The New York Times ran a piece on the second round of government funding for the development of a coronavirus vaccine. The piece only mentions in passing the issue raised by some Democrats in Congress about the price of any vaccine that gets developed through this funding.
This is probably too simple for the NYT reporters and editors to understand, but the reason the government grants drug companies patent monopolies is to give them a way to recover their research costs. In this case, according to the piece, the government has already paid $2.2 billion for research. The article makes clear that the government will be putting up considerably more money.
This is a huge amount to pay for research. At no point does the piece give any indication of how much of their own money, if any, the companies are putting up. Fans of the free market might be saying that if the government is paying the money, why on earth should the drug companies then have a patent monopoly?
But, reporters don’t seem interested in asking questions like this when the beneficiaries of government handouts are rich people (generally white). They generally are far more concerned about a few hundred dollars that might improperly be paid out to someone on food stamps rather than the hundreds of billions that the government hands out every year with its patent and copyright monopolies.
The New York Times ran a piece on the second round of government funding for the development of a coronavirus vaccine. The piece only mentions in passing the issue raised by some Democrats in Congress about the price of any vaccine that gets developed through this funding.
This is probably too simple for the NYT reporters and editors to understand, but the reason the government grants drug companies patent monopolies is to give them a way to recover their research costs. In this case, according to the piece, the government has already paid $2.2 billion for research. The article makes clear that the government will be putting up considerably more money.
This is a huge amount to pay for research. At no point does the piece give any indication of how much of their own money, if any, the companies are putting up. Fans of the free market might be saying that if the government is paying the money, why on earth should the drug companies then have a patent monopoly?
But, reporters don’t seem interested in asking questions like this when the beneficiaries of government handouts are rich people (generally white). They generally are far more concerned about a few hundred dollars that might improperly be paid out to someone on food stamps rather than the hundreds of billions that the government hands out every year with its patent and copyright monopolies.
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(This piece originally ran on my Patreon page.) I see that my friend, David Dayen, is highly critical of the Federal Reserve Board’s bailout of corporate America. I’m afraid that I will have to disagree with him on this one.
Before going into details, let me briefly give my bailout credentials. I was one of the few progressive economists who was opposed to the 2008-2009 bailouts. I argued at the time that it would have been better to let the market work its magic on Goldman Sachs, Citigroup, Bank of America and the rest. This would have instantly downsized our bloated financial sector, eliminating an enormous source of waste in our economy by putting most of the Wall Street behemoths out of business.
At the time, it was fashionable among our elites to claim that this would lead to a Second Great Depression. This was utter nonsense. We learned the secret for getting out of a depression seventy years earlier at the start of World War II. It’s called “spending money.” A large enough stimulus package could have pushed the economy back towards full employment in fairly short order.
There is little doubt that if the big banks were allowed to fail, the immediate downturn would have been worse, but it would not have been as bad as the bank runs at the start of the Great Depression for the simple reason that we learned from those bank runs. We now have the Federal Deposit Insurance Corporation, which exists to ensure that banks can pay depositors and carry on other normal banking activity even after a bank has failed. Because we have the FDIC, as well as other safeguards, the idea pushed by politicians and the media, that we would have been unable to carry on normal business activity was utter nonsense.
And, there was an obvious moral/economic reason to allow the banks to go bankrupt, they had done this to themselves. The banks had issued trillions of dollars of dubious mortgages and packaged them into mortgage backed securities, collateralized debt obligations and other complex financial instruments. Their greed and incompetence put them in the situation where they faced bankruptcy. There was little reason not to let the people who had earned six, seven, and eight-figure paychecks during the bubble years enjoy the fruits of their labor. They should have lost their jobs and whatever holdings they had in these banks.
So, back in 2008-2010, I was firmly opposed to the bailouts. I wanted the Wall Street banks to pay the price for what they had done to the economy and the country. But there is a simple reason that things are different this time. The economic collapse was not the result of bad practices by major corporations, it was the result of a pandemic that none of them could reasonably have expected.
This is not to say that many of them were not engaged in bad practices. They were forking over far more of their profits to shareholders in the form of dividends and share buybacks than they were investing in new equipment and technologies. They also were paying CEOs, and other top executives, exorbitant salaries. These execs had little to show even by the narrow measure of providing good returns to shareholders.
But these bad practices were not the reason that companies found themselves on the brink when the pandemic struck. Even the best run airline was not going to be able to survive a 90 percent drop in traffic when the pandemic hit. The same applies to a wide range of other businesses who saw revenue plummet when the economy went into shutdown mode back in March. There would have been a massive wave of bankruptcies if the Fed had not stepped in to support financial markets.
Dayan notes that the Fed put no conditions on its loans, such as banning share buybacks or capping the paychecks of CEOs and other top executives. This would have been desirable, but Congress explicitly rejected putting these conditions in the CARES Act. It would have been difficult for the Fed to turn around and impose conditions that Congress had opted not to include in the bill.
Also, as the piece notes, much of the benefit of the Fed’s bond buying is going to companies where the Fed may not even be buying up their loans. The Fed’s intervention has boosted the bond and stock markets as a whole, since investors now know that the Fed is prepared to act to support financial markets.
I have long argued that we place too much emphasis on financial markets and that the cheerleading for a rising stock market is utter idiocy. But if the financial markets do go into a free fall, so that most companies are unable to raise capital, that is a real economic problem. We were facing this sort of situation back in March, when the Fed made its first major interventions to support financial markets.
Perhaps I’m being soft on Jerome Powell’s Fed because he moved the ball so much on monetary policy. Powell explicitly acknowledged what many progressives had long argued, that the Fed’s monetary policy very directly affects income distribution. When the unemployment rates get to very low levels, as it had before the crisis, it disproportionately benefits the most disadvantaged segments of the labor market.
African Americans, Hispanics, people with less education, people with criminal records and others who face discrimination in the labor market suddenly face much better employment prospects. And, the tighter labor markets also mean that these workers have the bargaining power to secure higher wages. This is in fact what we had been seeing the prior five years, as the tighter labor market was allowing workers at the middle and bottom of the wage distribution to see wage gains that exceeded inflation.
It was truly extraordinary to see the Fed chair as an ally in both pushing this view of monetary policy, and largely putting it into practice by allowing the unemployment rate to fall to levels that most economists had predicted would lead to spiraling inflation.
But apart from my view of Powell’s tenure at the Fed, it is still difficult for me to see how a Fed decision to stay out of financial markets in the pandemic would have made us better off. There are many moral and political takeaways from these actions.
First, Dayan is 100 percent right that, most immediately the Fed did save the hides of big share and bondholders. While this may have saved millions of jobs, it also means that the wealthiest people in the country turned to the government to keep them whole in this crisis. We must remember this fact in arguing for unemployment insurance, nutrition support, health care, housing assistance and other measures that will be needed to keep the bulk of the population whole in this pandemic.
It’s fair to say that investors could not anticipate this sort of disaster but neither could flight attendants, retail clerks, or restaurant workers. If the government is prepared to act to ensure that the richest don’t suffer as a result of the pandemic, it also better be prepared to protect those at the middle and the bottom of the income ladder.
The efforts to stabilize markets also put financial transactions taxes in a new light. Needless to say, many market makers and short—term traders stood to be wiped out by the market plunges that preceded the Fed’s interventions. If these actors can rely on the government to rescue them in a time of crisis, it is certainly reasonable to expect that they pay a modest fee in the form of a financial transactions tax as an insurance premium against such unanticipated disasters.
Perhaps most importantly, this is a vivid example of how the government sets the rules for determining who wins and loses in the market. It is more blatant in a crisis like this, but that is the way of the world. This is a lesson that every progressive should learn.
(This piece originally ran on my Patreon page.) I see that my friend, David Dayen, is highly critical of the Federal Reserve Board’s bailout of corporate America. I’m afraid that I will have to disagree with him on this one.
Before going into details, let me briefly give my bailout credentials. I was one of the few progressive economists who was opposed to the 2008-2009 bailouts. I argued at the time that it would have been better to let the market work its magic on Goldman Sachs, Citigroup, Bank of America and the rest. This would have instantly downsized our bloated financial sector, eliminating an enormous source of waste in our economy by putting most of the Wall Street behemoths out of business.
At the time, it was fashionable among our elites to claim that this would lead to a Second Great Depression. This was utter nonsense. We learned the secret for getting out of a depression seventy years earlier at the start of World War II. It’s called “spending money.” A large enough stimulus package could have pushed the economy back towards full employment in fairly short order.
There is little doubt that if the big banks were allowed to fail, the immediate downturn would have been worse, but it would not have been as bad as the bank runs at the start of the Great Depression for the simple reason that we learned from those bank runs. We now have the Federal Deposit Insurance Corporation, which exists to ensure that banks can pay depositors and carry on other normal banking activity even after a bank has failed. Because we have the FDIC, as well as other safeguards, the idea pushed by politicians and the media, that we would have been unable to carry on normal business activity was utter nonsense.
And, there was an obvious moral/economic reason to allow the banks to go bankrupt, they had done this to themselves. The banks had issued trillions of dollars of dubious mortgages and packaged them into mortgage backed securities, collateralized debt obligations and other complex financial instruments. Their greed and incompetence put them in the situation where they faced bankruptcy. There was little reason not to let the people who had earned six, seven, and eight-figure paychecks during the bubble years enjoy the fruits of their labor. They should have lost their jobs and whatever holdings they had in these banks.
So, back in 2008-2010, I was firmly opposed to the bailouts. I wanted the Wall Street banks to pay the price for what they had done to the economy and the country. But there is a simple reason that things are different this time. The economic collapse was not the result of bad practices by major corporations, it was the result of a pandemic that none of them could reasonably have expected.
This is not to say that many of them were not engaged in bad practices. They were forking over far more of their profits to shareholders in the form of dividends and share buybacks than they were investing in new equipment and technologies. They also were paying CEOs, and other top executives, exorbitant salaries. These execs had little to show even by the narrow measure of providing good returns to shareholders.
But these bad practices were not the reason that companies found themselves on the brink when the pandemic struck. Even the best run airline was not going to be able to survive a 90 percent drop in traffic when the pandemic hit. The same applies to a wide range of other businesses who saw revenue plummet when the economy went into shutdown mode back in March. There would have been a massive wave of bankruptcies if the Fed had not stepped in to support financial markets.
Dayan notes that the Fed put no conditions on its loans, such as banning share buybacks or capping the paychecks of CEOs and other top executives. This would have been desirable, but Congress explicitly rejected putting these conditions in the CARES Act. It would have been difficult for the Fed to turn around and impose conditions that Congress had opted not to include in the bill.
Also, as the piece notes, much of the benefit of the Fed’s bond buying is going to companies where the Fed may not even be buying up their loans. The Fed’s intervention has boosted the bond and stock markets as a whole, since investors now know that the Fed is prepared to act to support financial markets.
I have long argued that we place too much emphasis on financial markets and that the cheerleading for a rising stock market is utter idiocy. But if the financial markets do go into a free fall, so that most companies are unable to raise capital, that is a real economic problem. We were facing this sort of situation back in March, when the Fed made its first major interventions to support financial markets.
Perhaps I’m being soft on Jerome Powell’s Fed because he moved the ball so much on monetary policy. Powell explicitly acknowledged what many progressives had long argued, that the Fed’s monetary policy very directly affects income distribution. When the unemployment rates get to very low levels, as it had before the crisis, it disproportionately benefits the most disadvantaged segments of the labor market.
African Americans, Hispanics, people with less education, people with criminal records and others who face discrimination in the labor market suddenly face much better employment prospects. And, the tighter labor markets also mean that these workers have the bargaining power to secure higher wages. This is in fact what we had been seeing the prior five years, as the tighter labor market was allowing workers at the middle and bottom of the wage distribution to see wage gains that exceeded inflation.
It was truly extraordinary to see the Fed chair as an ally in both pushing this view of monetary policy, and largely putting it into practice by allowing the unemployment rate to fall to levels that most economists had predicted would lead to spiraling inflation.
But apart from my view of Powell’s tenure at the Fed, it is still difficult for me to see how a Fed decision to stay out of financial markets in the pandemic would have made us better off. There are many moral and political takeaways from these actions.
First, Dayan is 100 percent right that, most immediately the Fed did save the hides of big share and bondholders. While this may have saved millions of jobs, it also means that the wealthiest people in the country turned to the government to keep them whole in this crisis. We must remember this fact in arguing for unemployment insurance, nutrition support, health care, housing assistance and other measures that will be needed to keep the bulk of the population whole in this pandemic.
It’s fair to say that investors could not anticipate this sort of disaster but neither could flight attendants, retail clerks, or restaurant workers. If the government is prepared to act to ensure that the richest don’t suffer as a result of the pandemic, it also better be prepared to protect those at the middle and the bottom of the income ladder.
The efforts to stabilize markets also put financial transactions taxes in a new light. Needless to say, many market makers and short—term traders stood to be wiped out by the market plunges that preceded the Fed’s interventions. If these actors can rely on the government to rescue them in a time of crisis, it is certainly reasonable to expect that they pay a modest fee in the form of a financial transactions tax as an insurance premium against such unanticipated disasters.
Perhaps most importantly, this is a vivid example of how the government sets the rules for determining who wins and loses in the market. It is more blatant in a crisis like this, but that is the way of the world. This is a lesson that every progressive should learn.
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Democrats in Congress have been pushing for a large amount of assistance for state and local governments in the next pandemic aid package. The finances of these governments have been devastated by the pandemic, with all of them seeing massive shortfalls in revenue due to the shutdowns and the weak economy that is projected for the months ahead. At the same time, they have had enormous demands for public services as a result of the pandemic, largely due to the need for additional health care spending. The demand for services has been further increased as a result of state and local government efforts to deal with the protests following the police killing of George Floyd.
The Republicans have thus far balked on providing aid to state and local governments. Senate Majority Leader Mitch McConnell has openly said that states should declare bankruptcy, which would allow them to default on their pension obligations.
Defaulting on the pensions of state and local employees would be a huge hit to African American workers and retirees. They are substantially over-represented among current and retired public sector employees. This is due to the fact that they faced less discrimination in employment opportunities in public sector employment than in private sector employment.
Currently, the African American share of the state and local workforce is almost 25 percent higher than its share of the private sector workforce. In the 1990s, the African American share of state and local employment was almost 40 percent higher than its share of private sector employment. State and local governments provided millions of African Americans middle class jobs that they were denied in the private sector.
Part of the compensation for a middle class job has historically been a pension. These pensions are not a gift from the government, workers sacrifice pay during their working years in exchange for this pension in retirement. Mitch McConnell’s plan to have states declare bankruptcy, and thereby renege on pensions promised to workers, is in effect an effort to take away pay that workers have already worked for. And, the victims of Senator McConnell’s scheme would disproportionately be African American workers.
And Republicans wonder why so many black people are angry.
Democrats in Congress have been pushing for a large amount of assistance for state and local governments in the next pandemic aid package. The finances of these governments have been devastated by the pandemic, with all of them seeing massive shortfalls in revenue due to the shutdowns and the weak economy that is projected for the months ahead. At the same time, they have had enormous demands for public services as a result of the pandemic, largely due to the need for additional health care spending. The demand for services has been further increased as a result of state and local government efforts to deal with the protests following the police killing of George Floyd.
The Republicans have thus far balked on providing aid to state and local governments. Senate Majority Leader Mitch McConnell has openly said that states should declare bankruptcy, which would allow them to default on their pension obligations.
Defaulting on the pensions of state and local employees would be a huge hit to African American workers and retirees. They are substantially over-represented among current and retired public sector employees. This is due to the fact that they faced less discrimination in employment opportunities in public sector employment than in private sector employment.
Currently, the African American share of the state and local workforce is almost 25 percent higher than its share of the private sector workforce. In the 1990s, the African American share of state and local employment was almost 40 percent higher than its share of private sector employment. State and local governments provided millions of African Americans middle class jobs that they were denied in the private sector.
Part of the compensation for a middle class job has historically been a pension. These pensions are not a gift from the government, workers sacrifice pay during their working years in exchange for this pension in retirement. Mitch McConnell’s plan to have states declare bankruptcy, and thereby renege on pensions promised to workers, is in effect an effort to take away pay that workers have already worked for. And, the victims of Senator McConnell’s scheme would disproportionately be African American workers.
And Republicans wonder why so many black people are angry.
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Yesterday Donald Trump vetoed a resolution passed by Congress, which would have left in place rules making it easier for students to default on debt owed to for-profit colleges that had engaged in deceptive marketing practices. The Washington Post told readers that this veto is expected to save the government $11 billion over the next decade.
Most readers may not have a good sense of how much money $11 billion over the next decade is. The government is projected to spend 60,700 billion over this period. That means the savings from this veto will be a bit less than 0.02 percent of projected spending.
Yesterday Donald Trump vetoed a resolution passed by Congress, which would have left in place rules making it easier for students to default on debt owed to for-profit colleges that had engaged in deceptive marketing practices. The Washington Post told readers that this veto is expected to save the government $11 billion over the next decade.
Most readers may not have a good sense of how much money $11 billion over the next decade is. The government is projected to spend 60,700 billion over this period. That means the savings from this veto will be a bit less than 0.02 percent of projected spending.
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Thankfully, it is not a nuclear war. Apparently the Washington Post thinks plans considered by Trump to delist Chinese companies from U.S. stock exchanges and to make it more difficult for the country to trade in dollars will pose an “existential” threat to the country.
While these plans, which put into practice, will almost certainly sink the stock market and further alienate the United States from its traditional allies, it is very hard to understand how this could be an existential threat to China. Chinese companies that are already listed on U.S. stock exchanges are not currently raising capital. If they are delisted, the price of their shares will fall sharply, but that does not directly affect their ongoing operations. Other Chinese companies will presumably be blocked from being listed on the U.S. exchanges, but this was not a major source of investment capital for these companies in any case.
The piece also implies that China’s trade will be seriously impaired if they are unable to conduct it in dollars. It tells readers:
“China’s years-long ambition of internationalizing the yuan has progressed slowly, with only 2 percent of all global transactions conducted in the Chinese currency.”
The piece implies that this amount is small. However, China’s trade is only a bit more than 12 percent of the world’s total. That means that close to 20 percent of China’s trade is already conducted in its own currency (assuming that the bulk of the trade conducted in yuan has China as a trading partner). That is a pretty good jumping-off point. Furthermore, it is unlikely that most of the rest of the world will go along with Trump’s schemes against China. This means that China would have little problem trading with the euro, the yen, or other major currencies.
As a sidebar, these moves should also mean that China should be able to get use of all U.S. patents and copyrights for free, since why on earth would they pay Pfizer and Microsoft for their intellectual property claims in this context. That should be a good boost to its economy and a major victory for free trade.
Anyhow, given the relative strength of China’s economy and the U.S. economy, and their relative standing in the world, this sounds like a great plan to do lots of damage to the U.S. economy and its standing in the world. The impact on China is likely to be relatively limited.
Thankfully, it is not a nuclear war. Apparently the Washington Post thinks plans considered by Trump to delist Chinese companies from U.S. stock exchanges and to make it more difficult for the country to trade in dollars will pose an “existential” threat to the country.
While these plans, which put into practice, will almost certainly sink the stock market and further alienate the United States from its traditional allies, it is very hard to understand how this could be an existential threat to China. Chinese companies that are already listed on U.S. stock exchanges are not currently raising capital. If they are delisted, the price of their shares will fall sharply, but that does not directly affect their ongoing operations. Other Chinese companies will presumably be blocked from being listed on the U.S. exchanges, but this was not a major source of investment capital for these companies in any case.
The piece also implies that China’s trade will be seriously impaired if they are unable to conduct it in dollars. It tells readers:
“China’s years-long ambition of internationalizing the yuan has progressed slowly, with only 2 percent of all global transactions conducted in the Chinese currency.”
The piece implies that this amount is small. However, China’s trade is only a bit more than 12 percent of the world’s total. That means that close to 20 percent of China’s trade is already conducted in its own currency (assuming that the bulk of the trade conducted in yuan has China as a trading partner). That is a pretty good jumping-off point. Furthermore, it is unlikely that most of the rest of the world will go along with Trump’s schemes against China. This means that China would have little problem trading with the euro, the yen, or other major currencies.
As a sidebar, these moves should also mean that China should be able to get use of all U.S. patents and copyrights for free, since why on earth would they pay Pfizer and Microsoft for their intellectual property claims in this context. That should be a good boost to its economy and a major victory for free trade.
Anyhow, given the relative strength of China’s economy and the U.S. economy, and their relative standing in the world, this sounds like a great plan to do lots of damage to the U.S. economy and its standing in the world. The impact on China is likely to be relatively limited.
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The Washington Post had an excellent piece documenting how the government put up most of the money for developing remdesivir, a drug that now offers the hope of being the first effective treatment for the coronavirus. As the piece explains, in spite of the substantial contribution of public funds, Gilead Sciences holds a patent monopoly on remdesivir, which will allow it to charge whatever it wants without facing competition from other manufacturers.
There is a simple and obvious solution to this problem. The government should simply take possession of the patent, putting it in the public domain so that anyone can manufacture the drug and also conduct further research, subject to the requirement that any subsequent developments are also in the public domain. (This would be analogous to the rules for free software.)
To ensure that Gilead is fairly compensated, we can pay the company an amount that is 10 percent above any research costs it incurred that exceeded the government payments for development. Gilead would just have to submit its records, with the payment coming after they are fully audited. (There would be a return applied to past payments, of say 5 percent real, so that a payment made in 2015 would get a 25 percent real return [ignoring compounding], in addition to the ten percent markup.)
See, it’s simple, fun, and easy. We get the drug. Gilead gets a respectable profit, and remdesivir is cheap. Is everybody happy?
The Washington Post had an excellent piece documenting how the government put up most of the money for developing remdesivir, a drug that now offers the hope of being the first effective treatment for the coronavirus. As the piece explains, in spite of the substantial contribution of public funds, Gilead Sciences holds a patent monopoly on remdesivir, which will allow it to charge whatever it wants without facing competition from other manufacturers.
There is a simple and obvious solution to this problem. The government should simply take possession of the patent, putting it in the public domain so that anyone can manufacture the drug and also conduct further research, subject to the requirement that any subsequent developments are also in the public domain. (This would be analogous to the rules for free software.)
To ensure that Gilead is fairly compensated, we can pay the company an amount that is 10 percent above any research costs it incurred that exceeded the government payments for development. Gilead would just have to submit its records, with the payment coming after they are fully audited. (There would be a return applied to past payments, of say 5 percent real, so that a payment made in 2015 would get a 25 percent real return [ignoring compounding], in addition to the ten percent markup.)
See, it’s simple, fun, and easy. We get the drug. Gilead gets a respectable profit, and remdesivir is cheap. Is everybody happy?
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The NYT ran a column by a bar-restaurant owner telling of the horrible circumstances facing restaurants during and after the shutdown period. While the restaurant industry is among the hardest-hit sectors, and many will not survive, a few of the complaints in the piece need some qualification.
For example, it tells readers:
“Rent is obviously one of our biggest expenses, especially in larger cities. Rent easements are not voluntarily coming from landlords afraid that they will not be able to pay their taxes and other expenses. For commercial rent forgiveness to become a given, it would have to be mandated by the state government, and for that to work, the landlords would in turn have to be granted easements of property taxes. That might mean drawing a straight percentage line, cutting rents by law to 50 percent, say, or pegging easements to monthly gains against former revenue as shown by tax records.”
While we could look to legislate rent reductions, that would be hard to do in an equitable matter. As a practical matter, landlords would be very foolish not to agree to lower rents for restaurants and other struggling businesses, given that the alternative will be a vacant building from which they will collect zero rent. We know from watching Donald Trump and his son-in-law chief adviser that big landlords often don’t know much economics, but most of them probably do understand that some rent is better than no rent.
As far as the landlords’ obligations, most importantly their mortgages, banks will also likely recognize that it is better to get some payment on a loan than no payment. They can force properties into foreclosure, which they will then be looking to sell in the middle of the worst economic slump since the Great Depression. Again, the housing bubble taught us that bankers are also not very good at economics, but presumably most of them can be made to understand that it doesn’t help their bottom line to foreclose on commercial property owners who cannot pay their full mortgage.
The piece also includes a complaint about payroll taxes that does not make any sense:
“When we pay out $16,000 of payroll to the staff, I’m adding another $8,500 in payroll taxes.”
It is hard to understand how payroll taxes can be 53 percent of wages. Perhaps a digit was dropped in the size of the payroll, but nowhere in the country has taxes anywhere near that rate.
But the piece’s first and main complaint is about social distancing requirements:
“Protocols already being readied in most states will limit indoor business to 50 percent of prior capacity — even down to 25 percent in some states — and restrict seating to safe distances of six feet. … That is quite effectively a death sentence. It would result in revenues of 25 percent or less of our normal operation, which in this business, even given a popular spot doing quite well, yielded razor-thin margins to begin with. There is, quite simply, no possible way for anyone to make those numbers work.”
There are two problems with this argument. First, it is not clear that many people would want to patronize a restaurant if they did not feel that it was taking reasonable precautions to ensure customers’ safety. That has been the experience in many places that have allowed openings with lax standards.
The other major problem is the assertion that the industry has “razor-thin margins.” That was the case before the crisis. There is no reason it would be the case now.
As the column complains, restaurants will only have 50 percent or possibly even 25 percent of prior capacity. This means that they will be able to serve many fewer customers. Also, many restaurants are going out of business. This means there is far less competition.
In that context, what would prevent a restaurant from substantially increasing their prices? Even if price hikes cost them half of their former customers they will still have all the business they can handle. The idea that everything in the world changes, but somehow a law of nature mandates that restaurants operate on low-profit margins, makes zero sense.
In reality, we should expect that in most cases the restaurants that reopen will do so with sharply higher prices. This will be needed to cover their higher per-customer costs. That is not good news for people going out to restaurants, but it is likely to be the world we face until the pandemic is controlled or we develop more effective treatments.
The NYT ran a column by a bar-restaurant owner telling of the horrible circumstances facing restaurants during and after the shutdown period. While the restaurant industry is among the hardest-hit sectors, and many will not survive, a few of the complaints in the piece need some qualification.
For example, it tells readers:
“Rent is obviously one of our biggest expenses, especially in larger cities. Rent easements are not voluntarily coming from landlords afraid that they will not be able to pay their taxes and other expenses. For commercial rent forgiveness to become a given, it would have to be mandated by the state government, and for that to work, the landlords would in turn have to be granted easements of property taxes. That might mean drawing a straight percentage line, cutting rents by law to 50 percent, say, or pegging easements to monthly gains against former revenue as shown by tax records.”
While we could look to legislate rent reductions, that would be hard to do in an equitable matter. As a practical matter, landlords would be very foolish not to agree to lower rents for restaurants and other struggling businesses, given that the alternative will be a vacant building from which they will collect zero rent. We know from watching Donald Trump and his son-in-law chief adviser that big landlords often don’t know much economics, but most of them probably do understand that some rent is better than no rent.
As far as the landlords’ obligations, most importantly their mortgages, banks will also likely recognize that it is better to get some payment on a loan than no payment. They can force properties into foreclosure, which they will then be looking to sell in the middle of the worst economic slump since the Great Depression. Again, the housing bubble taught us that bankers are also not very good at economics, but presumably most of them can be made to understand that it doesn’t help their bottom line to foreclose on commercial property owners who cannot pay their full mortgage.
The piece also includes a complaint about payroll taxes that does not make any sense:
“When we pay out $16,000 of payroll to the staff, I’m adding another $8,500 in payroll taxes.”
It is hard to understand how payroll taxes can be 53 percent of wages. Perhaps a digit was dropped in the size of the payroll, but nowhere in the country has taxes anywhere near that rate.
But the piece’s first and main complaint is about social distancing requirements:
“Protocols already being readied in most states will limit indoor business to 50 percent of prior capacity — even down to 25 percent in some states — and restrict seating to safe distances of six feet. … That is quite effectively a death sentence. It would result in revenues of 25 percent or less of our normal operation, which in this business, even given a popular spot doing quite well, yielded razor-thin margins to begin with. There is, quite simply, no possible way for anyone to make those numbers work.”
There are two problems with this argument. First, it is not clear that many people would want to patronize a restaurant if they did not feel that it was taking reasonable precautions to ensure customers’ safety. That has been the experience in many places that have allowed openings with lax standards.
The other major problem is the assertion that the industry has “razor-thin margins.” That was the case before the crisis. There is no reason it would be the case now.
As the column complains, restaurants will only have 50 percent or possibly even 25 percent of prior capacity. This means that they will be able to serve many fewer customers. Also, many restaurants are going out of business. This means there is far less competition.
In that context, what would prevent a restaurant from substantially increasing their prices? Even if price hikes cost them half of their former customers they will still have all the business they can handle. The idea that everything in the world changes, but somehow a law of nature mandates that restaurants operate on low-profit margins, makes zero sense.
In reality, we should expect that in most cases the restaurants that reopen will do so with sharply higher prices. This will be needed to cover their higher per-customer costs. That is not good news for people going out to restaurants, but it is likely to be the world we face until the pandemic is controlled or we develop more effective treatments.
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In the last couple of weeks both the New York Times and National Public Radio have warned that China could steal a vaccine against the coronavirus, or at least steal work in the U.S. done towards developing a vaccine. Both outlets obviously thought their audiences should view this as a serious concern.
As I wrote previously, it is not clear why those of us who don’t either own large amounts of stock in drug companies or give a damn about Donald Trump’s ego, should be upset about the prospect of China “stealing” a vaccine. Concretely, if China gained knowledge from labs in the United States that allowed it to develop and produce a vaccine more quickly, this would mean that hundreds of millions of people might be protected against a deadly disease more quickly than would otherwise be the case. If China made this vaccine available to people in the developing world, then the numbers could be in the billions.
Sounds pretty scary, right?
It is amazing that neither the reporters writing these stories nor their editors apparently gave much thought to the implications of China “stealing” a vaccine. Or perhaps, even worse, maybe they did. Anyhow, I suspect that most of the audiences of these outlets would not consider it a terrible thing if people in China or other countries could get vaccinated more quickly against the coronavirus.
But the issue of this potential theft is just the beginning of the story. If China can in principle develop a vaccine more quickly if it has access to data from labs in the United States then it must also be the case that researchers in the United States could develop a vaccine more quickly if they had data from labs in China and elsewhere. This raises the question of why we are not researching a vaccine collectively, with researchers all over the world posting their findings as quickly as practical so that teams of researchers everywhere can benefit from them?
There is a bad answer and a somewhat less bad answer to this question. The bad answer is that the goal of the researchers is to get a government-granted patent monopoly so that they can charge lots of money for a vaccine and get very rich. The less bad answer is that we rely on grants of patent monopolies to finance research. If companies didn’t have the hope of getting a patent monopoly, they would have no way to recoup the costs they are incurring paying researchers and undertaking the trials necessary to establish the safety and effectiveness of a vaccine.
The reason why the less bad answer is still a pretty damn bad answer is that it assumes that we have no other way to pay for the research and testing of a vaccine, except with patent monopolies. It should be pretty obvious that this is not the case since much of the funding for the research now taking place comes from the government.[1] However, for some reason, the idea that the government would take up the slack and pick up the full tab for developing a vaccine, including testing and going through the FDA approval, is difficult for people to conceive.
The failure of imagination here is more than a little bizarre. This is in part because the government already pays for many clinical trials through the National Institutes of Health and other agencies. However, there is also an obvious model for large-scale funding for research and development, the Defense Department.
The Defense Department will sign large multi-year contracts with major military suppliers, like Lockheed or Boeing. The contractors will typically subcontract much of the work to smaller and newer companies, but the decision on what to do in-house and what to do under contract is largely left up to the prime contractors.
There are many grounds for complaints about the military, but the fact is that we do get good weapons systems. And, we have a huge advantage with medical research over military research. There are legitimate reasons for keeping military research secret, we would not want ISIS to be able to download the plans for our latest weapons systems off the web. By contrast, there is no good reason for wanting to keep medical research secret. There could be nothing better than to have a team of researchers in another country, learn from findings here, and then build on them to develop a successful vaccine or treatment for the coronavirus. (I discuss this issue in more detail in chapter 5 of Rigged [it’s free.])
Ideally, we would have some system of international coordination where the costs of research were shared. This would require some negotiations but our current system of patent monopolies also involves difficult negotiations. Provisions on patents and related protections were a major part of every trade deal for the last three decades. These provisions have often been especially contentious. In fact, the final version of the Trans-Pacific Partnership was delayed for several years over the terms on patent-related protections demanded by the U.S. pharmaceutical industry. So, while it is true that we would like a mechanism to ensure fair sharing of research costs, it is likely that negotiating this sharing will be no more difficult than it has been under the patent monopoly system.
However, in a context where the whole world is struggling to deal with a pandemic that is killing hundreds of thousands of people, it might be reasonable to just do the research and worry about the cost-sharing later. It would make sense for governments to fund their own research to the extent practical and require that everything be fully public as soon as possible.
If we went this route, our leading news outlets could put aside their fears that China would steal the vaccine. If they take advantage of U.S. research and rush ahead and develop an effective vaccine before our own researchers, then the whole world will benefit from having a vaccine sooner than would otherwise be the case.
If China somehow decides to break commitments and keep its vaccine secret, surely we will be able to secure a dose and reverse engineer it. This should still leave us hugely better off than if our researchers are struggling to overcome obstacles that China’s researchers have already managed to surmount. In any case, China certainly does not have a poor record of adhering to international agreements, at least not compared to the United States under Donald Trump.
We have a huge amount of potential gain from going the route of open research and very little to lose. And our leading news outlets would be able to stop worrying about China stealing our vaccine.
[1] It is worth noting on this topic that remdesivir, currently the most promising drug for treating the coronavirus, was developed to a large extent with public money, even though Gilead owns a patent on it.
In the last couple of weeks both the New York Times and National Public Radio have warned that China could steal a vaccine against the coronavirus, or at least steal work in the U.S. done towards developing a vaccine. Both outlets obviously thought their audiences should view this as a serious concern.
As I wrote previously, it is not clear why those of us who don’t either own large amounts of stock in drug companies or give a damn about Donald Trump’s ego, should be upset about the prospect of China “stealing” a vaccine. Concretely, if China gained knowledge from labs in the United States that allowed it to develop and produce a vaccine more quickly, this would mean that hundreds of millions of people might be protected against a deadly disease more quickly than would otherwise be the case. If China made this vaccine available to people in the developing world, then the numbers could be in the billions.
Sounds pretty scary, right?
It is amazing that neither the reporters writing these stories nor their editors apparently gave much thought to the implications of China “stealing” a vaccine. Or perhaps, even worse, maybe they did. Anyhow, I suspect that most of the audiences of these outlets would not consider it a terrible thing if people in China or other countries could get vaccinated more quickly against the coronavirus.
But the issue of this potential theft is just the beginning of the story. If China can in principle develop a vaccine more quickly if it has access to data from labs in the United States then it must also be the case that researchers in the United States could develop a vaccine more quickly if they had data from labs in China and elsewhere. This raises the question of why we are not researching a vaccine collectively, with researchers all over the world posting their findings as quickly as practical so that teams of researchers everywhere can benefit from them?
There is a bad answer and a somewhat less bad answer to this question. The bad answer is that the goal of the researchers is to get a government-granted patent monopoly so that they can charge lots of money for a vaccine and get very rich. The less bad answer is that we rely on grants of patent monopolies to finance research. If companies didn’t have the hope of getting a patent monopoly, they would have no way to recoup the costs they are incurring paying researchers and undertaking the trials necessary to establish the safety and effectiveness of a vaccine.
The reason why the less bad answer is still a pretty damn bad answer is that it assumes that we have no other way to pay for the research and testing of a vaccine, except with patent monopolies. It should be pretty obvious that this is not the case since much of the funding for the research now taking place comes from the government.[1] However, for some reason, the idea that the government would take up the slack and pick up the full tab for developing a vaccine, including testing and going through the FDA approval, is difficult for people to conceive.
The failure of imagination here is more than a little bizarre. This is in part because the government already pays for many clinical trials through the National Institutes of Health and other agencies. However, there is also an obvious model for large-scale funding for research and development, the Defense Department.
The Defense Department will sign large multi-year contracts with major military suppliers, like Lockheed or Boeing. The contractors will typically subcontract much of the work to smaller and newer companies, but the decision on what to do in-house and what to do under contract is largely left up to the prime contractors.
There are many grounds for complaints about the military, but the fact is that we do get good weapons systems. And, we have a huge advantage with medical research over military research. There are legitimate reasons for keeping military research secret, we would not want ISIS to be able to download the plans for our latest weapons systems off the web. By contrast, there is no good reason for wanting to keep medical research secret. There could be nothing better than to have a team of researchers in another country, learn from findings here, and then build on them to develop a successful vaccine or treatment for the coronavirus. (I discuss this issue in more detail in chapter 5 of Rigged [it’s free.])
Ideally, we would have some system of international coordination where the costs of research were shared. This would require some negotiations but our current system of patent monopolies also involves difficult negotiations. Provisions on patents and related protections were a major part of every trade deal for the last three decades. These provisions have often been especially contentious. In fact, the final version of the Trans-Pacific Partnership was delayed for several years over the terms on patent-related protections demanded by the U.S. pharmaceutical industry. So, while it is true that we would like a mechanism to ensure fair sharing of research costs, it is likely that negotiating this sharing will be no more difficult than it has been under the patent monopoly system.
However, in a context where the whole world is struggling to deal with a pandemic that is killing hundreds of thousands of people, it might be reasonable to just do the research and worry about the cost-sharing later. It would make sense for governments to fund their own research to the extent practical and require that everything be fully public as soon as possible.
If we went this route, our leading news outlets could put aside their fears that China would steal the vaccine. If they take advantage of U.S. research and rush ahead and develop an effective vaccine before our own researchers, then the whole world will benefit from having a vaccine sooner than would otherwise be the case.
If China somehow decides to break commitments and keep its vaccine secret, surely we will be able to secure a dose and reverse engineer it. This should still leave us hugely better off than if our researchers are struggling to overcome obstacles that China’s researchers have already managed to surmount. In any case, China certainly does not have a poor record of adhering to international agreements, at least not compared to the United States under Donald Trump.
We have a huge amount of potential gain from going the route of open research and very little to lose. And our leading news outlets would be able to stop worrying about China stealing our vaccine.
[1] It is worth noting on this topic that remdesivir, currently the most promising drug for treating the coronavirus, was developed to a large extent with public money, even though Gilead owns a patent on it.
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There is an endless market for pieces that tell us that the typical worker is doing quite well, in spite of all the gloom and talk we hear constantly. Michael Strain, who is actually a pretty good economist, took on the job in a column in the NYT yesterday.
The gist of Strain’s piece is that we shouldn’t be upset about inequality because the great fortunes at the top are really helping to make us all richer. He contrasts the 1990s, when inequality grew a lot, with the period from 2007 to 2017, when there was little rise in inequality. Strain notes the much slower income growth in the second period and tells us:
“I would argue that part of the answer must be that inflation-adjusted wages for typical workers grew 44 percent more in the 1990s than in the 10 years beginning in 2007. “
That 44 percent difference sounds like a big deal, but not to folks familiar with the data. According to the Economic Policy Institute, the wage of the typical worker grew roughly 2 percent in the second period. So sure, wage growth of 2.88 percent over the course of a decade is better than 2.0 percent growth over a decade, but I don’t think I would make too much of that difference.
Some of the other tricks in this one include the focus on “post-tax-and-transfer income” which Strain tells us is “the most comprehensive measure of the flow of resources available to households.” I would disagree with this assessment. A very big chunk of post-tax-and-transfer income is government payments for Medicare and Medicaid. While these programs are enormously important, the government’s payments to drug companies, medical equipment suppliers, and doctors are not the same thing as cash in people’s pockets.
With these payments now getting close to $10,000 per person, it is easy to see how they distort calculations when we are looking at median family incomes of close to $60,000 and even more so with low-income families with income less than half this level. It is also worth noting that if we paid drug companies, medical equipment suppliers, and doctors the same amount they get in other wealthy countries, the payments would be roughly half this size and we would see similar outcomes.
The expensive health care story features prominently in this claim:
“From 1990 to 2016, Congressional Budget Office data show that the median household saw inflation-adjusted market income increase by 21 percent, while post-tax-and-transfer income grew by 44 percent. Households in the bottom 20 percent saw that measure of income grow by two-thirds during this period.”
The other trick is that much of the rise in market income for the median household over this period is the increase in two-earner households. This includes the period in which women were entering the labor market in large numbers. We would expect a two-earner household to have a larger income than a one-earner household. It also has increased costs associated with items like child care and transportation.
And then we are told:
“The American dream that our children will do better than ourselves is alive and well. Using the Panel Study of Income Dynamics, a data set that tracks families over time and across generations, I calculate that inflation-adjusted household income for three-quarters of people in their 40s today is higher than their parents’ income when their parents were of similar age. Eighty-six percent of people raised in the bottom 20 percent have higher household incomes than their parents did. Around eight in 10 men in their 40s today who were raised in the bottom 20 percent earn more money in the job market than their fathers did at a similar age.”
Having a higher income than your parents did at the same age is an incredibly low bar. If we go back to the old days 1947 to 1973, when inequality was not increasing, wages and incomes were rising by about 2.0 percent annually. If we assume 25-year generations, the wage of a typical worker would be roughly 64 percent higher than their parents’ pay at the same age. In that story, almost no one would be seeing a lower income than their parents had at the same age.
There clearly were other differences between the 1947 to 1973 Golden Age and the nearly half-century of inequality we have seen in the subsequent period. Perhaps we can’t blame all of our problems on rising inequality, but if Strain is trying to make the case that we are all better off as a result, he has a long way to go.
There is an endless market for pieces that tell us that the typical worker is doing quite well, in spite of all the gloom and talk we hear constantly. Michael Strain, who is actually a pretty good economist, took on the job in a column in the NYT yesterday.
The gist of Strain’s piece is that we shouldn’t be upset about inequality because the great fortunes at the top are really helping to make us all richer. He contrasts the 1990s, when inequality grew a lot, with the period from 2007 to 2017, when there was little rise in inequality. Strain notes the much slower income growth in the second period and tells us:
“I would argue that part of the answer must be that inflation-adjusted wages for typical workers grew 44 percent more in the 1990s than in the 10 years beginning in 2007. “
That 44 percent difference sounds like a big deal, but not to folks familiar with the data. According to the Economic Policy Institute, the wage of the typical worker grew roughly 2 percent in the second period. So sure, wage growth of 2.88 percent over the course of a decade is better than 2.0 percent growth over a decade, but I don’t think I would make too much of that difference.
Some of the other tricks in this one include the focus on “post-tax-and-transfer income” which Strain tells us is “the most comprehensive measure of the flow of resources available to households.” I would disagree with this assessment. A very big chunk of post-tax-and-transfer income is government payments for Medicare and Medicaid. While these programs are enormously important, the government’s payments to drug companies, medical equipment suppliers, and doctors are not the same thing as cash in people’s pockets.
With these payments now getting close to $10,000 per person, it is easy to see how they distort calculations when we are looking at median family incomes of close to $60,000 and even more so with low-income families with income less than half this level. It is also worth noting that if we paid drug companies, medical equipment suppliers, and doctors the same amount they get in other wealthy countries, the payments would be roughly half this size and we would see similar outcomes.
The expensive health care story features prominently in this claim:
“From 1990 to 2016, Congressional Budget Office data show that the median household saw inflation-adjusted market income increase by 21 percent, while post-tax-and-transfer income grew by 44 percent. Households in the bottom 20 percent saw that measure of income grow by two-thirds during this period.”
The other trick is that much of the rise in market income for the median household over this period is the increase in two-earner households. This includes the period in which women were entering the labor market in large numbers. We would expect a two-earner household to have a larger income than a one-earner household. It also has increased costs associated with items like child care and transportation.
And then we are told:
“The American dream that our children will do better than ourselves is alive and well. Using the Panel Study of Income Dynamics, a data set that tracks families over time and across generations, I calculate that inflation-adjusted household income for three-quarters of people in their 40s today is higher than their parents’ income when their parents were of similar age. Eighty-six percent of people raised in the bottom 20 percent have higher household incomes than their parents did. Around eight in 10 men in their 40s today who were raised in the bottom 20 percent earn more money in the job market than their fathers did at a similar age.”
Having a higher income than your parents did at the same age is an incredibly low bar. If we go back to the old days 1947 to 1973, when inequality was not increasing, wages and incomes were rising by about 2.0 percent annually. If we assume 25-year generations, the wage of a typical worker would be roughly 64 percent higher than their parents’ pay at the same age. In that story, almost no one would be seeing a lower income than their parents had at the same age.
There clearly were other differences between the 1947 to 1973 Golden Age and the nearly half-century of inequality we have seen in the subsequent period. Perhaps we can’t blame all of our problems on rising inequality, but if Strain is trying to make the case that we are all better off as a result, he has a long way to go.
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The piece tells readers that small businesses in cities with high rents face a serious risk of bankruptcy. The point is very clear in the headline, “small businesses in high-rent cities face disaster. If they go under, urban life will change.”
The obvious problem with this story is that if large numbers of businesses go under, then it is hard to see how rents stay high. Landlords may not be the smartest folks in the world, but it doesn’t take a genius to realize that you get more money from a rent that is 20 or 30 percent lower than from a vacant building. If rents drop sharply, the high-rent cities would no longer be high-rent cities.
Of course, the Post could be right and landlords may not be able to figure out that they are better off with a tenant paying lower rent than not getting any rent at all, but that should really be the story. We have seen many stories in the Post and elsewhere about workers don’t have the right skills for the jobs that are available. This would be a clear case in which landlords lacked the skills needed to run their business profitably.
The piece tells readers that small businesses in cities with high rents face a serious risk of bankruptcy. The point is very clear in the headline, “small businesses in high-rent cities face disaster. If they go under, urban life will change.”
The obvious problem with this story is that if large numbers of businesses go under, then it is hard to see how rents stay high. Landlords may not be the smartest folks in the world, but it doesn’t take a genius to realize that you get more money from a rent that is 20 or 30 percent lower than from a vacant building. If rents drop sharply, the high-rent cities would no longer be high-rent cities.
Of course, the Post could be right and landlords may not be able to figure out that they are better off with a tenant paying lower rent than not getting any rent at all, but that should really be the story. We have seen many stories in the Post and elsewhere about workers don’t have the right skills for the jobs that are available. This would be a clear case in which landlords lacked the skills needed to run their business profitably.
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