd to claim that somehow we cannot spend an amount that is equal or less than our savings from lower than projected fossil fuel costs, in order to reduce the threat from global warming. If a baseline, in which fossil fuels cost us $5.4 trillion more in 2019 than we are actually paying, was somehow thought to be manageable, then devoting $5.4 trillion in 2019 towards reducing greenhouse gas emissions must also be affordable. Given the enormous savings we are experiencing on fossil fuels, it takes some pretty sloppy thinking to argue that this sort of spending for saving the planet is somehow not economically practical.  

This brings me back to the issue I raised earlier as to whether spending to reduce GHG emissions should even be seen as a burden. Ever since the collapse of the housing bubble and the Great Recession, the United States and much of the world have suffered from secular stagnation. Or, to put it in more straightforward terms, there has not been enough demand in the economy.

This means that the economy is not supply constrained. If we choose to spend more money on roads and bridges, or electric cars and clean energy, we can do it because the economy has idle resources (meaning unemployed workers and idle production capacity) that can be put to use for these purposes. That contrasts with the situation where the economy is supply constrained, where the only way we can get more workers and other resources for these tasks would be to pull them away from other sectors in the economy.

While it is difficult to know how much the United States and other major economies are operating below their capacity, given the lack of inflationary pressure in any major economy, it is likely that there is still a substantial amount of idle resources. (This is likely more the case in Europe than in the United States, at present.) Insofar as there are unemployed resources, reducing emissions can essentially be a free lunch. We can spend to put people to work without having to tax to reduce spending in other areas. While an ambitious program of the scale needed to avoid massive and permanent damage to the environment will almost certainly require substantial taxes, the existence of unemployed workers and excess capacity in many areas will reduce this burden.

In any case, it is important that we talk about the problem in a way that reflects the reality. The opponents of measures to reduce to GHG emissions are not at all interested in preserving market outcomes. They are insisting on their right to dump their sewage on our lawn, or more specifically to make the planet uninhabitable for anyone who doesn’t have the money to protect themselves from the consequences. This has nothing to do with a question of market principles, it is about using the power of government to screw the people with less money and power.   

(This post originally appeared on my Patreon page.)

In debates over protecting the environment, and especially global warming, it is standard practice to refer to the pro-protection side as being in favor of government regulation and the anti-protection side as being pro-free market. This is nonsense and it is nonsense in a way that strongly benefits the enemies of environmental protection.

There is a simple way to think about environmental protection. If I build a home and want to dispose of my sewage in the cheapest possible way, I will just dump it on my neighbor’s lawn. Environmental regulation means having the government say that I can’t do this.

It is bizarre that somehow the prohibition of dumping my sewage on my neighbor’s lawn is treated as government regulation interfering in the market. The government is protecting my neighbor’s property. Prohibiting me from dumping sewage on her lawn is not really different from prohibiting me from building an addition that takes up half of her lot. In both cases, the government is not acting to interfere with the market, it is acting to protect the property rights that are the foundation of the market.

Somehow this basic logic has gotten lost in discussions of environmental regulation and in particular with respect to policies designed to curb global warming. The right routinely gets away with the idea that its opposition is grounded in a commitment to the free market and that those who want to protect the environment are proponents of big government bureaucracy telling everyone what they can and can’t do.

At this point, the fact that greenhouse gas (GHG) emissions are warming the planet and leading to a wide variety of disastrous climate outcomes is no longer debatable. The decision by some politicians to insist ignorance on the issue changes nothing. We know that spewing greenhouse gases into the atmosphere is imposing damage on people in the present and will do much more in the future. Restricting these emissions is effectively telling people that they can’t dump their sewage on their neighbor’s lawns. 

In this context, there is no defense to regulations restricting GHG emissions. There are no philosophical or ideological points at issue. The only question is how best to limit GHG emissions and how much we should be willing to pay to do so.

In terms of how much we should be willing to pay, a recent analysis from the I.M.F. not usually known as a place for whacky tree-hugging environmentalists, placed the global cost of the implicit subsidies for fossil fuels at 6.5 percent of GDP in 2017. That would come to around $5.7 trillion this year. You can retrofit a huge number of buildings, build many million electric powered cars, and install an awful lot of solar and wind power for $5.7 trillion.

Just as an example, if an electric powered car costs on average $40,000, we can build more than 140 million cars with this money. That is twice the world’s annual production. And this figure is an annual figure, the study projects that the size of the subsidy is growing year by year.

In fairness, there is a huge amount of uncertainty around the estimate produced in this study. It is certainly plausible that it could be $2 trillion a year lower. Of course a plausible estimate could put the subsidy $2 trillion higher as well. The point is that we are incurring massive costs in the form of rising oceans, droughts, floods, and other extraordinary weather events as a result of GHG gas emissions. This occurs because we don’t require the emitters to pay the price of the damage they are doing to the planet.

There is another important point in the debate on global warming that is largely absent from current discussions. It is widely accepted, even by many proponents of aggressive steps to reduce GHG emissions, that the effort will impose an enormous economic burden. (I’ll qualify this discussion shortly.) Clearly the money needed on a worldwide basis to quickly reduce GHG emissions through energy conservation, clean energy production, and electric vehicle production is substantial. An effort on the scale of the problem will almost certainly require at least 2.0 percent of world GDP ($1.8 trillion in 2019), and possibly quite a bit more.

While many are quick to pronounce this an unaffordable burden, it is worth noting energy prices have fallen sharply in recent years. As a result, we are paying far less for energy today than was generally predicted ten or fifteen years ago.

For example, in 2010 the OECD projected that the price of oil today would be close to $120 a barrel in 2009 dollars. That would come to more than $140 a barrel in current dollars. With oil at less than $60 a barrel and world oil consumption at more than 93 million barrels a day, the savings between the oil price projected from 2010 and the actual price of oil today comes to more than $2.7 trillion a year. If we add in savings from lower priced natural gas and coal, which would be at least comparable, the total would be in the neighborhood of $5.4 trillion a year.

The reason this number is significant is because it shows the savings relative to a baseline that our major economic forecasters were expecting that we would be spending on fossil fuels in 2019. All of their growth projections from 2010 had this much higher baseline of fossil fuel costs included as an assumption, and their projections still showed healthy rates of growth of GDP and employment.

That matters because it is utterly absurd to claim that somehow we cannot spend an amount that is equal or less than our savings from lower than projected fossil fuel costs, in order to reduce the threat from global warming. If a baseline, in which fossil fuels cost us $5.4 trillion more in 2019 than we are actually paying, was somehow thought to be manageable, then devoting $5.4 trillion in 2019 towards reducing greenhouse gas emissions must also be affordable. Given the enormous savings we are experiencing on fossil fuels, it takes some pretty sloppy thinking to argue that this sort of spending for saving the planet is somehow not economically practical.  

This brings me back to the issue I raised earlier as to whether spending to reduce GHG emissions should even be seen as a burden. Ever since the collapse of the housing bubble and the Great Recession, the United States and much of the world have suffered from secular stagnation. Or, to put it in more straightforward terms, there has not been enough demand in the economy.

This means that the economy is not supply constrained. If we choose to spend more money on roads and bridges, or electric cars and clean energy, we can do it because the economy has idle resources (meaning unemployed workers and idle production capacity) that can be put to use for these purposes. That contrasts with the situation where the economy is supply constrained, where the only way we can get more workers and other resources for these tasks would be to pull them away from other sectors in the economy.

While it is difficult to know how much the United States and other major economies are operating below their capacity, given the lack of inflationary pressure in any major economy, it is likely that there is still a substantial amount of idle resources. (This is likely more the case in Europe than in the United States, at present.) Insofar as there are unemployed resources, reducing emissions can essentially be a free lunch. We can spend to put people to work without having to tax to reduce spending in other areas. While an ambitious program of the scale needed to avoid massive and permanent damage to the environment will almost certainly require substantial taxes, the existence of unemployed workers and excess capacity in many areas will reduce this burden.

In any case, it is important that we talk about the problem in a way that reflects the reality. The opponents of measures to reduce to GHG emissions are not at all interested in preserving market outcomes. They are insisting on their right to dump their sewage on our lawn, or more specifically to make the planet uninhabitable for anyone who doesn’t have the money to protect themselves from the consequences. This has nothing to do with a question of market principles, it is about using the power of government to screw the people with less money and power.   

Trade Deals Are About Increasing Protectionist Barriers

The NYT had a piece describing the departure of the UK from the EU as the end of an era:

“The notion that global economic integration amounts to human progress had a good run, dominating the thinking of the powers that be for more than seven decades. But a new era is underway in which national interests take primacy over collective concerns, with trading arrangements negotiated among individual countries.”

This fundamentally misrepresents past trade policies and totally misrepresents the crux of recent trade deals, like the Trans-Pacific Partnership (TPP).

Past trade deals were about making it easier to trade manufactured goods, making it as easy as possible for corporations to take advantage of low-cost labor in the developing world. This has the predicted and actual effect of putting downward pressure on the wages of less-educated workers.

The impact of trade was devastating for large segments of the U.S. workforce. It cost 3.4 million manufacturing jobs (20 percent of the total) between the years 2000 and 2007. (It cost almost 40 percent of all unionized manufacturing jobs.) Note, that this was before the Great Recession, which began in December of 2007.

The argument that this was technology and not trade is truly Trumpian and deserves the same sort of derision as Trump’s claims about his “perfect” phone call with Ukraine’s president. We lost relatively few manufacturing jobs between 1970 and 2000, and we have gained a small number since 2010. So the Trumpers arguing for the technology story want us to believe that technology only cost us manufacturing jobs in the years when the trade deficit exploded, but not in the years prior to that or in the years since. Right.

It is also worth noting that the “free traders” have pretty much zero interest in free trade in professional services. Even though we could save on the order of $100 billion a year ($700 per family per year) if we liberalized rules for physicians, and allowed qualified doctors in places like Canada and Germany to practice in the United States, the people who think that “global economic integration amounts to human progress,” have little interest in global integration when it might reduce the living standards of highly paid professionals.

It is also important to point out that the liberalization of trade in goods is largely a done deal. Tariffs are already zero or near zero in the vast majority of cases. The potential gains from further liberalization are limited, especially since goods are a rapidly falling share of total output.

Instead, deals like the TPP are largely about locking in rules on items like intellectual property protections and preserving Mark Zuckerberg’s dominance of the Internet. The TPP, like other recent trade deals, calls for longer and stronger patent and copyright monopolies.

These protections are 180 degrees at odds with free trade. They are about shifting more income from the bulk of the population to people who benefit from rents on patents and copyrights, by making them pay more for drugs, medical equipment, software and a wide variety of other items. 

The deals also look to lock in existing rules on the Internet, making it more difficult for both the United States and other countries to regulate Internet behemoths like Facebook and Google. Perhaps most importantly, these deals enshrine Section 230, which protects Facebook and other Internet intermediaries from facing the same liability for circulating libelous material as print and broadcast outlets. This has nothing obviously to due with economic integration, but it is likely to make Mark Zuckerberg richer.   

The NYT had a piece describing the departure of the UK from the EU as the end of an era:

“The notion that global economic integration amounts to human progress had a good run, dominating the thinking of the powers that be for more than seven decades. But a new era is underway in which national interests take primacy over collective concerns, with trading arrangements negotiated among individual countries.”

This fundamentally misrepresents past trade policies and totally misrepresents the crux of recent trade deals, like the Trans-Pacific Partnership (TPP).

Past trade deals were about making it easier to trade manufactured goods, making it as easy as possible for corporations to take advantage of low-cost labor in the developing world. This has the predicted and actual effect of putting downward pressure on the wages of less-educated workers.

The impact of trade was devastating for large segments of the U.S. workforce. It cost 3.4 million manufacturing jobs (20 percent of the total) between the years 2000 and 2007. (It cost almost 40 percent of all unionized manufacturing jobs.) Note, that this was before the Great Recession, which began in December of 2007.

The argument that this was technology and not trade is truly Trumpian and deserves the same sort of derision as Trump’s claims about his “perfect” phone call with Ukraine’s president. We lost relatively few manufacturing jobs between 1970 and 2000, and we have gained a small number since 2010. So the Trumpers arguing for the technology story want us to believe that technology only cost us manufacturing jobs in the years when the trade deficit exploded, but not in the years prior to that or in the years since. Right.

It is also worth noting that the “free traders” have pretty much zero interest in free trade in professional services. Even though we could save on the order of $100 billion a year ($700 per family per year) if we liberalized rules for physicians, and allowed qualified doctors in places like Canada and Germany to practice in the United States, the people who think that “global economic integration amounts to human progress,” have little interest in global integration when it might reduce the living standards of highly paid professionals.

It is also important to point out that the liberalization of trade in goods is largely a done deal. Tariffs are already zero or near zero in the vast majority of cases. The potential gains from further liberalization are limited, especially since goods are a rapidly falling share of total output.

Instead, deals like the TPP are largely about locking in rules on items like intellectual property protections and preserving Mark Zuckerberg’s dominance of the Internet. The TPP, like other recent trade deals, calls for longer and stronger patent and copyright monopolies.

These protections are 180 degrees at odds with free trade. They are about shifting more income from the bulk of the population to people who benefit from rents on patents and copyrights, by making them pay more for drugs, medical equipment, software and a wide variety of other items. 

The deals also look to lock in existing rules on the Internet, making it more difficult for both the United States and other countries to regulate Internet behemoths like Facebook and Google. Perhaps most importantly, these deals enshrine Section 230, which protects Facebook and other Internet intermediaries from facing the same liability for circulating libelous material as print and broadcast outlets. This has nothing obviously to due with economic integration, but it is likely to make Mark Zuckerberg richer.   

People who remember the 1990s stock bubble and the housing bubble of the last decade know that markets are not always right. But it is nonetheless worth following their response to events to see how ostensibly knowledgeable people see them.

In the case of Trump’s trade deal with China, where the big highlight was an announcement of new soybean purchases, the response was a big thumbs down. While soybean prices did go up by close to 1.0 percent yesterday, they are still around 3.0 percent below November levels and more than 10 percent below highs hit last year. This means that, for now, the markets do not expect Trump’s trade deal to substantially improve the prospects for soybean farmers.

People who remember the 1990s stock bubble and the housing bubble of the last decade know that markets are not always right. But it is nonetheless worth following their response to events to see how ostensibly knowledgeable people see them.

In the case of Trump’s trade deal with China, where the big highlight was an announcement of new soybean purchases, the response was a big thumbs down. While soybean prices did go up by close to 1.0 percent yesterday, they are still around 3.0 percent below November levels and more than 10 percent below highs hit last year. This means that, for now, the markets do not expect Trump’s trade deal to substantially improve the prospects for soybean farmers.

The Free College Battle

(This post originally appeared on my Patreon page.)

The prospect of free public college is shaping up as one of the major divides between the more progressive candidates (Bernie Sanders and Elizabeth Warren) and the more centrist candidates (Joe Biden and Pete Buttigieg). Buttigieg in particular has been especially vocal in his opposition to making college free for everyone.

He has argued that it would be regressive to tax middle class people to pay for the children of the wealthy to go to college. Buttigieg argues instead that he would make public colleges free for children of families earning less than $100,000. He would have a sliding scale for families with incomes between $100,000 and $150,000, and have families with incomes over $150,000 pay full tuition.

Sanders and Warren have argued that college should be seen as a right, comparable to attending a public grade school, and that we shouldn’t expect people to pay for it. They also point to the strong political support for universal programs, like Social Security and Medicare, as opposed to anti-poverty programs like Temporary Assistance for Needy Families (TANF) or food stamps.

While these are important arguments for universal free college, there is another side of this issue that has been largely neglected. Specifically, Buttigieg and other proponents of means-testing tuition seem to have not grappled with the administrative difficulties of their plan.

It is one thing to write down on paper how much we think families at various income levels should pay for their kids’ college. Implementing this payment schedule in practice is a very different story.

Economists tend to believe that people respond to incentives. The Buttigieg plan gives families enormous incentives to make their income appear smaller than it actually is.

If that sounds strange, after all, we do a reasonably good job of collecting income taxes, let’s start with the most simple issue, divorced or separated parents. Roughly a third of all children are in families without two parents. Most often the mother is the custodial parent and usually has the lower income.

What does Mayor Buttigieg want us to do with children with low earning mothers, but high earning non-custodial fathers? Generally, parents are not responsible for supporting kids once they turn eighteen. We can change the laws to make both parents responsible for paying for their kids’ college, but enforcing that law may not be that easy.

Less than 44 percent of custodial parents receive the full amount of child support which the non-custodial parent is obligated to pay. This is often because the non-custodial parent literally does not have the money to pay child support, but in many cases the non-custodial parent is simply able to avoid paying through various legal or illegal dodges. Perhaps Buttigieg will find ways to crack down on these deadbeat dads, but that is a non-trivial task.

And, what do we do for the kids with low-earning mothers and deadbeat doctor dads? Does Buttigieg want to make them responsible for $25,000 in annual tuition based on their absent father’s earnings? Or, will he give them a pass, not wanting to punish the kids for the irresponsible behavior of their father?

Either route poses serious problems. Certainly it is not fair to punish children because they happen to have a relatively wealthy parent who is a jerk, so it doesn’t make sense to require them to pay tuition based on money they don’t see.

On the other hand, excluding the deadbeat dad’s income from the tuition calculation gives a very strong incentive for high-earning non-custodial parents to become deadbeats. If a professional earning $200,000 a year can save $25,000 a year in tuition by refusing to help support his kid ($50,000 for two college age kids), we have given them a very large incentive to disavow the kid(s). In fact, we can anticipate couples becoming legally divorced or separated just to be able to take advantage of Buttigieg’s free college.

While parental separation is a big and obvious problem with this sort of means-test, it is far from the only one. Many parents disapprove of their adult children’s behavior in various ways. This can mean anything from rejecting their choice of a college major, to disliking a partner, or disapproving of their sexual orientation.

High earning parents will be able to withhold tuition payments for their children based on these, or other, considerations. Children can become legally independent of their parents and thereby have their income excluded from tuition calculations, but this is a major legal hurdle. It is also likely to be in many cases a serious emotional hurdle that we probably do not want to force young people to have to deal with in order to be able to afford college.

And, if high-earning parents can avoid paying for their kids’ college by having them become legally independent at age 18, then they have a very strong incentive to have them become legally independent at age 18. In fact, Buttigieg’s plan is likely to spur a new industry of consultants who earn their income by figuring out how high earning parents can avoid paying for their kids’ college.

Of course these problems and the various types of subterfuges are not new. Colleges offering financial aid have been dealing with them for many decades. However, we can expect the extent of gaming, and the resources needed to contain it, to become qualitatively greater with a national program offering free college to the bottom 80 percent of the population.   

If we want to ask the question seriously about whether the government should pay for college for the kids from wealthy families, we really have to ask how many resources should society be prepared to commit to make sure that more affluent parents do pay for their kids’ education?

After all, we allow the rich to use city streets and parks for free too. We can say this is regressive, and decide that we will charge higher income people to use these facilities. We can have check points where people either have to show that they are not high income or cough up the payment if they are. No one would suggest this move towards more progressive payments for streets and parks because the costs would be absurdly high compared to the money we would collect.

Arguably, it is the same story with free college. At the end of the day, the money we are likely to collect from high income families for their kids’ tuition is not likely to be worth the effort we make everyone go through to show that they in fact qualify for free tuition. And, the program will be largely funded with higher taxes on the wealthy in any case, so they will end up paying.

There are many serious issues that need to be thought through if we are to implement a national program of free college. For example, if we base the federal payment on current state payments, with the feds picking up the difference, we are giving an enormous subsidy to the states that have been stingiest in support of their public colleges.

We also have to recognize that this program will decimate the existing system of private colleges, with only the most elite likely to survive. That may be a small price to pay for universal free public college, but it is a cost that should be acknowledged. 

There are many other important issues that will have to be dealt with when we get to the nuts and bolts of a free college policy. However, the concern that we could potentially be paying tuition for Bill Gates’ kids hardly seems like it should be at the top of the list.

(This post originally appeared on my Patreon page.)

The prospect of free public college is shaping up as one of the major divides between the more progressive candidates (Bernie Sanders and Elizabeth Warren) and the more centrist candidates (Joe Biden and Pete Buttigieg). Buttigieg in particular has been especially vocal in his opposition to making college free for everyone.

He has argued that it would be regressive to tax middle class people to pay for the children of the wealthy to go to college. Buttigieg argues instead that he would make public colleges free for children of families earning less than $100,000. He would have a sliding scale for families with incomes between $100,000 and $150,000, and have families with incomes over $150,000 pay full tuition.

Sanders and Warren have argued that college should be seen as a right, comparable to attending a public grade school, and that we shouldn’t expect people to pay for it. They also point to the strong political support for universal programs, like Social Security and Medicare, as opposed to anti-poverty programs like Temporary Assistance for Needy Families (TANF) or food stamps.

While these are important arguments for universal free college, there is another side of this issue that has been largely neglected. Specifically, Buttigieg and other proponents of means-testing tuition seem to have not grappled with the administrative difficulties of their plan.

It is one thing to write down on paper how much we think families at various income levels should pay for their kids’ college. Implementing this payment schedule in practice is a very different story.

Economists tend to believe that people respond to incentives. The Buttigieg plan gives families enormous incentives to make their income appear smaller than it actually is.

If that sounds strange, after all, we do a reasonably good job of collecting income taxes, let’s start with the most simple issue, divorced or separated parents. Roughly a third of all children are in families without two parents. Most often the mother is the custodial parent and usually has the lower income.

What does Mayor Buttigieg want us to do with children with low earning mothers, but high earning non-custodial fathers? Generally, parents are not responsible for supporting kids once they turn eighteen. We can change the laws to make both parents responsible for paying for their kids’ college, but enforcing that law may not be that easy.

Less than 44 percent of custodial parents receive the full amount of child support which the non-custodial parent is obligated to pay. This is often because the non-custodial parent literally does not have the money to pay child support, but in many cases the non-custodial parent is simply able to avoid paying through various legal or illegal dodges. Perhaps Buttigieg will find ways to crack down on these deadbeat dads, but that is a non-trivial task.

And, what do we do for the kids with low-earning mothers and deadbeat doctor dads? Does Buttigieg want to make them responsible for $25,000 in annual tuition based on their absent father’s earnings? Or, will he give them a pass, not wanting to punish the kids for the irresponsible behavior of their father?

Either route poses serious problems. Certainly it is not fair to punish children because they happen to have a relatively wealthy parent who is a jerk, so it doesn’t make sense to require them to pay tuition based on money they don’t see.

On the other hand, excluding the deadbeat dad’s income from the tuition calculation gives a very strong incentive for high-earning non-custodial parents to become deadbeats. If a professional earning $200,000 a year can save $25,000 a year in tuition by refusing to help support his kid ($50,000 for two college age kids), we have given them a very large incentive to disavow the kid(s). In fact, we can anticipate couples becoming legally divorced or separated just to be able to take advantage of Buttigieg’s free college.

While parental separation is a big and obvious problem with this sort of means-test, it is far from the only one. Many parents disapprove of their adult children’s behavior in various ways. This can mean anything from rejecting their choice of a college major, to disliking a partner, or disapproving of their sexual orientation.

High earning parents will be able to withhold tuition payments for their children based on these, or other, considerations. Children can become legally independent of their parents and thereby have their income excluded from tuition calculations, but this is a major legal hurdle. It is also likely to be in many cases a serious emotional hurdle that we probably do not want to force young people to have to deal with in order to be able to afford college.

And, if high-earning parents can avoid paying for their kids’ college by having them become legally independent at age 18, then they have a very strong incentive to have them become legally independent at age 18. In fact, Buttigieg’s plan is likely to spur a new industry of consultants who earn their income by figuring out how high earning parents can avoid paying for their kids’ college.

Of course these problems and the various types of subterfuges are not new. Colleges offering financial aid have been dealing with them for many decades. However, we can expect the extent of gaming, and the resources needed to contain it, to become qualitatively greater with a national program offering free college to the bottom 80 percent of the population.   

If we want to ask the question seriously about whether the government should pay for college for the kids from wealthy families, we really have to ask how many resources should society be prepared to commit to make sure that more affluent parents do pay for their kids’ education?

After all, we allow the rich to use city streets and parks for free too. We can say this is regressive, and decide that we will charge higher income people to use these facilities. We can have check points where people either have to show that they are not high income or cough up the payment if they are. No one would suggest this move towards more progressive payments for streets and parks because the costs would be absurdly high compared to the money we would collect.

Arguably, it is the same story with free college. At the end of the day, the money we are likely to collect from high income families for their kids’ tuition is not likely to be worth the effort we make everyone go through to show that they in fact qualify for free tuition. And, the program will be largely funded with higher taxes on the wealthy in any case, so they will end up paying.

There are many serious issues that need to be thought through if we are to implement a national program of free college. For example, if we base the federal payment on current state payments, with the feds picking up the difference, we are giving an enormous subsidy to the states that have been stingiest in support of their public colleges.

We also have to recognize that this program will decimate the existing system of private colleges, with only the most elite likely to survive. That may be a small price to pay for universal free public college, but it is a cost that should be acknowledged. 

There are many other important issues that will have to be dealt with when we get to the nuts and bolts of a free college policy. However, the concern that we could potentially be paying tuition for Bill Gates’ kids hardly seems like it should be at the top of the list.

Dear Beat the Press Readers

Dawn Niederhauser, CEPR’s Development Department here. It’s the time of year when I highjack Dean’s blog to ask that you consider making a year-end donation to CEPR. As you may have heard, it’s CEPR’s 20th Anniversary this year. Yep, Dean has been calling out bad economic reporting for two decades now, and while he’s definitely made an impact over the years, there’s much more work to do.

So please, click here and donate in Dean’s honor today. Help us to help Dean keep those reporters on their toes!

Many thanks for your support. And as Dean always says, don’t believe everything you read in the papers…

Dawn Niederhauser, CEPR’s Development Department here. It’s the time of year when I highjack Dean’s blog to ask that you consider making a year-end donation to CEPR. As you may have heard, it’s CEPR’s 20th Anniversary this year. Yep, Dean has been calling out bad economic reporting for two decades now, and while he’s definitely made an impact over the years, there’s much more work to do.

So please, click here and donate in Dean’s honor today. Help us to help Dean keep those reporters on their toes!

Many thanks for your support. And as Dean always says, don’t believe everything you read in the papers…

The NYT and Washington Post gave us more of their fraternity ritual budget reporting in talking about the new $738 billion military budget agreed to by Congress and Donald Trump. This is known as fraternity ritual reporting because everyone knows that the number $738 billion is completely meaningless to the overwhelming majority of NYT and Post readers. Nonetheless, reporters put it down knowing that it conveys no information, because that is the ritual.

If the papers were actually interested in providing information to their readers they could have told them the budget comes to just under 3.4 percent of GDP. Alternatively, they could have said that it accounts for a bit less than 17 percent of projected federal spending for the fiscal year. But no one expects these newspapers to be in the business of providing information.

The NYT and Washington Post gave us more of their fraternity ritual budget reporting in talking about the new $738 billion military budget agreed to by Congress and Donald Trump. This is known as fraternity ritual reporting because everyone knows that the number $738 billion is completely meaningless to the overwhelming majority of NYT and Post readers. Nonetheless, reporters put it down knowing that it conveys no information, because that is the ritual.

If the papers were actually interested in providing information to their readers they could have told them the budget comes to just under 3.4 percent of GDP. Alternatively, they could have said that it accounts for a bit less than 17 percent of projected federal spending for the fiscal year. But no one expects these newspapers to be in the business of providing information.

Washington Post columnist Charles Lane took a story from a German TV show to lecture his readers about health care costs. According to Lane, the show featured a  German civil servant who had a daughter with a rare and fatal spinal condition. Her only hope was a $330,000 operation in a clinic in Colorado. Her German insurance company refused to pay for it, forcing the guy to try an on-line fundraiser, which also failed.

No reason to go any further with the TV show, but Lane’s takeaway is that:

“neither Germany nor any other country on Earth, major or minor, does is ‘guarantee’ everyone health care, in the sense of assuring them all the care they want, at a price they can afford, no matter what.

“Trade-offs in health care are real and not merely the result of insurance company or drug company greed.”

This is a warning against an expansive Medicare for All plan, such as the one being pushed by Bernie Sanders.

It’s worth thinking about Lane’s German TV show a bit more carefully. Let’s ask why some medical treatments are very expensive, regardless of whether it is the government, private insurers, or the patient who pays.

A major reason that many treatments involving new drugs are expensive is that the government granted the companies patent monopolies. It is true that money had to be spent on the research, but at the point the drug is available to patients, that research was already done. In almost all cases the cost of manufacturing and distributing the drug would not require anyone to have an online fundraiser even in the absence of insurance.

We do have to pay for the research, but government-granted patent monopolies are an extremely inefficient mechanism. (See Rigged chapter 5, for a discussion of alternatives [it’s free].) In addition to creating the horrible problem of making otherwise cheap drugs costly, patent monopolies also give companies an incentive to misrepresent the safety and effectiveness of their drugs in order to sell them as widely as possible. This is an important part of the story of the opioid epidemic.

There is a similar story with medical equipment. There are a whole range of treatments that are very costly, not because the equipment is expensive to manufacture, but because the manufacturer has a patent monopoly on it. If we didn’t rely on patent monopolies to finance the development of this equipment, it would be cheap as well.

What about the poor German civil servant looking at a $330,000 bill for his daughter’s operation. Well, Lane doesn’t tell us much about the operation, so we don’t know exactly what caused the high cost, but it is true that many specialists in the United States are very highly paid, earning $400k or $500k a year, or more. It is possible that this procedure involved a considerable amount of time from one or more of these highly paid specialists, which would make it expensive, although probably not get us to the $330,000 range. (Two full days of work from someone earning $500k a year would be just $4,000, assuming 250 workdays a year.)

But the fact that these specialists can get $500k a year is not an accident. We have rigged the market to ensure that they are in short supply and can set their own terms.

 

While trade policy has been designed to put U.S. manufacturing workers in direct competition with low paid workers in developing countries, with the predicted and actual result of driving down their pay. We have largely protected our most highly paid professionals, especially doctors, from similar foreign (and domestic) competition.

There are undoubtedly many highly qualified doctors in Europe and elsewhere who would be happy to work in the United States for half the pay our specialists receive. But we don’t let them. This is a form of protectionism that folks like Charles Lane and the Washington Post are happy to preserve. As a result, our specialists get paid far more than if they faced the same competition as less highly educated workers.

That may sound bad, but wait, it gets worse. The exorbitant pay of specialists encourages them to develop procedures that may not be effective, just as patent monopolies encourage drug companies to push their drugs in contexts where they may not be appropriate.

It is very likely that the $330,000 operation for the civil servant’s daughter would not have actually helped her. It was simply a ruse that some hack doctor in Colorado had developed to make themselves very rich. That is likely why the German insurance company refused to pay.

So, the real story here is not of a suffering person being denied medical treatment that could save her life. The story is of a sleazebag doctor taking advantage of the suffering of a dying person and their family to make themselves richer.

It’s amazing the lessons on health care that you can learn from a German television show.

 

Washington Post columnist Charles Lane took a story from a German TV show to lecture his readers about health care costs. According to Lane, the show featured a  German civil servant who had a daughter with a rare and fatal spinal condition. Her only hope was a $330,000 operation in a clinic in Colorado. Her German insurance company refused to pay for it, forcing the guy to try an on-line fundraiser, which also failed.

No reason to go any further with the TV show, but Lane’s takeaway is that:

“neither Germany nor any other country on Earth, major or minor, does is ‘guarantee’ everyone health care, in the sense of assuring them all the care they want, at a price they can afford, no matter what.

“Trade-offs in health care are real and not merely the result of insurance company or drug company greed.”

This is a warning against an expansive Medicare for All plan, such as the one being pushed by Bernie Sanders.

It’s worth thinking about Lane’s German TV show a bit more carefully. Let’s ask why some medical treatments are very expensive, regardless of whether it is the government, private insurers, or the patient who pays.

A major reason that many treatments involving new drugs are expensive is that the government granted the companies patent monopolies. It is true that money had to be spent on the research, but at the point the drug is available to patients, that research was already done. In almost all cases the cost of manufacturing and distributing the drug would not require anyone to have an online fundraiser even in the absence of insurance.

We do have to pay for the research, but government-granted patent monopolies are an extremely inefficient mechanism. (See Rigged chapter 5, for a discussion of alternatives [it’s free].) In addition to creating the horrible problem of making otherwise cheap drugs costly, patent monopolies also give companies an incentive to misrepresent the safety and effectiveness of their drugs in order to sell them as widely as possible. This is an important part of the story of the opioid epidemic.

There is a similar story with medical equipment. There are a whole range of treatments that are very costly, not because the equipment is expensive to manufacture, but because the manufacturer has a patent monopoly on it. If we didn’t rely on patent monopolies to finance the development of this equipment, it would be cheap as well.

What about the poor German civil servant looking at a $330,000 bill for his daughter’s operation. Well, Lane doesn’t tell us much about the operation, so we don’t know exactly what caused the high cost, but it is true that many specialists in the United States are very highly paid, earning $400k or $500k a year, or more. It is possible that this procedure involved a considerable amount of time from one or more of these highly paid specialists, which would make it expensive, although probably not get us to the $330,000 range. (Two full days of work from someone earning $500k a year would be just $4,000, assuming 250 workdays a year.)

But the fact that these specialists can get $500k a year is not an accident. We have rigged the market to ensure that they are in short supply and can set their own terms.

 

While trade policy has been designed to put U.S. manufacturing workers in direct competition with low paid workers in developing countries, with the predicted and actual result of driving down their pay. We have largely protected our most highly paid professionals, especially doctors, from similar foreign (and domestic) competition.

There are undoubtedly many highly qualified doctors in Europe and elsewhere who would be happy to work in the United States for half the pay our specialists receive. But we don’t let them. This is a form of protectionism that folks like Charles Lane and the Washington Post are happy to preserve. As a result, our specialists get paid far more than if they faced the same competition as less highly educated workers.

That may sound bad, but wait, it gets worse. The exorbitant pay of specialists encourages them to develop procedures that may not be effective, just as patent monopolies encourage drug companies to push their drugs in contexts where they may not be appropriate.

It is very likely that the $330,000 operation for the civil servant’s daughter would not have actually helped her. It was simply a ruse that some hack doctor in Colorado had developed to make themselves very rich. That is likely why the German insurance company refused to pay.

So, the real story here is not of a suffering person being denied medical treatment that could save her life. The story is of a sleazebag doctor taking advantage of the suffering of a dying person and their family to make themselves richer.

It’s amazing the lessons on health care that you can learn from a German television show.

 

A very large portion of U.S. workers will earn more than $2 million. That’s not in a year, but in a working lifetime. That makes a huge difference.

Apparently that point is too subtle for the people who write headlines for the Washington Post. The headline of an article on Senator Warren’s income from consulting fees told readers, “Sen. Elizabeth Warren earned nearly $2 million consulting for corporations and financial firms, records show.”

As people who read the article would learn, this amount was earned over roughly twenty years, meaning that the average payments were in the neighborhood of $50,000 a year. While that is still a considerable chunk of change, it is common for a lawyer of Ms. Warren’s stature to earn millions of dollars a year. (I’m not saying that’s justified, it just happens to be the reality.)

In any case, there is a huge difference between earning $2 million in a single year or a short period of time and earning it over a long portion of a person’s career. The people who write headlines for major newspapers should understand this point.  

A very large portion of U.S. workers will earn more than $2 million. That’s not in a year, but in a working lifetime. That makes a huge difference.

Apparently that point is too subtle for the people who write headlines for the Washington Post. The headline of an article on Senator Warren’s income from consulting fees told readers, “Sen. Elizabeth Warren earned nearly $2 million consulting for corporations and financial firms, records show.”

As people who read the article would learn, this amount was earned over roughly twenty years, meaning that the average payments were in the neighborhood of $50,000 a year. While that is still a considerable chunk of change, it is common for a lawyer of Ms. Warren’s stature to earn millions of dollars a year. (I’m not saying that’s justified, it just happens to be the reality.)

In any case, there is a huge difference between earning $2 million in a single year or a short period of time and earning it over a long portion of a person’s career. The people who write headlines for major newspapers should understand this point.  

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