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.

I was on the road yesterday (literally). This meant I had to listen on the radio to many people who should know better say silly things about the big August jump in labor force participation rates (LFPR), and especially LFPR for prime-age workers (ages 25 to 54). In case you missed it, the overall LFPR rose by 0.3 percentage points, while the LFPR for prime-age workers rose by 0.4 percentage points.

To be clear, this is definitely good to see. Many of us were struck by the fact that LFPR for prime-age workers fell through the spring and into the summer even as the establishment survey showed that the economy was creating over 400,000 jobs a month. This didn’t seem consistent. There was some fall in the unemployment rate, but employment in the household survey actually fell by 168,000 between March and July. This was a period in which the establishment survey showed the economy creating almost 1.6 million jobs.

While this was bothersome. Folks who follow the data closely know that the household survey often does weird things. On a month-to-month basis, its movements are largely noise, and even over a period of several months it can often follow a path that is inconsistent with what we know about the economy.

Here’s the picture on changes in the seasonally adjusted prime-age LFPR from 2012 and 2019. (I’m using this period because it is one of relatively stable growth, without the big falloffs from the Great Recession or the Pandemic.)

Does anyone know of anything really bad that happened in June and July of 2015 that caused the LFPR for prime-age workers to drop by 0.6 percentage points and then another 0.1 percentage point? The economy grew at a 2.3 percent rate in the second quarter of that year and 1.3 percent in the third quarter. The establishment survey showed a gain of 174,000 jobs in June and 302,000 jobs in July.

Thankfully, whatever bad thing caused this plunge in LFPRs, it was reversed in the fall and winter. By February 2016, the prime-age LFPR was back to its May level of 81.2 percent.

This is not the only time we got bad news from the household survey that was later reversed. From March 2019 to July 2019, the prime-age LFPR fell by 0.9 percentage points. The economy grew at a 3.2 percent rate in the second quarter and 2.8 percent rate in third quarter. The establishment survey showed a gain of almost 600,000 jobs for this four-month period.

Fortunately, this bad news was quickly reversed and, by September, the prime-age LFPR was at 82.8 percent. This is 0.2 percentage points above its March level.

So, do we think that prime-age workers suddenly lost interest in working in the summer of 2015 and again in the spring-summer of 2019? And, then they changed their minds and decided to go back into the workforce in the next few months?

If there was a major change in policy on something like childcare or schools, perhaps these fluctuations would make sense. But if such changes happened, I must have missed them.

The long and short is that the movements in the household survey are erratic. This is true for a single month and can also be true over a several month period, as happened in the spring and summer of 2019.

Like everyone else, I use the data we have. When we see a change for the positive, as we did in August, that is good news. But, we also have to recognize that it may very well be noise.

For my part, I don’t believe that the fall in prime-age LFPR reported from March to July was real, so I don’t think there was actually a big jump in August. This is a case where the household survey is now looking more like the establishment survey and other economic data. (A third independent data source is payroll tax collections, which also looks like the establishment survey.)

I’m always happy to see when our data sources seem to line up as they should, but I’m not going to break out the champagne over the correction of a statistical anomaly.

I was on the road yesterday (literally). This meant I had to listen on the radio to many people who should know better say silly things about the big August jump in labor force participation rates (LFPR), and especially LFPR for prime-age workers (ages 25 to 54). In case you missed it, the overall LFPR rose by 0.3 percentage points, while the LFPR for prime-age workers rose by 0.4 percentage points.

To be clear, this is definitely good to see. Many of us were struck by the fact that LFPR for prime-age workers fell through the spring and into the summer even as the establishment survey showed that the economy was creating over 400,000 jobs a month. This didn’t seem consistent. There was some fall in the unemployment rate, but employment in the household survey actually fell by 168,000 between March and July. This was a period in which the establishment survey showed the economy creating almost 1.6 million jobs.

While this was bothersome. Folks who follow the data closely know that the household survey often does weird things. On a month-to-month basis, its movements are largely noise, and even over a period of several months it can often follow a path that is inconsistent with what we know about the economy.

Here’s the picture on changes in the seasonally adjusted prime-age LFPR from 2012 and 2019. (I’m using this period because it is one of relatively stable growth, without the big falloffs from the Great Recession or the Pandemic.)

Does anyone know of anything really bad that happened in June and July of 2015 that caused the LFPR for prime-age workers to drop by 0.6 percentage points and then another 0.1 percentage point? The economy grew at a 2.3 percent rate in the second quarter of that year and 1.3 percent in the third quarter. The establishment survey showed a gain of 174,000 jobs in June and 302,000 jobs in July.

Thankfully, whatever bad thing caused this plunge in LFPRs, it was reversed in the fall and winter. By February 2016, the prime-age LFPR was back to its May level of 81.2 percent.

This is not the only time we got bad news from the household survey that was later reversed. From March 2019 to July 2019, the prime-age LFPR fell by 0.9 percentage points. The economy grew at a 3.2 percent rate in the second quarter and 2.8 percent rate in third quarter. The establishment survey showed a gain of almost 600,000 jobs for this four-month period.

Fortunately, this bad news was quickly reversed and, by September, the prime-age LFPR was at 82.8 percent. This is 0.2 percentage points above its March level.

So, do we think that prime-age workers suddenly lost interest in working in the summer of 2015 and again in the spring-summer of 2019? And, then they changed their minds and decided to go back into the workforce in the next few months?

If there was a major change in policy on something like childcare or schools, perhaps these fluctuations would make sense. But if such changes happened, I must have missed them.

The long and short is that the movements in the household survey are erratic. This is true for a single month and can also be true over a several month period, as happened in the spring and summer of 2019.

Like everyone else, I use the data we have. When we see a change for the positive, as we did in August, that is good news. But, we also have to recognize that it may very well be noise.

For my part, I don’t believe that the fall in prime-age LFPR reported from March to July was real, so I don’t think there was actually a big jump in August. This is a case where the household survey is now looking more like the establishment survey and other economic data. (A third independent data source is payroll tax collections, which also looks like the establishment survey.)

I’m always happy to see when our data sources seem to line up as they should, but I’m not going to break out the champagne over the correction of a statistical anomaly.

The Washington Post ran a piece last week that raised the possibility that workers who are now working remotely may see their jobs outsourced to countries with lower-cost labor. It raised the possibility that this might lead to the same sort of hit to jobs and wages that the rise in imports from China and elsewhere gave to manufacturing workers.

The piece then tells readers:

“Many economists are optimistic that American workers will land on their feet amid a gradual transition from a world in which they compete with a few dozen locals for each new job to one in which they compete with a few million professionals worldwide. But economists were optimistic about Y2K-era globalization as well, and it seems wise to keep a wary eye on the possible downside.”

While the second part of this paragraph is certainly true, most economists were very willing to ignore economics in arguing that massive imports from developing countries would not reduce the pay of manufacturing workers, and less educated workers more generally, the first sentence is a bit bizarre.

Exposing manufacturing workers to competition with their much lower-paid counterparts in the developing world is a big part of the upward redistribution of the last four decades. This had the effect of both lowering the pay of less-educated workers, and reducing the cost in the United States of a wide range of goods, from shoes and clothes, to cars and steel.

More educated workers were the beneficiaries of this reduction in costs. While their wages were not hurt by foreign competition, since they were largely protected, their money went further since they could now buy goods at a lower cost.

In this context, it is hard to imagine why anyone would consider it “optimistic” that the pay of more educated workers, who are now working remotely, will not be lowered by international competition. Such a reduction in pay should mean that a wide range of services, such as accounting, legal services, and medical services, can be provided at lower costs. This will benefit the whole country, but especially those workers who are not seeing their pay cut as a result of this competition.

The reduction in pay for more highly educated workers should also help reduce inflationary pressure in the economy. The highest 10 percent of the population takes in almost 50 percent of personal income. If we can reduce this by just 5 percent, this would be equal to 2.5 percent of total income.

To understand the economic importance of this sort of hit to the income of high-end earners, remember that many economists were going hysterical about the inflationary impact of President Biden’s student loan forgiveness program. By most estimates, loan forgiveness will reduce the amount that people are paying on student loans by roughly 0.1 percent of GDP.

This means that a 5 percent reduction in the pay of high-end earners would have 25 times as much impact in lowering inflation as the student loan forgiveness had in raising inflation. If people think student loan forgiveness is a big deal in raising inflation, then they should think that the prospect of international competition for remote workers will be an enormous deal in lowering inflation. Now, isn’t that optimistic?

Let me just add that I know that not all the people who will be hurt by increased competition for remote workers are rich. But, as the old saying goes, if you think you have a policy that does something useful, without harming some people you don’t want to see harmed, you don’t understand the policy. There is no way to lower incomes at the top without hitting some people who are not at the top.

Having said that, we can and should also pursue policies that are more directly focused on the very top, such as lowering CEO pay and eliminating the bloat in the financial sector. But if you show me a policy whose impact will be primarily to lower the pay of the top 20 percent of the workforce, I’m an optimist and I’m for it. I’d love to hear from those economists who say this is bad.

The Washington Post ran a piece last week that raised the possibility that workers who are now working remotely may see their jobs outsourced to countries with lower-cost labor. It raised the possibility that this might lead to the same sort of hit to jobs and wages that the rise in imports from China and elsewhere gave to manufacturing workers.

The piece then tells readers:

“Many economists are optimistic that American workers will land on their feet amid a gradual transition from a world in which they compete with a few dozen locals for each new job to one in which they compete with a few million professionals worldwide. But economists were optimistic about Y2K-era globalization as well, and it seems wise to keep a wary eye on the possible downside.”

While the second part of this paragraph is certainly true, most economists were very willing to ignore economics in arguing that massive imports from developing countries would not reduce the pay of manufacturing workers, and less educated workers more generally, the first sentence is a bit bizarre.

Exposing manufacturing workers to competition with their much lower-paid counterparts in the developing world is a big part of the upward redistribution of the last four decades. This had the effect of both lowering the pay of less-educated workers, and reducing the cost in the United States of a wide range of goods, from shoes and clothes, to cars and steel.

More educated workers were the beneficiaries of this reduction in costs. While their wages were not hurt by foreign competition, since they were largely protected, their money went further since they could now buy goods at a lower cost.

In this context, it is hard to imagine why anyone would consider it “optimistic” that the pay of more educated workers, who are now working remotely, will not be lowered by international competition. Such a reduction in pay should mean that a wide range of services, such as accounting, legal services, and medical services, can be provided at lower costs. This will benefit the whole country, but especially those workers who are not seeing their pay cut as a result of this competition.

The reduction in pay for more highly educated workers should also help reduce inflationary pressure in the economy. The highest 10 percent of the population takes in almost 50 percent of personal income. If we can reduce this by just 5 percent, this would be equal to 2.5 percent of total income.

To understand the economic importance of this sort of hit to the income of high-end earners, remember that many economists were going hysterical about the inflationary impact of President Biden’s student loan forgiveness program. By most estimates, loan forgiveness will reduce the amount that people are paying on student loans by roughly 0.1 percent of GDP.

This means that a 5 percent reduction in the pay of high-end earners would have 25 times as much impact in lowering inflation as the student loan forgiveness had in raising inflation. If people think student loan forgiveness is a big deal in raising inflation, then they should think that the prospect of international competition for remote workers will be an enormous deal in lowering inflation. Now, isn’t that optimistic?

Let me just add that I know that not all the people who will be hurt by increased competition for remote workers are rich. But, as the old saying goes, if you think you have a policy that does something useful, without harming some people you don’t want to see harmed, you don’t understand the policy. There is no way to lower incomes at the top without hitting some people who are not at the top.

Having said that, we can and should also pursue policies that are more directly focused on the very top, such as lowering CEO pay and eliminating the bloat in the financial sector. But if you show me a policy whose impact will be primarily to lower the pay of the top 20 percent of the workforce, I’m an optimist and I’m for it. I’d love to hear from those economists who say this is bad.

There is much confusion surrounding the concept of industrial policy, starting at the definitional level. If we think of industrial policy as a set of policies designed to favor certain industries, then we are always doing industrial policy.

For example, the decision to have the government finance the construction of airports supports the airline industry, as well as air freight, just as the decision to build the highways 70 years ago supported the auto industry and the suburbs. We spend over $50 billion a year on biomedical research, which is a huge subsidy to the pharmaceutical and medical equipment industries.

In short, industrial policy is not an on-off switch. We are always practicing industrial policy; the only issue is which industries we choose to favor and how we structure the mechanisms.

Recent legislation approved by Congress, the CHIPS Act and the Inflation Reduction Act (IRA), have been seen as big steps in advancing industrial policy. While there is much positive in these bills, there are three important areas where the legislation falls short:

  • The ownership of intellectual property
  • The price of clean energy products supported through the IRA
  • The false promise of manufacturing jobs

These are taken in turn.

Ownership of Intellectual Property

The treatment of intellectual property in these bills, and in fact in policy more generally, is badly misguided. The government is quite explicitly funding research in a wide range of areas. However, it will allow the companies benefitting from this research to claim ownership of patents and other forms of intellectual property based on the research it has funded.

This is an absurd subsidy that could redistribute a huge amount of income upward in the decades ahead. It would be comparable to the government paying a company to build a factory, and then giving it ownership of the factory. While the absurdity of this sort of giveaway in the case of a physical product is apparent to anyone, for some reason, it seems natural that we have the government pay for research and then allow companies to gain patent monopolies or other forms of protection to control the product and sell it at a monopoly price.

There is a huge amount of money at stake in this. In responding to the pandemic, Operation Warp Speed gave Moderna close to $900 million to develop and test a coronavirus vaccine. It then allowed Moderna to keep control of the vaccine, adding tens of billions of dollars to its market capitalization and creating at least five Moderna billionaires.

This sort of outcome should outrage anyone who cares about inequality. The idea that we only pay companies once for their work is not radical. If we pay for the research, then companies should not also be able to get control of the output.

Ideally, all the results of publicly funded research would be in the public domain. This means that anyone could produce a product based on the results, or build on the research to produce a better product. There are other rules that could still allow some further gain by those who did the work, such as compulsory licensing, or an agreement to accept shorter patent monopolies, but keeping the research in the public domain would be the simplest and most equitable route.[1] It would also be important to prohibit non-disclosure agreements by companies working on taxpayer supported research.

Keeping the Price of Products Low

While we want to keep down the price of all products wherever possible, this is especially true of the items being developed to slow climate change. In principle, we would like solar panels, electric car batteries, and other green products to sell at the lowest possible price.

Patent monopolies and other forms of protection push prices in the opposite direction. In many cases, the cost associated with patent monopolies can be a very large share of the price. This is especially true with prescription drugs where the patent is responsible for close to 80 percent of the price of protected drugs on average, and in some cases more than 99 percent.

The share of the price associated with patent protections with items like solar panels or batteries is likely to be considerably lower, since these products do involve a complex manufacturing process and more physical material than drugs. Nonetheless, patents and related protections could still raise the price of these items by 20 to 30 percent. Furthermore, locking up technologies behind patent protection may slow innovation, since other companies will have less access to it.

Since our goal in promoting clean technology is to have it adopted as widely as possible, as quickly as possible, we should very much want to see prices lowered by having all research in the public domain. If the price of solar panels would fall by 25 percent by eliminating any intellectual property claims, this would have the same effect in increasing demand as an additional government subsidy to purchasers of 25 percent of the sale price. This is a big deal.

The False Promise of Manufacturing Jobs

Much of the discussion around both the CHIPS bill and the IRA highlighted provisions in the bills that would lead to more manufacturing in the United States. The view that we should be seeking out jobs in manufacturing specifically, rather than jobs in other sectors of the economy, rests on a misunderstanding of the current nature of manufacturing jobs.

Historically, manufacturing had been a source of relatively good-paying jobs for workers without college degrees. Jobs in manufacturing paid substantially more than jobs in other sectors, after controlling for factors like age, education, and location. This is no longer true. The manufacturing wage premium has fallen sharply in recent decades, so that it is now close to zero.

Trade has been a big factor in the reduction of the manufacturing wage premium. The country lost millions of jobs to imports in the 90s and 00s. The jobs that remained often paid far less than the jobs that were lost. A big part of this story was the decline of unionization in manufacturing. In 1980, close to 20 percent of the manufacturing workforce was unionized. This had fallen to just 7.7 percent by 2021, only slightly higher than the private sector average of 6.1 percent.

Furthermore, there is little reason to believe that the return of manufacturing jobs will mean a substantial increase in unionized manufacturing jobs. From the recession trough in 2010 to 2021, the manufacturing sector added back over 800,000 jobs. However, the number of union members in manufacturing actually dropped by 400,000 over this period.

In short, our trade policies had a devastating impact on manufacturing workers and workers without college degrees more generally, but reversing these policies now will not help the problem. We want these workers to be able to get good paying jobs, but they are no more likely to find them in manufacturing than in any other sector.  (It is worth noting that manufacturing employment is still more than 70 percent male.)

There is an issue about the need to have more domestic production for national security reasons, as well as protection against events like the pandemic. This point is true, but often exaggerated. Clearly there is a national security issue when most of our semiconductors come from Taiwan when a conflict with China could quickly choke off this source of supply. However, we could be reasonably comfortable importing semiconductors from Canada, Mexico, and many other countries.

The pandemic did disrupt imports from our trading partners, but we also had many domestic factories shut down during the pandemic. Furthermore, if we think of the range of potential disasters, certainly there are many areas in the United States where production could be stopped for extended periods by hurricanes, floods, or other extreme weather events. What we really need are diverse sources of supply, not just domestic production. A focus on domestic production that doesn’t recognize the need for a diversity of sources, will not create resiliency.

Conclusion: Better Industrial Policy Would be Good, but We Need to Approach it With Clear Eyes

There is much that is good in the recent legislation that has been touted as industrial policy. However, these bills have not been well-structured from the standpoint of reducing income inequality. They also won’t necessarily help to make the economy more resilient in the ways many have claimed.

Industrial policy cannot just be a mantra, whereby calling something industrial policy implies better outcomes. It has to be carefully designed to meet specific goals. If we want to reduce inequality and speedup the adoption of clean technology, we can do much better than the CHIPS Act and the IRA climate provisions.

[1] There would need to be some agreement on sharing research costs and findings internationally, but we already have this problem with the existing IP system. Patent obligations and related protections have been a major source of conflict in the negotiation of recent trade agreements.

There is much confusion surrounding the concept of industrial policy, starting at the definitional level. If we think of industrial policy as a set of policies designed to favor certain industries, then we are always doing industrial policy.

For example, the decision to have the government finance the construction of airports supports the airline industry, as well as air freight, just as the decision to build the highways 70 years ago supported the auto industry and the suburbs. We spend over $50 billion a year on biomedical research, which is a huge subsidy to the pharmaceutical and medical equipment industries.

In short, industrial policy is not an on-off switch. We are always practicing industrial policy; the only issue is which industries we choose to favor and how we structure the mechanisms.

Recent legislation approved by Congress, the CHIPS Act and the Inflation Reduction Act (IRA), have been seen as big steps in advancing industrial policy. While there is much positive in these bills, there are three important areas where the legislation falls short:

  • The ownership of intellectual property
  • The price of clean energy products supported through the IRA
  • The false promise of manufacturing jobs

These are taken in turn.

Ownership of Intellectual Property

The treatment of intellectual property in these bills, and in fact in policy more generally, is badly misguided. The government is quite explicitly funding research in a wide range of areas. However, it will allow the companies benefitting from this research to claim ownership of patents and other forms of intellectual property based on the research it has funded.

This is an absurd subsidy that could redistribute a huge amount of income upward in the decades ahead. It would be comparable to the government paying a company to build a factory, and then giving it ownership of the factory. While the absurdity of this sort of giveaway in the case of a physical product is apparent to anyone, for some reason, it seems natural that we have the government pay for research and then allow companies to gain patent monopolies or other forms of protection to control the product and sell it at a monopoly price.

There is a huge amount of money at stake in this. In responding to the pandemic, Operation Warp Speed gave Moderna close to $900 million to develop and test a coronavirus vaccine. It then allowed Moderna to keep control of the vaccine, adding tens of billions of dollars to its market capitalization and creating at least five Moderna billionaires.

This sort of outcome should outrage anyone who cares about inequality. The idea that we only pay companies once for their work is not radical. If we pay for the research, then companies should not also be able to get control of the output.

Ideally, all the results of publicly funded research would be in the public domain. This means that anyone could produce a product based on the results, or build on the research to produce a better product. There are other rules that could still allow some further gain by those who did the work, such as compulsory licensing, or an agreement to accept shorter patent monopolies, but keeping the research in the public domain would be the simplest and most equitable route.[1] It would also be important to prohibit non-disclosure agreements by companies working on taxpayer supported research.

Keeping the Price of Products Low

While we want to keep down the price of all products wherever possible, this is especially true of the items being developed to slow climate change. In principle, we would like solar panels, electric car batteries, and other green products to sell at the lowest possible price.

Patent monopolies and other forms of protection push prices in the opposite direction. In many cases, the cost associated with patent monopolies can be a very large share of the price. This is especially true with prescription drugs where the patent is responsible for close to 80 percent of the price of protected drugs on average, and in some cases more than 99 percent.

The share of the price associated with patent protections with items like solar panels or batteries is likely to be considerably lower, since these products do involve a complex manufacturing process and more physical material than drugs. Nonetheless, patents and related protections could still raise the price of these items by 20 to 30 percent. Furthermore, locking up technologies behind patent protection may slow innovation, since other companies will have less access to it.

Since our goal in promoting clean technology is to have it adopted as widely as possible, as quickly as possible, we should very much want to see prices lowered by having all research in the public domain. If the price of solar panels would fall by 25 percent by eliminating any intellectual property claims, this would have the same effect in increasing demand as an additional government subsidy to purchasers of 25 percent of the sale price. This is a big deal.

The False Promise of Manufacturing Jobs

Much of the discussion around both the CHIPS bill and the IRA highlighted provisions in the bills that would lead to more manufacturing in the United States. The view that we should be seeking out jobs in manufacturing specifically, rather than jobs in other sectors of the economy, rests on a misunderstanding of the current nature of manufacturing jobs.

Historically, manufacturing had been a source of relatively good-paying jobs for workers without college degrees. Jobs in manufacturing paid substantially more than jobs in other sectors, after controlling for factors like age, education, and location. This is no longer true. The manufacturing wage premium has fallen sharply in recent decades, so that it is now close to zero.

Trade has been a big factor in the reduction of the manufacturing wage premium. The country lost millions of jobs to imports in the 90s and 00s. The jobs that remained often paid far less than the jobs that were lost. A big part of this story was the decline of unionization in manufacturing. In 1980, close to 20 percent of the manufacturing workforce was unionized. This had fallen to just 7.7 percent by 2021, only slightly higher than the private sector average of 6.1 percent.

Furthermore, there is little reason to believe that the return of manufacturing jobs will mean a substantial increase in unionized manufacturing jobs. From the recession trough in 2010 to 2021, the manufacturing sector added back over 800,000 jobs. However, the number of union members in manufacturing actually dropped by 400,000 over this period.

In short, our trade policies had a devastating impact on manufacturing workers and workers without college degrees more generally, but reversing these policies now will not help the problem. We want these workers to be able to get good paying jobs, but they are no more likely to find them in manufacturing than in any other sector.  (It is worth noting that manufacturing employment is still more than 70 percent male.)

There is an issue about the need to have more domestic production for national security reasons, as well as protection against events like the pandemic. This point is true, but often exaggerated. Clearly there is a national security issue when most of our semiconductors come from Taiwan when a conflict with China could quickly choke off this source of supply. However, we could be reasonably comfortable importing semiconductors from Canada, Mexico, and many other countries.

The pandemic did disrupt imports from our trading partners, but we also had many domestic factories shut down during the pandemic. Furthermore, if we think of the range of potential disasters, certainly there are many areas in the United States where production could be stopped for extended periods by hurricanes, floods, or other extreme weather events. What we really need are diverse sources of supply, not just domestic production. A focus on domestic production that doesn’t recognize the need for a diversity of sources, will not create resiliency.

Conclusion: Better Industrial Policy Would be Good, but We Need to Approach it With Clear Eyes

There is much that is good in the recent legislation that has been touted as industrial policy. However, these bills have not been well-structured from the standpoint of reducing income inequality. They also won’t necessarily help to make the economy more resilient in the ways many have claimed.

Industrial policy cannot just be a mantra, whereby calling something industrial policy implies better outcomes. It has to be carefully designed to meet specific goals. If we want to reduce inequality and speedup the adoption of clean technology, we can do much better than the CHIPS Act and the IRA climate provisions.

[1] There would need to be some agreement on sharing research costs and findings internationally, but we already have this problem with the existing IP system. Patent obligations and related protections have been a major source of conflict in the negotiation of recent trade agreements.

These are remarkable times, and they just keep getting more remarkable. The latest is an oped in the Washington Post that actually cites Sanders’ approvingly. The Post ran a piece by Caleb Watney and Heidi Williams arguing for alternatives to patent monopolies for financing the development of new drugs. The piece approvingly cites a proposal from Sanders from 2013, which would have created innovation prizes to reward drug companies for developing important new drugs.

The context for the mention of Sanders is the concerns raised by the pharmaceutical industry that the lower prices for its drugs, as a result of provisions in the Inflation Reduction Act, will lead them to develop fewer new drugs. Watney and Williams accept that the industry will likely spend somewhat less on research, but make the obvious point that this can be offset by additional government funding for research.

This is an incredibly important point that seems to have largely escaped almost everyone in the debate over limited drug prices. While it is true that if the industry has more money, it will likely invest more in research, there is no reason we have to rely on patent monopolies as the only mechanism for financing research.

As Watney and Williams note, we already rely on the government to support a large amount of biomedical research. While much of this is more basic research supported through the National Institutes of Health, government funding often does support the actual development and testing of new drugs and vaccines, as was the case with the Moderna Covid vaccine developed with funds from Operation Warp Speed. Watney and Williams propose a variety of mechanisms for increased public funding, including something along the lines of Sanders’ innovation prize.  

Recognizing the trade-off between patent monopoly supported research and other mechanisms is a huge step forward, but the Watney and Williams piece only gives us part of the picture. Drugs are cheap. The government makes them expensive by issuing patent monopolies and providing other forms of protection.

We will spend roughly $520 billion this year on prescription drugs this year. This is 2.2 percent of GDP or 60 percent of the size of the military budget. If drugs were sold in a free market, without patent monopolies or related protections, we would likely pay less than $100 billion. Drugs that currently sell for tens or hundreds of thousands of dollars would likely sell for several hundred dollars. It is rare that drugs are expensive to manufacture and distribute. The high prices stem from the fact that drug companies have a monopoly on a drug that may be necessary for someone’s health or life.

For the extra $400 billion plus that we spend on buying drugs, we get a bit more than $100 billion in research from the pharmaceutical industry. While much of this spending goes to developing important new drugs, much also goes to developing copycat drugs, or innovations that allow drug companies to extend their period of patent protection or other forms of exclusivity in the market.

We can look to replace the patent monopoly financing with other forms of government supported research. We can use routes like the Sanders’ innovation prize, but my preferred route would be the direct funding route, similar to what the National Institutes of Health now pursues with its $50 billion plus budget.

My route would add two additional features. First, it would have the funding go through private companies on long-term contracts, similar to what the Defense Department does with prime contractors on major weapons systems.[1] The other difference would be that I would require that all results be posted as quickly as practical on the web and that all patents would be in the public domain. This means that all new drugs, vaccines, and medical equipment could be sold as cheap generics from the day they are approved by the Food and Drug Administration.

By making all research fully public as quickly as possible, we are likely to see more rapid progress in developing new and better treatments. Researchers could quickly build on successes of other researchers, and avoid taking routes that other researchers had determined to be dead ends.

By having all drugs sell in a free market, as opposed to patent protected prices, we would also avoid much of the corruption resulting from patent monopolies. While all economists recognize that tariffs of 10 or 25 percent can lead to corruption, for some reason they have trouble recognizing that patent monopolies, that raise the price of drugs by 1000 percent or even 10,000 percent above the free market price, can also lead to corruption.

This is especially surprising since the evidence is all around us, starting with the drug pushing that fed the opioid crisis, but with plenty of other prominent examples. When drug companies can sell drugs at prices that are so far above their cost of production, it would be shocking if they didn’t do everything possible to promote their drugs as widely as possible. This is exactly what economics predicts will happen.

Anyhow, moving away from a system of supporting prescription drug research through government-granted patent monopolies to a system of direct public funding will be a long process. But we have to get the debate started. It is great to see the Washington Post taking the first small step on its opinion page.

 

[1] I describe this system in more detail here and in Chapter 5 of Rigged [it’s free].

These are remarkable times, and they just keep getting more remarkable. The latest is an oped in the Washington Post that actually cites Sanders’ approvingly. The Post ran a piece by Caleb Watney and Heidi Williams arguing for alternatives to patent monopolies for financing the development of new drugs. The piece approvingly cites a proposal from Sanders from 2013, which would have created innovation prizes to reward drug companies for developing important new drugs.

The context for the mention of Sanders is the concerns raised by the pharmaceutical industry that the lower prices for its drugs, as a result of provisions in the Inflation Reduction Act, will lead them to develop fewer new drugs. Watney and Williams accept that the industry will likely spend somewhat less on research, but make the obvious point that this can be offset by additional government funding for research.

This is an incredibly important point that seems to have largely escaped almost everyone in the debate over limited drug prices. While it is true that if the industry has more money, it will likely invest more in research, there is no reason we have to rely on patent monopolies as the only mechanism for financing research.

As Watney and Williams note, we already rely on the government to support a large amount of biomedical research. While much of this is more basic research supported through the National Institutes of Health, government funding often does support the actual development and testing of new drugs and vaccines, as was the case with the Moderna Covid vaccine developed with funds from Operation Warp Speed. Watney and Williams propose a variety of mechanisms for increased public funding, including something along the lines of Sanders’ innovation prize.  

Recognizing the trade-off between patent monopoly supported research and other mechanisms is a huge step forward, but the Watney and Williams piece only gives us part of the picture. Drugs are cheap. The government makes them expensive by issuing patent monopolies and providing other forms of protection.

We will spend roughly $520 billion this year on prescription drugs this year. This is 2.2 percent of GDP or 60 percent of the size of the military budget. If drugs were sold in a free market, without patent monopolies or related protections, we would likely pay less than $100 billion. Drugs that currently sell for tens or hundreds of thousands of dollars would likely sell for several hundred dollars. It is rare that drugs are expensive to manufacture and distribute. The high prices stem from the fact that drug companies have a monopoly on a drug that may be necessary for someone’s health or life.

For the extra $400 billion plus that we spend on buying drugs, we get a bit more than $100 billion in research from the pharmaceutical industry. While much of this spending goes to developing important new drugs, much also goes to developing copycat drugs, or innovations that allow drug companies to extend their period of patent protection or other forms of exclusivity in the market.

We can look to replace the patent monopoly financing with other forms of government supported research. We can use routes like the Sanders’ innovation prize, but my preferred route would be the direct funding route, similar to what the National Institutes of Health now pursues with its $50 billion plus budget.

My route would add two additional features. First, it would have the funding go through private companies on long-term contracts, similar to what the Defense Department does with prime contractors on major weapons systems.[1] The other difference would be that I would require that all results be posted as quickly as practical on the web and that all patents would be in the public domain. This means that all new drugs, vaccines, and medical equipment could be sold as cheap generics from the day they are approved by the Food and Drug Administration.

By making all research fully public as quickly as possible, we are likely to see more rapid progress in developing new and better treatments. Researchers could quickly build on successes of other researchers, and avoid taking routes that other researchers had determined to be dead ends.

By having all drugs sell in a free market, as opposed to patent protected prices, we would also avoid much of the corruption resulting from patent monopolies. While all economists recognize that tariffs of 10 or 25 percent can lead to corruption, for some reason they have trouble recognizing that patent monopolies, that raise the price of drugs by 1000 percent or even 10,000 percent above the free market price, can also lead to corruption.

This is especially surprising since the evidence is all around us, starting with the drug pushing that fed the opioid crisis, but with plenty of other prominent examples. When drug companies can sell drugs at prices that are so far above their cost of production, it would be shocking if they didn’t do everything possible to promote their drugs as widely as possible. This is exactly what economics predicts will happen.

Anyhow, moving away from a system of supporting prescription drug research through government-granted patent monopolies to a system of direct public funding will be a long process. But we have to get the debate started. It is great to see the Washington Post taking the first small step on its opinion page.

 

[1] I describe this system in more detail here and in Chapter 5 of Rigged [it’s free].

At least some of us were productivity optimists in the earlier days of pandemic recovery. There was some evidence of a productivity uptick in the period from the beginning of the pandemic, continuing to the fourth quarter of 2021. While productivity growth averaged just 1.0 percent from the fourth quarter of 2009 to the fourth quarter of 2019, growth averaged 2.3 percent in the two years from the fourth quarter of 2019 to the fourth quarter of 2021.  

Anyone who follows productivity data closely knows that the data are erratic, and even two good years doesn’t amount to much. No one should assume we’re on a faster growth path based on an uptick over a relatively short time period.

However, there was also some anecdotal evidence that we might be a faster growth trajectory. The most obvious story had to with the increased use of Zoom and other technologies allowing for teleconferencing. Insofar as business can be conducted without people traveling across town or across the country, there is a gain in productivity. There were many other stories of businesses being forced to adopt new and often more efficient ways of operating to get around the disruptions of the pandemic.

That was an optimistic story, but the picture looks much worse after the last two quarters. Productivity fell at a 7.4 percent annual rate in the first quarter of 2022 and a 4.6 percent rate in the second quarter. These drops totally offset the positive picture of 2020 and 2021. With the more recent data, productivity growth since the fourth quarter of 2019 now averages just 0.6 percent.

While this might mean that the productivity optimists should throw in the towel, there still is some reason for hoping that the data from the last two quarters are an anomaly and we could be on a faster growth path. There are three directions in which the productivity optimists’ argument would go:

  • Data errors gave us the bad numbers for the first two quarters;
  • Temporary disruptions from the pandemic slowed productivity growth in the first half of 2022;
  • There are important gains in productivity not reflected in the official data.

I’ll lay out each of these arguments briefly below.

Gross Domestic Product and Gross Domestic Income

The extraordinary job growth in the first half of 2022 is hard to reconcile with the negative GDP growth reported for this period. Many of us have noted that Gross Domestic Income (GDI) was actually reported as growing at a healthy 1.8 percent annual rate in the first quarter. (We don’t have GDI data for the second quarter yet.)

In principle, GDP and GDI should be the same. GDI is simply measuring GDP based on the income received. While the two numbers are never exactly the same, the gap in the first quarter was especially large. In fact, GDI growth has been outpacing GDP growth ever since the start of the pandemic. While real GDP has grown a total of 2.7 percent between the fourth quarter of 2019 and the first quarter of 2022, real GDI has grown by 6.1 percent. That translates into a 2.7 percent annual rate of growth since the start of the pandemic, compared to a 1.2 percent rate for GDP.

If the GDI measure is in fact closer to the actual rate of the economy’s growth over this period, then productivity growth would be approximately 1.4 percentage points faster than productivity calculated based on the GDP number. Instead of the 1.1 percent rate now reported for the period between the fourth quarter of 2019 and the first quarter of 2022, the growth rate would be close to 2.5 percent. That would still be consistent with the productivity speed-up story.[1]

Rather than just taking GDI growth or GDP growth, it is common for economists to look at the average for the two measures. The growth rate for the average of GDI and GDP between the fourth quarter of 2019 and the first quarter of 2021 was 1.9 percent. Using this as the basis for measuring productivity growth would give us an average growth rate of 1.7 percent for the nine quarters since the start of the pandemic. That is not clear evidence of a speedup in productivity, but it is notably better than the growth rate for the prior decade.

As we get further revisions to growth data over the next year, the picture on productivity growth since the start of the pandemic will become clearer. But it is worth noting that the data at this point are not conclusive. If the GDI growth data prove to be more accurate then we will still have evidence of a productivity uptick since the start of the pandemic.

Temporary Pandemic Related Disruptions

As we know, the pandemic gave us supply chain disruptions in many major sectors of the economy. At the level of consumers, this meant shortages and higher prices for a wide variety of products.

However, these supply chain disruptions also hit businesses. They had to deal with unanticipated delays in the shipping of many products, and in some cases were forced to go without some items altogether. It would be amazing if these disruptions did not lead to slower productivity growth.

To see this story, we can look at an ad hoc measure of productivity growth in the construction industry. The combined categories in the National Income and Product Accounts of non-residential construction and residential construction (Table 1.1.6, Lines 10 and 13) fell 6.8 percent between the fourth quarter of 2019 and the second quarter of 2022. By contrast, the Bureau of Labor Statistics (BLS) index of aggregate hours for the construction sector rose 1.0 percent over this period. This would imply roughly a 7.8 percent decline in productivity over this ten-quarter period.[2]

It doesn’t seem plausible that either construction technology or the quality of labor in the industry could have deteriorated so much in such a short period of time. The more obvious explanation for a decline in productivity in construction is that many workers were effectively wasting their time waiting for parts or materials that were needed for them to do their jobs. It would be reasonable to expect that when we have gotten through the supply chain disruptions associated with the pandemic, productivity in construction will return at least to its pre-pandemic level.

Insofar as this sort of story describes the work situation in other industries, it would mean that supply chain disruptions may have been a drag on productivity growth throughout the economy. It is also worth noting that many businesses had to take pandemic related measures, such as screening people who entered restaurants and stores, or frequently cleaning and sanitizing facilities, that would have also been a drag on productivity growth. As businesses stop doing these pandemic related safety measures, the drag on productivity growth will be reversed.

In short, we should have expected that the pandemic would have created a major drag on productivity growth, both through its impact on supply chains, and by forcing businesses to engage in pandemic-related safety practices that would not ordinarily be required. This means that even if businesses had sustained trend rates of productivity improvement in the way they conducted business, reported productivity would show a falloff due to the effects of the pandemic. It also would mean that we should see above trend productivity growth as the impact of the pandemic fades.  

Unmeasured Gains in Productivity and Living Standards

As I argued at the start of the pandemic, changes in practices due to the pandemic are likely to lead to improvements in living standards that are not picked up in our measures of GDP and productivity. Many of these are related to the increased ability of people to work from home.

In the most recent jobs report, more than 11 million people still reported that they were working from home due to the pandemic. This does not include all the people who are still working from home, but had not previously, as a result of changes in their work situation independent of the current state of the pandemic. Clearly, a large segment of the workforce is now working from home, full-time or part-time, who had not previously had this option.

There are two ways this leads to improvements in living standards. The first is simply the time saved on commuting. The average time spent each day commuting in 2019, for those who commuted to work, was 55 minutes. This means that a person who can now entirely work from home, as opposed to commuting five days a week, would save 225 minutes commuting a week. This comes to 3 hours and 45 minutes or more than 10 percent of the length of the average workweek.

To put this another way, the length of the average workweek is currently 34.6 hours. If we think of the worker’s pay as being for both their time at work, and their time getting to and from work, saving 3 hours and 45 minutes commuting each week, amounts to a 10 percent real increase in their hourly pay. This is a big deal.

Of course, many of the people who now work from home as a result of changes induced by the pandemic, only work two or three days a week at home. But this still implies substantial savings in time spent commuting, which are presumably are of considerable value to the workers who now have this option.  

In addition to time, there are also expenses associated with commuting. If people drive, in addition to gas, they also will need more maintenance for their car and have higher insurance costs due to their commutes. In the case of public transportation, they will have daily costs associated with train and bus fares. People also need to buy and clean business clothes for working in an office that they would not need for working at home.

It is not easy to get good data on savings on driving as a result of less commuting, but real spending on public ground transportation, which would include commuter trains and buses, fell from $61.5 billion in the fourth quarter of 2019 to $48.7 billion in the second quarter of 2022 (NIPA Table 2.4.5U, Line 198). This is a bit less than 0.1 percent of consumption spending.

Real spending on personal care services, which includes items like hair salons and dry cleaning, fell from $167.6 billion in the fourth quarter of 2019 to $146.8 billion in the second quarter of 2022 (NIPA Table 2.4.5U, Line 306). The savings of $20.8 billion would be a bit more than 0.1 percent of total spending.

These savings on work-related expenses do not appear in the data as productivity gains. In fact, most immediately they appear as lower GDP, as we have less consumption spending. Although if people spend this money in other areas, GDP will not be affected.

The savings from less commuting are offset to some extent by costs associated with working from home, such as the need for additional space for an office and possibly spending more on Internet services. But the largest monetary savings from less commuting are likely those associated with less driving. Also, the increased ability to work from home has allowed millions of families to move to locations that they find more desirable, either due to physical amenities or to be closer to family or friends. This would of course not be picked up in GDP data.

Other changes from the pandemic are also likely to have enduring benefits. One obvious one is the increased use of telemedicine. I am not aware of good data on this, but during the pandemic, many doctors allowed for patients to have consultations through Zoom, rather than having to travel to their office. For patients suffering from health problems, avoiding a trip that could be time-consuming and painful, has to be of substantial value.

This is another gain that would not appear in GDP or be recorded as an increase in productivity. Insofar as they were increased opportunities for remote services in other areas, there could be substantial benefits that are not showing up in our data. It is likely that such gains will grow through time as service providers find new and better ways to take advantage of technology that allows services to provided over the Internet. This process was already going on before the pandemic, but it is likely that the pandemic has hastened the pace.

The Jury is Still Out on a Pandemic Productivity Speedup

The last two quarters of terrible productivity data have undermined the most obvious basis for believing that the pandemic was leading to faster productivity growth. However, there are reasons for questions these data, and believing that revised data may look substantially better. It is also clear that disruptions directly associated with the pandemic have lowered productivity over the last two and a half years. When we overcome these disruptions, productivity should rebound in the affected areas. And, there are gains associated with a change in patterns of work and consumption that are not picked up in productivity data.

For these reasons, we can still have some hope that we are on a faster productivity path than we were before the pandemic. However, we will need to see more evidence to believe this is actually the case.

 

[1] The gap between GDI growth and GDP growth cannot be exactly added to productivity growth, since our standard measure of productivity is for the non-farm business sector. That excludes some areas of GDP, most notably the government sector.

 

[2] This is a very crude productivity measure. On the output side, the residential construction data includes some services related to mortgage issuance, which would not be produced by construction workers. The BLS measure of hours only counts payroll employment, excluding self-employed and likely also many workers who might work off the books.

At least some of us were productivity optimists in the earlier days of pandemic recovery. There was some evidence of a productivity uptick in the period from the beginning of the pandemic, continuing to the fourth quarter of 2021. While productivity growth averaged just 1.0 percent from the fourth quarter of 2009 to the fourth quarter of 2019, growth averaged 2.3 percent in the two years from the fourth quarter of 2019 to the fourth quarter of 2021.  

Anyone who follows productivity data closely knows that the data are erratic, and even two good years doesn’t amount to much. No one should assume we’re on a faster growth path based on an uptick over a relatively short time period.

However, there was also some anecdotal evidence that we might be a faster growth trajectory. The most obvious story had to with the increased use of Zoom and other technologies allowing for teleconferencing. Insofar as business can be conducted without people traveling across town or across the country, there is a gain in productivity. There were many other stories of businesses being forced to adopt new and often more efficient ways of operating to get around the disruptions of the pandemic.

That was an optimistic story, but the picture looks much worse after the last two quarters. Productivity fell at a 7.4 percent annual rate in the first quarter of 2022 and a 4.6 percent rate in the second quarter. These drops totally offset the positive picture of 2020 and 2021. With the more recent data, productivity growth since the fourth quarter of 2019 now averages just 0.6 percent.

While this might mean that the productivity optimists should throw in the towel, there still is some reason for hoping that the data from the last two quarters are an anomaly and we could be on a faster growth path. There are three directions in which the productivity optimists’ argument would go:

  • Data errors gave us the bad numbers for the first two quarters;
  • Temporary disruptions from the pandemic slowed productivity growth in the first half of 2022;
  • There are important gains in productivity not reflected in the official data.

I’ll lay out each of these arguments briefly below.

Gross Domestic Product and Gross Domestic Income

The extraordinary job growth in the first half of 2022 is hard to reconcile with the negative GDP growth reported for this period. Many of us have noted that Gross Domestic Income (GDI) was actually reported as growing at a healthy 1.8 percent annual rate in the first quarter. (We don’t have GDI data for the second quarter yet.)

In principle, GDP and GDI should be the same. GDI is simply measuring GDP based on the income received. While the two numbers are never exactly the same, the gap in the first quarter was especially large. In fact, GDI growth has been outpacing GDP growth ever since the start of the pandemic. While real GDP has grown a total of 2.7 percent between the fourth quarter of 2019 and the first quarter of 2022, real GDI has grown by 6.1 percent. That translates into a 2.7 percent annual rate of growth since the start of the pandemic, compared to a 1.2 percent rate for GDP.

If the GDI measure is in fact closer to the actual rate of the economy’s growth over this period, then productivity growth would be approximately 1.4 percentage points faster than productivity calculated based on the GDP number. Instead of the 1.1 percent rate now reported for the period between the fourth quarter of 2019 and the first quarter of 2022, the growth rate would be close to 2.5 percent. That would still be consistent with the productivity speed-up story.[1]

Rather than just taking GDI growth or GDP growth, it is common for economists to look at the average for the two measures. The growth rate for the average of GDI and GDP between the fourth quarter of 2019 and the first quarter of 2021 was 1.9 percent. Using this as the basis for measuring productivity growth would give us an average growth rate of 1.7 percent for the nine quarters since the start of the pandemic. That is not clear evidence of a speedup in productivity, but it is notably better than the growth rate for the prior decade.

As we get further revisions to growth data over the next year, the picture on productivity growth since the start of the pandemic will become clearer. But it is worth noting that the data at this point are not conclusive. If the GDI growth data prove to be more accurate then we will still have evidence of a productivity uptick since the start of the pandemic.

Temporary Pandemic Related Disruptions

As we know, the pandemic gave us supply chain disruptions in many major sectors of the economy. At the level of consumers, this meant shortages and higher prices for a wide variety of products.

However, these supply chain disruptions also hit businesses. They had to deal with unanticipated delays in the shipping of many products, and in some cases were forced to go without some items altogether. It would be amazing if these disruptions did not lead to slower productivity growth.

To see this story, we can look at an ad hoc measure of productivity growth in the construction industry. The combined categories in the National Income and Product Accounts of non-residential construction and residential construction (Table 1.1.6, Lines 10 and 13) fell 6.8 percent between the fourth quarter of 2019 and the second quarter of 2022. By contrast, the Bureau of Labor Statistics (BLS) index of aggregate hours for the construction sector rose 1.0 percent over this period. This would imply roughly a 7.8 percent decline in productivity over this ten-quarter period.[2]

It doesn’t seem plausible that either construction technology or the quality of labor in the industry could have deteriorated so much in such a short period of time. The more obvious explanation for a decline in productivity in construction is that many workers were effectively wasting their time waiting for parts or materials that were needed for them to do their jobs. It would be reasonable to expect that when we have gotten through the supply chain disruptions associated with the pandemic, productivity in construction will return at least to its pre-pandemic level.

Insofar as this sort of story describes the work situation in other industries, it would mean that supply chain disruptions may have been a drag on productivity growth throughout the economy. It is also worth noting that many businesses had to take pandemic related measures, such as screening people who entered restaurants and stores, or frequently cleaning and sanitizing facilities, that would have also been a drag on productivity growth. As businesses stop doing these pandemic related safety measures, the drag on productivity growth will be reversed.

In short, we should have expected that the pandemic would have created a major drag on productivity growth, both through its impact on supply chains, and by forcing businesses to engage in pandemic-related safety practices that would not ordinarily be required. This means that even if businesses had sustained trend rates of productivity improvement in the way they conducted business, reported productivity would show a falloff due to the effects of the pandemic. It also would mean that we should see above trend productivity growth as the impact of the pandemic fades.  

Unmeasured Gains in Productivity and Living Standards

As I argued at the start of the pandemic, changes in practices due to the pandemic are likely to lead to improvements in living standards that are not picked up in our measures of GDP and productivity. Many of these are related to the increased ability of people to work from home.

In the most recent jobs report, more than 11 million people still reported that they were working from home due to the pandemic. This does not include all the people who are still working from home, but had not previously, as a result of changes in their work situation independent of the current state of the pandemic. Clearly, a large segment of the workforce is now working from home, full-time or part-time, who had not previously had this option.

There are two ways this leads to improvements in living standards. The first is simply the time saved on commuting. The average time spent each day commuting in 2019, for those who commuted to work, was 55 minutes. This means that a person who can now entirely work from home, as opposed to commuting five days a week, would save 225 minutes commuting a week. This comes to 3 hours and 45 minutes or more than 10 percent of the length of the average workweek.

To put this another way, the length of the average workweek is currently 34.6 hours. If we think of the worker’s pay as being for both their time at work, and their time getting to and from work, saving 3 hours and 45 minutes commuting each week, amounts to a 10 percent real increase in their hourly pay. This is a big deal.

Of course, many of the people who now work from home as a result of changes induced by the pandemic, only work two or three days a week at home. But this still implies substantial savings in time spent commuting, which are presumably are of considerable value to the workers who now have this option.  

In addition to time, there are also expenses associated with commuting. If people drive, in addition to gas, they also will need more maintenance for their car and have higher insurance costs due to their commutes. In the case of public transportation, they will have daily costs associated with train and bus fares. People also need to buy and clean business clothes for working in an office that they would not need for working at home.

It is not easy to get good data on savings on driving as a result of less commuting, but real spending on public ground transportation, which would include commuter trains and buses, fell from $61.5 billion in the fourth quarter of 2019 to $48.7 billion in the second quarter of 2022 (NIPA Table 2.4.5U, Line 198). This is a bit less than 0.1 percent of consumption spending.

Real spending on personal care services, which includes items like hair salons and dry cleaning, fell from $167.6 billion in the fourth quarter of 2019 to $146.8 billion in the second quarter of 2022 (NIPA Table 2.4.5U, Line 306). The savings of $20.8 billion would be a bit more than 0.1 percent of total spending.

These savings on work-related expenses do not appear in the data as productivity gains. In fact, most immediately they appear as lower GDP, as we have less consumption spending. Although if people spend this money in other areas, GDP will not be affected.

The savings from less commuting are offset to some extent by costs associated with working from home, such as the need for additional space for an office and possibly spending more on Internet services. But the largest monetary savings from less commuting are likely those associated with less driving. Also, the increased ability to work from home has allowed millions of families to move to locations that they find more desirable, either due to physical amenities or to be closer to family or friends. This would of course not be picked up in GDP data.

Other changes from the pandemic are also likely to have enduring benefits. One obvious one is the increased use of telemedicine. I am not aware of good data on this, but during the pandemic, many doctors allowed for patients to have consultations through Zoom, rather than having to travel to their office. For patients suffering from health problems, avoiding a trip that could be time-consuming and painful, has to be of substantial value.

This is another gain that would not appear in GDP or be recorded as an increase in productivity. Insofar as they were increased opportunities for remote services in other areas, there could be substantial benefits that are not showing up in our data. It is likely that such gains will grow through time as service providers find new and better ways to take advantage of technology that allows services to provided over the Internet. This process was already going on before the pandemic, but it is likely that the pandemic has hastened the pace.

The Jury is Still Out on a Pandemic Productivity Speedup

The last two quarters of terrible productivity data have undermined the most obvious basis for believing that the pandemic was leading to faster productivity growth. However, there are reasons for questions these data, and believing that revised data may look substantially better. It is also clear that disruptions directly associated with the pandemic have lowered productivity over the last two and a half years. When we overcome these disruptions, productivity should rebound in the affected areas. And, there are gains associated with a change in patterns of work and consumption that are not picked up in productivity data.

For these reasons, we can still have some hope that we are on a faster productivity path than we were before the pandemic. However, we will need to see more evidence to believe this is actually the case.

 

[1] The gap between GDI growth and GDP growth cannot be exactly added to productivity growth, since our standard measure of productivity is for the non-farm business sector. That excludes some areas of GDP, most notably the government sector.

 

[2] This is a very crude productivity measure. On the output side, the residential construction data includes some services related to mortgage issuance, which would not be produced by construction workers. The BLS measure of hours only counts payroll employment, excluding self-employed and likely also many workers who might work off the books.

Inflation: Where are We Now?

With the data we have seen from the last few months, it’s fair to say that no one has a very good idea of where the economy is. At the most basic level, we have seen seven months of incredibly rapid job creation this year; the economy added 3.3 million jobs through July, along with two consecutive quarters of negative growth. We don’t have to join the Trumpers in calling this a recession, to be bothered by seeing two main economic indicators going in opposite directions.

I suspect most economists (I haven’t done a poll) would agree that the negative growth reported for the first two quarters was a statistical fluke. The GDP data are often revised by large amounts, so it would not be surprising if we see a very different picture after comprehensive revisions next year.

In this respect, it is worth noting Gross Domestic Income (GDI) grew at a 1.8 percent annual rate in the first quarter. In principle, GDI should be the same as GDP, since it is just measuring the income side of the GDP equation. While the two measures never measure up exactly, the size of the divergence in the first quarter was extraordinary. This is consistent with the view that GDP for the quarter may be revised upward. (We don’t have GDI data for the second quarter yet.)

Is Inflation Slowing?

But the different story being told by the jobs and the GDP data is only one of the confusing aspects of the current economic situation. Many of us, who thought the uptick in inflation in 2021 was likely to be transitory, were encouraged by evidence that wage growth seemed to be slowing in the spring. While I am typically happy to see workers getting higher pay, the hourly rate of wage growth at the end of 2021 exceeded 6.0 percent. There is no way that we can sustain a pace of 6.0 percent wage growth without inflation in the neighborhood of 4.0 percent higher.

For this reason, I was happy to see that the rate of hourly wage growth seemed to have slowed to close to 4.0 percent by June. This may still be somewhat higher than a pace that is consistent with the Fed’s 2.0 percent inflation target, but the difference hardly seems like much to worry over. (Wage growth averaged 3.4 percent in 2019, when inflation was still comfortably under the Fed’s 2.0 percent target.)

Then we got the Employment Cost Index (ECI) data for the second quarter. This showed wages rising at a 5.6 percent annual rate in the second quarter. While there are methodological differences that could explain some of the gap between the ECI wage data and the much lower number reported for the average hourly wage in the monthly payroll data, none could plausibly explain away a difference of this magnitude.

It turned out that we really didn’t have to explain much when the July employment data came out. The June wage data was revised up, and, with strong wage growth reported for July, we were looking at a rate of growth in the average hourly wage of more than 5.0 percent, not very different from the growth rate reported in the ECI.

In short, wage growth clearly had not slowed as much as many of us thought. Wages were still growing at a pace much faster than would be consistent with the Fed’s 2.0 percent target.

This is the bad news part of the story, then we got some good news last week. The July Consumer Price Index showed that inflation was zero in July, as a sharp fall in gas prices offset price increases in other areas.

The Producer Price Index (PPI), which measures the prices of goods at earlier stages of production, provided even better news the next day. The overall finished goods index fell 0.5 percent. While this was also driven largely by a sharp fall in gas prices, inflation in the broader index also showed signs of moderating. The core PPI, which excludes food, energy, and trade, rose just 0.2 percent in July. This followed an increase of 0.3 percent in June. This provides some evidence that inflationary pressures at earlier stages of production seem to be lessening.

We got more evidence along these lines the next day when the Labor Department released data on Import and Export prices. The overall index for import prices fell by 1.4 percent in July, again driven by a sharp decline in oil prices. However, even the non-fuel index fell by 0.5 percent, its third consecutive monthly decline. This also supports the view that price pressures are easing in substantial segments of the economy.

In this respect, it is worth noting that import prices do not include shipping costs. These also have been falling sharply in recent months, although they are still substantially above their pre-pandemic level.

There is other evidence we are getting through the supply chain problems from the pandemic. The July data for motor vehicle production showed a sharp jump, putting us above our pre-pandemic levels. The jump in new and used car prices, due to reduced production resulting from a semi-conductor shortage, had been a major factor in inflation over the last year. As cars become more widely available, we can expect the recent rise to be at least partly reversed.

In other areas, stores have mostly managed to restock their inventories. The non-auto inventory-to-sales ratio is back to pre-pandemic levels. 

In the same vein, the Baltic Dry Goods Index, an index that measure the prices of a number of widely traded commodities, has fallen by more than 50 percent from peaks hit last October. It is now at roughly the same level it was at before the pandemic.

Even the price of chicken seems to be tumbling. Chicken and egg prices had soared due to an outbreak of Avian flu, that devasted the country’s chicken stock. It seems farmers have largely rebuilt their flocks and now have plenty of chicken to sell.

Perhaps most importantly, the price of gas is continuing to fall. Unless there is a sudden surge in gas prices in the last third of August, the CPI is likely to show a drop in gas prices for the month of close to 10 percent. This should mean another month where the increase in the CPI is near zero. If we get some good news on car prices, and some of the other items that saw supply chain related run-ups earlier this year, we may see a small price decline in the August CPI.

Is the Fed Done Hiking Rates?

It would be crazy to take two months of data and say this means that we are out of the woods on inflation. The monthly data are erratic, and in any case, no one believes that gas prices will keep falling 10 percent a month. If we don’t see substantial reductions in core inflation, then we will again see big monthly jumps in inflation once the decline in gas prices slows or moderates.

However, a couple of months of slower inflation can buy us some time. The main concern raised by the inflation hawks is that expectations of higher inflation will become embedded in the economy, leading to the sort of wage-price spiral we saw in the 1970s. That does not seem to be happening.

Our main measures of consumer expectations, the Michigan Consumer Sentiment Index and the New York Fed’s Survey of Consumer Expectations, actually show inflation expectations have edged downward. It seems that, whether rightly or wrongly, consumers are basing expectations of inflation in part on short-term movements in gas prices.

There is a similar story with investors. The break-even inflation rates for both five-year and ten-year Treasury bonds has been trending downward. It does not seem that we are in any imminent danger of expectations of high inflation getting embedded in the economy.

The fact that inflation expectations seem to be moderating, coupled with evidence that inflation is slowing in major areas, means that the Fed should be able to take some time to get a clearer assessment of where the economy is and the impact of its rate hikes to date.

What the Rate Hikes Have Done

There is little doubt that the Fed’s rate hikes have achieved their goal of slowing the economy and weakening the labor market, the big question is by how much. Most immediately, the rate hikes sent mortgage rates soaring, with the 30-year mortgage rate went from lows of under 3.0 percent in late 2021 to peaks of almost 6.0 percent in June.

The rise in mortgage rates had the predictable effect on the housing market. Existing home sales are now down more than 20 percent from year ago levels. After soaring by more than 30 percent over the last two years, prices also seem to be headed downward. This is great news for those concerned about another housing bubble and out-of-control rents.

Of course, the relationship between the house sales market and rent, which is what appears in the CPI and other measures of inflation, is indirect. In general, the two move in the same direction, but not in tandem. (The housing bubble years were a major exception, with house sale prices soaring, while rents moved roughly in step with the overall inflation rate.)

The logic where fewer people buying homes might lead to lower rental inflation is that people who might have moved into larger units, or bought a second home, are discouraged by higher mortgage rates. This leaves more units on the market, which can then be available as either lower-priced ownership housing or as rentals. (Housing often flips between being ownership units and rentals. Roughly 30 percent of all rentals are single-family homes.) Anyhow, there is some evidence that rental inflation is slowing, both in private indexes of market rents and in the July CPI, although rental inflation remained very high for the month.

Higher rates have also led to a sharp falloff in housing starts, which are now down more than 8.0 percent from year ago levels. While the falloff in starts is bad news from the standpoint of housing supply, it is worth noting that completions have actually been rising. This is another area where supply chain issues have created serious problems.

While the annual rate of starts rose from around 1.3 million before the pandemic to peaks of more than 1.8 million, completions remained near 1.3 million. Builders were apparently unable to get the materials or parts needed to finish the houses they started. Completions were at 1.42 million in July, 3.5 percent above the year ago level.

It is also worth noting that construction employment has continued to rise, even as starts fell. Presumably builders are still looking for more workers to complete homes that they had previously started.

The biggest impact of the rate hikes has probably been on mortgage refinancing, which is down more than 80 percent from year ago levels. This hits the economy in two ways. Hundreds of thousands of workers are directly employed in the refinancing process. For example, the number of people employed in the category of real estate credit is down by 20,000 from its year ago level (a bit less than 7.0 percent). The job loss due to the plunge in refinancing is likely to increase in the months ahead.

The other way that the falloff in refinancing slows the economy is by reducing access to credit. People often refinance for more money than their existing mortgage in order to get money for remodeling, vacations, or other uses. With this source of credit largely cut off, people will have less money to spend on these other items. (Many news articles have noted a recent increase in credit card debt and attributed it to economic hardships due to inflation. In fact, the main cause has probably been the lack of access to credit through refinancing.)

Is the Labor Market Normalizing?

From the standpoint of longer-term inflation prospects, the key issue is whether the labor market is returning to a more normal state. Ideally, we would like to see a strong labor market, where workers feel comfortable quitting jobs they don’t like and have enough bargaining power to secure real wage gains, but not one that is so strong that wage growth continues at an unsustainable pace. We clearly have moved in this direction as a result of the Fed rate hikes, the question is whether we are there yet.

One often cited measure arguing that the labor market is overheated is the rate of job openings. This stood at 6.6 percent in June. This is considerably higher than its pre-pandemic peak of 4.8 percent, but down sharply from the 7.3 percent rate reported for March.

In some sectors it has already fallen back to pre-pandemic levels. For example, in construction the job opening rate was 4.2 percent in June, down from a 5.5 percent peak in March, and well below the 5.3 level hit in April of 2019. The 5.1 percent rate in retail is down from a 7.4 percent rate in March and below the pre-pandemic peak of 6.3 percent. The 8.9 percent job opening rate for hotels and restaurants is more than two full percentage points above its pre-pandemic peak, but still down sharply from the 12.2 percent rate reported in December of 2021.

There is a similar story with quits rates, which are still above pre-pandemic levels, but have fallen from recent peaks. The overall quit rate stood at 2.8 percent in June, compared to a pre-pandemic peak of 2.4 percent. This is down from a 3.0 percent rate in November and December of last year. The 4.0 percent quit rate in retail is only slight above the 3.8 percent pre-pandemic peak and down from a 5.0 percent rate last December. The 5.7 percent quit rate in hotels and restaurants compares to a 5.2 percent pre-pandemic peak, but is down from the 6.4 percent rate reached in July and November of last year.

In short, these data show that the labor market is still very strong, but moving quickly back towards rates of openings and quits that are comparable to what we saw before the pandemic. In a similar vein, the share of unemployment that is due to people who have voluntarily quit their jobs stood at 14.7 percent in July. This is high, but below a 15.1 percent peak in February, and also below a 15.1 peak hit in June of 2019. In other words, it is not higher than the share we would expect to see in a strong but stable labor market.

Another key measure of the state of the labor market is unemployment insurance claims. The 4-week moving average has risen to nearly 250,000 from just over 170,000 in April. While 250,000 weekly claims is still low, the rise since earlier in the year indicates that employers feel comfortable laying off workers when they don’t think they need them. This would not be the case if they didn’t think they could hire new workers in response to an upturn in business.

These labor market data all point in the same direction. The labor market continues to be strong, but it is somewhat weaker than it had been at the end of 2021 and earlier in 2022. This weakening would be a reason to expect a slower pace of wage growth going forward.

Of course, it is possible that wage growth will not weaken. The standard Phillips Curve analysis relates changes in the pace of wage growth to the unemployment rate. With the unemployment rate sitting at 50-year low of 3.5 percent, the Phillips Curve would not be predicting a slower wage growth at this point. But not much about the economy has followed a Phillips Curve path since the pandemic (it didn’t fit very well before the pandemic either), so we probably should not put too much confidence in Phillips Curve predictions at this point.

While many economists are anxious to have the Fed push forward with an aggressive path of rate hikes, there is good reason to be cautious. If we deliberately raise the unemployment rate, and throw millions of people out of work, it will be the most disadvantaged in the economy and society who will be hardest hit.

And, the impact is not just on the people who actually lose their jobs, but on millions more who will be fearful of losing their jobs. In addition, tens of millions may feel stuck at dead end jobs with poor working conditions and abusive bosses. We should always be cautious about a policy that deliberately throws people out of work and try to avoid going this route unless it is absolutely necessary. (We should also come up with better routes for dealing with inflation, but I’ll skip that one for now.)

The recent government data on inflation, along with a wide variety of private measures, give us good reason to believe that we are seeing at least a temporary pause where the monthly inflation data will be moderate. As noted, there is clear evidence of substantial labor market weakening, which could slow the pace of wage growth to a rate consistent with moderate inflation. The Fed should take advantage of this pause to slow its path of rate hikes and get a better sense of where the labor market now stands.  

With the data we have seen from the last few months, it’s fair to say that no one has a very good idea of where the economy is. At the most basic level, we have seen seven months of incredibly rapid job creation this year; the economy added 3.3 million jobs through July, along with two consecutive quarters of negative growth. We don’t have to join the Trumpers in calling this a recession, to be bothered by seeing two main economic indicators going in opposite directions.

I suspect most economists (I haven’t done a poll) would agree that the negative growth reported for the first two quarters was a statistical fluke. The GDP data are often revised by large amounts, so it would not be surprising if we see a very different picture after comprehensive revisions next year.

In this respect, it is worth noting Gross Domestic Income (GDI) grew at a 1.8 percent annual rate in the first quarter. In principle, GDI should be the same as GDP, since it is just measuring the income side of the GDP equation. While the two measures never measure up exactly, the size of the divergence in the first quarter was extraordinary. This is consistent with the view that GDP for the quarter may be revised upward. (We don’t have GDI data for the second quarter yet.)

Is Inflation Slowing?

But the different story being told by the jobs and the GDP data is only one of the confusing aspects of the current economic situation. Many of us, who thought the uptick in inflation in 2021 was likely to be transitory, were encouraged by evidence that wage growth seemed to be slowing in the spring. While I am typically happy to see workers getting higher pay, the hourly rate of wage growth at the end of 2021 exceeded 6.0 percent. There is no way that we can sustain a pace of 6.0 percent wage growth without inflation in the neighborhood of 4.0 percent higher.

For this reason, I was happy to see that the rate of hourly wage growth seemed to have slowed to close to 4.0 percent by June. This may still be somewhat higher than a pace that is consistent with the Fed’s 2.0 percent inflation target, but the difference hardly seems like much to worry over. (Wage growth averaged 3.4 percent in 2019, when inflation was still comfortably under the Fed’s 2.0 percent target.)

Then we got the Employment Cost Index (ECI) data for the second quarter. This showed wages rising at a 5.6 percent annual rate in the second quarter. While there are methodological differences that could explain some of the gap between the ECI wage data and the much lower number reported for the average hourly wage in the monthly payroll data, none could plausibly explain away a difference of this magnitude.

It turned out that we really didn’t have to explain much when the July employment data came out. The June wage data was revised up, and, with strong wage growth reported for July, we were looking at a rate of growth in the average hourly wage of more than 5.0 percent, not very different from the growth rate reported in the ECI.

In short, wage growth clearly had not slowed as much as many of us thought. Wages were still growing at a pace much faster than would be consistent with the Fed’s 2.0 percent target.

This is the bad news part of the story, then we got some good news last week. The July Consumer Price Index showed that inflation was zero in July, as a sharp fall in gas prices offset price increases in other areas.

The Producer Price Index (PPI), which measures the prices of goods at earlier stages of production, provided even better news the next day. The overall finished goods index fell 0.5 percent. While this was also driven largely by a sharp fall in gas prices, inflation in the broader index also showed signs of moderating. The core PPI, which excludes food, energy, and trade, rose just 0.2 percent in July. This followed an increase of 0.3 percent in June. This provides some evidence that inflationary pressures at earlier stages of production seem to be lessening.

We got more evidence along these lines the next day when the Labor Department released data on Import and Export prices. The overall index for import prices fell by 1.4 percent in July, again driven by a sharp decline in oil prices. However, even the non-fuel index fell by 0.5 percent, its third consecutive monthly decline. This also supports the view that price pressures are easing in substantial segments of the economy.

In this respect, it is worth noting that import prices do not include shipping costs. These also have been falling sharply in recent months, although they are still substantially above their pre-pandemic level.

There is other evidence we are getting through the supply chain problems from the pandemic. The July data for motor vehicle production showed a sharp jump, putting us above our pre-pandemic levels. The jump in new and used car prices, due to reduced production resulting from a semi-conductor shortage, had been a major factor in inflation over the last year. As cars become more widely available, we can expect the recent rise to be at least partly reversed.

In other areas, stores have mostly managed to restock their inventories. The non-auto inventory-to-sales ratio is back to pre-pandemic levels. 

In the same vein, the Baltic Dry Goods Index, an index that measure the prices of a number of widely traded commodities, has fallen by more than 50 percent from peaks hit last October. It is now at roughly the same level it was at before the pandemic.

Even the price of chicken seems to be tumbling. Chicken and egg prices had soared due to an outbreak of Avian flu, that devasted the country’s chicken stock. It seems farmers have largely rebuilt their flocks and now have plenty of chicken to sell.

Perhaps most importantly, the price of gas is continuing to fall. Unless there is a sudden surge in gas prices in the last third of August, the CPI is likely to show a drop in gas prices for the month of close to 10 percent. This should mean another month where the increase in the CPI is near zero. If we get some good news on car prices, and some of the other items that saw supply chain related run-ups earlier this year, we may see a small price decline in the August CPI.

Is the Fed Done Hiking Rates?

It would be crazy to take two months of data and say this means that we are out of the woods on inflation. The monthly data are erratic, and in any case, no one believes that gas prices will keep falling 10 percent a month. If we don’t see substantial reductions in core inflation, then we will again see big monthly jumps in inflation once the decline in gas prices slows or moderates.

However, a couple of months of slower inflation can buy us some time. The main concern raised by the inflation hawks is that expectations of higher inflation will become embedded in the economy, leading to the sort of wage-price spiral we saw in the 1970s. That does not seem to be happening.

Our main measures of consumer expectations, the Michigan Consumer Sentiment Index and the New York Fed’s Survey of Consumer Expectations, actually show inflation expectations have edged downward. It seems that, whether rightly or wrongly, consumers are basing expectations of inflation in part on short-term movements in gas prices.

There is a similar story with investors. The break-even inflation rates for both five-year and ten-year Treasury bonds has been trending downward. It does not seem that we are in any imminent danger of expectations of high inflation getting embedded in the economy.

The fact that inflation expectations seem to be moderating, coupled with evidence that inflation is slowing in major areas, means that the Fed should be able to take some time to get a clearer assessment of where the economy is and the impact of its rate hikes to date.

What the Rate Hikes Have Done

There is little doubt that the Fed’s rate hikes have achieved their goal of slowing the economy and weakening the labor market, the big question is by how much. Most immediately, the rate hikes sent mortgage rates soaring, with the 30-year mortgage rate went from lows of under 3.0 percent in late 2021 to peaks of almost 6.0 percent in June.

The rise in mortgage rates had the predictable effect on the housing market. Existing home sales are now down more than 20 percent from year ago levels. After soaring by more than 30 percent over the last two years, prices also seem to be headed downward. This is great news for those concerned about another housing bubble and out-of-control rents.

Of course, the relationship between the house sales market and rent, which is what appears in the CPI and other measures of inflation, is indirect. In general, the two move in the same direction, but not in tandem. (The housing bubble years were a major exception, with house sale prices soaring, while rents moved roughly in step with the overall inflation rate.)

The logic where fewer people buying homes might lead to lower rental inflation is that people who might have moved into larger units, or bought a second home, are discouraged by higher mortgage rates. This leaves more units on the market, which can then be available as either lower-priced ownership housing or as rentals. (Housing often flips between being ownership units and rentals. Roughly 30 percent of all rentals are single-family homes.) Anyhow, there is some evidence that rental inflation is slowing, both in private indexes of market rents and in the July CPI, although rental inflation remained very high for the month.

Higher rates have also led to a sharp falloff in housing starts, which are now down more than 8.0 percent from year ago levels. While the falloff in starts is bad news from the standpoint of housing supply, it is worth noting that completions have actually been rising. This is another area where supply chain issues have created serious problems.

While the annual rate of starts rose from around 1.3 million before the pandemic to peaks of more than 1.8 million, completions remained near 1.3 million. Builders were apparently unable to get the materials or parts needed to finish the houses they started. Completions were at 1.42 million in July, 3.5 percent above the year ago level.

It is also worth noting that construction employment has continued to rise, even as starts fell. Presumably builders are still looking for more workers to complete homes that they had previously started.

The biggest impact of the rate hikes has probably been on mortgage refinancing, which is down more than 80 percent from year ago levels. This hits the economy in two ways. Hundreds of thousands of workers are directly employed in the refinancing process. For example, the number of people employed in the category of real estate credit is down by 20,000 from its year ago level (a bit less than 7.0 percent). The job loss due to the plunge in refinancing is likely to increase in the months ahead.

The other way that the falloff in refinancing slows the economy is by reducing access to credit. People often refinance for more money than their existing mortgage in order to get money for remodeling, vacations, or other uses. With this source of credit largely cut off, people will have less money to spend on these other items. (Many news articles have noted a recent increase in credit card debt and attributed it to economic hardships due to inflation. In fact, the main cause has probably been the lack of access to credit through refinancing.)

Is the Labor Market Normalizing?

From the standpoint of longer-term inflation prospects, the key issue is whether the labor market is returning to a more normal state. Ideally, we would like to see a strong labor market, where workers feel comfortable quitting jobs they don’t like and have enough bargaining power to secure real wage gains, but not one that is so strong that wage growth continues at an unsustainable pace. We clearly have moved in this direction as a result of the Fed rate hikes, the question is whether we are there yet.

One often cited measure arguing that the labor market is overheated is the rate of job openings. This stood at 6.6 percent in June. This is considerably higher than its pre-pandemic peak of 4.8 percent, but down sharply from the 7.3 percent rate reported for March.

In some sectors it has already fallen back to pre-pandemic levels. For example, in construction the job opening rate was 4.2 percent in June, down from a 5.5 percent peak in March, and well below the 5.3 level hit in April of 2019. The 5.1 percent rate in retail is down from a 7.4 percent rate in March and below the pre-pandemic peak of 6.3 percent. The 8.9 percent job opening rate for hotels and restaurants is more than two full percentage points above its pre-pandemic peak, but still down sharply from the 12.2 percent rate reported in December of 2021.

There is a similar story with quits rates, which are still above pre-pandemic levels, but have fallen from recent peaks. The overall quit rate stood at 2.8 percent in June, compared to a pre-pandemic peak of 2.4 percent. This is down from a 3.0 percent rate in November and December of last year. The 4.0 percent quit rate in retail is only slight above the 3.8 percent pre-pandemic peak and down from a 5.0 percent rate last December. The 5.7 percent quit rate in hotels and restaurants compares to a 5.2 percent pre-pandemic peak, but is down from the 6.4 percent rate reached in July and November of last year.

In short, these data show that the labor market is still very strong, but moving quickly back towards rates of openings and quits that are comparable to what we saw before the pandemic. In a similar vein, the share of unemployment that is due to people who have voluntarily quit their jobs stood at 14.7 percent in July. This is high, but below a 15.1 percent peak in February, and also below a 15.1 peak hit in June of 2019. In other words, it is not higher than the share we would expect to see in a strong but stable labor market.

Another key measure of the state of the labor market is unemployment insurance claims. The 4-week moving average has risen to nearly 250,000 from just over 170,000 in April. While 250,000 weekly claims is still low, the rise since earlier in the year indicates that employers feel comfortable laying off workers when they don’t think they need them. This would not be the case if they didn’t think they could hire new workers in response to an upturn in business.

These labor market data all point in the same direction. The labor market continues to be strong, but it is somewhat weaker than it had been at the end of 2021 and earlier in 2022. This weakening would be a reason to expect a slower pace of wage growth going forward.

Of course, it is possible that wage growth will not weaken. The standard Phillips Curve analysis relates changes in the pace of wage growth to the unemployment rate. With the unemployment rate sitting at 50-year low of 3.5 percent, the Phillips Curve would not be predicting a slower wage growth at this point. But not much about the economy has followed a Phillips Curve path since the pandemic (it didn’t fit very well before the pandemic either), so we probably should not put too much confidence in Phillips Curve predictions at this point.

While many economists are anxious to have the Fed push forward with an aggressive path of rate hikes, there is good reason to be cautious. If we deliberately raise the unemployment rate, and throw millions of people out of work, it will be the most disadvantaged in the economy and society who will be hardest hit.

And, the impact is not just on the people who actually lose their jobs, but on millions more who will be fearful of losing their jobs. In addition, tens of millions may feel stuck at dead end jobs with poor working conditions and abusive bosses. We should always be cautious about a policy that deliberately throws people out of work and try to avoid going this route unless it is absolutely necessary. (We should also come up with better routes for dealing with inflation, but I’ll skip that one for now.)

The recent government data on inflation, along with a wide variety of private measures, give us good reason to believe that we are seeing at least a temporary pause where the monthly inflation data will be moderate. As noted, there is clear evidence of substantial labor market weakening, which could slow the pace of wage growth to a rate consistent with moderate inflation. The Fed should take advantage of this pause to slow its path of rate hikes and get a better sense of where the labor market now stands.  

I don’t like to pick on Thomas Edsall because I think he is usually a very astute observer of US politics and society. However, his column today embraces the truly awful framing of government versus market that pretty much guarantees doom for progressive policies.

The gist of it is that Democrats or liberals seem to accept a view that many people find obstacles to success in the economy, so they need the government to help them out. By contrast, Republicans or conservatives say that everyone has a decent chance if they are prepared to work hard.

The framing that we somehow need government intervention to give people a shot makes it hugely more difficult to address the problems of inequality. In reality, the government shapes just about every aspect of the economy, and in the last four decades it has shaped the economy in ways to redistribute income upward.

To take a prominent recent example, according to Forbes, we created at least five Moderna billionaires by allowing the company to have intellectual property claims over a technology (mRNA) that was largely developed on the government’s dime and Covid vaccines that were completely developed on the government dime. Of course it is not just the billionaires, there are many more people earning six, seven, and eight figure paychecks at Moderna, and other drug companies, because of the way the government dishes out patent monopolies and other forms of intellectual property.

We just got another dose of this upward redistribution in the widely touted CHIPS bill, which commits the government to spend $50 billion in research on developing new generations of silicon chips. And guess who will get the ownership of the intellectual property? I’m sure this will generate a whole new round of big grants from liberal foundations trying to find the causes of inequality.

There are many other ways we structure the market to ensure that income flows up. Steel and textile workers are forced to compete with low-paid workers in developing countries. Our doctors and dentists are largely protected from this competition. We structure the financial sector in ways that allow people to make millions and billions ripping off ordinary workers. (I tell this story in Rigged for anyone interested [it’s free.])

The key point is that we can address inequality without ever having the debate about whether poor people can get ahead if they work hard. We can just debate the specific policies that redistribute income away from low and moderate income people to those at the top.

For example, we can debate whether we can just have publicly funded research be in the public domain. This would mean that the next great cancer drug might sell for $200 rather than $200,000. And, we can debate whether highly paid professionals should face the same sort of competition as manufacturing workers.

Perhaps working class Republicans will insist that we have to keep rigging the market in ways that disadvantage them, but I sort of doubt that. Of course, we will never know as long as we are not allowed to have this sort of debate in the New York Times and other leading media outlets.

 

I don’t like to pick on Thomas Edsall because I think he is usually a very astute observer of US politics and society. However, his column today embraces the truly awful framing of government versus market that pretty much guarantees doom for progressive policies.

The gist of it is that Democrats or liberals seem to accept a view that many people find obstacles to success in the economy, so they need the government to help them out. By contrast, Republicans or conservatives say that everyone has a decent chance if they are prepared to work hard.

The framing that we somehow need government intervention to give people a shot makes it hugely more difficult to address the problems of inequality. In reality, the government shapes just about every aspect of the economy, and in the last four decades it has shaped the economy in ways to redistribute income upward.

To take a prominent recent example, according to Forbes, we created at least five Moderna billionaires by allowing the company to have intellectual property claims over a technology (mRNA) that was largely developed on the government’s dime and Covid vaccines that were completely developed on the government dime. Of course it is not just the billionaires, there are many more people earning six, seven, and eight figure paychecks at Moderna, and other drug companies, because of the way the government dishes out patent monopolies and other forms of intellectual property.

We just got another dose of this upward redistribution in the widely touted CHIPS bill, which commits the government to spend $50 billion in research on developing new generations of silicon chips. And guess who will get the ownership of the intellectual property? I’m sure this will generate a whole new round of big grants from liberal foundations trying to find the causes of inequality.

There are many other ways we structure the market to ensure that income flows up. Steel and textile workers are forced to compete with low-paid workers in developing countries. Our doctors and dentists are largely protected from this competition. We structure the financial sector in ways that allow people to make millions and billions ripping off ordinary workers. (I tell this story in Rigged for anyone interested [it’s free.])

The key point is that we can address inequality without ever having the debate about whether poor people can get ahead if they work hard. We can just debate the specific policies that redistribute income away from low and moderate income people to those at the top.

For example, we can debate whether we can just have publicly funded research be in the public domain. This would mean that the next great cancer drug might sell for $200 rather than $200,000. And, we can debate whether highly paid professionals should face the same sort of competition as manufacturing workers.

Perhaps working class Republicans will insist that we have to keep rigging the market in ways that disadvantage them, but I sort of doubt that. Of course, we will never know as long as we are not allowed to have this sort of debate in the New York Times and other leading media outlets.

 

The major news outlets seem determined to tell everyone how terrible the economy is, even as unemployment is at a 50-year low and workers at the bottom end of the income distribution are seeing wage gains that outstrip inflation. We saw endless stories about how high gas prices were making it impossible for families to make ends meet as gas prices were going up. With gas prices plunging the last month and a half, the media apparently don’t think the price of gas is that important.

In keeping with this “the economy is terrible” theme, the Washington Post had a piece a few weeks back telling us that a record number of people report holding two full-time jobs. As the Post article explained, they need to work two full-time jobs to make ends meet because inflation is so bad. It seems this story has now migrated to Marketplace radio.

There are two problems with this story about workers being forced to work two jobs to make ends meet. The first is that wages for workers at the bottom have actually substantially outpaced inflation over the last few years. According to the Bureau of Labor Statistics, the real hourly wage for production and nonsupervisory workers in the hotel and restaurant industry was more than 5.0 percent higher in July than it was three years ago. However bad things might be for low-paid workers today, it was worse in the recent past.

 

The other problem is that a large number of people holding two full-time jobs seems to be evidence of a strong economy, not a weak one. While the data are erratic, the all-time peak in this number—measured as a share of the labor force—was in 2000, at the top of the late 1990s boom. The number fell in the years following the Great Recession, before rising again as the labor market strengthened in the years just before the pandemic. Both the Washington Post and Marketplace radio have effectively turned reality on its head to tell their terrible economy story about a statistic that actually suggests a good economy.

To be clear, there are undoubtedly millions of low-paid workers who are really struggling to get by and are often failing. But this is always true. Even in the late 1990s boom there were hundreds of thousands of families who were being evicted every year and millions more going without adequate food and being hounded by bill collectors. 

However, the media did not choose to present these people as representative of the state of the economy as they are doing now. For whatever reason, the media have decided the economy is terrible and they are not going to let the data get in the way.

 

 

The major news outlets seem determined to tell everyone how terrible the economy is, even as unemployment is at a 50-year low and workers at the bottom end of the income distribution are seeing wage gains that outstrip inflation. We saw endless stories about how high gas prices were making it impossible for families to make ends meet as gas prices were going up. With gas prices plunging the last month and a half, the media apparently don’t think the price of gas is that important.

In keeping with this “the economy is terrible” theme, the Washington Post had a piece a few weeks back telling us that a record number of people report holding two full-time jobs. As the Post article explained, they need to work two full-time jobs to make ends meet because inflation is so bad. It seems this story has now migrated to Marketplace radio.

There are two problems with this story about workers being forced to work two jobs to make ends meet. The first is that wages for workers at the bottom have actually substantially outpaced inflation over the last few years. According to the Bureau of Labor Statistics, the real hourly wage for production and nonsupervisory workers in the hotel and restaurant industry was more than 5.0 percent higher in July than it was three years ago. However bad things might be for low-paid workers today, it was worse in the recent past.

 

The other problem is that a large number of people holding two full-time jobs seems to be evidence of a strong economy, not a weak one. While the data are erratic, the all-time peak in this number—measured as a share of the labor force—was in 2000, at the top of the late 1990s boom. The number fell in the years following the Great Recession, before rising again as the labor market strengthened in the years just before the pandemic. Both the Washington Post and Marketplace radio have effectively turned reality on its head to tell their terrible economy story about a statistic that actually suggests a good economy.

To be clear, there are undoubtedly millions of low-paid workers who are really struggling to get by and are often failing. But this is always true. Even in the late 1990s boom there were hundreds of thousands of families who were being evicted every year and millions more going without adequate food and being hounded by bill collectors. 

However, the media did not choose to present these people as representative of the state of the economy as they are doing now. For whatever reason, the media have decided the economy is terrible and they are not going to let the data get in the way.

 

 

The Inflation Reduction Act includes a remarkable innovation. If it becomes law in its current form, share buybacks will be taxed at a 1.0 percent rate. This is a huge deal, not only because it taxes money that was often escaping taxation at the individual level, but it is a move away from basing the corporate income tax on profits, to taxing returns to shareholders.

The big issue here is that corporate profits are not a well-defined concept. There are a thousand issues that arise in determining profit, which depend to a substantial extent on judgement calls by accountants. Depreciation of capital is the most obvious problem, but there are many others.

While profits are something that we cannot see, returns to shareholders can be easily seen. This is simply the increase in market capitalization, plus whatever money is paid out in dividends. This information is readily available on dozens of financial websites.

There is also nothing that corporations can do to hide the returns on their stock, unless they want to rip off their shareholders in addition to ripping off the government. If we want to have a 25 percent corporate income tax, we can simply tax the returns to shareholders at a 25 percent rate, and we know exactly what we will get. (We can allow averaging, say over five-year periods, to smooth out tax payments.)

In addition to making the corporate income tax more easily collectable, shifting the basis of the tax to returns to shareholders will radically reduce the size of the tax shelter industry. As it stands now, companies spend tens of billions of dollars each year hiring lawyers and accountants to minimize their tax burden.

These expenditures on tax dodges are a complete waste of resources and undermine the purpose of the corporate income tax. As the Modern Monetary Theory crew reminds us, the purpose of taxes at the national level is to reduce demand in the economy. Insofar as companies spend large amounts of money trying to avoid paying taxes, the goal of the corporate income tax is undermined.

The tax avoidance industry is also itself a major source of inequality. Creative tax lawyers and accountants can make huge salaries by developing innovative tax dodges. We can put many of these people out of business by basing the corporate income tax on stock returns, which are completely transparent.

The taxation of share buybacks in the Inflation Reduction Act is a small but important step in this direction. It shows that we do not have to make profit the basis for the corporate income tax. After it has been in place for a few years, and we have the opportunity to see how effective it is in raising revenue, perhaps we can shift the basis for the rest of the corporate income tax to the stock returns we can all see, rather than the profit statements that are conjured up by accountants.

 

The Inflation Reduction Act includes a remarkable innovation. If it becomes law in its current form, share buybacks will be taxed at a 1.0 percent rate. This is a huge deal, not only because it taxes money that was often escaping taxation at the individual level, but it is a move away from basing the corporate income tax on profits, to taxing returns to shareholders.

The big issue here is that corporate profits are not a well-defined concept. There are a thousand issues that arise in determining profit, which depend to a substantial extent on judgement calls by accountants. Depreciation of capital is the most obvious problem, but there are many others.

While profits are something that we cannot see, returns to shareholders can be easily seen. This is simply the increase in market capitalization, plus whatever money is paid out in dividends. This information is readily available on dozens of financial websites.

There is also nothing that corporations can do to hide the returns on their stock, unless they want to rip off their shareholders in addition to ripping off the government. If we want to have a 25 percent corporate income tax, we can simply tax the returns to shareholders at a 25 percent rate, and we know exactly what we will get. (We can allow averaging, say over five-year periods, to smooth out tax payments.)

In addition to making the corporate income tax more easily collectable, shifting the basis of the tax to returns to shareholders will radically reduce the size of the tax shelter industry. As it stands now, companies spend tens of billions of dollars each year hiring lawyers and accountants to minimize their tax burden.

These expenditures on tax dodges are a complete waste of resources and undermine the purpose of the corporate income tax. As the Modern Monetary Theory crew reminds us, the purpose of taxes at the national level is to reduce demand in the economy. Insofar as companies spend large amounts of money trying to avoid paying taxes, the goal of the corporate income tax is undermined.

The tax avoidance industry is also itself a major source of inequality. Creative tax lawyers and accountants can make huge salaries by developing innovative tax dodges. We can put many of these people out of business by basing the corporate income tax on stock returns, which are completely transparent.

The taxation of share buybacks in the Inflation Reduction Act is a small but important step in this direction. It shows that we do not have to make profit the basis for the corporate income tax. After it has been in place for a few years, and we have the opportunity to see how effective it is in raising revenue, perhaps we can shift the basis for the rest of the corporate income tax to the stock returns we can all see, rather than the profit statements that are conjured up by accountants.

 

It’s pretty funny that we continually debate the causes of inequality when we routinely pass bills that redistribute income upward. The semiconductor bill about to be approved by Congress is the latest episode in this absurd charade.

To be clear, the bill does some good things. It has funding both to subsidize manufacturing capacity for semiconductors in the United States and also for further research in developing better chips in the future. Both of these are positive developments even if the benefits of the former are overstated.

It was common in the pandemic days to tout the supply chain problems as evidence that we needed more manufacturing in the United States in a variety of areas. However, that story ignored several factors.

First, the pandemic knocked out many factories in the United States also, it wasn’t just factories in Thailand and China that closed. Second, some of the problems were associated with shortages of truck drivers and other transportation workers and facilities. We need to transport goods made in the United States also, most people can’t just drive to the local furniture factory to pick up a new living room sofa.

Most importantly, the complaints about foreign sourcing ignores the fact that we saw a massive increase in goods imports, as there was a huge pandemic-induced shift in consumption from services to goods. Real imports of goods increased by more than $270 billion from the fourth quarter of 2019 to the second quarter of 2021.

That is almost 1.5 percent of GDP. It is difficult to envision a scenario where we could increase domestic production of manufactured goods by anything close to that amount in the middle of a pandemic. In short, our supply chains actually served us pretty well in providing us with a lot more imported stuff as large parts of the domestic economy were shut down, even if there were shortages of many items, pushing prices higher.

The other misleading aspect of the virtues of this bill is the idea that the working class (noncollege educated workers) will benefit from more manufacturing jobs in the United States. While this would have been true 30 years ago, it is no longer true today. Thanks to our trade policies over this period, the wage premium in manufacturing has largely disappeared.

At the most basic level, the average hourly earnings of production and nonsupervisory workers in manufacturing is now less than 92.0 percent of the average for the private sector as a whole. A fuller comparison has to include nonwage compensation and also look at the specific demographics of manufacturing workers compared to the workforce as a whole. This could still leave some premium, but almost certainly a very small one.

The disappearance of the manufacturing wage premium has been associated with the closing of the gap in unionization rates between manufacturing and the private sector as a whole. In 1993, 19.2 percent of manufacturing workers were in unions compared to 11.6 percent for the private sector as whole. By 2021 the gap in unionization rates had been hugely reduced, with 7.7 percent of manufacturing workers being unionized, compared to 6.1 percent for the private sector as whole.

In this context, the increase in manufacturing jobs that might result from this bill is not likely to be any great boon for noncollege educated workers. There is little reason to believe that the manufacturing jobs created by this bill will be qualitatively better than the alternative jobs these workers might be holding.

To be clear, it is probably best to have more diverse sources for such an important input in the modern economy, so an increase in domestic capacity is desirable. And, being so dependent on sources that could be closed off in a confrontation with China is a problem, although the idea of pushing forward with a new Cold War with China is almost certain to prove disastrous for the United States and the world.

Subsidies for Research and Inequality

The other part of this bill is a substantial boost to research funding that will be focused on developing new generations of semiconductors and related technologies. This is positive in the sense that we would benefit from more research in these areas. However, the problem is that the gains from developments in these areas will go disproportionately to those already at the top of the income ladder.

The development of the mRNA technologies and Moderna are the case study here. The development of mRNA technology over the last four decades was largely on the public dime, mostly through grants from the National Institutes of Health. Moderna recently began its own research, although it had not yet brought a successful vaccine to the market at the time the pandemic began.

The federal government paid Moderna $450 million dollars to develop its vaccine against the coronavirus. It then paid roughly the same amount for Moderna to conduct clinical trials to demonstrate its effectiveness.

It then let Moderna keep ownership of the intellectual property it had developed while working for the government. In effect, the government paid Moderna twice, once with the public funding, the second time by giving them monopoly control over what they developed.

As a result, according to Forbes, we had created at least five Moderna billionaires as of last summer. Undoubtedly many other well-placed people in the company pocketed tens or hundreds of millions. While the origins of rising inequality may be a mystery to many economists, it really shouldn’t be very surprising to anyone who follows the news.

We will spend over $500 billion on prescription drugs this year. If we did not give out patent monopolies or related protections the cost would almost certainly be less than $100 billion. The difference of more than $400 billion a year comes to roughly $3,000 a family or more than half of the military budget.

If we actually want to promote technology in a way that doesn’t hugely increase inequality we can use a system that only pays companies once. We can make it a condition of the funding that all the products developed have short patents. I proposed four years as a general rule, with everything in the public domain immediately in the case of biomedical research and climate. (See chapter five of Rigged [it’s free].)

If US companies find these terms too onerous, there are sure to be plenty of researchers elsewhere in the world happy to take our research dollars on these terms. Remember, we shouldn’t care at all where the researchers are located, the research will be open and available for our manufacturers here, as well as elsewhere, as a condition of the contracts. It is what economists and policy types always hype: free trade.

We Can Support the Economy Without Redistributing Upward

In short, with a bit of thought, the semiconductor bill could have been designed in ways that did not redistribute income upward. We need to get over the idea that manufacturing jobs are a fix for the problems of noncollege educated workers. That was true 30 years ago when our political leaders were vigorously pushing policies to destroy these jobs. However, thanks to their success in these efforts, bringing the jobs back won’t fix the problem.

The other point is that it is not technology that gives lots of money to those with skills in STEM and other areas, it is our policies on technology. As long as we can’t have a serious policy debate on altering these policies, we will continue to see further upward redistribution. It is that simple.

It’s pretty funny that we continually debate the causes of inequality when we routinely pass bills that redistribute income upward. The semiconductor bill about to be approved by Congress is the latest episode in this absurd charade.

To be clear, the bill does some good things. It has funding both to subsidize manufacturing capacity for semiconductors in the United States and also for further research in developing better chips in the future. Both of these are positive developments even if the benefits of the former are overstated.

It was common in the pandemic days to tout the supply chain problems as evidence that we needed more manufacturing in the United States in a variety of areas. However, that story ignored several factors.

First, the pandemic knocked out many factories in the United States also, it wasn’t just factories in Thailand and China that closed. Second, some of the problems were associated with shortages of truck drivers and other transportation workers and facilities. We need to transport goods made in the United States also, most people can’t just drive to the local furniture factory to pick up a new living room sofa.

Most importantly, the complaints about foreign sourcing ignores the fact that we saw a massive increase in goods imports, as there was a huge pandemic-induced shift in consumption from services to goods. Real imports of goods increased by more than $270 billion from the fourth quarter of 2019 to the second quarter of 2021.

That is almost 1.5 percent of GDP. It is difficult to envision a scenario where we could increase domestic production of manufactured goods by anything close to that amount in the middle of a pandemic. In short, our supply chains actually served us pretty well in providing us with a lot more imported stuff as large parts of the domestic economy were shut down, even if there were shortages of many items, pushing prices higher.

The other misleading aspect of the virtues of this bill is the idea that the working class (noncollege educated workers) will benefit from more manufacturing jobs in the United States. While this would have been true 30 years ago, it is no longer true today. Thanks to our trade policies over this period, the wage premium in manufacturing has largely disappeared.

At the most basic level, the average hourly earnings of production and nonsupervisory workers in manufacturing is now less than 92.0 percent of the average for the private sector as a whole. A fuller comparison has to include nonwage compensation and also look at the specific demographics of manufacturing workers compared to the workforce as a whole. This could still leave some premium, but almost certainly a very small one.

The disappearance of the manufacturing wage premium has been associated with the closing of the gap in unionization rates between manufacturing and the private sector as a whole. In 1993, 19.2 percent of manufacturing workers were in unions compared to 11.6 percent for the private sector as whole. By 2021 the gap in unionization rates had been hugely reduced, with 7.7 percent of manufacturing workers being unionized, compared to 6.1 percent for the private sector as whole.

In this context, the increase in manufacturing jobs that might result from this bill is not likely to be any great boon for noncollege educated workers. There is little reason to believe that the manufacturing jobs created by this bill will be qualitatively better than the alternative jobs these workers might be holding.

To be clear, it is probably best to have more diverse sources for such an important input in the modern economy, so an increase in domestic capacity is desirable. And, being so dependent on sources that could be closed off in a confrontation with China is a problem, although the idea of pushing forward with a new Cold War with China is almost certain to prove disastrous for the United States and the world.

Subsidies for Research and Inequality

The other part of this bill is a substantial boost to research funding that will be focused on developing new generations of semiconductors and related technologies. This is positive in the sense that we would benefit from more research in these areas. However, the problem is that the gains from developments in these areas will go disproportionately to those already at the top of the income ladder.

The development of the mRNA technologies and Moderna are the case study here. The development of mRNA technology over the last four decades was largely on the public dime, mostly through grants from the National Institutes of Health. Moderna recently began its own research, although it had not yet brought a successful vaccine to the market at the time the pandemic began.

The federal government paid Moderna $450 million dollars to develop its vaccine against the coronavirus. It then paid roughly the same amount for Moderna to conduct clinical trials to demonstrate its effectiveness.

It then let Moderna keep ownership of the intellectual property it had developed while working for the government. In effect, the government paid Moderna twice, once with the public funding, the second time by giving them monopoly control over what they developed.

As a result, according to Forbes, we had created at least five Moderna billionaires as of last summer. Undoubtedly many other well-placed people in the company pocketed tens or hundreds of millions. While the origins of rising inequality may be a mystery to many economists, it really shouldn’t be very surprising to anyone who follows the news.

We will spend over $500 billion on prescription drugs this year. If we did not give out patent monopolies or related protections the cost would almost certainly be less than $100 billion. The difference of more than $400 billion a year comes to roughly $3,000 a family or more than half of the military budget.

If we actually want to promote technology in a way that doesn’t hugely increase inequality we can use a system that only pays companies once. We can make it a condition of the funding that all the products developed have short patents. I proposed four years as a general rule, with everything in the public domain immediately in the case of biomedical research and climate. (See chapter five of Rigged [it’s free].)

If US companies find these terms too onerous, there are sure to be plenty of researchers elsewhere in the world happy to take our research dollars on these terms. Remember, we shouldn’t care at all where the researchers are located, the research will be open and available for our manufacturers here, as well as elsewhere, as a condition of the contracts. It is what economists and policy types always hype: free trade.

We Can Support the Economy Without Redistributing Upward

In short, with a bit of thought, the semiconductor bill could have been designed in ways that did not redistribute income upward. We need to get over the idea that manufacturing jobs are a fix for the problems of noncollege educated workers. That was true 30 years ago when our political leaders were vigorously pushing policies to destroy these jobs. However, thanks to their success in these efforts, bringing the jobs back won’t fix the problem.

The other point is that it is not technology that gives lots of money to those with skills in STEM and other areas, it is our policies on technology. As long as we can’t have a serious policy debate on altering these policies, we will continue to see further upward redistribution. It is that simple.

Want to search in the archives?

¿Quieres buscar en los archivos?

Click Here Haga clic aquí