Chrystia Freeland notes the rapid growth in the wealth of the extremely rich. Then she follows Greg Mankiw in arguing that this growth is largely positive insofar as it resulted from people like Steve Jobs and J.K. Rowling producing great innovations or creative material enjoyed by hundreds of millions of people.
While Freeland notes problems from the resulting inequality, she does commit the same error as Mankiw in implying both that the enormous wealth of these people is a natural outgrowth of the market and that these creative people would not have been as productive absent these enormous rewards. Neither claim is remotely plausible.
The choice of Jobs and Rowling is especially ironic in this context since the wealth of both individuals is so obviously dependent on the intervention of the government in the form of patent and copyright monopolies. These monopolies are a prize awarded by the government as a way to provide incentives for creative work. These are quintessential forms of government intervention, they are 180 degrees at odds with the free market.
Of course the government could have easily structured these monopolies in ways that did not allow Jobs and Rowling to get quite as rich. Suppose the length of these monopolies was cut in half or by 75 percent. (In the good old days copyrights lasted for 14 years, subject to an option for renewal. The duration is now 95 years.) Suppose the scope was drawn much more narrowly so that these monopolies did not apply to derivative works or were not enforced with the same vigor.
Even if we decide that these prizes of government monopolies are the best way to support innovative and creative work, the fact that they are structured to allow for such enormous wealth is a decision by governments. It was not the market. Mankiw has apparently made the sort of Excel spreadsheet type error for which Harvard professors have become famous.
Btw, we have many other mechanisms already in place to finance innovation and creative work. Ever hear of universities? foundations? the National Institutes of Health? the Department of Defense, as in the Internet? These alternatives could easily be expanded and altered to replace patents and copyrights. Going in this direction may or may not be the best way to finance innovation and creative work, but the point is that the choice of mechanism is a policy choice made by governments. It is not the result of the natural working of the market.
Oh, and there is some reason to believe that the individuals who get incredibly rich through patent and copyright protection will use their wealth to ensure that patent and copyright protection become stronger and last longer and that alternative mechanisms never get seriously considered in policy circles. (How much has the Gates Foundation contributed to supporting alternatives to patents for developing drugs and vaccines?)
The other obvious flaw in the Mankiw logic is the implication that the great wealth received by a Jobs or Rowling was necessary to persuade them to be enormously creative people. The history of science is full of people who did great work without achieving anything remotely comparable to the wealth of a Steve Jobs or Bill Gates. Anyone know the names of the individuals responsible for the big breakthroughs that gave us the Internet?
How about Jonas Salk who developed the first polio vaccine, protecting hundreds of millions of people from a horrible disease? He did this work without the promise of getting as rich as a Bill Gates.
In terms of creative work, there are countless writers, musicians and other creative workers who never made any substantial sum from their work. Is J.K. Rowlings’ work more valuable to society than the paintings of Vicent van Gogh, the music of Charlie Parker, or the writings of Franz Kafka? These people produced work that hundreds of millions of people have enjoyed over the decades without anything like the compensation of a J.K. Rowling.
Clearly we can structure a system in which a small number of creative people can get very rich. But that hardly implies that great wealth is a necessary incentive for generating work of great creativity.
In short, Mankiw has told us that the government has provided prizes that allow people to get enormously wealthy. He has no evidence that these prizes are the most efficient way to promote innovation and creativity, but he doesn’t see anything wrong with the resulting inequality.
Note: You can find further ruminations on this issue here.
Chrystia Freeland notes the rapid growth in the wealth of the extremely rich. Then she follows Greg Mankiw in arguing that this growth is largely positive insofar as it resulted from people like Steve Jobs and J.K. Rowling producing great innovations or creative material enjoyed by hundreds of millions of people.
While Freeland notes problems from the resulting inequality, she does commit the same error as Mankiw in implying both that the enormous wealth of these people is a natural outgrowth of the market and that these creative people would not have been as productive absent these enormous rewards. Neither claim is remotely plausible.
The choice of Jobs and Rowling is especially ironic in this context since the wealth of both individuals is so obviously dependent on the intervention of the government in the form of patent and copyright monopolies. These monopolies are a prize awarded by the government as a way to provide incentives for creative work. These are quintessential forms of government intervention, they are 180 degrees at odds with the free market.
Of course the government could have easily structured these monopolies in ways that did not allow Jobs and Rowling to get quite as rich. Suppose the length of these monopolies was cut in half or by 75 percent. (In the good old days copyrights lasted for 14 years, subject to an option for renewal. The duration is now 95 years.) Suppose the scope was drawn much more narrowly so that these monopolies did not apply to derivative works or were not enforced with the same vigor.
Even if we decide that these prizes of government monopolies are the best way to support innovative and creative work, the fact that they are structured to allow for such enormous wealth is a decision by governments. It was not the market. Mankiw has apparently made the sort of Excel spreadsheet type error for which Harvard professors have become famous.
Btw, we have many other mechanisms already in place to finance innovation and creative work. Ever hear of universities? foundations? the National Institutes of Health? the Department of Defense, as in the Internet? These alternatives could easily be expanded and altered to replace patents and copyrights. Going in this direction may or may not be the best way to finance innovation and creative work, but the point is that the choice of mechanism is a policy choice made by governments. It is not the result of the natural working of the market.
Oh, and there is some reason to believe that the individuals who get incredibly rich through patent and copyright protection will use their wealth to ensure that patent and copyright protection become stronger and last longer and that alternative mechanisms never get seriously considered in policy circles. (How much has the Gates Foundation contributed to supporting alternatives to patents for developing drugs and vaccines?)
The other obvious flaw in the Mankiw logic is the implication that the great wealth received by a Jobs or Rowling was necessary to persuade them to be enormously creative people. The history of science is full of people who did great work without achieving anything remotely comparable to the wealth of a Steve Jobs or Bill Gates. Anyone know the names of the individuals responsible for the big breakthroughs that gave us the Internet?
How about Jonas Salk who developed the first polio vaccine, protecting hundreds of millions of people from a horrible disease? He did this work without the promise of getting as rich as a Bill Gates.
In terms of creative work, there are countless writers, musicians and other creative workers who never made any substantial sum from their work. Is J.K. Rowlings’ work more valuable to society than the paintings of Vicent van Gogh, the music of Charlie Parker, or the writings of Franz Kafka? These people produced work that hundreds of millions of people have enjoyed over the decades without anything like the compensation of a J.K. Rowling.
Clearly we can structure a system in which a small number of creative people can get very rich. But that hardly implies that great wealth is a necessary incentive for generating work of great creativity.
In short, Mankiw has told us that the government has provided prizes that allow people to get enormously wealthy. He has no evidence that these prizes are the most efficient way to promote innovation and creativity, but he doesn’t see anything wrong with the resulting inequality.
Note: You can find further ruminations on this issue here.
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Suppose the price of corn plummets. Does that mean that the world economy is going down the tubes?
Well, it could be the result of the collapse of demand in the world economy leading to less demand for all commodities or it may just be the result of a bumper corn crop. The latter would be good news for the world economy even though it would be bad news for farmers who produce lots of corn.
Such is the case with stock markets. Stock markets move up and down all the time often for reasons that have nothing to do with the state of the economy. They also have very little predictive power. The market has more than doubled from its 2010 lows even though growth has averaged a pathetic 2.0 percent over the last three years.
Their effect on the economy is also limited. Few companies rely on the stock market to raise capital for investment. The main impact of the stock market on the economy is through the wealth effect on consumption. This is usually estimated as being in the range of 3-4 percent. That means a 10 percent run-up in the stock market, which would generate roughly $2 trillion in wealth, would eventually lead to $60-$80 billion in additional annual consumption. (The impact is usually estimated to be felt over a 2-3 year period.) With a multiplier of 1.5 this implies an impact of 0.6-0.7 percentage points of GDP. That is not trivial, but it is hardly the difference between a booming economy and stagnation.
This is why the NYT badly misled readers with a lead sentence in an article that said:
“Tumbling stock, bond and commodity prices around the world are demonstrating just how reliant the global economy has become on the monetary policies of the Federal Reserve.”
The movements in markets showed that the markets respond to actions of the Fed. The plunge in stock prices is bad news if you own a lot of stock, just as a plunge in corn prices is bad news if you have lots of corn. It is not necessarily bad news for the economy.
Suppose the price of corn plummets. Does that mean that the world economy is going down the tubes?
Well, it could be the result of the collapse of demand in the world economy leading to less demand for all commodities or it may just be the result of a bumper corn crop. The latter would be good news for the world economy even though it would be bad news for farmers who produce lots of corn.
Such is the case with stock markets. Stock markets move up and down all the time often for reasons that have nothing to do with the state of the economy. They also have very little predictive power. The market has more than doubled from its 2010 lows even though growth has averaged a pathetic 2.0 percent over the last three years.
Their effect on the economy is also limited. Few companies rely on the stock market to raise capital for investment. The main impact of the stock market on the economy is through the wealth effect on consumption. This is usually estimated as being in the range of 3-4 percent. That means a 10 percent run-up in the stock market, which would generate roughly $2 trillion in wealth, would eventually lead to $60-$80 billion in additional annual consumption. (The impact is usually estimated to be felt over a 2-3 year period.) With a multiplier of 1.5 this implies an impact of 0.6-0.7 percentage points of GDP. That is not trivial, but it is hardly the difference between a booming economy and stagnation.
This is why the NYT badly misled readers with a lead sentence in an article that said:
“Tumbling stock, bond and commodity prices around the world are demonstrating just how reliant the global economy has become on the monetary policies of the Federal Reserve.”
The movements in markets showed that the markets respond to actions of the Fed. The plunge in stock prices is bad news if you own a lot of stock, just as a plunge in corn prices is bad news if you have lots of corn. It is not necessarily bad news for the economy.
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Harvard’s standing in economic policy debates took a big hit when the famous Reinhart-Rogoff 90 percent debt-to-GDP growth cliff was shown to be the result of a simple spreadsheet error. Niall Ferguson’s strange rant in the Wall Street Journal about the United States becoming the land of government regulation continues the downhill slide.
The gist of the piece is that the country is going down the road to economic stagnation and suffocating bureaucracy because of excessive regulation. The Affordable Care Act (ACA) is the main villain in this story.
It’s fair to say that just about everything in the piece is wrong. Starting with the meat, rather than being some horrible burden for small businesses, the main effect of the ACA on the vast majority of small businesses will be to provide them with a subsidy if they offer their workers insurance. The mandate only applies to firms that employ more than 50 workers, most of whom already provide insurance that would meet the mandate anyhow. So these engines of innovation will grind to a halt if the government offers them subsidies for insurance? Interesting theory.
Ferguson then cites a number of hack studies that find enormous costs to regulation. The main trick in this sort of study is to add up every possible cost associated with restrictions without taking account of the benefits of these regulations.
Suppose we had a new law that allowed oil, gas, and other mineral companies to dig up anyone’s property without any compensation whatsoever. This would undoubtedly lead to huge growth in these extractive industries and a big gain in GDP that the Fergusons of the world would celebrate.
Of course there would be no accounting of the destruction to people’s property or the loss in value they may experience as a result of having an oil rig next to their front porch. Ferguson is effectively mourning that in the United States companies don’t enjoy this freedom to excavate or to in other ways damage the environment and the public’s health.
Other parts of Ferguson’s argument are equally off the mark. His main measure of regulation is the number of pages in the Federal Register. It’s not clear that this is a measure of anything. The originally proposed Volcker Rule, which prohibited banks with government insured deposits from engaging in speculative trading, was quite short. It grew an order magnitude larger as the industry watered down the restriction with gobs of exceptions.
By Ferguson’s measure, the watered down Volcker Rule means more regulation than the strong Volcker Rule because it involves more pages. There would be a similar story with many rules in the Federal Register.
Finally, Ferguson is badly confused when it comes to economic growth. He tells us:
“The last time regulation was cut was under Ronald Reagan, when the number of pages in the Federal Register fell by 31%. Surprise: Real GDP grew by 30% in that same period.”
Apparently Ferguson is impressed that the U.S. economy grew in the 1980s. Of course the U.S. economy almost always grows, economists usually ask about the rate of growth. At the peak of the Reagan business cycle in 1990, the economy was 33.8 percent larger than at the prior business cycle peak in 1981. By comparison, the economy was 41.1 percent larger in 2001 than it had been in 1990. In other words, the economy grew more rapidly after the evils of regulation had returned in the post-Reagan era.
The economy grew much more in the 1960s, the highpoint of liberal intervention. It was 51.6 percent larger in 1970 than in 1960. Even the dreadful 1970s had more growth than Ferguson’s low regulation Reagan days, expanding by 39.9 percent from 1970 to the business cycle peak in 1981. The productivity data, which measures growth per hour worked, would show a similar picture.
So there you have it: Ferguson has no serious measure of either the cost or the extent of regulation. And he gets the story on growth completely backward. This is the sort of wisdom on economic policy that we are coming to expect from Harvard University and the Wall Street Journal opinion page.
Harvard’s standing in economic policy debates took a big hit when the famous Reinhart-Rogoff 90 percent debt-to-GDP growth cliff was shown to be the result of a simple spreadsheet error. Niall Ferguson’s strange rant in the Wall Street Journal about the United States becoming the land of government regulation continues the downhill slide.
The gist of the piece is that the country is going down the road to economic stagnation and suffocating bureaucracy because of excessive regulation. The Affordable Care Act (ACA) is the main villain in this story.
It’s fair to say that just about everything in the piece is wrong. Starting with the meat, rather than being some horrible burden for small businesses, the main effect of the ACA on the vast majority of small businesses will be to provide them with a subsidy if they offer their workers insurance. The mandate only applies to firms that employ more than 50 workers, most of whom already provide insurance that would meet the mandate anyhow. So these engines of innovation will grind to a halt if the government offers them subsidies for insurance? Interesting theory.
Ferguson then cites a number of hack studies that find enormous costs to regulation. The main trick in this sort of study is to add up every possible cost associated with restrictions without taking account of the benefits of these regulations.
Suppose we had a new law that allowed oil, gas, and other mineral companies to dig up anyone’s property without any compensation whatsoever. This would undoubtedly lead to huge growth in these extractive industries and a big gain in GDP that the Fergusons of the world would celebrate.
Of course there would be no accounting of the destruction to people’s property or the loss in value they may experience as a result of having an oil rig next to their front porch. Ferguson is effectively mourning that in the United States companies don’t enjoy this freedom to excavate or to in other ways damage the environment and the public’s health.
Other parts of Ferguson’s argument are equally off the mark. His main measure of regulation is the number of pages in the Federal Register. It’s not clear that this is a measure of anything. The originally proposed Volcker Rule, which prohibited banks with government insured deposits from engaging in speculative trading, was quite short. It grew an order magnitude larger as the industry watered down the restriction with gobs of exceptions.
By Ferguson’s measure, the watered down Volcker Rule means more regulation than the strong Volcker Rule because it involves more pages. There would be a similar story with many rules in the Federal Register.
Finally, Ferguson is badly confused when it comes to economic growth. He tells us:
“The last time regulation was cut was under Ronald Reagan, when the number of pages in the Federal Register fell by 31%. Surprise: Real GDP grew by 30% in that same period.”
Apparently Ferguson is impressed that the U.S. economy grew in the 1980s. Of course the U.S. economy almost always grows, economists usually ask about the rate of growth. At the peak of the Reagan business cycle in 1990, the economy was 33.8 percent larger than at the prior business cycle peak in 1981. By comparison, the economy was 41.1 percent larger in 2001 than it had been in 1990. In other words, the economy grew more rapidly after the evils of regulation had returned in the post-Reagan era.
The economy grew much more in the 1960s, the highpoint of liberal intervention. It was 51.6 percent larger in 1970 than in 1960. Even the dreadful 1970s had more growth than Ferguson’s low regulation Reagan days, expanding by 39.9 percent from 1970 to the business cycle peak in 1981. The productivity data, which measures growth per hour worked, would show a similar picture.
So there you have it: Ferguson has no serious measure of either the cost or the extent of regulation. And he gets the story on growth completely backward. This is the sort of wisdom on economic policy that we are coming to expect from Harvard University and the Wall Street Journal opinion page.
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While meandering the streets of Paris, Paul Krugman apparently awakened to the fact that the assignment of claims to wealth through patents, copyrights, and other forms of intellectual property is a really big deal. This is good news for those who have been jumping up and down yelling about this issue for the last 15 years or so.
There is really big money in this area. Just to take my favorite one, we spend $340 billion a year on drugs, more than 2 percent of GDP ($295 billion on prescription drugs, $45 billion on non-prescription drugs). We would probably spend about one-tenth this amount in the absence of patent protection. The difference is equal to about 20 percent of after-tax corporate profits.
And this huge gap between price and marginal cost gives drug companies enormous incentive to push their drugs as much as possible. This means concealing evidence that they are ineffective or even harmful. We routinely see stories about the drug companies responding exactly as economic theory predicts.
Of course the huge gap between price and marginal cost leads to all the predicted distortions on the consumer side as well. People have to struggle to find the money to pay for drugs that cost hundreds or even thousands of dollars a prescription when the price would be largely a non-issue if they sold for the generic price.
In the case of the tech sector, Google, Apple, Microsoft, and Samsung compete at least as much in their legal departments as in the quality of the products they develop. Patents are more often used to harass competitors than to protect innovation — and that is what the business press says.
In the realm of copyright, we have the efforts by the entertainment industry to turn us all into junior copyright cops through measures like SOPA or PIPA.
So intellectual property is a really big deal in the modern economy. And what is neat about it is that these property relations are almost infinitely malleable. (Okay, all property relations are malleable, but IP seems to offer much more room.) That’s the key point that we all have to understand because the bad guys want to convince us that patents and copyrights came to us from on high and that it is our obligation to enforce them in their current or strengthened form, otherwise we are dirty communists.
It’s great to see that Krugman may now be on the case. Perhaps he will be able to teach the economists a bit of economics. (Hint: an intro textbook goes far here. Large gaps between price and marginal cost are bad in trade, much larger gaps between price and marginal cost are really bad when it comes to intellectual property.)
While meandering the streets of Paris, Paul Krugman apparently awakened to the fact that the assignment of claims to wealth through patents, copyrights, and other forms of intellectual property is a really big deal. This is good news for those who have been jumping up and down yelling about this issue for the last 15 years or so.
There is really big money in this area. Just to take my favorite one, we spend $340 billion a year on drugs, more than 2 percent of GDP ($295 billion on prescription drugs, $45 billion on non-prescription drugs). We would probably spend about one-tenth this amount in the absence of patent protection. The difference is equal to about 20 percent of after-tax corporate profits.
And this huge gap between price and marginal cost gives drug companies enormous incentive to push their drugs as much as possible. This means concealing evidence that they are ineffective or even harmful. We routinely see stories about the drug companies responding exactly as economic theory predicts.
Of course the huge gap between price and marginal cost leads to all the predicted distortions on the consumer side as well. People have to struggle to find the money to pay for drugs that cost hundreds or even thousands of dollars a prescription when the price would be largely a non-issue if they sold for the generic price.
In the case of the tech sector, Google, Apple, Microsoft, and Samsung compete at least as much in their legal departments as in the quality of the products they develop. Patents are more often used to harass competitors than to protect innovation — and that is what the business press says.
In the realm of copyright, we have the efforts by the entertainment industry to turn us all into junior copyright cops through measures like SOPA or PIPA.
So intellectual property is a really big deal in the modern economy. And what is neat about it is that these property relations are almost infinitely malleable. (Okay, all property relations are malleable, but IP seems to offer much more room.) That’s the key point that we all have to understand because the bad guys want to convince us that patents and copyrights came to us from on high and that it is our obligation to enforce them in their current or strengthened form, otherwise we are dirty communists.
It’s great to see that Krugman may now be on the case. Perhaps he will be able to teach the economists a bit of economics. (Hint: an intro textbook goes far here. Large gaps between price and marginal cost are bad in trade, much larger gaps between price and marginal cost are really bad when it comes to intellectual property.)
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The NYT reported on the findings of two independent studies that a spinal treatment procedure provided by the medical device maker Medtronic was no more effective than prior treatments and was possibly harmful. The studies implied that earlier studies by Medtronic were biased in exaggerating the potential benefits from the procedure, which has netted the company billions of dollars in revenue over the last decade.
This is exactly the sort of corruption that economic theory predicts would result from government granted patent monopolies. This leads to both large amounts of excess costs and often bad health outcomes.
The NYT reported on the findings of two independent studies that a spinal treatment procedure provided by the medical device maker Medtronic was no more effective than prior treatments and was possibly harmful. The studies implied that earlier studies by Medtronic were biased in exaggerating the potential benefits from the procedure, which has netted the company billions of dollars in revenue over the last decade.
This is exactly the sort of corruption that economic theory predicts would result from government granted patent monopolies. This leads to both large amounts of excess costs and often bad health outcomes.
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I sure didn’t, which is why I was surprised to see an NYT article refer to it as “the $760 billion program.” This number is referring to the cost of the program over a 10-year budget window, which careful readers may have gleaned from the rest of the sentence which tells us that fraud accounts for 1 percent of the program’s cost or $760 million a year. Nowhere does the piece directly say that the $760 billion figure refers to a ten year spending number and not a one year number.
This is a great example of the absurdity of budget reporting. It is highly unlikely that most NYT readers assume that budget numbers are for a ten year horizon. While this is a standard in budget wonk circles, it is hardly a normal practice anywhere else. Giving a spending figure without even explicitly telling readers the number of years it covers is not providing information. This should not have gotten by an editor.
It would have been simple to write this in a way that would convey information. The government is projected to spend a bit over $50 trillion in the next decade. If the piece had described projected spending on the food stamp program as a bit more than 1.5 percent of projected spending then most readers would have a reasonable idea of the importance of the program in the budget and to their tax obligations. If it makes people feel better it could also include the dollar figure, but since almost no one knows the size of the projected budget (especially over a ten year horizon), the percent number would provide far more information.
There is no excuse for using numbers that don’t convey information when it is so simple to use an alternative that would be easily understood by the vast majority of readers.
Note:
The NYT has a corrected the piece so that it no longer refers to food stamps as a $760 billion program. It would be nice if they described it as a percentage of the budget so as to actually convey some information to their readers.
I sure didn’t, which is why I was surprised to see an NYT article refer to it as “the $760 billion program.” This number is referring to the cost of the program over a 10-year budget window, which careful readers may have gleaned from the rest of the sentence which tells us that fraud accounts for 1 percent of the program’s cost or $760 million a year. Nowhere does the piece directly say that the $760 billion figure refers to a ten year spending number and not a one year number.
This is a great example of the absurdity of budget reporting. It is highly unlikely that most NYT readers assume that budget numbers are for a ten year horizon. While this is a standard in budget wonk circles, it is hardly a normal practice anywhere else. Giving a spending figure without even explicitly telling readers the number of years it covers is not providing information. This should not have gotten by an editor.
It would have been simple to write this in a way that would convey information. The government is projected to spend a bit over $50 trillion in the next decade. If the piece had described projected spending on the food stamp program as a bit more than 1.5 percent of projected spending then most readers would have a reasonable idea of the importance of the program in the budget and to their tax obligations. If it makes people feel better it could also include the dollar figure, but since almost no one knows the size of the projected budget (especially over a ten year horizon), the percent number would provide far more information.
There is no excuse for using numbers that don’t convey information when it is so simple to use an alternative that would be easily understood by the vast majority of readers.
Note:
The NYT has a corrected the piece so that it no longer refers to food stamps as a $760 billion program. It would be nice if they described it as a percentage of the budget so as to actually convey some information to their readers.
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That is the essence of his column today warning liberals of sharp cuts to domestic discretionary spending (e.g. Head Start, education, infrastructure etc.) unless there are cuts to Medicare and Social Security. Hiatt uses the term “entitlements” since it is less popular than the programs to which it refers.
The basic argument is that Hiatt has decided how large the deficit can be, he has decided that there can be no additional cuts to the military, and that there can be no new taxes ever. Therefore if liberals don’t want to see the domestic discretionary portion of the budget contract, then they better accept cuts to Social Security and Medicare.
It’s not clear why anyone should accept Hiatt’s assessment on any of these points. (He is batting close to 100 percent in the being wrong department. Remember when his gang was warning about budget deficits back in 2006-2007 as the collapse of the housing bubble was about to sink the economy?)
Of course the size of the deficit is not fixed and in the near term larger deficits will foster growth and create jobs. Why should liberals accept that cavemen, who have trouble with math and logic, will forever keep us from getting the economy back to full employment?
As far as the military budget, we were spending 3.0 percent of GDP on the military back in 2000, is there some obvious reason that we can’t get back to that level again? Our economy will be more than 50 percent larger in 2020, so 3 percent of 2020 GDP would be 50 percent more spending in real dollars than it was in 2000.
As far as taxes, liberals would obviously prefer progressive tax increases to regressive ones, but polling data consistently show that people across the political spectrum would prefer tax increases to cuts in Social Security and Medicare. In other words, if the budget situation requires that we either make cuts to these programs or raise the taxes needed to pay for them, Democrats, Independents and even Republicans prefer to raise taxes. It is only Washington elite types like Fred Hiatt who want to rule out this option.
Finally, most liberals would be happy to have cuts to Medicare that involve cutting excess payments to providers. We pay more than twice as much per person for our health care as the average for people in other wealthy countries. If we got our costs more in line by cutting payments to drug companies and medical equipment companies, most liberals would be fully on board.
We could also go the route of promoting free trade: allowing Medicare beneficiaries to buy into the more efficient health care systems in other countries and splitting the savings. Unfortunately Hiatt and other Washington elite types become ardent protectionists when the discussion is about trade that could reduce the income of their rich friends.
So we can see the problem is not inevitable cuts in domestic discretionary spending. The problem is that people like Fred Hiatt want to rule out any other options in order to try to force cuts to Social Security and Medicare.
One final point, there is no guarantee that even if liberals agreed to cut the benefits received by people on Social Security and Medicare that the money would go to domestic discretionary spending. In the past surplus funds have been used for tax cuts targeted to the rich. In the current political environment in Washington it would be absurd to assume that this could not happen again.
That is the essence of his column today warning liberals of sharp cuts to domestic discretionary spending (e.g. Head Start, education, infrastructure etc.) unless there are cuts to Medicare and Social Security. Hiatt uses the term “entitlements” since it is less popular than the programs to which it refers.
The basic argument is that Hiatt has decided how large the deficit can be, he has decided that there can be no additional cuts to the military, and that there can be no new taxes ever. Therefore if liberals don’t want to see the domestic discretionary portion of the budget contract, then they better accept cuts to Social Security and Medicare.
It’s not clear why anyone should accept Hiatt’s assessment on any of these points. (He is batting close to 100 percent in the being wrong department. Remember when his gang was warning about budget deficits back in 2006-2007 as the collapse of the housing bubble was about to sink the economy?)
Of course the size of the deficit is not fixed and in the near term larger deficits will foster growth and create jobs. Why should liberals accept that cavemen, who have trouble with math and logic, will forever keep us from getting the economy back to full employment?
As far as the military budget, we were spending 3.0 percent of GDP on the military back in 2000, is there some obvious reason that we can’t get back to that level again? Our economy will be more than 50 percent larger in 2020, so 3 percent of 2020 GDP would be 50 percent more spending in real dollars than it was in 2000.
As far as taxes, liberals would obviously prefer progressive tax increases to regressive ones, but polling data consistently show that people across the political spectrum would prefer tax increases to cuts in Social Security and Medicare. In other words, if the budget situation requires that we either make cuts to these programs or raise the taxes needed to pay for them, Democrats, Independents and even Republicans prefer to raise taxes. It is only Washington elite types like Fred Hiatt who want to rule out this option.
Finally, most liberals would be happy to have cuts to Medicare that involve cutting excess payments to providers. We pay more than twice as much per person for our health care as the average for people in other wealthy countries. If we got our costs more in line by cutting payments to drug companies and medical equipment companies, most liberals would be fully on board.
We could also go the route of promoting free trade: allowing Medicare beneficiaries to buy into the more efficient health care systems in other countries and splitting the savings. Unfortunately Hiatt and other Washington elite types become ardent protectionists when the discussion is about trade that could reduce the income of their rich friends.
So we can see the problem is not inevitable cuts in domestic discretionary spending. The problem is that people like Fred Hiatt want to rule out any other options in order to try to force cuts to Social Security and Medicare.
One final point, there is no guarantee that even if liberals agreed to cut the benefits received by people on Social Security and Medicare that the money would go to domestic discretionary spending. In the past surplus funds have been used for tax cuts targeted to the rich. In the current political environment in Washington it would be absurd to assume that this could not happen again.
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Neil Irwin wrote about a presentation that Alan Krueger gave at the Rock and Roll Hall of Fame that showed how the growing inequality of revenue in the music industry was characteristic of trends in inequality in the larger economy. Irwin quotes Krueger:
“We are increasingly becoming a ‘winner-take-all economy,’ a phenomenon that the music industry has long experienced. Over recent decades, technological change, globalization and an erosion of the institutions and practices that support shared prosperity in the U.S. have put the middle class under increasing stress. The lucky and the talented – and it is often hard to tell the difference – have been doing better and better, while the vast majority has struggled to keep up.”
The piece includes a chart that Krueger presented showing that the share of concert revenue going to the top 1 percent of performers went from 26 percent in 1982 to 56 percent in 2003. The next 4 percent saw their share squeezed somewhat from around 36 percent to 29 percent. This led to a fall in the share for everyone else from 38 percent to 15 percent.
While the share of the 1 percent was rising in this period, it is interesting to look what was happening to total revenue, most importantly in pre-recorded music. This rose rapidly as a share of GDP from less than 0.12 percent in 1980 to a peak of just under 0.2 percent in 1998. The obvious explanation for this rise was the growth of CDs. This new format meant that people were not only buying new music, but also many people were purchasing music they already had on tape or records in this new format. After 1998 the share of GDP spent on recorded music plummeted, falling to 0.11 percent in 2012.
It’s not clear what Krueger’s data would show over this period (his chart ends in 2003), but we might see a growing share for the top 1 percent of a sharply declining revenue stream. The logic is that it costs a great deal of money for the music industry to promote a new artist. In a context of sharply dwindling revenue due to technological innovation (the Internet has made a vast amount of material available at zero cost), it is much less likely that this money will be recouped in sales. As a result it makes more sense for the industry to market music that might have been made 30 or 40 years ago because there is very little risk involved.
However there are two important items in this picture that have nothing to do with technology. The first is efforts to restrict unauthorized copies. The industry has repeatedly gone to Congress to push for beefed up protection for copyright and stronger enforcement measures. The Digital Millennium Copyright Act was one piece of fruit from this effort. Another agenda item was SOPA and PIPA, which would impose much greater burdens on Internet intermediaries.
The other major item here is the extension of the length of copyright protection. The duration is now 95 years. This gives companies an incentive to promote old music that would not otherwise exist.
Anyhow, the point is that the concentration of earnings of the top 1 percent is not just technology, but rather the ability of the rich and powerful to control technology to ensure that it makes them richer and more powerful.
Btw, for those wondering, there was a substantial increase in the share of GDP going to live performances also. It went from 0.05 percent of GDP in 1980 to 0.12 percent in 2005. It had remained pretty stable at that level for several years, but fell back to 0.11 percent in 2011. Presumably the division of revenue from live performances loosely corresponds to the revenue from recorded music since it will be closely related to the extent to which various performers are promoted.
Neil Irwin wrote about a presentation that Alan Krueger gave at the Rock and Roll Hall of Fame that showed how the growing inequality of revenue in the music industry was characteristic of trends in inequality in the larger economy. Irwin quotes Krueger:
“We are increasingly becoming a ‘winner-take-all economy,’ a phenomenon that the music industry has long experienced. Over recent decades, technological change, globalization and an erosion of the institutions and practices that support shared prosperity in the U.S. have put the middle class under increasing stress. The lucky and the talented – and it is often hard to tell the difference – have been doing better and better, while the vast majority has struggled to keep up.”
The piece includes a chart that Krueger presented showing that the share of concert revenue going to the top 1 percent of performers went from 26 percent in 1982 to 56 percent in 2003. The next 4 percent saw their share squeezed somewhat from around 36 percent to 29 percent. This led to a fall in the share for everyone else from 38 percent to 15 percent.
While the share of the 1 percent was rising in this period, it is interesting to look what was happening to total revenue, most importantly in pre-recorded music. This rose rapidly as a share of GDP from less than 0.12 percent in 1980 to a peak of just under 0.2 percent in 1998. The obvious explanation for this rise was the growth of CDs. This new format meant that people were not only buying new music, but also many people were purchasing music they already had on tape or records in this new format. After 1998 the share of GDP spent on recorded music plummeted, falling to 0.11 percent in 2012.
It’s not clear what Krueger’s data would show over this period (his chart ends in 2003), but we might see a growing share for the top 1 percent of a sharply declining revenue stream. The logic is that it costs a great deal of money for the music industry to promote a new artist. In a context of sharply dwindling revenue due to technological innovation (the Internet has made a vast amount of material available at zero cost), it is much less likely that this money will be recouped in sales. As a result it makes more sense for the industry to market music that might have been made 30 or 40 years ago because there is very little risk involved.
However there are two important items in this picture that have nothing to do with technology. The first is efforts to restrict unauthorized copies. The industry has repeatedly gone to Congress to push for beefed up protection for copyright and stronger enforcement measures. The Digital Millennium Copyright Act was one piece of fruit from this effort. Another agenda item was SOPA and PIPA, which would impose much greater burdens on Internet intermediaries.
The other major item here is the extension of the length of copyright protection. The duration is now 95 years. This gives companies an incentive to promote old music that would not otherwise exist.
Anyhow, the point is that the concentration of earnings of the top 1 percent is not just technology, but rather the ability of the rich and powerful to control technology to ensure that it makes them richer and more powerful.
Btw, for those wondering, there was a substantial increase in the share of GDP going to live performances also. It went from 0.05 percent of GDP in 1980 to 0.12 percent in 2005. It had remained pretty stable at that level for several years, but fell back to 0.11 percent in 2011. Presumably the division of revenue from live performances loosely corresponds to the revenue from recorded music since it will be closely related to the extent to which various performers are promoted.
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