Beat the Press

Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

It is a popular theme in news reporting that there has been a sharp decline in the labor share of income over the last four decades, and that this is a big part of the story of wage stagnation. The data don’t quite agree.

Part of the confusion is that people often look at the labor share of GDP, a measure which includes depreciation of capital equipment. Since the depreciation share of GDP (the amount of spending needed to replace worn out or obsolete capital) has risen, that would definitionally lead to a fall in the labor share, even if there was no change in the split between labor and capital.

However, even looking at GDP, the loss of labor share would not explain much of the wage stagnation for typical workers over the last four decades. The labor share of GDP fell 2.6 percentage points over this period. This implies that wages would have been 4.8 percent higher in 2019 if the wage share had remained constant over this period. That’s not trivial, it means someone earning $20 an hour today would instead be getting $20.96 in a constant shares world, but it is not most of the story of wage stagnation.

But if we want to be more accurate and pull out the impact of rising depreciation, the labor share has only fallen by 1.6 percentage points over this forty year period. That would imply wages would be 2.5 percent higher in a constant share world. That translates into a wage of $20.50 an hour for the worker now earning $20.00 an hour.

It is also worth noting that all of the fall in the labor share has occurred in this century. In fact, I would say that it is really a Great Recession story, where the loss in shares is overwhelmingly the result of the weak labor market in the years 2008-2012. In the last few years, the labor share has been rising as the labor market tightens.

It is true that the data show a drop in shares prior to the Great Recession, but it is important to remember that these were the housing bubble years. During this period banks and other financial institutions were booking enormous profits on loans that subsequently went bad, leading to hundreds of billions in losses in the years 2008-2010. In other words, much of the profits booked in these years were not real profits. If we corrected for the tidal wave of bad loans, it is not clear that there would be much left of the rise in profit shares in the years 2002-2007.

In any case, it is clear that the vast majority of the upward redistribution was within the wage distribution, with pay that used to go to ordinary workers instead going to CEOs and other top executives, Wall Street financial types, and highly paid professionals (e.g. doctors, dentists, and lawyers). If we want to reverse this upward redistribution, the first step is to be clear on who got the money.

This doesn’t mean that we have not had failures in anti-trust policy, especially in areas like cell phones and Internet and cable service, but this is not the major cause of the upward redistribution of the last four decades.

It is a popular theme in news reporting that there has been a sharp decline in the labor share of income over the last four decades, and that this is a big part of the story of wage stagnation. The data don’t quite agree.

Part of the confusion is that people often look at the labor share of GDP, a measure which includes depreciation of capital equipment. Since the depreciation share of GDP (the amount of spending needed to replace worn out or obsolete capital) has risen, that would definitionally lead to a fall in the labor share, even if there was no change in the split between labor and capital.

However, even looking at GDP, the loss of labor share would not explain much of the wage stagnation for typical workers over the last four decades. The labor share of GDP fell 2.6 percentage points over this period. This implies that wages would have been 4.8 percent higher in 2019 if the wage share had remained constant over this period. That’s not trivial, it means someone earning $20 an hour today would instead be getting $20.96 in a constant shares world, but it is not most of the story of wage stagnation.

But if we want to be more accurate and pull out the impact of rising depreciation, the labor share has only fallen by 1.6 percentage points over this forty year period. That would imply wages would be 2.5 percent higher in a constant share world. That translates into a wage of $20.50 an hour for the worker now earning $20.00 an hour.

It is also worth noting that all of the fall in the labor share has occurred in this century. In fact, I would say that it is really a Great Recession story, where the loss in shares is overwhelmingly the result of the weak labor market in the years 2008-2012. In the last few years, the labor share has been rising as the labor market tightens.

It is true that the data show a drop in shares prior to the Great Recession, but it is important to remember that these were the housing bubble years. During this period banks and other financial institutions were booking enormous profits on loans that subsequently went bad, leading to hundreds of billions in losses in the years 2008-2010. In other words, much of the profits booked in these years were not real profits. If we corrected for the tidal wave of bad loans, it is not clear that there would be much left of the rise in profit shares in the years 2002-2007.

In any case, it is clear that the vast majority of the upward redistribution was within the wage distribution, with pay that used to go to ordinary workers instead going to CEOs and other top executives, Wall Street financial types, and highly paid professionals (e.g. doctors, dentists, and lawyers). If we want to reverse this upward redistribution, the first step is to be clear on who got the money.

This doesn’t mean that we have not had failures in anti-trust policy, especially in areas like cell phones and Internet and cable service, but this is not the major cause of the upward redistribution of the last four decades.

The Logic of Medical Co-Payments

Aaron Carroll had a very useful NYT Upshot piece highlighting research showing that even modest co-payments discourage people from getting necessary medical care. The article is about co-payments for prescription drugs where it highlights research showing that people will often skip taking prescribed drugs to avoid co-payments. There are a couple of points worth making about co-payments in this context and more generally.

First, if a drug has been prescribed for a patient, then it is the judgment of a medical professional that they need this drug for their health. The argument for co-pays, that we want people to think twice before getting the treatment, really should not apply here since a medical professional has determined that they do need the treatment. It doesn’t make sense, in general, to encourage people to substitute their own judgement for that of a medical professional. (That doesn’t mean that medical professionals will always be right, but it would be best if patients made the determination to ignore their judgment based on their own research, not the desire to save a co-pay.)

The other point is that drugs are almost invariably cheap. By this, I mean that they are cheap to manufacture and distribute. The research can be expensive, but this is a sunk cost at the point where the drug is being prescribed for the patient. If all drugs sold as generics, with no patent or related protections, they would rarely cost more than $10 or $20 per prescription. For this reason, there are not much savings to society if we get people to take fewer drugs, we are just risking people’s health with co-pays.

We do need to pay for the research. I suggest doing this upfront, with the government contracting out to private firms. All results and patents are in the public domain. (See Rigged, chapter 5 [it’s free].)

The issue with drugs is qualitatively different than with doctors’ visits. First, a visit to the doctor does require the use of a doctor’s time, as well as the time of their support staff and possibly other health care professionals. This means that there actually are savings from discouraging unnecessary visits.

The second point is that a decision to visit a doctor depends on the patient’s judgment, not that of a medical professional. (This is not the case with repeat treatments, just an initial visit.) People will always weigh several factors in deciding whether to visit a doctor, whether or not there is a co-pay.

For example, if they have a busy schedule or long-planned travel, they may choose not to see a doctor for a particular issue where they might otherwise see a doctor. In this context, it may be very reasonable to have a modest co-payment (e.g. $20 per visit — which would be waved for low-income people) to make people think twice before seeing a doctor.

This sort of co-payment can be seen as analogous to charging people five cents for using a plastic bag when they shop, as many cities now do. If someone really wants the bag, the five-cent fee will not prevent them from getting it, but it does get people to think twice, and therefore has led to a large decline in usage.

It is reasonable to think that a modest co-pay could have a similar effect on doctors’ visits. It should not prevent people with serious health issues from seeing a doctor, but it may discourage some visits for relatively trivial matters, like a cold.

Note, this is not the “skin in the game” story pushed by many economists, which wants patients to be comparative shoppers. There is considerable evidence that patients generally are not good at weighing the relative price of different treatments, and when they do, they often make the wrong choice for their health.

This is simply arguing that it would be good if patients think twice before rushing to see a doctor. We can’t guarantee that this will never mean that a person who needed to see a doctor chose not to, but in the alternative, we can’t guarantee that a person in desperate need to see a doctor won’t have to wait because the person in front of them in line has a cold.

Aaron Carroll had a very useful NYT Upshot piece highlighting research showing that even modest co-payments discourage people from getting necessary medical care. The article is about co-payments for prescription drugs where it highlights research showing that people will often skip taking prescribed drugs to avoid co-payments. There are a couple of points worth making about co-payments in this context and more generally.

First, if a drug has been prescribed for a patient, then it is the judgment of a medical professional that they need this drug for their health. The argument for co-pays, that we want people to think twice before getting the treatment, really should not apply here since a medical professional has determined that they do need the treatment. It doesn’t make sense, in general, to encourage people to substitute their own judgement for that of a medical professional. (That doesn’t mean that medical professionals will always be right, but it would be best if patients made the determination to ignore their judgment based on their own research, not the desire to save a co-pay.)

The other point is that drugs are almost invariably cheap. By this, I mean that they are cheap to manufacture and distribute. The research can be expensive, but this is a sunk cost at the point where the drug is being prescribed for the patient. If all drugs sold as generics, with no patent or related protections, they would rarely cost more than $10 or $20 per prescription. For this reason, there are not much savings to society if we get people to take fewer drugs, we are just risking people’s health with co-pays.

We do need to pay for the research. I suggest doing this upfront, with the government contracting out to private firms. All results and patents are in the public domain. (See Rigged, chapter 5 [it’s free].)

The issue with drugs is qualitatively different than with doctors’ visits. First, a visit to the doctor does require the use of a doctor’s time, as well as the time of their support staff and possibly other health care professionals. This means that there actually are savings from discouraging unnecessary visits.

The second point is that a decision to visit a doctor depends on the patient’s judgment, not that of a medical professional. (This is not the case with repeat treatments, just an initial visit.) People will always weigh several factors in deciding whether to visit a doctor, whether or not there is a co-pay.

For example, if they have a busy schedule or long-planned travel, they may choose not to see a doctor for a particular issue where they might otherwise see a doctor. In this context, it may be very reasonable to have a modest co-payment (e.g. $20 per visit — which would be waved for low-income people) to make people think twice before seeing a doctor.

This sort of co-payment can be seen as analogous to charging people five cents for using a plastic bag when they shop, as many cities now do. If someone really wants the bag, the five-cent fee will not prevent them from getting it, but it does get people to think twice, and therefore has led to a large decline in usage.

It is reasonable to think that a modest co-pay could have a similar effect on doctors’ visits. It should not prevent people with serious health issues from seeing a doctor, but it may discourage some visits for relatively trivial matters, like a cold.

Note, this is not the “skin in the game” story pushed by many economists, which wants patients to be comparative shoppers. There is considerable evidence that patients generally are not good at weighing the relative price of different treatments, and when they do, they often make the wrong choice for their health.

This is simply arguing that it would be good if patients think twice before rushing to see a doctor. We can’t guarantee that this will never mean that a person who needed to see a doctor chose not to, but in the alternative, we can’t guarantee that a person in desperate need to see a doctor won’t have to wait because the person in front of them in line has a cold.

It is a bit bizarre that in the various discussions of a wealth tax no one mentions the most obvious way that rich people can avoid paying: renounce their U.S. citizenship. This would make them completely exempt from a U.S. wealth tax.

While Warren’s proposal, and presumably Sanders’ as well, would include a steep exit tax on the wealth of people renouncing their citizenship, this would only apply after the tax is in place. While there is little reason to believe that most billionaires are especially bright, it unlikely that most of them are morons. If they don’t want to pay the tax they could leave while it was being debated in Congress, if they thought it likely to pass.

It’s not clear how many would choose this route, but many billionaires have made it quite clear that they are not committed to the country and don’t have much respect for democracy. If they felt their wealth was seriously threatened, it’s hard to believe that many would not simply choose to give up their citizenship.

 

It is a bit bizarre that in the various discussions of a wealth tax no one mentions the most obvious way that rich people can avoid paying: renounce their U.S. citizenship. This would make them completely exempt from a U.S. wealth tax.

While Warren’s proposal, and presumably Sanders’ as well, would include a steep exit tax on the wealth of people renouncing their citizenship, this would only apply after the tax is in place. While there is little reason to believe that most billionaires are especially bright, it unlikely that most of them are morons. If they don’t want to pay the tax they could leave while it was being debated in Congress, if they thought it likely to pass.

It’s not clear how many would choose this route, but many billionaires have made it quite clear that they are not committed to the country and don’t have much respect for democracy. If they felt their wealth was seriously threatened, it’s hard to believe that many would not simply choose to give up their citizenship.

 

(This post originally appeared on my Patreon page.)

This summer, the Business Roundtable, a group that includes most of the country’s largest corporations, made big news. It issued a statement that its members would no longer be concerned exclusively with maximizing returns to shareholders. Instead, Roundtable members would take into account the well-being of their workers, the communities in which they do business, and the environment.

This statement was given a mixed reception. While some applauded the idea of moving away from a single-minded focus on shareholder value others questioned the sincerity of the commitment. After all, drug companies pushing opioids, oil companies lying about fossil fuels, and hotel and retail chains cheating workers out of their pay, always had the option to do the right thing, but chose not to. Did anyone believe this resolution from the Business Roundtable would change the way they operate? 

However, there is a more basic point that got almost no attention. There is little reason to believe that corporations are being run to maximize returns to shareholders. The reason for questioning this claim is that returns to shareholders have actually been low by historical standards in the last two decades, as shown in the figure below.

 

 

 

image001

Source: Shiller 2019 and author’s calculations.

The average real return over the last two decades has been just 2.8 percent annually. This compares to average returns of more than 7.0 percent, and sometimes in the double-digits, in the 1950s and 1960s, when corporations were supposedly less single-mindedly pursuing shareholder value. And, this weak return required considerable help from the government in the form of sharply lower corporate tax rates.

The data are very clear. If corporations are being operated to maximize returns to shareholders, they are failing badly in their efforts.

If corporations are not actually maximizing returns to shareholders, then what are they doing? Larry Mishel and Julia Wolfe, at the Economic Policy Institute, recently did an analysis of CEO pay. It found that pay had risen by 1008 percent since 1978, after adjusting for inflation. Average CEO pay for the companies they examined was $14.0 million in 2018 using a conservative method of valuing stock options. If we assess pay using the realized value of the options, average pay was $17.2 million in 2018.

CEOs often justify this compensation by the returns they produce for shareholders. But the data show that they have not been producing high returns for shareholders. Shareholders are doing much worse in the period when corporations are supposed to be maximizing shareholder return than they did in the post-war Golden Age, when unions were strong and workers shared in the gains from growth. This means that today’s CEOs are producing considerably lower returns, but getting paid far more money.

While these basic facts are indisputable (the data on returns are taken from S&P 500, as compiled by Robert Shiller, the data on CEO pay come from the Compustat data base), they are not widely known. Most people seem to believe that corporations really are being run to maximize returns to shareholders.

The persistence of this fantasy is difficult to understand. Conservatives certainly have a reason to maintain this fiction. It is arguable whether a world in which corporations maximize returns to shareholders will give the best outcomes, but this is a much easier case to sell than a world where the CEOs and other top management are maximizing their own paychecks.

This means that the right has a reason to perpetuate this fiction, but why does it persist on the left? I have not carefully monitored the leading progressive publications over the last ten or fifteen years, but I would guess that not one of them has featured a single piece making the point that returns to shareholders have actually been historically low in recent years. Given the importance of this point to the way the economy works, the issue might have been worth a couple of pages somewhere over the last decade.

This is not just a question of good housekeeping or semantics. The excessive pay for CEOs has a massive impact on pay structures both in the corporate sector and in the economy more generally. If the CEO is getting $17 million, then the chief financial officer and other top tier executives are likely getting in the neighborhood of $10 million. The next tier might well be getting $2 to $3 million.

These exorbitant pay scales also affect pay outside the corporate sector. It is now common for university presidents and heads of major non-profits to get well over $1 million a year, and outliers can get pay of $2 to $3 million. The next echelon of executives at these non-profits can get pay in the high six figures.

And, as we learn from economics, more money at the top means less money for everyone else. Suppose CEOs still got 20 to 30 times the pay of a typical worker instead of 200 to 300 times. If we had a world where CEOs of major corporations were earning $2 million a year, then the other top executives would likely be earning around $1.5 million, the next tier may not even cross $1 million.

The president of Harvard, and other elite institutions in the non-profit sector, would likely be looking at pay in the high six figures. There would be corresponding reductions in the pay for provosts, vice-presidents, deans and other top administrators.

In short, the world where CEO pay scales were back where they were forty years ago would have a very different income distribution than the world we see today.

This is why attacking the myth of maximizing shareholder returns is so important. If it really is the case that CEOs produce returns to shareholders that justify their $17 million salary, then they have a rationale for their outsized paychecks. We can attack the idea that the economy and society are best-served by corporations maximizing returns to shareholders, but at least this is a serious position. But if CEOs are not maximizing returns to shareholders, but rather only maximizing their own paychecks, they have a much more difficult argument to make.  

I realize that siding with shareholders on anything may rub progressives the wrong way, but we need to look at issues with clear eyes. After all, it’s hard not to side with Jeff Bezos, the world’s richest person, if Donald Trump is denying Amazon a Defense Department contract to punish Bezos for the way the Washington Post covers him.

We all know that stock ownership is hugely skewed towards the rich. But there are middle income people who are relying on their stockholdings for much of their retirement income. In addition, traditional pension funds hold trillions of dollars of stock. Middle class stockholders and workers receiving pensions will both benefit from having less money paid out to CEOs and top executives.

By contrast, every dollar of CEO pay is going to someone in the top 0.01 percent of the income distribution. Insofar, as income is transferred from this group to shareholders in general, it should be seen as a positive for society.

But the bigger picture is far more important than getting a few additional dollars for shareholders. If we can get CEO pay down to anything like its levels of four or five decades ago, the spillover effects on the pay on other top executives (both in the corporate sector and elsewhere) will be enormous. We would be looking at a very different economy and society.

For this reason, it makes sense to make common cause with shareholders in efforts that will allow them to put downward pressure on the pay of CEOs. We should want CEOs to be treated just like all the front-line workers who have seen pay and benefit cuts over the last four decades. If someone else can do the same job for less money, then the CEO will have to live with lower pay or find a new job.

I have written about ways to give shareholders more power to rein in CEO pay (see Rigged, chapter 6 [it’s free]). I’m sure others who are more knowledgeable about corporate governance have better ideas.

Progressives may look at such proposals and decide that reining in CEO pay is not the best use of their time given so many urgent priorities. That is understandable, but one thing that is absolutely not understandable is claiming that corporations are being run to maximize returns to shareholders. That is not true and the people making the claim are either ignorant or deliberately trying to deceive their audience.

(This post originally appeared on my Patreon page.)

This summer, the Business Roundtable, a group that includes most of the country’s largest corporations, made big news. It issued a statement that its members would no longer be concerned exclusively with maximizing returns to shareholders. Instead, Roundtable members would take into account the well-being of their workers, the communities in which they do business, and the environment.

This statement was given a mixed reception. While some applauded the idea of moving away from a single-minded focus on shareholder value others questioned the sincerity of the commitment. After all, drug companies pushing opioids, oil companies lying about fossil fuels, and hotel and retail chains cheating workers out of their pay, always had the option to do the right thing, but chose not to. Did anyone believe this resolution from the Business Roundtable would change the way they operate? 

However, there is a more basic point that got almost no attention. There is little reason to believe that corporations are being run to maximize returns to shareholders. The reason for questioning this claim is that returns to shareholders have actually been low by historical standards in the last two decades, as shown in the figure below.

 

 

 

image001

Source: Shiller 2019 and author’s calculations.

The average real return over the last two decades has been just 2.8 percent annually. This compares to average returns of more than 7.0 percent, and sometimes in the double-digits, in the 1950s and 1960s, when corporations were supposedly less single-mindedly pursuing shareholder value. And, this weak return required considerable help from the government in the form of sharply lower corporate tax rates.

The data are very clear. If corporations are being operated to maximize returns to shareholders, they are failing badly in their efforts.

If corporations are not actually maximizing returns to shareholders, then what are they doing? Larry Mishel and Julia Wolfe, at the Economic Policy Institute, recently did an analysis of CEO pay. It found that pay had risen by 1008 percent since 1978, after adjusting for inflation. Average CEO pay for the companies they examined was $14.0 million in 2018 using a conservative method of valuing stock options. If we assess pay using the realized value of the options, average pay was $17.2 million in 2018.

CEOs often justify this compensation by the returns they produce for shareholders. But the data show that they have not been producing high returns for shareholders. Shareholders are doing much worse in the period when corporations are supposed to be maximizing shareholder return than they did in the post-war Golden Age, when unions were strong and workers shared in the gains from growth. This means that today’s CEOs are producing considerably lower returns, but getting paid far more money.

While these basic facts are indisputable (the data on returns are taken from S&P 500, as compiled by Robert Shiller, the data on CEO pay come from the Compustat data base), they are not widely known. Most people seem to believe that corporations really are being run to maximize returns to shareholders.

The persistence of this fantasy is difficult to understand. Conservatives certainly have a reason to maintain this fiction. It is arguable whether a world in which corporations maximize returns to shareholders will give the best outcomes, but this is a much easier case to sell than a world where the CEOs and other top management are maximizing their own paychecks.

This means that the right has a reason to perpetuate this fiction, but why does it persist on the left? I have not carefully monitored the leading progressive publications over the last ten or fifteen years, but I would guess that not one of them has featured a single piece making the point that returns to shareholders have actually been historically low in recent years. Given the importance of this point to the way the economy works, the issue might have been worth a couple of pages somewhere over the last decade.

This is not just a question of good housekeeping or semantics. The excessive pay for CEOs has a massive impact on pay structures both in the corporate sector and in the economy more generally. If the CEO is getting $17 million, then the chief financial officer and other top tier executives are likely getting in the neighborhood of $10 million. The next tier might well be getting $2 to $3 million.

These exorbitant pay scales also affect pay outside the corporate sector. It is now common for university presidents and heads of major non-profits to get well over $1 million a year, and outliers can get pay of $2 to $3 million. The next echelon of executives at these non-profits can get pay in the high six figures.

And, as we learn from economics, more money at the top means less money for everyone else. Suppose CEOs still got 20 to 30 times the pay of a typical worker instead of 200 to 300 times. If we had a world where CEOs of major corporations were earning $2 million a year, then the other top executives would likely be earning around $1.5 million, the next tier may not even cross $1 million.

The president of Harvard, and other elite institutions in the non-profit sector, would likely be looking at pay in the high six figures. There would be corresponding reductions in the pay for provosts, vice-presidents, deans and other top administrators.

In short, the world where CEO pay scales were back where they were forty years ago would have a very different income distribution than the world we see today.

This is why attacking the myth of maximizing shareholder returns is so important. If it really is the case that CEOs produce returns to shareholders that justify their $17 million salary, then they have a rationale for their outsized paychecks. We can attack the idea that the economy and society are best-served by corporations maximizing returns to shareholders, but at least this is a serious position. But if CEOs are not maximizing returns to shareholders, but rather only maximizing their own paychecks, they have a much more difficult argument to make.  

I realize that siding with shareholders on anything may rub progressives the wrong way, but we need to look at issues with clear eyes. After all, it’s hard not to side with Jeff Bezos, the world’s richest person, if Donald Trump is denying Amazon a Defense Department contract to punish Bezos for the way the Washington Post covers him.

We all know that stock ownership is hugely skewed towards the rich. But there are middle income people who are relying on their stockholdings for much of their retirement income. In addition, traditional pension funds hold trillions of dollars of stock. Middle class stockholders and workers receiving pensions will both benefit from having less money paid out to CEOs and top executives.

By contrast, every dollar of CEO pay is going to someone in the top 0.01 percent of the income distribution. Insofar, as income is transferred from this group to shareholders in general, it should be seen as a positive for society.

But the bigger picture is far more important than getting a few additional dollars for shareholders. If we can get CEO pay down to anything like its levels of four or five decades ago, the spillover effects on the pay on other top executives (both in the corporate sector and elsewhere) will be enormous. We would be looking at a very different economy and society.

For this reason, it makes sense to make common cause with shareholders in efforts that will allow them to put downward pressure on the pay of CEOs. We should want CEOs to be treated just like all the front-line workers who have seen pay and benefit cuts over the last four decades. If someone else can do the same job for less money, then the CEO will have to live with lower pay or find a new job.

I have written about ways to give shareholders more power to rein in CEO pay (see Rigged, chapter 6 [it’s free]). I’m sure others who are more knowledgeable about corporate governance have better ideas.

Progressives may look at such proposals and decide that reining in CEO pay is not the best use of their time given so many urgent priorities. That is understandable, but one thing that is absolutely not understandable is claiming that corporations are being run to maximize returns to shareholders. That is not true and the people making the claim are either ignorant or deliberately trying to deceive their audience.

Steven Rattner's Rant Against Warren

The New York Times gives Steven Rattner the opportunity to push stale economic bromides in columns on a regular basis. His column today goes after Senator Elizabeth Warren.

He begins by telling us that Warren’s plan for financing a Medicare for All program is “yet more evidence that a Warren presidency a terrifying prospect.” He goes on to warn us:

“She would turn America’s uniquely successful public-private relationship into a dirigiste, European-style system. If you want to live in France (economically), Elizabeth Warren should be your candidate.”

It’s not worth going into every complaint in Rattner’s piece, and to be clear, there are very reasonable grounds for questioning many of Warren’s proposals. However, he deserves some serious ridicule for raising the bogeyman of France and later Germany.

In spite of its “dirigiste” system France actually has a higher employment rate for prime age workers (ages 25 to 54) than the United States. (Germany has a much higher employment rate.) France has a lower overall employment rate because young people generally don’t work and people in their sixties are less likely to work.

In both cases, this is the result of deliberate policy choices. In the case of young people, the French are less likely to work because college is free and students get small living stipends. For older workers, France has a system that is more generous to early retirees. One can disagree with both of these policies, but they are not obvious failures. Large segments of the French population benefit from them.

France and Germany both have lower per capita GDP than the United States, but the biggest reason for the gap is that workers in both countries put in many fewer hours annually than in the United States. According to the OECD, an average worker in France puts in 1520 hours a year, in Germany just 1360. That compares to 1780 hours a year in the United States. In both countries, five or six weeks a year of vacation are standard, as are paid family leave and paid sick days. Again, one can argue that it is better to have more money, but it is not obviously a bad choice to have more leisure time as do workers in these countries.

Anyhow, the point is that Rattner’s bogeymen here are not the horror stories that he wants us to imagine for ordinary workers, even if they may not be as appealing to rich people like himself. Perhaps the biggest tell in this piece is when Rattner warns us that under Warren’s proposals “private equity, which plays a useful role in driving business efficiency, would be effectively eliminated.”

Okay, the prospect of eliminating private equity, now we’re all really scared!

The New York Times gives Steven Rattner the opportunity to push stale economic bromides in columns on a regular basis. His column today goes after Senator Elizabeth Warren.

He begins by telling us that Warren’s plan for financing a Medicare for All program is “yet more evidence that a Warren presidency a terrifying prospect.” He goes on to warn us:

“She would turn America’s uniquely successful public-private relationship into a dirigiste, European-style system. If you want to live in France (economically), Elizabeth Warren should be your candidate.”

It’s not worth going into every complaint in Rattner’s piece, and to be clear, there are very reasonable grounds for questioning many of Warren’s proposals. However, he deserves some serious ridicule for raising the bogeyman of France and later Germany.

In spite of its “dirigiste” system France actually has a higher employment rate for prime age workers (ages 25 to 54) than the United States. (Germany has a much higher employment rate.) France has a lower overall employment rate because young people generally don’t work and people in their sixties are less likely to work.

In both cases, this is the result of deliberate policy choices. In the case of young people, the French are less likely to work because college is free and students get small living stipends. For older workers, France has a system that is more generous to early retirees. One can disagree with both of these policies, but they are not obvious failures. Large segments of the French population benefit from them.

France and Germany both have lower per capita GDP than the United States, but the biggest reason for the gap is that workers in both countries put in many fewer hours annually than in the United States. According to the OECD, an average worker in France puts in 1520 hours a year, in Germany just 1360. That compares to 1780 hours a year in the United States. In both countries, five or six weeks a year of vacation are standard, as are paid family leave and paid sick days. Again, one can argue that it is better to have more money, but it is not obviously a bad choice to have more leisure time as do workers in these countries.

Anyhow, the point is that Rattner’s bogeymen here are not the horror stories that he wants us to imagine for ordinary workers, even if they may not be as appealing to rich people like himself. Perhaps the biggest tell in this piece is when Rattner warns us that under Warren’s proposals “private equity, which plays a useful role in driving business efficiency, would be effectively eliminated.”

Okay, the prospect of eliminating private equity, now we’re all really scared!

Ruchir Sharma's Swiss Model

The New York Times had a column by “global investor” Ruchir Sharma this weekend in which he touted the Swiss model as being preferable to the Scandinavian model promoted by Bernie Sanders and other progressives. He notes that Switzerland is considerably richer, has a smaller government role in its economy, and still manages to provide health insurance to everyone.

There are a few points worth making about Sharma’s piece. First, one of the big factors that contributed to Switzerland’s wealth is that it shielded the wealth of rich criminals from around the world. Not only did it hide this wealth from tax authorities, it is also allowed drug dealers, gun runners, and corrupt dictators to park their money in a safe haven for themselves and their families. Not every country would want to follow this path to prosperity and in any case there is a limit to the amount of illicit funds to be deposited in such havens.

One of the reasons Sharma is impressed with Switzerland is that, rather than having the government provide health care for its population, it requires its citizens to purchase private insurance. This does lead to universal coverage, although it seems to come at a substantial price. According to the OECD, Switzerland’s health care costs of $7,300 per person are considerably less than the U.S per person cost of $10,600, but 17 percent more than #3 Norway’s costs and almost 40 percent higher than Denmark’s. It’s not clear that our model for reform should be the second most costly system in the world.

The next point is that this treatment of health care is a big factor in the difference between the 50 percent government share of GDP in the Scandinavian countries compared to the one third in Switzerland. Perhaps it makes a big difference to people whether they are mandated to pay premiums to an insurance company as opposed to taxes to the government, but it is not obvious why that would be the case.

This treatment of health care is also relevant to Sharma’s point on relative wealth:

“The typical Swiss family has a net worth around $540,000, twice its Scandinavian peer.”

Middle income families have greater need for wealth in Switzerland, where they have to pay for their health insurance, than in the Scandinavian countries where it is paid for by the government. How much additional wealth is needed would depend on the timing of health care payments over people’s lifetimes.

There is an area where progressives Democrats are looking to Switzerland as a model. The country has a wealth tax on its richest people. Both Senators Warren and Sanders have proposed a comparable tax for the United States.

 

 

The New York Times had a column by “global investor” Ruchir Sharma this weekend in which he touted the Swiss model as being preferable to the Scandinavian model promoted by Bernie Sanders and other progressives. He notes that Switzerland is considerably richer, has a smaller government role in its economy, and still manages to provide health insurance to everyone.

There are a few points worth making about Sharma’s piece. First, one of the big factors that contributed to Switzerland’s wealth is that it shielded the wealth of rich criminals from around the world. Not only did it hide this wealth from tax authorities, it is also allowed drug dealers, gun runners, and corrupt dictators to park their money in a safe haven for themselves and their families. Not every country would want to follow this path to prosperity and in any case there is a limit to the amount of illicit funds to be deposited in such havens.

One of the reasons Sharma is impressed with Switzerland is that, rather than having the government provide health care for its population, it requires its citizens to purchase private insurance. This does lead to universal coverage, although it seems to come at a substantial price. According to the OECD, Switzerland’s health care costs of $7,300 per person are considerably less than the U.S per person cost of $10,600, but 17 percent more than #3 Norway’s costs and almost 40 percent higher than Denmark’s. It’s not clear that our model for reform should be the second most costly system in the world.

The next point is that this treatment of health care is a big factor in the difference between the 50 percent government share of GDP in the Scandinavian countries compared to the one third in Switzerland. Perhaps it makes a big difference to people whether they are mandated to pay premiums to an insurance company as opposed to taxes to the government, but it is not obvious why that would be the case.

This treatment of health care is also relevant to Sharma’s point on relative wealth:

“The typical Swiss family has a net worth around $540,000, twice its Scandinavian peer.”

Middle income families have greater need for wealth in Switzerland, where they have to pay for their health insurance, than in the Scandinavian countries where it is paid for by the government. How much additional wealth is needed would depend on the timing of health care payments over people’s lifetimes.

There is an area where progressives Democrats are looking to Switzerland as a model. The country has a wealth tax on its richest people. Both Senators Warren and Sanders have proposed a comparable tax for the United States.

 

 

The New York Times has an article on the Trump administration’s decision to pull the United States out of the Paris Agreement on climate change. The first sentence wrongly describes the United States as “the world’s largest economy.” Actually China passed the United States as the world’s largest economy early in the decade. According to the I.M.F. its economy is now more than 25 percent larger than the U.S. economy. It is projected to be more than 50 percent larger by 2024.

This matters because China actually has moved aggressively to adopt clean energy. It is now by far the world leader in the use of solar and wind power and electric car sales. The fact that the Trump administration is determined not to cooperate in efforts to reduce greenhouse gas emissions is unfortunate, but the fact that the world’s actual largest economy is taking big steps to curb emissions is hugely important.

The New York Times has an article on the Trump administration’s decision to pull the United States out of the Paris Agreement on climate change. The first sentence wrongly describes the United States as “the world’s largest economy.” Actually China passed the United States as the world’s largest economy early in the decade. According to the I.M.F. its economy is now more than 25 percent larger than the U.S. economy. It is projected to be more than 50 percent larger by 2024.

This matters because China actually has moved aggressively to adopt clean energy. It is now by far the world leader in the use of solar and wind power and electric car sales. The fact that the Trump administration is determined not to cooperate in efforts to reduce greenhouse gas emissions is unfortunate, but the fact that the world’s actual largest economy is taking big steps to curb emissions is hugely important.

I hate to let the data ruin good lines in news stories, but apart from a few quarters in 2012, the savings rate is at its highest level in the last quarter-century.

fredgraph6

This means that people are actually consuming a smaller share of their income than normal. That is consistent with a tax cut that gave a lot more money to rich people, who tend to consume a smaller share of their income than low and middle class people.

I hate to let the data ruin good lines in news stories, but apart from a few quarters in 2012, the savings rate is at its highest level in the last quarter-century.

fredgraph6

This means that people are actually consuming a smaller share of their income than normal. That is consistent with a tax cut that gave a lot more money to rich people, who tend to consume a smaller share of their income than low and middle class people.

Mark Zuckerberg is a Rich Jerk

Last week, New York Times columnist Timothy Egan had a piece headlined “Why Doesn’t Mark Zuckerberg Get It?” The piece then goes on to document how Facebook has become a medium for spreading lies and nonsense all over the world, that many ill-informed users have come to believe.

This is what Egan wants Zuckerberg to “get.” While it would be nice if Zuckerberg understood the problems created by Facebook, and took effective measures to address them, the problem with Egan’s piece is that there is no reason to expect that Zuckerberg would get this point.

Zuckerberg is not a political philosopher concerned about the public good. There is a zero evidence he is a deep thinker of any sort. He is a Harvard boy who stumbled into a good idea and had the necessary connections to get very rich from it: end of story.

It is bizarre that so many people look to the country’s billionaires to tell us how the world should be constructed or think that these people have any great insight into such matters. Being a billionaire means that you were successful at getting very rich. There is no reason to believe that billionaires have any more insight into major policy issues than anyone else.

Imagine if we turned to LeBron James, a truly great basketball player, to get advice on how best to deal with global warming. LeBron is a smart guy, but no one would expect him to have special insights into dealing with global warming, in spite of his incredible skills on the basketball court.

In the same vein, why would anyone think that Zuckerberg would know or care about how Facebook should be run in a way that protects democracy? Zuckerberg runs Facebook to make to make money (lots of it), not to promote democracy. The way to fix the problems of Facebook is not to convince Zuckerberg of its harms, the way to fix Facebook is to change the law.

Ending Facebook’s Exemption from Libel Law

The best way to address the immediate issue of concern with Facebook, that it will run political ads with lies, is simply to remove Facebook’s exemption from libel law. In the early days of the Internet, Congress passed the Communications Decency Act, which established rules for Internet. The law included a provision, Section 230, which exempted intermediaries like Facebook from libel. This provision means that Facebook, unlike the New York Times or CNN, cannot be sued if it transmits false and damaging claims about individuals, companies, or other entities.

It is difficult to see why Facebook, or any Internet intermediary, should enjoy this sort of special treatment. Zuckerberg has said that he doesn’t want to be in the business of determining what is true. It may be the case that his Facebook team is not terribly competent, but the fact is that his competitors in traditional media have been in this business for decades.

I cannot buy an ad in the New York Times or on CNN attacking Donald Trump, Joe Biden, or any other political figure unless I can demonstrate to them that the claims in the ad are true. This is partly because these companies are worried about their reputations, and don’t want to be associated with passing along lies, but also because they could be subject to a libel suit if they helped me pass along libelous claims.

Zuckerberg might argue that Facebook’s operations are highly automated, people can buy ads on Facebook without any human intervention. This means that it doesn’t have staff available to review all the ads that it runs. That is undoubtedly true, but that is Mark Zuckerberg’s problem. Just as the New York Times and CNN pay people to review the ads they run, Facebook can pay to review the ads it runs. That will cost lots of money and reduce Facebook’s profits, but so what?

It is worth noting the contrast in the treatment of copyrights and libelous material by Facebook. In accordance with the law, Facebook polices its site for copyright violations. If someone has posted material that has been identified to Facebook as infringing on a copyright, Facebook will remove it from any sites where it has been posted. By contrast, Mark Zuckerberg says Facebook doesn’t care if posted material can be shown to be false and libelous.

It is hard to see an argument as to why we should not be at least as concerned about protecting democracy as protecting copyright holders’ ability to make money from their copyrights. It may be too much to demand that Facebook preemptively review posts for libelous material, but as with copyright infringement, they can be required to remove material that has been demonstrated to be false and damaging.

The law can also require that Facebook take steps to correct the damage from any false and libelous posts. This could mean that it would post a correction to the material that would appear on any Facebook pages where the libelous material appeared.

Allowing for such corrections could be one of the items that Facebook includes in those “terms of service” that no one ever reads.  If people object to the idea that they may having a correction to their libelous posting appear on their Facebook page, then they can opt not to use Facebook. (Consumer choice is great.)

Facebook and other Internet intermediaries often try to portray themselves as passive actors, like a bulletin board on the web. There are in fact many such passive bulletin board type sites on the web. The difference between these sites and Facebook, is that these sites don’t make money from advertising or their participants’ personal information. If Facebook wanted to go that route, then it could be exempted from responsibility for libelous material, just as a neighborhood bulletin board would not be held responsible for libelous material.

However, if Facebook wants to compete with print and broadcast outlets for advertising dollars, it should be held to the same rules as these outlets. There is no justification for special treatment for rich jerks from Harvard. There is no reason to waste any effort trying to convince Mark Zuckerberg what is good for democracy. We just have to tell him, and make him a pay a very big price if he is too lazy or dumb to “get” it.   

Last week, New York Times columnist Timothy Egan had a piece headlined “Why Doesn’t Mark Zuckerberg Get It?” The piece then goes on to document how Facebook has become a medium for spreading lies and nonsense all over the world, that many ill-informed users have come to believe.

This is what Egan wants Zuckerberg to “get.” While it would be nice if Zuckerberg understood the problems created by Facebook, and took effective measures to address them, the problem with Egan’s piece is that there is no reason to expect that Zuckerberg would get this point.

Zuckerberg is not a political philosopher concerned about the public good. There is a zero evidence he is a deep thinker of any sort. He is a Harvard boy who stumbled into a good idea and had the necessary connections to get very rich from it: end of story.

It is bizarre that so many people look to the country’s billionaires to tell us how the world should be constructed or think that these people have any great insight into such matters. Being a billionaire means that you were successful at getting very rich. There is no reason to believe that billionaires have any more insight into major policy issues than anyone else.

Imagine if we turned to LeBron James, a truly great basketball player, to get advice on how best to deal with global warming. LeBron is a smart guy, but no one would expect him to have special insights into dealing with global warming, in spite of his incredible skills on the basketball court.

In the same vein, why would anyone think that Zuckerberg would know or care about how Facebook should be run in a way that protects democracy? Zuckerberg runs Facebook to make to make money (lots of it), not to promote democracy. The way to fix the problems of Facebook is not to convince Zuckerberg of its harms, the way to fix Facebook is to change the law.

Ending Facebook’s Exemption from Libel Law

The best way to address the immediate issue of concern with Facebook, that it will run political ads with lies, is simply to remove Facebook’s exemption from libel law. In the early days of the Internet, Congress passed the Communications Decency Act, which established rules for Internet. The law included a provision, Section 230, which exempted intermediaries like Facebook from libel. This provision means that Facebook, unlike the New York Times or CNN, cannot be sued if it transmits false and damaging claims about individuals, companies, or other entities.

It is difficult to see why Facebook, or any Internet intermediary, should enjoy this sort of special treatment. Zuckerberg has said that he doesn’t want to be in the business of determining what is true. It may be the case that his Facebook team is not terribly competent, but the fact is that his competitors in traditional media have been in this business for decades.

I cannot buy an ad in the New York Times or on CNN attacking Donald Trump, Joe Biden, or any other political figure unless I can demonstrate to them that the claims in the ad are true. This is partly because these companies are worried about their reputations, and don’t want to be associated with passing along lies, but also because they could be subject to a libel suit if they helped me pass along libelous claims.

Zuckerberg might argue that Facebook’s operations are highly automated, people can buy ads on Facebook without any human intervention. This means that it doesn’t have staff available to review all the ads that it runs. That is undoubtedly true, but that is Mark Zuckerberg’s problem. Just as the New York Times and CNN pay people to review the ads they run, Facebook can pay to review the ads it runs. That will cost lots of money and reduce Facebook’s profits, but so what?

It is worth noting the contrast in the treatment of copyrights and libelous material by Facebook. In accordance with the law, Facebook polices its site for copyright violations. If someone has posted material that has been identified to Facebook as infringing on a copyright, Facebook will remove it from any sites where it has been posted. By contrast, Mark Zuckerberg says Facebook doesn’t care if posted material can be shown to be false and libelous.

It is hard to see an argument as to why we should not be at least as concerned about protecting democracy as protecting copyright holders’ ability to make money from their copyrights. It may be too much to demand that Facebook preemptively review posts for libelous material, but as with copyright infringement, they can be required to remove material that has been demonstrated to be false and damaging.

The law can also require that Facebook take steps to correct the damage from any false and libelous posts. This could mean that it would post a correction to the material that would appear on any Facebook pages where the libelous material appeared.

Allowing for such corrections could be one of the items that Facebook includes in those “terms of service” that no one ever reads.  If people object to the idea that they may having a correction to their libelous posting appear on their Facebook page, then they can opt not to use Facebook. (Consumer choice is great.)

Facebook and other Internet intermediaries often try to portray themselves as passive actors, like a bulletin board on the web. There are in fact many such passive bulletin board type sites on the web. The difference between these sites and Facebook, is that these sites don’t make money from advertising or their participants’ personal information. If Facebook wanted to go that route, then it could be exempted from responsibility for libelous material, just as a neighborhood bulletin board would not be held responsible for libelous material.

However, if Facebook wants to compete with print and broadcast outlets for advertising dollars, it should be held to the same rules as these outlets. There is no justification for special treatment for rich jerks from Harvard. There is no reason to waste any effort trying to convince Mark Zuckerberg what is good for democracy. We just have to tell him, and make him a pay a very big price if he is too lazy or dumb to “get” it.   

The Washington Post had a piece on newly released data on the federal budget deficit. The piece included the obligatory comments from the always wrong budget “experts” at the Committee for a Responsible Federal Budget. It also warned readers:

“U.S. debt is considered one of the safest investments in the world and interest rates remain low, which is why the government has been able to borrow money at cheap rates to finance the large annual deficits. But the costs are adding up. The government spent about $380 billion in interest payments on its debt last year, almost as much as the entire federal government contribution to Medicaid.”

“Almost as much as the entire federal government contribution to Medicaid!” Think about that. Try also thinking about the fact that interest payments were around 1.7 percent of GDP last year (before deducting money refunded from the Fed). That compares to a peak of 3.2 percent of GDP in 1991. Are you scared yet?

It’s also not quite right to claim that interest rates in the United States are especially low, at least not compared to other rich countries. The U.S. pays an interest rate on 10-year government bonds that is more than two full percentage points higher than the interest rate paid by Germany and the Netherlands. It’s even higher than the interest rate paid by Greece.

The Washington Post had a piece on newly released data on the federal budget deficit. The piece included the obligatory comments from the always wrong budget “experts” at the Committee for a Responsible Federal Budget. It also warned readers:

“U.S. debt is considered one of the safest investments in the world and interest rates remain low, which is why the government has been able to borrow money at cheap rates to finance the large annual deficits. But the costs are adding up. The government spent about $380 billion in interest payments on its debt last year, almost as much as the entire federal government contribution to Medicaid.”

“Almost as much as the entire federal government contribution to Medicaid!” Think about that. Try also thinking about the fact that interest payments were around 1.7 percent of GDP last year (before deducting money refunded from the Fed). That compares to a peak of 3.2 percent of GDP in 1991. Are you scared yet?

It’s also not quite right to claim that interest rates in the United States are especially low, at least not compared to other rich countries. The U.S. pays an interest rate on 10-year government bonds that is more than two full percentage points higher than the interest rate paid by Germany and the Netherlands. It’s even higher than the interest rate paid by Greece.

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