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.

Note on Non-Responses to E-Mail

I recently realized that Verizon is apparently randomly blocking e-mails to my account.  I have no idea why this would be the case, but it is. Anyhow, I generally respond to e-mails, if they raise real questions or make serious points. If anyone has sent me a note and not gotten response, I’d suggest trying Twitter. I’m at @deanbaker13.

I recently realized that Verizon is apparently randomly blocking e-mails to my account.  I have no idea why this would be the case, but it is. Anyhow, I generally respond to e-mails, if they raise real questions or make serious points. If anyone has sent me a note and not gotten response, I’d suggest trying Twitter. I’m at @deanbaker13.

Donald Trump and his supporters routinely boast about his great success in reducing the unemployment rate. While the unemployment rate did fall to low levels under Trump, this was just a continuation of the downward trend that had been in place under Obama since 2010.

Here’s the picture with the overall unemployment rate.

See the sharp drop for the Trump years? Yeah, I don’t either. By the way, I am being very polite in leaving out the impact of the pandemic, which would show unemployment soaring. That has not happened in most other countries because their leaders were better able to deal with the pandemic and the economy.

Here’s the picture for the Black unemployment rate since Trump apparently thinks his administration has been great for Blacks.

We see the same story here as with the overall unemployment rate, the continuation of a downward trend, albeit at a slower pace, than had been going on for years. Trump can take credit for not crashing the economy, until the pandemic, but that really is not all that much to boast about.

Donald Trump and his supporters routinely boast about his great success in reducing the unemployment rate. While the unemployment rate did fall to low levels under Trump, this was just a continuation of the downward trend that had been in place under Obama since 2010.

Here’s the picture with the overall unemployment rate.

See the sharp drop for the Trump years? Yeah, I don’t either. By the way, I am being very polite in leaving out the impact of the pandemic, which would show unemployment soaring. That has not happened in most other countries because their leaders were better able to deal with the pandemic and the economy.

Here’s the picture for the Black unemployment rate since Trump apparently thinks his administration has been great for Blacks.

We see the same story here as with the overall unemployment rate, the continuation of a downward trend, albeit at a slower pace, than had been going on for years. Trump can take credit for not crashing the economy, until the pandemic, but that really is not all that much to boast about.

There continues to be enormous confusion about what we should be trying to accomplish in the next pandemic relief package. This is best demonstrated by Republicans’ obsession with getting people back to work, with a mixture of cuts to unemployment benefits and return to work bonuses.

Ignoring the questionable economic logic (there is zero evidence of large numbers of jobs going unfilled), this approach also ignores the reality of the pandemic. At the start of April, both houses voted nearly unanimously to support measures that were designed to make it possible for people to stay at home rather than work. At that time, we had roughly 35,000 new infections a day. Currently, we are seeing well over 60,000 new infections a day, with the count crossing 70,000 in many recent days.

The comparison looks even worse if we pull out New York and New Jersey, both of which were overwhelmed by the pandemic at the start of April. Between them, they had roughly 15,000 new infections a day, which means the rest of the country was seeing close to 20,000. By contrast, at present both states have the virus relatively under control, which means that the new infection count in the country would still be over 60,000 a day, excluding New York and New Jersey.

This raises the obvious point: if Congress thought it made sense to allow, encourage, and possibly even require people to stay home rather than work at the start of April, how could it possibly make sense to push people to work at a time when the rate of new infections is more than three times as high, in areas outside of New York and New Jersey?

This is really a question of life and death. Tens of millions of workers have serious health conditions that mean they would be at considerable danger if they became infected. Tens of millions more workers would be putting into danger family members, with serious health conditions, if they became infected. As a result, a high percentage of the work force has very good reasons for not wanting to return to work just now.

If we face the reality of the pandemic, we should not be designing a package to get people back to work, we need to design a package to keep them whole through a period in which tens of millions of people will still not be able to work because of the pandemic. This means that we want people to have the money to pay their rent or mortgage and to buy food and other necessary items. We don’t want them to be going out to restaurants and bars, to see movies or baseball games, or to fly away on vacations or go on a cruise ship.

There was considerable confusion on this point even back in March and April where many were referring to the bills passed by Congress as stimulus. Some were even pushing types of spending that could boost the economy. There was little reason to want to boost the economy back in April, nor should there be now. We want to make it so that people endure as little hardship as possible for now, and the economy to be prepared to start up as quickly as possible, once the pandemic is under control.

Of course, we should not be in this situation. Most of the economy was shut down from the middle of March to the middle of May, with major restrictions staying in place in the hardest-hit areas well into June. These restrictions did largely bring the pandemic under control in places like New York, New Jersey, Maryland, Massachusetts, and Washington (both state and DC).

Unfortunately, many states did not take the need for restricting business seriously and began to open at the start of May. This is the reason that states like Arizona, Georgia, Florida, and Texas now have major outbreaks. California also now has a major outbreak, as a lack of financial support from the federal government, coupled with political pressure orchestrated by Donald Trump in the form of “liberate California” protests, led the state to relax restrictions sooner than it should have.[1]

It would be possible to talk about an economic reopening now, if we had been successful in bringing the pandemic under control, as is the case in Europe and East Asia, in addition to the Northeast in the United States. But we can’t make plans based on a reality that does not exist. The pandemic is more out of control than ever in most of the country. This means that we again have to plan for another period in which the economy will not be operating normally by design. We need to focus on keeping people whole.

 

The Shape of this Rescue Package

 

The centerpiece of a keeping people whole strategy should be the continuation of the $600 weekly supplements to unemployment checks.  We can debate whether $600 is the right sum, but unemployment benefits have fallen far below the levels that would allow millions of workers to sustain anything close to their normal living standards through a period of prolonged unemployment. In order for millions of workers who are unemployed due to the pandemic to be able to pay their mortgage or rent and cover other unavoidable expenses, it will be necessary to have a substantial supplement to normal benefits.

There have been numerous complaints from Republicans, and some economists, that these supplements will discourage people from working. This is undoubtedly true in some cases, but this is the point. When we have a pandemic that is out of control, we don’t want to force people to work and threaten their own health and/or the health of family members.

Some have raised the issue that it is not fair that some people who are working at low-paying jobs are getting less from their paychecks than other workers are getting from being unemployed. This isn’t fair, but there is much that is going on in this pandemic that is not fair.

For example, the government is paying the pharmaceutical company, Moderna, $955 million to develop and test a vaccine. Then, after covering the research and testing costs, Trump will also give Moderna a patent monopoly that will allow it to charge prices that are more than 2000 percent above the cost of manufacturing and delivering the vaccine. The company is getting the patents in spite of the fact that the taxpayers paid for the research and took all the risk. Several top executives of the company have already made tens of millions on stock options as a result of the government contracts. There are similar stories at other pharmaceutical and medical equipment companies.

So, the fact that some workers may be getting less money at low-paying jobs than other workers are getting from unemployment insurance is unfair. But if this is someone’s biggest concern over unfairness, they are not paying attention to the world around them.

Others have also expressed concerns that these unemployment insurance supplements are making it hard for employers to find workers. There is zero evidence that this is a problem. There are millions of unemployed workers anxious to find jobs. If employers were having difficulty getting workers we should be seeing an increase in the number of job openings for unfilled positions. In fact, openings are very low. We should also be seeing rapidly rising wages as employers compete for available workers. The most recent data on compensation, that controls for changes in the mix of the workforce, found that compensation growth slowed sharply in the second quarter.

There will be workers who fall through the cracks and don’t get unemployment insurance. To try to help as many of these workers as possible, we should expand both the size and eligibility criteria for SNAP. We also must ensure that the moratoriums on evictions and moratoriums on foreclosures remain in place throughout the rest of the year.

Some of the other items that should be in the rescue package are funding for state and local governments. The Postal Service will also need substantial additional funding to prevent large-scale layoffs. State and local governments have already laid off 1.6 million workers, additional funding will allow them to hire back many of these workers and prevent the lay off of millions of additional workers. These governments also have an essential role to play in bringing the pandemic under control, doing things like testing and tracing, providing health care to coronavirus patients, and ensuring that workplaces and businesses are safe.

In the same vein, money is needed to allow schools to reopen safely. It is very important for both children and parents that the schools be open, but plans have to be put in place to allow for safe re-openings. Unfortunately, there was no national leadership or money for this effort over the summer and now most schools are not prepared to reopen. The next rescue package must have the money to allow for schools to make the necessary arrangements so that they can have safe re-openings as soon as possible.

We also need to try to lay the groundwork for a quick recovery when the pandemic is brought under control. The Paycheck Protection Program was useful for this purpose, keeping many businesses intact through a period in which they were operating well below capacity or shutdown completely. It would be good to extend this through the next three months.

We also need to ensure that our child care facilities are up and running. Lack of affordable child care has long been a problem, but it has become much worse in the pandemic as many child care centers have closed. We will need adequate child care arrangements if we want to ensure that parents are able to go back to work when the pandemic is brought under control.

One item that is completely unnecessary is the pandemic checks that gave every adult $1,200 in the first round and seem destined to be included in the last round as well.  While these checks give Donald Trump something to put his name on, they did little to keep people whole in the shutdown and are not likely to provide much of a demand boost when we reopen.

The vast majority of these checks were saved, with the saving rate out of disposable income soaring to 25.0 percent in the second quarter. (The saving rate was hovering near 8.0 percent before the pandemic.) The overwhelming majority of people who received these checks did not suffer any substantial fall in income as a result of the pandemic, they are either still getting full pay at their job or were retired. It is difficult to understand what the purpose of these checks is supposed to be.

To be clear, at a time when the economy is operating well below its capacity there is no particular harm in adding $1,200 to everyone’s bank account. This is not about causing an inflationary spiral, in large part because people are not spending the money. But if there are political limits on the size of the pandemic package, knocking out a $300 billion item that serves no real purpose, is a very good place to start.

[1] Trump also promoted “liberate” rallies, which often involved heavily armed protestors, in New York, Michigan, Pennsylvania, and Minnesota, among other states.

There continues to be enormous confusion about what we should be trying to accomplish in the next pandemic relief package. This is best demonstrated by Republicans’ obsession with getting people back to work, with a mixture of cuts to unemployment benefits and return to work bonuses.

Ignoring the questionable economic logic (there is zero evidence of large numbers of jobs going unfilled), this approach also ignores the reality of the pandemic. At the start of April, both houses voted nearly unanimously to support measures that were designed to make it possible for people to stay at home rather than work. At that time, we had roughly 35,000 new infections a day. Currently, we are seeing well over 60,000 new infections a day, with the count crossing 70,000 in many recent days.

The comparison looks even worse if we pull out New York and New Jersey, both of which were overwhelmed by the pandemic at the start of April. Between them, they had roughly 15,000 new infections a day, which means the rest of the country was seeing close to 20,000. By contrast, at present both states have the virus relatively under control, which means that the new infection count in the country would still be over 60,000 a day, excluding New York and New Jersey.

This raises the obvious point: if Congress thought it made sense to allow, encourage, and possibly even require people to stay home rather than work at the start of April, how could it possibly make sense to push people to work at a time when the rate of new infections is more than three times as high, in areas outside of New York and New Jersey?

This is really a question of life and death. Tens of millions of workers have serious health conditions that mean they would be at considerable danger if they became infected. Tens of millions more workers would be putting into danger family members, with serious health conditions, if they became infected. As a result, a high percentage of the work force has very good reasons for not wanting to return to work just now.

If we face the reality of the pandemic, we should not be designing a package to get people back to work, we need to design a package to keep them whole through a period in which tens of millions of people will still not be able to work because of the pandemic. This means that we want people to have the money to pay their rent or mortgage and to buy food and other necessary items. We don’t want them to be going out to restaurants and bars, to see movies or baseball games, or to fly away on vacations or go on a cruise ship.

There was considerable confusion on this point even back in March and April where many were referring to the bills passed by Congress as stimulus. Some were even pushing types of spending that could boost the economy. There was little reason to want to boost the economy back in April, nor should there be now. We want to make it so that people endure as little hardship as possible for now, and the economy to be prepared to start up as quickly as possible, once the pandemic is under control.

Of course, we should not be in this situation. Most of the economy was shut down from the middle of March to the middle of May, with major restrictions staying in place in the hardest-hit areas well into June. These restrictions did largely bring the pandemic under control in places like New York, New Jersey, Maryland, Massachusetts, and Washington (both state and DC).

Unfortunately, many states did not take the need for restricting business seriously and began to open at the start of May. This is the reason that states like Arizona, Georgia, Florida, and Texas now have major outbreaks. California also now has a major outbreak, as a lack of financial support from the federal government, coupled with political pressure orchestrated by Donald Trump in the form of “liberate California” protests, led the state to relax restrictions sooner than it should have.[1]

It would be possible to talk about an economic reopening now, if we had been successful in bringing the pandemic under control, as is the case in Europe and East Asia, in addition to the Northeast in the United States. But we can’t make plans based on a reality that does not exist. The pandemic is more out of control than ever in most of the country. This means that we again have to plan for another period in which the economy will not be operating normally by design. We need to focus on keeping people whole.

 

The Shape of this Rescue Package

 

The centerpiece of a keeping people whole strategy should be the continuation of the $600 weekly supplements to unemployment checks.  We can debate whether $600 is the right sum, but unemployment benefits have fallen far below the levels that would allow millions of workers to sustain anything close to their normal living standards through a period of prolonged unemployment. In order for millions of workers who are unemployed due to the pandemic to be able to pay their mortgage or rent and cover other unavoidable expenses, it will be necessary to have a substantial supplement to normal benefits.

There have been numerous complaints from Republicans, and some economists, that these supplements will discourage people from working. This is undoubtedly true in some cases, but this is the point. When we have a pandemic that is out of control, we don’t want to force people to work and threaten their own health and/or the health of family members.

Some have raised the issue that it is not fair that some people who are working at low-paying jobs are getting less from their paychecks than other workers are getting from being unemployed. This isn’t fair, but there is much that is going on in this pandemic that is not fair.

For example, the government is paying the pharmaceutical company, Moderna, $955 million to develop and test a vaccine. Then, after covering the research and testing costs, Trump will also give Moderna a patent monopoly that will allow it to charge prices that are more than 2000 percent above the cost of manufacturing and delivering the vaccine. The company is getting the patents in spite of the fact that the taxpayers paid for the research and took all the risk. Several top executives of the company have already made tens of millions on stock options as a result of the government contracts. There are similar stories at other pharmaceutical and medical equipment companies.

So, the fact that some workers may be getting less money at low-paying jobs than other workers are getting from unemployment insurance is unfair. But if this is someone’s biggest concern over unfairness, they are not paying attention to the world around them.

Others have also expressed concerns that these unemployment insurance supplements are making it hard for employers to find workers. There is zero evidence that this is a problem. There are millions of unemployed workers anxious to find jobs. If employers were having difficulty getting workers we should be seeing an increase in the number of job openings for unfilled positions. In fact, openings are very low. We should also be seeing rapidly rising wages as employers compete for available workers. The most recent data on compensation, that controls for changes in the mix of the workforce, found that compensation growth slowed sharply in the second quarter.

There will be workers who fall through the cracks and don’t get unemployment insurance. To try to help as many of these workers as possible, we should expand both the size and eligibility criteria for SNAP. We also must ensure that the moratoriums on evictions and moratoriums on foreclosures remain in place throughout the rest of the year.

Some of the other items that should be in the rescue package are funding for state and local governments. The Postal Service will also need substantial additional funding to prevent large-scale layoffs. State and local governments have already laid off 1.6 million workers, additional funding will allow them to hire back many of these workers and prevent the lay off of millions of additional workers. These governments also have an essential role to play in bringing the pandemic under control, doing things like testing and tracing, providing health care to coronavirus patients, and ensuring that workplaces and businesses are safe.

In the same vein, money is needed to allow schools to reopen safely. It is very important for both children and parents that the schools be open, but plans have to be put in place to allow for safe re-openings. Unfortunately, there was no national leadership or money for this effort over the summer and now most schools are not prepared to reopen. The next rescue package must have the money to allow for schools to make the necessary arrangements so that they can have safe re-openings as soon as possible.

We also need to try to lay the groundwork for a quick recovery when the pandemic is brought under control. The Paycheck Protection Program was useful for this purpose, keeping many businesses intact through a period in which they were operating well below capacity or shutdown completely. It would be good to extend this through the next three months.

We also need to ensure that our child care facilities are up and running. Lack of affordable child care has long been a problem, but it has become much worse in the pandemic as many child care centers have closed. We will need adequate child care arrangements if we want to ensure that parents are able to go back to work when the pandemic is brought under control.

One item that is completely unnecessary is the pandemic checks that gave every adult $1,200 in the first round and seem destined to be included in the last round as well.  While these checks give Donald Trump something to put his name on, they did little to keep people whole in the shutdown and are not likely to provide much of a demand boost when we reopen.

The vast majority of these checks were saved, with the saving rate out of disposable income soaring to 25.0 percent in the second quarter. (The saving rate was hovering near 8.0 percent before the pandemic.) The overwhelming majority of people who received these checks did not suffer any substantial fall in income as a result of the pandemic, they are either still getting full pay at their job or were retired. It is difficult to understand what the purpose of these checks is supposed to be.

To be clear, at a time when the economy is operating well below its capacity there is no particular harm in adding $1,200 to everyone’s bank account. This is not about causing an inflationary spiral, in large part because people are not spending the money. But if there are political limits on the size of the pandemic package, knocking out a $300 billion item that serves no real purpose, is a very good place to start.

[1] Trump also promoted “liberate” rallies, which often involved heavily armed protestors, in New York, Michigan, Pennsylvania, and Minnesota, among other states.

I have written before on the post-pandemic economy and how it should actually provide enormous opportunities, but it is worth clarifying a few points. First and most importantly, there is an important measurement issue with GDP that people will need to appreciate.

It is often said that GDP is not a good measure of well-being, we see this in a very big way in the post-pandemic period. It is likely that many of the changes in behavior forced by the pandemic, first and foremost telecommuting, will be enduring.

Most immediately, this will show up as a sharp drop in GDP. We will be consuming much less of the goods and services associated with commuting to and from work. This means that we will be driving less. That means we will be buying less gas and needing fewer cars, car parts, and car repair services. We’ll also need less auto insurance. In addition, there will be many fewer taxi or Uber trips, as well as trips on busses, trains, and other forms of public transportation.

There is also an economy built up around serving the people working in downtown office buildings. This includes the offices themselves and the people who service and clean them. There are also restaurants, gyms, and other businesses that serve the people who come into the city to work each day. And, there are all the items that people have to spend money on for office work, such as business clothes and shoes and dry-cleaning services.

We will see a huge reduction in demand in all these areas if much of the work being done on-line stays online. We will also see less business travel, which means fewer airplane trips, taxi rides, and stays in hotels.

This fall into demand will translate into a large loss of GDP, but it translates into very little by way of real loss in well-being. This doesn’t mean there will not be some loss. People may miss seeing work colleagues on a daily basis, or the opportunity to meet up with friends for lunch near the office. Some people may actually enjoy business travel. But the drop in GDP will dwarf whatever losses of these sorts people may feel, and in most cases, they will be offset by gains, such as not having to spend two hours a day commuting and having more time to spend with friends and family.

So, let’s say that we see GDP drop by 3.0 percent ($660 billion a year), how should we think about this? (This is a very crude guess, not a careful calculation) On its face, that would look like a very severe downturn. In the Great Recession, GDP only fell by 4.0 percent from peak to trough, so this looks like a very serious hit to the economy.

But that really misses the story. To take an analogous situation, let’s say for some reason, such as better diet, more exercise, or an act of God, everyone’s health got hugely better. Imagine that we could have the same outcomes in terms of life expectancy and quality of overall health using half as many health care services. This would mean half as many doctors’ visits, surgeries, MRIs, prescription drugs, and everything else in health care that costs money.

This reduction in health care consumption would mean a drop in GDP of more than 8.5 percent, yet everyone’s health would be just as good as it had been previously. In this story, no one in their right mind would be concerned about the loss of GDP, what we value is health, not the number of times we see a doctor or the amount of drugs we take. The decline in the resources needed to maintain our health is effectively an increase in productivity. We have seen a jump of 8.5 percent in the level of productivity, as we can get the same output as we had previously, with 8.5 percent fewer inputs.[1]  In other words, we are much richer as a result of this remarkable improvement in the public’s health.

We should think about my hypothesized savings of 3.0 percent of GDP on work-related expenses the same way. We had been expending a large amount of resources to maintain an office work system that is no longer needed. This is effectively a huge jump in productivity. By comparison, over the last 15 years, productivity growth has averaged just 1.3 percent annually.

This matters hugely in how we think about the post-pandemic economy. If we look at the lost GDP associated with fewer work-related expenses we would think that the economy is really suffering. However, if we think of this as big jump in productivity, then it effectively means that we have extra resources to address long-neglected social needs.

And, these resources should be readily visible in the form of all the workers who are no longer employed in restaurants, gyms, dry cleaners, or the making, servicing, or driving of cars. These are people who can be instead employed providing child care, senior care, doing energy audits of buildings, installing solar panels and energy-conserving appliances, or other tasks that address neglected needs.

As I have pointed out before, we need not think that every person who lost their job waiting tables will get a job installing solar panels or as a child care provider. That’s not the way the labor market works. People in fact switch jobs frequently. In a normal pre-pandemic economy more than 5.5 million people lose or leave their job every month. If we create jobs in installing solar panels, energy audits, and child care, people will leave other jobs to fill these newly created positions, which can leave openings for laid-off restaurant and hotel workers to again get jobs in hotels and restaurants, as well as other sectors.

The fact that we have a large number of idle workers, because of this effective jump in productivity, means that we should not be shy about large amounts of government spending to address these unmet needs, even though it will mean large budget deficits. For the near-term future, we will not have to worry about deficits creating too much demand in the economy and causing inflation. In the longer term, excessive demand and the resulting inflation can be a problem, which will require addressing the factors that redistribute so much money upward (e.g. patent and copyright monopolies, a corrupt corporate governance structure, and a bloated financial sector), but that will not be a problem as we recover from the recession.

If we do let obsessions with government deficits and debt curtail spending, then we can expect to see a long and harsh recession. To set up the analogy, suppose there was a 3.0 percent jump in productivity, but there was no increase in workers’ real wages. Assume all the money went to higher corporate profits. Since profits have little relationship to investment, there is no reason to expect any notable increase in investment. Let’s assume that consumption spending out of dividends and share buybacks is limited.

In this case, the economy can produce the same output with 3 percent fewer workers, meaning that 4.8 million people will be out of jobs. And, that situation can persist for a long period of time, since there is nothing inherent to the workings of the economy to bring us back to full employment.

That would really be a disaster story, especially if the correct figure for this implicit jump in productivity is something more like 5 percent, or even more. The key to preventing this sort of disaster is to understand that the reduced spending on work-related expenses is effectively an increase in productivity.

And, we also have to recognize that when we have a serious problem of unemployment, the failure to run large deficits is incredibly damaging to the country. Millions of workers will needlessly suffer, as will their families. And the failure is increased when it means not spending in areas that will have long-term benefits for the country, like child care and slowing global warming. It is tragic that deficit hawks are able to do so much harm to our children under the guise of saving our children.

[1] For those being technical, I am not using “productivity” precisely here. A reduction equal to 8.5 percent of GDP in the value of goods or services devoted to health care, does not necessarily mean that the amount of labor used in the health care sector has fallen by an amount equal to 8.5 percent of the economy’s annual labor usage. But I’m ignoring this point for now.  

I have written before on the post-pandemic economy and how it should actually provide enormous opportunities, but it is worth clarifying a few points. First and most importantly, there is an important measurement issue with GDP that people will need to appreciate.

It is often said that GDP is not a good measure of well-being, we see this in a very big way in the post-pandemic period. It is likely that many of the changes in behavior forced by the pandemic, first and foremost telecommuting, will be enduring.

Most immediately, this will show up as a sharp drop in GDP. We will be consuming much less of the goods and services associated with commuting to and from work. This means that we will be driving less. That means we will be buying less gas and needing fewer cars, car parts, and car repair services. We’ll also need less auto insurance. In addition, there will be many fewer taxi or Uber trips, as well as trips on busses, trains, and other forms of public transportation.

There is also an economy built up around serving the people working in downtown office buildings. This includes the offices themselves and the people who service and clean them. There are also restaurants, gyms, and other businesses that serve the people who come into the city to work each day. And, there are all the items that people have to spend money on for office work, such as business clothes and shoes and dry-cleaning services.

We will see a huge reduction in demand in all these areas if much of the work being done on-line stays online. We will also see less business travel, which means fewer airplane trips, taxi rides, and stays in hotels.

This fall into demand will translate into a large loss of GDP, but it translates into very little by way of real loss in well-being. This doesn’t mean there will not be some loss. People may miss seeing work colleagues on a daily basis, or the opportunity to meet up with friends for lunch near the office. Some people may actually enjoy business travel. But the drop in GDP will dwarf whatever losses of these sorts people may feel, and in most cases, they will be offset by gains, such as not having to spend two hours a day commuting and having more time to spend with friends and family.

So, let’s say that we see GDP drop by 3.0 percent ($660 billion a year), how should we think about this? (This is a very crude guess, not a careful calculation) On its face, that would look like a very severe downturn. In the Great Recession, GDP only fell by 4.0 percent from peak to trough, so this looks like a very serious hit to the economy.

But that really misses the story. To take an analogous situation, let’s say for some reason, such as better diet, more exercise, or an act of God, everyone’s health got hugely better. Imagine that we could have the same outcomes in terms of life expectancy and quality of overall health using half as many health care services. This would mean half as many doctors’ visits, surgeries, MRIs, prescription drugs, and everything else in health care that costs money.

This reduction in health care consumption would mean a drop in GDP of more than 8.5 percent, yet everyone’s health would be just as good as it had been previously. In this story, no one in their right mind would be concerned about the loss of GDP, what we value is health, not the number of times we see a doctor or the amount of drugs we take. The decline in the resources needed to maintain our health is effectively an increase in productivity. We have seen a jump of 8.5 percent in the level of productivity, as we can get the same output as we had previously, with 8.5 percent fewer inputs.[1]  In other words, we are much richer as a result of this remarkable improvement in the public’s health.

We should think about my hypothesized savings of 3.0 percent of GDP on work-related expenses the same way. We had been expending a large amount of resources to maintain an office work system that is no longer needed. This is effectively a huge jump in productivity. By comparison, over the last 15 years, productivity growth has averaged just 1.3 percent annually.

This matters hugely in how we think about the post-pandemic economy. If we look at the lost GDP associated with fewer work-related expenses we would think that the economy is really suffering. However, if we think of this as big jump in productivity, then it effectively means that we have extra resources to address long-neglected social needs.

And, these resources should be readily visible in the form of all the workers who are no longer employed in restaurants, gyms, dry cleaners, or the making, servicing, or driving of cars. These are people who can be instead employed providing child care, senior care, doing energy audits of buildings, installing solar panels and energy-conserving appliances, or other tasks that address neglected needs.

As I have pointed out before, we need not think that every person who lost their job waiting tables will get a job installing solar panels or as a child care provider. That’s not the way the labor market works. People in fact switch jobs frequently. In a normal pre-pandemic economy more than 5.5 million people lose or leave their job every month. If we create jobs in installing solar panels, energy audits, and child care, people will leave other jobs to fill these newly created positions, which can leave openings for laid-off restaurant and hotel workers to again get jobs in hotels and restaurants, as well as other sectors.

The fact that we have a large number of idle workers, because of this effective jump in productivity, means that we should not be shy about large amounts of government spending to address these unmet needs, even though it will mean large budget deficits. For the near-term future, we will not have to worry about deficits creating too much demand in the economy and causing inflation. In the longer term, excessive demand and the resulting inflation can be a problem, which will require addressing the factors that redistribute so much money upward (e.g. patent and copyright monopolies, a corrupt corporate governance structure, and a bloated financial sector), but that will not be a problem as we recover from the recession.

If we do let obsessions with government deficits and debt curtail spending, then we can expect to see a long and harsh recession. To set up the analogy, suppose there was a 3.0 percent jump in productivity, but there was no increase in workers’ real wages. Assume all the money went to higher corporate profits. Since profits have little relationship to investment, there is no reason to expect any notable increase in investment. Let’s assume that consumption spending out of dividends and share buybacks is limited.

In this case, the economy can produce the same output with 3 percent fewer workers, meaning that 4.8 million people will be out of jobs. And, that situation can persist for a long period of time, since there is nothing inherent to the workings of the economy to bring us back to full employment.

That would really be a disaster story, especially if the correct figure for this implicit jump in productivity is something more like 5 percent, or even more. The key to preventing this sort of disaster is to understand that the reduced spending on work-related expenses is effectively an increase in productivity.

And, we also have to recognize that when we have a serious problem of unemployment, the failure to run large deficits is incredibly damaging to the country. Millions of workers will needlessly suffer, as will their families. And the failure is increased when it means not spending in areas that will have long-term benefits for the country, like child care and slowing global warming. It is tragic that deficit hawks are able to do so much harm to our children under the guise of saving our children.

[1] For those being technical, I am not using “productivity” precisely here. A reduction equal to 8.5 percent of GDP in the value of goods or services devoted to health care, does not necessarily mean that the amount of labor used in the health care sector has fallen by an amount equal to 8.5 percent of the economy’s annual labor usage. But I’m ignoring this point for now.  

Donald Trump has repeatedly complained about the crime in major U.S. cities. In fact, he just now decided that it would be clever to send U.S. law enforcement officers to major cities in swing states (Milwaukee, Detroit, and Cleveland), ostensibly because of the high crime there.

While he has been obsessed with talking about crime in cities with large minority populations, Trump has apparently not been paying much attention to the number of people dying from the pandemic (1,485 yesterday). In fact, far more people have died from the coronavirus than from homicides.

As of July 29th, 153,840 people had died from the coronavirus. By contrast, in 2018, the last year for which I could find full data, 16,214 died by homicide. Here’s the picture.

Source: Statista.com and Worldometersinfo.com.

Donald Trump has repeatedly complained about the crime in major U.S. cities. In fact, he just now decided that it would be clever to send U.S. law enforcement officers to major cities in swing states (Milwaukee, Detroit, and Cleveland), ostensibly because of the high crime there.

While he has been obsessed with talking about crime in cities with large minority populations, Trump has apparently not been paying much attention to the number of people dying from the pandemic (1,485 yesterday). In fact, far more people have died from the coronavirus than from homicides.

As of July 29th, 153,840 people had died from the coronavirus. By contrast, in 2018, the last year for which I could find full data, 16,214 died by homicide. Here’s the picture.

Source: Statista.com and Worldometersinfo.com.

Moderna, a relatively new biotech company, has generally been seen as the leading U.S. contender to develop a coronavirus vaccine, although it trails several Chinese companies. Whether or not its vaccine pans out, it should certainly get an award for milking the government.

It was the big winner in initial contracts, getting $483 million back in April for developing a vaccine. While that may have seemed adequate to get it through both the development and testing process, the company decided to go back to the trough and have the government pay $472 million for the Phase 3 testing of the vaccine.

Together these payments virtually guarantee that the company will make a substantial profit on its development and testing of the vaccine.  Yet, Moderna will still get a patent monopoly on the vaccine, which will allow it to charge people in the United States and elsewhere in the world as much as it wants for the vaccine.

Some simple arithmetic shows that Moderna almost certainly has made a profit already. The company reported having 892 employees at the end of 2019. Let’s suppose that they paid each one $20,000 a month for the three months between signing the contract and when they had their first round of clinical tests. (It was actually more like two months.) That would come to $53,520,000. If we double this for equipment and other inputs, we get $107,040,000.

The Phase 3 trials are projected to involve 30,000 people. Recent research indicates that the average per-person cost in a Phase 3 trial for vaccines is $10,000. That would come to $300 million. Let’s raise this by 50 percent because Moderna is in a hurry, that gets us $450 million.

Since the government paid $483 million for the pre-clinical research and $472 million for the Phase 3 trials, it looks like Moderna is making a healthy profit on both. Yet, the government is still giving Moderna a patent monopoly, which means that it will arrest anyone who tries to produce the vaccine without Moderna’s permission.[1]

If we go back to Econ 101, the rationale for the government granting patent monopolies to drug companies or anyone else is to give them incentives for doing research and developing new products. The monopoly will allow them to both recoup research costs and compensate them for the risk that they won’t have a successful product.

The Moderna story won’t fit here. It was already compensated for its research costs by the government. Furthermore, it has zero risks. If its vaccine turns out to be ineffective or have harmful side effects, the company has already been paid for its work.

The patent monopoly means that we are paying Moderna twice. We first picked up the tab for the research and the testing and now we are giving the company a patent monopoly so that it can charge people around the world as much as it wants for the vaccine.

 

This should be a huge scandal, but I guess everyone knows that drug companies rip us off. Besides, economists and media types are too busy worrying about unemployed workers getting too much money.

[1] To save literalists some trouble, people don’t actually get arrested for patent violations. They get served with an injunction telling them to stop violating the patent. They would then get arrested for defying the injunction if they continued to produce the vaccine without Moderna’s permission.

Moderna, a relatively new biotech company, has generally been seen as the leading U.S. contender to develop a coronavirus vaccine, although it trails several Chinese companies. Whether or not its vaccine pans out, it should certainly get an award for milking the government.

It was the big winner in initial contracts, getting $483 million back in April for developing a vaccine. While that may have seemed adequate to get it through both the development and testing process, the company decided to go back to the trough and have the government pay $472 million for the Phase 3 testing of the vaccine.

Together these payments virtually guarantee that the company will make a substantial profit on its development and testing of the vaccine.  Yet, Moderna will still get a patent monopoly on the vaccine, which will allow it to charge people in the United States and elsewhere in the world as much as it wants for the vaccine.

Some simple arithmetic shows that Moderna almost certainly has made a profit already. The company reported having 892 employees at the end of 2019. Let’s suppose that they paid each one $20,000 a month for the three months between signing the contract and when they had their first round of clinical tests. (It was actually more like two months.) That would come to $53,520,000. If we double this for equipment and other inputs, we get $107,040,000.

The Phase 3 trials are projected to involve 30,000 people. Recent research indicates that the average per-person cost in a Phase 3 trial for vaccines is $10,000. That would come to $300 million. Let’s raise this by 50 percent because Moderna is in a hurry, that gets us $450 million.

Since the government paid $483 million for the pre-clinical research and $472 million for the Phase 3 trials, it looks like Moderna is making a healthy profit on both. Yet, the government is still giving Moderna a patent monopoly, which means that it will arrest anyone who tries to produce the vaccine without Moderna’s permission.[1]

If we go back to Econ 101, the rationale for the government granting patent monopolies to drug companies or anyone else is to give them incentives for doing research and developing new products. The monopoly will allow them to both recoup research costs and compensate them for the risk that they won’t have a successful product.

The Moderna story won’t fit here. It was already compensated for its research costs by the government. Furthermore, it has zero risks. If its vaccine turns out to be ineffective or have harmful side effects, the company has already been paid for its work.

The patent monopoly means that we are paying Moderna twice. We first picked up the tab for the research and the testing and now we are giving the company a patent monopoly so that it can charge people around the world as much as it wants for the vaccine.

 

This should be a huge scandal, but I guess everyone knows that drug companies rip us off. Besides, economists and media types are too busy worrying about unemployed workers getting too much money.

[1] To save literalists some trouble, people don’t actually get arrested for patent violations. They get served with an injunction telling them to stop violating the patent. They would then get arrested for defying the injunction if they continued to produce the vaccine without Moderna’s permission.

The NYT had an interesting piece on how top executives and corporate board members at drug companies working on coronavirus vaccines and treatments are cashing out options and selling stock just after big announcements of contracts or progress in research. While there are no explicit allegations, the implication is that many of these sales are based on inside information.

It is widely asserted in policy circles, especially by those on the left, that corporations are being run to maximize shareholder value. I have argued that corporations are actually being run to maximize the pay of top executives and pointed to the historically low returns to shareholders in the last two decades. If insider trading is in fact a major phenomenon, it is hard to argue that companies are being run to maximize returns to shareholders, since insider trading effectively means top executives are stealing from the companies they run. 

The NYT had an interesting piece on how top executives and corporate board members at drug companies working on coronavirus vaccines and treatments are cashing out options and selling stock just after big announcements of contracts or progress in research. While there are no explicit allegations, the implication is that many of these sales are based on inside information.

It is widely asserted in policy circles, especially by those on the left, that corporations are being run to maximize shareholder value. I have argued that corporations are actually being run to maximize the pay of top executives and pointed to the historically low returns to shareholders in the last two decades. If insider trading is in fact a major phenomenon, it is hard to argue that companies are being run to maximize returns to shareholders, since insider trading effectively means top executives are stealing from the companies they run. 

I just finished reading Carter’s book and I will agree with the general assessment. It is an outstanding book that brings together much useful material on the life and influence of Keynes.

While I am of course familiar with Keynes’ history and the history of Keynesianism, there is much that I learned here. In particular, I am impressed with the importance he gives Joan Robinson in spreading the ideas of Keynes, especially to followers from the United States.

When I first start taking economics, I hugely appreciated Robinson’s writing. She both did very important analytic work, especially her pathbreaking analysis of imperfect competition, but was also tremendously witty in her popular writing. I will always remember her great comment on unemployment (paraphrasing): “The only thing worse than being exploited by capital is not being exploited by capital.”

Anyhow, I am happy to see her given the starring role in the spread of Keynesian thought, especially given that, as a woman, she had a huge amount to overcome in a field that was, and is, tremendously sexist.  

Carter also provides a fascinating account of the friendship/rivalry between John Kenneth Galbraith and Paul Samuelson. While these luminaries spent decades together in Cambridge, I was not aware of their personal history.

If I have any quibbles with the book, it is probably with its run-through of the last fifty years and the decline of Keynes’ radical vision in economics. There are certainly some items I would give a bit more attention, such as the decline of the labor movement, but covering fifty years of U.S. history in 100 pages is a major undertaking.

There are two items that do need some correction. First, from a labor market perspective, the recession following the collapse of the 1990s stock bubble was not mild. While the economy quickly rebounded in 2002 from a recession that did not even have two consecutive quarters of negative growth (the standard definition for a recession), the economy continued to shed jobs all the way through 2002 and most of the way through 2003. It did not recover the jobs lost in the downturn until February of 2005, four full years after the pre-recession peak. At the time, this was the longest period without job growth since the Great Depression. In other words, bursting bubbles have real consequence, as John Kenneth Galbraith had warned.

The other item is considerably more important. Carter buys the often-told story that bailing out the banks in the Great Recession saved us from a Second Great Depression. No biographer of Keynes should ever say anything like this.

First and foremost, Keynes taught us how to get out of the first Great Depression. The secret is spending money. If the government had gone on a huge spending spree in 1930, in response to the initial crash, instead of waiting to go full Keynesian in response to World War II, we never would have had the first Great Depression.

If we had let the market work its magic on Citigroup, Goldman, and the rest, there is no doubt that the initial downturn would have been worse. But if we responded with a massive public investment program in clean energy, health care, child care, and other areas, we quickly would have recovered. And, we would have eliminated a massive source of economic waste in the bloated financial sector. It is also worth noting that the bloated financial sector is a major generator of inequality. It is where many of the seven, eight, and even nine-figure paychecks can be found.

We should be clear; the bailout was about saving the very rich and their institutions. We could have rescued the economy just fine without them.

This gets me to the question that Carter poses at the end as to why the radicalism at the core of Keynes’s vision withered away after he died. Carter partially endorses Joan Robinson’s answer that Keynes was too naïve in believing good ideas could triumph on their own.

While this is undoubtedly in part true, I would add a bit to this in saying that Keynes and his followers were not quite radical enough in their ideas. Specifically, they were too willing to accept the idea of a natural market, that is somehow pre-existing, but may require the intervention of the government to achieve both full employment and important public goals. This acceptance lends way too much legitimacy to the critiques posed by Hayek, Friedman, and other neo-liberal opponents of Keynesianism.

The point is that the government structures the market in very fundamental ways. It can and does structure it differently through time in ways that have an enormous impact on the distribution of income.

To take my favorite example, patent and copyrights are government-granted monopolies that redistribute an enormous amount of income upward. I put the figure in the neighborhood of $1 trillion a year, or roughly half of all corporate profits. The United States would still be a capitalist economy without these government-granted monopolies, although we would have a far more equal distribution of income.  As I like to say, in the world without patent and copyright monopolies, Bill Gates would still be working for a living.[1]

To take another example, the government sets the rules of corporate governance. In the United States, we have a structure of governance that makes it extremely difficult for shareholders to rein in the pay of CEOs and other top management. This is another source of massive inequality as the ratio of CEO pay to the pay of ordinary workers has exploded from just around 20 to 1 five decades ago, to around 200 to 1 today.

Incredibly, many on the left seem to think that the soaring pay of top executives is about maximizing shareholder value, even as returns to shareholders have been relatively weak in the last two decades. Even stories about insider trading, which obviously benefits top management at the expense of the corporation, do not shake this view. Anyhow, a capitalist system that made it easier for shareholders to rein in CEO pay is still very much a capitalist system.

I could cite other ways in which we have shaped the market to redistribute income upward (this is the main theme of Rigged [it’s free]), but the point should be clear. The neo-liberals are not arguing for the market as an alternative to government intervention, they are arguing for a particular structure of the market that ensures that a grossly disproportionate share of income goes to those on top.

The left gives away a huge amount in the ideological battle when it allows neo-liberals to be champions of the market, as opposed to being recognized for the champions of policies that give money to the rich. The market has real uses, and there is an inherent appeal to much of the public for the idea of leaving things to the market, rather than government bureaucrats. By contrast, saying that we want to structure the market to give as much money to the rich as possible has much less appeal.

The neo-liberals are about the latter, and the left has given them way more legitimacy than they deserve by implying that they actually have an abstract commitment to the market as a matter of principle. Exposing this deception may not be sufficient to turn the tide and bring back Keynes’s radical vision, but the failure to expose it is serious political and economic malpractice.

[1] Carter does mention this issue briefly in reference to trade deals and the WTO but does not pursue the larger implications.

I just finished reading Carter’s book and I will agree with the general assessment. It is an outstanding book that brings together much useful material on the life and influence of Keynes.

While I am of course familiar with Keynes’ history and the history of Keynesianism, there is much that I learned here. In particular, I am impressed with the importance he gives Joan Robinson in spreading the ideas of Keynes, especially to followers from the United States.

When I first start taking economics, I hugely appreciated Robinson’s writing. She both did very important analytic work, especially her pathbreaking analysis of imperfect competition, but was also tremendously witty in her popular writing. I will always remember her great comment on unemployment (paraphrasing): “The only thing worse than being exploited by capital is not being exploited by capital.”

Anyhow, I am happy to see her given the starring role in the spread of Keynesian thought, especially given that, as a woman, she had a huge amount to overcome in a field that was, and is, tremendously sexist.  

Carter also provides a fascinating account of the friendship/rivalry between John Kenneth Galbraith and Paul Samuelson. While these luminaries spent decades together in Cambridge, I was not aware of their personal history.

If I have any quibbles with the book, it is probably with its run-through of the last fifty years and the decline of Keynes’ radical vision in economics. There are certainly some items I would give a bit more attention, such as the decline of the labor movement, but covering fifty years of U.S. history in 100 pages is a major undertaking.

There are two items that do need some correction. First, from a labor market perspective, the recession following the collapse of the 1990s stock bubble was not mild. While the economy quickly rebounded in 2002 from a recession that did not even have two consecutive quarters of negative growth (the standard definition for a recession), the economy continued to shed jobs all the way through 2002 and most of the way through 2003. It did not recover the jobs lost in the downturn until February of 2005, four full years after the pre-recession peak. At the time, this was the longest period without job growth since the Great Depression. In other words, bursting bubbles have real consequence, as John Kenneth Galbraith had warned.

The other item is considerably more important. Carter buys the often-told story that bailing out the banks in the Great Recession saved us from a Second Great Depression. No biographer of Keynes should ever say anything like this.

First and foremost, Keynes taught us how to get out of the first Great Depression. The secret is spending money. If the government had gone on a huge spending spree in 1930, in response to the initial crash, instead of waiting to go full Keynesian in response to World War II, we never would have had the first Great Depression.

If we had let the market work its magic on Citigroup, Goldman, and the rest, there is no doubt that the initial downturn would have been worse. But if we responded with a massive public investment program in clean energy, health care, child care, and other areas, we quickly would have recovered. And, we would have eliminated a massive source of economic waste in the bloated financial sector. It is also worth noting that the bloated financial sector is a major generator of inequality. It is where many of the seven, eight, and even nine-figure paychecks can be found.

We should be clear; the bailout was about saving the very rich and their institutions. We could have rescued the economy just fine without them.

This gets me to the question that Carter poses at the end as to why the radicalism at the core of Keynes’s vision withered away after he died. Carter partially endorses Joan Robinson’s answer that Keynes was too naïve in believing good ideas could triumph on their own.

While this is undoubtedly in part true, I would add a bit to this in saying that Keynes and his followers were not quite radical enough in their ideas. Specifically, they were too willing to accept the idea of a natural market, that is somehow pre-existing, but may require the intervention of the government to achieve both full employment and important public goals. This acceptance lends way too much legitimacy to the critiques posed by Hayek, Friedman, and other neo-liberal opponents of Keynesianism.

The point is that the government structures the market in very fundamental ways. It can and does structure it differently through time in ways that have an enormous impact on the distribution of income.

To take my favorite example, patent and copyrights are government-granted monopolies that redistribute an enormous amount of income upward. I put the figure in the neighborhood of $1 trillion a year, or roughly half of all corporate profits. The United States would still be a capitalist economy without these government-granted monopolies, although we would have a far more equal distribution of income.  As I like to say, in the world without patent and copyright monopolies, Bill Gates would still be working for a living.[1]

To take another example, the government sets the rules of corporate governance. In the United States, we have a structure of governance that makes it extremely difficult for shareholders to rein in the pay of CEOs and other top management. This is another source of massive inequality as the ratio of CEO pay to the pay of ordinary workers has exploded from just around 20 to 1 five decades ago, to around 200 to 1 today.

Incredibly, many on the left seem to think that the soaring pay of top executives is about maximizing shareholder value, even as returns to shareholders have been relatively weak in the last two decades. Even stories about insider trading, which obviously benefits top management at the expense of the corporation, do not shake this view. Anyhow, a capitalist system that made it easier for shareholders to rein in CEO pay is still very much a capitalist system.

I could cite other ways in which we have shaped the market to redistribute income upward (this is the main theme of Rigged [it’s free]), but the point should be clear. The neo-liberals are not arguing for the market as an alternative to government intervention, they are arguing for a particular structure of the market that ensures that a grossly disproportionate share of income goes to those on top.

The left gives away a huge amount in the ideological battle when it allows neo-liberals to be champions of the market, as opposed to being recognized for the champions of policies that give money to the rich. The market has real uses, and there is an inherent appeal to much of the public for the idea of leaving things to the market, rather than government bureaucrats. By contrast, saying that we want to structure the market to give as much money to the rich as possible has much less appeal.

The neo-liberals are about the latter, and the left has given them way more legitimacy than they deserve by implying that they actually have an abstract commitment to the market as a matter of principle. Exposing this deception may not be sufficient to turn the tide and bring back Keynes’s radical vision, but the failure to expose it is serious political and economic malpractice.

[1] Carter does mention this issue briefly in reference to trade deals and the WTO but does not pursue the larger implications.

This is worth keeping in mind when reading a New York Times article discussing Republican plans to cut the weekly $600 supplement to unemployment insurance benefits. The piece cites Mulligan as a conservative economist who argues that this supplement is discouraging people from working and therefore keeping unemployment high. In this context, it is worth remembering that Mulligan made the same argument about the high unemployment in the Great Recession.

Note: Mulligan tweeted this note, which gives his estimates of the employment impact of food stamps, unemployment insurance, and other benefit programs put in place or enhanced under Obama.

This is worth keeping in mind when reading a New York Times article discussing Republican plans to cut the weekly $600 supplement to unemployment insurance benefits. The piece cites Mulligan as a conservative economist who argues that this supplement is discouraging people from working and therefore keeping unemployment high. In this context, it is worth remembering that Mulligan made the same argument about the high unemployment in the Great Recession.

Note: Mulligan tweeted this note, which gives his estimates of the employment impact of food stamps, unemployment insurance, and other benefit programs put in place or enhanced under Obama.

The push for a $15 an hour minimum wage has developed considerable political momentum over the last decade. It is a very real possibility that we will see legislation imposing a national minimum wage of $15 an hour by 2024 if Joe Biden wins the election this fall.

That would be a great thing, it would mean a large increase in pay for tens of millions of workers, but it is still very modest compared to what the minimum wage would be if it had kept pace with productivity growth. As is often mentioned, the purchasing power of the minimum wage hit its peak in 1968, at roughly $12 an hour in today’s dollars. However, productivity (output per hour work) has more than doubled over the last 52 years.[1]

This means that if the minimum wage had kept pace with productivity growth it would be over $24 an hour today. Furthermore, if we go out four years to 2024, and we see normal inflation and productivity growth, a productivity adjusted minimum wage in that year would be almost $27 an hour, nearly twice the $15 an hour target.

The idea that the minimum wage would keep pace with productivity should not seem far-fetched. It actually did follow productivity growth fairly closely in the first three decades in which we had a national minimum wage, from 1938 to 1968. This did not lead to soaring unemployment. In 1968 the unemployment rate averaged 3.5 percent. So, the idea that the minimum wage track productivity growth should not be far-fetched.

Nonetheless, I would not advocate a $27 an hour minimum wage for 2024 or even phased in over a longer period of time. The reason is that we have restructured the economy in ways that it likely could not support a $24 an hour minimum wage in 2020. Raising the minimum wage to this level would almost certainly result in spiraling inflation.

We would then have to take steps to counter this inflation, such as interest rate hikes by the Fed or tax increases by the federal government. The result would be higher unemployment, and quite possibly a situation that left workers in the middle and bottom worse off than if we left the minimum wage at its current level. The key to allowing workers at the middle and bottom to get their fair share of the economic pay is to reverse the policies that redistributed so much income upward.

 

Reversing Upward Redistribution

I realize I must sound like a broken record on this stuff to regular readers, but the point is important. If workers at the middle and bottom are going to have more, people at the top have to get less. This is straightforward. If we could tell a story whereby the high pay for those at the top leads to more rapid economic growth so that their higher pay in effect paid for itself, then cutting pay for those at the top would not be freeing up resources for the middle and bottom. But this is not the case. By every measure, productivity growth has been slower in the period of inequality (from 1979 onward) then it was in the period of equally distributed growth, from 1947 to 1973. While it may not be the case that growing inequality is the reason for slower growth, it takes quite an imagination to claim that it led to faster growth.

It is also worth remembering that the gains were at the top end of the wage distribution, not corporate profits. The before-tax profit share of net income was 23.4 percent in 1968. In 2018 (the last year for which full data are available) it was 24.7 percent.[2] With the data to date showing a drop in the capital share of roughly 0.7 percentage points from 2018 to 2019, the final figure on profit share for 2019 is likely to be a little different from the figure for 1968. This means that the redistribution from workers at the middle and bottom did not go to any significant extent to corporate profits.

The big winners were instead high-end wage earners, people like CEOs and other top-level corporate executives, hedge fund managers and other Wall Street types, higher-paid tech workers, and highly paid professionals, like doctors and dentists. If we want to make it possible for the minimum wage to rise back to its productivity-adjusted 1968 level, then we have to take back the big pay going to those at the top.

I know I harp endlessly on this issue, but reversing the big paychecks for those at the top (this is the whole point of Rigged [it’s free]) is essential for improving living standards for those at the middle and the bottom. We can envision various ways to make the economy more productive, and some may actually work, but as a practical matter, if we want to see large gains in living standards for those at the middle and bottom, it will have to come at the expense of those at the top.

There are many on the left who would agree with this view, but then say that they would just tax away the high and very high incomes earned at the top. That is an alternative route, but I would argue there are both serious political and practical obstacles to reducing high-end consumption through this channel.

On the political side, in addition to facing the full-fledged opposition of the rich, efforts at highly progressive taxation often also face opposition by many people who would not be affected by high top-end rates. Part of this is just confusion — almost no one understand the concept of a marginal tax, which is why many middle-income families are terrified their estate may fall one dollar over the taxation cutoff – but part of it stems from concepts of fairness. Some people consider it unfair to tax someone’s income at 80 or 90 percent, even if they do understand that this only applies to income over some high threshold.

But even if we overcome the political obstacles, there are still practical obstacles. Rich people will not sit there and politely hand over whatever amount we tax them under the law. They will use every tool at their disposal, both legal and often illegal, to avoid paying the legislated tax rate. Remember, if we have a 90 percent marginal tax rate, we are effectively paying rich people 90 cents to hide a dollar of income, or to be closer to the mark, we are paying them 9 million dollars to hide 10 million dollars of income. 

I know every progressive committed to high marginal tax rates is convinced that under a progressive regime we will have super-sleuth tax auditors at the I.R.S. who will crack down on avoidance/evasion schemes, but we have never seen the required levels of diligence here or anywhere else. My expectation is that if we have very high levels of progressive taxation is that we won’t see the money, but we will see an explosive growth of the tax shelter industry, another major source of inequality. (Hiding rich people’s money pays very well.)

This is why I want to change rules of corporate governance so CEOs cannot rip off the companies for which they work. (Their $20 million paychecks are not explained by returns to shareholders, which have been historically low for the last two decades.) If CEOs got $2-$3 million, and we saw corresponding pay cuts for others at the top of the pecking order, there would be much more money for everyone else.

In the same vein, the government can make patent and copyright monopolies shorter and weaker, and in some cases, like prescription drugs and medical equipment, not rely on them at all for financing research and development. This would reduce the money going to the top by several hundred billion dollars annually (2-4 percent of GDP).

We should also crackdown on the massive waste, and associated high salaries, in the financial sector. The place to start here is a financial transactions tax and cracking down on the abuses by private equity companies and hedge funds. And, we should subject our most highly paid professionals, in particular doctors and dentists, to the same sort of international competition that autoworkers and textile workers now face.

If we made these sorts of changes, we could realistically talk about a $24 an hour minimum wage in 2020. With an economy that was not structured so as to redistribute so much income upward, there is no reason that the minimum wage could not track economywide productivity.

And think of what a difference it would make if the lowest-paid worker, say a custodian or dishwasher in a restaurant earned $24 an hour, or $48,000 a year for a full-time full-year job. That comes to $96,000 a year for a two-earner couple.

If this is the floor, presumably someone working for 15 to 20 years can expect to earn at least 15 to 20 percent more, which would be putting them over $55,000 a year for a full-time job. In this world, we could really imagine that everyone had a comfortable and secure standard of living, especially if we had national health insurance (which would likely mean higher taxes on our low-wage earners) and free or low-cost child care.

The idea of a $24 an hour minimum wage is also worth thinking about in the context of racial inequality, where we have disproportionately relegated Blacks to the lowest paying jobs. It is not acceptable that Blacks are so much more likely than whites to work as custodians or housekeepers, and so much less likely to work as doctors or lawyers, but that is the reality we have today.

While still far from fair, the situation would be quite different if custodians and housekeepers earned $24 an hour, and doctors and lawyers earned on average something close to half of their current pay. And in that situation, the children of custodians and housekeepers would likely have much better prospects of becoming doctors and lawyers than is the case today.

But to allow for more pay at the bottom, we have to do something about pay at the top. And that means changing the way we structure the market. And, if we aren’t paying attention to restructuring the market, we aren’t serious about addressing inequality, including racial inequality.  

[1] This calculation uses a very conservative measure of productivity that adjusts for the difference in gross and net output and the difference between inflation as measured by the Consumer Price Index and the GDP deflator. These issues are discussed here and here.

[2] These data are taken from National Income and Product Accounts, Table 1.13, Line 7 plus Line 8, divided by Line 5, plus Line 6, plus Line 7, plus Line 8.

The push for a $15 an hour minimum wage has developed considerable political momentum over the last decade. It is a very real possibility that we will see legislation imposing a national minimum wage of $15 an hour by 2024 if Joe Biden wins the election this fall.

That would be a great thing, it would mean a large increase in pay for tens of millions of workers, but it is still very modest compared to what the minimum wage would be if it had kept pace with productivity growth. As is often mentioned, the purchasing power of the minimum wage hit its peak in 1968, at roughly $12 an hour in today’s dollars. However, productivity (output per hour work) has more than doubled over the last 52 years.[1]

This means that if the minimum wage had kept pace with productivity growth it would be over $24 an hour today. Furthermore, if we go out four years to 2024, and we see normal inflation and productivity growth, a productivity adjusted minimum wage in that year would be almost $27 an hour, nearly twice the $15 an hour target.

The idea that the minimum wage would keep pace with productivity should not seem far-fetched. It actually did follow productivity growth fairly closely in the first three decades in which we had a national minimum wage, from 1938 to 1968. This did not lead to soaring unemployment. In 1968 the unemployment rate averaged 3.5 percent. So, the idea that the minimum wage track productivity growth should not be far-fetched.

Nonetheless, I would not advocate a $27 an hour minimum wage for 2024 or even phased in over a longer period of time. The reason is that we have restructured the economy in ways that it likely could not support a $24 an hour minimum wage in 2020. Raising the minimum wage to this level would almost certainly result in spiraling inflation.

We would then have to take steps to counter this inflation, such as interest rate hikes by the Fed or tax increases by the federal government. The result would be higher unemployment, and quite possibly a situation that left workers in the middle and bottom worse off than if we left the minimum wage at its current level. The key to allowing workers at the middle and bottom to get their fair share of the economic pay is to reverse the policies that redistributed so much income upward.

 

Reversing Upward Redistribution

I realize I must sound like a broken record on this stuff to regular readers, but the point is important. If workers at the middle and bottom are going to have more, people at the top have to get less. This is straightforward. If we could tell a story whereby the high pay for those at the top leads to more rapid economic growth so that their higher pay in effect paid for itself, then cutting pay for those at the top would not be freeing up resources for the middle and bottom. But this is not the case. By every measure, productivity growth has been slower in the period of inequality (from 1979 onward) then it was in the period of equally distributed growth, from 1947 to 1973. While it may not be the case that growing inequality is the reason for slower growth, it takes quite an imagination to claim that it led to faster growth.

It is also worth remembering that the gains were at the top end of the wage distribution, not corporate profits. The before-tax profit share of net income was 23.4 percent in 1968. In 2018 (the last year for which full data are available) it was 24.7 percent.[2] With the data to date showing a drop in the capital share of roughly 0.7 percentage points from 2018 to 2019, the final figure on profit share for 2019 is likely to be a little different from the figure for 1968. This means that the redistribution from workers at the middle and bottom did not go to any significant extent to corporate profits.

The big winners were instead high-end wage earners, people like CEOs and other top-level corporate executives, hedge fund managers and other Wall Street types, higher-paid tech workers, and highly paid professionals, like doctors and dentists. If we want to make it possible for the minimum wage to rise back to its productivity-adjusted 1968 level, then we have to take back the big pay going to those at the top.

I know I harp endlessly on this issue, but reversing the big paychecks for those at the top (this is the whole point of Rigged [it’s free]) is essential for improving living standards for those at the middle and the bottom. We can envision various ways to make the economy more productive, and some may actually work, but as a practical matter, if we want to see large gains in living standards for those at the middle and bottom, it will have to come at the expense of those at the top.

There are many on the left who would agree with this view, but then say that they would just tax away the high and very high incomes earned at the top. That is an alternative route, but I would argue there are both serious political and practical obstacles to reducing high-end consumption through this channel.

On the political side, in addition to facing the full-fledged opposition of the rich, efforts at highly progressive taxation often also face opposition by many people who would not be affected by high top-end rates. Part of this is just confusion — almost no one understand the concept of a marginal tax, which is why many middle-income families are terrified their estate may fall one dollar over the taxation cutoff – but part of it stems from concepts of fairness. Some people consider it unfair to tax someone’s income at 80 or 90 percent, even if they do understand that this only applies to income over some high threshold.

But even if we overcome the political obstacles, there are still practical obstacles. Rich people will not sit there and politely hand over whatever amount we tax them under the law. They will use every tool at their disposal, both legal and often illegal, to avoid paying the legislated tax rate. Remember, if we have a 90 percent marginal tax rate, we are effectively paying rich people 90 cents to hide a dollar of income, or to be closer to the mark, we are paying them 9 million dollars to hide 10 million dollars of income. 

I know every progressive committed to high marginal tax rates is convinced that under a progressive regime we will have super-sleuth tax auditors at the I.R.S. who will crack down on avoidance/evasion schemes, but we have never seen the required levels of diligence here or anywhere else. My expectation is that if we have very high levels of progressive taxation is that we won’t see the money, but we will see an explosive growth of the tax shelter industry, another major source of inequality. (Hiding rich people’s money pays very well.)

This is why I want to change rules of corporate governance so CEOs cannot rip off the companies for which they work. (Their $20 million paychecks are not explained by returns to shareholders, which have been historically low for the last two decades.) If CEOs got $2-$3 million, and we saw corresponding pay cuts for others at the top of the pecking order, there would be much more money for everyone else.

In the same vein, the government can make patent and copyright monopolies shorter and weaker, and in some cases, like prescription drugs and medical equipment, not rely on them at all for financing research and development. This would reduce the money going to the top by several hundred billion dollars annually (2-4 percent of GDP).

We should also crackdown on the massive waste, and associated high salaries, in the financial sector. The place to start here is a financial transactions tax and cracking down on the abuses by private equity companies and hedge funds. And, we should subject our most highly paid professionals, in particular doctors and dentists, to the same sort of international competition that autoworkers and textile workers now face.

If we made these sorts of changes, we could realistically talk about a $24 an hour minimum wage in 2020. With an economy that was not structured so as to redistribute so much income upward, there is no reason that the minimum wage could not track economywide productivity.

And think of what a difference it would make if the lowest-paid worker, say a custodian or dishwasher in a restaurant earned $24 an hour, or $48,000 a year for a full-time full-year job. That comes to $96,000 a year for a two-earner couple.

If this is the floor, presumably someone working for 15 to 20 years can expect to earn at least 15 to 20 percent more, which would be putting them over $55,000 a year for a full-time job. In this world, we could really imagine that everyone had a comfortable and secure standard of living, especially if we had national health insurance (which would likely mean higher taxes on our low-wage earners) and free or low-cost child care.

The idea of a $24 an hour minimum wage is also worth thinking about in the context of racial inequality, where we have disproportionately relegated Blacks to the lowest paying jobs. It is not acceptable that Blacks are so much more likely than whites to work as custodians or housekeepers, and so much less likely to work as doctors or lawyers, but that is the reality we have today.

While still far from fair, the situation would be quite different if custodians and housekeepers earned $24 an hour, and doctors and lawyers earned on average something close to half of their current pay. And in that situation, the children of custodians and housekeepers would likely have much better prospects of becoming doctors and lawyers than is the case today.

But to allow for more pay at the bottom, we have to do something about pay at the top. And that means changing the way we structure the market. And, if we aren’t paying attention to restructuring the market, we aren’t serious about addressing inequality, including racial inequality.  

[1] This calculation uses a very conservative measure of productivity that adjusts for the difference in gross and net output and the difference between inflation as measured by the Consumer Price Index and the GDP deflator. These issues are discussed here and here.

[2] These data are taken from National Income and Product Accounts, Table 1.13, Line 7 plus Line 8, divided by Line 5, plus Line 6, plus Line 7, plus Line 8.

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