• DebtEconomic Crisis and RecoveryCrisis económica y recuperaciónUnited StatesEE. UU.
There has been a lot of hype in the media recently about the 2.8 percent personal saving rate reported for the first quarter. This is near a record low and has many commentators predicting disaster when consumers run out of savings.
While it is undoubtedly true that the savings rate has fallen by any measure, a large part of the decline is due to people paying taxes on capital gains. This can easily be seen in the data. If we look at the third quarter data, people paid $3,244 billion in taxes, or 14.8 percent of personal income.[1] By comparison, in the fourth quarter of 2019, the last pre-pandemic quarter, people paid $2,216 billion, 11.8 percent of their income in taxes.
Since there were no major changes in tax rates over this period, we can assume that most of this increase in tax payments was due to capital gains taxes on stocks that people sold. Capital gains do not count as income in the national income accounts. Let me repeat that for the folks worried we will run out of savings. Capital gains do not count as income in the national income accounts.
This means that we have deducted the taxes people pay on their gains from income, thereby reducing measured savings, but have not added these gains to their income. For example, if a household had sold stock for a $50,000 gain and then paid $10,000 in taxes on these gains, we would say that their savings had fallen by $10,000. Let’s see, at this rate, this household should run out of savings in …..
If people were still paying 11.8 percent of their income in taxes instead of the 14.8 percent paid in the third quarter, the saving rate in the third quarter would have been 6.2 percent. There is still down from the 8.7 percent saving rate in the fourth quarter of 2019, but not the crash being touted by economic analysts who don’t have access to government data.
There is another serious quirk of accounting worth noting when commenting on all-time lows in saving rates. When a company pays out money to shareholders as dividends, this is counted as personal income to shareholders. When a company pays out money to shareholders by buying back stock, this does not count as personal income for shareholders but rather as saving by the corporate sector.
This is not a factor likely to matter much quarter to quarter. Still, if we compare current saving rates to decades before share buybacks were legal, we will be understating personal income and therefore understating savings. In recent years, share buybacks have been close to $300 billion. This would raise personal income by almost 1.4 percent and disposable personal income by more than 1.5 percent.
If we treated the money paid out to shareholders as buybacks the same way we treated the money paid out to shareholders as dividends, the saving rate would be roughly 1.5 percentage points higher in 2022. This would still not change the fact that there has been a decline in recent quarters from the pre-pandemic level, but we are very far from zero in this story.
There is one other related area of confusion. A popular line in commentaries is that credit card debt is soaring, implying that people are experiencing extreme hardship and being forced to borrow on their credit cards. While there are undoubtedly many people in this situation, the main reason that credit card debt has soared is that mortgage refinancing has gone through the floor.
It is common for people refinancing a mortgage to borrow more than their existing mortgage, using the extra money for buying a car, remodeling their home, or other major expenditures. Now that the rise in mortgage interest rates has cut off this channel of financing, they are looking to other channels for borrowing, most obviously credit card debt.
Anyone who hypes the rise in credit card debt without noting the collapse in mortgage refinancing is telling us that they don’t know what they are talking about. These two phenomena are obviously related, and it simply is not serious to talk about rising credit card debt as exclusively an indication of economic desperation. That is wrong.
[1] Tax payments can be found in the National Income and Products Accounts, Table 2.1, Line 26.
There has been a lot of hype in the media recently about the 2.8 percent personal saving rate reported for the first quarter. This is near a record low and has many commentators predicting disaster when consumers run out of savings.
While it is undoubtedly true that the savings rate has fallen by any measure, a large part of the decline is due to people paying taxes on capital gains. This can easily be seen in the data. If we look at the third quarter data, people paid $3,244 billion in taxes, or 14.8 percent of personal income.[1] By comparison, in the fourth quarter of 2019, the last pre-pandemic quarter, people paid $2,216 billion, 11.8 percent of their income in taxes.
Since there were no major changes in tax rates over this period, we can assume that most of this increase in tax payments was due to capital gains taxes on stocks that people sold. Capital gains do not count as income in the national income accounts. Let me repeat that for the folks worried we will run out of savings. Capital gains do not count as income in the national income accounts.
This means that we have deducted the taxes people pay on their gains from income, thereby reducing measured savings, but have not added these gains to their income. For example, if a household had sold stock for a $50,000 gain and then paid $10,000 in taxes on these gains, we would say that their savings had fallen by $10,000. Let’s see, at this rate, this household should run out of savings in …..
If people were still paying 11.8 percent of their income in taxes instead of the 14.8 percent paid in the third quarter, the saving rate in the third quarter would have been 6.2 percent. There is still down from the 8.7 percent saving rate in the fourth quarter of 2019, but not the crash being touted by economic analysts who don’t have access to government data.
There is another serious quirk of accounting worth noting when commenting on all-time lows in saving rates. When a company pays out money to shareholders as dividends, this is counted as personal income to shareholders. When a company pays out money to shareholders by buying back stock, this does not count as personal income for shareholders but rather as saving by the corporate sector.
This is not a factor likely to matter much quarter to quarter. Still, if we compare current saving rates to decades before share buybacks were legal, we will be understating personal income and therefore understating savings. In recent years, share buybacks have been close to $300 billion. This would raise personal income by almost 1.4 percent and disposable personal income by more than 1.5 percent.
If we treated the money paid out to shareholders as buybacks the same way we treated the money paid out to shareholders as dividends, the saving rate would be roughly 1.5 percentage points higher in 2022. This would still not change the fact that there has been a decline in recent quarters from the pre-pandemic level, but we are very far from zero in this story.
There is one other related area of confusion. A popular line in commentaries is that credit card debt is soaring, implying that people are experiencing extreme hardship and being forced to borrow on their credit cards. While there are undoubtedly many people in this situation, the main reason that credit card debt has soared is that mortgage refinancing has gone through the floor.
It is common for people refinancing a mortgage to borrow more than their existing mortgage, using the extra money for buying a car, remodeling their home, or other major expenditures. Now that the rise in mortgage interest rates has cut off this channel of financing, they are looking to other channels for borrowing, most obviously credit card debt.
Anyone who hypes the rise in credit card debt without noting the collapse in mortgage refinancing is telling us that they don’t know what they are talking about. These two phenomena are obviously related, and it simply is not serious to talk about rising credit card debt as exclusively an indication of economic desperation. That is wrong.
[1] Tax payments can be found in the National Income and Products Accounts, Table 2.1, Line 26.
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• COVID-19CoronavirusEconomic Crisis and RecoveryCrisis económica y recuperaciónInflationUnited StatesEE. UU.WagesWorkersSector del trabajo
I confess I am a card-carrying member of Team Transitory, and I have been wrong about the extent to which inflation would be persistent. This was largely due to subsequent rounds of Covid, China’s zero Covid policy, and the Russian invasion of Ukraine, all factors which the inflation hawks did not anticipate either. But regardless of how we got here, the question is what things look like going forward.
We saw much more job growth in the November jobs report than most analysts, including me, had expected. By any measure, 263,000 new jobs in an economy near full employment is strong growth. It is not plausible that the economy can continue to add jobs at this pace.
Furthermore, we had a 0.6 percent jump in the average hourly wage in November. Annualized, that comes to over 7.0 percent wage growth. That is clearly not consistent with the Fed’s 2.0 percent inflation target, or anything close to it. The 1.4 percent three-month increase annualizes to 5.6 percent, which is not all that much better.
Taken together, the stronger than expected job growth, coupled with the big jump in wages, seems to indicate that we have a serious problem with inflation. The consensus seems to be that the Fed may have to keep the rate hikes in overdrive.
The Decline in Hours
There is no dispute that these are bad signs from the standpoint of inflation, but there are some items pointing in the other direction in the November report that were almost completely overlooked. First, although we did see a big jump in employment in the month, the length of the average workweek actually fell by 0.1 hour. This was not just the result of rounding; the index of aggregate weekly hours fell by 0.2 percent.
Hiring new workers and increasing hours per worker are alternative mechanisms of meeting the demand for labor. When hours per worker falls, that indicates less demand for labor. When aggregate hours fall, that indicates there was actually less demand for labor in November than in October. In other words, the opposite of a strong growth. This could be a sign that employers will be looking to reduce the size of their workforce in future months.
It is important to throw out the usual qualifications. This is one month of data. The index of aggregate hours is erratic, we often see sharp shifts from month to month. It is also subject to revisions, so the picture may look different when we get the December data.
But based on what we see in the November jobs report, demand for labor actually declined in November. Also, just to be clear, there were no obvious weather events or other non-economic disruptions in the reference period that could easily explain this decline.
The Jump in Pay in Transportation and Warehousing
While the 0.6 percent increase in average hourly wages is definitely bad news from the standpoint of inflation, it was driven in large part by a 2.5 percent reported increase in average hourly wages for workers in the transportation and warehousing sector. This was apparently due to large severance payments to workers in the sector, which presumably will not be repeated.
Julia Coronado, who called this to my attention in a tweet, calculated that the increase in the average hourly wage without this jump would have been 0.45 percent in November, the same as in October. In other words, there is no evidence of acceleration, we are not seeing the dreaded wage-price spiral.
She also pointed out that the response rate for Current Employment Situation survey, which is the basis for these data, plummeted in November. That means that the revisions, which will be reported next month, could be unusually large. Of course, revisions can go in either direction, but that is again grounds for viewing the November data with more caution than usual.
Drop in Share of Unemployment Due to Quits
Many of us have long looked to share of unemployment due to voluntary quits as a good measure of the strength of the labor market. This is effectively measuring the extent to which workers are so confident of their labor market prospects that they are willing to quit one job before they have another job lined up.
This has been high throughout the year, and reached an all-time record of 15.9 percent in September. It fell back to 14.6 percent in October, and was just 13.9 percent in November. That is lower than many months in 2018 and 2019, and only slightly higher than the 2019 average of 13.6 percent.
It is also worth noting that all the duration measures of unemployment increased in November. The average duration of unemployment spells rose by 0.6 weeks to 21.4 weeks, while the median increased by 0.3 weeks to 8.4 weeks. The share of long-term unemployed (more than 26 weeks) jumped by 1.1 percentage points to 20.6 percent.
This is consistent with a weakening of the labor market where workers are finding it more difficult to get jobs. That is also what we have been seeing in the weekly unemployment insurance data, where the percentage of workers remaining on unemployment insurance has been gradually increasing for several months, even though the level is still low.
Does the November Jobs Report Mean the Fed Has to Keep Firing the Big Guns?
We should try to look at the data with as clear eyes as possible, recognizing that our priors will inevitably bias our view to some extent. The November data did not provide the optimistic picture on inflation being beaten that many of us had hoped for. However, it is not a terrible report showing the opposite either.
We need to look at all the data available. As has been widely noted, even by Chair Powell, rental inflation as measured by the CPI and PCE deflator is virtually certain to slow in 2023, as private indexes of marketed units are showing sharp drops in rental inflation and possibly even deflation. These will show up in the official measures in 2023.
We have also seen a sharp drop in shipping costs, with averages now getting close to pre-pandemic levels. After rising rapidly in 2021 and the first months of 2022, non-fuel import prices are now falling. And, the core producer price index has been showing moderate inflation for the last five months.
It is also worth noting that the upward revision to the third quarter GDP report released last week will also mean an upward revision to reported productivity growth for the quarter. It still will be fairly weak, but hugely better than the negative productivity growth figures reported for the first half of this year. With fourth quarter GDP also looking to be relatively healthy at this point, we look to be back to at least a normal productivity growth trend, which will alleviate cost pressures.
It is undoubtedly true that if wages continue to grow at a nominal rate close to 5.0 percent, we will not be able to hit the Fed’s 2.0 percent inflation target. However, given the sharp shift to profits during the pandemic, we should expect that some higher-than-normal wage gains will be accommodated by a drop in profit margins, assuming that conditions of competition have not changed from the period before the pandemic.
In short, there is still a strong case for restraint from the Fed. The November jobs report definitely points towards inflation being more of a problem than I believed before seeing it, but it is not the slam dunk that many have claimed.
I confess I am a card-carrying member of Team Transitory, and I have been wrong about the extent to which inflation would be persistent. This was largely due to subsequent rounds of Covid, China’s zero Covid policy, and the Russian invasion of Ukraine, all factors which the inflation hawks did not anticipate either. But regardless of how we got here, the question is what things look like going forward.
We saw much more job growth in the November jobs report than most analysts, including me, had expected. By any measure, 263,000 new jobs in an economy near full employment is strong growth. It is not plausible that the economy can continue to add jobs at this pace.
Furthermore, we had a 0.6 percent jump in the average hourly wage in November. Annualized, that comes to over 7.0 percent wage growth. That is clearly not consistent with the Fed’s 2.0 percent inflation target, or anything close to it. The 1.4 percent three-month increase annualizes to 5.6 percent, which is not all that much better.
Taken together, the stronger than expected job growth, coupled with the big jump in wages, seems to indicate that we have a serious problem with inflation. The consensus seems to be that the Fed may have to keep the rate hikes in overdrive.
The Decline in Hours
There is no dispute that these are bad signs from the standpoint of inflation, but there are some items pointing in the other direction in the November report that were almost completely overlooked. First, although we did see a big jump in employment in the month, the length of the average workweek actually fell by 0.1 hour. This was not just the result of rounding; the index of aggregate weekly hours fell by 0.2 percent.
Hiring new workers and increasing hours per worker are alternative mechanisms of meeting the demand for labor. When hours per worker falls, that indicates less demand for labor. When aggregate hours fall, that indicates there was actually less demand for labor in November than in October. In other words, the opposite of a strong growth. This could be a sign that employers will be looking to reduce the size of their workforce in future months.
It is important to throw out the usual qualifications. This is one month of data. The index of aggregate hours is erratic, we often see sharp shifts from month to month. It is also subject to revisions, so the picture may look different when we get the December data.
But based on what we see in the November jobs report, demand for labor actually declined in November. Also, just to be clear, there were no obvious weather events or other non-economic disruptions in the reference period that could easily explain this decline.
The Jump in Pay in Transportation and Warehousing
While the 0.6 percent increase in average hourly wages is definitely bad news from the standpoint of inflation, it was driven in large part by a 2.5 percent reported increase in average hourly wages for workers in the transportation and warehousing sector. This was apparently due to large severance payments to workers in the sector, which presumably will not be repeated.
Julia Coronado, who called this to my attention in a tweet, calculated that the increase in the average hourly wage without this jump would have been 0.45 percent in November, the same as in October. In other words, there is no evidence of acceleration, we are not seeing the dreaded wage-price spiral.
She also pointed out that the response rate for Current Employment Situation survey, which is the basis for these data, plummeted in November. That means that the revisions, which will be reported next month, could be unusually large. Of course, revisions can go in either direction, but that is again grounds for viewing the November data with more caution than usual.
Drop in Share of Unemployment Due to Quits
Many of us have long looked to share of unemployment due to voluntary quits as a good measure of the strength of the labor market. This is effectively measuring the extent to which workers are so confident of their labor market prospects that they are willing to quit one job before they have another job lined up.
This has been high throughout the year, and reached an all-time record of 15.9 percent in September. It fell back to 14.6 percent in October, and was just 13.9 percent in November. That is lower than many months in 2018 and 2019, and only slightly higher than the 2019 average of 13.6 percent.
It is also worth noting that all the duration measures of unemployment increased in November. The average duration of unemployment spells rose by 0.6 weeks to 21.4 weeks, while the median increased by 0.3 weeks to 8.4 weeks. The share of long-term unemployed (more than 26 weeks) jumped by 1.1 percentage points to 20.6 percent.
This is consistent with a weakening of the labor market where workers are finding it more difficult to get jobs. That is also what we have been seeing in the weekly unemployment insurance data, where the percentage of workers remaining on unemployment insurance has been gradually increasing for several months, even though the level is still low.
Does the November Jobs Report Mean the Fed Has to Keep Firing the Big Guns?
We should try to look at the data with as clear eyes as possible, recognizing that our priors will inevitably bias our view to some extent. The November data did not provide the optimistic picture on inflation being beaten that many of us had hoped for. However, it is not a terrible report showing the opposite either.
We need to look at all the data available. As has been widely noted, even by Chair Powell, rental inflation as measured by the CPI and PCE deflator is virtually certain to slow in 2023, as private indexes of marketed units are showing sharp drops in rental inflation and possibly even deflation. These will show up in the official measures in 2023.
We have also seen a sharp drop in shipping costs, with averages now getting close to pre-pandemic levels. After rising rapidly in 2021 and the first months of 2022, non-fuel import prices are now falling. And, the core producer price index has been showing moderate inflation for the last five months.
It is also worth noting that the upward revision to the third quarter GDP report released last week will also mean an upward revision to reported productivity growth for the quarter. It still will be fairly weak, but hugely better than the negative productivity growth figures reported for the first half of this year. With fourth quarter GDP also looking to be relatively healthy at this point, we look to be back to at least a normal productivity growth trend, which will alleviate cost pressures.
It is undoubtedly true that if wages continue to grow at a nominal rate close to 5.0 percent, we will not be able to hit the Fed’s 2.0 percent inflation target. However, given the sharp shift to profits during the pandemic, we should expect that some higher-than-normal wage gains will be accommodated by a drop in profit margins, assuming that conditions of competition have not changed from the period before the pandemic.
In short, there is still a strong case for restraint from the Fed. The November jobs report definitely points towards inflation being more of a problem than I believed before seeing it, but it is not the slam dunk that many have claimed.
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• HousingInequalityLa DesigualdadUnited StatesEE. UU.
It is getting almost as bad as propaganda from an authoritarian regime. We keep hearing major news outlets tell us that inflation is whacking lower-income families. The Washington Post did it yesterday in an editorial demanding more rate hikes from the Fed to throw people out of work.
Lower-income people, like everyone else, are paying more for food, gas, and rent. The argument is that these items are a larger share of the budget of lower-income people, so they are hit harder by inflation than higher-income households.
The problem with telling this simple story is that wages have been growing most rapidly at the bottom end of the wage distribution, substantially outpacing inflation since the start of the pandemic. Also, in a tight labor market, more people are likely working in many households. They are also more likely to be able to find a job that has lower commuting costs or might allow them to work part-time to deal with child care or family needs.
One way to assess how these things balance out is to look at what has happened to homeownership rates. More homeownership is not always better, as some of us warned during the housing bubble years, but people who have the option to buy a home generally choose to do so.
Contrary to the propaganda coming from the media, homeownership rates have actually risen rapidly since the pandemic for households with incomes below the median, as shown below. (The big jump in 2020, which was partially reversed, is likely due to a skewing in responses, as the pandemic sent response rates plummeting.)
Source: Census Bureau (Table 8).
Homeownership rates have also risen for Black and Hispanic households and those headed by someone under age 35. It is more than a bit bizarre that the media have been almost uniformly insisting that these are horrible times for lower-income people despite data that say the opposite.
It is getting almost as bad as propaganda from an authoritarian regime. We keep hearing major news outlets tell us that inflation is whacking lower-income families. The Washington Post did it yesterday in an editorial demanding more rate hikes from the Fed to throw people out of work.
Lower-income people, like everyone else, are paying more for food, gas, and rent. The argument is that these items are a larger share of the budget of lower-income people, so they are hit harder by inflation than higher-income households.
The problem with telling this simple story is that wages have been growing most rapidly at the bottom end of the wage distribution, substantially outpacing inflation since the start of the pandemic. Also, in a tight labor market, more people are likely working in many households. They are also more likely to be able to find a job that has lower commuting costs or might allow them to work part-time to deal with child care or family needs.
One way to assess how these things balance out is to look at what has happened to homeownership rates. More homeownership is not always better, as some of us warned during the housing bubble years, but people who have the option to buy a home generally choose to do so.
Contrary to the propaganda coming from the media, homeownership rates have actually risen rapidly since the pandemic for households with incomes below the median, as shown below. (The big jump in 2020, which was partially reversed, is likely due to a skewing in responses, as the pandemic sent response rates plummeting.)
Source: Census Bureau (Table 8).
Homeownership rates have also risen for Black and Hispanic households and those headed by someone under age 35. It is more than a bit bizarre that the media have been almost uniformly insisting that these are horrible times for lower-income people despite data that say the opposite.
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It’s more than a bit bizarre that until Elon Musk bought Twitter, most policy types apparently did not see a risk that huge platforms like Facebook and Twitter could be controlled by people with a clear political agenda. While just about everyone had some complaints about the moderation of these and other commonly used platforms, they clearly were not pushing Fox News-style nonsense.
With Elon Musk in charge, that may no longer be true. Musk has indicated his fondness for racists and anti-Semites, and made it clear that they are welcome on his new toy. He also is apparently good with right-wing kooks making up stories about everything from Paul Pelosi to Covid vaccines. (Remember, with Section 230 protection, Musk cannot be sued for defaming individuals and companies by mass-marketing lies, only the originators face any legal liability.)
If the hate and lies aren’t enough to make Twitter unattractive to the reality-based community, the right-wing crazies are putting together their lists of people to be purged. We don’t know who they will come up with, and what qualifies in their mind for banishment. We also don’t know whether the self-proclaimed free-speech absolutist Elon Musk will go along, but there certainly is a risk that Musk will want to keep his friends happy.
In that case, Twitter may go the way of Truth Social and Parlor, which would be unfortunate, but probably better than having a massive social media platform subject to Elon Musk’s whims. But we should still be asking how we can get in a situation where one right-wing jerk can have so much power?
The Problem of Media Concentration Is Not New
The Musk problem is hardly new. After all, Rupert Murdoch has been broadcasting his imaginary world to the country for decades, highlighting pressing national issues like the War on Christmas and President Obama’s tan suit.
But the problem goes well beyond Murdoch. Media outlets are owned and controlled by rich people and/or large corporations. They exist first and foremost to make money. While there are some cases where owners may genuinely have a commitment to using their news outlet to serve the public, for example, the Sulzberger family, which has controlled the New York Times for more than a century, these are the exceptions.
And, even with the exceptions, their perception of the public good is an extremely wealthy person’s perception of the public good. That may not be the same as the perception of an average working person struggling to get by.
As far as for-profit enterprises, news outlets have to be concerned about getting advertising. That may make them less likely to report news that will reflect poorly on major advertisers. That means things like both siding the role of the fossil fuel industry in global warming, or downplaying the windfall that corporations got from Trump’s 2017 tax cut.
This ownership structure could reasonably cause us to question the neutrality of news from outlets like CNN (owned by AT&T), ABC (owned by Disney), or NBC (owned by GE). But Musk’s takeover of Twitter takes the problem a step further. The viewership of each of the networks’ news shows numbers in the single digit millions. Twitter has almost 80 million active users in the United States. This means it matters much more if Twitter is taken over by a right-wing jerk than your average television network.
Alternatives to Corporate Control
Even though the media are incredibly important in shaping people’s view of the world, there has been remarkably little attention to the issue from most liberals or progressives. There are some small, and poorly funded, organizations, like Fairness and Accuracy in Reporting and Media Matters, which do focus on the issue. And there are a few prominent intellectuals who have written on the topic, like Rick McChesney, Dan Froomkin, and Jay Rosen, but for the most part, the issue of media control gets little attention from the left of center.
Ironically, campaign finance reform, which is almost certainly an exercise in futility given recent Supreme Court rulings, gets far more attention. The absurdity of the focus on campaign finance reform should be apparent to anyone who gives the issue a moment’s thought.
Suppose through some miracle Congress passed, and the Supreme Court upheld, a bill that limited billionaires’ abilities to buy political ads for their favorite candidate. Is anything going to stop these billionaires from buying up newspapers and television stations and running the ads supporting their favored candidates as news stories?
There is no remotely satisfying answer to that question, and it is ridiculous that campaign finance reformers haven’t recognized this fact. Limiting campaign spending by rich people will do nothing if we don’t do something to limit their ability to influence public opinion through the media.
Fortunately, there are some ideas for challenging the control the rich have over the media. The basic story is that we are not going to be able to prevent the rich from buying and owning media outlets. Instead, we will have to go the other way and allow the non-rich to have a voice.[1]
The idea is that we can give every person some amount of money (e.g. $100 to $200) to support the media outlet(s), or possibly a broader category of creative workers, of their choice. This system could be modeled along the lines of the charitable contribution tax deduction, where the government draws out general conditions for being eligible to receive the funds.
This means that the government specifies the types of organizations that can qualify to receive the funds. In the case of the charitable deduction, an organization has to indicate that it’s a church, it provides food for the poor, or does something else that qualifies it to be a charitable organization.
The government doesn’t try to determine whether it’s a good church or whether the food it provides is high quality, the only question is whether the organization does what it claims. A similar policy could be applied to the recipients of funds allocated through this system. (In my view, I would make not getting copyright protection a condition of getting funding – the government gives you one subsidy, not two – but that is the sort of issue that could be resolved down the road.)
This sort of system could provide a large amount of money to sustain media organizations that are not owned by rich people. For example, if the credit were $200, and 10 million people chose to support a specific television network with their full credit, the organization would have $2 billion a year to cover its operating expenses. That is roughly equal to CNN’s annual operating revenue.
This credit could create enormous opportunities for the non-rich to finance newspapers/websites, television stations, and other outlets that could compete with the current ones owned and controlled by billionaires. This path also has the great benefit that it could put adopted piecemeal, with states and even local governments, giving their residents the opportunity to support new types of news outlets.
If enough people could gain support for this type of program, they could get a more progressive state, like California or Massachusetts to pave the way, or a city like San Francisco or Seattle. Just as the movement for a higher minimum wage has spread from successes in these places, the same could happen with a tax credit system to support alternative media.
Fun with Elon Musk and Twitter
Even if it proves to be possible to advance a tax credit system to support alternatives to the billionaires’ media, we still have the problem of massive platforms like Facebook and Twitter being owned by rich people, who can essentially do what they want in accordance with their whims. The big problem here is the issue of network effects.
The idea of network effects is that people benefit from being part of a massive network since they want to be able to see what a large number of other people are posting, and they may hope that a large number of people will see what they post. These effects can be exaggerated. For example, the overwhelming majority of users will never have their Facebook pages or Twitter posts viewed by more than a small number of people. Nonetheless, they are real. This makes it hard to dislodge a Facebook or Twitter, once it has become dominant.
One route to go is to make the playing field less hospitable to large platforms. This can be done by removing Section 230 protections for websites that either sell advertising or personal information. This means that the big platforms could be held liable for defamatory material that they circulated over their platform.
In this scenario, if election deniers wrote posts on Twitter saying that Dominion voting machines had switched votes from Trump to Biden, Elon Musk could be sued by Dominion for defamation, just as Fox News is now being sued. The same would apply to the vaccine deniers claiming that Pfizer and Moderna vaccines have killed huge numbers of people.
Taking away Section 230 protection from these platforms would not just help large actors. As it stands now, if some racist asshole started posting on their Facebook page that a restaurant owned by Blacks or Asians had poisoned their family and sent them to the hospital, the restaurant owner would have no legal recourse against Facebook. They could sue the racist, who may not have much money, but they could not even force Facebook to take down the post.
By contrast, if a television station or newspaper had allowed the person to speak or printed a letter to the editor along the same lines, they would face liability. They could be forced to issue a correction to avoid being named in a defamation suit.
There are clearly complications with going this route. A platform with billions of posts daily could not be expected to monitor posts in advance for potentially defamatory material. This problem has been solved (imperfectly) with copyright, under the Digital Millennium Copyright Act (DMCA), by requiring platforms to remove violating material in a timely manner after being notified by the copyright holder.
There could be a similar requirement for Internet sites. The evidence from the DMCA is that websites are overly cautious and err on the side of removing material even when the claim of violation is extremely weak. That may also prove to be the case with Internet platforms like Facebook and Twitter when it comes to allegedly defamatory material, but that is in part the point.
Part of the point of removing Section 230 protection from sites that rely on advertising or selling personal information is to put them at a disadvantage relative to sites that rely on subscriptions or donations to stay in business. In that case, people could count on posting material on a smaller site that might be removed by Facebook or Twitter. This would give sites operating on an alternative model a large advantage relative to the current Internet giants.
In any case, taking away Section 230 protection would clearly raise costs for the major Internet platforms. Given that Twitter was already struggling even before Elon Musk took it over, this sort of increase in costs would clearly be a serious blow.
Undoubtedly, changing the law on Section 230 protection would hurt some other sites as well. While some could probably switch over to a subscription model relatively easily, others may find it difficult. Sites will of course develop new modes of operation. For example, a site like Airbnb could require users to sign away their right to sue for defamation as a condition of usage.
As a practical matter, it is impossible to guarantee that there will be no negative outcomes from this change, just as is true of every policy that actually does anything in the world. The question is whether some number of sites either being seriously downsized, or going out of business altogether, is a price worth paying to prevent rich jerks from being able to operate huge platforms according to their whims.
To my view, it would be worth the price, but your mileage may vary. In any case, it is distressing to see we are now in a situation where this is the reality, not just a hypothetical one. It speaks volumes about the quality of intellectual debate in this country, that this possibility apparently caught so many of our leading policy types by surprise.
It’s more than a bit bizarre that until Elon Musk bought Twitter, most policy types apparently did not see a risk that huge platforms like Facebook and Twitter could be controlled by people with a clear political agenda. While just about everyone had some complaints about the moderation of these and other commonly used platforms, they clearly were not pushing Fox News-style nonsense.
With Elon Musk in charge, that may no longer be true. Musk has indicated his fondness for racists and anti-Semites, and made it clear that they are welcome on his new toy. He also is apparently good with right-wing kooks making up stories about everything from Paul Pelosi to Covid vaccines. (Remember, with Section 230 protection, Musk cannot be sued for defaming individuals and companies by mass-marketing lies, only the originators face any legal liability.)
If the hate and lies aren’t enough to make Twitter unattractive to the reality-based community, the right-wing crazies are putting together their lists of people to be purged. We don’t know who they will come up with, and what qualifies in their mind for banishment. We also don’t know whether the self-proclaimed free-speech absolutist Elon Musk will go along, but there certainly is a risk that Musk will want to keep his friends happy.
In that case, Twitter may go the way of Truth Social and Parlor, which would be unfortunate, but probably better than having a massive social media platform subject to Elon Musk’s whims. But we should still be asking how we can get in a situation where one right-wing jerk can have so much power?
The Problem of Media Concentration Is Not New
The Musk problem is hardly new. After all, Rupert Murdoch has been broadcasting his imaginary world to the country for decades, highlighting pressing national issues like the War on Christmas and President Obama’s tan suit.
But the problem goes well beyond Murdoch. Media outlets are owned and controlled by rich people and/or large corporations. They exist first and foremost to make money. While there are some cases where owners may genuinely have a commitment to using their news outlet to serve the public, for example, the Sulzberger family, which has controlled the New York Times for more than a century, these are the exceptions.
And, even with the exceptions, their perception of the public good is an extremely wealthy person’s perception of the public good. That may not be the same as the perception of an average working person struggling to get by.
As far as for-profit enterprises, news outlets have to be concerned about getting advertising. That may make them less likely to report news that will reflect poorly on major advertisers. That means things like both siding the role of the fossil fuel industry in global warming, or downplaying the windfall that corporations got from Trump’s 2017 tax cut.
This ownership structure could reasonably cause us to question the neutrality of news from outlets like CNN (owned by AT&T), ABC (owned by Disney), or NBC (owned by GE). But Musk’s takeover of Twitter takes the problem a step further. The viewership of each of the networks’ news shows numbers in the single digit millions. Twitter has almost 80 million active users in the United States. This means it matters much more if Twitter is taken over by a right-wing jerk than your average television network.
Alternatives to Corporate Control
Even though the media are incredibly important in shaping people’s view of the world, there has been remarkably little attention to the issue from most liberals or progressives. There are some small, and poorly funded, organizations, like Fairness and Accuracy in Reporting and Media Matters, which do focus on the issue. And there are a few prominent intellectuals who have written on the topic, like Rick McChesney, Dan Froomkin, and Jay Rosen, but for the most part, the issue of media control gets little attention from the left of center.
Ironically, campaign finance reform, which is almost certainly an exercise in futility given recent Supreme Court rulings, gets far more attention. The absurdity of the focus on campaign finance reform should be apparent to anyone who gives the issue a moment’s thought.
Suppose through some miracle Congress passed, and the Supreme Court upheld, a bill that limited billionaires’ abilities to buy political ads for their favorite candidate. Is anything going to stop these billionaires from buying up newspapers and television stations and running the ads supporting their favored candidates as news stories?
There is no remotely satisfying answer to that question, and it is ridiculous that campaign finance reformers haven’t recognized this fact. Limiting campaign spending by rich people will do nothing if we don’t do something to limit their ability to influence public opinion through the media.
Fortunately, there are some ideas for challenging the control the rich have over the media. The basic story is that we are not going to be able to prevent the rich from buying and owning media outlets. Instead, we will have to go the other way and allow the non-rich to have a voice.[1]
The idea is that we can give every person some amount of money (e.g. $100 to $200) to support the media outlet(s), or possibly a broader category of creative workers, of their choice. This system could be modeled along the lines of the charitable contribution tax deduction, where the government draws out general conditions for being eligible to receive the funds.
This means that the government specifies the types of organizations that can qualify to receive the funds. In the case of the charitable deduction, an organization has to indicate that it’s a church, it provides food for the poor, or does something else that qualifies it to be a charitable organization.
The government doesn’t try to determine whether it’s a good church or whether the food it provides is high quality, the only question is whether the organization does what it claims. A similar policy could be applied to the recipients of funds allocated through this system. (In my view, I would make not getting copyright protection a condition of getting funding – the government gives you one subsidy, not two – but that is the sort of issue that could be resolved down the road.)
This sort of system could provide a large amount of money to sustain media organizations that are not owned by rich people. For example, if the credit were $200, and 10 million people chose to support a specific television network with their full credit, the organization would have $2 billion a year to cover its operating expenses. That is roughly equal to CNN’s annual operating revenue.
This credit could create enormous opportunities for the non-rich to finance newspapers/websites, television stations, and other outlets that could compete with the current ones owned and controlled by billionaires. This path also has the great benefit that it could put adopted piecemeal, with states and even local governments, giving their residents the opportunity to support new types of news outlets.
If enough people could gain support for this type of program, they could get a more progressive state, like California or Massachusetts to pave the way, or a city like San Francisco or Seattle. Just as the movement for a higher minimum wage has spread from successes in these places, the same could happen with a tax credit system to support alternative media.
Fun with Elon Musk and Twitter
Even if it proves to be possible to advance a tax credit system to support alternatives to the billionaires’ media, we still have the problem of massive platforms like Facebook and Twitter being owned by rich people, who can essentially do what they want in accordance with their whims. The big problem here is the issue of network effects.
The idea of network effects is that people benefit from being part of a massive network since they want to be able to see what a large number of other people are posting, and they may hope that a large number of people will see what they post. These effects can be exaggerated. For example, the overwhelming majority of users will never have their Facebook pages or Twitter posts viewed by more than a small number of people. Nonetheless, they are real. This makes it hard to dislodge a Facebook or Twitter, once it has become dominant.
One route to go is to make the playing field less hospitable to large platforms. This can be done by removing Section 230 protections for websites that either sell advertising or personal information. This means that the big platforms could be held liable for defamatory material that they circulated over their platform.
In this scenario, if election deniers wrote posts on Twitter saying that Dominion voting machines had switched votes from Trump to Biden, Elon Musk could be sued by Dominion for defamation, just as Fox News is now being sued. The same would apply to the vaccine deniers claiming that Pfizer and Moderna vaccines have killed huge numbers of people.
Taking away Section 230 protection from these platforms would not just help large actors. As it stands now, if some racist asshole started posting on their Facebook page that a restaurant owned by Blacks or Asians had poisoned their family and sent them to the hospital, the restaurant owner would have no legal recourse against Facebook. They could sue the racist, who may not have much money, but they could not even force Facebook to take down the post.
By contrast, if a television station or newspaper had allowed the person to speak or printed a letter to the editor along the same lines, they would face liability. They could be forced to issue a correction to avoid being named in a defamation suit.
There are clearly complications with going this route. A platform with billions of posts daily could not be expected to monitor posts in advance for potentially defamatory material. This problem has been solved (imperfectly) with copyright, under the Digital Millennium Copyright Act (DMCA), by requiring platforms to remove violating material in a timely manner after being notified by the copyright holder.
There could be a similar requirement for Internet sites. The evidence from the DMCA is that websites are overly cautious and err on the side of removing material even when the claim of violation is extremely weak. That may also prove to be the case with Internet platforms like Facebook and Twitter when it comes to allegedly defamatory material, but that is in part the point.
Part of the point of removing Section 230 protection from sites that rely on advertising or selling personal information is to put them at a disadvantage relative to sites that rely on subscriptions or donations to stay in business. In that case, people could count on posting material on a smaller site that might be removed by Facebook or Twitter. This would give sites operating on an alternative model a large advantage relative to the current Internet giants.
In any case, taking away Section 230 protection would clearly raise costs for the major Internet platforms. Given that Twitter was already struggling even before Elon Musk took it over, this sort of increase in costs would clearly be a serious blow.
Undoubtedly, changing the law on Section 230 protection would hurt some other sites as well. While some could probably switch over to a subscription model relatively easily, others may find it difficult. Sites will of course develop new modes of operation. For example, a site like Airbnb could require users to sign away their right to sue for defamation as a condition of usage.
As a practical matter, it is impossible to guarantee that there will be no negative outcomes from this change, just as is true of every policy that actually does anything in the world. The question is whether some number of sites either being seriously downsized, or going out of business altogether, is a price worth paying to prevent rich jerks from being able to operate huge platforms according to their whims.
To my view, it would be worth the price, but your mileage may vary. In any case, it is distressing to see we are now in a situation where this is the reality, not just a hypothetical one. It speaks volumes about the quality of intellectual debate in this country, that this possibility apparently caught so many of our leading policy types by surprise.
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• CryptoGlobal FinanceUnited StatesEE. UU.
We should all recognize that Sam Bankman-Fried is much smarter than the rest of us. After all, outwardly he looks to be one of the biggest frauds of all time. By the age of 30 he amassed a fortune that dwarfs that of your average billionaire. He did it by running a crypto Ponzi-scheme. While claiming to be using his wealth to support philanthropies that were carefully selected to maximize human welfare, he was actually living a high life-style with his friends.
Now that the Ponzi has collapsed, the investors who trusted him look to be out of luck. And, of course there is no money for the philanthropies that he supported, many of which will are now struggling because they won’t get contributions they had been counting on.
That all looks pretty reprehensible, but maybe that’s the point. See, Sam Bankman-Fried was so committed to his philosophy of effective philanthropy that he was prepared to make himself appear to be the epitome of a despicable human being, and spend many years in prison, all to teach us that finance is a wasteful cesspool that needs to be reined in for the good of humanity. And, the place to start is his particular corner of the cesspool: crypto.
Philanthropy verse Reform: How Best to Save Humanity
The point here is straightforward. Suppose that Mr. Bankman-Fried was actually able to accumulate tens of billions of dollars through his brilliance, which he would then donate to the worthy causes he had carefully selected to have a maximum impact on human well-being. That would undoubtedly benefit some number of people in the United States and around the world.
But think for a minute about the financial sector. It has expanded enormously relative to the size of the economy over the last half century.
The broad finance, insurance, and real estate sector has more than doubled as a share of GDP over the last half-century, increasing from 5.5 percent of GDP in 1971 to 12.0 percent in 2021.[1] The additional 6.5 percent of GDP being devoted to finance in 2021 is equivalent to more than $1.4 trillion being absorbed by the sector. That comes to more than $11,800 a year for an average family.
The more narrow securities and commodity trading sector, along with investment funds and trusts, more than quadrupled as a share of GDP, rising from 0.55 percent of GDP in 1971 to 2.56 percent in 2021. This increase of 2.0 percentage points of GDP comes to more than $500 billion a year in the current economy, or almost $4,400 a year per family.
There is little to show for the massive expansion in the size of the financial sector. Finance is an intermediate good, like trucking. While both sectors are essential to the functioning of a modern economy, they don’t directly provide value to people in the way that the housing, food, or health care sectors do.
We need these sectors, but we want them to perform their economic functions as efficiently as possible. In the case of finance, those functions are facilitating payments to households and businesses and allocating capital to its best uses.
Clearly we have developed better mechanisms for paying our bills and carrying on other transactions, but the biggest developments are hardly new. Direct deposit of our paychecks and automatic payments for bills are great innovations that save lots of time for both sides of the transactions. However, these innovations date back more than four decades.
The same holds with credit cards and debit cards. The overwhelming majority of transactions are now made with these cards, but this is not especially new technology. Credit cards were already widely available in 1971, even if they were nowhere near as ubiquitous as they are today.
We can give the financial sector credit for the increase in the convenience of our system of payments, but how much is this worth? Is the time saved from using credit cards or having a direct deposit of your payments worth $11,800 a year to you? That seems a bit steep. I suspect given the option, most people would prefer an extra $11,800 in their paycheck and be given the check by hand rather than having it deposited automatically in their bank account.
How about the other part of the financial sector’s function, allocating capital to its best uses? There is no simple way to evaluate how effective our enlarged financial sector has been in allocating capital, primarily because we don’t have a counterfactual. We can’t point to an America with a smaller financial sector over the last half-century. (Steven Cecchetti and Enisse Kharroubbi did a cross-country analysis which found a larger financial sector boosted growth, but after reaching a certain size relative to the economy, it was a drag on growth.)
We can make a comparison of productivity growth in recent decades with productivity growth in the decades before the financial sector was consuming such a large share of the country’s output. In the years from the beginning of the Bureau of Labor Statistics productivity series in 1947 to 1972, productivity growth averaged 2.8 percent annually. From 1972 to 2022, productivity growth averaged just 1.8 percent.
If anything, productivity growth has slowed further as the financial sector has expanded relative to the economy. While there was a strong decade of productivity growth from 1995 to 2005, in the years from 2005 to 2019, productivity growth averaged just 1.4 percent.
The expanded financial sector may not be responsible for the slowing of productivity growth, and it’s certainly possible that it would have slowed even more without a larger financial sector. But, it is not easy to make the case that the financial sector has somehow led to faster productivity growth.
We pay for the waste in the financial sector not only through fees on financial transactions and our 401(k)s, and being front-run on our stock trades, but also through higher prices for housing and other items. Finance has created many of the great fortunes in the economy, not just Sam Bankman-Fried’s. When these people spend money buying bigger and/or more houses, it makes housing more expensive for the rest of us. They also hire people as their servants and demand workers for a wide range of activities from driving their cars to massaging their backs. Because the rich tie up so many workers meeting their luxury consumption, we have fewer people to work in child care centers or as teachers.
Sam Bankman-Fried Exposes the Corruption in Finance
So Bankman-Fried, being a genius, recognized the incredible waste and corruption in the financial sector. He knew that the best way to help humanity is to downsize the financial sector. The gains would dwarf the impact of anything he could hope to do with the money he could accumulate in his business dealings.
After all, even if he gave his entire Ponzi fortune of $15 billion to the best causes, this would be dwarfed by the good he could do by seriously downsizing the financial sector. After all, $15 billion is just over 1.0 percent of the $1.4 trillion increase in the relative size in the financial sector over the last half century. It is only 3.0 percent of the size of the increase in the relative size of just the narrow securities and commodities trading sectors.
Even if he managed to accumulate a pre-Twitter Elon Musk size fortune of $200 billion it would barely change the picture. That is less than 15 percent of the size of the bloat in the larger financial sector and just 40 percent of the bloat in the more narrow securities and commodities sector.
And, these are annual figures. The financial sector bloat is pulling these sums from the economy every year. A Musk-size fortune, accumulated over a life-time, would just be equal to 15 percent of a single year’s waste in the financial sector.
Obviously, Bankman-Fried is aware of this situation. He therefore realizes that the gains to humanity from reducing the waste in the financial sector would dwarf any benefits that he could hope to provide from the wealth he accumulates.
Bankman-Fried’s Brilliant Strategy
Recognizing the enormous waste and corruption in the financial sector, Bankman-Fried decided that the best way to attack it was by putting himself at the center of a scandal hitting finance at its most vulnerable point: the crypto craze. Most sectors of finance involve a mix of productive uses with speculation and waste. This is true of the stock and commodities markets, which do allow for businesses to raise capital and for primary goods producers to lock in prices, even if most trading is speculative in nature. Even private equity firms can occasionally turn around troubled businesses, as their supporters claim.
However, crypto does nothing for the economy. If all crypto currencies disappeared tomorrow, the only effect would be that some illicit transactions may become more risky for the people carrying them through.
This means that cracking down on crypto poses no real risks to the economy, only to crypto speculators. If we put a hefty tax on crypto trades, treating it like the gambling it is, it can raise revenue for the government and hugely reduce the amount of resources wasted in crypto trading.
Even more importantly, it can be a great foot in the door for a more general crackdown on finance. A crypto trading tax should introduce people in policy positions to the idea of taxing financial transactions (they should already be familiar with financial transactions taxes, but they aren’t), and ideally open the door to cracking down on finance more generally.
The potential benefits here are enormous. If we can just downsize the financial sector by 10 percent, it will free up more than $300 billion a year for productive purposes. That comes to more than $2,500 a year for every family in the country. As the effective philanthropy folks say, you can buy a lot of mosquito netting with $300 billion a year.
So, Bankman-Fried knew what he was doing in running a Ponzi-scheme and making himself look like one of the most despicable people alive. He may spend a lot of time in prison and be viewed with universal contempt for the rest of his life, but if his crimes lead to a crackdown on finance, he will have provided a great service to humanity.
[1] These data are taken from National Income and Product Accounts Table 6.2B, with the total share being Line 52 divided by Line 1 for 1971 and Table 6.2D, Lines 57 and 62, divided Line 1 for 2021. For the narrow securities and commodity trading sector, and holding and trust accounts, the calculation uses Line 55 and Line 59, divided by Line 1 for 1971. For 2021, it uses Line 59 and Line 61, divided by Line 1. These tables only give data on labor compensation. The implicit assumption is that the industry’s value added is proportional to labor compensation in the sector. While this will not be precisely accurate, it should be reasonably close.
We should all recognize that Sam Bankman-Fried is much smarter than the rest of us. After all, outwardly he looks to be one of the biggest frauds of all time. By the age of 30 he amassed a fortune that dwarfs that of your average billionaire. He did it by running a crypto Ponzi-scheme. While claiming to be using his wealth to support philanthropies that were carefully selected to maximize human welfare, he was actually living a high life-style with his friends.
Now that the Ponzi has collapsed, the investors who trusted him look to be out of luck. And, of course there is no money for the philanthropies that he supported, many of which will are now struggling because they won’t get contributions they had been counting on.
That all looks pretty reprehensible, but maybe that’s the point. See, Sam Bankman-Fried was so committed to his philosophy of effective philanthropy that he was prepared to make himself appear to be the epitome of a despicable human being, and spend many years in prison, all to teach us that finance is a wasteful cesspool that needs to be reined in for the good of humanity. And, the place to start is his particular corner of the cesspool: crypto.
Philanthropy verse Reform: How Best to Save Humanity
The point here is straightforward. Suppose that Mr. Bankman-Fried was actually able to accumulate tens of billions of dollars through his brilliance, which he would then donate to the worthy causes he had carefully selected to have a maximum impact on human well-being. That would undoubtedly benefit some number of people in the United States and around the world.
But think for a minute about the financial sector. It has expanded enormously relative to the size of the economy over the last half century.
The broad finance, insurance, and real estate sector has more than doubled as a share of GDP over the last half-century, increasing from 5.5 percent of GDP in 1971 to 12.0 percent in 2021.[1] The additional 6.5 percent of GDP being devoted to finance in 2021 is equivalent to more than $1.4 trillion being absorbed by the sector. That comes to more than $11,800 a year for an average family.
The more narrow securities and commodity trading sector, along with investment funds and trusts, more than quadrupled as a share of GDP, rising from 0.55 percent of GDP in 1971 to 2.56 percent in 2021. This increase of 2.0 percentage points of GDP comes to more than $500 billion a year in the current economy, or almost $4,400 a year per family.
There is little to show for the massive expansion in the size of the financial sector. Finance is an intermediate good, like trucking. While both sectors are essential to the functioning of a modern economy, they don’t directly provide value to people in the way that the housing, food, or health care sectors do.
We need these sectors, but we want them to perform their economic functions as efficiently as possible. In the case of finance, those functions are facilitating payments to households and businesses and allocating capital to its best uses.
Clearly we have developed better mechanisms for paying our bills and carrying on other transactions, but the biggest developments are hardly new. Direct deposit of our paychecks and automatic payments for bills are great innovations that save lots of time for both sides of the transactions. However, these innovations date back more than four decades.
The same holds with credit cards and debit cards. The overwhelming majority of transactions are now made with these cards, but this is not especially new technology. Credit cards were already widely available in 1971, even if they were nowhere near as ubiquitous as they are today.
We can give the financial sector credit for the increase in the convenience of our system of payments, but how much is this worth? Is the time saved from using credit cards or having a direct deposit of your payments worth $11,800 a year to you? That seems a bit steep. I suspect given the option, most people would prefer an extra $11,800 in their paycheck and be given the check by hand rather than having it deposited automatically in their bank account.
How about the other part of the financial sector’s function, allocating capital to its best uses? There is no simple way to evaluate how effective our enlarged financial sector has been in allocating capital, primarily because we don’t have a counterfactual. We can’t point to an America with a smaller financial sector over the last half-century. (Steven Cecchetti and Enisse Kharroubbi did a cross-country analysis which found a larger financial sector boosted growth, but after reaching a certain size relative to the economy, it was a drag on growth.)
We can make a comparison of productivity growth in recent decades with productivity growth in the decades before the financial sector was consuming such a large share of the country’s output. In the years from the beginning of the Bureau of Labor Statistics productivity series in 1947 to 1972, productivity growth averaged 2.8 percent annually. From 1972 to 2022, productivity growth averaged just 1.8 percent.
If anything, productivity growth has slowed further as the financial sector has expanded relative to the economy. While there was a strong decade of productivity growth from 1995 to 2005, in the years from 2005 to 2019, productivity growth averaged just 1.4 percent.
The expanded financial sector may not be responsible for the slowing of productivity growth, and it’s certainly possible that it would have slowed even more without a larger financial sector. But, it is not easy to make the case that the financial sector has somehow led to faster productivity growth.
We pay for the waste in the financial sector not only through fees on financial transactions and our 401(k)s, and being front-run on our stock trades, but also through higher prices for housing and other items. Finance has created many of the great fortunes in the economy, not just Sam Bankman-Fried’s. When these people spend money buying bigger and/or more houses, it makes housing more expensive for the rest of us. They also hire people as their servants and demand workers for a wide range of activities from driving their cars to massaging their backs. Because the rich tie up so many workers meeting their luxury consumption, we have fewer people to work in child care centers or as teachers.
Sam Bankman-Fried Exposes the Corruption in Finance
So Bankman-Fried, being a genius, recognized the incredible waste and corruption in the financial sector. He knew that the best way to help humanity is to downsize the financial sector. The gains would dwarf the impact of anything he could hope to do with the money he could accumulate in his business dealings.
After all, even if he gave his entire Ponzi fortune of $15 billion to the best causes, this would be dwarfed by the good he could do by seriously downsizing the financial sector. After all, $15 billion is just over 1.0 percent of the $1.4 trillion increase in the relative size in the financial sector over the last half century. It is only 3.0 percent of the size of the increase in the relative size of just the narrow securities and commodities trading sectors.
Even if he managed to accumulate a pre-Twitter Elon Musk size fortune of $200 billion it would barely change the picture. That is less than 15 percent of the size of the bloat in the larger financial sector and just 40 percent of the bloat in the more narrow securities and commodities sector.
And, these are annual figures. The financial sector bloat is pulling these sums from the economy every year. A Musk-size fortune, accumulated over a life-time, would just be equal to 15 percent of a single year’s waste in the financial sector.
Obviously, Bankman-Fried is aware of this situation. He therefore realizes that the gains to humanity from reducing the waste in the financial sector would dwarf any benefits that he could hope to provide from the wealth he accumulates.
Bankman-Fried’s Brilliant Strategy
Recognizing the enormous waste and corruption in the financial sector, Bankman-Fried decided that the best way to attack it was by putting himself at the center of a scandal hitting finance at its most vulnerable point: the crypto craze. Most sectors of finance involve a mix of productive uses with speculation and waste. This is true of the stock and commodities markets, which do allow for businesses to raise capital and for primary goods producers to lock in prices, even if most trading is speculative in nature. Even private equity firms can occasionally turn around troubled businesses, as their supporters claim.
However, crypto does nothing for the economy. If all crypto currencies disappeared tomorrow, the only effect would be that some illicit transactions may become more risky for the people carrying them through.
This means that cracking down on crypto poses no real risks to the economy, only to crypto speculators. If we put a hefty tax on crypto trades, treating it like the gambling it is, it can raise revenue for the government and hugely reduce the amount of resources wasted in crypto trading.
Even more importantly, it can be a great foot in the door for a more general crackdown on finance. A crypto trading tax should introduce people in policy positions to the idea of taxing financial transactions (they should already be familiar with financial transactions taxes, but they aren’t), and ideally open the door to cracking down on finance more generally.
The potential benefits here are enormous. If we can just downsize the financial sector by 10 percent, it will free up more than $300 billion a year for productive purposes. That comes to more than $2,500 a year for every family in the country. As the effective philanthropy folks say, you can buy a lot of mosquito netting with $300 billion a year.
So, Bankman-Fried knew what he was doing in running a Ponzi-scheme and making himself look like one of the most despicable people alive. He may spend a lot of time in prison and be viewed with universal contempt for the rest of his life, but if his crimes lead to a crackdown on finance, he will have provided a great service to humanity.
[1] These data are taken from National Income and Product Accounts Table 6.2B, with the total share being Line 52 divided by Line 1 for 1971 and Table 6.2D, Lines 57 and 62, divided Line 1 for 2021. For the narrow securities and commodity trading sector, and holding and trust accounts, the calculation uses Line 55 and Line 59, divided by Line 1 for 1971. For 2021, it uses Line 59 and Line 61, divided by Line 1. These tables only give data on labor compensation. The implicit assumption is that the industry’s value added is proportional to labor compensation in the sector. While this will not be precisely accurate, it should be reasonably close.
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• Economic Crisis and RecoveryCrisis económica y recuperaciónInflationUnited StatesEE. UU.
The media’s coverage of the economy in the last year and a half has inflation playing a starring, and almost exclusive, role. Items like the 50-year low in unemployment reached earlier this year have barely been mentioned.
Inflation has clearly been uncomfortably high, with the rising price of necessities putting a major burden on many households. But the story of mass impoverishment told by the media simply does not fit the data.
Wages for workers at the bottom have largely kept pace with inflation, with workers in low-paying industries, like hotels and restaurants, actually seeing pay gains that outpace inflation. We have also seen twenty million families refinance their mortgages, saving thousands of dollars a year in interest payments. And, the number of people working from home has increased by close to ten million. These workers are saving thousands a year in commuting costs.
For this reason, the idea that large segments of the country are experiencing extraordinary hardship does not make sense. This comes with the usual qualification that around 20 percent of the country (roughly 70 million people) are always struggling to get by, even in good times. However, the idea that times are much worse than in pre-pandemic years, for most of the population, is simply not true.
One way to get a sense of how people are doing is to look at how much they are consuming. We have quarterly data from the Commerce Department that allows us to measure real consumption. This is of course aggregate, so it is not measuring the distribution of consumption, but with the real wage gains at the bottom and the money saved on refinancing for millions in the middle, we can be reasonably comfortable that it is not all going to the top.
The figure below shows aggregate consumption, with one important modification. It pulls out consumption of health care services.[1] We have actually seen the share of spending on health care fall sharply since the pandemic. With people spending less on healthcare, it means that they have more to spend on other items.
Source: Bureau of Economic Analysis and author’s calculations.
As can be seen, spending on non-health care items has grown rapidly over the last three years. Real non-health consumption is up 7.8 percent since the fourth quarter of 2019, which translates into an annual growth rate of just under 2.8 percent.
For the curious, the biggest increase has been in consumption of durable goods, which were 25.6 percent higher in the third quarter of 2022 than in the fourth quarter of 2019. While most categories of durable goods had substantial increases, the largest increase was a 53.0 percent rise in spending on recreational goods, items like televisions and sporting goods. That doesn’t seem to fit the story of mass suffering told in the media, but who are you going to believe, CNN or government data?
It is worth asking about the drop in health care spending. People are relying more on telemedicine and home diagnostics. It is too early to know whether this corresponds to a decline in the quality of care. But it is important to remember that what we care about is health, not the number of doctors visits or medical tests. If we can get by with spending less on services, without jeopardizing the quality of care, this is a big plus. We will have to see if that is the case.
[1] These data are taken from National Income and Products Account Table 2.4.6U. The calculation takes total consumption (Line 1) and subtracts spending on therapeutic appliances and equipment (Line 64), pharmaceutical and other medical products (Line 119), health care services (Line 170), net health insurance (Line 273).
The media’s coverage of the economy in the last year and a half has inflation playing a starring, and almost exclusive, role. Items like the 50-year low in unemployment reached earlier this year have barely been mentioned.
Inflation has clearly been uncomfortably high, with the rising price of necessities putting a major burden on many households. But the story of mass impoverishment told by the media simply does not fit the data.
Wages for workers at the bottom have largely kept pace with inflation, with workers in low-paying industries, like hotels and restaurants, actually seeing pay gains that outpace inflation. We have also seen twenty million families refinance their mortgages, saving thousands of dollars a year in interest payments. And, the number of people working from home has increased by close to ten million. These workers are saving thousands a year in commuting costs.
For this reason, the idea that large segments of the country are experiencing extraordinary hardship does not make sense. This comes with the usual qualification that around 20 percent of the country (roughly 70 million people) are always struggling to get by, even in good times. However, the idea that times are much worse than in pre-pandemic years, for most of the population, is simply not true.
One way to get a sense of how people are doing is to look at how much they are consuming. We have quarterly data from the Commerce Department that allows us to measure real consumption. This is of course aggregate, so it is not measuring the distribution of consumption, but with the real wage gains at the bottom and the money saved on refinancing for millions in the middle, we can be reasonably comfortable that it is not all going to the top.
The figure below shows aggregate consumption, with one important modification. It pulls out consumption of health care services.[1] We have actually seen the share of spending on health care fall sharply since the pandemic. With people spending less on healthcare, it means that they have more to spend on other items.
Source: Bureau of Economic Analysis and author’s calculations.
As can be seen, spending on non-health care items has grown rapidly over the last three years. Real non-health consumption is up 7.8 percent since the fourth quarter of 2019, which translates into an annual growth rate of just under 2.8 percent.
For the curious, the biggest increase has been in consumption of durable goods, which were 25.6 percent higher in the third quarter of 2022 than in the fourth quarter of 2019. While most categories of durable goods had substantial increases, the largest increase was a 53.0 percent rise in spending on recreational goods, items like televisions and sporting goods. That doesn’t seem to fit the story of mass suffering told in the media, but who are you going to believe, CNN or government data?
It is worth asking about the drop in health care spending. People are relying more on telemedicine and home diagnostics. It is too early to know whether this corresponds to a decline in the quality of care. But it is important to remember that what we care about is health, not the number of doctors visits or medical tests. If we can get by with spending less on services, without jeopardizing the quality of care, this is a big plus. We will have to see if that is the case.
[1] These data are taken from National Income and Products Account Table 2.4.6U. The calculation takes total consumption (Line 1) and subtracts spending on therapeutic appliances and equipment (Line 64), pharmaceutical and other medical products (Line 119), health care services (Line 170), net health insurance (Line 273).
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• COVID-19CoronavirusCryptoIntellectual PropertyPropiedad IntelectualUnited StatesEE. UU.
The World Health Organization is in the early phases of putting together an international agreement for dealing with pandemics. The goal is to ensure both that the world is prepared to fend off future pandemics by developing effective vaccines, tests, and treatments; and that these products are widely accessible, including in low-income countries that don’t have large amounts of money available for public health expenditures.
While the drafting of the agreement is still in its early phases, the shape of the main conflicts is already clear. The public health advocates, who want to ensure widespread access to these products, are trying to limit the extent to which patent monopolies and other protections price them out of the reach of developing countries. On the other side, the pharmaceutical industry wants these protections to be as long and as strong as possible, in order to maximize their profits. As Pfizer and Moderna know well, pandemics can be great for business.
The shape of this battle is hardly new. We saw the same story not just in the Covid pandemic, but also in the AIDS pandemic in the 1990s, when millions of people needlessly died in Sub-Saharan Africa because the U.S. and European pharmaceutical industries tried to block the widespread distribution of AIDS drugs.
Although the battle lines are familiar, one disturbing feature is the continuing failure of those concerned about inequality to take part in this debate. In the United States, we have plenty of groups and individuals who will spend endless hours fighting over clauses in the tax code that may give a few hundred million dollars to the rich. This is generally a good fight, but it is hard to understand the lack of interest in the structuring of a pandemic treaty that could mean hundreds of billions of dollars going to the rich.
This is not fanciful speculation. After the U.S. government paid Moderna $450 million to develop its Covid vaccine, and then another $450 million for the Phase 3 clinical trials, it then let the company have intellectual property rights in the vaccine. The stock price then increased more than ten-fold, creating at least five Moderna billionaires.
The extent of government support for the Moderna vaccine is extraordinary, but the basic story of drug companies getting huge profits, and select employees getting very rich, as a result of government research and government-granted patent monopolies, is very much the norm. The United States will pay close to $525 billion for prescription drugs in 2022.[1] It would likely be paying less than $100 billion in a free market, without patent monopolies and other forms of protection. The difference of $425 billion is more than half the size of the defense budget, it comes to more than $3,000 per family. And, it makes a relatively small number of people very rich.
The issue of intellectual property claims in the context of a pandemic preparedness agreement will not directly overturn the whole structure of the pharmaceutical industry, but it is likely to involve a substantial chunk of money if a future pandemic is similar to the Covid pandemic. It also could establish an alternative path for financing drug development.
If there was an agreement that publicly funded research would be freely shared across countries, and that anyone with the manufacturing capabilities could produce the drugs, vaccines, and tests that were produced by the research, it could establish the feasibility of a clear alternative to patent monopoly financed research. This could become a model for drug development more generally, which would jeopardize the huge fortunes being generated in the pharmaceutical industry.
For this reason, there is potentially an enormous amount of money at stake, with large impacts on inequality, in how a pandemic preparedness agreement is structured. In short, there is plenty here that should warrant the interest of the individuals and organizations that focus on inequality; they should be paying attention.
Of course, this doesn’t take away from the fact that the main focus of a pandemic agreement should be on saving lives. But the delays in sharing technology in the Covid pandemic strongly suggest that the path of open source research and free market production will be best both from the standpoint of reducing inequality and saving lives.
The Crypto Meltdown: Just Tax Gambling
I’ve been following economic debates long enough to have seen lots of craziness. In the 1990s stock bubble, I heard PhD economists telling me that we could count on the stock market going up 10 percent a year, even when price-to-earnings ratios were already at record highs. In the 00s, we had financial experts saying that housing was a safe investment because, even if the price plummeted, you could always live in your home.
The crypto craze has both bubbles beat, as the price of absolutely nothing soared to incredible levels. Other than possibly facilitating illegal transactions (I’ve heard law enforcement experts claim that crypto can now be traced relatively easily), there is no remotely plausible use for crypto. In other words, its price is pure speculation. Bitcoin and other cryptocurrencies have no intrinsic value, therefore the price can very possibly fall to zero, once the promoters run out of suckers, or “the brave,” as Matt Damon calls them.
Anyhow, this one really should not be hard from a policy standpoint. Putting money in crypto is gambling, pure and simple. We don’t make it illegal for people to gamble. They can gamble in Las Vegas bet on sports events and elections, or play the lottery. We just tax gambling so the government can get a cut and we try to make sure that people understand what they are doing – that they are playing a game that is structured so that they will lose.
In this sense, taxing crypto trades seems like an ideal policy. It will be a way to both get tax revenue and also to inform people that they are gambling, not investing. It looks like we presently have around $2 trillion a year in crypto trades. If we tax each trade at a 1.0 percent rate (half paid by the buyer and half by the seller), that would raise $20 billion a year, or $200 billion over a ten-year budget window.
A tax of this size (still far lower than taxes on casino gambling or lotteries) would hugely reduce the volume of trading, so the government may end up collecting half this amount, or even less. But, by reducing the resources that are tied up in crypto trading, we will be freeing up resources for productive uses, even if the government is not collecting the money in taxes. Think of it as an anti-inflation policy.
The good part of this story is that there really is no downside. When we tax things like food or gas, we make it more difficult for people to buy items that they need to get by. But who cares if it is more expensive for people to speculate with crypto?
The folks who run the crypto exchanges will be unhappy, as well as the celebrities who might get fewer dollars for their ads, but these people can instead try to channel their energy into something that is productive. People make money pushing heroin also, but no one feels bad about reducing opportunities in the heroin industry.
There also is a side benefit from a tax on crypto. It may get people to think more clearly about the financial sector generally. We need a financial sector to carry through transactions and to allocate capital, but we have seen the size of the financial sector explode (relative to the economy) in the last half century. This hugely bloated financial sector is an enormous drain of resources from the economy and a major source of inequality.
A tax on crypto can be a step towards implementing financial transaction taxes more generally. A tax on trades of stocks, bonds, and other assets would have to be far lower since there would be an economic cost from eliminating these trades altogether. But we could have a tax of, say 0.1 percent on stock trades, which would just raise trading costs back to their 1990s levels. This would eliminate much short-term speculative trading and could raise close to $100 billion a year.
We are very far from having the political support for a broad financial transactions tax, but perhaps the FTX meltdown can create enough anger to build momentum for a tax on crypto trades. It certainly seems like it’s worth a try.
Can Progressives Learn to be Opportunists?
The pandemic preparedness treaty and the crypto collapse might seem pretty far removed, but both present opportunities to crack down on major sources of waste and inequality in the economy. The right has been very clever in finding ways to undermine progressive structures and sources of power.
For example, they managed to destroy traditionally defined benefit pensions by inserting an obscure provision in the tax code, which created 401(k) defined contribution retirement accounts. They hugely undermined manufacturing unions by pursuing fictitious “free-trade” agreements, which subjected manufacturing workers to international competition, while protecting high-end professionals and increasing protections for patent and copyright monopolies.
The pandemic agreement provides a great opportunity to weaken patent monopolies and related protections while increasing the prospect that billions of people in the developing world will be able to survive the next pandemic. The crypto meltdown provides a window through which people may see the enormous waste and corruption in the financial sector. It would be great if progressives could take advantage of these opportunities.
[1] This figure comes from the Bureau of Economic Analysis, National Income and Product Accounts, Table 2.4.5U Line 121. The calculation of the cost without patent monopolies can be found here.
The World Health Organization is in the early phases of putting together an international agreement for dealing with pandemics. The goal is to ensure both that the world is prepared to fend off future pandemics by developing effective vaccines, tests, and treatments; and that these products are widely accessible, including in low-income countries that don’t have large amounts of money available for public health expenditures.
While the drafting of the agreement is still in its early phases, the shape of the main conflicts is already clear. The public health advocates, who want to ensure widespread access to these products, are trying to limit the extent to which patent monopolies and other protections price them out of the reach of developing countries. On the other side, the pharmaceutical industry wants these protections to be as long and as strong as possible, in order to maximize their profits. As Pfizer and Moderna know well, pandemics can be great for business.
The shape of this battle is hardly new. We saw the same story not just in the Covid pandemic, but also in the AIDS pandemic in the 1990s, when millions of people needlessly died in Sub-Saharan Africa because the U.S. and European pharmaceutical industries tried to block the widespread distribution of AIDS drugs.
Although the battle lines are familiar, one disturbing feature is the continuing failure of those concerned about inequality to take part in this debate. In the United States, we have plenty of groups and individuals who will spend endless hours fighting over clauses in the tax code that may give a few hundred million dollars to the rich. This is generally a good fight, but it is hard to understand the lack of interest in the structuring of a pandemic treaty that could mean hundreds of billions of dollars going to the rich.
This is not fanciful speculation. After the U.S. government paid Moderna $450 million to develop its Covid vaccine, and then another $450 million for the Phase 3 clinical trials, it then let the company have intellectual property rights in the vaccine. The stock price then increased more than ten-fold, creating at least five Moderna billionaires.
The extent of government support for the Moderna vaccine is extraordinary, but the basic story of drug companies getting huge profits, and select employees getting very rich, as a result of government research and government-granted patent monopolies, is very much the norm. The United States will pay close to $525 billion for prescription drugs in 2022.[1] It would likely be paying less than $100 billion in a free market, without patent monopolies and other forms of protection. The difference of $425 billion is more than half the size of the defense budget, it comes to more than $3,000 per family. And, it makes a relatively small number of people very rich.
The issue of intellectual property claims in the context of a pandemic preparedness agreement will not directly overturn the whole structure of the pharmaceutical industry, but it is likely to involve a substantial chunk of money if a future pandemic is similar to the Covid pandemic. It also could establish an alternative path for financing drug development.
If there was an agreement that publicly funded research would be freely shared across countries, and that anyone with the manufacturing capabilities could produce the drugs, vaccines, and tests that were produced by the research, it could establish the feasibility of a clear alternative to patent monopoly financed research. This could become a model for drug development more generally, which would jeopardize the huge fortunes being generated in the pharmaceutical industry.
For this reason, there is potentially an enormous amount of money at stake, with large impacts on inequality, in how a pandemic preparedness agreement is structured. In short, there is plenty here that should warrant the interest of the individuals and organizations that focus on inequality; they should be paying attention.
Of course, this doesn’t take away from the fact that the main focus of a pandemic agreement should be on saving lives. But the delays in sharing technology in the Covid pandemic strongly suggest that the path of open source research and free market production will be best both from the standpoint of reducing inequality and saving lives.
The Crypto Meltdown: Just Tax Gambling
I’ve been following economic debates long enough to have seen lots of craziness. In the 1990s stock bubble, I heard PhD economists telling me that we could count on the stock market going up 10 percent a year, even when price-to-earnings ratios were already at record highs. In the 00s, we had financial experts saying that housing was a safe investment because, even if the price plummeted, you could always live in your home.
The crypto craze has both bubbles beat, as the price of absolutely nothing soared to incredible levels. Other than possibly facilitating illegal transactions (I’ve heard law enforcement experts claim that crypto can now be traced relatively easily), there is no remotely plausible use for crypto. In other words, its price is pure speculation. Bitcoin and other cryptocurrencies have no intrinsic value, therefore the price can very possibly fall to zero, once the promoters run out of suckers, or “the brave,” as Matt Damon calls them.
Anyhow, this one really should not be hard from a policy standpoint. Putting money in crypto is gambling, pure and simple. We don’t make it illegal for people to gamble. They can gamble in Las Vegas bet on sports events and elections, or play the lottery. We just tax gambling so the government can get a cut and we try to make sure that people understand what they are doing – that they are playing a game that is structured so that they will lose.
In this sense, taxing crypto trades seems like an ideal policy. It will be a way to both get tax revenue and also to inform people that they are gambling, not investing. It looks like we presently have around $2 trillion a year in crypto trades. If we tax each trade at a 1.0 percent rate (half paid by the buyer and half by the seller), that would raise $20 billion a year, or $200 billion over a ten-year budget window.
A tax of this size (still far lower than taxes on casino gambling or lotteries) would hugely reduce the volume of trading, so the government may end up collecting half this amount, or even less. But, by reducing the resources that are tied up in crypto trading, we will be freeing up resources for productive uses, even if the government is not collecting the money in taxes. Think of it as an anti-inflation policy.
The good part of this story is that there really is no downside. When we tax things like food or gas, we make it more difficult for people to buy items that they need to get by. But who cares if it is more expensive for people to speculate with crypto?
The folks who run the crypto exchanges will be unhappy, as well as the celebrities who might get fewer dollars for their ads, but these people can instead try to channel their energy into something that is productive. People make money pushing heroin also, but no one feels bad about reducing opportunities in the heroin industry.
There also is a side benefit from a tax on crypto. It may get people to think more clearly about the financial sector generally. We need a financial sector to carry through transactions and to allocate capital, but we have seen the size of the financial sector explode (relative to the economy) in the last half century. This hugely bloated financial sector is an enormous drain of resources from the economy and a major source of inequality.
A tax on crypto can be a step towards implementing financial transaction taxes more generally. A tax on trades of stocks, bonds, and other assets would have to be far lower since there would be an economic cost from eliminating these trades altogether. But we could have a tax of, say 0.1 percent on stock trades, which would just raise trading costs back to their 1990s levels. This would eliminate much short-term speculative trading and could raise close to $100 billion a year.
We are very far from having the political support for a broad financial transactions tax, but perhaps the FTX meltdown can create enough anger to build momentum for a tax on crypto trades. It certainly seems like it’s worth a try.
Can Progressives Learn to be Opportunists?
The pandemic preparedness treaty and the crypto collapse might seem pretty far removed, but both present opportunities to crack down on major sources of waste and inequality in the economy. The right has been very clever in finding ways to undermine progressive structures and sources of power.
For example, they managed to destroy traditionally defined benefit pensions by inserting an obscure provision in the tax code, which created 401(k) defined contribution retirement accounts. They hugely undermined manufacturing unions by pursuing fictitious “free-trade” agreements, which subjected manufacturing workers to international competition, while protecting high-end professionals and increasing protections for patent and copyright monopolies.
The pandemic agreement provides a great opportunity to weaken patent monopolies and related protections while increasing the prospect that billions of people in the developing world will be able to survive the next pandemic. The crypto meltdown provides a window through which people may see the enormous waste and corruption in the financial sector. It would be great if progressives could take advantage of these opportunities.
[1] This figure comes from the Bureau of Economic Analysis, National Income and Product Accounts, Table 2.4.5U Line 121. The calculation of the cost without patent monopolies can be found here.
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• EnergyEnvironmentEuropeEuropaMedia
The NYT did a classic “really big number” move when in an article on Europe’s energy needs. It told readers:
“But major challenges remain. Solar power, in particular, has supply chain risks of its own. China has a near-monopoly on the raw materials and technical expertise to produce photovoltaic cells for solar panels. An analysis from Bloomberg BNEF found it would take nearly $150 billion for Europe to build the plants to manufacture enough solar capacity and storage to meet demand by 2030.”
Since it’s possible that some NYT readers don’t have a good idea of what the European Union’s GDP will be over the next seven years, the IMF projections tell us it should be well over $100 trillion. That means that the projected cost of building solar manufacturing facilities will be a bit more than 0.1 percent of its GDP over this period.
The NYT did a classic “really big number” move when in an article on Europe’s energy needs. It told readers:
“But major challenges remain. Solar power, in particular, has supply chain risks of its own. China has a near-monopoly on the raw materials and technical expertise to produce photovoltaic cells for solar panels. An analysis from Bloomberg BNEF found it would take nearly $150 billion for Europe to build the plants to manufacture enough solar capacity and storage to meet demand by 2030.”
Since it’s possible that some NYT readers don’t have a good idea of what the European Union’s GDP will be over the next seven years, the IMF projections tell us it should be well over $100 trillion. That means that the projected cost of building solar manufacturing facilities will be a bit more than 0.1 percent of its GDP over this period.
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• Economic Crisis and RecoveryCrisis económica y recuperaciónInflationUnited StatesEE. UU.
The evidence continues to grow that inflation is now slowing to a pace consistent with the Fed’s 2.0 percent inflation target. The October Consumer Price Index showed inflation overall was 0.4 percent and 0.3 percent in the core index. These figures are still considerably higher than what would be consistent with the Fed’s 2.0 percent target, but they were lower than generally expected.
Most importantly, the direction of change is clearly downward, with the annual rate of inflation over the last three months coming to 2.4 percent in the overall CPI and 5.1 percent in the core index. The latter still would be very worrying except, that it is driven largely by rent, which accounts for almost 40 percent of the core index.
We know that the rate of rental inflation is slowing sharply. There are a number of private indexes that track the rents of units that come up on the market, as opposed to the CPI, which measures the changes in rent for all units. These private indexes all show a sharp slowing in rent increases, with the most recent data possibly even indicating declining rents.
In any case, we know that in 2023, rental inflation in the CPI will be far lower than what we are seeing now. Slower rental inflation will go far towards moving us towards the Fed’s target.
We also got more good news on inflation this week with the release of data on producer prices and import prices. Both provide more evidence that inflation is likely to slow further in the rest of 2022 and the first months of 2023.
The Producer Price Index, which measures wholesale prices at various stages of the production process, has been showing a sharp slowing of inflation. The chart below shows the annualized rate of inflation over the prior three months for the core final demand index (excluding food and energy), which measures the price of goods and services at the last stage of the production process before retail.
Source: Bureau of Labor Statistics and author’s calculations.
As can be seen, this measure showed an inflation rate of more than 11.0 percent at the end of 2021. It slowed sharply over the course of this year, and it was now just 3.0 percent for the three-month period ending in October. This is lower than peak periods in the years before the pandemic, when inflation was below the Fed’s 2.0 percent target.
The picture in the import price index provides even better news on disinflation.
Source: Bureau of Labor Statistics and author’s calculations.
The graph shows that inflation in non-fuel import prices peaked at almost a 15 percent annual rate early in the year. Since April, import prices have turned around and instead of rising sharply, they actually have been falling. In the three-month period ending in October they were falling at almost a 2.5 percent annual rate.
This turnaround in import prices will have a large effect on inflation in the months ahead. Non-fuel imports are equal to more than 14 percent of GDP. They include both inputs of parts and materials and final products like clothes and appliances. It makes a huge difference if the price of imports is rising at a double-digit rate, as was the case at the start of the year, or falling at a single digit rate, as is now the case.
We continue to see evidence that inflation is slowing sharply, from slower wage growth, to sharply lower rental inflation, and falling import prices. It will be some months before the impact of these changes are fully reflected in consumer prices, but we can be fairly certain that it will be showing up in the not distant future.
The evidence continues to grow that inflation is now slowing to a pace consistent with the Fed’s 2.0 percent inflation target. The October Consumer Price Index showed inflation overall was 0.4 percent and 0.3 percent in the core index. These figures are still considerably higher than what would be consistent with the Fed’s 2.0 percent target, but they were lower than generally expected.
Most importantly, the direction of change is clearly downward, with the annual rate of inflation over the last three months coming to 2.4 percent in the overall CPI and 5.1 percent in the core index. The latter still would be very worrying except, that it is driven largely by rent, which accounts for almost 40 percent of the core index.
We know that the rate of rental inflation is slowing sharply. There are a number of private indexes that track the rents of units that come up on the market, as opposed to the CPI, which measures the changes in rent for all units. These private indexes all show a sharp slowing in rent increases, with the most recent data possibly even indicating declining rents.
In any case, we know that in 2023, rental inflation in the CPI will be far lower than what we are seeing now. Slower rental inflation will go far towards moving us towards the Fed’s target.
We also got more good news on inflation this week with the release of data on producer prices and import prices. Both provide more evidence that inflation is likely to slow further in the rest of 2022 and the first months of 2023.
The Producer Price Index, which measures wholesale prices at various stages of the production process, has been showing a sharp slowing of inflation. The chart below shows the annualized rate of inflation over the prior three months for the core final demand index (excluding food and energy), which measures the price of goods and services at the last stage of the production process before retail.
Source: Bureau of Labor Statistics and author’s calculations.
As can be seen, this measure showed an inflation rate of more than 11.0 percent at the end of 2021. It slowed sharply over the course of this year, and it was now just 3.0 percent for the three-month period ending in October. This is lower than peak periods in the years before the pandemic, when inflation was below the Fed’s 2.0 percent target.
The picture in the import price index provides even better news on disinflation.
Source: Bureau of Labor Statistics and author’s calculations.
The graph shows that inflation in non-fuel import prices peaked at almost a 15 percent annual rate early in the year. Since April, import prices have turned around and instead of rising sharply, they actually have been falling. In the three-month period ending in October they were falling at almost a 2.5 percent annual rate.
This turnaround in import prices will have a large effect on inflation in the months ahead. Non-fuel imports are equal to more than 14 percent of GDP. They include both inputs of parts and materials and final products like clothes and appliances. It makes a huge difference if the price of imports is rising at a double-digit rate, as was the case at the start of the year, or falling at a single digit rate, as is now the case.
We continue to see evidence that inflation is slowing sharply, from slower wage growth, to sharply lower rental inflation, and falling import prices. It will be some months before the impact of these changes are fully reflected in consumer prices, but we can be fairly certain that it will be showing up in the not distant future.
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• CryptoFinancial Transaction TaxUnited StatesEE. UU.Wall StreetEl Mundo Financiero
I remember talking to a progressive group a bit more than a decade ago, arguing for the merits of a financial transactions tax (FTT). After I laid out the case, someone asked me if we had lost the opportunity to push for an FTT now that the financial crisis was over. I assured the person that we could count on the financial sector to give us more scandals that would create opportunities for reform.
Shortly after, we were rewarded with the trading scandal from the aptly named investment company, MF Global. It seems that FTX has given us yet another great case study of greed and corruption in the financial sector.
The financial sector was and is a happy home for those seeking big bucks and who don’t mind bending or breaking the rules to fill their pockets. Corporate America is not generally known as a center of virtue, but in most other sectors, there is at least a product by which a company can be evaluated. Does the auto industry produce cars that are safe and drive well? Does the airline industry get people to their destinations on time?
These are metrics that can be applied in a reasonably straightforward way. But what does the financial sector do? In fact, there are metrics, but they are not as straightforward, and we literally never see the business press applying them to the sector.
Finance and Trucking: Big is Bad
At the most basic level, finance is an intermediate good. This distinguishes the financial sector from sectors like health care, housing, or agriculture. Finance does not directly produce anything of value to households. Its value to the economy is that it facilitates transactions and allocates capital. These functions are tremendously important, but they are not valuable in themselves. They are valuable because of their service to the productive economy.
In this way, finance can be considered similar to the trucking industry. Trucking is enormously important to the economy in getting goods to consumers and essential inputs to manufacturers and service providers. But it does not directly produce value. We only benefit from having more workers and trucks if they allow the industry to serve its function better. That means getting goods to their destination more quickly or getting them there with less damage or spoilage.
This is the same story with finance. We benefit from having more resources in finance only insofar as they allow it to service the productive economy better. That means facilitating payments to make them easier and quicker and better allocating capital to its most productive uses.
Serious Bloat in Finance
The financial sector has exploded in size in the last half-century. The broad finance, insurance, and real estate sector has more than doubled as a share of GDP over the last half-century, increasing from 5.5 percent of GDP in 1971 to 12.0 percent in 2021.[1] The additional 6.5 percent of GDP being devoted to finance in 2021 is equivalent to more than $1.4 trillion being absorbed by the sector. This comes to more than $11,800 a year for an average family.
The more narrow securities and commodity trading sector, along with investment funds and trusts, more than quadrupled as a share of GDP, rising from 0.55 percent of GDP in 1971 to 2.56 percent in 2021. This increase of 2.0 percentage points of GDP comes to more than $500 billion a year in the current economy, or almost $4,400 a year per family. This is more than half the size of the military budget.
Clearly, the financial sector is a far larger drain on the economy today than fifty years ago. It is also a major source of inequality. The list of the country’s billionaires is chock full of people, like Stephan Schwarzman and Peter Thiel, who made fortunes in hedge funds, private equity funds, and other financial entities. In short, the data are clear: the financial sector is taking up a far larger share of the economy’s resources than it did a half-century ago, and it is a major factor in generating inequality,
The big question is, what are we getting for all the extra resources the financial sector is taking from the rest of us? This is asking about the extent to which our means of payments have been improved and the extent to which we better allocate capital today than we would be with a smaller financial sector.
On the first question, clearly we have developed better mechanisms for paying our bills and carrying on other transactions, but the biggest developments are hardly new. Direct deposit of our paychecks and automatic payments for bills are great innovations that save lots of time for both sides of the transactions. However, these innovations date back more than four decades.
The same holds with credit cards and debit cards. The overwhelming majority of transactions are now made with these cards, but this is not especially new technology. Credit cards were already widely available in 1971, even if they were nowhere near as ubiquitous as they are today.
We can give the financial sector credit for the increase in the convenience of our system of payments, but how much is this worth? Is the time saved from using credit cards or having a direct deposit of your payments worth $11,800 a year to you? That seems a bit steep. I suspect given the option, most people would prefer an extra $11,800 in their paycheck and be given the check by hand rather than having it deposited automatically in their bank account.
How about the other part of the financial sector’s function, allocating capital to its best uses? There is no simple way to evaluate how effective our enlarged financial sector has been in allocating capital, primarily because we don’t have a counterfactual. We can’t point to an America with a smaller financial sector over the last half-century. (Steven Cecchetti and Enisse Kharroubbi did a cross-country analysis which found a larger financial sector boosted growth, but after reaching a certain size relative to the economy, it was a drag on growth.)
We can make a comparison of productivity growth in recent decades with productivity growth in the decades before the financial sector was consuming such a large share of the country’s output. In the years from the beginning of the Bureau of Labor Statistics productivity series in 1947 to 1972, productivity growth averaged 2.8 percent annually. From 1972 to 2022, productivity growth averaged just 1.8 percent.
If anything, productivity growth has slowed further as the financial sector has expanded relative to the economy. While there was a strong decade of productivity growth from 1995 to 2005, in the years from 2005 to 2019, productivity growth averaged just 1.4 percent.
The expanded financial sector may not be responsible for the slowing of productivity growth, and it’s certainly possible that it would have slowed even more without a larger financial sector. But, it is not easy to make the case that the financial sector has somehow led to faster productivity growth.
FTX, Crypto, Rent-Seeking, and Fraud
Suppose the growth of the financial sector has not led to corresponding benefits to the productive economy. In that case, we should view it as a source of waste and inefficiency, just as we would view a massive increase in the size of the trucking industry without any benefits in terms of improved delivery times. From the standpoint of policy, we should be looking at every opportunity to whittle down the size of the financial sector to reduce waste in the economy.
Applying a financial transactions tax, similar to the sales tax paid in other sectors, would be a great place to start. Getting rid of tax preferences that provide government subsidies to private equity and hedge funds is another great policy option. Also, simplifying the corporate tax code to reduce the money made by tax gaming should also be a priority.
As a general rule, we should be doing everything possible to reduce the size of the financial sector, as long as we are not jeopardizing its ability to serve the productive economy. The message here for dealing with crypto should be very clear.
There is zero reason to encourage the growth of crypto. If people want to play around with crypto, that is their right, just like people can gamble at casinos or horse races. But the idea that the government should look to foster the growth of crypto, as many politicians have advocated, would be like the government encouraging alcohol or tobacco addiction.
While crypto may help facilitate criminal transactions (apparently this is no longer clearly true), it serves no legitimate purpose. In a world of scammers, it should not be surprising that we would see a sham exchange like FTX that seems to have defrauded its customers big time.
The proper government response is not to encourage people to gamble in crypto by regulating the industry and making it safer for ordinary people to throw their money in the toilet. The proper response is to throw the fraudsters in jail and tell people they invest in crypto at their own risk. If they want to engage in honest gambling, let them go to Vegas.
If our politicians actually had any interest in economic efficiency, they would be engaged in an all-out push to downsize the financial industry and free up hundreds of billions of dollars for productive uses. Unfortunately, their flirtation with crypto scammers is a symptom of the larger problem. The finance industry has bought their collaboration, and politicians of both parties will continue to run interference for the financial industry as long as the campaign contributions are coming in.
[1] These data are taken from National Income and Product Accounts Table 6.2B, with the total share being Line 52 divided by Line 1 for 1971 and Table 6.2D, Lines 57 and 62, divided Line 1 for 2021. For the narrow securities and commodity trading sector, and holding and trust accounts, the calculation uses Line 55 and Line 59, divided by Line 1 for 1971. For 2021, it uses Line 59 and Line 61, divided by Line 1. These tables only give data on labor compensation. The implicit assumption is that the industry’s value added is proportional to labor compensation in the sector. While this will not be precisely accurate, it should be reasonably close.
I remember talking to a progressive group a bit more than a decade ago, arguing for the merits of a financial transactions tax (FTT). After I laid out the case, someone asked me if we had lost the opportunity to push for an FTT now that the financial crisis was over. I assured the person that we could count on the financial sector to give us more scandals that would create opportunities for reform.
Shortly after, we were rewarded with the trading scandal from the aptly named investment company, MF Global. It seems that FTX has given us yet another great case study of greed and corruption in the financial sector.
The financial sector was and is a happy home for those seeking big bucks and who don’t mind bending or breaking the rules to fill their pockets. Corporate America is not generally known as a center of virtue, but in most other sectors, there is at least a product by which a company can be evaluated. Does the auto industry produce cars that are safe and drive well? Does the airline industry get people to their destinations on time?
These are metrics that can be applied in a reasonably straightforward way. But what does the financial sector do? In fact, there are metrics, but they are not as straightforward, and we literally never see the business press applying them to the sector.
Finance and Trucking: Big is Bad
At the most basic level, finance is an intermediate good. This distinguishes the financial sector from sectors like health care, housing, or agriculture. Finance does not directly produce anything of value to households. Its value to the economy is that it facilitates transactions and allocates capital. These functions are tremendously important, but they are not valuable in themselves. They are valuable because of their service to the productive economy.
In this way, finance can be considered similar to the trucking industry. Trucking is enormously important to the economy in getting goods to consumers and essential inputs to manufacturers and service providers. But it does not directly produce value. We only benefit from having more workers and trucks if they allow the industry to serve its function better. That means getting goods to their destination more quickly or getting them there with less damage or spoilage.
This is the same story with finance. We benefit from having more resources in finance only insofar as they allow it to service the productive economy better. That means facilitating payments to make them easier and quicker and better allocating capital to its most productive uses.
Serious Bloat in Finance
The financial sector has exploded in size in the last half-century. The broad finance, insurance, and real estate sector has more than doubled as a share of GDP over the last half-century, increasing from 5.5 percent of GDP in 1971 to 12.0 percent in 2021.[1] The additional 6.5 percent of GDP being devoted to finance in 2021 is equivalent to more than $1.4 trillion being absorbed by the sector. This comes to more than $11,800 a year for an average family.
The more narrow securities and commodity trading sector, along with investment funds and trusts, more than quadrupled as a share of GDP, rising from 0.55 percent of GDP in 1971 to 2.56 percent in 2021. This increase of 2.0 percentage points of GDP comes to more than $500 billion a year in the current economy, or almost $4,400 a year per family. This is more than half the size of the military budget.
Clearly, the financial sector is a far larger drain on the economy today than fifty years ago. It is also a major source of inequality. The list of the country’s billionaires is chock full of people, like Stephan Schwarzman and Peter Thiel, who made fortunes in hedge funds, private equity funds, and other financial entities. In short, the data are clear: the financial sector is taking up a far larger share of the economy’s resources than it did a half-century ago, and it is a major factor in generating inequality,
The big question is, what are we getting for all the extra resources the financial sector is taking from the rest of us? This is asking about the extent to which our means of payments have been improved and the extent to which we better allocate capital today than we would be with a smaller financial sector.
On the first question, clearly we have developed better mechanisms for paying our bills and carrying on other transactions, but the biggest developments are hardly new. Direct deposit of our paychecks and automatic payments for bills are great innovations that save lots of time for both sides of the transactions. However, these innovations date back more than four decades.
The same holds with credit cards and debit cards. The overwhelming majority of transactions are now made with these cards, but this is not especially new technology. Credit cards were already widely available in 1971, even if they were nowhere near as ubiquitous as they are today.
We can give the financial sector credit for the increase in the convenience of our system of payments, but how much is this worth? Is the time saved from using credit cards or having a direct deposit of your payments worth $11,800 a year to you? That seems a bit steep. I suspect given the option, most people would prefer an extra $11,800 in their paycheck and be given the check by hand rather than having it deposited automatically in their bank account.
How about the other part of the financial sector’s function, allocating capital to its best uses? There is no simple way to evaluate how effective our enlarged financial sector has been in allocating capital, primarily because we don’t have a counterfactual. We can’t point to an America with a smaller financial sector over the last half-century. (Steven Cecchetti and Enisse Kharroubbi did a cross-country analysis which found a larger financial sector boosted growth, but after reaching a certain size relative to the economy, it was a drag on growth.)
We can make a comparison of productivity growth in recent decades with productivity growth in the decades before the financial sector was consuming such a large share of the country’s output. In the years from the beginning of the Bureau of Labor Statistics productivity series in 1947 to 1972, productivity growth averaged 2.8 percent annually. From 1972 to 2022, productivity growth averaged just 1.8 percent.
If anything, productivity growth has slowed further as the financial sector has expanded relative to the economy. While there was a strong decade of productivity growth from 1995 to 2005, in the years from 2005 to 2019, productivity growth averaged just 1.4 percent.
The expanded financial sector may not be responsible for the slowing of productivity growth, and it’s certainly possible that it would have slowed even more without a larger financial sector. But, it is not easy to make the case that the financial sector has somehow led to faster productivity growth.
FTX, Crypto, Rent-Seeking, and Fraud
Suppose the growth of the financial sector has not led to corresponding benefits to the productive economy. In that case, we should view it as a source of waste and inefficiency, just as we would view a massive increase in the size of the trucking industry without any benefits in terms of improved delivery times. From the standpoint of policy, we should be looking at every opportunity to whittle down the size of the financial sector to reduce waste in the economy.
Applying a financial transactions tax, similar to the sales tax paid in other sectors, would be a great place to start. Getting rid of tax preferences that provide government subsidies to private equity and hedge funds is another great policy option. Also, simplifying the corporate tax code to reduce the money made by tax gaming should also be a priority.
As a general rule, we should be doing everything possible to reduce the size of the financial sector, as long as we are not jeopardizing its ability to serve the productive economy. The message here for dealing with crypto should be very clear.
There is zero reason to encourage the growth of crypto. If people want to play around with crypto, that is their right, just like people can gamble at casinos or horse races. But the idea that the government should look to foster the growth of crypto, as many politicians have advocated, would be like the government encouraging alcohol or tobacco addiction.
While crypto may help facilitate criminal transactions (apparently this is no longer clearly true), it serves no legitimate purpose. In a world of scammers, it should not be surprising that we would see a sham exchange like FTX that seems to have defrauded its customers big time.
The proper government response is not to encourage people to gamble in crypto by regulating the industry and making it safer for ordinary people to throw their money in the toilet. The proper response is to throw the fraudsters in jail and tell people they invest in crypto at their own risk. If they want to engage in honest gambling, let them go to Vegas.
If our politicians actually had any interest in economic efficiency, they would be engaged in an all-out push to downsize the financial industry and free up hundreds of billions of dollars for productive uses. Unfortunately, their flirtation with crypto scammers is a symptom of the larger problem. The finance industry has bought their collaboration, and politicians of both parties will continue to run interference for the financial industry as long as the campaign contributions are coming in.
[1] These data are taken from National Income and Product Accounts Table 6.2B, with the total share being Line 52 divided by Line 1 for 1971 and Table 6.2D, Lines 57 and 62, divided Line 1 for 2021. For the narrow securities and commodity trading sector, and holding and trust accounts, the calculation uses Line 55 and Line 59, divided by Line 1 for 1971. For 2021, it uses Line 59 and Line 61, divided by Line 1. These tables only give data on labor compensation. The implicit assumption is that the industry’s value added is proportional to labor compensation in the sector. While this will not be precisely accurate, it should be reasonably close.
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