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.

Most progressives who have been pressuring the Fed to be more supportive of full employment, and less concerned about inflation, would be very happy to see Powell reappointed as Fed chair. He has led the Fed in a complete reversal of its priorities. He shifted it away from its obsession with inflation, which often meant raising rates and throwing people out of work, even when there was no clear evidence of accelerating. Instead, he wants the Fed to target full employment and only raise rates once we see the sort of unemployment rates we had before the pandemic.

This is hugely important, not only because it can mean that millions of additional workers get jobs, but also because high unemployment has been a major factor contributing to inequality over the last four decades. When the unemployment rate rises, it is disproportionately the most disadvantaged workers who lose their jobs. This means Blacks and Hispanics, workers without a high school degree, disabled workers, and workers with a criminal record.

Not only does a rise in the unemployment rate prevent these workers from getting jobs, it also puts downward pressure on the pay of workers at the bottom of the wage ladder. When we have sustained periods of low unemployment, such as the late 1990s and the four years before the pandemic, workers in the bottom half of the wage distribution were able to secure pay increases that outpaced inflation, and those at the tenth percentile saw the largest gains.

For these reasons, progressive economists who have been pushing the Fed to pay more attention to full employment have been very happy with Powell’s reversal of past Fed policy. However, some progressives have objected to Powell because he has supported the weakening of the regulations that were put in place by the Dodd-Frank financial reform bill.

Powell’s record on regulation is bad, and this is a problem. However, the Fed’s policy on regulation can likely be shifted by appointing new members who are committed to a stronger regulatory framework. The rumored selection of Sarah Bloom Raskin, a former Fed Board member, and deputy Treasury Secretary, as Vice-Chair for Supervision, would go far towards this end.

But apart from the question of how much Biden can shift the Fed’s regulatory orientation, there is also the question of its relative importance. There has been a tendency to overstate the importance of regulation because many people believe that it was regulatory failures that led to the Great Recession, as opposed to the Fed’s ignoring a housing bubble that was driving the economy.

The distinction is important because the issue here was a huge bubble not bad regulation per se. Bubbles are not necessarily the result of regulatory failures. The 1990s stock bubble, whose collapse gave us a recession in 2001, and the longest period without job growth since the Great Depression (until the Great Recession), was not the result of any obvious regulatory failure.

As Alan Greenspan famously commented at the time, the bubble was the result of “irrational exuberance,” the widely held belief that stock prices would always rise and that investing in the market carried little or no risk. The bubble made it easier to hide financial fraud of various types, such as the Enron or WorldCom scams, but it was not driven in any important way by these scams.

Fraudulent loans and their securitization did play a more important role in the housing bubble, but it was really only necessary to see the bubble, which was pretty much impossible to miss than to see the financial edifice that was helping it to grow. Although as a practical matter, when mortgage issuers were boasting about their negative amortization loans, it wasn’t too easy to miss the bad loans either.

The point here is that we will not see another recession because the Fed was failing to monitor the books of a future AIG or ignoring fraudulent loans in a major sector of the economy. We got the Great Recession because the Fed ignored a huge housing bubble that was driving the economy. Seeing that bubble didn’t require a regulatory microscope, all that was needed was someone who paid attention to the quarterly GDP data and could examine the fundamentals in the housing market, which was clearly driving the economy from 2002 to 2007.    

Financial Regulation is Important

Having said this, I would argue it is still important to keep a tight leash on the financial sector, for three reasons. First, the financial industry is a major source of inefficiency in the economy. Finance is an intermediate good like trucking. We need it to allocate capital and make payments, just as we need trucking to get goods from one place to another, but unlike items like health care or housing, it does not directly provide benefits to people.

For this reason, an efficient financial sector is a small financial sector. Unfortunately, the financial sector has exploded as a share of the economy in the last half century. The narrow securities and commodities trading sector has nearly quintupled relative to the size of the economy over this period. This would be comparable to a situation where we needed five times as many trucks and drivers, relative to the size of the economy, as we did in 1971.

If we had something to show for the explosion of the financial sector, say in better capital allocation or more secure savings, then perhaps we could justify the increase in its size. But, it would be very hard to make that case. Instead, we have people working in finance who could be productively employed in health care, construction, or other sectors that actually provide goods and services that people value.

The second reason that we need to have tighter regulation of finance is that it is a major source of inequality. Many of the richest people in the country got their wealth from running hedge funds, private equity funds, or other financial institutions.

There is at least an argument for extreme wealth when it is associated with important innovations that benefit society, like electric cars or an efficient on-line retail system. There is not much of a case when the wealth comes from financial engineering that left workers, landlords, and/or other investors worse off.

The last reason why it is important to regulate finance is that unregulated finance will often turn to predatory practices that prey on lower income households, and especially Blacks and Hispanics. A well-educated lawyer or accountant, who devotes themselves to the task, can find ways to design deceptive contracts that will take advantage of their customers. If we greenlight such practices, effectively allowing people to make large amounts of money by ripping off their customers, then we can be very sure that many people will go into the business of ripping off customers.

We need the government to limit abusive practices in the financial sector. As Senator Elizabeth Warren famously argued in her push to get the Consumer Financial Protection Bureau established, we wouldn’t let a company sell toasters that blow up in people’s kitchens, we shouldn’t let financial institutions sell products that blow up in the faces of the people who buy them.

The Net Story on Financial Regulation and the Fed

Having argued the case for the importance of regulating finance (see also Rigged chapter 4 [it’s free]), let me say that I still see it as very much a secondary consideration in the selection of the Fed chair. First, the Fed’s ability to control the amount of employment in the economy, through its monetary policy, is incredibly important in determining the economic well-being of tens of millions of people, especially those who are disadvantaged in the labor market and society.

Second, we have other regulatory bodies, such as the Consumer Financial Protection Bureau, the Securities and Exchange Commission, and Comptroller of the Currency, and several more. Good appointees at these agencies can go far towards ensuring that the financial system is well-regulated.

Finally, if Biden makes good picks for the currently vacant position at the Fed and for the Vice-Chair for Supervision, and the spot that will open up in the winter, he can likely change the Fed’s course on regulation.

But at the end of the day, it’s hard to see the Fed’s regulatory stance as being anywhere close in importance to its position on monetary policy. Firing Powell because he has not been good on regulation would be like dumping the great pitcher Bob Gibson from the team because he wasn’t a good base runner.

We need a Fed that is firmly committed to full employment. For the first time in seventy years, we have that with Jerome Powell. Biden would be taking a huge risk by going with a different chair.[1]

[1] It is also worth mentioning that Powell, unlike almost anyone else should have an easy confirmation. Many Republican senators will almost certainly vote for him. After all, he was picked originally as chair by Trump. (Obama appointed him as a Fed board member.) It is very possible that any other Biden pick will face 50 no votes from Republican senators. That means that Biden would need to make sure that Manchin, Sinema, and other centrists were on board. These centrists would then effectively have veto power over the success of Biden’s presidency.    

Most progressives who have been pressuring the Fed to be more supportive of full employment, and less concerned about inflation, would be very happy to see Powell reappointed as Fed chair. He has led the Fed in a complete reversal of its priorities. He shifted it away from its obsession with inflation, which often meant raising rates and throwing people out of work, even when there was no clear evidence of accelerating. Instead, he wants the Fed to target full employment and only raise rates once we see the sort of unemployment rates we had before the pandemic.

This is hugely important, not only because it can mean that millions of additional workers get jobs, but also because high unemployment has been a major factor contributing to inequality over the last four decades. When the unemployment rate rises, it is disproportionately the most disadvantaged workers who lose their jobs. This means Blacks and Hispanics, workers without a high school degree, disabled workers, and workers with a criminal record.

Not only does a rise in the unemployment rate prevent these workers from getting jobs, it also puts downward pressure on the pay of workers at the bottom of the wage ladder. When we have sustained periods of low unemployment, such as the late 1990s and the four years before the pandemic, workers in the bottom half of the wage distribution were able to secure pay increases that outpaced inflation, and those at the tenth percentile saw the largest gains.

For these reasons, progressive economists who have been pushing the Fed to pay more attention to full employment have been very happy with Powell’s reversal of past Fed policy. However, some progressives have objected to Powell because he has supported the weakening of the regulations that were put in place by the Dodd-Frank financial reform bill.

Powell’s record on regulation is bad, and this is a problem. However, the Fed’s policy on regulation can likely be shifted by appointing new members who are committed to a stronger regulatory framework. The rumored selection of Sarah Bloom Raskin, a former Fed Board member, and deputy Treasury Secretary, as Vice-Chair for Supervision, would go far towards this end.

But apart from the question of how much Biden can shift the Fed’s regulatory orientation, there is also the question of its relative importance. There has been a tendency to overstate the importance of regulation because many people believe that it was regulatory failures that led to the Great Recession, as opposed to the Fed’s ignoring a housing bubble that was driving the economy.

The distinction is important because the issue here was a huge bubble not bad regulation per se. Bubbles are not necessarily the result of regulatory failures. The 1990s stock bubble, whose collapse gave us a recession in 2001, and the longest period without job growth since the Great Depression (until the Great Recession), was not the result of any obvious regulatory failure.

As Alan Greenspan famously commented at the time, the bubble was the result of “irrational exuberance,” the widely held belief that stock prices would always rise and that investing in the market carried little or no risk. The bubble made it easier to hide financial fraud of various types, such as the Enron or WorldCom scams, but it was not driven in any important way by these scams.

Fraudulent loans and their securitization did play a more important role in the housing bubble, but it was really only necessary to see the bubble, which was pretty much impossible to miss than to see the financial edifice that was helping it to grow. Although as a practical matter, when mortgage issuers were boasting about their negative amortization loans, it wasn’t too easy to miss the bad loans either.

The point here is that we will not see another recession because the Fed was failing to monitor the books of a future AIG or ignoring fraudulent loans in a major sector of the economy. We got the Great Recession because the Fed ignored a huge housing bubble that was driving the economy. Seeing that bubble didn’t require a regulatory microscope, all that was needed was someone who paid attention to the quarterly GDP data and could examine the fundamentals in the housing market, which was clearly driving the economy from 2002 to 2007.    

Financial Regulation is Important

Having said this, I would argue it is still important to keep a tight leash on the financial sector, for three reasons. First, the financial industry is a major source of inefficiency in the economy. Finance is an intermediate good like trucking. We need it to allocate capital and make payments, just as we need trucking to get goods from one place to another, but unlike items like health care or housing, it does not directly provide benefits to people.

For this reason, an efficient financial sector is a small financial sector. Unfortunately, the financial sector has exploded as a share of the economy in the last half century. The narrow securities and commodities trading sector has nearly quintupled relative to the size of the economy over this period. This would be comparable to a situation where we needed five times as many trucks and drivers, relative to the size of the economy, as we did in 1971.

If we had something to show for the explosion of the financial sector, say in better capital allocation or more secure savings, then perhaps we could justify the increase in its size. But, it would be very hard to make that case. Instead, we have people working in finance who could be productively employed in health care, construction, or other sectors that actually provide goods and services that people value.

The second reason that we need to have tighter regulation of finance is that it is a major source of inequality. Many of the richest people in the country got their wealth from running hedge funds, private equity funds, or other financial institutions.

There is at least an argument for extreme wealth when it is associated with important innovations that benefit society, like electric cars or an efficient on-line retail system. There is not much of a case when the wealth comes from financial engineering that left workers, landlords, and/or other investors worse off.

The last reason why it is important to regulate finance is that unregulated finance will often turn to predatory practices that prey on lower income households, and especially Blacks and Hispanics. A well-educated lawyer or accountant, who devotes themselves to the task, can find ways to design deceptive contracts that will take advantage of their customers. If we greenlight such practices, effectively allowing people to make large amounts of money by ripping off their customers, then we can be very sure that many people will go into the business of ripping off customers.

We need the government to limit abusive practices in the financial sector. As Senator Elizabeth Warren famously argued in her push to get the Consumer Financial Protection Bureau established, we wouldn’t let a company sell toasters that blow up in people’s kitchens, we shouldn’t let financial institutions sell products that blow up in the faces of the people who buy them.

The Net Story on Financial Regulation and the Fed

Having argued the case for the importance of regulating finance (see also Rigged chapter 4 [it’s free]), let me say that I still see it as very much a secondary consideration in the selection of the Fed chair. First, the Fed’s ability to control the amount of employment in the economy, through its monetary policy, is incredibly important in determining the economic well-being of tens of millions of people, especially those who are disadvantaged in the labor market and society.

Second, we have other regulatory bodies, such as the Consumer Financial Protection Bureau, the Securities and Exchange Commission, and Comptroller of the Currency, and several more. Good appointees at these agencies can go far towards ensuring that the financial system is well-regulated.

Finally, if Biden makes good picks for the currently vacant position at the Fed and for the Vice-Chair for Supervision, and the spot that will open up in the winter, he can likely change the Fed’s course on regulation.

But at the end of the day, it’s hard to see the Fed’s regulatory stance as being anywhere close in importance to its position on monetary policy. Firing Powell because he has not been good on regulation would be like dumping the great pitcher Bob Gibson from the team because he wasn’t a good base runner.

We need a Fed that is firmly committed to full employment. For the first time in seventy years, we have that with Jerome Powell. Biden would be taking a huge risk by going with a different chair.[1]

[1] It is also worth mentioning that Powell, unlike almost anyone else should have an easy confirmation. Many Republican senators will almost certainly vote for him. After all, he was picked originally as chair by Trump. (Obama appointed him as a Fed board member.) It is very possible that any other Biden pick will face 50 no votes from Republican senators. That means that Biden would need to make sure that Manchin, Sinema, and other centrists were on board. These centrists would then effectively have veto power over the success of Biden’s presidency.    

The explosion of coronavirus infections across the country, and especially in the low vaccination states in the South, is really bad news. While it appeared that the pandemic was coming under control and no longer posed a major health risk in early July, we are now seeing rates of infections of close to 150,000 a day.

The hardest hit states, like Louisiana and Mississippi are seeing daily infection numbers that far exceed the worst days of the winter. Intensive care units are filled to capacity, which not only prevents many people infected with Covid from receiving adequate care, but also victims of car crashes and others in need of immediate care. This is quite a turnaround from where we were a month and half ago.

But we can tell a better story about future prospects. We know that our vaccines are not as effective against the Delta variant in preventing infections, but they still seem to be quite effective in preventing serious illness and death. This story is well-demonstrated by the situation in Denmark.

Denmark ranks near the top in the share of its population that is vaccinated. As of August 21, 75.4 percent of its population had received at least one shot and 69.0 percent were fully vaccinated. These numbers refer to percentages of its whole population, so the share of the population over 12 that has received at least one shot is close to 90 percent.

By comparison, the shares for the same day in the United States were 60.2 percent of the whole population receiving at least one shot and 51.0 percent being fully vaccinated. Getting another 15.2 percent of the currently eligible population vaccinated in the United States would mean giving the shots to over 42 million people.

We are current giving out more than 800,000 shots a day, most of which are mRNA vaccines which require two doses. If we assume this translates into roughly 450,000 new people getting shots each day, it would take us a bit over 90 days, or three months to hit Denmark’s vaccination rates. So, hitting Danish rates of vaccination should not be seen as impossible, although if the active resisters can successfully press their case, we may not be able to sustain the current rate of vaccination.

But we can still look to the situation in Denmark as a guidepost. The country actually still has a fairly high rate of infection. It has been averaging roughly 970 cases a day. Denmark’s population is just over 5.8 million, or 1.7 percent the size of the U.S. population. This means that Denmark’s current rate of infections would be equivalent to a bit less than 56,000 a day in the United States. That is less than half of our current rate, but close to three times the lows hit in July.

There is one important qualification to Denmark’s reported infection rate. They do an enormous amount of testing in Denmark. They have given an average of 13.7 tests per person since the pandemic began. By comparison, the United States has given just 1.7 tests per person. This means that the reported number of infections in Denmark is likely very close to the actual number. By comparison, the positive rate on tests in the United States is over 11 percent, which means that we are missing a large number of new infections.  

So clearly Denmark has a far lower rate of infections than the United States, although it is still seeing a substantial spread of the pandemic. But the bigger difference between the United States and Denmark is not in the number of infections, but rather than number of deaths and seriously ill people. Denmark has been averaging just one death a day, which would be the equivalent of fewer than 60 a day in the United States. That compares to an average of more than 800 a day in the United States, a figure that has been rising. While every death is a tragedy, Denmark’s current death rate from Covid is considerably lower than what we would see from flu in a typical year.

Of course, many people who don’t die from Covid will suffer serious symptoms, some of which may be long lasting. We can’t know yet how many people who develop Covid will suffer severe or continuing symptoms, but rates of hospitalization should be a good proxy. Denmark currently has 20 people classified as being in serious or critical condition from Covid. That would be equivalent to roughly 1,400 people in the United States.

We currently have almost 23,000 people in intensive care due to Covid in the United States and of course these cases are disproportionately in the low vaccination states in the South. Denmark’s rate of Covid-related hospitalization would not be overwhelming hospitals and requiring health care workers to work themselves to the point of exhaustion.

In short, the situation with Covid in Denmark is not one where the disease has been eradicated. They are still seeing large numbers of infections. But it has become a very manageable disease, not one that most people need to fear and certainly not the sort of pandemic which would lead to large-scale economic shutdowns.

We should see this as an encouraging picture. If the nonsense coming from the vaccine resisters can be effectively countered, we should be able to reach vaccination rates comparable to Denmark’s in the not distant future. Some high vaccination states, such Hawaii, Vermont, and Massachusetts, are not very far from reaching the vaccination rates seen in Denmark.

This means that bringing the pandemic back under control is still very much a reachable target. We just need to maintain a high rate of daily vaccinations and we will get there soon. And, ideally get people to wear masks and maintain social distancing in the areas where infection rates are still high, until we can substantially increase the vaccination rate in those places.

Covid may be with us for a while, but it need not be a dreaded disease and pose a major threat to the economy.

The explosion of coronavirus infections across the country, and especially in the low vaccination states in the South, is really bad news. While it appeared that the pandemic was coming under control and no longer posed a major health risk in early July, we are now seeing rates of infections of close to 150,000 a day.

The hardest hit states, like Louisiana and Mississippi are seeing daily infection numbers that far exceed the worst days of the winter. Intensive care units are filled to capacity, which not only prevents many people infected with Covid from receiving adequate care, but also victims of car crashes and others in need of immediate care. This is quite a turnaround from where we were a month and half ago.

But we can tell a better story about future prospects. We know that our vaccines are not as effective against the Delta variant in preventing infections, but they still seem to be quite effective in preventing serious illness and death. This story is well-demonstrated by the situation in Denmark.

Denmark ranks near the top in the share of its population that is vaccinated. As of August 21, 75.4 percent of its population had received at least one shot and 69.0 percent were fully vaccinated. These numbers refer to percentages of its whole population, so the share of the population over 12 that has received at least one shot is close to 90 percent.

By comparison, the shares for the same day in the United States were 60.2 percent of the whole population receiving at least one shot and 51.0 percent being fully vaccinated. Getting another 15.2 percent of the currently eligible population vaccinated in the United States would mean giving the shots to over 42 million people.

We are current giving out more than 800,000 shots a day, most of which are mRNA vaccines which require two doses. If we assume this translates into roughly 450,000 new people getting shots each day, it would take us a bit over 90 days, or three months to hit Denmark’s vaccination rates. So, hitting Danish rates of vaccination should not be seen as impossible, although if the active resisters can successfully press their case, we may not be able to sustain the current rate of vaccination.

But we can still look to the situation in Denmark as a guidepost. The country actually still has a fairly high rate of infection. It has been averaging roughly 970 cases a day. Denmark’s population is just over 5.8 million, or 1.7 percent the size of the U.S. population. This means that Denmark’s current rate of infections would be equivalent to a bit less than 56,000 a day in the United States. That is less than half of our current rate, but close to three times the lows hit in July.

There is one important qualification to Denmark’s reported infection rate. They do an enormous amount of testing in Denmark. They have given an average of 13.7 tests per person since the pandemic began. By comparison, the United States has given just 1.7 tests per person. This means that the reported number of infections in Denmark is likely very close to the actual number. By comparison, the positive rate on tests in the United States is over 11 percent, which means that we are missing a large number of new infections.  

So clearly Denmark has a far lower rate of infections than the United States, although it is still seeing a substantial spread of the pandemic. But the bigger difference between the United States and Denmark is not in the number of infections, but rather than number of deaths and seriously ill people. Denmark has been averaging just one death a day, which would be the equivalent of fewer than 60 a day in the United States. That compares to an average of more than 800 a day in the United States, a figure that has been rising. While every death is a tragedy, Denmark’s current death rate from Covid is considerably lower than what we would see from flu in a typical year.

Of course, many people who don’t die from Covid will suffer serious symptoms, some of which may be long lasting. We can’t know yet how many people who develop Covid will suffer severe or continuing symptoms, but rates of hospitalization should be a good proxy. Denmark currently has 20 people classified as being in serious or critical condition from Covid. That would be equivalent to roughly 1,400 people in the United States.

We currently have almost 23,000 people in intensive care due to Covid in the United States and of course these cases are disproportionately in the low vaccination states in the South. Denmark’s rate of Covid-related hospitalization would not be overwhelming hospitals and requiring health care workers to work themselves to the point of exhaustion.

In short, the situation with Covid in Denmark is not one where the disease has been eradicated. They are still seeing large numbers of infections. But it has become a very manageable disease, not one that most people need to fear and certainly not the sort of pandemic which would lead to large-scale economic shutdowns.

We should see this as an encouraging picture. If the nonsense coming from the vaccine resisters can be effectively countered, we should be able to reach vaccination rates comparable to Denmark’s in the not distant future. Some high vaccination states, such Hawaii, Vermont, and Massachusetts, are not very far from reaching the vaccination rates seen in Denmark.

This means that bringing the pandemic back under control is still very much a reachable target. We just need to maintain a high rate of daily vaccinations and we will get there soon. And, ideally get people to wear masks and maintain social distancing in the areas where infection rates are still high, until we can substantially increase the vaccination rate in those places.

Covid may be with us for a while, but it need not be a dreaded disease and pose a major threat to the economy.

That may sound pretty crazy, but that’s roughly what the minimum wage would be today if it had kept pace with productivity growth since its value peaked in 1968. And, having the minimum wage track productivity growth is not a crazy idea. The national minimum wage did in fact keep pace with productivity growth for the first 30 years after a national minimum wage first came into existence in 1938. Furthermore, a minimum wage that grew in step with the rapid rises in productivity in these decades did not lead to mass unemployment. The year-round average for the unemployment rate in 1968 was 3.6 percent, a lower average than for any year in the last half century.
 

 

The $26 an Hour World

Think of what the country would look like if the lowest paying jobs, think of dishwashers or custodians, paid $26 an hour. That would mean someone who worked a 2000 hour year would have an annual income of $52,000. This income would put a single mother with two kids at well over twice the poverty level.

And, this is just for starting wages. Presumably workers would see their pay increase above the minimum as they stayed at their job for a number of years and ideally were promoted to better paying positions. If we assume that after 10 or 15 years their pay had risen by 20 percent, then these workers at the bottom of the pay ladder would be getting more than $60,000 a year.

While that is hardly a luxurious standard of living, it is certainly enough to support a middle-class lifestyle. For a two-earner couple this would be $120,000 a year. Imagine this is what people at the very bottom of the labor force could reasonably expect when they are in their thirties and forties.

Don’t Try This at Home

The $26 an hour is useful as a thought experiment for envisioning what the world might look like today, but it would not be realistic as policy for local, state, or even national minimum wage without many other changes to the economy. A minimum wage this high would almost certainly lead to large-scale unemployment, and that would be true even if it were phased in over five or six years.

The problem is that we have made many changes to the economy that shifted huge amounts of income upward, so that we cannot support a pay structure that gives workers at the bottom $52,000 a year. This is the whole point of my book, Rigged [it’s free], we have restructured the economy in ways that ensure a disproportionate share of income goes to those at the top. If the bottom half or 80 percent of the workforce got the same share they got 50 years ago, we would have an enormous problem with inflation.  

Just to quickly run through the short list, we can start with my favorites, government-granted patent and copyright monopolies. Items like drugs, medical equipment, and computer software, which would all be relatively cheap in a free market, instead cost us huge amounts of money because of these monopolies. In the case of prescription drugs alone, patent monopolies and related protections may add more than $400 billion a year (roughly $3,000 per family) to our annual bill. In total, the cost from these protections can easily exceed $1 trillion a year (almost $8,000 per family).

And the beneficiaries from patent and copyright monopolies are overwhelming those at the top end of the income distribution. Many workers in the tech sector make high six or even seven figure salaries. Lucky winners can walk away with tens or even hundreds of millions of dollars because of these government-granted monopolies. Bill Gates would probably still be working for a living if the government was not prepared to arrest anyone who made copies of Microsoft software without his permission.

And yes, there are other ways to finance creative work and innovation. We can pay people, sort of like we do with just about every other task in the economy. (Read chapter 5 of Rigged.)

Next, we have corporate governance. The story here is that we have tens, or even hundreds, of millions of dollars going to CEOs, who don’t produce value anywhere close to this amount. This is not a moral judgement about the worth of the CEO. The point is that in almost all cases it would be possible to pay a person $2 or $3 million who would produce as much shareholder value as a CEO getting $20 million.   

The reason we don’t see downward pressure on CEO pay is that the corporate boards that most immediately determine CEO pay are largely selected by the CEO and other top management. They have no incentive to lower CEO pay. From their vantage point, there is no downside to grossly inflated CEO pay (it’s not their money), and there is no reason to risk antagonizing other board members by suggesting that their friend the CEO gets too much money.

Bloated CEO pay matters not only for the relatively small number of people who run major companies, but also for its impact on pay scales for those near the top. If the CEO gets $20 million, the chief financial officer may get $10-$12 million. And third tier execs may get $1-$2 million. [1]

The picture would look very different if CEOs got paid $2-$3 million, as would be the case if we had the same pay ratios between CEOs and ordinary workers as in the 1960s.  In that case, the third-tier executives would probably be looking at mid or high six figure salaries, not millions of dollars a year.

The financial sector is another place where we structure the economy to give large sums to a small number of rich people. We have created a tax and regulatory structure that allows some people to get incredibly rich by making little or no contribution to the productive economy. For example, it would be hugely more efficient if we all had digital bank accounts with the Fed, from which we could make all our payments and where we could receive our monthly paycheck and other income, at virtually zero cost.

The most obvious reason that we don’t have such a system is that it would deprive the banking industry of tens of billions in annual fees. There is no reason that we should not have a modest financial transactions tax along the lines of the 0.1 percent tax proposed by Senator Schatz. (Most other sectors have sales taxes, which are far higher.)  We can also make it difficult for public pension funds to hand billions in fees to private equity partners who do not produce higher returns. The same applies to private universities who seem to like having friends make millions off their endowments while losing the university money.

And, we have our doctors and other highly paid professionals, who make more than twice as much as their counterparts in other wealthy countries because we protect them from competition, both foreign and domestic. If we paid our doctors the same as doctors in Germany or France, it would save us close to $100 billion annually, or roughly $750 per family. If we subjected all our highly paid professions to the same sort of competition as our auto and textile workers, the savings could be twice as high.

Bottom Line: These Huge Welfare Checks Make a $26 an Hour Minimum Wage Impossible

To see how the bloated incomes for those at the top, make it impossible for those in the middle and bottom to get decent pay, imagine that the high-end incomes came in the form of government checks. Instead of Bill Gates getting his billions from Microsoft’s patent and copyright monopolies, suppose their software sold at free market prices, but the government sent him billions of dollars each year to allow him to accumulate his current fortune.

Suppose we did the same with the pharmaceutical industry, sending top executives tens of billions annually, as all drugs were now being sold as cheap generics. And, the government paid out tens or hundreds of millions of dollars each year to private equity and hedge fund partners and other big winners in finance.

If we added this up, we would be increasing government spending on the order of $1-2 trillion annually, or $10 to $20 trillion over a 10-year budget horizon. If we did not offset this burst of spending on the country’s richest people with some serious tax increases, we would be looking at very real problems with inflation — too much money chasing too few goods and services, to take the classic storyline.

But, we did effectively have tax increases. We made the government’s labor policy far more hostile to unions, radically reducing the unionized share of the workforce, as well as reducing the power of those who are organized. We also subjected our manufacturing workers to direct competition with the lowest paid workers around the world, putting serious downward pressure on what had been a relatively privileged segment of the labor market.

And, we removed the link between productivity and the minimum wage. Not only did the federal minimum wage not keep pace with productivity growth, it did not even keep pace with inflation. A person working at the minimum wage today is getting substantial lower pay than a worker did 53 years ago in 1968.

It would be a great story if we could reestablish the link between the minimum wage and productivity and make up the ground lost over the last half century. But we have to make many other changes in the economy to make this possible. These changes are well worth making.     

[1] It’s amazing that many people can complain about share buybacks being used to manipulate the markets and thereby increase the value of top management’s options, without recognizing that this is a story of management ripping off shareholders. If shareholders want top management to have more money, they could just pay them more money, they don’t have to force them to commit stock fraud to increase their pay checks.

That may sound pretty crazy, but that’s roughly what the minimum wage would be today if it had kept pace with productivity growth since its value peaked in 1968. And, having the minimum wage track productivity growth is not a crazy idea. The national minimum wage did in fact keep pace with productivity growth for the first 30 years after a national minimum wage first came into existence in 1938. Furthermore, a minimum wage that grew in step with the rapid rises in productivity in these decades did not lead to mass unemployment. The year-round average for the unemployment rate in 1968 was 3.6 percent, a lower average than for any year in the last half century.
 

 

The $26 an Hour World

Think of what the country would look like if the lowest paying jobs, think of dishwashers or custodians, paid $26 an hour. That would mean someone who worked a 2000 hour year would have an annual income of $52,000. This income would put a single mother with two kids at well over twice the poverty level.

And, this is just for starting wages. Presumably workers would see their pay increase above the minimum as they stayed at their job for a number of years and ideally were promoted to better paying positions. If we assume that after 10 or 15 years their pay had risen by 20 percent, then these workers at the bottom of the pay ladder would be getting more than $60,000 a year.

While that is hardly a luxurious standard of living, it is certainly enough to support a middle-class lifestyle. For a two-earner couple this would be $120,000 a year. Imagine this is what people at the very bottom of the labor force could reasonably expect when they are in their thirties and forties.

Don’t Try This at Home

The $26 an hour is useful as a thought experiment for envisioning what the world might look like today, but it would not be realistic as policy for local, state, or even national minimum wage without many other changes to the economy. A minimum wage this high would almost certainly lead to large-scale unemployment, and that would be true even if it were phased in over five or six years.

The problem is that we have made many changes to the economy that shifted huge amounts of income upward, so that we cannot support a pay structure that gives workers at the bottom $52,000 a year. This is the whole point of my book, Rigged [it’s free], we have restructured the economy in ways that ensure a disproportionate share of income goes to those at the top. If the bottom half or 80 percent of the workforce got the same share they got 50 years ago, we would have an enormous problem with inflation.  

Just to quickly run through the short list, we can start with my favorites, government-granted patent and copyright monopolies. Items like drugs, medical equipment, and computer software, which would all be relatively cheap in a free market, instead cost us huge amounts of money because of these monopolies. In the case of prescription drugs alone, patent monopolies and related protections may add more than $400 billion a year (roughly $3,000 per family) to our annual bill. In total, the cost from these protections can easily exceed $1 trillion a year (almost $8,000 per family).

And the beneficiaries from patent and copyright monopolies are overwhelming those at the top end of the income distribution. Many workers in the tech sector make high six or even seven figure salaries. Lucky winners can walk away with tens or even hundreds of millions of dollars because of these government-granted monopolies. Bill Gates would probably still be working for a living if the government was not prepared to arrest anyone who made copies of Microsoft software without his permission.

And yes, there are other ways to finance creative work and innovation. We can pay people, sort of like we do with just about every other task in the economy. (Read chapter 5 of Rigged.)

Next, we have corporate governance. The story here is that we have tens, or even hundreds, of millions of dollars going to CEOs, who don’t produce value anywhere close to this amount. This is not a moral judgement about the worth of the CEO. The point is that in almost all cases it would be possible to pay a person $2 or $3 million who would produce as much shareholder value as a CEO getting $20 million.   

The reason we don’t see downward pressure on CEO pay is that the corporate boards that most immediately determine CEO pay are largely selected by the CEO and other top management. They have no incentive to lower CEO pay. From their vantage point, there is no downside to grossly inflated CEO pay (it’s not their money), and there is no reason to risk antagonizing other board members by suggesting that their friend the CEO gets too much money.

Bloated CEO pay matters not only for the relatively small number of people who run major companies, but also for its impact on pay scales for those near the top. If the CEO gets $20 million, the chief financial officer may get $10-$12 million. And third tier execs may get $1-$2 million. [1]

The picture would look very different if CEOs got paid $2-$3 million, as would be the case if we had the same pay ratios between CEOs and ordinary workers as in the 1960s.  In that case, the third-tier executives would probably be looking at mid or high six figure salaries, not millions of dollars a year.

The financial sector is another place where we structure the economy to give large sums to a small number of rich people. We have created a tax and regulatory structure that allows some people to get incredibly rich by making little or no contribution to the productive economy. For example, it would be hugely more efficient if we all had digital bank accounts with the Fed, from which we could make all our payments and where we could receive our monthly paycheck and other income, at virtually zero cost.

The most obvious reason that we don’t have such a system is that it would deprive the banking industry of tens of billions in annual fees. There is no reason that we should not have a modest financial transactions tax along the lines of the 0.1 percent tax proposed by Senator Schatz. (Most other sectors have sales taxes, which are far higher.)  We can also make it difficult for public pension funds to hand billions in fees to private equity partners who do not produce higher returns. The same applies to private universities who seem to like having friends make millions off their endowments while losing the university money.

And, we have our doctors and other highly paid professionals, who make more than twice as much as their counterparts in other wealthy countries because we protect them from competition, both foreign and domestic. If we paid our doctors the same as doctors in Germany or France, it would save us close to $100 billion annually, or roughly $750 per family. If we subjected all our highly paid professions to the same sort of competition as our auto and textile workers, the savings could be twice as high.

Bottom Line: These Huge Welfare Checks Make a $26 an Hour Minimum Wage Impossible

To see how the bloated incomes for those at the top, make it impossible for those in the middle and bottom to get decent pay, imagine that the high-end incomes came in the form of government checks. Instead of Bill Gates getting his billions from Microsoft’s patent and copyright monopolies, suppose their software sold at free market prices, but the government sent him billions of dollars each year to allow him to accumulate his current fortune.

Suppose we did the same with the pharmaceutical industry, sending top executives tens of billions annually, as all drugs were now being sold as cheap generics. And, the government paid out tens or hundreds of millions of dollars each year to private equity and hedge fund partners and other big winners in finance.

If we added this up, we would be increasing government spending on the order of $1-2 trillion annually, or $10 to $20 trillion over a 10-year budget horizon. If we did not offset this burst of spending on the country’s richest people with some serious tax increases, we would be looking at very real problems with inflation — too much money chasing too few goods and services, to take the classic storyline.

But, we did effectively have tax increases. We made the government’s labor policy far more hostile to unions, radically reducing the unionized share of the workforce, as well as reducing the power of those who are organized. We also subjected our manufacturing workers to direct competition with the lowest paid workers around the world, putting serious downward pressure on what had been a relatively privileged segment of the labor market.

And, we removed the link between productivity and the minimum wage. Not only did the federal minimum wage not keep pace with productivity growth, it did not even keep pace with inflation. A person working at the minimum wage today is getting substantial lower pay than a worker did 53 years ago in 1968.

It would be a great story if we could reestablish the link between the minimum wage and productivity and make up the ground lost over the last half century. But we have to make many other changes in the economy to make this possible. These changes are well worth making.     

[1] It’s amazing that many people can complain about share buybacks being used to manipulate the markets and thereby increase the value of top management’s options, without recognizing that this is a story of management ripping off shareholders. If shareholders want top management to have more money, they could just pay them more money, they don’t have to force them to commit stock fraud to increase their pay checks.

With the economy facing substantial bottlenecks, and the continuing spread of the pandemic, it is worth taking a quick look at how lower paid workers have been faring. Nominal wages have been rising rapidly for workers at the bottom of the pay ladder in recent months. This has allowed workers in the lowest paying jobs to see substantial increases in real wages, in spite of the uptick in inflation the last few months.

Here’s the picture in retail for production and non-supervisory workers. Note that real wages were actually somewhat lower in 2018 than they had been in 2002. (These numbers are 1982-1984 dollars, so multiply by about 2.6 to get current dollars.) They did rise in 2018 and 2019, due to a tightening of the labor market, as well as minimum wage hikes at the state and local  level. The impact of the pandemic and the recovery has been a big net positive. Real wages in the sector are roughly 4.6 percent higher than the level of two years ago, a 2.3 percent annual real wage gain.

Average Hourly Earnings for Production and non-Supervisory Workers in Retail , 1982-84 dollars 

 

 

Source: Bureau of Labor Statistics.

The story looks even better in the hotel and restaurant sector. Real wages had been rising fairly consistently since 2014, but growth has picked up in the pandemic and recovery. Real wages are now 6.3 percent above their level of two years ago, an average annual increase of 3.2 percent. This rate of increase is not likely to continue, but so far workers in this sector have been seeing extraordinary wage gains.

Average Hourly Earnings for Production and non-Supervisory Workers in Leisure and Hospitality , 1982-84 dollars

With the economy facing substantial bottlenecks, and the continuing spread of the pandemic, it is worth taking a quick look at how lower paid workers have been faring. Nominal wages have been rising rapidly for workers at the bottom of the pay ladder in recent months. This has allowed workers in the lowest paying jobs to see substantial increases in real wages, in spite of the uptick in inflation the last few months.

Here’s the picture in retail for production and non-supervisory workers. Note that real wages were actually somewhat lower in 2018 than they had been in 2002. (These numbers are 1982-1984 dollars, so multiply by about 2.6 to get current dollars.) They did rise in 2018 and 2019, due to a tightening of the labor market, as well as minimum wage hikes at the state and local  level. The impact of the pandemic and the recovery has been a big net positive. Real wages in the sector are roughly 4.6 percent higher than the level of two years ago, a 2.3 percent annual real wage gain.

Average Hourly Earnings for Production and non-Supervisory Workers in Retail , 1982-84 dollars 

 

 

Source: Bureau of Labor Statistics.

The story looks even better in the hotel and restaurant sector. Real wages had been rising fairly consistently since 2014, but growth has picked up in the pandemic and recovery. Real wages are now 6.3 percent above their level of two years ago, an average annual increase of 3.2 percent. This rate of increase is not likely to continue, but so far workers in this sector have been seeing extraordinary wage gains.

Average Hourly Earnings for Production and non-Supervisory Workers in Leisure and Hospitality , 1982-84 dollars

During the first decade of this century I was one of the few economists in the country to warn of the housing bubble and the likelihood that its collapse would lead to a serious recession. It was easy to see that the housing market was in a bubble, and that when the bubble burst it would lead to plunges in both residential construction and consumption, which was booming thanks to bubble generated housing wealth.

My favorite remedy for the bubble was talk, or more specifically, talk from Alan Greenspan and other top Fed officials, about research documenting the housing bubble. The point I tried to make in those years was that the hard data showed we had a bubble. It wasn’t an issue of crystal ball reading.

We had an unprecedented divergence of house sale prices and rents. While house sale prices were soaring, rents were moving along roughly in line with the overall rate of inflation. At the same time, the vacancy rate for housing units was hitting record highs. These facts were hardly consistent with a story of house prices being driven by an increased demand for housing.

The explosion of subprime mortgages was also not a secret, it was widely talked about in the business press. The fact that increasing numbers of mortgages were being issued with low or even no down payment was also widely known. And, the fact that people were spending in a big way out of their newly generated housing wealth was well-known. Greenspan even wrote about it.

If the Fed had done research documenting these, and other facts, showing that the housing market was indeed in a bubble, and top Fed officials regularly highlighted this research in Congressional testimony, public speeches and their writings, it would be impossible for the financial sector to ignore. As it was, the mortgage bankers and brokers, the investment banks, and everyone else involved in the process, was making money hand over fist.

No one gave a damn if a few scattered economists said there was a bubble and it would burst. When it finally did burst, and many banks were pushed to the brink of bankruptcy and beyond (before the government bailed them all out), the people who got them into trouble all got off on the “who could have known?” defense. After all, no one saw the bubble, so how could a highly paid CEO be held responsible if they just made the same mistake as everyone else in believing that house prices would rise by double digit amounts forever?

They might have had a more difficult time with this defense if Greenspan and the rest of the Fed crew had been writing “WARNING: HOUSING BUBBLE” in huge neon lights everywhere they could. It’s easy for a high-level executive to say that they didn’t pay attention to the rantings of some obscure economist, it’s much harder for them to say they don’t bother looking at what the Fed chair says and the research it publishes.

The Role for Fed Warnings on Global Warming

Just as I would have liked to see the Fed document the existence of a housing bubble and offer clear warnings about the implications of its collapse, I would like to see it do the same with the impacts of global warming. This would mean researching the ways in which climate change is likely to affect various areas of the economy in coming decades, and giving clear warnings to the affected businesses and financial institutions, as well as the general public.

Much of this research would involve just documenting what should already be fairly obvious. For example, there are large areas of the country near the coasts, lakes, or rivers, where there is a far greater likelihood of serious flood damage due to both rising water levels and also the greater probability of hurricanes and other extreme weather events. One implication of this increased risk is that there are now likely millions of mortgages that should not be issued without flood insurance.

Flood insurance is usually quite expensive. Having it as a requirement for mortgages will make the affected areas far less attractive to would be homebuyers. It would also be a big hit to house prices in the affected areas. Also, in floods many cars are destroyed. That should mean that auto insurers either write policies that explicitly exclude flood damage, or raise their prices for people living in areas newly susceptible to flooding.

We have also seen a massive wave of forest fires through large chunks of the West, driven by years of drought and high temperatures. These fires have destroyed thousands of homes and threatened tens, or even hundreds of thousands, more. Here too, solid documentation of the fire risk to houses as a result of global warming should have a substantial impact on the course of development. If someone wants to build a home in a densely wooded area, they should know that insurance will either be very costly, or altogether unavailable, because of the heightened fire risk resulting from global warming.

There are also large portions of the Southwest (Utah, Arizona, Colorado, Nevada and Southern California) where lack of water may be a serious impediment to further development. The prospect of water shortages may make certain patterns of growth, such as developments with large homes with large lawns, unaffordable. The lifestyle that people moving to the area anticipated, which often includes golf as a major form of recreation, may no longer be possible. Furthermore, this area, which is heavily dependent on hydropower, may be looking at power shortages unless it turns to alternative energy.

All of this could be documented in Fed research. Developers and lenders would need to take it into account in their plans.

There are similar stories for many other types of business. The unprecedented heat wave hitting the Northwest devastated its berry crops. In a world where such extreme weather may be a more regular event, berry growing is a less profitable and more risky business. The same applies to agriculture in many other areas, most notably the inland valley in California, where hot weather and water shortages are likely to be a serious hit.

We can also expect to see some serious hits to the fossil fuel industry, if measures to promote clean energy get off the ground. If half of new cars sold in 2030 are electric, and we have seen large-scale conversion of utilities to wind, solar, or other clean energy sources, then oil and gas prices will almost certainly take a big hit.[1] The projection of lower prices may not have much impact on fracking projects that are expected to pay off in two or three years, but if taken seriously by the industry, it should wipe  out long-term projects like drilling in the Arctic, which would require decades of revenue to recover the upfront investment. Even if companies might want to do such drilling, they would probably be unable to arrange the financing.

The Power of a Green Fed

This list is just the beginning. There are few areas of the economy that would not be affected in a big way, either positively or negatively, by the long-term implications of global warming. Research from the Fed could drive the realities home in a way that would have real impact.

At least as important as the direct economic impact that the Fed’s research could have, it will also help to bring home the fact that global warming has real costs in people’s everyday lives. The question is not just whether we think it would be nice to have a decent planet to pass onto our kids, it’s also an issue of how much people want to pay for their food.  It’s a question of whether they want to see their home plummet in value because of the increased flooding or fire risk. It’s a question of whether they want to see an increased risk of future pandemics because of the changing habitats of various species of plants and animals.

Of course, there is a large number of people who will always be climate deniers, just as there are many people who insist the earth is flat. But, constantly hitting people with the evidence can have an effect on at least some people, and as a result, they may be more willing to support measures that will reduce greenhouse gas emissions.

There are some climate activists who have wanted the Fed to act more directly to try to reduce greenhouse gas emissions, for example by trying to block loans to the fossil fuel industry. While the Fed has a broad mandate that it has been largely free to interpret itself, it’s clear that few in Congress intended to give it this mandate. If it were to go this route, there would likely be efforts, coming from both parties in Congress, to rein in the Fed. It is likely in that story that we would end up with a Fed that, is not only prevented from acting directly to reduce greenhouse gas emissions, but is much more tightly constrained in its ability to sustain full employment.

By contrast, the Fed is supposed to do research on the economy for the benefit of governments, businesses, and households. As we know, many Republicans object to research when the data doesn’t support their preferred outcome, but thankfully that is still a minority view in the public and even in Congress. Informing the public about the economic risks of global warming should not be a bridge too far for the Fed.   

[1] Ideally, we would offset price declines with higher taxes to discourage the use of fossil fuels, but the point is that the industry will be seeing less money.

During the first decade of this century I was one of the few economists in the country to warn of the housing bubble and the likelihood that its collapse would lead to a serious recession. It was easy to see that the housing market was in a bubble, and that when the bubble burst it would lead to plunges in both residential construction and consumption, which was booming thanks to bubble generated housing wealth.

My favorite remedy for the bubble was talk, or more specifically, talk from Alan Greenspan and other top Fed officials, about research documenting the housing bubble. The point I tried to make in those years was that the hard data showed we had a bubble. It wasn’t an issue of crystal ball reading.

We had an unprecedented divergence of house sale prices and rents. While house sale prices were soaring, rents were moving along roughly in line with the overall rate of inflation. At the same time, the vacancy rate for housing units was hitting record highs. These facts were hardly consistent with a story of house prices being driven by an increased demand for housing.

The explosion of subprime mortgages was also not a secret, it was widely talked about in the business press. The fact that increasing numbers of mortgages were being issued with low or even no down payment was also widely known. And, the fact that people were spending in a big way out of their newly generated housing wealth was well-known. Greenspan even wrote about it.

If the Fed had done research documenting these, and other facts, showing that the housing market was indeed in a bubble, and top Fed officials regularly highlighted this research in Congressional testimony, public speeches and their writings, it would be impossible for the financial sector to ignore. As it was, the mortgage bankers and brokers, the investment banks, and everyone else involved in the process, was making money hand over fist.

No one gave a damn if a few scattered economists said there was a bubble and it would burst. When it finally did burst, and many banks were pushed to the brink of bankruptcy and beyond (before the government bailed them all out), the people who got them into trouble all got off on the “who could have known?” defense. After all, no one saw the bubble, so how could a highly paid CEO be held responsible if they just made the same mistake as everyone else in believing that house prices would rise by double digit amounts forever?

They might have had a more difficult time with this defense if Greenspan and the rest of the Fed crew had been writing “WARNING: HOUSING BUBBLE” in huge neon lights everywhere they could. It’s easy for a high-level executive to say that they didn’t pay attention to the rantings of some obscure economist, it’s much harder for them to say they don’t bother looking at what the Fed chair says and the research it publishes.

The Role for Fed Warnings on Global Warming

Just as I would have liked to see the Fed document the existence of a housing bubble and offer clear warnings about the implications of its collapse, I would like to see it do the same with the impacts of global warming. This would mean researching the ways in which climate change is likely to affect various areas of the economy in coming decades, and giving clear warnings to the affected businesses and financial institutions, as well as the general public.

Much of this research would involve just documenting what should already be fairly obvious. For example, there are large areas of the country near the coasts, lakes, or rivers, where there is a far greater likelihood of serious flood damage due to both rising water levels and also the greater probability of hurricanes and other extreme weather events. One implication of this increased risk is that there are now likely millions of mortgages that should not be issued without flood insurance.

Flood insurance is usually quite expensive. Having it as a requirement for mortgages will make the affected areas far less attractive to would be homebuyers. It would also be a big hit to house prices in the affected areas. Also, in floods many cars are destroyed. That should mean that auto insurers either write policies that explicitly exclude flood damage, or raise their prices for people living in areas newly susceptible to flooding.

We have also seen a massive wave of forest fires through large chunks of the West, driven by years of drought and high temperatures. These fires have destroyed thousands of homes and threatened tens, or even hundreds of thousands, more. Here too, solid documentation of the fire risk to houses as a result of global warming should have a substantial impact on the course of development. If someone wants to build a home in a densely wooded area, they should know that insurance will either be very costly, or altogether unavailable, because of the heightened fire risk resulting from global warming.

There are also large portions of the Southwest (Utah, Arizona, Colorado, Nevada and Southern California) where lack of water may be a serious impediment to further development. The prospect of water shortages may make certain patterns of growth, such as developments with large homes with large lawns, unaffordable. The lifestyle that people moving to the area anticipated, which often includes golf as a major form of recreation, may no longer be possible. Furthermore, this area, which is heavily dependent on hydropower, may be looking at power shortages unless it turns to alternative energy.

All of this could be documented in Fed research. Developers and lenders would need to take it into account in their plans.

There are similar stories for many other types of business. The unprecedented heat wave hitting the Northwest devastated its berry crops. In a world where such extreme weather may be a more regular event, berry growing is a less profitable and more risky business. The same applies to agriculture in many other areas, most notably the inland valley in California, where hot weather and water shortages are likely to be a serious hit.

We can also expect to see some serious hits to the fossil fuel industry, if measures to promote clean energy get off the ground. If half of new cars sold in 2030 are electric, and we have seen large-scale conversion of utilities to wind, solar, or other clean energy sources, then oil and gas prices will almost certainly take a big hit.[1] The projection of lower prices may not have much impact on fracking projects that are expected to pay off in two or three years, but if taken seriously by the industry, it should wipe  out long-term projects like drilling in the Arctic, which would require decades of revenue to recover the upfront investment. Even if companies might want to do such drilling, they would probably be unable to arrange the financing.

The Power of a Green Fed

This list is just the beginning. There are few areas of the economy that would not be affected in a big way, either positively or negatively, by the long-term implications of global warming. Research from the Fed could drive the realities home in a way that would have real impact.

At least as important as the direct economic impact that the Fed’s research could have, it will also help to bring home the fact that global warming has real costs in people’s everyday lives. The question is not just whether we think it would be nice to have a decent planet to pass onto our kids, it’s also an issue of how much people want to pay for their food.  It’s a question of whether they want to see their home plummet in value because of the increased flooding or fire risk. It’s a question of whether they want to see an increased risk of future pandemics because of the changing habitats of various species of plants and animals.

Of course, there is a large number of people who will always be climate deniers, just as there are many people who insist the earth is flat. But, constantly hitting people with the evidence can have an effect on at least some people, and as a result, they may be more willing to support measures that will reduce greenhouse gas emissions.

There are some climate activists who have wanted the Fed to act more directly to try to reduce greenhouse gas emissions, for example by trying to block loans to the fossil fuel industry. While the Fed has a broad mandate that it has been largely free to interpret itself, it’s clear that few in Congress intended to give it this mandate. If it were to go this route, there would likely be efforts, coming from both parties in Congress, to rein in the Fed. It is likely in that story that we would end up with a Fed that, is not only prevented from acting directly to reduce greenhouse gas emissions, but is much more tightly constrained in its ability to sustain full employment.

By contrast, the Fed is supposed to do research on the economy for the benefit of governments, businesses, and households. As we know, many Republicans object to research when the data doesn’t support their preferred outcome, but thankfully that is still a minority view in the public and even in Congress. Informing the public about the economic risks of global warming should not be a bridge too far for the Fed.   

[1] Ideally, we would offset price declines with higher taxes to discourage the use of fossil fuels, but the point is that the industry will be seeing less money.

For decades I have harangued reporters about writing down really big numbers, most often budget numbers, without providing any context that would make them meaningful for their audience. Even though leading news outlets, like the New York Times (NYT), Washington Post (WaPo), and National Public Radio (NPR), have well-educated audiences, most readers/listeners have no idea what $250 billion, or some other huge sum, over the next decade means. (Often the time period over which money will be spent is not even specified in a piece – it does matter.)

Few reporters have ever tried to tell me that their audience actually did know the meaning of the very large sums of money that are often discussed in budget stories, when no context is provided. This was explicitly acknowledged some years back in a column by Margaret Sullivan, who was the NYT’s Public Editor at the time. The column includes comments by David Leonhardt, then the NYT’s Washington Bureau Chief, who completely accepted the point.

The piece indicated a commitment to putting numbers in a context that would make them understandable to readers. There’s not much evidence of any follow-up on that one. It is still standard to see budget articles that report the millions, billions, or trillions, with no context whatsoever. It is a safe bet that for most readers, this is the same thing, as David Leonhardt put it, as if they just wrote “really big number.”

The latest item that caught my attention in this respect is a NYT article on the bipartisan infrastructure bill.  The article made a really big deal out of the fact that the Congressional Budget Office (CBO) had scored the bill as adding $256 billion to the debt over the agency’s 10-year budget horizon.

From its treatment in the piece, readers were obviously supposed to believe that this $256 billion is a really big deal. But is it?

If we want some basis of comparison, we can look at CBO’s projection for GDP over this 10-year period. CBO projects that GDP will be a bit over $290 trillion, which means that the addition to the debt it projects will be equal to a bit less than 0.09 percent of GDP over this period.

Alternatively, we can say that 0.09 percent of GDP will be the size of the boost to the annual deficit. If we want a per person figure, the total boost to the debt is projected at a bit less than $800 a head.

We can also express the increment to the debt as a share of current projected spending. That can be found either by going to the CBO budget projections or using CEPR’s “It’s the Budget Stupid” Federal Budget Calculator. That tells us that the increase to the deficit is equal to 0.42 percent of projected spending.

People may disagree on which comparison provides the best context. That is fine, we can experiment with different metrics. Perhaps after some time there will be agreement on what should be the standard, but any of these are clearly much better than just writing down $256 billion.

It is more than a bit mind-boggling that our leading news outlets would insist on a practice that everyone knows is not meaningful to the vast majority of their audience. After all, the purpose of reporting is supposed to be to provide information. Using a really big number with no context, is not providing information. It’s just as if they wrote an article in an obscure language that almost no one in the country spoke. That is not a way to provide information.

Why Confusion on Budget Numbers Matters

We should want budget numbers to be expressed in a way that is meaningful as an end in itself; we want the public to be informed. But getting a clearer understanding also matters for how people view various programs.

Polls have consistently shown that the public hugely overestimates the amount of money going to a wide range of programs, such as food stamps, TANF (Temporary Assistance for Needy Families – the reformed welfare program), and foreign aid. It’s hard to imagine that the public’s support for these programs is not affected by its perception of the amount of money going to them.

If people believe that food stamps take up 20 percent of the budget, they are likely to think very differently about the program than if they realized that it costs roughly 1.4 percent of the budget ($63 billion this year). If the food stamp program actually cost 20 percent of the budget, then people might reasonably think that they could pay lower taxes if we cut it down to size. They might also reasonably think that the program is not very effective, if we could spend this much money and still have serious issues of malnutrition and hunger. The same story would apply to a wide range of other programs.

When I have raised this point with other progressives they almost invariably tell me that people want to believe that these programs cost hugely more than is actually the case because they are racist and want to believe that all their tax dollars are going to undeserving Blacks and Hispanics.

While there are many people who fit this story, exaggerations on the cost of these programs go well beyond the Trump base. There are many people who consider themselves centrists, or even liberals, who also hugely over-estimate the amount of money spent on social programs. Many of these people vote for Democrats and progressive candidates.

It would take a highly-paid DC political strategist to try to claim that these sorts of misconceptions did not affect people’s attitudes towards these programs. In fact, you would have something seriously wrong with your thought processes if you had the same attitude to a program if you believed it was spending $1 trillion a year instead of $63 billion.

Yet, almost none of the liberal/progressive policy groups or funders has ever thought to take on the misconceptions spread by the media. Having worked at and co-directed one of the poorer policy shops in this category, I know that time and resources are scarce, but it is a bit incredible to me that these groups could claim that all the papers, conferences, or workshops they have done over the last three decades have been more important than trying to change the way the media covers budget numbers.

I realize this is asking them to do something new. After all, they all have been writing forever on why the food stamp or TANF budget should be protected or expanded, trying to influence media coverage means doing something different. And, for many of these people doing something different is scary.

Margaret Sullivan wrote her piece as public editor, acknowledging the NYT’s failure to write big numbers in a way that is meaningful to its readers, in response to a petition/e-mail campaign organized by CEPR, Fairness and Accuracy in Reporting, Media Matters, and Just Foreign Policy. You may notice some big- name liberal Washington policy shops missing from the list.

Needless to say, we got zero funding. Changing budget reporting and how people see the world just is not on the agenda of big liberal funders. Anyhow, I don’t think it is impossible to change the way the media talk about the budget. Everyone knows their current reporting is incredibly irresponsible. It just takes some pressure to force the issue.

Why Worry About Government Deficit/Debt?

The media largely take it as a given that we should view government deficits and debt as a bad thing. I imagine most of the reporters writing this stuff would struggle to come up with an answer if anyone asked them “why?”

There is a classic Econ 101 story that we can tell about the evils of budget deficits. The story runs that when the government borrows money, it puts upward pressure on interest rates. Higher interest rates then crowd out investment (and net exports – slightly longer story). And less investment means less productivity growth, which means that we will be poorer in the future because of our deficits today.

The big problem with this story is that interest rates have been extraordinarily low during the last year and a half as the deficit has exploded. The interest rate on 10-year Treasury bonds has been under 2.0 percent for the whole period, and in recent weeks it has been under 1.5 percent. By contrast, in the glory days of budget surpluses in the late 1990s, the 10-year Treasury rate was over 4.0 percent and sometimes over 5.0 percent. The story of deficits leading to high interest rates doesn’t appear very credible just now.

There is a story about budget deficits causing inflation. That clearly can be an issue, and there is some evidence inflation could be a problem now. But, at this point it is difficult to sort out the effects of disruptions associated with an economy reopening after a pandemic from the effects of an overheating economy. Most of the uptick in inflation that we have seen thus far has been due to rising new and used car prices, which in turn are largely the result of a semi-conductor shortage due to a fire at a major plant in Japan.

But most of the complaints get to the burden of the debt on our children. The idea is that we are passing on this massive debt, which will be a crushing burden on our children as they attempt to live their lives and raise their own kids. This story usually comes with emphasizing the size of the debt in trillions, which is of course a very big number, but one that has almost no meaning for anyone.

If we’re being serious about the burden of the debt, the first thing to note is that we don’t have to pay off the debt. We just have to pay the annual interest on the debt. This debt service is the actual burden of the debt.

By this measure we don’t have much to worry about at the moment. Our net interest on the debt is currently around $230 billion a year, or roughly 1.0 percent of GDP. (This takes out the $80 billion that the Federal Reserve Board refunds to the Treasury each year from the interest on the bonds it holds.)[1] By comparison, the debt service burden was over 3.0 percent of GDP in the early and mid-1990s.

The deficit hawks usually respond that this story could change if interest rates were to rise to more typical historical levels. That is true, although it’s not clear that a sharp rise in interest rates is very likely. Furthermore, even if we did see interest rates rise to something like 4-5 percent, it’s far from clear this is any sort of disaster story. Remember, the 1990s was a very prosperous decade, in spite of relatively high debt service burden.

Also, we have to remember that the bulk of interest payments are made to other people of the same generation. If we think of some distant future, all of us who are building up the debt today will be dead. The people who hold the bonds and collect interest will be the children and grandchildren of people alive today. If the debt service is placing a burden on the budget, we can just increase the taxes on these lucky people who are collecting the interest payments. That is not a burden across generations, this is a question of intra-generational equity.[2]  

If Payments on Government Debt Are Bad, How About Rents on Government-Granted Patent Monopolies?

I realize that I am just about the only economist who ever makes this point, but I am more interested in being right than agreeing with other economists. Direct payments are only one way the government pays for things, it can also pay for things by granting patent and copyright monopolies.

The deal with these monopolies is that the government tells individuals or companies to innovate or do creative work, and then we will give you a monopoly. The government will arrest anyone who competes with you, allowing you to charge a far higher price than in a free market.

The difference between the patent (or copyright) monopoly price and the free market price is the rent that the company is able to charge as a result of this government-granted monopoly. The gap is often quite large. In the case of prescription drugs, the patent protected price may be more than a hundred times the free market price. Drugs are almost invariably cheap to manufacture and distribute, it is patent monopolies that make them expensive.[3]  

The amount of money that we pay out each year as a result of patent and copyright rents is enormous. I calculated that it is over $400 billion annually in the case of prescription drugs alone, almost twice the debt service burden. Adding in medical equipment, computer software, and other areas where these rents can be a large share of the price, the total can easily come to more than $1 trillion annually, more than $3,000 for every person in the country.  

It makes zero sense that we would worry about the burden created by government debt, and the resulting debt service, but pay zero attention to the burdens created by government-granted patent and copyright monopolies. As noted above, direct spending and the granting of monopolies are alternative modes of payment by the government. The deficit hawks only want us to look at the costs from the first one.

In some cases, the trade-offs are made explicitly. The Food and Drug Administration wanted more drug companies to perform pediatric clinical trials to ensure that their drugs were safe and effective for children. Rather than having the government pay for these trials directly, drug companies can extend the length of their patents by six months if they conduct a pediatric trial.

If the government just paid the companies to conduct the trials, there would be an item in the budget that would add to the deficit and debt that we are then supposed to be concerned about. But when the government just says that we will give you a longer patent monopoly, the deficit hawks say this is fine – no cost.

That sort of thinking may make sense at the New York Times, Washington Post and other high-end news outlets, but it makes zero sense in reality land. I opt to continue to live in the latter.

The Debt and the Planet

As I’m sitting here in Southern Utah, we are facing a multi-year drought, hundred degree temperatures, severe water shortages (also our source of power), and are inundated with thick haze from the forest fires in California. It’s a bit hard for me to see the debt as the major injustice facing future generations. We are destroying so much of the nature that makes this country and the world beautiful or even livable.

I keep envisioning the following scenario for 2050: one of today’s leading deficit hawks, now up in years, boasting to a group of young people about how we paid off the national debt. The world outside is scorched, with few trees or any other plant life. Most of the animals that are alive today have gone extinct. Coral reefs are ancient history.

Somehow, I can’t imagine the kids being grateful. This again is not a complex concept. We will hand down a whole natural and social world to our children and grandchildren. The burden of the debt and the debt service is such a trivial part of this picture, it’s hard to believe serious people would waste their time on it.

[1] Arguably, we should be looking at the real interest burden of the debt, which would subtract out the extent to which the real value of the debt is reduced by inflation. If we applied this standard, the real debt service burden would be negative, since the inflation rate current exceeds the interest rate.  (The real interest rate is the nominal interest rate minus the inflation rate.)

[2] There is an issue of foreign holders of government debt. The interest on this debt is a burden on the country, but that goes well beyond government debt. Insofar as foreigners hold any U.S. financial asset – stock, real estate, the bonds of private corporations – the payments create a burden for the country. In the late 1990s, even as we had large budget surpluses, foreigners were buying up large amounts of U.S. financial assets. There is no direct relationship between the size of our government debt or deficit and the amount of U.S. financial assets being purchased by foreigners.  

[3] Patent monopolies also create perverse incentives. The high mark-ups created by these monopolies give companies incentive to mislead doctors and the public about the safety and effectiveness of their drugs in order to maximize sales, as happened with the opioid crisis.

For decades I have harangued reporters about writing down really big numbers, most often budget numbers, without providing any context that would make them meaningful for their audience. Even though leading news outlets, like the New York Times (NYT), Washington Post (WaPo), and National Public Radio (NPR), have well-educated audiences, most readers/listeners have no idea what $250 billion, or some other huge sum, over the next decade means. (Often the time period over which money will be spent is not even specified in a piece – it does matter.)

Few reporters have ever tried to tell me that their audience actually did know the meaning of the very large sums of money that are often discussed in budget stories, when no context is provided. This was explicitly acknowledged some years back in a column by Margaret Sullivan, who was the NYT’s Public Editor at the time. The column includes comments by David Leonhardt, then the NYT’s Washington Bureau Chief, who completely accepted the point.

The piece indicated a commitment to putting numbers in a context that would make them understandable to readers. There’s not much evidence of any follow-up on that one. It is still standard to see budget articles that report the millions, billions, or trillions, with no context whatsoever. It is a safe bet that for most readers, this is the same thing, as David Leonhardt put it, as if they just wrote “really big number.”

The latest item that caught my attention in this respect is a NYT article on the bipartisan infrastructure bill.  The article made a really big deal out of the fact that the Congressional Budget Office (CBO) had scored the bill as adding $256 billion to the debt over the agency’s 10-year budget horizon.

From its treatment in the piece, readers were obviously supposed to believe that this $256 billion is a really big deal. But is it?

If we want some basis of comparison, we can look at CBO’s projection for GDP over this 10-year period. CBO projects that GDP will be a bit over $290 trillion, which means that the addition to the debt it projects will be equal to a bit less than 0.09 percent of GDP over this period.

Alternatively, we can say that 0.09 percent of GDP will be the size of the boost to the annual deficit. If we want a per person figure, the total boost to the debt is projected at a bit less than $800 a head.

We can also express the increment to the debt as a share of current projected spending. That can be found either by going to the CBO budget projections or using CEPR’s “It’s the Budget Stupid” Federal Budget Calculator. That tells us that the increase to the deficit is equal to 0.42 percent of projected spending.

People may disagree on which comparison provides the best context. That is fine, we can experiment with different metrics. Perhaps after some time there will be agreement on what should be the standard, but any of these are clearly much better than just writing down $256 billion.

It is more than a bit mind-boggling that our leading news outlets would insist on a practice that everyone knows is not meaningful to the vast majority of their audience. After all, the purpose of reporting is supposed to be to provide information. Using a really big number with no context, is not providing information. It’s just as if they wrote an article in an obscure language that almost no one in the country spoke. That is not a way to provide information.

Why Confusion on Budget Numbers Matters

We should want budget numbers to be expressed in a way that is meaningful as an end in itself; we want the public to be informed. But getting a clearer understanding also matters for how people view various programs.

Polls have consistently shown that the public hugely overestimates the amount of money going to a wide range of programs, such as food stamps, TANF (Temporary Assistance for Needy Families – the reformed welfare program), and foreign aid. It’s hard to imagine that the public’s support for these programs is not affected by its perception of the amount of money going to them.

If people believe that food stamps take up 20 percent of the budget, they are likely to think very differently about the program than if they realized that it costs roughly 1.4 percent of the budget ($63 billion this year). If the food stamp program actually cost 20 percent of the budget, then people might reasonably think that they could pay lower taxes if we cut it down to size. They might also reasonably think that the program is not very effective, if we could spend this much money and still have serious issues of malnutrition and hunger. The same story would apply to a wide range of other programs.

When I have raised this point with other progressives they almost invariably tell me that people want to believe that these programs cost hugely more than is actually the case because they are racist and want to believe that all their tax dollars are going to undeserving Blacks and Hispanics.

While there are many people who fit this story, exaggerations on the cost of these programs go well beyond the Trump base. There are many people who consider themselves centrists, or even liberals, who also hugely over-estimate the amount of money spent on social programs. Many of these people vote for Democrats and progressive candidates.

It would take a highly-paid DC political strategist to try to claim that these sorts of misconceptions did not affect people’s attitudes towards these programs. In fact, you would have something seriously wrong with your thought processes if you had the same attitude to a program if you believed it was spending $1 trillion a year instead of $63 billion.

Yet, almost none of the liberal/progressive policy groups or funders has ever thought to take on the misconceptions spread by the media. Having worked at and co-directed one of the poorer policy shops in this category, I know that time and resources are scarce, but it is a bit incredible to me that these groups could claim that all the papers, conferences, or workshops they have done over the last three decades have been more important than trying to change the way the media covers budget numbers.

I realize this is asking them to do something new. After all, they all have been writing forever on why the food stamp or TANF budget should be protected or expanded, trying to influence media coverage means doing something different. And, for many of these people doing something different is scary.

Margaret Sullivan wrote her piece as public editor, acknowledging the NYT’s failure to write big numbers in a way that is meaningful to its readers, in response to a petition/e-mail campaign organized by CEPR, Fairness and Accuracy in Reporting, Media Matters, and Just Foreign Policy. You may notice some big- name liberal Washington policy shops missing from the list.

Needless to say, we got zero funding. Changing budget reporting and how people see the world just is not on the agenda of big liberal funders. Anyhow, I don’t think it is impossible to change the way the media talk about the budget. Everyone knows their current reporting is incredibly irresponsible. It just takes some pressure to force the issue.

Why Worry About Government Deficit/Debt?

The media largely take it as a given that we should view government deficits and debt as a bad thing. I imagine most of the reporters writing this stuff would struggle to come up with an answer if anyone asked them “why?”

There is a classic Econ 101 story that we can tell about the evils of budget deficits. The story runs that when the government borrows money, it puts upward pressure on interest rates. Higher interest rates then crowd out investment (and net exports – slightly longer story). And less investment means less productivity growth, which means that we will be poorer in the future because of our deficits today.

The big problem with this story is that interest rates have been extraordinarily low during the last year and a half as the deficit has exploded. The interest rate on 10-year Treasury bonds has been under 2.0 percent for the whole period, and in recent weeks it has been under 1.5 percent. By contrast, in the glory days of budget surpluses in the late 1990s, the 10-year Treasury rate was over 4.0 percent and sometimes over 5.0 percent. The story of deficits leading to high interest rates doesn’t appear very credible just now.

There is a story about budget deficits causing inflation. That clearly can be an issue, and there is some evidence inflation could be a problem now. But, at this point it is difficult to sort out the effects of disruptions associated with an economy reopening after a pandemic from the effects of an overheating economy. Most of the uptick in inflation that we have seen thus far has been due to rising new and used car prices, which in turn are largely the result of a semi-conductor shortage due to a fire at a major plant in Japan.

But most of the complaints get to the burden of the debt on our children. The idea is that we are passing on this massive debt, which will be a crushing burden on our children as they attempt to live their lives and raise their own kids. This story usually comes with emphasizing the size of the debt in trillions, which is of course a very big number, but one that has almost no meaning for anyone.

If we’re being serious about the burden of the debt, the first thing to note is that we don’t have to pay off the debt. We just have to pay the annual interest on the debt. This debt service is the actual burden of the debt.

By this measure we don’t have much to worry about at the moment. Our net interest on the debt is currently around $230 billion a year, or roughly 1.0 percent of GDP. (This takes out the $80 billion that the Federal Reserve Board refunds to the Treasury each year from the interest on the bonds it holds.)[1] By comparison, the debt service burden was over 3.0 percent of GDP in the early and mid-1990s.

The deficit hawks usually respond that this story could change if interest rates were to rise to more typical historical levels. That is true, although it’s not clear that a sharp rise in interest rates is very likely. Furthermore, even if we did see interest rates rise to something like 4-5 percent, it’s far from clear this is any sort of disaster story. Remember, the 1990s was a very prosperous decade, in spite of relatively high debt service burden.

Also, we have to remember that the bulk of interest payments are made to other people of the same generation. If we think of some distant future, all of us who are building up the debt today will be dead. The people who hold the bonds and collect interest will be the children and grandchildren of people alive today. If the debt service is placing a burden on the budget, we can just increase the taxes on these lucky people who are collecting the interest payments. That is not a burden across generations, this is a question of intra-generational equity.[2]  

If Payments on Government Debt Are Bad, How About Rents on Government-Granted Patent Monopolies?

I realize that I am just about the only economist who ever makes this point, but I am more interested in being right than agreeing with other economists. Direct payments are only one way the government pays for things, it can also pay for things by granting patent and copyright monopolies.

The deal with these monopolies is that the government tells individuals or companies to innovate or do creative work, and then we will give you a monopoly. The government will arrest anyone who competes with you, allowing you to charge a far higher price than in a free market.

The difference between the patent (or copyright) monopoly price and the free market price is the rent that the company is able to charge as a result of this government-granted monopoly. The gap is often quite large. In the case of prescription drugs, the patent protected price may be more than a hundred times the free market price. Drugs are almost invariably cheap to manufacture and distribute, it is patent monopolies that make them expensive.[3]  

The amount of money that we pay out each year as a result of patent and copyright rents is enormous. I calculated that it is over $400 billion annually in the case of prescription drugs alone, almost twice the debt service burden. Adding in medical equipment, computer software, and other areas where these rents can be a large share of the price, the total can easily come to more than $1 trillion annually, more than $3,000 for every person in the country.  

It makes zero sense that we would worry about the burden created by government debt, and the resulting debt service, but pay zero attention to the burdens created by government-granted patent and copyright monopolies. As noted above, direct spending and the granting of monopolies are alternative modes of payment by the government. The deficit hawks only want us to look at the costs from the first one.

In some cases, the trade-offs are made explicitly. The Food and Drug Administration wanted more drug companies to perform pediatric clinical trials to ensure that their drugs were safe and effective for children. Rather than having the government pay for these trials directly, drug companies can extend the length of their patents by six months if they conduct a pediatric trial.

If the government just paid the companies to conduct the trials, there would be an item in the budget that would add to the deficit and debt that we are then supposed to be concerned about. But when the government just says that we will give you a longer patent monopoly, the deficit hawks say this is fine – no cost.

That sort of thinking may make sense at the New York Times, Washington Post and other high-end news outlets, but it makes zero sense in reality land. I opt to continue to live in the latter.

The Debt and the Planet

As I’m sitting here in Southern Utah, we are facing a multi-year drought, hundred degree temperatures, severe water shortages (also our source of power), and are inundated with thick haze from the forest fires in California. It’s a bit hard for me to see the debt as the major injustice facing future generations. We are destroying so much of the nature that makes this country and the world beautiful or even livable.

I keep envisioning the following scenario for 2050: one of today’s leading deficit hawks, now up in years, boasting to a group of young people about how we paid off the national debt. The world outside is scorched, with few trees or any other plant life. Most of the animals that are alive today have gone extinct. Coral reefs are ancient history.

Somehow, I can’t imagine the kids being grateful. This again is not a complex concept. We will hand down a whole natural and social world to our children and grandchildren. The burden of the debt and the debt service is such a trivial part of this picture, it’s hard to believe serious people would waste their time on it.

[1] Arguably, we should be looking at the real interest burden of the debt, which would subtract out the extent to which the real value of the debt is reduced by inflation. If we applied this standard, the real debt service burden would be negative, since the inflation rate current exceeds the interest rate.  (The real interest rate is the nominal interest rate minus the inflation rate.)

[2] There is an issue of foreign holders of government debt. The interest on this debt is a burden on the country, but that goes well beyond government debt. Insofar as foreigners hold any U.S. financial asset – stock, real estate, the bonds of private corporations – the payments create a burden for the country. In the late 1990s, even as we had large budget surpluses, foreigners were buying up large amounts of U.S. financial assets. There is no direct relationship between the size of our government debt or deficit and the amount of U.S. financial assets being purchased by foreigners.  

[3] Patent monopolies also create perverse incentives. The high mark-ups created by these monopolies give companies incentive to mislead doctors and the public about the safety and effectiveness of their drugs in order to maximize sales, as happened with the opioid crisis.

Another jobs report, another cheap shot at the former guy. As I always say, this sort of comparison is silly because so many things beyond the president’s control affect job growth and the economy. But, you know that if the situation were reversed, we would be hearing this comparison endlessly.  Donald Trump Jr. would probably even have the graph tattooed on his forehead.

So, here’s where we stand now. After yesterday’s big jobs number, Biden has now created 4.1 million jobs in the first six months of his presidency.  Trump lost 2.9 million jobs over his four years in office.

 

Source:  Bureau of Labor Statistics.

Another jobs report, another cheap shot at the former guy. As I always say, this sort of comparison is silly because so many things beyond the president’s control affect job growth and the economy. But, you know that if the situation were reversed, we would be hearing this comparison endlessly.  Donald Trump Jr. would probably even have the graph tattooed on his forehead.

So, here’s where we stand now. After yesterday’s big jobs number, Biden has now created 4.1 million jobs in the first six months of his presidency.  Trump lost 2.9 million jobs over his four years in office.

 

Source:  Bureau of Labor Statistics.

This is a very serious question, even if I’m using a bit of clickbait here. I’m not out to get Dr. Fauci, who deserves some sort of Nobel Prize for trying to give straight information to the public, even as Donald Trump was doing everything he could to minimize the pandemic. But there is an important issue of both, our current failings in vaccinating the world, and a system that almost always allows those at the top to escape responsibility for their failures.

I have gone on at length before about the need to vaccinate the world. The spread of the Delta variant should make the point obvious to everyone. The more the virus spreads, the more it has opportunities to mutate.

We are actually fortunate with the Delta variant since it seems our vaccines are still effective in reducing the risk of infection and very effective in reducing the risk of severe illness or death. But this is just luck. If the pandemic spreads enough, we will see more mutations. It is entirely possible that a new strain will develop against which our vaccines provide us little or no protection.

It may be the case, as Pfizer and Moderna claim, that it will be possible to quickly design an effective mRNA vaccine against a new strain. But even in a best case scenario, where it takes just a few weeks to develop a new vaccine, it will still be many months before it can be tested, produced, and distributed to hundreds of millions of people across the country and billions across the world.  

In the meantime, we will be seeing a whole new round of infections and deaths, as well as trillions of dollars of lost economic output. And, just to be clear, these trillions in lost output is not just an issue of stacks of dollar bills in a vault, this translates into people going without food, medical care, shelter and other basic needs. Rich countries have the resources to largely protect their populations from most of the economic impact of the pandemic, developing countries in Asia, Africa, and Latin America do not.

Of course, even for the rich countries it will mean trillions more in government debt. That means a lot of to some people when a Democrat is in the White House.

The Open-Source Alternative

The drug companies will tell us that they are actually doing the best they can in getting the world vaccinated. They have in fact ramped up production considerably, although the bulk of their vaccines is still going to wealthy countries.

But the real question is whether we could be producing more vaccines, taking advantage of capacity not only in rich countries but in countries like India, Brazil, South Africa, Pakistan and other developing countries with potential manufacturing capacity. Our friends in the pharmaceutical industry tell us that manufacturing these vaccines is a complex process and can’t just be done overnight.

Of course, everyone in the world understands that it can’t be done overnight, which is why many of us were advocating ramping up capacity a year and a half ago. The pharmaceutical industry has been engaged in a filibuster, at least since October, when South Africa and India introduced their WTO resolution for suspending intellectual property rules for the duration of the pandemic, telling us it takes time to increase production. And, if we had focused on increasing production at the time they began their filibuster, we could have produced many more vaccines by now.

The logic of open-sourcing vaccines is that we would put the details of the manufacturing process for the vaccines on the web, allowing engineers around the world to study them as the basis for new facilities or converting existing ones. Ideally, the engineers for the Pfizer, Moderna, AstraZeneca and the rest (including the Chinese, Russian, and Indian vaccines) would also be available to conduct webinars and to provide in-person guidance.

Last month I was on a panel with someone from the pharmaceutical industry who questioned how this sort of transfer could be legally required. I pointed out that we (the U.S. and other rich country governments) should offer to pay a reasonable price for this expertise. If the drug companies refused, then we should go directly to their top engineers and offer them exorbitant pay (e.g. $1-2 million a month) for sharing their knowledge. Since they are undoubtedly bound by non-disclosure agreements, so governments would also have to commit to cover their legal expenses and any payments resulting from lawsuits. (The drug industry lawsuits, for sharing life-saving information in a pandemic, should at least help to clear up any ambiguity about their reason for existence.)

If vaccinating the world was treated as a real emergency, does anyone doubt something like this would happen? If GE or Lockheed had developed a new sonar in World War II that made it easier to detect German submarines, does anyone think we would just sit there and say that this is proprietary knowledge, and nothing can be done, if the companies chose not to share it with the government?

In addition to sharing existing knowledge, open-sourcing the production process should also allow for innovations that would increase production. The official position of the industry is that they have mastered the process for manufacturing their vaccines and it cannot possibly be improved. This claim is absurd on its face.

In February, Pfizer announced that it had discovered a way to cut its production time in half. Pfizer also discovered that its vaccine did not have to be super-frozen at temperatures of less than minus 90 degrees Fahrenheit, but instead could be stored in a normal freezer for up to two weeks. This makes a huge difference in transporting its vaccine, especially in developing countries. Pfizer also discovered that its standard vial contained enough material for six doses, rather than just five. As a result of this mistake, one sixth of the Pfizer vaccines were being thrown down the toilet for the first couple of months after it was approved.

Given this history, it’s hard to believe that there is no way to further improve on the production processes of Pfizer or the other vaccine manufacturers. If engineers all around the world had the opportunity to inspect their methods, surely many would be able to come up with innovations that could speed up the production and distribution of vaccines.

Does Making Deadly Mistakes Carry Consequences?

As much as the industry and politicians might want to pretend there was/is no way to accelerate the production of vaccines, that story is not credible. We had an alternative path that would have required the sharing of knowledge and expertise, and overriding patent rights. We did not go this path. Thus far, we have been very fortunate. No vaccine resistant strain has yet developed and spread widely.

Hopefully, the world’s good luck in this respect will continue, as we vaccinate the developing world, however slowly. It is worth noting that even with the spread of the Delta variant, the number of new cases in former hotspots like India and Brazil, has fallen sharply in recent weeks. This is presumably the result of many people enjoying some immunity from previous infections, as well as increasing levels of vaccinations.

But we certainly can’t take for granted that a vaccine resistant strain will not develop. And, if that happens, and we face the horror story of having to go through a whole new round of infections and shutdowns, the question is whether anyone will be held accountable?

My guess is that the answer will be no. (Who ended up unemployed because of the war in Iraq or the housing bubble?) The major media outlets will likely pretend that there was nothing that could have been done. They may acknowledge that we could have been somewhat quicker in getting out our vaccines to developing countries, but they will not acknowledge even the possibility that open-sourced technology could have sped up the production process for vaccines in both rich and developing countries. The idea that millions of people will needlessly die because our political leaders did not want to jeopardize the profits of the pharmaceutical industry is too horrible to be aired in places like the New York Times, Washington Post, and National Public Radio.

The long and short is that, in our high-tech globalized economy, accountability is only something that those at the bottom have to worry about. Dishwashers and truck drivers get fired when they mess up on the job. Top public health officials, and indeed the whole public health profession, are largely immune from this sort of accountability for infinitely bigger mess-ups.

This is a very serious question, even if I’m using a bit of clickbait here. I’m not out to get Dr. Fauci, who deserves some sort of Nobel Prize for trying to give straight information to the public, even as Donald Trump was doing everything he could to minimize the pandemic. But there is an important issue of both, our current failings in vaccinating the world, and a system that almost always allows those at the top to escape responsibility for their failures.

I have gone on at length before about the need to vaccinate the world. The spread of the Delta variant should make the point obvious to everyone. The more the virus spreads, the more it has opportunities to mutate.

We are actually fortunate with the Delta variant since it seems our vaccines are still effective in reducing the risk of infection and very effective in reducing the risk of severe illness or death. But this is just luck. If the pandemic spreads enough, we will see more mutations. It is entirely possible that a new strain will develop against which our vaccines provide us little or no protection.

It may be the case, as Pfizer and Moderna claim, that it will be possible to quickly design an effective mRNA vaccine against a new strain. But even in a best case scenario, where it takes just a few weeks to develop a new vaccine, it will still be many months before it can be tested, produced, and distributed to hundreds of millions of people across the country and billions across the world.  

In the meantime, we will be seeing a whole new round of infections and deaths, as well as trillions of dollars of lost economic output. And, just to be clear, these trillions in lost output is not just an issue of stacks of dollar bills in a vault, this translates into people going without food, medical care, shelter and other basic needs. Rich countries have the resources to largely protect their populations from most of the economic impact of the pandemic, developing countries in Asia, Africa, and Latin America do not.

Of course, even for the rich countries it will mean trillions more in government debt. That means a lot of to some people when a Democrat is in the White House.

The Open-Source Alternative

The drug companies will tell us that they are actually doing the best they can in getting the world vaccinated. They have in fact ramped up production considerably, although the bulk of their vaccines is still going to wealthy countries.

But the real question is whether we could be producing more vaccines, taking advantage of capacity not only in rich countries but in countries like India, Brazil, South Africa, Pakistan and other developing countries with potential manufacturing capacity. Our friends in the pharmaceutical industry tell us that manufacturing these vaccines is a complex process and can’t just be done overnight.

Of course, everyone in the world understands that it can’t be done overnight, which is why many of us were advocating ramping up capacity a year and a half ago. The pharmaceutical industry has been engaged in a filibuster, at least since October, when South Africa and India introduced their WTO resolution for suspending intellectual property rules for the duration of the pandemic, telling us it takes time to increase production. And, if we had focused on increasing production at the time they began their filibuster, we could have produced many more vaccines by now.

The logic of open-sourcing vaccines is that we would put the details of the manufacturing process for the vaccines on the web, allowing engineers around the world to study them as the basis for new facilities or converting existing ones. Ideally, the engineers for the Pfizer, Moderna, AstraZeneca and the rest (including the Chinese, Russian, and Indian vaccines) would also be available to conduct webinars and to provide in-person guidance.

Last month I was on a panel with someone from the pharmaceutical industry who questioned how this sort of transfer could be legally required. I pointed out that we (the U.S. and other rich country governments) should offer to pay a reasonable price for this expertise. If the drug companies refused, then we should go directly to their top engineers and offer them exorbitant pay (e.g. $1-2 million a month) for sharing their knowledge. Since they are undoubtedly bound by non-disclosure agreements, so governments would also have to commit to cover their legal expenses and any payments resulting from lawsuits. (The drug industry lawsuits, for sharing life-saving information in a pandemic, should at least help to clear up any ambiguity about their reason for existence.)

If vaccinating the world was treated as a real emergency, does anyone doubt something like this would happen? If GE or Lockheed had developed a new sonar in World War II that made it easier to detect German submarines, does anyone think we would just sit there and say that this is proprietary knowledge, and nothing can be done, if the companies chose not to share it with the government?

In addition to sharing existing knowledge, open-sourcing the production process should also allow for innovations that would increase production. The official position of the industry is that they have mastered the process for manufacturing their vaccines and it cannot possibly be improved. This claim is absurd on its face.

In February, Pfizer announced that it had discovered a way to cut its production time in half. Pfizer also discovered that its vaccine did not have to be super-frozen at temperatures of less than minus 90 degrees Fahrenheit, but instead could be stored in a normal freezer for up to two weeks. This makes a huge difference in transporting its vaccine, especially in developing countries. Pfizer also discovered that its standard vial contained enough material for six doses, rather than just five. As a result of this mistake, one sixth of the Pfizer vaccines were being thrown down the toilet for the first couple of months after it was approved.

Given this history, it’s hard to believe that there is no way to further improve on the production processes of Pfizer or the other vaccine manufacturers. If engineers all around the world had the opportunity to inspect their methods, surely many would be able to come up with innovations that could speed up the production and distribution of vaccines.

Does Making Deadly Mistakes Carry Consequences?

As much as the industry and politicians might want to pretend there was/is no way to accelerate the production of vaccines, that story is not credible. We had an alternative path that would have required the sharing of knowledge and expertise, and overriding patent rights. We did not go this path. Thus far, we have been very fortunate. No vaccine resistant strain has yet developed and spread widely.

Hopefully, the world’s good luck in this respect will continue, as we vaccinate the developing world, however slowly. It is worth noting that even with the spread of the Delta variant, the number of new cases in former hotspots like India and Brazil, has fallen sharply in recent weeks. This is presumably the result of many people enjoying some immunity from previous infections, as well as increasing levels of vaccinations.

But we certainly can’t take for granted that a vaccine resistant strain will not develop. And, if that happens, and we face the horror story of having to go through a whole new round of infections and shutdowns, the question is whether anyone will be held accountable?

My guess is that the answer will be no. (Who ended up unemployed because of the war in Iraq or the housing bubble?) The major media outlets will likely pretend that there was nothing that could have been done. They may acknowledge that we could have been somewhat quicker in getting out our vaccines to developing countries, but they will not acknowledge even the possibility that open-sourced technology could have sped up the production process for vaccines in both rich and developing countries. The idea that millions of people will needlessly die because our political leaders did not want to jeopardize the profits of the pharmaceutical industry is too horrible to be aired in places like the New York Times, Washington Post, and National Public Radio.

The long and short is that, in our high-tech globalized economy, accountability is only something that those at the bottom have to worry about. Dishwashers and truck drivers get fired when they mess up on the job. Top public health officials, and indeed the whole public health profession, are largely immune from this sort of accountability for infinitely bigger mess-ups.

An important item in the GDP report released this week, that received little attention, is that the saving rate is still well above the pre-pandemic level. For the second quarter as a whole the saving rate was 10.9 percent. If we just look at the month of June alone, the last month in the quarter, the rate was still 9.4 percent. This compares to an average saving rate of 7.5 percent in the three years prior to the pandemic.

For those not familiar with this economic concept, the saving rate is the percent of after-tax income that is not spent. To be clear, not spent means literally that people did not use it on consumption. If they used their income to pay for rent, buy a car, pay for their college, this would all be counted as consumption.

By comparison, if they put their money in their checking account or savings account, bought a government bond or shares of stock, this would be counted as saving. It would also be counted as savings if they used some of their money to pay down credit card or student loan debt.

Saving doesn’t even have to involve a conscious decision to put money aside in some way. Someone may cash their paycheck and have $1,000 sitting around their house, which they plan to spend, but have not done so yet. This would also count as savings. Savings just means after-tax income that is not spent on consumption.

There are two reasons this rise in the saving rate is a big deal. The first is that it indicates that the money the government paid out over the course of the pandemic is not now leading to a big surge in spending. There have been economists, most notably former Treasury Secretary Larry Summers, who have argued that the Biden recovery package was so large that it was likely to set off a wage-price inflationary spiral comparable to what we saw in the 1970s.

A big part of that story was that the money many households accumulated, as a result of the government payments made over the course of the pandemic, would lead to a huge surge in spending once the economy had recovered. While it’s still early, and the threat of the pandemic is still present, the vast majority of businesses have now reopened and most pandemic restrictions have been removed in most areas.

The fact that we are still seeing a saving rate that is well above the pre-pandemic level goes against the view that people would rush out and spend as soon as they had the opportunity. If we did see this flood of spending it would mean that the saving rate is below its normal level, that would mean that it would have to be considerably below the 7.5 percent rate we were seeing before the pandemic, rather than being almost 2.0 percentage points higher, as was the case in June.

A higher than normal saving rate also implies that there will be a gap in demand that needs to be filled by some other component of GDP, such as increased government spending, if the economy is to operate at close to its full employment level of output. In this context, a large government deficit may be essential for supporting demand.

Of course, the story may be different in a couple of months. Perhaps people still feel uncomfortable about going to restaurants, seeing movies, or engaging in other activities that could expose themselves to infections. If that’s true, we may still see the flood of spending, but it will take place a bit later than we might have expected, but for now, the data don’t support the huge spending surge story.

How the Pandemic Changed the Economy and Society

The other interesting issue in the latest consumption data is that it may provide us with more insights into the post-pandemic economy. We know that many more people worked from home during the pandemic than had previously. In many cases, businesses are now putting in place their plans for operating in a post-pandemic world. This will surely include more opportunities for people to work from home, although obviously fewer than at the peak of the pandemic.

Consistent with this story, spending (all figures are adjusted for inflation) on services in June was still 2.6 percent below the pre-pandemic level. By comparison, spending on durable goods (largely cars) was 23.8 percent higher and spending on non-durables was 12.4 percent above its pre-pandemic level.

The services where we see the sharpest falloffs are not a surprise. Spending on transportation services were 20.6 percent below their pre-pandemic level in June. Air transportation was down 24.8 percent, while spending on forms of transportation associated with commuting, such as busses and taxies, was down even more, with declines of close to 50 percent.

We will likely see air transportation rise back towards its pre-pandemic level as people come to feel more comfortable about flying, but much of the falloff in spending on commuting is likely to be permanent. (Spending on gas [gallons purchased] was 2.2 percent below its pre-pandemic level.) Consistent with the decline in commuting, spending on dry cleaning was 2.8 percent below its pre-pandemic level.

Spending on child care is down 21.7 percent. This is partly due to less commuting, but also in part due to less supply, as many child care centers closed in the downturn. The Biden administration is trying to make increased federal support for child care a priority. If additional funding does come through in the bills currently before Congress it will likely mean a large increase in usage, even above pre-pandemic levels. This would be the case even if we continue to see an increase in working from home. There are many parents working from home who would still welcome child care for at least part of the day.

Interestingly, spending on restaurant meals overall (including food at colleges and K-12 schools) is up 3.5 percent from before the pandemic. This indicates that any reduction in restaurant meals by people who used to work in offices or other places, is being offset by an increase in meals purchased by people who are not commuting.

This increase is also striking because restaurant employment is still 10.3 percent below the pre-pandemic level. This indicates a large increase in productivity at restaurants. Part of this story is likely an increase in the percentage of carry out meals, although many employers may have found ways to use their staff more efficiently.   

Spending at hotels and motels is still down 21.9 percent. This presumably reflects both fears about the pandemic and also that people had not planned trips for the month. Spending on housing at schools was down 44.7 percent, reflecting the fact that many schools did not have in person classes this spring.

Spending in the category of recreational services, which includes live music, movies, sports events, and a variety of other activities that were largely shut down during the pandemic, was still down 19.2 percent. This likely reflects the fact that many of these venues had not fully opened by the start of the month. One notable exception is casino gambling, where spending is up 8.5 percent. We will probably need a few more months to see what the longer-term post-pandemic picture is likely to be in this area. In some cases, such as movie theaters (spending was down 83.1 percent), behavior patterns may have been permanently altered by the pandemic.  

Spending on health care services, which accounts for more than 15 percent of consumption expenditures, was still down 4.1 percent in June. This primarily reflects people still putting off non-urgent care. That is best seen in the case of dental services, where spending was down 11.9 percent from the pre-pandemic level.

The other, more dismal, outlier in this sector is nursing homes, which also had an 11.9 percent decline in services. This likely reflects many patients leaving the care of nursing homes because they or their families feared for their well-being. It also reflects the fact that many nursing home residents died from the pandemic.

It seems clear that in many areas of consumption we were still very much seeing the impact of the pandemic in June. We will have to see how consumption patterns change when the case numbers fall back to levels where the pandemic is no longer a major concern. Some important changes may not be clearly visible in the GDP data. For example, the replacement of in-person university classes by remote learning will not be immediately apparent in the data. The increased use of tele-medicine also will not show up in GDP data. But it is likely that many consumption patterns will be permanently altered by the pandemic.

 

Productivity in the Pandemic

One hugely important point that has not gotten nearly enough attention is the sharp uptick in productivity since the pandemic began. GDP in the second quarter was 0.8 percent higher than in the fourth quarter of 2019. On average, we had 4.4 percent fewer people employed in the second quarter of 2021. If there was no change in average hours worked, that would imply an increase in productivity of more than 5.0 percent, almost 3.4 percent on annual basis.

Of course, there was some increase in average hours and other factors, like the self-employed and the government sector, which complicate the calculation. However, productivity clearly grew far more rapidly than the 1.0 percent annual rate for the decade prior to the pandemic.   

This is a huge deal in the context of inflation fears. The 1970s stagflation was associated with a sharp slowing in the rate of productivity growth, from an average annual rate of 3.0 percent in the period from 1947 to 1973, to just over 1.0 percent from 1973 to 1980. If we can sustain even a modest uptick in productivity growth from the pre-pandemic pace, it will go far towards eliminating the risk of inflation.

It’s also worth noting the latest GDP data, which include the comprehensive revisions to data from 2019 and 2020, shows a sharp increase in the profit share of corporate income in the first quarter of 2021. The profit share rose to 25.5 percent in the first quarter of 2021, compared to an average of 23.9 percent in 2020.

This rise in profit shares goes directly at odds with the idea that excessive wage growth will lead to higher prices, producing a wage-price inflationary spiral like we saw in the 1970s. In the 1970s, the profit share of income fell.

An important item in the GDP report released this week, that received little attention, is that the saving rate is still well above the pre-pandemic level. For the second quarter as a whole the saving rate was 10.9 percent. If we just look at the month of June alone, the last month in the quarter, the rate was still 9.4 percent. This compares to an average saving rate of 7.5 percent in the three years prior to the pandemic.

For those not familiar with this economic concept, the saving rate is the percent of after-tax income that is not spent. To be clear, not spent means literally that people did not use it on consumption. If they used their income to pay for rent, buy a car, pay for their college, this would all be counted as consumption.

By comparison, if they put their money in their checking account or savings account, bought a government bond or shares of stock, this would be counted as saving. It would also be counted as savings if they used some of their money to pay down credit card or student loan debt.

Saving doesn’t even have to involve a conscious decision to put money aside in some way. Someone may cash their paycheck and have $1,000 sitting around their house, which they plan to spend, but have not done so yet. This would also count as savings. Savings just means after-tax income that is not spent on consumption.

There are two reasons this rise in the saving rate is a big deal. The first is that it indicates that the money the government paid out over the course of the pandemic is not now leading to a big surge in spending. There have been economists, most notably former Treasury Secretary Larry Summers, who have argued that the Biden recovery package was so large that it was likely to set off a wage-price inflationary spiral comparable to what we saw in the 1970s.

A big part of that story was that the money many households accumulated, as a result of the government payments made over the course of the pandemic, would lead to a huge surge in spending once the economy had recovered. While it’s still early, and the threat of the pandemic is still present, the vast majority of businesses have now reopened and most pandemic restrictions have been removed in most areas.

The fact that we are still seeing a saving rate that is well above the pre-pandemic level goes against the view that people would rush out and spend as soon as they had the opportunity. If we did see this flood of spending it would mean that the saving rate is below its normal level, that would mean that it would have to be considerably below the 7.5 percent rate we were seeing before the pandemic, rather than being almost 2.0 percentage points higher, as was the case in June.

A higher than normal saving rate also implies that there will be a gap in demand that needs to be filled by some other component of GDP, such as increased government spending, if the economy is to operate at close to its full employment level of output. In this context, a large government deficit may be essential for supporting demand.

Of course, the story may be different in a couple of months. Perhaps people still feel uncomfortable about going to restaurants, seeing movies, or engaging in other activities that could expose themselves to infections. If that’s true, we may still see the flood of spending, but it will take place a bit later than we might have expected, but for now, the data don’t support the huge spending surge story.

How the Pandemic Changed the Economy and Society

The other interesting issue in the latest consumption data is that it may provide us with more insights into the post-pandemic economy. We know that many more people worked from home during the pandemic than had previously. In many cases, businesses are now putting in place their plans for operating in a post-pandemic world. This will surely include more opportunities for people to work from home, although obviously fewer than at the peak of the pandemic.

Consistent with this story, spending (all figures are adjusted for inflation) on services in June was still 2.6 percent below the pre-pandemic level. By comparison, spending on durable goods (largely cars) was 23.8 percent higher and spending on non-durables was 12.4 percent above its pre-pandemic level.

The services where we see the sharpest falloffs are not a surprise. Spending on transportation services were 20.6 percent below their pre-pandemic level in June. Air transportation was down 24.8 percent, while spending on forms of transportation associated with commuting, such as busses and taxies, was down even more, with declines of close to 50 percent.

We will likely see air transportation rise back towards its pre-pandemic level as people come to feel more comfortable about flying, but much of the falloff in spending on commuting is likely to be permanent. (Spending on gas [gallons purchased] was 2.2 percent below its pre-pandemic level.) Consistent with the decline in commuting, spending on dry cleaning was 2.8 percent below its pre-pandemic level.

Spending on child care is down 21.7 percent. This is partly due to less commuting, but also in part due to less supply, as many child care centers closed in the downturn. The Biden administration is trying to make increased federal support for child care a priority. If additional funding does come through in the bills currently before Congress it will likely mean a large increase in usage, even above pre-pandemic levels. This would be the case even if we continue to see an increase in working from home. There are many parents working from home who would still welcome child care for at least part of the day.

Interestingly, spending on restaurant meals overall (including food at colleges and K-12 schools) is up 3.5 percent from before the pandemic. This indicates that any reduction in restaurant meals by people who used to work in offices or other places, is being offset by an increase in meals purchased by people who are not commuting.

This increase is also striking because restaurant employment is still 10.3 percent below the pre-pandemic level. This indicates a large increase in productivity at restaurants. Part of this story is likely an increase in the percentage of carry out meals, although many employers may have found ways to use their staff more efficiently.   

Spending at hotels and motels is still down 21.9 percent. This presumably reflects both fears about the pandemic and also that people had not planned trips for the month. Spending on housing at schools was down 44.7 percent, reflecting the fact that many schools did not have in person classes this spring.

Spending in the category of recreational services, which includes live music, movies, sports events, and a variety of other activities that were largely shut down during the pandemic, was still down 19.2 percent. This likely reflects the fact that many of these venues had not fully opened by the start of the month. One notable exception is casino gambling, where spending is up 8.5 percent. We will probably need a few more months to see what the longer-term post-pandemic picture is likely to be in this area. In some cases, such as movie theaters (spending was down 83.1 percent), behavior patterns may have been permanently altered by the pandemic.  

Spending on health care services, which accounts for more than 15 percent of consumption expenditures, was still down 4.1 percent in June. This primarily reflects people still putting off non-urgent care. That is best seen in the case of dental services, where spending was down 11.9 percent from the pre-pandemic level.

The other, more dismal, outlier in this sector is nursing homes, which also had an 11.9 percent decline in services. This likely reflects many patients leaving the care of nursing homes because they or their families feared for their well-being. It also reflects the fact that many nursing home residents died from the pandemic.

It seems clear that in many areas of consumption we were still very much seeing the impact of the pandemic in June. We will have to see how consumption patterns change when the case numbers fall back to levels where the pandemic is no longer a major concern. Some important changes may not be clearly visible in the GDP data. For example, the replacement of in-person university classes by remote learning will not be immediately apparent in the data. The increased use of tele-medicine also will not show up in GDP data. But it is likely that many consumption patterns will be permanently altered by the pandemic.

 

Productivity in the Pandemic

One hugely important point that has not gotten nearly enough attention is the sharp uptick in productivity since the pandemic began. GDP in the second quarter was 0.8 percent higher than in the fourth quarter of 2019. On average, we had 4.4 percent fewer people employed in the second quarter of 2021. If there was no change in average hours worked, that would imply an increase in productivity of more than 5.0 percent, almost 3.4 percent on annual basis.

Of course, there was some increase in average hours and other factors, like the self-employed and the government sector, which complicate the calculation. However, productivity clearly grew far more rapidly than the 1.0 percent annual rate for the decade prior to the pandemic.   

This is a huge deal in the context of inflation fears. The 1970s stagflation was associated with a sharp slowing in the rate of productivity growth, from an average annual rate of 3.0 percent in the period from 1947 to 1973, to just over 1.0 percent from 1973 to 1980. If we can sustain even a modest uptick in productivity growth from the pre-pandemic pace, it will go far towards eliminating the risk of inflation.

It’s also worth noting the latest GDP data, which include the comprehensive revisions to data from 2019 and 2020, shows a sharp increase in the profit share of corporate income in the first quarter of 2021. The profit share rose to 25.5 percent in the first quarter of 2021, compared to an average of 23.9 percent in 2020.

This rise in profit shares goes directly at odds with the idea that excessive wage growth will lead to higher prices, producing a wage-price inflationary spiral like we saw in the 1970s. In the 1970s, the profit share of income fell.

The New York Times had an article about how Dr. Fauci wants the government to spend several billion dollars developing what he calls “prototype” vaccines. According to the article, the idea is that the vaccine would be developed against a family of viruses. In principle, they could then be quickly modified to protect against specific virus within the family that posed a serious health risk to the world.

Incredibly, the piece literally says nothing about who would own rights to the vaccines. The companies that have gained rights to the coronavirus vaccines, such as Moderna, Pfizer, and AstraZenca, have already made billions in profits from these vaccines. They may make tens of billions more in future years, if people need regular booster shots. 

Since Dr. Fauci’s proposal seems to imply that the government would be putting up the money to develop these vaccines, and taking the risk of failure, it might be reasonable for the government to have rights to the vaccines. Ideally it would place patent rights in the public domain, both so that scientists around the world can quickly build on the new innovations produced by this research, and so that any vaccines developed can be sold as cheap generics.

If the New York Times took income inequality seriously, it would have spent at least a paragraph or two discussing ownership of this research. Unfortunately, the paper only regards income inequality as a cause for hand-wringing, not a serious policy issue.

The New York Times had an article about how Dr. Fauci wants the government to spend several billion dollars developing what he calls “prototype” vaccines. According to the article, the idea is that the vaccine would be developed against a family of viruses. In principle, they could then be quickly modified to protect against specific virus within the family that posed a serious health risk to the world.

Incredibly, the piece literally says nothing about who would own rights to the vaccines. The companies that have gained rights to the coronavirus vaccines, such as Moderna, Pfizer, and AstraZenca, have already made billions in profits from these vaccines. They may make tens of billions more in future years, if people need regular booster shots. 

Since Dr. Fauci’s proposal seems to imply that the government would be putting up the money to develop these vaccines, and taking the risk of failure, it might be reasonable for the government to have rights to the vaccines. Ideally it would place patent rights in the public domain, both so that scientists around the world can quickly build on the new innovations produced by this research, and so that any vaccines developed can be sold as cheap generics.

If the New York Times took income inequality seriously, it would have spent at least a paragraph or two discussing ownership of this research. Unfortunately, the paper only regards income inequality as a cause for hand-wringing, not a serious policy issue.

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