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.

Since the Biden administration announced its decision to support a motion at the WTO to waive patent rights on vaccines for the duration of the pandemic, we have been deluged with statements by experts telling us that this cannot possibly increase vaccine production. The argument is that everyone who can produce vaccines is already producing them. Furthermore, there are bottlenecks in the production process, so that even if another manufacturer was prepared to produce vaccines, they could not get the necessary materials.

There are two big problems with these claims. First, it’s not clear what these experts envision as the end date of the pandemic. Surely no new production can come on line tomorrow, and probably not even in the next few months, but unfortunately, we are almost certainly looking at a much longer time-frame for getting the world vaccinated.

At the current pace, we would be very lucky to get most of the world vaccinated by the end of 2022, and it could very well be much later. Are we supposed to believe that making the technology freely available could not lead to an increase in production in eight months or even a year down the road? It’s important to remember, there were no vaccines in March of 2020, yet several companies had the capacity to produce large quantities by November.

It would have been great if we had gone the route of open source technology when South Africa and India first proposed suspending intellectual property rules back in October. Better yet, we could have taken the pandemic seriously and gone this route from the beginning last March. But even where we are now, there is good reason to believe that we can hasten the process of vaccinating the world by freely transferring technology.

The other point is that the production process is not set in stone. Pfizer announced back in February that it discovered a way to cut its production time nearly in half. It also discovered that its vaccine did not need to be super-frozen at temperatures below minus 90 degrees Fahrenheit; instead it can be kept in a normal freezer for up to two weeks. This greatly eases the process of transporting and delivering the vaccine. It also discovered that a typical vial contains six doses rather than five, which implies 20 percent more doses.

The point is that Pfizer’s engineers have repeatedly found ways to improve its production and delivery process. It is hard to believe that if its technology were open-sourced for engineers all over the world to review, that not one of them could find a way to further improve its production process. And, even small improvements, say five percent or ten percent, imply enormous benefits in reduced infections and deaths, as well as economic benefits.

The same story would, of course, apply to Moderna and the other manufacturers. It also applies to the suppliers of inputs that are in short supply. It’s pretty hard to imagine that, if these technologies were fully open and available for experts everywhere to review, there would not be further improvements.   

In short, it seems very likely that if we really got open source technology for the production of vaccines and the necessary inputs, we would have substantially more vaccines available in the not-distant future. Given the enormous potential gains, that’s a pretty good argument for open-sourcing the key technologies.

Since the Biden administration announced its decision to support a motion at the WTO to waive patent rights on vaccines for the duration of the pandemic, we have been deluged with statements by experts telling us that this cannot possibly increase vaccine production. The argument is that everyone who can produce vaccines is already producing them. Furthermore, there are bottlenecks in the production process, so that even if another manufacturer was prepared to produce vaccines, they could not get the necessary materials.

There are two big problems with these claims. First, it’s not clear what these experts envision as the end date of the pandemic. Surely no new production can come on line tomorrow, and probably not even in the next few months, but unfortunately, we are almost certainly looking at a much longer time-frame for getting the world vaccinated.

At the current pace, we would be very lucky to get most of the world vaccinated by the end of 2022, and it could very well be much later. Are we supposed to believe that making the technology freely available could not lead to an increase in production in eight months or even a year down the road? It’s important to remember, there were no vaccines in March of 2020, yet several companies had the capacity to produce large quantities by November.

It would have been great if we had gone the route of open source technology when South Africa and India first proposed suspending intellectual property rules back in October. Better yet, we could have taken the pandemic seriously and gone this route from the beginning last March. But even where we are now, there is good reason to believe that we can hasten the process of vaccinating the world by freely transferring technology.

The other point is that the production process is not set in stone. Pfizer announced back in February that it discovered a way to cut its production time nearly in half. It also discovered that its vaccine did not need to be super-frozen at temperatures below minus 90 degrees Fahrenheit; instead it can be kept in a normal freezer for up to two weeks. This greatly eases the process of transporting and delivering the vaccine. It also discovered that a typical vial contains six doses rather than five, which implies 20 percent more doses.

The point is that Pfizer’s engineers have repeatedly found ways to improve its production and delivery process. It is hard to believe that if its technology were open-sourced for engineers all over the world to review, that not one of them could find a way to further improve its production process. And, even small improvements, say five percent or ten percent, imply enormous benefits in reduced infections and deaths, as well as economic benefits.

The same story would, of course, apply to Moderna and the other manufacturers. It also applies to the suppliers of inputs that are in short supply. It’s pretty hard to imagine that, if these technologies were fully open and available for experts everywhere to review, there would not be further improvements.   

In short, it seems very likely that if we really got open source technology for the production of vaccines and the necessary inputs, we would have substantially more vaccines available in the not-distant future. Given the enormous potential gains, that’s a pretty good argument for open-sourcing the key technologies.

To repeat my standard disclaimer, I know this sort of comparison is silly, but I also know that Trump and the Republicans would be touting this to the sky if the shoe were on the other foot. So, here’s the latest, the economy has created approximately 1.6 million in three months under Biden. It lost almost 2.9 million jobs in the four years of the Trump administration.


Source: Bureau of Labor Statistics and author’s calculations.

To repeat my standard disclaimer, I know this sort of comparison is silly, but I also know that Trump and the Republicans would be touting this to the sky if the shoe were on the other foot. So, here’s the latest, the economy has created approximately 1.6 million in three months under Biden. It lost almost 2.9 million jobs in the four years of the Trump administration.


Source: Bureau of Labor Statistics and author’s calculations.

(This post first appeared on my Patreon page.)

President Biden made a huge step yesterday when his trade representative, Katherine Tai, announced that the United States would be supporting a resolution at the World Trade Organization (WTO), to suspend intellectual property rules on vaccines for the duration of the pandemic. This resolution had been introduced by India and South Africa back in October.

The United States had previously been leading wealthy countries in opposition to the resolution. With Biden now reversing the position of the Trump administration, the resolution is likely to be approved.

However, the approval is not necessarily a foregone conclusion. In reversing the U.S. position, Biden went against a major lobbying campaign by the pharmaceutical industry.  Many European countries also have large pharmaceutical companies. They are being every bit as vigorous in lobbying their own countries’ governments to get them to maintain their opposition to the resolution.

Since everything at the WTO has to be unanimous, a single country can block action on the resolution. Nonetheless, it is unlikely that any of the European countries, or even a small group of them, would want to be seen standing in the way of getting the world vaccinated as quickly as possible.

It is also important to recognize that Ambassador Tai’s announcement only indicated that the United States supported the proposal to end intellectual property protections on vaccines. The resolution introduced by India and South Africa also called for ending protections on treatments and tests for the duration of the pandemic. A suspension of IP protections in these other areas is needed to minimize the death and suffering from the pandemic, but we still should recognize the huge step taken by the Biden administration yesterday.

 

How We Got Here

While President Biden deserves enormous credit for this step, it is important to realize that it came about as a result of a great deal of work by activists here and around the world. First of all, the Indian and South African governments kicked it off with their WTO proposal. Many groups had been urging open source technology from the beginning of the pandemic, but this resolution gave activists and policy types a clear rallying point.   

I am tempted to list the groups and individuals who deserve congratulations for their efforts on this, but I am going to restrain myself out of the fear of leaving some important ones off the list. I will just say that this came about because of the efforts of many people in the United States and around the world, who argued that we have to do everything possible to limit the suffering from the pandemic.

The change in positions shows the potential for public pressure to have an impact. This calls to mind the possibly apocryphal story of when a group of progressives met with Franklin Roosevelt to press him on one of the important New Deal issues. He supposedly said something to the effect of, “you convinced me, now make me do it.”

We needed a president who was open to this sort of move for the pressure to succeed. But without the pressure from activists here and around the world, it is unlikely that Biden would have bucked the Big Pharma lobby.

 

What is Left to be Done

It is important to realize that the change in the U.S. position at the WTO doesn’t directly get a single shot in anyone’s arm. What is needed is a full-scale effort to not only remove the constraints of patent monopolies but also to push the drug companies to transfer their technology as quickly as possible.

Ideally, this would mean going full open-source. That would require Pfizer, Moderna, and the rest to post their manufacturing plans online, and then conduct webinars, and hands-on training with everyone capable of quickly getting manufacturing capacity up to speed.

It is unlikely that the Biden administration will go this route, but it should be seen as the gold standard here. Not only would this allow for the most rapid diffusion of the technology, but it would also open the door for further innovations that could hasten production.

Back in February, Pfizer announced that it had found ways to improve its production process so as to nearly double output. It also discovered that its vaccines did not need to be super-frozen, but could be safely stored in a normal freezer for up to two weeks. Unless we think that Pfizer’s engineers are the only people in the world who could improve its production and delivery process, making the information open-source is likely to lead to further improvements that could increase its rate of output.

Assuming that we do not go the open-source route, Biden should be prepared to use the Defense Production Act to force vaccine makers to enter into contracts with manufacturers around the world, in which they share the technology needed for them to start production as quickly as possible. He already did with Johnson and Johnson and Merck, with the latter now producing the vaccine developed by Johnson and Johnson. Biden needs to take the same step, forcing our manufacturers to transfer their technology to anyone with capacity anywhere in the world.

We also really need to collaborate with Russia and China, as well as any other country that has a vaccine that is shown to be safe and effective. We can have our political fights in other spheres, but we have a common interest in getting the world vaccinated as quickly as possible.

In addition to doing an inventory of the obstacles to ramping up production of the U.S.-European vaccines, we should also be addressing obstacles that prevent these countries from producing more of their vaccines. Ideally, they can also be pushed to have increased transparency on their clinical trial results. It is important to know which vaccines are most effective against each variant, and also the extent to which some are better or worse for different demographic groups.

The goal here should be getting the world vaccinated, not scoring propaganda points. If President Biden approaches the issue that way, hopefully, he can get his counterparts in other major powers to do the same.

 

Implications for the Longer Term

In my spare time, I have been writing on patent and copyright monopolies for a quarter-century. This is the first time I have ever seen IP issues get any substantial amount of attention from a general audience. Usually, the only people paying attention are the affected industries and a relatively narrow group of activists and policy types.

That matters hugely because when the affected industries dominate the debate, they can be pretty much guaranteed of being able to steer the policy in a way that benefits them. This is really the story of patent and copyright policy over the last four decades, with the inclusion of the TRIPS provisions in the WTO being the most notable example. TRIPS got added to the WTO because the drug companies wanted to impose U.S.-style patent protection on the developing world. There was no major public debate in the United States, or anywhere else, as to whether it was a good idea.

Now that we do have the public paying attention to IP issues, it is worth trying to press a few points.

First, we need to recognize that there are alternatives to patent monopolies for financing research and development. That should be obvious since the federal government already spends more than $40 billion a year on biomedical research through the National Institutes of Health (NIH). (That compares to roughly $90 billion spent by the industry.)

In addition, the government put up another $10 billion in the funding of pandemic-related research with Operation Warp Speed (OWS). While most of the NIH funding goes to more basic research (occasionally it has financed the development of new drugs), OWS was directly focused on developing treatments, tests, and vaccines. In the case of the Moderna vaccine, the government picked up the full tab for the development costs.

In principle, there is no reason why direct public funding cannot be the more standard route of paying for research. There are various ways this can be done (I discuss mechanisms in chapter 5 of Rigged [it’s free], see also this paper by Arjun Jayadev, Joe Stiglitz, and me), but the point is that we don’t have to rely on government-granted patent monopolies to provide incentives for developing drugs.

There are many advantages of direct public funding. First, if the government has paid the tab for the research, any new drugs or vaccines can be sold as cheap generics from the day they are approved. This means that nearly all drugs would be cheap. Instead of selling for hundreds or thousands of dollars a prescription, drugs would sell for ten or twenty dollars.

A second major advantage is that if the government is funding the research, it can require that it all be open-source. This means that not only are all patents placed in the public domain, but all research findings are posted on the web as soon as practical. That would allow researchers all over the world to quickly build on successes and learn from failures.

A third major benefit is that if all drugs were sold as cheap generics, it would take away the incentive that patent monopolies give drug companies to lie about the safety and effectiveness of their drugs. When a drug is selling for a mark-up of several thousand percent over production costs, companies have a huge incentive to push it as widely as possible. We saw this most recently with the opioid crisis, where several companies paid billions of dollars in settlements based on the allegation that they deliberately misled doctors about the addictiveness of the new generation of opioids.

 

A second important point is that we need to have a clear understanding of the economic importance of patent and copyright monopolies. By my calculations, we transfer over $1 trillion annually (half of all corporate profits) from the public as a whole to the beneficiaries of rents from patents and copyrights. This is a huge amount of money and a big part of the story of the rise in inequality over the last four decades.

While it can be argued that our rules on patents and copyrights promote economic growth (the counterfactual should be alternative incentive mechanisms, not no incentive mechanism) it is indisputable that these are government policies, not the market.

This means that when someone says that technology has been responsible for the upward redistribution over the last four decades, they are speaking nonsense. Technology did not make Bill Gates rich, the patent and copyright monopolies the government gave Microsoft on its software made him rich. These monopolies can be longer and stronger, or shorter and weaker, or they can be replaced by different mechanisms altogether. The fact that a substantial segment of the population was able to get very wealthy from these monopolies was due to policy choices, don’t blame the technology.

The rents created by government-granted patents and copyright monopolies are also a form of government debt. It is utterly bizarre that we have so many people complaining about the debt burden that government borrowing is creating for our children, while completely ignoring the burden created by patent and copyright monopolies.

It’s pretty nutty to claim that if we tax people $400 billion to pay debt service (roughly twice the current debt level of debt service), it’s a burden. But, if we give drug companies patent monopolies, that allow them to raise their prices by $400 billion above the free market level, it’s not a problem. Government-granted patent and copyright monopolies are alternatives to direct government spending. We cannot claim the debt from direct spending is a burden and then pretend the rents from these monopolies are not a problem.

Finally, we should be taking away some lessons from the pandemic for future trade policy, most importantly with China, our major competitor in the world economy. We have real and important differences with China.

China is not a democracy and it does not respect human rights. Critics of the government face serious risks of persecution and imprisonment. It has engaged in large-scale abuses against minority populations in Tibet and the Uygur population in Xinjiang. It also is reversing commitments it made to respect the autonomy of Hong Kong.

But it doesn’t follow that we would benefit from having a Cold War stance toward China, as we did with the Soviet Union for most of its existence. (One consideration for those wanting to go the Cold War route is that China’s economy is already almost 20 percent larger than the U.S. economy, the Soviet economy probably peaked at less than half of the size of the U.S. economy.) Many bad things, both domestically and internationally, were justified by the need to confront the Soviet Union. We should not want to see that story again in a Cold War with China.  

We should look to cooperate with China in the areas where we can, most obviously in health and climate change. This would mean a full sharing of technology. After all, in both cases, we gain if China gains and vice-versa. We are not harmed if China uses our technology to develop better ways to store energy or to treat cancer. Ideally, we would look to pool our resources in these, and possibly other areas, with all research findings being fully open. We should look to bring in the rest of the world as well to address the common problems that confront us.

I won’t claim to be an expert in political science and to make predictions about what impact greater sharing of technology can have on China, but I will note an argument that was often made to justify opening to trade with China in the 1990s and 2000s. Many supporters of removing trade barriers argued not just that there would be economic benefits, but also political ones, in that increased trade would lead to more openness in China and a move towards democracy.

While China is undoubtedly more open in some ways than it was three decades ago, it clearly is not a democracy. I never fully understood how increased U.S. imports of Chinese manufactured goods, which were often produced by very low-paid workers, with few rights, were supposed to lead to democracy, but this was the line parroted by many people in policy debates.

By contrast, if the plan is to have open cooperative research in health, climate, and possibly other areas, we will be creating a system in which large numbers of Chinese scientists and researchers would be in regular contact with their counterparts in the United States and West Europe. These scientists and researchers will be the brothers and sisters, sons and daughters, and fathers and mothers of the leaders in China. I don’t know if this contact is likely to have an impact on China’s policy towards democracy and the West, but I will speculate that it has a greater chance of having a positive impact than buying textiles produced by low-paid workers putting in long hours in unsafe conditions.  

But that is all just speculation. What is not speculation is that a relatively small group of people stand to benefit from continuing to make our patents longer and stronger and seeing health and climate as areas of competition with China. Most of us will be better off without these policies, and certainly without a new Cold War.

(This post first appeared on my Patreon page.)

President Biden made a huge step yesterday when his trade representative, Katherine Tai, announced that the United States would be supporting a resolution at the World Trade Organization (WTO), to suspend intellectual property rules on vaccines for the duration of the pandemic. This resolution had been introduced by India and South Africa back in October.

The United States had previously been leading wealthy countries in opposition to the resolution. With Biden now reversing the position of the Trump administration, the resolution is likely to be approved.

However, the approval is not necessarily a foregone conclusion. In reversing the U.S. position, Biden went against a major lobbying campaign by the pharmaceutical industry.  Many European countries also have large pharmaceutical companies. They are being every bit as vigorous in lobbying their own countries’ governments to get them to maintain their opposition to the resolution.

Since everything at the WTO has to be unanimous, a single country can block action on the resolution. Nonetheless, it is unlikely that any of the European countries, or even a small group of them, would want to be seen standing in the way of getting the world vaccinated as quickly as possible.

It is also important to recognize that Ambassador Tai’s announcement only indicated that the United States supported the proposal to end intellectual property protections on vaccines. The resolution introduced by India and South Africa also called for ending protections on treatments and tests for the duration of the pandemic. A suspension of IP protections in these other areas is needed to minimize the death and suffering from the pandemic, but we still should recognize the huge step taken by the Biden administration yesterday.

 

How We Got Here

While President Biden deserves enormous credit for this step, it is important to realize that it came about as a result of a great deal of work by activists here and around the world. First of all, the Indian and South African governments kicked it off with their WTO proposal. Many groups had been urging open source technology from the beginning of the pandemic, but this resolution gave activists and policy types a clear rallying point.   

I am tempted to list the groups and individuals who deserve congratulations for their efforts on this, but I am going to restrain myself out of the fear of leaving some important ones off the list. I will just say that this came about because of the efforts of many people in the United States and around the world, who argued that we have to do everything possible to limit the suffering from the pandemic.

The change in positions shows the potential for public pressure to have an impact. This calls to mind the possibly apocryphal story of when a group of progressives met with Franklin Roosevelt to press him on one of the important New Deal issues. He supposedly said something to the effect of, “you convinced me, now make me do it.”

We needed a president who was open to this sort of move for the pressure to succeed. But without the pressure from activists here and around the world, it is unlikely that Biden would have bucked the Big Pharma lobby.

 

What is Left to be Done

It is important to realize that the change in the U.S. position at the WTO doesn’t directly get a single shot in anyone’s arm. What is needed is a full-scale effort to not only remove the constraints of patent monopolies but also to push the drug companies to transfer their technology as quickly as possible.

Ideally, this would mean going full open-source. That would require Pfizer, Moderna, and the rest to post their manufacturing plans online, and then conduct webinars, and hands-on training with everyone capable of quickly getting manufacturing capacity up to speed.

It is unlikely that the Biden administration will go this route, but it should be seen as the gold standard here. Not only would this allow for the most rapid diffusion of the technology, but it would also open the door for further innovations that could hasten production.

Back in February, Pfizer announced that it had found ways to improve its production process so as to nearly double output. It also discovered that its vaccines did not need to be super-frozen, but could be safely stored in a normal freezer for up to two weeks. Unless we think that Pfizer’s engineers are the only people in the world who could improve its production and delivery process, making the information open-source is likely to lead to further improvements that could increase its rate of output.

Assuming that we do not go the open-source route, Biden should be prepared to use the Defense Production Act to force vaccine makers to enter into contracts with manufacturers around the world, in which they share the technology needed for them to start production as quickly as possible. He already did with Johnson and Johnson and Merck, with the latter now producing the vaccine developed by Johnson and Johnson. Biden needs to take the same step, forcing our manufacturers to transfer their technology to anyone with capacity anywhere in the world.

We also really need to collaborate with Russia and China, as well as any other country that has a vaccine that is shown to be safe and effective. We can have our political fights in other spheres, but we have a common interest in getting the world vaccinated as quickly as possible.

In addition to doing an inventory of the obstacles to ramping up production of the U.S.-European vaccines, we should also be addressing obstacles that prevent these countries from producing more of their vaccines. Ideally, they can also be pushed to have increased transparency on their clinical trial results. It is important to know which vaccines are most effective against each variant, and also the extent to which some are better or worse for different demographic groups.

The goal here should be getting the world vaccinated, not scoring propaganda points. If President Biden approaches the issue that way, hopefully, he can get his counterparts in other major powers to do the same.

 

Implications for the Longer Term

In my spare time, I have been writing on patent and copyright monopolies for a quarter-century. This is the first time I have ever seen IP issues get any substantial amount of attention from a general audience. Usually, the only people paying attention are the affected industries and a relatively narrow group of activists and policy types.

That matters hugely because when the affected industries dominate the debate, they can be pretty much guaranteed of being able to steer the policy in a way that benefits them. This is really the story of patent and copyright policy over the last four decades, with the inclusion of the TRIPS provisions in the WTO being the most notable example. TRIPS got added to the WTO because the drug companies wanted to impose U.S.-style patent protection on the developing world. There was no major public debate in the United States, or anywhere else, as to whether it was a good idea.

Now that we do have the public paying attention to IP issues, it is worth trying to press a few points.

First, we need to recognize that there are alternatives to patent monopolies for financing research and development. That should be obvious since the federal government already spends more than $40 billion a year on biomedical research through the National Institutes of Health (NIH). (That compares to roughly $90 billion spent by the industry.)

In addition, the government put up another $10 billion in the funding of pandemic-related research with Operation Warp Speed (OWS). While most of the NIH funding goes to more basic research (occasionally it has financed the development of new drugs), OWS was directly focused on developing treatments, tests, and vaccines. In the case of the Moderna vaccine, the government picked up the full tab for the development costs.

In principle, there is no reason why direct public funding cannot be the more standard route of paying for research. There are various ways this can be done (I discuss mechanisms in chapter 5 of Rigged [it’s free], see also this paper by Arjun Jayadev, Joe Stiglitz, and me), but the point is that we don’t have to rely on government-granted patent monopolies to provide incentives for developing drugs.

There are many advantages of direct public funding. First, if the government has paid the tab for the research, any new drugs or vaccines can be sold as cheap generics from the day they are approved. This means that nearly all drugs would be cheap. Instead of selling for hundreds or thousands of dollars a prescription, drugs would sell for ten or twenty dollars.

A second major advantage is that if the government is funding the research, it can require that it all be open-source. This means that not only are all patents placed in the public domain, but all research findings are posted on the web as soon as practical. That would allow researchers all over the world to quickly build on successes and learn from failures.

A third major benefit is that if all drugs were sold as cheap generics, it would take away the incentive that patent monopolies give drug companies to lie about the safety and effectiveness of their drugs. When a drug is selling for a mark-up of several thousand percent over production costs, companies have a huge incentive to push it as widely as possible. We saw this most recently with the opioid crisis, where several companies paid billions of dollars in settlements based on the allegation that they deliberately misled doctors about the addictiveness of the new generation of opioids.

 

A second important point is that we need to have a clear understanding of the economic importance of patent and copyright monopolies. By my calculations, we transfer over $1 trillion annually (half of all corporate profits) from the public as a whole to the beneficiaries of rents from patents and copyrights. This is a huge amount of money and a big part of the story of the rise in inequality over the last four decades.

While it can be argued that our rules on patents and copyrights promote economic growth (the counterfactual should be alternative incentive mechanisms, not no incentive mechanism) it is indisputable that these are government policies, not the market.

This means that when someone says that technology has been responsible for the upward redistribution over the last four decades, they are speaking nonsense. Technology did not make Bill Gates rich, the patent and copyright monopolies the government gave Microsoft on its software made him rich. These monopolies can be longer and stronger, or shorter and weaker, or they can be replaced by different mechanisms altogether. The fact that a substantial segment of the population was able to get very wealthy from these monopolies was due to policy choices, don’t blame the technology.

The rents created by government-granted patents and copyright monopolies are also a form of government debt. It is utterly bizarre that we have so many people complaining about the debt burden that government borrowing is creating for our children, while completely ignoring the burden created by patent and copyright monopolies.

It’s pretty nutty to claim that if we tax people $400 billion to pay debt service (roughly twice the current debt level of debt service), it’s a burden. But, if we give drug companies patent monopolies, that allow them to raise their prices by $400 billion above the free market level, it’s not a problem. Government-granted patent and copyright monopolies are alternatives to direct government spending. We cannot claim the debt from direct spending is a burden and then pretend the rents from these monopolies are not a problem.

Finally, we should be taking away some lessons from the pandemic for future trade policy, most importantly with China, our major competitor in the world economy. We have real and important differences with China.

China is not a democracy and it does not respect human rights. Critics of the government face serious risks of persecution and imprisonment. It has engaged in large-scale abuses against minority populations in Tibet and the Uygur population in Xinjiang. It also is reversing commitments it made to respect the autonomy of Hong Kong.

But it doesn’t follow that we would benefit from having a Cold War stance toward China, as we did with the Soviet Union for most of its existence. (One consideration for those wanting to go the Cold War route is that China’s economy is already almost 20 percent larger than the U.S. economy, the Soviet economy probably peaked at less than half of the size of the U.S. economy.) Many bad things, both domestically and internationally, were justified by the need to confront the Soviet Union. We should not want to see that story again in a Cold War with China.  

We should look to cooperate with China in the areas where we can, most obviously in health and climate change. This would mean a full sharing of technology. After all, in both cases, we gain if China gains and vice-versa. We are not harmed if China uses our technology to develop better ways to store energy or to treat cancer. Ideally, we would look to pool our resources in these, and possibly other areas, with all research findings being fully open. We should look to bring in the rest of the world as well to address the common problems that confront us.

I won’t claim to be an expert in political science and to make predictions about what impact greater sharing of technology can have on China, but I will note an argument that was often made to justify opening to trade with China in the 1990s and 2000s. Many supporters of removing trade barriers argued not just that there would be economic benefits, but also political ones, in that increased trade would lead to more openness in China and a move towards democracy.

While China is undoubtedly more open in some ways than it was three decades ago, it clearly is not a democracy. I never fully understood how increased U.S. imports of Chinese manufactured goods, which were often produced by very low-paid workers, with few rights, were supposed to lead to democracy, but this was the line parroted by many people in policy debates.

By contrast, if the plan is to have open cooperative research in health, climate, and possibly other areas, we will be creating a system in which large numbers of Chinese scientists and researchers would be in regular contact with their counterparts in the United States and West Europe. These scientists and researchers will be the brothers and sisters, sons and daughters, and fathers and mothers of the leaders in China. I don’t know if this contact is likely to have an impact on China’s policy towards democracy and the West, but I will speculate that it has a greater chance of having a positive impact than buying textiles produced by low-paid workers putting in long hours in unsafe conditions.  

But that is all just speculation. What is not speculation is that a relatively small group of people stand to benefit from continuing to make our patents longer and stronger and seeing health and climate as areas of competition with China. Most of us will be better off without these policies, and certainly without a new Cold War.

This is Dawn, Dean’s colleague here at CEPR. I just wanted to make sure you saw Dean’s recent BTP post about the New York Post reporter. In a story criticizing the great investigative work by our CEPR colleagues at the Revolving Door Project, he said that CEPR was, and I quote: “ a well-funded and influential left-wing think tank.”

OK, while I’m happy that he thinks we’re influential (we like to think so too), as CEPR’s Development Director I can assure you that (despite my absolute best efforts) we are not “well-funded”, especially if you compare our budgets to some other think tanks. The Heritage Foundation and the American Enterprise Foundation have budgets between $50 and $80 million with endowments in the hundreds of millions. The Center for American Progress’ budget is close to $50 million. CEPR’s? $2.5 million. And we don’t have an endowment.

As Dean mentioned in his piece there are thousands of Wall Street bankers and Hedge Fund gurus whose expense accounts are larger than our entire budget. Or put another way, the reporter who called us well-funded makes about 25% of our entire budget for salaries. The reporter surely hasn’t been following Dean or he would know not to lie about budget numbers.

Anyhow (as Dean likes to say), it made me think, hmmm, if this guy thinks we’re influential now, what if we really WERE well-funded? I know that a lot of you dear readers are also supporters of CEPR, either directly or though Dean’s Patreon page, but if you aren’t, please help us to become MORE influential AND well-funded by making a donation to CEPR here, or if you haven’t already, make a pledge to Dean on Patreon, here.

I’m sure that Dean would agree with me when I say success is the best revenge. And now back to your regularly scheduled program…

This is Dawn, Dean’s colleague here at CEPR. I just wanted to make sure you saw Dean’s recent BTP post about the New York Post reporter. In a story criticizing the great investigative work by our CEPR colleagues at the Revolving Door Project, he said that CEPR was, and I quote: “ a well-funded and influential left-wing think tank.”

OK, while I’m happy that he thinks we’re influential (we like to think so too), as CEPR’s Development Director I can assure you that (despite my absolute best efforts) we are not “well-funded”, especially if you compare our budgets to some other think tanks. The Heritage Foundation and the American Enterprise Foundation have budgets between $50 and $80 million with endowments in the hundreds of millions. The Center for American Progress’ budget is close to $50 million. CEPR’s? $2.5 million. And we don’t have an endowment.

As Dean mentioned in his piece there are thousands of Wall Street bankers and Hedge Fund gurus whose expense accounts are larger than our entire budget. Or put another way, the reporter who called us well-funded makes about 25% of our entire budget for salaries. The reporter surely hasn’t been following Dean or he would know not to lie about budget numbers.

Anyhow (as Dean likes to say), it made me think, hmmm, if this guy thinks we’re influential now, what if we really WERE well-funded? I know that a lot of you dear readers are also supporters of CEPR, either directly or though Dean’s Patreon page, but if you aren’t, please help us to become MORE influential AND well-funded by making a donation to CEPR here, or if you haven’t already, make a pledge to Dean on Patreon, here.

I’m sure that Dean would agree with me when I say success is the best revenge. And now back to your regularly scheduled program…

You can’t get a graduate education (or undergrad) in economics without hearing a thousand times that protectionism is bad. When you get to actually deal with policy issues, you discover that only protectionism that benefits ordinary workers is bad, protectionism that benefits high-end workers and corporate profits is sacred.

This is exactly the point of the Washington Post editorial condemning efforts to suspend patent monopolies and other protections of intellectual products on pandemic-related vaccines, treatments, and tests.  To make its case the Post does some name-calling and double-talk.

In the name-calling category, we are told the idea of a free people’s vaccine is “is more slogan than solution.” A little later it appears as a “chimera.” We get it, the Post doesn’t like it.

On the double-talk front, the Post tells us:

“The most salient fact is that patents on vaccines are not the central bottleneck, and even if turned over to other nations, would not quickly result in more shots. This is because vaccine manufacturing is exacting and time-consuming.”

Arguing over the “central bottleneck” is hardly worth anyone’s time. The demand is not just that patents be suspended, but that the technology needed to produce vaccines (and tests and treatments) be freely shared for the duration of the pandemic. It is amazing that the Post somehow does not realize this fact, or alternatively has deliberately decided to misrepresent the position it is criticizing.

The sharing of technology would mean that Pfizer, Moderna, and other producers of vaccines would share detailed descriptions of their manufacturing technology, conduct webinars, and provide hands-on assistance to manufacturers around the world to enable them to produce their vaccines on a large scale.  They can be paid for this, but they will have little choice in the matter. If they don’t agree, the government can offer large payments to their top engineers (e.g. $1 million a month) to share their knowledge directly, while indemnifying them from future legal actions by their former employers.

As far as the time involved, it’s not zero, but we know it is not all that long. The vaccines did not exist last March, yet these companies were able to produce large quantities by November. Presumably, we can assume at least the same speed going forward. Of course, it would have been much better if we had followed this path at the start of the pandemic, as some of us advocated at the time, or at least in October when South Africa and India introduced their resolution at the World Trade Organization.  

Perhaps the most stunning part of the editorial is the warning about incentives:

“It is true that pharmaceutical companies stand to profit handsomely from monopolies on individual patented vaccines. It is also true that stripping away their intellectual property now could discourage future innovation. The U.S. government spent some $10 billion in Operation Warp Speed to help that effort, among other things, but did not require companies to turn over their intellectual property to the government — or to share it.”

The companies involved have all made enormous profits on a relatively small short-term investment. The government put up much of the money and took much of the risk. That is not sufficient incentive?

Furthermore, we should assume that the people running pharmaceutical companies are not dumber than rocks. The law allows for the government to require the licensing of patents in emergencies (Section 1498 of the commercial code). Presumably, they know this. The loss of incentive story here is that if they hoped to get some pandemic super-bonanza in the future, they now know that they will just get extraordinarily large profits. Let’s cry for the drug companies.

I have argued that patent monopolies are actually a terrible way to finance drug research (see Rigged, chapter 5 [it’s free]). If we changed our mechanism for financing research, then we could ignore the issue of incentives here altogether. But that’s a longer discussion.

The reality is that much of the developing world is needlessly facing a humanitarian disaster because of vaccine nationalism and our protection of intellectual products. Furthermore, even the U.S. and other wealthy countries face an enormous risk that a new vaccine-resistant strain will develop (anyone want to go through another round of infections and lockdowns?), as long as the pandemic spreads unchecked anywhere in the world.

But to the Post, all of this is secondary to drug company profits.

You can’t get a graduate education (or undergrad) in economics without hearing a thousand times that protectionism is bad. When you get to actually deal with policy issues, you discover that only protectionism that benefits ordinary workers is bad, protectionism that benefits high-end workers and corporate profits is sacred.

This is exactly the point of the Washington Post editorial condemning efforts to suspend patent monopolies and other protections of intellectual products on pandemic-related vaccines, treatments, and tests.  To make its case the Post does some name-calling and double-talk.

In the name-calling category, we are told the idea of a free people’s vaccine is “is more slogan than solution.” A little later it appears as a “chimera.” We get it, the Post doesn’t like it.

On the double-talk front, the Post tells us:

“The most salient fact is that patents on vaccines are not the central bottleneck, and even if turned over to other nations, would not quickly result in more shots. This is because vaccine manufacturing is exacting and time-consuming.”

Arguing over the “central bottleneck” is hardly worth anyone’s time. The demand is not just that patents be suspended, but that the technology needed to produce vaccines (and tests and treatments) be freely shared for the duration of the pandemic. It is amazing that the Post somehow does not realize this fact, or alternatively has deliberately decided to misrepresent the position it is criticizing.

The sharing of technology would mean that Pfizer, Moderna, and other producers of vaccines would share detailed descriptions of their manufacturing technology, conduct webinars, and provide hands-on assistance to manufacturers around the world to enable them to produce their vaccines on a large scale.  They can be paid for this, but they will have little choice in the matter. If they don’t agree, the government can offer large payments to their top engineers (e.g. $1 million a month) to share their knowledge directly, while indemnifying them from future legal actions by their former employers.

As far as the time involved, it’s not zero, but we know it is not all that long. The vaccines did not exist last March, yet these companies were able to produce large quantities by November. Presumably, we can assume at least the same speed going forward. Of course, it would have been much better if we had followed this path at the start of the pandemic, as some of us advocated at the time, or at least in October when South Africa and India introduced their resolution at the World Trade Organization.  

Perhaps the most stunning part of the editorial is the warning about incentives:

“It is true that pharmaceutical companies stand to profit handsomely from monopolies on individual patented vaccines. It is also true that stripping away their intellectual property now could discourage future innovation. The U.S. government spent some $10 billion in Operation Warp Speed to help that effort, among other things, but did not require companies to turn over their intellectual property to the government — or to share it.”

The companies involved have all made enormous profits on a relatively small short-term investment. The government put up much of the money and took much of the risk. That is not sufficient incentive?

Furthermore, we should assume that the people running pharmaceutical companies are not dumber than rocks. The law allows for the government to require the licensing of patents in emergencies (Section 1498 of the commercial code). Presumably, they know this. The loss of incentive story here is that if they hoped to get some pandemic super-bonanza in the future, they now know that they will just get extraordinarily large profits. Let’s cry for the drug companies.

I have argued that patent monopolies are actually a terrible way to finance drug research (see Rigged, chapter 5 [it’s free]). If we changed our mechanism for financing research, then we could ignore the issue of incentives here altogether. But that’s a longer discussion.

The reality is that much of the developing world is needlessly facing a humanitarian disaster because of vaccine nationalism and our protection of intellectual products. Furthermore, even the U.S. and other wealthy countries face an enormous risk that a new vaccine-resistant strain will develop (anyone want to go through another round of infections and lockdowns?), as long as the pandemic spreads unchecked anywhere in the world.

But to the Post, all of this is secondary to drug company profits.

I was happy to see the New York Post take note of the work of the Revolving Door Project (RDP) at the Center for Economic and Policy Research. RDP has been very aggressive in vetting potential appointees in the Biden administration. It tries to prevent people with clear conflicts of interest from getting top-level jobs.

The immediate basis for the Post’s ire was the fact that Alex Oh was forced to step down from a top position at the Securities and Exchange Commission (SEC). Before getting the position at the SEC, Oh had worked at a major corporate law firm where she represented several of the country’s largest companies. One of these was Exxon-Mobil, which she defended in a suit claiming that claimed it was responsible for rape, torture, and murder committed by the Indonesian military in the vicinity of one of the company’s oil drilling operations. A judge in the case considered Oh’s conduct sufficiently egregious that he asked her to produce evidence that she should not be subject to sanctions. (Those interested in a fuller account of RDP’s case against Oh can read it here.)

The fact the Post did not agree with RDP’s position is not surprising, but what was striking was its description of the Center for Economic and Policy Research as a “well-funded and influential left-wing think tank.” While I like to think that CEPR is influential, as a co-founder and co-director for 18 years, I strongly dispute the claim that we are well-funded. My guess is that most senior Wall Street lawyers have annual salaries that exceed CEPR’s entire budget. Our office has a leaky roof, failing air conditioning and heating systems, and rodents.

The reality is that the people at CEPR do the work we do because we think it is important. We don’t get big bucks. People on the right may use politics as a path to personal enrichment, but that is not the way things work on our corner on the left. The Post is welcome to disagree with our work, but the idea that we are doing it for the money is a flat-out lie.

I was happy to see the New York Post take note of the work of the Revolving Door Project (RDP) at the Center for Economic and Policy Research. RDP has been very aggressive in vetting potential appointees in the Biden administration. It tries to prevent people with clear conflicts of interest from getting top-level jobs.

The immediate basis for the Post’s ire was the fact that Alex Oh was forced to step down from a top position at the Securities and Exchange Commission (SEC). Before getting the position at the SEC, Oh had worked at a major corporate law firm where she represented several of the country’s largest companies. One of these was Exxon-Mobil, which she defended in a suit claiming that claimed it was responsible for rape, torture, and murder committed by the Indonesian military in the vicinity of one of the company’s oil drilling operations. A judge in the case considered Oh’s conduct sufficiently egregious that he asked her to produce evidence that she should not be subject to sanctions. (Those interested in a fuller account of RDP’s case against Oh can read it here.)

The fact the Post did not agree with RDP’s position is not surprising, but what was striking was its description of the Center for Economic and Policy Research as a “well-funded and influential left-wing think tank.” While I like to think that CEPR is influential, as a co-founder and co-director for 18 years, I strongly dispute the claim that we are well-funded. My guess is that most senior Wall Street lawyers have annual salaries that exceed CEPR’s entire budget. Our office has a leaky roof, failing air conditioning and heating systems, and rodents.

The reality is that the people at CEPR do the work we do because we think it is important. We don’t get big bucks. People on the right may use politics as a path to personal enrichment, but that is not the way things work on our corner on the left. The Post is welcome to disagree with our work, but the idea that we are doing it for the money is a flat-out lie.

(This post first appeared on my Patreon page.)

There has been a lot of silliness around President Biden’s proposed infrastructure packages and the extent to which they are affordable for the country. First and foremost, there has been tremendous confusion about the size of the package. This is because the media have engaged in a feast of really big numbers, where they give us the size of the package with no context whatsoever, leaving their audience almost completely ignorant about the actual cost.

We have been told endlessly about Biden’s “massive” or “huge” proposal to spend $4 trillion. At this point, many people probably think that Biden actually proposed a “huge infrastructure” package, with “huge” or “massive,” being part of the proposal’s title.

While it would be helpful if media outlets could leave these adjectives to the opinion section, the bigger sin is using a very big number, which means almost nothing to its audience, without providing any context. In fact, much of the reporting doesn’t even bother to tell people that this spending is projected to take place over eight years, not one to two years, as was the case with Biden’s recovery package.

Over an eight-year period, Biden’s proposed spending averages $500 billion annually. This is a period in which GDP is projected to be more than $210 trillion, meaning that his package is projected to be around 1.9 percent of GDP. While that is hardly trivial, military spending is projected to be around 3.3 percent of GDP over this period. This means that Biden is proposing to increase infrastructure spending by an amount that is roughly 60 percent of projected military spending.

It is infuriating that most of the reporting on these proposals make no effort to put the spending in any context that would make it meaningful for people. Reporters all know that almost no one has any idea what $4 trillion over eight years means (especially if no one tells them it is over eight years), yet they refuse to take the two minutes that would be needed to add some context to make such really big numbers meaningful. Therefore, we have a large segment of the population that just thinks the program is massive or huge.

What Paying for Spending Really Means

As our MMT friends constantly remind us, a government that prints its own money, like the United States, does not need tax revenue to pay for its spending. This distinguishes the U.S. government from a household or state and local governments. Households and state and local governments actually need money in the bank to pay their bills. For them, more spending requires more income or taxes and/or more borrowing. The federal government does not have this constraint.

Nonetheless, the federal government does face a limit on its spending: the ability of the economy to produce goods and services. If the federal government spends so much that it pushes the economy beyond its ability to produce goods and services, we will see inflation. If this excessive spending is sustained over a substantial period of time then we could see the sort of inflationary spiral that we had in the 1970s.[1]

If the economy is already near its capacity when President Biden’s infrastructure package starts to come on line in 2022 and 2023, an increase in spending of a bit less than 2.0 percent of GDP could be large enough to create problems with inflation. This is the reason that we have to talk about “paying for” the infrastructure package. We need not be concerned about getting the money in the bank, we have to reduce demand in the economy by enough to make room for the additional spending in Biden’s infrastructure agenda. This is where a financial transactions tax comes in.

 

The Virtue of Financial Transactions Tax as a Pay For

The Biden tax proposals have focused on increasing the amount of money that corporations and wealthy individuals pay in taxes. This makes sense since they have been the big gainers in the economy over the last four decades.

His tax increases will just take back a fraction of the income that has been redistributed upward through a variety of government policies over this period. And, in the case of the corporate income tax, his proposal will just be partially reversing a tax cut that was put in place at the end of 2017 by Donald Trump and a Republican Congress. While taxing the economy’s big gainers is certainly fair, there is a problem with going this route to cover the cost of Biden’s program: the rich don’t spend a large share of their income.

This point is straightforward; if we give Jeff Bezos, Elon Musk, or any of the other super-wealthy another $100 million this year, it would likely not affect their consumption at all. They already have more than enough money to buy anything they could conceivably want, so even giving them a huge wad of money will not likely lead them to increase their consumption to any noticeable extent. Many of us are used to making this point when we argue that any stimulus payments in a recession should be focused on the middle class and the poor.

But this story also works in reverse, if we take $100 million away from the super-rich, it is not likely to reduce their spending to any noticeable extent. This means that Biden’s tax increases are not likely to have as much impact on reducing demand as tax increases that hit the poor and middle class. This is not an argument for hitting the people who have not fared well over the last four decades, it is just noting the impact of taxing the super-rich.

Financial transaction taxes (FTT) are qualitatively different in this respect. While the immediate impact of a financial transaction tax is hugely progressive, in the sense that the overwhelming majority of stock trading is done by the rich and very rich, the impact on the economy makes FTTs look even better.

Most research shows that the volume of stock trading falls roughly in proportion to the increase in the cost of trading. This means that if a FTT raises the cost of trading by 40 percent, the volume of trading will fall by roughly 40 percent. For a typical investor, that implies that they (or their fund manager) will be paying 40 percent more on each trade, but they will be doing 40 percent fewer trades. In other words, the total amount that they spend on trades with the tax in place will be roughly the same as the amount that they spent on trades before the tax is in place.

And investors will not be hurt by less trading. Every trade has a winner and a loser. If I’m lucky and dump my hundred shares of Amazon stock just before the price drops, it means that some unlucky sucker bought the stock a day too soon. Every trade is like this. The reality is that for the vast majority of investors, trades are a wash. Half the time they end up as winners, and half the time they end up as losers.

However, they do end up as losers by doing lots of trading, that’s because they are paying fees and commissions to the people in the financial industry carrying through the trades. This is why most financial advisers recommend that people buy and hold index funds so that they don’t waste money on trading.

A FTT reduces the money going to the financial industry to carry through trades by reducing the volume of trading. This very directly frees up resources in the economy. The number of people employed shuffling stocks, bonds, and various derivatives back and forth will be sharply reduced.

This is comparable to a situation where we found hundreds of thousands of people digging holes and filling them up again. A financial transactions tax, coupled with Biden’s infrastructure proposals, will be a way to redeploy these people to productive work elsewhere in the economy.

There is also a substantial amount of money here. According to the Congressional Budget Office, a tax of 0.1 percent (ten cents on a hundred dollars) would raise almost $800 billion over the course of a decade. I’ve calculated that a graduated tax, with different rates on different assets (0.2 percent on stock transactions, lower on everything else) could raise an amount of revenue equal to almost 0.6 percent of GDP over the course of a decade, or $1.6 trillion. My friend, Bob Pollin has calculated that a somewhat steeper tax, along the lines proposed by Senator Bernie Sanders, could raise close to twice as much. In short, this is real money.

That doesn’t mean that we should reject President Biden’s proposals to increase corporate income taxes and taxes on the top one or two percent. (My route for taxing corporations is better than his.) Even if Elon Musk might not change his consumption much as a result of paying another $100 million taxes, there are many moderately rich people, earning single-digit millions, who may have to forgo a third home or live-in cook, if we raise their taxes as President Biden proposed.

The bottom line is that Biden’s investment plan addresses longstanding needs in the country. We will likely have to reduce other spending in the economy to make room for it. A financial transactions tax is a great place to look for some of the offset.  

[1] People also often raise the issue of burdening our children with the debt. This is mostly an expression of extreme ignorance since the issue of debt service is incredibly trivial compared with the quality of the economy and society that we pass onto to our children. The debt service is also dwarfed by the rents created by government-granted patent and copyright monopolies, which are also a form of government debt passed on to our children. The debt whiners literally never talk about this massive implicit debt burden, which takes the form of higher prices on everything from drugs and software to video games and computers. In the case of prescription drugs alone, the rents come close to $400 billion annually, nearly twice the size of our debt service burden.

(This post first appeared on my Patreon page.)

There has been a lot of silliness around President Biden’s proposed infrastructure packages and the extent to which they are affordable for the country. First and foremost, there has been tremendous confusion about the size of the package. This is because the media have engaged in a feast of really big numbers, where they give us the size of the package with no context whatsoever, leaving their audience almost completely ignorant about the actual cost.

We have been told endlessly about Biden’s “massive” or “huge” proposal to spend $4 trillion. At this point, many people probably think that Biden actually proposed a “huge infrastructure” package, with “huge” or “massive,” being part of the proposal’s title.

While it would be helpful if media outlets could leave these adjectives to the opinion section, the bigger sin is using a very big number, which means almost nothing to its audience, without providing any context. In fact, much of the reporting doesn’t even bother to tell people that this spending is projected to take place over eight years, not one to two years, as was the case with Biden’s recovery package.

Over an eight-year period, Biden’s proposed spending averages $500 billion annually. This is a period in which GDP is projected to be more than $210 trillion, meaning that his package is projected to be around 1.9 percent of GDP. While that is hardly trivial, military spending is projected to be around 3.3 percent of GDP over this period. This means that Biden is proposing to increase infrastructure spending by an amount that is roughly 60 percent of projected military spending.

It is infuriating that most of the reporting on these proposals make no effort to put the spending in any context that would make it meaningful for people. Reporters all know that almost no one has any idea what $4 trillion over eight years means (especially if no one tells them it is over eight years), yet they refuse to take the two minutes that would be needed to add some context to make such really big numbers meaningful. Therefore, we have a large segment of the population that just thinks the program is massive or huge.

What Paying for Spending Really Means

As our MMT friends constantly remind us, a government that prints its own money, like the United States, does not need tax revenue to pay for its spending. This distinguishes the U.S. government from a household or state and local governments. Households and state and local governments actually need money in the bank to pay their bills. For them, more spending requires more income or taxes and/or more borrowing. The federal government does not have this constraint.

Nonetheless, the federal government does face a limit on its spending: the ability of the economy to produce goods and services. If the federal government spends so much that it pushes the economy beyond its ability to produce goods and services, we will see inflation. If this excessive spending is sustained over a substantial period of time then we could see the sort of inflationary spiral that we had in the 1970s.[1]

If the economy is already near its capacity when President Biden’s infrastructure package starts to come on line in 2022 and 2023, an increase in spending of a bit less than 2.0 percent of GDP could be large enough to create problems with inflation. This is the reason that we have to talk about “paying for” the infrastructure package. We need not be concerned about getting the money in the bank, we have to reduce demand in the economy by enough to make room for the additional spending in Biden’s infrastructure agenda. This is where a financial transactions tax comes in.

 

The Virtue of Financial Transactions Tax as a Pay For

The Biden tax proposals have focused on increasing the amount of money that corporations and wealthy individuals pay in taxes. This makes sense since they have been the big gainers in the economy over the last four decades.

His tax increases will just take back a fraction of the income that has been redistributed upward through a variety of government policies over this period. And, in the case of the corporate income tax, his proposal will just be partially reversing a tax cut that was put in place at the end of 2017 by Donald Trump and a Republican Congress. While taxing the economy’s big gainers is certainly fair, there is a problem with going this route to cover the cost of Biden’s program: the rich don’t spend a large share of their income.

This point is straightforward; if we give Jeff Bezos, Elon Musk, or any of the other super-wealthy another $100 million this year, it would likely not affect their consumption at all. They already have more than enough money to buy anything they could conceivably want, so even giving them a huge wad of money will not likely lead them to increase their consumption to any noticeable extent. Many of us are used to making this point when we argue that any stimulus payments in a recession should be focused on the middle class and the poor.

But this story also works in reverse, if we take $100 million away from the super-rich, it is not likely to reduce their spending to any noticeable extent. This means that Biden’s tax increases are not likely to have as much impact on reducing demand as tax increases that hit the poor and middle class. This is not an argument for hitting the people who have not fared well over the last four decades, it is just noting the impact of taxing the super-rich.

Financial transaction taxes (FTT) are qualitatively different in this respect. While the immediate impact of a financial transaction tax is hugely progressive, in the sense that the overwhelming majority of stock trading is done by the rich and very rich, the impact on the economy makes FTTs look even better.

Most research shows that the volume of stock trading falls roughly in proportion to the increase in the cost of trading. This means that if a FTT raises the cost of trading by 40 percent, the volume of trading will fall by roughly 40 percent. For a typical investor, that implies that they (or their fund manager) will be paying 40 percent more on each trade, but they will be doing 40 percent fewer trades. In other words, the total amount that they spend on trades with the tax in place will be roughly the same as the amount that they spent on trades before the tax is in place.

And investors will not be hurt by less trading. Every trade has a winner and a loser. If I’m lucky and dump my hundred shares of Amazon stock just before the price drops, it means that some unlucky sucker bought the stock a day too soon. Every trade is like this. The reality is that for the vast majority of investors, trades are a wash. Half the time they end up as winners, and half the time they end up as losers.

However, they do end up as losers by doing lots of trading, that’s because they are paying fees and commissions to the people in the financial industry carrying through the trades. This is why most financial advisers recommend that people buy and hold index funds so that they don’t waste money on trading.

A FTT reduces the money going to the financial industry to carry through trades by reducing the volume of trading. This very directly frees up resources in the economy. The number of people employed shuffling stocks, bonds, and various derivatives back and forth will be sharply reduced.

This is comparable to a situation where we found hundreds of thousands of people digging holes and filling them up again. A financial transactions tax, coupled with Biden’s infrastructure proposals, will be a way to redeploy these people to productive work elsewhere in the economy.

There is also a substantial amount of money here. According to the Congressional Budget Office, a tax of 0.1 percent (ten cents on a hundred dollars) would raise almost $800 billion over the course of a decade. I’ve calculated that a graduated tax, with different rates on different assets (0.2 percent on stock transactions, lower on everything else) could raise an amount of revenue equal to almost 0.6 percent of GDP over the course of a decade, or $1.6 trillion. My friend, Bob Pollin has calculated that a somewhat steeper tax, along the lines proposed by Senator Bernie Sanders, could raise close to twice as much. In short, this is real money.

That doesn’t mean that we should reject President Biden’s proposals to increase corporate income taxes and taxes on the top one or two percent. (My route for taxing corporations is better than his.) Even if Elon Musk might not change his consumption much as a result of paying another $100 million taxes, there are many moderately rich people, earning single-digit millions, who may have to forgo a third home or live-in cook, if we raise their taxes as President Biden proposed.

The bottom line is that Biden’s investment plan addresses longstanding needs in the country. We will likely have to reduce other spending in the economy to make room for it. A financial transactions tax is a great place to look for some of the offset.  

[1] People also often raise the issue of burdening our children with the debt. This is mostly an expression of extreme ignorance since the issue of debt service is incredibly trivial compared with the quality of the economy and society that we pass onto to our children. The debt service is also dwarfed by the rents created by government-granted patent and copyright monopolies, which are also a form of government debt passed on to our children. The debt whiners literally never talk about this massive implicit debt burden, which takes the form of higher prices on everything from drugs and software to video games and computers. In the case of prescription drugs alone, the rents come close to $400 billion annually, nearly twice the size of our debt service burden.

Two members of Congress, Tom Malinowski and Anna Eshoo, took to the Washington Post today to promote their meaningless plan to attack social media profits in the name of protecting democracy (their terminology). The gist of their column is that they want to take away Section 230 protection for any social media company that has algorithms that  “amplify content that contributes to an act of terrorism or to a violation of civil rights statutes meant to combat extremist groups.”

Just to remind folks, Section 230 gives Internet intermediaries special treatment that is denied to other media companies. While the New York Times or CNN could be sued for libelous ads or guest opinion pieces for material in a newspaper or broadcast on the airwaves, Section 230 means that Facebook could not be held libel for the same material. This means that someone could produce a bogus video, showing a person doing all sorts of horrible things that they did not actually do, pay Facebook millions to have it circulated to billions of people, and Facebook gets to pocket the cash with no liability.

But our brave members of Congress want to crack down on social media profits. So, first, we have to determine that its algorithms steer people to these bad groups or sites. Then of course we have to determine that the sites are in fact bad. I can assure you, that one will not be easy if you have not given it any thought.

It gets worse. Suppose that Facebook and other social media companies are quaking in their boots after Representatives Malinowski and Eshoo’s bill passes and then change their algorithms. Nothing in their bill, as described in their column, prevents Facebook from selling ads to hate groups to spread vile material to millions of specially targeted individuals. In other words, their bill does almost nothing to prevent Facebook from profiting from fostering the growth of hate groups.

To some of us, the big problem is that we have behemoths like Facebook and Twitter in the first place, which almost certainly could not exist in their current form without Section 230 protection. The future of democracy should not depend on the whims of billionaire jerks like Mark Zuckerberg.

The answer, in this case, would be to repeal Section 230 protection and hold Internet intermediaries to the same sort of liability as to their competitors in print and broadcast media. But that would actually jeopardize social media profits, apparently few members of Congress are willing to do that.

 

Two members of Congress, Tom Malinowski and Anna Eshoo, took to the Washington Post today to promote their meaningless plan to attack social media profits in the name of protecting democracy (their terminology). The gist of their column is that they want to take away Section 230 protection for any social media company that has algorithms that  “amplify content that contributes to an act of terrorism or to a violation of civil rights statutes meant to combat extremist groups.”

Just to remind folks, Section 230 gives Internet intermediaries special treatment that is denied to other media companies. While the New York Times or CNN could be sued for libelous ads or guest opinion pieces for material in a newspaper or broadcast on the airwaves, Section 230 means that Facebook could not be held libel for the same material. This means that someone could produce a bogus video, showing a person doing all sorts of horrible things that they did not actually do, pay Facebook millions to have it circulated to billions of people, and Facebook gets to pocket the cash with no liability.

But our brave members of Congress want to crack down on social media profits. So, first, we have to determine that its algorithms steer people to these bad groups or sites. Then of course we have to determine that the sites are in fact bad. I can assure you, that one will not be easy if you have not given it any thought.

It gets worse. Suppose that Facebook and other social media companies are quaking in their boots after Representatives Malinowski and Eshoo’s bill passes and then change their algorithms. Nothing in their bill, as described in their column, prevents Facebook from selling ads to hate groups to spread vile material to millions of specially targeted individuals. In other words, their bill does almost nothing to prevent Facebook from profiting from fostering the growth of hate groups.

To some of us, the big problem is that we have behemoths like Facebook and Twitter in the first place, which almost certainly could not exist in their current form without Section 230 protection. The future of democracy should not depend on the whims of billionaire jerks like Mark Zuckerberg.

The answer, in this case, would be to repeal Section 230 protection and hold Internet intermediaries to the same sort of liability as to their competitors in print and broadcast media. But that would actually jeopardize social media profits, apparently few members of Congress are willing to do that.

 

A New York Times piece on soaring CEO pay at one point noted how attaching most CEO pay to stock options is supposed to align CEO pay with shareholder interests:

“Executives at publicly traded companies receive most of their compensation in stock, an arrangement intended to align pay with the performance of a company’s share price. When the stock price goes up, the theory goes, investors and executives alike share in the gains.”

This would only be true if shareholders are able to determine the number of options and the structure of the package. The package could, for example, cap the amount of money that CEOs and other top executives get from options, or it could have the returns from options linked to the performance of other companies in the same industry. Tying pay to options in a context where CEOs and other top management largely control the boards that set their pay does not mean there is an alignment between CEO pay and shareholders’ interest.

If this is difficult to understand, imagine that cashiers at McDonald’s got paid in stock options, and the cashiers got to determine how many options they were awarded. By the theory described in the NYT piece, cashier’s pay would then be allied with shareholders’ interest. The piece actually provides evidence of this misalignment when noting that Starbuck’s shareholders voted down their CEO’s pay package, but since the vote was non-binding on the board of directors, the CEO’s pay was not affected. There is no shortage of examples of CEOs getting high pay that is in no obvious way related to returns to shareholders.

This matters because if CEOs are ripping off the companies that employ them, then shareholders should be allies in the effort to bring down CEO pay. The vast majority of the rise in inequality over the last four decades has been due to wage income being redistributed upward, not a shift from wages to profits. Soaring CEO pay is a big part of this story. When the CEO gets $20 million, the chief financial officer and other top execs are likely to be getting close to $10 million, and even third tier execs can be earning $2-3 million. This also affects pay in the non-corporate sector, where is now common for presidents of major foundations and universities to be paid well over $1 million a year. And, as fans of arithmetic know, more money going to the top means less money for everyone else.

The story would be very different if CEOs were paid 20 to 30 times the wages of ordinary workers, as was the case in the 1960s and 1970s. If shareholders can be empowered in ways that make them more able to control CEO pay, this could be a large step towards reducing income inequality.

A New York Times piece on soaring CEO pay at one point noted how attaching most CEO pay to stock options is supposed to align CEO pay with shareholder interests:

“Executives at publicly traded companies receive most of their compensation in stock, an arrangement intended to align pay with the performance of a company’s share price. When the stock price goes up, the theory goes, investors and executives alike share in the gains.”

This would only be true if shareholders are able to determine the number of options and the structure of the package. The package could, for example, cap the amount of money that CEOs and other top executives get from options, or it could have the returns from options linked to the performance of other companies in the same industry. Tying pay to options in a context where CEOs and other top management largely control the boards that set their pay does not mean there is an alignment between CEO pay and shareholders’ interest.

If this is difficult to understand, imagine that cashiers at McDonald’s got paid in stock options, and the cashiers got to determine how many options they were awarded. By the theory described in the NYT piece, cashier’s pay would then be allied with shareholders’ interest. The piece actually provides evidence of this misalignment when noting that Starbuck’s shareholders voted down their CEO’s pay package, but since the vote was non-binding on the board of directors, the CEO’s pay was not affected. There is no shortage of examples of CEOs getting high pay that is in no obvious way related to returns to shareholders.

This matters because if CEOs are ripping off the companies that employ them, then shareholders should be allies in the effort to bring down CEO pay. The vast majority of the rise in inequality over the last four decades has been due to wage income being redistributed upward, not a shift from wages to profits. Soaring CEO pay is a big part of this story. When the CEO gets $20 million, the chief financial officer and other top execs are likely to be getting close to $10 million, and even third tier execs can be earning $2-3 million. This also affects pay in the non-corporate sector, where is now common for presidents of major foundations and universities to be paid well over $1 million a year. And, as fans of arithmetic know, more money going to the top means less money for everyone else.

The story would be very different if CEOs were paid 20 to 30 times the wages of ordinary workers, as was the case in the 1960s and 1970s. If shareholders can be empowered in ways that make them more able to control CEO pay, this could be a large step towards reducing income inequality.

I know it was the last guy who promised hope and change, not Joe Biden, but I couldn’t resist stealing Sarah Palin’s best line ever. Besides, even if Biden didn’t promise hope and change, it looks like he might deliver.  

We are going to get the GDP growth data for the first quarter next week, and it is almost certain to be very strong, quite likely over 7.0 percent. This is great news in terms of recovering from the pandemic recession and getting people back to work, but we know that all the inflation hawks will be yelling that we will soon be back in the 1970s, with inflation spiraling ever higher. For this reason, it’s worth trying to dissect the data to see if it can give evidence that bears on this question.

 

Productivity Growth

One of the key factors that will determine whether inflation ends up being a problem is the economy’s rate of productivity growth. The story here is straightforward. If productivity grows more rapidly, then wages can grow more rapidly without causing inflation to increase or profit margins to be squeezed.

To take a simple example, if productivity growth is 1.0 percent annually, and wage growth is 3.0 percent, we would expect inflation to be roughly 2.0 percent. By contrast, if productivity grows 2.0 percent annually and wage growth were still 3.0 percent, then we would expect 1.0 percent inflation. Alternatively, if we want to see 2.0 percent inflation and we have 2.0 percent annual growth in productivity, then we would want wages to be rising 4.0 percent annually.

There is some evidence that we are actually seeing an uptick in productivity growth. Productivity grew at just a 1.0 percent annual rate from the fourth quarter of 2009 to the fourth quarter of 2019. However, it grew 2.5 from the fourth quarter of 2019 to the fourth quarter of 2020. Hours worked increased at roughly a 2.5 percent annual rate in the first quarter. If GDP growth comes in around 7.0 percent, it would imply productivity growth of around 4.5 percent.

Quarterly productivity data are enormously erratic, so we should be cautious about making much out of the extraordinary growth we are likely to see in the first quarter, but it is consistent with the continuation of the more rapid growth from 2019. If we can stay on track with something close to 2.5 percent annual productivity growth, or even 2.0 percent, it will go very far towards alleviating any inflationary pressure that might be caused by Biden’s recovery package.

Any discussion of productivity growth has to come with a huge caveat: our ability to predict it is close to zero. The figure below shows annual productivity growth in the post war era.

 

While the data are highly erratic, the average for the years 1947 to 1973 was 2.8 percent. Growth slowed sharply in the 1970s, averaging just 1.5 percent in the years from 1973 to 1995. Productivity growth then increased to 3.0 percent annually from 1995 to 2005, when it slowed again to just over 1.0 percent.

These sharp shifts in trends caught nearly everyone by surprise. Virtually no one saw the 1973 slowdown coming and it was not recognized for many years after the fact. Even today there is no widespread agreement as to its cause. Most economists feel reasonably comfortable attributing the 1990s upturn to computers and other information technologies, even if few saw it coming. The slowdown in 2006 again caught economists by surprise, and here also there is no generally accepted view as to its cause.

So, when we see an uptick in growth in 2020, that seems to be continuing at least into the first quarter of this year, we can be encouraged by it, but we should not have much confidence it will persist for any substantial period of time. Clearly the pandemic forced businesses to adjust their way of doing things, and it was undoubtedly a big factor in the rapid productivity growth we saw last year, but whether we will continue to see large gains is really little more than a guess at this point.

 

Investment

In the sloppy Econ 101 textbook, investment is the key to productivity growth. The idea is that we get more and better capital, and thereby make workers more productive. Think of one person driving a bulldozer instead of 20 workers with a shovel.

As a practical matter, most of the differences we see in rates of productivity growth over the post-World War II era are not due to differences in the rate of investment, or the rate of improvement in the education of the labor force, the other major input for productivity. Most of the differences between the periods of rapid productivity growth and the slowdown years are due to differences in the rate of multi-factor productivity growth.

This is the growth in productivity which cannot be attributed to either more capital or more educated workers. In other words, it is the growth in productivity that we can’t explain.

But if we do turn to the productivity growth that we can explain, investment is clearly a plus, In general, more investment means more productivity. And on this score, we have been seeing good news.    

Investment held up remarkably well through the pandemic. The fourth quarter level was only 1.4 percent lower than the year-ago level. And, this falloff was entirely due to weaker investment in structures. Businesses were cutting back spending on office buildings and retail space for obvious reasons.

By contrast, investment in both equipment and intellectual products was already slightly higher in the fourth quarter of 2020 than in the fourth quarter of 2019. We will see further increases in the first quarter, indicating that investment is pretty much in line or possibly even above its path from before the pandemic. 

With most business surveys showing considerable business optimism, much of it spurred by Biden’s recovery package and now his infrastructure plan, we should see investment continuing at a healthy pace for the immediate future. Again, this is not the biggest factor in productivity growth, but it certainly is a positive one. If investment remains strong, the resulting increases in productivity growth will help alleviate inflation risks.

 

The Trade Deficit

In other times, we may view the rise in the trade deficit as a bad signal about US competitiveness, however that is not the case at present. With the economy getting a solid boost from the recovery package, the trade deficit provides a useful relief valve. Insofar as domestic producers are unable to meet demand, foreign producers will be stepping in to fill the gap. The trade deficit will also provide a welcome boost to growth for our allies in Europe, Japan, and elsewhere.

In the past, the loss of manufacturing jobs also meant the loss of relatively high-paying jobs for people without college degrees. This was a good reason to be worried about the trade deficit.

This is no longer the case as the devastation the sector suffered due to import competition in prior decades has largely eliminated the wage premium in manufacturing. In 1990, the average hourly wage for production and non-supervisory workers in manufacturing was close to 6.0 percent higher than for the private sector as a whole. Now it is more than 6.0 percent lower. Manufacturing workers are still more likely to get health care insurance and other benefits than non-manufacturing workers, so there is still some compensation premium, but it is clearly much less than in prior decades.  

The reduction in the wage premium has gone along with a plunge in unionization rates in the sector. Historically, manufacturing has been a relatively heavily unionized sector. This is no longer true. Its 8.5 percent unionization rate is still somewhat higher than the 6.3 percent rate for the private sector as a whole, but it’s hardly a qualitatively different story.

Furthermore, when we added back jobs in manufacturing, they have not been union jobs. Since 2010, we have added more than 1.6 million jobs in manufacturing, however the number of union members in manufacturing has fallen by 180,000.

As a result of the deterioration in the quality of manufacturing jobs, there is little reason to be concerned about the impact of the trade deficit on the composition of employment. Instead, we can mostly be relieved that trade provides an outlet for excess demand in the U.S. economy.

That is what we have seen to date. Measured as a share of GDP, it had risen by 1.2 percentage points from the fourth quarter of 2019 to the fourth quarter of 2020. The share of the trade deficit in the first quarter is likely to be the largest since the start of the Great Recession.

This is a story where the US economy is growing far more rapidly than the economies of our trading partners. As a result, our imports in the fourth quarter were almost back to their pre-pandemic level, while our exports were still down by almost 11.0 percent.  

 

The Future is Bright

Okay, we have a long way to go, and there should be no celebrations when we still have 6.0 percent unemployment and millions of people who have dropped out of the labor market and given up looking for work altogether. But for the moment, the economy is moving in the right direction and at a very rapid pace. If this continues for another year or so, we will have some serious cause for celebrating.

I know it was the last guy who promised hope and change, not Joe Biden, but I couldn’t resist stealing Sarah Palin’s best line ever. Besides, even if Biden didn’t promise hope and change, it looks like he might deliver.  

We are going to get the GDP growth data for the first quarter next week, and it is almost certain to be very strong, quite likely over 7.0 percent. This is great news in terms of recovering from the pandemic recession and getting people back to work, but we know that all the inflation hawks will be yelling that we will soon be back in the 1970s, with inflation spiraling ever higher. For this reason, it’s worth trying to dissect the data to see if it can give evidence that bears on this question.

 

Productivity Growth

One of the key factors that will determine whether inflation ends up being a problem is the economy’s rate of productivity growth. The story here is straightforward. If productivity grows more rapidly, then wages can grow more rapidly without causing inflation to increase or profit margins to be squeezed.

To take a simple example, if productivity growth is 1.0 percent annually, and wage growth is 3.0 percent, we would expect inflation to be roughly 2.0 percent. By contrast, if productivity grows 2.0 percent annually and wage growth were still 3.0 percent, then we would expect 1.0 percent inflation. Alternatively, if we want to see 2.0 percent inflation and we have 2.0 percent annual growth in productivity, then we would want wages to be rising 4.0 percent annually.

There is some evidence that we are actually seeing an uptick in productivity growth. Productivity grew at just a 1.0 percent annual rate from the fourth quarter of 2009 to the fourth quarter of 2019. However, it grew 2.5 from the fourth quarter of 2019 to the fourth quarter of 2020. Hours worked increased at roughly a 2.5 percent annual rate in the first quarter. If GDP growth comes in around 7.0 percent, it would imply productivity growth of around 4.5 percent.

Quarterly productivity data are enormously erratic, so we should be cautious about making much out of the extraordinary growth we are likely to see in the first quarter, but it is consistent with the continuation of the more rapid growth from 2019. If we can stay on track with something close to 2.5 percent annual productivity growth, or even 2.0 percent, it will go very far towards alleviating any inflationary pressure that might be caused by Biden’s recovery package.

Any discussion of productivity growth has to come with a huge caveat: our ability to predict it is close to zero. The figure below shows annual productivity growth in the post war era.

 

While the data are highly erratic, the average for the years 1947 to 1973 was 2.8 percent. Growth slowed sharply in the 1970s, averaging just 1.5 percent in the years from 1973 to 1995. Productivity growth then increased to 3.0 percent annually from 1995 to 2005, when it slowed again to just over 1.0 percent.

These sharp shifts in trends caught nearly everyone by surprise. Virtually no one saw the 1973 slowdown coming and it was not recognized for many years after the fact. Even today there is no widespread agreement as to its cause. Most economists feel reasonably comfortable attributing the 1990s upturn to computers and other information technologies, even if few saw it coming. The slowdown in 2006 again caught economists by surprise, and here also there is no generally accepted view as to its cause.

So, when we see an uptick in growth in 2020, that seems to be continuing at least into the first quarter of this year, we can be encouraged by it, but we should not have much confidence it will persist for any substantial period of time. Clearly the pandemic forced businesses to adjust their way of doing things, and it was undoubtedly a big factor in the rapid productivity growth we saw last year, but whether we will continue to see large gains is really little more than a guess at this point.

 

Investment

In the sloppy Econ 101 textbook, investment is the key to productivity growth. The idea is that we get more and better capital, and thereby make workers more productive. Think of one person driving a bulldozer instead of 20 workers with a shovel.

As a practical matter, most of the differences we see in rates of productivity growth over the post-World War II era are not due to differences in the rate of investment, or the rate of improvement in the education of the labor force, the other major input for productivity. Most of the differences between the periods of rapid productivity growth and the slowdown years are due to differences in the rate of multi-factor productivity growth.

This is the growth in productivity which cannot be attributed to either more capital or more educated workers. In other words, it is the growth in productivity that we can’t explain.

But if we do turn to the productivity growth that we can explain, investment is clearly a plus, In general, more investment means more productivity. And on this score, we have been seeing good news.    

Investment held up remarkably well through the pandemic. The fourth quarter level was only 1.4 percent lower than the year-ago level. And, this falloff was entirely due to weaker investment in structures. Businesses were cutting back spending on office buildings and retail space for obvious reasons.

By contrast, investment in both equipment and intellectual products was already slightly higher in the fourth quarter of 2020 than in the fourth quarter of 2019. We will see further increases in the first quarter, indicating that investment is pretty much in line or possibly even above its path from before the pandemic. 

With most business surveys showing considerable business optimism, much of it spurred by Biden’s recovery package and now his infrastructure plan, we should see investment continuing at a healthy pace for the immediate future. Again, this is not the biggest factor in productivity growth, but it certainly is a positive one. If investment remains strong, the resulting increases in productivity growth will help alleviate inflation risks.

 

The Trade Deficit

In other times, we may view the rise in the trade deficit as a bad signal about US competitiveness, however that is not the case at present. With the economy getting a solid boost from the recovery package, the trade deficit provides a useful relief valve. Insofar as domestic producers are unable to meet demand, foreign producers will be stepping in to fill the gap. The trade deficit will also provide a welcome boost to growth for our allies in Europe, Japan, and elsewhere.

In the past, the loss of manufacturing jobs also meant the loss of relatively high-paying jobs for people without college degrees. This was a good reason to be worried about the trade deficit.

This is no longer the case as the devastation the sector suffered due to import competition in prior decades has largely eliminated the wage premium in manufacturing. In 1990, the average hourly wage for production and non-supervisory workers in manufacturing was close to 6.0 percent higher than for the private sector as a whole. Now it is more than 6.0 percent lower. Manufacturing workers are still more likely to get health care insurance and other benefits than non-manufacturing workers, so there is still some compensation premium, but it is clearly much less than in prior decades.  

The reduction in the wage premium has gone along with a plunge in unionization rates in the sector. Historically, manufacturing has been a relatively heavily unionized sector. This is no longer true. Its 8.5 percent unionization rate is still somewhat higher than the 6.3 percent rate for the private sector as a whole, but it’s hardly a qualitatively different story.

Furthermore, when we added back jobs in manufacturing, they have not been union jobs. Since 2010, we have added more than 1.6 million jobs in manufacturing, however the number of union members in manufacturing has fallen by 180,000.

As a result of the deterioration in the quality of manufacturing jobs, there is little reason to be concerned about the impact of the trade deficit on the composition of employment. Instead, we can mostly be relieved that trade provides an outlet for excess demand in the U.S. economy.

That is what we have seen to date. Measured as a share of GDP, it had risen by 1.2 percentage points from the fourth quarter of 2019 to the fourth quarter of 2020. The share of the trade deficit in the first quarter is likely to be the largest since the start of the Great Recession.

This is a story where the US economy is growing far more rapidly than the economies of our trading partners. As a result, our imports in the fourth quarter were almost back to their pre-pandemic level, while our exports were still down by almost 11.0 percent.  

 

The Future is Bright

Okay, we have a long way to go, and there should be no celebrations when we still have 6.0 percent unemployment and millions of people who have dropped out of the labor market and given up looking for work altogether. But for the moment, the economy is moving in the right direction and at a very rapid pace. If this continues for another year or so, we will have some serious cause for celebrating.

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