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.

As the vaccination campaign picks up steam, we have many public health experts warning us about a possible resurgence of the pandemic due to the spread of new vaccine-resistant strains. The logic is that, as more people are protected against the predominant strain for which the vaccines were designed, it will allow room for mutations to spread, for which the current vaccines may not be effective. This can leave us in a whack-a-mole situation, where we have to constantly alter our vaccines and do new rounds of inoculations to limit the death and suffering from the pandemic.

This situation would seem to make the urgency for open-sourcing our research on vaccines even greater than in the past. The point is that we would want evidence on new strains to be shared as quickly as possible. We also would want the evidence on the effectiveness of the current batch of vaccines against each new strain to be quickly shared.

The Problem of Patent Monopolies

That is not likely to happen as long as drug companies are trying to maximize the profits from their government-granted patent monopolies. They have little incentive to share evidence that their vaccines may not be effective against particular strains. Regulatory agencies may make this determination and publicly disclose their findings, but it is not in the interest of, for example, Pfizer, to make this determination and widely disseminate its findings.

The issue of protecting intellectual property claims in the pandemic has gotten considerable attention in the rest of the world, if not in the United States, as a result of a resolution put forward at the World Trade Organization by India and South Africa. This resolution would suspend patent and other intellectual property claims on vaccines, treatments, and tests for the duration of the pandemic. While it enjoys overwhelming support in the developing world, the United States and other wealthy countries stand nearly united in opposition.

After the resolution was put forward a number of analysts argued that ending intellectual property protections would not speed the diffusion of vaccines (They generally did not address the issue of treatments and tests.). Their argument was that producing the vaccines involved sophisticated manufacturing processes, which other producers could not replicate even if not blocked by patent monopolies. They also argued that there were intrinsic limits to how rapidly production could proceed and that these limits would not be affected by the removal of patent monopolies.

As far as the first point, there is no dispute. Pfizer, Moderna, and other vaccine manufacturers have specific knowledge of manufacturing processes that is not widely available. While producers elsewhere could probably in time replicate their processes, we would want these companies to directly share their manufacturing expertise.

This can be done in two ways. We can pay them for transferring their knowledge. This would mean having seminars and consultations with engineers at other manufacturers to allow them to get up to speed as quickly as possible. Ideally, we could negotiate terms that would be acceptable to these companies.

But suppose Pfizer, Moderna, and the rest insist they are not selling, or at least not at a reasonable price. Then we go route two. We offer big bucks directly to the people who have this knowledge. Suppose we offer $5-$10 million to key engineers for a couple of months to work with engineers around the world. Yeah, Pfizer and Moderna can sue them. We’ll pick up the tab for their legal fees and any money they could lose in settlements. The sums involved are trivial relative to lives that could be saved and the damage prevented by more rapid diffusion of the vaccines.

If these companies actually pursued lawsuits it would also be a great teaching opportunity. It would show the world how single-mindedly these companies pursue profits and how incredibly corrupting the current system of patent monopoly financing is.

Okay, but let’s say we can overcome the obstacles and get the knowledge from these companies freely dispensed around the world. We still have the claim that there are physical limits to how rapidly vaccines can be produced.

There are two points here. First, while there clearly are limits, we can still move more quickly in the relevant time frame. No one had vaccines in March of 2020, but the leading producers had the capacity to produce tens of millions of doses a month by November, a period of less than eight months.

Unfortunately, the pandemic is still likely to be a serious problem in much of the world in October of this year. This means that if we replicated the facilities of Pfizer, Moderna, and the other leading manufacturers, we would be able to have additional supplies in a time frame where it would still be enormously helpful, and the October target assumes no learning that speeds up the process.

On this point, Pfizer recently announced that it had discovered changes in its production process that could nearly double its production rate. This is of course great news, but it means that the authoritative voices who assured us that there was no way to accelerate the production process, were not exactly right.

Pfizer’s discovery of production efficiencies also raised the obvious question as to whether Pfizer’s engineers are the only people in the world with the ability to uncover ways to speed the production of vaccines. In other words, if knowledge of Pfizer’s production process was freely shared with engineers throughout the world, do we really believe that no one else could come up with further improvements?

Fighting the Variants

This gets us back to the value of going full open-source to combat the spread of new vaccine-resistant variants. At this point, we have more than a half dozen vaccines that are being widely distributed in countries around the world. In addition to the U.S. and European vaccines, there are at least two from China (the country has apparently just approved a third), a vaccine from India, and a vaccine from Russia. These vaccines have varying effectiveness rates and undoubtedly will also have different rates against different strains.

As it stands, there are serious complaints about the lack of transparency on results from the non-U.S.-European manufacturers, however, even the U.S. and European manufacturers have not been fully open with their trial results. It would be ideal if all these companies fully disclosed their clinical trial results so that researchers throughout the world could see which groups of people each vaccine was most effective with, and how it fared in protecting against the various strains.

Getting full disclosure is something that would have to be negotiated, but this is why god created governments. In principle, this should be a doable lift. After all, it is to everyone’s benefit to have the pandemic controlled as quickly as possible. And the specific task involved does not require great effort. The manufacturers of the vaccines have the data, we just need to have them post it on the web.

If we had full information on the effectiveness of each vaccine and we freely allowed manufacturers everywhere to produce any vaccine, without regard to intellectual property claims, we would be best situated to contain the pandemic and quickly respond to the development of new strains. Of course, this will raise questions about whether our current system of patent monopoly financing is the best way to support the development of new drugs and vaccines, but that seems a risk worth taking.           

As the vaccination campaign picks up steam, we have many public health experts warning us about a possible resurgence of the pandemic due to the spread of new vaccine-resistant strains. The logic is that, as more people are protected against the predominant strain for which the vaccines were designed, it will allow room for mutations to spread, for which the current vaccines may not be effective. This can leave us in a whack-a-mole situation, where we have to constantly alter our vaccines and do new rounds of inoculations to limit the death and suffering from the pandemic.

This situation would seem to make the urgency for open-sourcing our research on vaccines even greater than in the past. The point is that we would want evidence on new strains to be shared as quickly as possible. We also would want the evidence on the effectiveness of the current batch of vaccines against each new strain to be quickly shared.

The Problem of Patent Monopolies

That is not likely to happen as long as drug companies are trying to maximize the profits from their government-granted patent monopolies. They have little incentive to share evidence that their vaccines may not be effective against particular strains. Regulatory agencies may make this determination and publicly disclose their findings, but it is not in the interest of, for example, Pfizer, to make this determination and widely disseminate its findings.

The issue of protecting intellectual property claims in the pandemic has gotten considerable attention in the rest of the world, if not in the United States, as a result of a resolution put forward at the World Trade Organization by India and South Africa. This resolution would suspend patent and other intellectual property claims on vaccines, treatments, and tests for the duration of the pandemic. While it enjoys overwhelming support in the developing world, the United States and other wealthy countries stand nearly united in opposition.

After the resolution was put forward a number of analysts argued that ending intellectual property protections would not speed the diffusion of vaccines (They generally did not address the issue of treatments and tests.). Their argument was that producing the vaccines involved sophisticated manufacturing processes, which other producers could not replicate even if not blocked by patent monopolies. They also argued that there were intrinsic limits to how rapidly production could proceed and that these limits would not be affected by the removal of patent monopolies.

As far as the first point, there is no dispute. Pfizer, Moderna, and other vaccine manufacturers have specific knowledge of manufacturing processes that is not widely available. While producers elsewhere could probably in time replicate their processes, we would want these companies to directly share their manufacturing expertise.

This can be done in two ways. We can pay them for transferring their knowledge. This would mean having seminars and consultations with engineers at other manufacturers to allow them to get up to speed as quickly as possible. Ideally, we could negotiate terms that would be acceptable to these companies.

But suppose Pfizer, Moderna, and the rest insist they are not selling, or at least not at a reasonable price. Then we go route two. We offer big bucks directly to the people who have this knowledge. Suppose we offer $5-$10 million to key engineers for a couple of months to work with engineers around the world. Yeah, Pfizer and Moderna can sue them. We’ll pick up the tab for their legal fees and any money they could lose in settlements. The sums involved are trivial relative to lives that could be saved and the damage prevented by more rapid diffusion of the vaccines.

If these companies actually pursued lawsuits it would also be a great teaching opportunity. It would show the world how single-mindedly these companies pursue profits and how incredibly corrupting the current system of patent monopoly financing is.

Okay, but let’s say we can overcome the obstacles and get the knowledge from these companies freely dispensed around the world. We still have the claim that there are physical limits to how rapidly vaccines can be produced.

There are two points here. First, while there clearly are limits, we can still move more quickly in the relevant time frame. No one had vaccines in March of 2020, but the leading producers had the capacity to produce tens of millions of doses a month by November, a period of less than eight months.

Unfortunately, the pandemic is still likely to be a serious problem in much of the world in October of this year. This means that if we replicated the facilities of Pfizer, Moderna, and the other leading manufacturers, we would be able to have additional supplies in a time frame where it would still be enormously helpful, and the October target assumes no learning that speeds up the process.

On this point, Pfizer recently announced that it had discovered changes in its production process that could nearly double its production rate. This is of course great news, but it means that the authoritative voices who assured us that there was no way to accelerate the production process, were not exactly right.

Pfizer’s discovery of production efficiencies also raised the obvious question as to whether Pfizer’s engineers are the only people in the world with the ability to uncover ways to speed the production of vaccines. In other words, if knowledge of Pfizer’s production process was freely shared with engineers throughout the world, do we really believe that no one else could come up with further improvements?

Fighting the Variants

This gets us back to the value of going full open-source to combat the spread of new vaccine-resistant variants. At this point, we have more than a half dozen vaccines that are being widely distributed in countries around the world. In addition to the U.S. and European vaccines, there are at least two from China (the country has apparently just approved a third), a vaccine from India, and a vaccine from Russia. These vaccines have varying effectiveness rates and undoubtedly will also have different rates against different strains.

As it stands, there are serious complaints about the lack of transparency on results from the non-U.S.-European manufacturers, however, even the U.S. and European manufacturers have not been fully open with their trial results. It would be ideal if all these companies fully disclosed their clinical trial results so that researchers throughout the world could see which groups of people each vaccine was most effective with, and how it fared in protecting against the various strains.

Getting full disclosure is something that would have to be negotiated, but this is why god created governments. In principle, this should be a doable lift. After all, it is to everyone’s benefit to have the pandemic controlled as quickly as possible. And the specific task involved does not require great effort. The manufacturers of the vaccines have the data, we just need to have them post it on the web.

If we had full information on the effectiveness of each vaccine and we freely allowed manufacturers everywhere to produce any vaccine, without regard to intellectual property claims, we would be best situated to contain the pandemic and quickly respond to the development of new strains. Of course, this will raise questions about whether our current system of patent monopoly financing is the best way to support the development of new drugs and vaccines, but that seems a risk worth taking.           

If you were worried that you had a drinking problem, you probably would not ask your neighborhood bartender for advice (Let’s assume the bartender owns the bar, so they pocket the cash from the drinks.) The bartender may be a very nice person, and may actually be your friend, but they obviously have a material interest in keeping you coming back to the bar.

It is the same story for pension funds when it comes to their various pension advisers. The pension funds’ boards (the people who actually are in charge of running the fund) are often on good terms with the people who manage their money. In many cases, they have used the same group of advisers for years or even decades.

Nonetheless, the fund’s investment advisers are in the same relationship to the pension fund as the bartender is to the person worried about their drinking problem. The advisers are making money off the fund.

This simple point is important to keep in mind in considering the reactions of pension fund advisers to proposals for financial transactions tax. The goal of a financial transactions tax is to raise revenue for the government while reducing the volume of excess trading.

The idea is that a modest tax (0.1 percent is the rate proposed in a recent bill introduced by Representative Peter DeFazio) will have little impact on the ability of financial markets to effectively allocate capital, but it would substantially reduce the resources devoted to high-frequency and other short-term trading.

According to the Congressional Budget Office, this tax could raise more than $700 billion over a decade, or $70 billion a year. This is roughly equal to the size of the food stamp budget, an amount equal to 1.5 percent of total spending.

This money would come almost entirely out of the pockets of the financial industry. Research shows that when trading costs go up, trading volume declines by roughly the same percent. If the DeFazio tax raises the average cost of a trade by 40 percent, we should expect that trading volume will also decline by roughly 40 percent.

This means that, from the standpoint of a pension fund, they can expect to be paying 40 percent more on each trade, but since they are doing 40 percent less trading, they will spend no more on their trading with the tax than they did before the tax. In other words, for the pension fund, the tax is a wash.

But aren’t they hurt because they are doing less trading? The evidence is that they are not. Every trade has a winner and a loser, and most people end up in each camp roughly half the time. This means that pension funds do not typically benefit from the amount of trading they are currently doing. (Yes, every investment adviser tells us they are a star and always beat the market. They aren’t.)

So why do investment advisers tell pension funds that a financial transactions tax is bad news for the pension? They say this for the same reason the bartender tells their customer they don’t have a drinking problem.

They want the business.  

If you were worried that you had a drinking problem, you probably would not ask your neighborhood bartender for advice (Let’s assume the bartender owns the bar, so they pocket the cash from the drinks.) The bartender may be a very nice person, and may actually be your friend, but they obviously have a material interest in keeping you coming back to the bar.

It is the same story for pension funds when it comes to their various pension advisers. The pension funds’ boards (the people who actually are in charge of running the fund) are often on good terms with the people who manage their money. In many cases, they have used the same group of advisers for years or even decades.

Nonetheless, the fund’s investment advisers are in the same relationship to the pension fund as the bartender is to the person worried about their drinking problem. The advisers are making money off the fund.

This simple point is important to keep in mind in considering the reactions of pension fund advisers to proposals for financial transactions tax. The goal of a financial transactions tax is to raise revenue for the government while reducing the volume of excess trading.

The idea is that a modest tax (0.1 percent is the rate proposed in a recent bill introduced by Representative Peter DeFazio) will have little impact on the ability of financial markets to effectively allocate capital, but it would substantially reduce the resources devoted to high-frequency and other short-term trading.

According to the Congressional Budget Office, this tax could raise more than $700 billion over a decade, or $70 billion a year. This is roughly equal to the size of the food stamp budget, an amount equal to 1.5 percent of total spending.

This money would come almost entirely out of the pockets of the financial industry. Research shows that when trading costs go up, trading volume declines by roughly the same percent. If the DeFazio tax raises the average cost of a trade by 40 percent, we should expect that trading volume will also decline by roughly 40 percent.

This means that, from the standpoint of a pension fund, they can expect to be paying 40 percent more on each trade, but since they are doing 40 percent less trading, they will spend no more on their trading with the tax than they did before the tax. In other words, for the pension fund, the tax is a wash.

But aren’t they hurt because they are doing less trading? The evidence is that they are not. Every trade has a winner and a loser, and most people end up in each camp roughly half the time. This means that pension funds do not typically benefit from the amount of trading they are currently doing. (Yes, every investment adviser tells us they are a star and always beat the market. They aren’t.)

So why do investment advisers tell pension funds that a financial transactions tax is bad news for the pension? They say this for the same reason the bartender tells their customer they don’t have a drinking problem.

They want the business.  

I saw this piece last week on the soaring price of baseball cards and naturally started thinking about Bitcoin. The article begins with a story about how a rare LeBron James trading card (it’s all sports cards, not just baseball cards) would now sell for over $3 million, more than ten times its price in 2016. It then reports on how the prices for rare cards of other famous players have also gone through the roof, with even cards of less great players selling for several million dollars.

The reason this got me thinking about Bitcoin is that the price of Bitcoin has also been soaring. In fact, it has risen considerably faster than the price of baseball cards, increasing more than a hundredfold over the last five years.

 

Bitcoin as a Currency

Bitcoin proponents see this soaring price as vindication. After all, if the price of a Bitcoin has risen more than a hundred times in just five years, then this digital currency must be extremely valuable.

There is no doubt that Bitcoin investors could have become rich through their investment. A $10,000 Bitcoin investment in 2016 would be worth more than $1.4 million today. If they had made their Bitcoin investment earlier, they would be even richer today. In that sense, at least for now, we can say that someone would have been right to buy Bitcoin as an investment.

But does this mean Bitcoin is establishing itself as a currency? In fact, Bitcoin’s soaring price argues the opposite.

One of the main features that we value in a currency is stability. This is the basis for the obsession of the Federal Reserve Board and other central banks with inflation. While they have often carried their concerns about inflation too far, needlessly slowing the economy and throwing people out of work at the first vague hint of accelerating inflation, there is a real logic to their concern.

Inflation can be a seriously disrupting force in the economy. In the most extreme cases, such as the German hyperinflation after World War I or the more recent episode of hyperinflation in Zimbabwe, the currency becomes worthless as a medium of exchange. There are famous stories in Weimar Germany of people taking wheelbarrows full of money to the bakery to buy a loaf of bread. An economy cannot function with a currency whose value plunges by the minute.

Even less serious rates of inflation can be a problem. Certainly, the inflation the United States saw in the 1970s was a problem. It peaked at just over 10 percent at the end of the decade. This inflation did not cause the economy to collapse or even stop growth altogether, but it definitely made planning more difficult, and perhaps more importantly, led people to believe they were being cheated as their pay increases were quickly offset by rapid rises in prices.

The story with Bitcoin is the exact opposite. The value of Bitcoin has been soaring, not plummeting. But if we think of Bitcoin as a currency, this means that we are seeing massive deflation. The price of items measured in Bitcoin is going through the floor.

To make this concrete, suppose someone signed a five-year lease in Bitcoin, where they agreed to pay two Bitcoins a month for office space. (Five-year leases are common for commercial properties.) At the start of their lease in 2016, they would be paying an amount equal to less than $800 a month. Today, they would be paying over $100,000 a month for the same space. Anyone who committed to this rent would either have been forced into bankruptcy or renegotiated the lease.

Imagine the same story with a wage contract. Suppose a union had negotiated a contract where its members were paid two Bitcoins a week in 2016 with an inflation clause that provided for 2 percent raises a year. If this had been a five-year contract, these workers would now be earning well over $100,000 a week.

Suppose someone had arranged loan terms where they borrowed in Bitcoin and agreed to pay 3.0 percent interest annually. If they had taken out a thousand Bitcoin loans in 2016 (just under $400,000), their annual interest payment would be almost $1.7 million today. Again, any business that had signed a contract like this would have been forced to either renegotiate or face bankruptcy.

If this sounds like I’m making up irrelevant stories, think more closely. If Bitcoin is supposed to be a currency then it has to be possible to use it as a currency. That means being able to sign contracts that work for the parties involved. A currency that soars in value is no more useful for conducting normal economic activity than a currency that plunges in values.

 

The Elon Musk Embrace

But Elon Musk announced that he will start allowing people to buy a Tesla with Bitcoin. The Bitcoin celebrants may see this as a big deal, but there is much less here than meets the eye.

First, it’s not clear what Musk’s motive would be in accepting Bitcoin rather than standard currencies for his cars. Perhaps he thinks that Bitcoin is a good investment for his company.

That may be the case, but if he thinks buying Bitcoin is a better investment than expanding Tesla’s production capacities, he has the option to do this whether or not he sells his cars for Bitcoins. It should be little problem for Tesla to buy a few hundred million dollars of Bitcoin any day of the week if Musk thinks this is a good use of Tesla’s funds.

In short, the Bitcoin as investment story really doesn’t make any sense. The decision for Tesla to invest in Bitcoin has nothing to do with whether it sells its cars for Bitcoin.

It is certainly possible that Musk wants to accept Bitcoin just because he thinks it is a cool thing to do. I would never get in the business of trying to read Musk’s mind, but he clearly says many things off the cuff, and it is certainly possible that he has no well-thought-out motive in accepting Bitcoin.

Of course, there is one obvious, less flattering, motive for selling Teslas for Bitcoin. One of the main attractions of Bitcoin is that it allows people to make untraceable transactions. Unlike transfers through bank accounts or credit cards, there is no traceable record of Bitcoin transactions. For this reason, Bitcoin has become very popular among drug dealers and others engaged in illegal activities.

By selling Teslas for Bitcoins, Musk will be allowing these criminals to buy his cars without going through the intermediate step of trading their Bitcoins for traditional currencies. This should make Teslas especially attractive for successful criminals around the world.

Again, I would not try to read Musk’s mind, but an unavoidable implication of his decision to accept Bitcoin is that it makes Tesla far more attractive to criminals than other high-end cars. Assuming that Musk carries through with this move, it may lead to an interesting scenario.

If Tesla becomes a popular car with drug dealers and other criminals, driving a Tesla could become grounds for suspecting someone of criminal activity. It probably wouldn’t be sufficient grounds for police to get a search warrant, but it would be a big red flag for law enforcement agencies. (I suppose the government can require that Tesla turn over information on anyone who buys a car with Bitcoin in the same way that it requires banks to report large cash deposits.)

 

The Future of Bitcoin

I am not going to try to make a price projection for Bitcoin. I personally wouldn’t make a bet on it, but that was true ten years ago also when it sold for less than one percent of its current price. Of course. I also wouldn’t put a lot of money in baseball cards, but who knows, the LeBron James card may sell for $30 million in a decade.

It’s still hard to not see these prices as the result of bubbles, since it is difficult to see anything like this much intrinsic value in other a sports trading card or Bitcoin. The sports trading card has the advantage in this area, since at least it is something, whereas Bitcoin is quite literally nothing.

A lesson I learned from the stock bubble of the 1990s and the housing bubble of the next decade, is that bubbles can go on much longer than seems plausible. When the stock market was hitting record levels in 1998, I felt pretty confident that it was in a bubble and that it would likely burst within six months or so. It kept going another two years.

I first wrote about the housing bubble in the summer of 2002. I again thought it was likely to burst within six months or so, but I was smart enough not to say this at the time. It didn’t finally start to deflate until 2006, with the decline first gaining serious momentum in 2007. (In fairness, I never imagined banks issuing and securitizing some of the crazy loans that propelled the later stages of the housing bubble.)

Anyhow, I have no idea how high the Bitcoin enthusiasts will push up its price. The one prediction in which I feel very confident is that it is not about to become a currency that will replace traditional currencies.

I saw this piece last week on the soaring price of baseball cards and naturally started thinking about Bitcoin. The article begins with a story about how a rare LeBron James trading card (it’s all sports cards, not just baseball cards) would now sell for over $3 million, more than ten times its price in 2016. It then reports on how the prices for rare cards of other famous players have also gone through the roof, with even cards of less great players selling for several million dollars.

The reason this got me thinking about Bitcoin is that the price of Bitcoin has also been soaring. In fact, it has risen considerably faster than the price of baseball cards, increasing more than a hundredfold over the last five years.

 

Bitcoin as a Currency

Bitcoin proponents see this soaring price as vindication. After all, if the price of a Bitcoin has risen more than a hundred times in just five years, then this digital currency must be extremely valuable.

There is no doubt that Bitcoin investors could have become rich through their investment. A $10,000 Bitcoin investment in 2016 would be worth more than $1.4 million today. If they had made their Bitcoin investment earlier, they would be even richer today. In that sense, at least for now, we can say that someone would have been right to buy Bitcoin as an investment.

But does this mean Bitcoin is establishing itself as a currency? In fact, Bitcoin’s soaring price argues the opposite.

One of the main features that we value in a currency is stability. This is the basis for the obsession of the Federal Reserve Board and other central banks with inflation. While they have often carried their concerns about inflation too far, needlessly slowing the economy and throwing people out of work at the first vague hint of accelerating inflation, there is a real logic to their concern.

Inflation can be a seriously disrupting force in the economy. In the most extreme cases, such as the German hyperinflation after World War I or the more recent episode of hyperinflation in Zimbabwe, the currency becomes worthless as a medium of exchange. There are famous stories in Weimar Germany of people taking wheelbarrows full of money to the bakery to buy a loaf of bread. An economy cannot function with a currency whose value plunges by the minute.

Even less serious rates of inflation can be a problem. Certainly, the inflation the United States saw in the 1970s was a problem. It peaked at just over 10 percent at the end of the decade. This inflation did not cause the economy to collapse or even stop growth altogether, but it definitely made planning more difficult, and perhaps more importantly, led people to believe they were being cheated as their pay increases were quickly offset by rapid rises in prices.

The story with Bitcoin is the exact opposite. The value of Bitcoin has been soaring, not plummeting. But if we think of Bitcoin as a currency, this means that we are seeing massive deflation. The price of items measured in Bitcoin is going through the floor.

To make this concrete, suppose someone signed a five-year lease in Bitcoin, where they agreed to pay two Bitcoins a month for office space. (Five-year leases are common for commercial properties.) At the start of their lease in 2016, they would be paying an amount equal to less than $800 a month. Today, they would be paying over $100,000 a month for the same space. Anyone who committed to this rent would either have been forced into bankruptcy or renegotiated the lease.

Imagine the same story with a wage contract. Suppose a union had negotiated a contract where its members were paid two Bitcoins a week in 2016 with an inflation clause that provided for 2 percent raises a year. If this had been a five-year contract, these workers would now be earning well over $100,000 a week.

Suppose someone had arranged loan terms where they borrowed in Bitcoin and agreed to pay 3.0 percent interest annually. If they had taken out a thousand Bitcoin loans in 2016 (just under $400,000), their annual interest payment would be almost $1.7 million today. Again, any business that had signed a contract like this would have been forced to either renegotiate or face bankruptcy.

If this sounds like I’m making up irrelevant stories, think more closely. If Bitcoin is supposed to be a currency then it has to be possible to use it as a currency. That means being able to sign contracts that work for the parties involved. A currency that soars in value is no more useful for conducting normal economic activity than a currency that plunges in values.

 

The Elon Musk Embrace

But Elon Musk announced that he will start allowing people to buy a Tesla with Bitcoin. The Bitcoin celebrants may see this as a big deal, but there is much less here than meets the eye.

First, it’s not clear what Musk’s motive would be in accepting Bitcoin rather than standard currencies for his cars. Perhaps he thinks that Bitcoin is a good investment for his company.

That may be the case, but if he thinks buying Bitcoin is a better investment than expanding Tesla’s production capacities, he has the option to do this whether or not he sells his cars for Bitcoins. It should be little problem for Tesla to buy a few hundred million dollars of Bitcoin any day of the week if Musk thinks this is a good use of Tesla’s funds.

In short, the Bitcoin as investment story really doesn’t make any sense. The decision for Tesla to invest in Bitcoin has nothing to do with whether it sells its cars for Bitcoin.

It is certainly possible that Musk wants to accept Bitcoin just because he thinks it is a cool thing to do. I would never get in the business of trying to read Musk’s mind, but he clearly says many things off the cuff, and it is certainly possible that he has no well-thought-out motive in accepting Bitcoin.

Of course, there is one obvious, less flattering, motive for selling Teslas for Bitcoin. One of the main attractions of Bitcoin is that it allows people to make untraceable transactions. Unlike transfers through bank accounts or credit cards, there is no traceable record of Bitcoin transactions. For this reason, Bitcoin has become very popular among drug dealers and others engaged in illegal activities.

By selling Teslas for Bitcoins, Musk will be allowing these criminals to buy his cars without going through the intermediate step of trading their Bitcoins for traditional currencies. This should make Teslas especially attractive for successful criminals around the world.

Again, I would not try to read Musk’s mind, but an unavoidable implication of his decision to accept Bitcoin is that it makes Tesla far more attractive to criminals than other high-end cars. Assuming that Musk carries through with this move, it may lead to an interesting scenario.

If Tesla becomes a popular car with drug dealers and other criminals, driving a Tesla could become grounds for suspecting someone of criminal activity. It probably wouldn’t be sufficient grounds for police to get a search warrant, but it would be a big red flag for law enforcement agencies. (I suppose the government can require that Tesla turn over information on anyone who buys a car with Bitcoin in the same way that it requires banks to report large cash deposits.)

 

The Future of Bitcoin

I am not going to try to make a price projection for Bitcoin. I personally wouldn’t make a bet on it, but that was true ten years ago also when it sold for less than one percent of its current price. Of course. I also wouldn’t put a lot of money in baseball cards, but who knows, the LeBron James card may sell for $30 million in a decade.

It’s still hard to not see these prices as the result of bubbles, since it is difficult to see anything like this much intrinsic value in other a sports trading card or Bitcoin. The sports trading card has the advantage in this area, since at least it is something, whereas Bitcoin is quite literally nothing.

A lesson I learned from the stock bubble of the 1990s and the housing bubble of the next decade, is that bubbles can go on much longer than seems plausible. When the stock market was hitting record levels in 1998, I felt pretty confident that it was in a bubble and that it would likely burst within six months or so. It kept going another two years.

I first wrote about the housing bubble in the summer of 2002. I again thought it was likely to burst within six months or so, but I was smart enough not to say this at the time. It didn’t finally start to deflate until 2006, with the decline first gaining serious momentum in 2007. (In fairness, I never imagined banks issuing and securitizing some of the crazy loans that propelled the later stages of the housing bubble.)

Anyhow, I have no idea how high the Bitcoin enthusiasts will push up its price. The one prediction in which I feel very confident is that it is not about to become a currency that will replace traditional currencies.

Naomi Klein has an interesting piece in the New York Times on the implications of the Texas disaster. I would disagree with some parts, which attack the Texas approach to energy as “free market.” To my view, this is far too generous.

Even Texas’ deregulated energy market is still highly regulated. It is possible to have hugely different outcomes and incentives by structuring the market in slightly different ways. For example, since the supply of electricity to individual homes is inherently a monopoly relationship (no one will have two electrical hookups), the burden can be placed on the provider to ensure electricity in a specified price range, rather than structuring the market so the risk lies entirely with consumers.

The latter makes little sense for free-market types, since consumers both have no ability to assess the risk that their providers are taking, nor the ability to take steps to reduce the risk. If contracts were written so that the risks fell to the providers, this would provide the sort of market incentives that fans of the “free market” claim they value.

But beyond this issue, Klein correctly notes that Texas Republicans and Republicans more generally see the Green New Deal as a huge threat, which she argues is because it is a challenger in the battle of ideas:

“Because for the first time in a long time, Republicans face the very thing that they claim to revere but never actually wanted: competition — in the battle of ideas.”

I see the challenge as being even stronger. The Green New Deal is a huge challenge to major financial backers of the Republican Party. The fossil fuel industry has long been a major backer of the Republican Party and right-wing causes. Many major right-wing funders, most notoriously the Koch brothers, got a substantial portion of their fortunes from fossil fuels. If this industry is whacked by policies to limit global warming, it will be a serious hit to these funders.

Looking at politics this way mirrors the strategy that Republicans have used successfully for decades to undermine the basis for progressive politics. They weren’t just arguing in the battle place of ideas, they did things like appoint judges and National Labor Relations Board officials who would do everything they could to weaken unions and undermine the ability of workers to organize. And, they (along with leading Democrats) pushed trade and regulation policies that seriously weakened unions in sectors like manufacturing, transportation, and communications. After weakening unions in the private sector, they then designed a strategy for undermining them in the public sector as well.

They also looked to undermine other bases of support for progressive policies. For example, Reagan gutted federal support for legal services, which was a secure base from which many progressive lawyers pursued suits to benefit the working-class and the poor. They also radically cut back support for programs like the National Endowments for the Arts and Humanities, and the Corporation for Public Broadcasting.

Basically, the Republicans were more interested in destroying the financial bases for support for progressives than winning battles of ideas. It would be great if progressives could turn the table and destroy a major source of right-wing funding while creating good-paying jobs and saving the environment.  

Naomi Klein has an interesting piece in the New York Times on the implications of the Texas disaster. I would disagree with some parts, which attack the Texas approach to energy as “free market.” To my view, this is far too generous.

Even Texas’ deregulated energy market is still highly regulated. It is possible to have hugely different outcomes and incentives by structuring the market in slightly different ways. For example, since the supply of electricity to individual homes is inherently a monopoly relationship (no one will have two electrical hookups), the burden can be placed on the provider to ensure electricity in a specified price range, rather than structuring the market so the risk lies entirely with consumers.

The latter makes little sense for free-market types, since consumers both have no ability to assess the risk that their providers are taking, nor the ability to take steps to reduce the risk. If contracts were written so that the risks fell to the providers, this would provide the sort of market incentives that fans of the “free market” claim they value.

But beyond this issue, Klein correctly notes that Texas Republicans and Republicans more generally see the Green New Deal as a huge threat, which she argues is because it is a challenger in the battle of ideas:

“Because for the first time in a long time, Republicans face the very thing that they claim to revere but never actually wanted: competition — in the battle of ideas.”

I see the challenge as being even stronger. The Green New Deal is a huge challenge to major financial backers of the Republican Party. The fossil fuel industry has long been a major backer of the Republican Party and right-wing causes. Many major right-wing funders, most notoriously the Koch brothers, got a substantial portion of their fortunes from fossil fuels. If this industry is whacked by policies to limit global warming, it will be a serious hit to these funders.

Looking at politics this way mirrors the strategy that Republicans have used successfully for decades to undermine the basis for progressive politics. They weren’t just arguing in the battle place of ideas, they did things like appoint judges and National Labor Relations Board officials who would do everything they could to weaken unions and undermine the ability of workers to organize. And, they (along with leading Democrats) pushed trade and regulation policies that seriously weakened unions in sectors like manufacturing, transportation, and communications. After weakening unions in the private sector, they then designed a strategy for undermining them in the public sector as well.

They also looked to undermine other bases of support for progressive policies. For example, Reagan gutted federal support for legal services, which was a secure base from which many progressive lawyers pursued suits to benefit the working-class and the poor. They also radically cut back support for programs like the National Endowments for the Arts and Humanities, and the Corporation for Public Broadcasting.

Basically, the Republicans were more interested in destroying the financial bases for support for progressives than winning battles of ideas. It would be great if progressives could turn the table and destroy a major source of right-wing funding while creating good-paying jobs and saving the environment.  

I posted this Twitter thread this morning. It should be self-explanatory, but it is more than a little infuriating to see the media (not just Thomas Edsall) act like they are innocent bystanders in the rise of an anti-democratic right-wing movement that constantly lies to advance its agenda. The media have agency but have thus far largely sought to pretend to just be observers. As a result, they allow themselves to be played endlessly by liars like Cruz, Hawley, and Trump.

I saw this Thomas Edsall piece in the NYT that includes a variety of genuflections about social media and democracy. What the piece never addresses is the responsibility of the mainstream media (thread):

It is one thing for random individuals to spew nonsense on social media sites. That is a real problem with no comprehensive solution.

Libel law can be helpful, as in the suits that Dominion and Smartmatic are filing against various prominent figures who have falsely accused them of rigging the election.

It would also be helpful to allow libel suits against the platforms that spread these lies. But, unlike the New York Times and CNN, Facebook and Twitter enjoy protection against such suits due to Section 230.

Apparently, the media considers it beyond the pale to question Section 230 protection, since I have never seen the issue seriously raised. Much better to have endless articles and columns fretting about the spread of lies on the Internet.

Perhaps even more important is that the fact that mainstream media outlets allow public figures to spread their lies and not have it affect their reputation.

To take a somewhat overblown analogy, if someone were running around denying the Holocaust, would they still be politely interviewed on the evening news, or on the Sunday morning talk shows, or quoted respectfully in the New York Times?

Of course, a Holocaust denier would not be given this respect, and their identification as a Holocaust denier would follow them wherever they went. Any time they were mentioned in a serious news outlet, “Holocaust denier” would be part of their identification.

We are now facing something similar with a large percentage of Republican political figures who refuse to acknowledge the results of the presidential election. Obviously, these people do not respect democracy.

For this reason, they should be treated as pariahs in the same way that a Holocaust denier would be treated as a pariah. Their views on issues should not be treated seriously until they can speak truthfully about the election outcome.

And, every reference to them in a news story or opinion piece should identify them as an “election denier.” This isn’t partisan, it is about standing up for reality.

That may not solve the problem of social media spreading crap, but it is a simple step that responsible news outlets can take, rather than just fretting about the lack of a common understanding of reality.  

I posted this Twitter thread this morning. It should be self-explanatory, but it is more than a little infuriating to see the media (not just Thomas Edsall) act like they are innocent bystanders in the rise of an anti-democratic right-wing movement that constantly lies to advance its agenda. The media have agency but have thus far largely sought to pretend to just be observers. As a result, they allow themselves to be played endlessly by liars like Cruz, Hawley, and Trump.

I saw this Thomas Edsall piece in the NYT that includes a variety of genuflections about social media and democracy. What the piece never addresses is the responsibility of the mainstream media (thread):

It is one thing for random individuals to spew nonsense on social media sites. That is a real problem with no comprehensive solution.

Libel law can be helpful, as in the suits that Dominion and Smartmatic are filing against various prominent figures who have falsely accused them of rigging the election.

It would also be helpful to allow libel suits against the platforms that spread these lies. But, unlike the New York Times and CNN, Facebook and Twitter enjoy protection against such suits due to Section 230.

Apparently, the media considers it beyond the pale to question Section 230 protection, since I have never seen the issue seriously raised. Much better to have endless articles and columns fretting about the spread of lies on the Internet.

Perhaps even more important is that the fact that mainstream media outlets allow public figures to spread their lies and not have it affect their reputation.

To take a somewhat overblown analogy, if someone were running around denying the Holocaust, would they still be politely interviewed on the evening news, or on the Sunday morning talk shows, or quoted respectfully in the New York Times?

Of course, a Holocaust denier would not be given this respect, and their identification as a Holocaust denier would follow them wherever they went. Any time they were mentioned in a serious news outlet, “Holocaust denier” would be part of their identification.

We are now facing something similar with a large percentage of Republican political figures who refuse to acknowledge the results of the presidential election. Obviously, these people do not respect democracy.

For this reason, they should be treated as pariahs in the same way that a Holocaust denier would be treated as a pariah. Their views on issues should not be treated seriously until they can speak truthfully about the election outcome.

And, every reference to them in a news story or opinion piece should identify them as an “election denier.” This isn’t partisan, it is about standing up for reality.

That may not solve the problem of social media spreading crap, but it is a simple step that responsible news outlets can take, rather than just fretting about the lack of a common understanding of reality.  

That may seem like a silly question. Of course they will know because there are a number of well-funded policy shops that will be spewing out endless papers and columns telling them that they are facing a crushing debt burden. And, because these policy shops are well-funded and well-connected we can be sure that major media outlets, like the New York Times, Washington Post, and National Public Radio, will give their complaints plenty of space.

But let’s imagine a world where our children weren’t constantly being told that they face a crushing debt burden, how would they know? It might be hard if the latest budget projects are close to the mark. The Congressional Budget Office (CBO) just released new projections for the budget and the economy. They show in 2031, the last year in their budget horizon, the interest burden on our debt will be 2.4 percent of GDP. That’s up from current interest costs of 1.4 percent of GDP.[1] That implies an increase in the debt burden, measured by interest costs, of 1.0 percentage points of GDP.

Will an interest burden of 2.4 percent of GDP crush our children? On the face of it, the deficit hawks have a hard case here. The interest burden was over 3.0 percent of GDP for most the early and mid-1990s. And for those who were not around or have forgotten, the 1990s, or at least the second half, was a very prosperous decade. It’s a bit hard to see how an interest burden of 2.4 percent of GDP can be crushing, if burdens of more than 3.0 percent of GDP were not a big problem.

But, the debt burden may be higher than the current projections show. After all, President Biden has proposed a $1.9 trillion pandemic rescue package. He also will have other spending initiatives, and the CBO baseline includes tax increases in current law that may not actually go into effect.

CBO’s latest projections put the debt at $35.3 trillion in 2031. Let’s assume that the rescue package and other issues raise the debt for that year by 10 percent, or $3.5 trillion. This brings the interest burden to 2.7 percent of GDP. That’s still below the 1990s level. Furthermore, insofar as the rescue package and other initiatives are successful in boosting growth, GDP, the denominator in this calculation, will be larger, which will at least partially offset the higher interest burden.

One point the deficit hawks add to this calculation is that interest rates are extraordinarily low at present. CBO does project that interest rates will rise, but in 2031 they still project an interest rate on 10-year Treasury bonds of just 3.0 percent. This is up from 1.1 percent at present but still well below the rates we saw over the 40 years before the Great Recession. It certainly is not impossible that interest rates will rise to 4.0 percent or even 5.0 percent.

Higher rates will mean that the debt poses a greater interest burden, but there are couple of important qualifications that need to be made. First, much of our debt is long-term. The 30-year bond issued in 2021 at a 2.0 percent interest rate doesn’t have to be refinanced until 2051. That means that even if interest rates do rise substantially they will only gradually lead to a substantially higher interest burden.

The other point is that we have to ask about the reason interest rates are rising. It is possible that interest rates will be rising even as the inflation rate remains more or less in line with CBO’s latest projection of around 2.0 percent. In that case, higher interest rates mean a greater burden through time.

However, interest rates may also rise because we see higher than projected inflation. Suppose the inflation rate rises to 3.0 percent, roughly a percentage point higher than projected. If interest rates also rise by a percentage point, so that the interest rate on a 10-year Treasury bond in 2031 is 4.0 percent, instead of 3.0 percent, we would still be looking at the same real interest rate. In that case, the value of the bond would be eroded by an extra 1.0 percentage point annually, due to the impact of higher inflation.

In the case where higher inflation is the reason for higher interest rates, the actual burden of the debt does not change. With nominal GDP growing more rapidly due to the higher inflation, the ratio of debt to GDP would be lower than in the case with lower inflation.[2]  This means that we only need to worry about a higher interest burden if interest rates rise without a corresponding increase in the rate of inflation.

 

What would an additional interest burden of 1.0 percentage point of GDP look like?

 

Suppose that the CBO projections prove to be exactly right. At first glance, this higher interest burden implies that, if the economy is operating near its capacity, we would have to get by having the government spend roughly 1.0 percentage point less of GDP on various programs. This could mean, for example, cuts to spending on education and infrastructure, or the military. Alternatively, it would need to raise taxes by roughly 1.0 percentage point of GDP, or some combination in order to offset the additional interest payments on the debt.

In fact, the first glance story is likely to substantially overstate the impact of this debt burden. The reason we would need to cut spending and/or raise taxes is to keep the economy from overheating. The interest burden increases this risk by increasing the income of bondholders, who then spend more money because of their higher income.

But the bondholders don’t spend all of the interest income they receive, in fact, they might spend a relatively small share. Remember, the people who hold government bonds are disproportionately higher income households, that’s why it is possible to say there is burden from interest payments. If the interest was paid out to all of us equally, then we would just be paying ourselves, as was the case with the pandemic checks, and there would be no burden.[3]

With a large share of interest payments going to the wealthiest households, perhaps 70 cents on a dollar ends up being spent. This is what we have to offset with spending cuts or higher taxes. That means we need to come up with a combination of spending cuts and tax increases that will reduce demand in the economy by 0.7 percent of GDP.

If we did this on the spending side, we would need to cut an amount of spending roughly equal to this amount. In the current economy, 0.7 percent of GDP would come to around $150 billion in spending cuts, roughly 20 percent of the military budget or twice the annual for Food Stamps.

On the tax side, we might be tempted to take it from the wealthy, but we then come to back to the same issue, that the wealthy save much of their income. If we want to reduce the consumption of the wealthy by an amount equal to 0.7 percent, we may have to raise taxes on them by something close to twice this amount, or 1.4 percent of GDP.

Suppose this proves politically impossible, so we end up having to share the higher tax burden more or less evenly across households. This means a tax increase equal to roughly 0.7 percent of people’s incomes. Is this a big deal?

 

Source: Author’s calculations, see text.

The figure above shows the impact of CBO’s projected increase in productivity over the next decade on wages, assuming productivity growth is fully passed on in higher wages. It also shows the 0.7 percent hit from debt burden taxes. As can be seen, the projected wage gains from higher productivity growth are roughly twenty times the “crushing” burden of the debt calculated above. This means that even with a higher tax burden due to the debt we are now building up, workers ten years out should enjoy substantially higher living standards than they do today.

There is the obvious issue that productivity growth does not automatically translate in higher wage growth. While wage growth for the typical worker did track productivity growth from 1947 to 1973, that has not been the case since 1979. Average wage growth did continue to track productivity growth reasonably well in the last four decades, but most of the gains went to high end workers, such as top- level corporate executives and Wall Street types. Typical workers saw little benefit.  

This pattern of upward redistribution of before-tax income could continue for the next decade, which would mean that most workers cannot offset an increased tax burden with higher pay. That would be a very serious problem, but the problem would be the upward redistribution blocking wage growth, not the relatively minor tax increase they might see due to the debt. Anyone generally concerned about the well-being of workers ten years out, or further in the future, should be focused on what is happening to before-tax income, not the relatively modest burden that taxes may pose due to the debt.

This brings up a final issue about burdens. As I have often pointed out, direct spending is only one way the government pays for services. It also grants patent and copyright monopolies to provide incentive for innovation and creative work. By my calculations, these monopolies add more than $1 trillion a year (4.8 percent of GDP) to the cost of a wide range of items, such as prescription drugs, medical equipment, and computer software. The higher prices charged by the companies that own these monopolies are effectively a private tax that the government allows them to impose in exchange for their work. No honest discussion of the burden of government debt can exclude the implicit debt that the government creates with these monopolies.

At the end of the day, we hand down a whole economy and society to future generations. Anyone seriously asking about the well-being of future generations must look at the education and training we have given our children, the physical and social infrastructure, and, of course, the state of the natural environment. The government debt is such a trivial part of this story that is hard to believe that would even be raised in the context of generational equity, if not for the big money folks who want to keep it front and center.

[1] The true debt burden is actually somewhat less than these numbers indicate. Last year the Federal Reserve Board refunded $88 billion, roughly 0.4 percent of GDP, to the Treasury. This was based on interest that it had collected on the bonds it held. In effect, this means that the Treasury paid an amount of interest equal to 0.4 percentage points of GDP to the Fed, which then handed the money right back to the Treasury. That leaves the actual interest burden around 1.0 percent of GDP.

[2] If the economy grows at a 2.0 percent real rate over the next decade, and the inflation rate averages 2.0 percent, then nominal GDP will be 48 percent larger in 2031 than it is today. If it grows at a 2.0 percent real rate and the inflation rate averages 3.0 percent, nominal GDP will be 63 percent larger in 2031 than it is today. With nominal GDP 10 percent larger in 2031 in the case with higher inflation than the case with lower inflation, the same amount of interest would imply a 10 percent lower burden, relative to GDP. Alternatively, to have the same burden relative to GDP, interest payments would have to be 10 percent higher.   

[3] There is an argument that because of the higher levels of government spending that created the debt, we had higher interest rates than would otherwise have been the case. The higher interest rates reduce investment, which means that productivity growth is slower than would otherwise be. Slower productivity would translate into slower GDP growth which would mean the economy is smaller in 2031 than would have been the case if we had lower deficits in 2021. With interest rates at extraordinarily low levels, even as we run very large deficits, it is not clear that many people would want to make this argument.

That may seem like a silly question. Of course they will know because there are a number of well-funded policy shops that will be spewing out endless papers and columns telling them that they are facing a crushing debt burden. And, because these policy shops are well-funded and well-connected we can be sure that major media outlets, like the New York Times, Washington Post, and National Public Radio, will give their complaints plenty of space.

But let’s imagine a world where our children weren’t constantly being told that they face a crushing debt burden, how would they know? It might be hard if the latest budget projects are close to the mark. The Congressional Budget Office (CBO) just released new projections for the budget and the economy. They show in 2031, the last year in their budget horizon, the interest burden on our debt will be 2.4 percent of GDP. That’s up from current interest costs of 1.4 percent of GDP.[1] That implies an increase in the debt burden, measured by interest costs, of 1.0 percentage points of GDP.

Will an interest burden of 2.4 percent of GDP crush our children? On the face of it, the deficit hawks have a hard case here. The interest burden was over 3.0 percent of GDP for most the early and mid-1990s. And for those who were not around or have forgotten, the 1990s, or at least the second half, was a very prosperous decade. It’s a bit hard to see how an interest burden of 2.4 percent of GDP can be crushing, if burdens of more than 3.0 percent of GDP were not a big problem.

But, the debt burden may be higher than the current projections show. After all, President Biden has proposed a $1.9 trillion pandemic rescue package. He also will have other spending initiatives, and the CBO baseline includes tax increases in current law that may not actually go into effect.

CBO’s latest projections put the debt at $35.3 trillion in 2031. Let’s assume that the rescue package and other issues raise the debt for that year by 10 percent, or $3.5 trillion. This brings the interest burden to 2.7 percent of GDP. That’s still below the 1990s level. Furthermore, insofar as the rescue package and other initiatives are successful in boosting growth, GDP, the denominator in this calculation, will be larger, which will at least partially offset the higher interest burden.

One point the deficit hawks add to this calculation is that interest rates are extraordinarily low at present. CBO does project that interest rates will rise, but in 2031 they still project an interest rate on 10-year Treasury bonds of just 3.0 percent. This is up from 1.1 percent at present but still well below the rates we saw over the 40 years before the Great Recession. It certainly is not impossible that interest rates will rise to 4.0 percent or even 5.0 percent.

Higher rates will mean that the debt poses a greater interest burden, but there are couple of important qualifications that need to be made. First, much of our debt is long-term. The 30-year bond issued in 2021 at a 2.0 percent interest rate doesn’t have to be refinanced until 2051. That means that even if interest rates do rise substantially they will only gradually lead to a substantially higher interest burden.

The other point is that we have to ask about the reason interest rates are rising. It is possible that interest rates will be rising even as the inflation rate remains more or less in line with CBO’s latest projection of around 2.0 percent. In that case, higher interest rates mean a greater burden through time.

However, interest rates may also rise because we see higher than projected inflation. Suppose the inflation rate rises to 3.0 percent, roughly a percentage point higher than projected. If interest rates also rise by a percentage point, so that the interest rate on a 10-year Treasury bond in 2031 is 4.0 percent, instead of 3.0 percent, we would still be looking at the same real interest rate. In that case, the value of the bond would be eroded by an extra 1.0 percentage point annually, due to the impact of higher inflation.

In the case where higher inflation is the reason for higher interest rates, the actual burden of the debt does not change. With nominal GDP growing more rapidly due to the higher inflation, the ratio of debt to GDP would be lower than in the case with lower inflation.[2]  This means that we only need to worry about a higher interest burden if interest rates rise without a corresponding increase in the rate of inflation.

 

What would an additional interest burden of 1.0 percentage point of GDP look like?

 

Suppose that the CBO projections prove to be exactly right. At first glance, this higher interest burden implies that, if the economy is operating near its capacity, we would have to get by having the government spend roughly 1.0 percentage point less of GDP on various programs. This could mean, for example, cuts to spending on education and infrastructure, or the military. Alternatively, it would need to raise taxes by roughly 1.0 percentage point of GDP, or some combination in order to offset the additional interest payments on the debt.

In fact, the first glance story is likely to substantially overstate the impact of this debt burden. The reason we would need to cut spending and/or raise taxes is to keep the economy from overheating. The interest burden increases this risk by increasing the income of bondholders, who then spend more money because of their higher income.

But the bondholders don’t spend all of the interest income they receive, in fact, they might spend a relatively small share. Remember, the people who hold government bonds are disproportionately higher income households, that’s why it is possible to say there is burden from interest payments. If the interest was paid out to all of us equally, then we would just be paying ourselves, as was the case with the pandemic checks, and there would be no burden.[3]

With a large share of interest payments going to the wealthiest households, perhaps 70 cents on a dollar ends up being spent. This is what we have to offset with spending cuts or higher taxes. That means we need to come up with a combination of spending cuts and tax increases that will reduce demand in the economy by 0.7 percent of GDP.

If we did this on the spending side, we would need to cut an amount of spending roughly equal to this amount. In the current economy, 0.7 percent of GDP would come to around $150 billion in spending cuts, roughly 20 percent of the military budget or twice the annual for Food Stamps.

On the tax side, we might be tempted to take it from the wealthy, but we then come to back to the same issue, that the wealthy save much of their income. If we want to reduce the consumption of the wealthy by an amount equal to 0.7 percent, we may have to raise taxes on them by something close to twice this amount, or 1.4 percent of GDP.

Suppose this proves politically impossible, so we end up having to share the higher tax burden more or less evenly across households. This means a tax increase equal to roughly 0.7 percent of people’s incomes. Is this a big deal?

 

Source: Author’s calculations, see text.

The figure above shows the impact of CBO’s projected increase in productivity over the next decade on wages, assuming productivity growth is fully passed on in higher wages. It also shows the 0.7 percent hit from debt burden taxes. As can be seen, the projected wage gains from higher productivity growth are roughly twenty times the “crushing” burden of the debt calculated above. This means that even with a higher tax burden due to the debt we are now building up, workers ten years out should enjoy substantially higher living standards than they do today.

There is the obvious issue that productivity growth does not automatically translate in higher wage growth. While wage growth for the typical worker did track productivity growth from 1947 to 1973, that has not been the case since 1979. Average wage growth did continue to track productivity growth reasonably well in the last four decades, but most of the gains went to high end workers, such as top- level corporate executives and Wall Street types. Typical workers saw little benefit.  

This pattern of upward redistribution of before-tax income could continue for the next decade, which would mean that most workers cannot offset an increased tax burden with higher pay. That would be a very serious problem, but the problem would be the upward redistribution blocking wage growth, not the relatively minor tax increase they might see due to the debt. Anyone generally concerned about the well-being of workers ten years out, or further in the future, should be focused on what is happening to before-tax income, not the relatively modest burden that taxes may pose due to the debt.

This brings up a final issue about burdens. As I have often pointed out, direct spending is only one way the government pays for services. It also grants patent and copyright monopolies to provide incentive for innovation and creative work. By my calculations, these monopolies add more than $1 trillion a year (4.8 percent of GDP) to the cost of a wide range of items, such as prescription drugs, medical equipment, and computer software. The higher prices charged by the companies that own these monopolies are effectively a private tax that the government allows them to impose in exchange for their work. No honest discussion of the burden of government debt can exclude the implicit debt that the government creates with these monopolies.

At the end of the day, we hand down a whole economy and society to future generations. Anyone seriously asking about the well-being of future generations must look at the education and training we have given our children, the physical and social infrastructure, and, of course, the state of the natural environment. The government debt is such a trivial part of this story that is hard to believe that would even be raised in the context of generational equity, if not for the big money folks who want to keep it front and center.

[1] The true debt burden is actually somewhat less than these numbers indicate. Last year the Federal Reserve Board refunded $88 billion, roughly 0.4 percent of GDP, to the Treasury. This was based on interest that it had collected on the bonds it held. In effect, this means that the Treasury paid an amount of interest equal to 0.4 percentage points of GDP to the Fed, which then handed the money right back to the Treasury. That leaves the actual interest burden around 1.0 percent of GDP.

[2] If the economy grows at a 2.0 percent real rate over the next decade, and the inflation rate averages 2.0 percent, then nominal GDP will be 48 percent larger in 2031 than it is today. If it grows at a 2.0 percent real rate and the inflation rate averages 3.0 percent, nominal GDP will be 63 percent larger in 2031 than it is today. With nominal GDP 10 percent larger in 2031 in the case with higher inflation than the case with lower inflation, the same amount of interest would imply a 10 percent lower burden, relative to GDP. Alternatively, to have the same burden relative to GDP, interest payments would have to be 10 percent higher.   

[3] There is an argument that because of the higher levels of government spending that created the debt, we had higher interest rates than would otherwise have been the case. The higher interest rates reduce investment, which means that productivity growth is slower than would otherwise be. Slower productivity would translate into slower GDP growth which would mean the economy is smaller in 2031 than would have been the case if we had lower deficits in 2021. With interest rates at extraordinarily low levels, even as we run very large deficits, it is not clear that many people would want to make this argument.

I just read Nicholas Kristof’s column about his childhood friend Mike Stepp. The piece is actually very moving.

Mr. Stepp grew up next door to Kristof. As he explains in the column, he grew up with an abusive father. Their family didn’t value education, so neither Mike or his brother ever finished high school. While previous generations of workers (white male workers) could work in a factory job without a high school degree and still enjoy a middle class standard of living, this was no longer a possibility for Mike. As a result, he struggled with periods of unemployment, low-paying jobs, drug addiction, mental health problems, and homelessness. He ended up dying last year at age 55.

Kristof tells us that Mike was a decent intelligent person who was let down by society. As he explains, we took away the opportunities that had existed for a large segment of the workforce, and did nothing to fill in the gaps:

“Witnessing the torment of people I grew up with, like Mike, has led me to conclude that I was wrong in many of my own views. Like many liberals with a university education and a reliable paycheck, I was too scornful of labor unions, too unreservedly enthusiastic about international trade, too glib about “creative destruction,” too heartless about its toll.”

I would strongly agree with the basic thrust of Kristof’s argument, but I want to ask about what happens to all the people like Kristof who now admits, “I was wrong in many of my own views.”

Just to be clear, I’m not looking for a jihad against Kristof who is both honest enough to admit his error and appears to have genuine compassion for the people who have been victimized by our policies of the last four decades. But Kristof is just one of a very long list of public intellectuals who made this same mistake. They openly, and often belligerently, pushed policies that had very serious negative effects for large segments of the population. While others have also come to recognize their mistake, many still don’t, and continue to blame the victims of their policies for the difficulties they face in life.

I am not going to rehash the arguments about the policies here (see my book Rigged [it’s free], if you want my account), rather I want to make a different point about accountability. Failing to recognize that the devastating impact of the economic policies promoted in the last four decades was a very serious mistake. But is anyone anywhere losing their job for it?

There is no shortage of economists, policy types, and columnists (e.g. Kristof’s colleague at the NYT, Thomas Friedman) who have made this mistake. However, the idea that any of them would face serious career consequences for this sort of massive failure is viewed as absurd. Even to suggest it is seen as mean-spirited vindictiveness.

So, we live in a society where the dishwasher can get fired in a minute for breaking the dishes. The same is the case for the custodian that doesn’t clean the toilet. But the highly paid workers at the top of their profession face no career risk from making huge mistakes with massive consequences for society.

Can I hear the story about meritocracy again?

 

 

I just read Nicholas Kristof’s column about his childhood friend Mike Stepp. The piece is actually very moving.

Mr. Stepp grew up next door to Kristof. As he explains in the column, he grew up with an abusive father. Their family didn’t value education, so neither Mike or his brother ever finished high school. While previous generations of workers (white male workers) could work in a factory job without a high school degree and still enjoy a middle class standard of living, this was no longer a possibility for Mike. As a result, he struggled with periods of unemployment, low-paying jobs, drug addiction, mental health problems, and homelessness. He ended up dying last year at age 55.

Kristof tells us that Mike was a decent intelligent person who was let down by society. As he explains, we took away the opportunities that had existed for a large segment of the workforce, and did nothing to fill in the gaps:

“Witnessing the torment of people I grew up with, like Mike, has led me to conclude that I was wrong in many of my own views. Like many liberals with a university education and a reliable paycheck, I was too scornful of labor unions, too unreservedly enthusiastic about international trade, too glib about “creative destruction,” too heartless about its toll.”

I would strongly agree with the basic thrust of Kristof’s argument, but I want to ask about what happens to all the people like Kristof who now admits, “I was wrong in many of my own views.”

Just to be clear, I’m not looking for a jihad against Kristof who is both honest enough to admit his error and appears to have genuine compassion for the people who have been victimized by our policies of the last four decades. But Kristof is just one of a very long list of public intellectuals who made this same mistake. They openly, and often belligerently, pushed policies that had very serious negative effects for large segments of the population. While others have also come to recognize their mistake, many still don’t, and continue to blame the victims of their policies for the difficulties they face in life.

I am not going to rehash the arguments about the policies here (see my book Rigged [it’s free], if you want my account), rather I want to make a different point about accountability. Failing to recognize that the devastating impact of the economic policies promoted in the last four decades was a very serious mistake. But is anyone anywhere losing their job for it?

There is no shortage of economists, policy types, and columnists (e.g. Kristof’s colleague at the NYT, Thomas Friedman) who have made this mistake. However, the idea that any of them would face serious career consequences for this sort of massive failure is viewed as absurd. Even to suggest it is seen as mean-spirited vindictiveness.

So, we live in a society where the dishwasher can get fired in a minute for breaking the dishes. The same is the case for the custodian that doesn’t clean the toilet. But the highly paid workers at the top of their profession face no career risk from making huge mistakes with massive consequences for society.

Can I hear the story about meritocracy again?

 

 

I already weighed in on Larry Summers’ complaint that the Biden rescue package may overstimulate the economy. As I said, I thought that while he could be right, the risks of going too small were so much greater than the risks of going too big, that it was worth going forward with the Biden package.

One of the points I made in that post was that excessive demand could be siphoned off in the form of a larger trade deficit, thereby limiting the extent to which it creates inflationary pressures in the United States. I  thought I would show the fourth-quarter data on the growth in GDP and the growth in the trade deficit to make this point.

Source: Bureau of Economic Analysis and author’s calculations.

As can be seen, the increase in the trade deficit in the fourth quarter was over 55 percent of the size of the growth in GDP. The point is that excessive GDP growth can quickly be siphoned off in the form of a trade deficit. This is of course not ideal, we would rather see growth in the U.S., but if the economy is really seeing excess demand that it can’t meet, an increased deficit is preferable to an inflationary spiral.

To understand how this can work, imagine that the economy of a particular state is really booming, with extraordinarily low unemployment. We see this on occasion, as for example when a state has an oil boom pushing its unemployment rate to very low levels, and pulling in workers from other states. In such situations, we may see an increase in house prices and the prices of a limited number of services, but we don’t see a wage-price inflationary spiral.

Given our high degree of globalization, even if we did push the economy too far, we are more likely to see something like what happens in a state experiencing an oil boom, rather than the U.S. economy in the 1970s. This supports the case that the downside risks of pushing too far are much smaller than the risk of not pushing far enough. 

I already weighed in on Larry Summers’ complaint that the Biden rescue package may overstimulate the economy. As I said, I thought that while he could be right, the risks of going too small were so much greater than the risks of going too big, that it was worth going forward with the Biden package.

One of the points I made in that post was that excessive demand could be siphoned off in the form of a larger trade deficit, thereby limiting the extent to which it creates inflationary pressures in the United States. I  thought I would show the fourth-quarter data on the growth in GDP and the growth in the trade deficit to make this point.

Source: Bureau of Economic Analysis and author’s calculations.

As can be seen, the increase in the trade deficit in the fourth quarter was over 55 percent of the size of the growth in GDP. The point is that excessive GDP growth can quickly be siphoned off in the form of a trade deficit. This is of course not ideal, we would rather see growth in the U.S., but if the economy is really seeing excess demand that it can’t meet, an increased deficit is preferable to an inflationary spiral.

To understand how this can work, imagine that the economy of a particular state is really booming, with extraordinarily low unemployment. We see this on occasion, as for example when a state has an oil boom pushing its unemployment rate to very low levels, and pulling in workers from other states. In such situations, we may see an increase in house prices and the prices of a limited number of services, but we don’t see a wage-price inflationary spiral.

Given our high degree of globalization, even if we did push the economy too far, we are more likely to see something like what happens in a state experiencing an oil boom, rather than the U.S. economy in the 1970s. This supports the case that the downside risks of pushing too far are much smaller than the risk of not pushing far enough. 

My diatribe in the Nation — the risk of a new Cold War gives us yet another good reason not to be fans of intellectual property.

My diatribe in the Nation — the risk of a new Cold War gives us yet another good reason not to be fans of intellectual property.

I have been dismissive of many of the folks, mostly progressives, who highlight wealth inequality as a measure of overall inequality. As most of us know, the richest people in the country have gotten a lot richer since the start of the pandemic. (Of course, the story isn’t quite as dramatic if we use February of 2020, before the hit from the pandemic, as the base of comparison.) As much as I am not a fan of rich people, this doesn’t especially trouble me.

I have never considered wealth a very good measure of inequality for several reasons.

  • Wealth depends on financial asset values (e.g. stocks and bonds) that fluctuate wildly;
  • Wealth can be a very bad measure of people’s economic circumstances;
  • Wealth and social insurance are very direct substitutes.

There is also the very important issue of wealth translating into political power. I will get into that at the end of this essay.

 

The Fluctuating Value of Wealth

We have seen a sharp run-up in the price of stocks, bonds, and other financial assets in the pandemic, as the Federal Reserve Board pushed short-term interest rates to zero and also sought to lower long-term rates. Since the majority of these assets are held by the richest ten percent of households and close to half are held by the richest one percent, this meant there was a huge rise in wealth inequality. Should this bother us?

I would argue no, first because it is hard to disagree with the merits of the policy. The economy went into a steep recession last spring. Low interest rates have helped sustain demand in the economy since the onset of the pandemic. They have encouraged home buying and new construction. They also encouraged car buying. And millions of people are now saving thousands of dollars in interest payments each year because they were able to refinance their mortgage.

Lower rates also eased the financial situation of state and local governments, who were able to borrow at lower interest rates. They also likely led to somewhat more investment in both the public and private sectors. This is exactly the sort of increase in demand we needed in the economy.

Turning more directly to the wealth issue, Jeff Bezos and Elon Musk have more wealth now than would otherwise be the case, because the short-term interest rate is zero and the long-term rate on U.S. government bonds is around 1.0 percent. Let’s say that’s bad.

Suppose in a year or two, the economy has recovered and the interest rate on long-term bonds is up to something like 3.0 percent. Let’s imagine this knocks stock prices down by 20 percent and the price of bonds by even more.[1] Is everyone happy now?

If wealth inequality is the big evil that we want to combat, then we should be celebrating a drop in the stock market that lessens inequality. Perhaps the opponents of inequality will be out there dancing in the street if the market plunges, but somehow I doubt it. Just as a logical matter, you don’t get to be upset about a rise in the stock market increasing inequality and not then be happy with a fall in the stock market reducing inequality.

For my part, I find it hard to get too upset about fluctuations in wealth that are likely to be temporary. There was not a fundamental change in the structure of the economy that caused the soaring wealth of the last ten months. In all probability, it is a temporary fluctuation that will be reversed. (I’m not making stock market predictions, so I’m not advising everyone to go short.)

 

Wealth as a Measure of Well-Being

If we stacked everyone in the world by wealth, going from richest to poorest, those at the very bottom would be recent graduates of Harvard business and medical school. I’m not kidding. Many of these people have borrowed hundreds of thousands of dollars to pay for their education. Most of them have few if any assets. This means that on net, they are hundreds of thousands of dollars in the hole.

Should we be concerned about these very poor people? Since they are likely to be earning well over $100,000 a year and quite possibly over $200,000 a year, as soon as they start work, it is hard to feel terribly sorry for them.

In fact, many of the poorest people by this wealth measure, both internationally and nationally, are recent graduates who have taken out student loans. While many of these recent grads will have trouble paying off their debts, most won’t.

The number of people with large negative wealth creates silly scenarios where we can say that Jeff Bezos or Elon Musk has more wealth than the bottom 40 percent (or whatever) of the world’s population. That is dramatic, but it also doesn’t mean much.

I probably have more wealth than the bottom 20 percent of the world’s population. That isn’t because of my great wealth, it is simply due to the fact that I have some positive wealth and the bottom 20 percent taken as a whole does not.

Even beyond these theatrics, there is still the problem that student debt makes for calculating well-being. Is a 30-year-old college grad with $20,000 in debt worse off than a high school grad with no debt? The college grad almost certainly has much better earnings prospects, with the difference swamping the $20,000 debt, but if we just looked at wealth, the high school grad is much better off.

But even besides this issue, there is also a more general problem of what counts as wealth. Forty years ago, most middle-income workers (especially men), had traditionally defined benefit pensions. These pensions could typically guarantee these workers a middle-class standard of living in retirement.

Traditional pensions have largely disappeared, especially in the private sector. This means that if a worker hopes to maintain a middle-class standard of living in retirement, they have to accumulate assets in a 401(k) or some other retirement account.

The money in a retirement account is included in standard calculations of wealth. Traditional pensions generally are not. (We can impute values for these pensions, but this is generally not done in most wealth calculations.) This leads to a story where we would say that a person with a 401(k) is much wealthier than a person with a traditional pension, even if they have no better prospects for retirement income.

 

Social Insurance as a Substitute for Wealth

The pension issue is only part of the story, social insurance more generally can be seen as a substitute for wealth. In addition to needing wealth to support income in retirement, we also might need wealth to deal with spells of unemployment, unexpected medical expenses, to pay for their children’s college and to buy a house. Some people also have aspirations of starting a business, which also requires some wealth.

The extent to which wealth is needed in each of these areas depends on how we structure our system of social supports. As noted, a good Social Security and pension system make it unnecessary to accumulate a substantial amount of wealth in retirement. In the case of unemployment, if we have a healthy system of unemployment insurance, most workers can be kept whole through stretches of unemployment.

It’s also worth noting that the wealth accumulated by middle-class people is primarily in their homes. This matters because this wealth is not easily accessible during spells of unemployment. Banks will be reluctant to issue a mortgage or home equity loan to someone who is unemployed. If an unemployed worker is able to borrow at all, they will pay a substantial interest premium on what would be viewed as a risky loan. They would generally be far better off with a strong system of unemployment insurance.  

The same story applies to medical expenses. Bankruptcies due to medical expenses are virtually unheard of in Europe. The reason is these countries have national health insurance systems, which protect the vast majority of the population against major medical expenses.

The provision of a free or low-cost college education also makes it unnecessary to accumulate large amounts of money to pay for their children’s education. Even in a system with largely free public education, some people may still choose to pay the additional cost to send their kids to elite private schools. This sort of inequality in educational opportunity is unfortunate, but the better focus for public policy is ensuring that the public system is high quality and affordable.

In the United States, the vast majority of middle-class households are homeowners. While this does typically allow them to accumulate some wealth, the fact that ownership is a superior form of housing is largely due to our laws that effectively make renters a type of second-class citizen. In countries with stronger protections for renters, most notably Germany, homeownership rates are far lower.

There is nothing intrinsically desirable about homeownership. People want the security of tenure, so they know they can’t just be thrown out of their home on the whim of a landlord. They also want protection against unexpected jumps in rents. Both of these protections can be provided in a legal system that treats renters as full citizens. We actually see this to a limited extent in the United States, where some cities, most notably New York, provide strong rental protections. In these cases, we do see many solidly middle-class (and even affluent) people remain tenants for most of their life.

Beyond just making the point that strong systems of public support reduce the need for wealth in many areas, there is also the concrete matter that the instruments for accumulating wealth tend to divert large amounts of money to the financial sector. To just take the most obvious case, the annual fees on 401(k)s are often over 1.0 percent of the fund’s value.[2] When the fees from managing individual funds within an account are added in, many people pay close to 2.0 percent of their fund’s value to the financial industry each year.

This could mean that a person earning $60,000 a year, who has managed to accumulate $100,000 in a 401(k), is paying $2,000 a year to the financial industry, or more than 3.0 percent of their income. This is money and resources that would be saved if the Social Security system were instead designed to provide them with an adequate retirement income. There is a similar story with wealth being accumulated to meet other needs, such as health care costs and college tuition.

Homeownership may actually be the worst in this respect. The costs associated with buying and then selling a home can easily exceed ten percent of the purchase price. These costs may not be a big deal for a person that stays in the same house for twenty or thirty years, but they are enormous for someone who only lives in a house for two or three years.

If someone buys a house for $300,000 and then sells it two years later for roughly the same price, they will likely pay over $30,000 in realtor commissions, closing costs on a mortgage, title searches and insurance, and other expenses. This comes to $15,000 a year, for expenses that would be completely unnecessary if they had remained a renter through this period. In a society that is structured to favor homeownership, it is understandable that most people would want to be homeowners, but we must recognize that homeownership is not inherently good, and it can be very costly for people who are not in a stable employment or family situation.

It is also worth noting that house prices do sometimes fall, as folks who lived through the collapse of the housing bubble should know well. The idea that the wealth people have in a house will inevitably increase is simply wrong.

Policies to support the accumulation of wealth for low- and middle-income families will almost always be seen as alternatives to policies for better systems of social support. It is clear that the wealth accumulation track is better for the financial industry. The track of stronger social supports is likely to be better for almost everyone else.

Okay, I left out the need for wealth to start a business. This is a case where it is hard to see a system of social supports providing an alternative, although the opportunity for stable employment and protection from unexpected medical expenses and the need to save for retirement and children’s education, should provide opportunities to accumulate some wealth. And, the vast majority of people will actually never try to start their own business.

 

Taxing Wealth

The huge sums accumulated by the country’s wealthiest people have led many progressives to have dreams of the amount of social spending that could be supported with a wealth tax. As I have argued elsewhere, there are serious political, practical, and legal obstacles to implementing a wealth tax. But on this question, there is a more fundamental economic issue.

At the federal level, we need taxes to restrict consumption, not to literally pay the bills. As the Modern Monetary Theory crew reminds us, the government can print as much money as it wants. The limit is that if we create too much demand in the economy, it will lead to inflation. So, we tax to reduce consumption, by reducing the amount of money in people’s pockets.

If we think of the prospects of reducing consumption with a wealth tax, they don’t look very promising. Consider our latest round of incredibly rich people, like Elon Musk, Jeff Bezos, and Mark Zuckerberg, all of whom have over $100 billion in wealth. While I am sure these people all live very well, I doubt they spend substantially more on their own consumption in a year than your typical single-digit billionaire. There are only so many homes you can live in, cars you can drive, trips you take, etc.

This means that if we taxed away 10 percent, 20 percent, or even 50 percent of their wealth, it will have very little impact on their consumption. This means that it will not get us very far in freeing up resources for an expanded social welfare state. We will not be able to pay for Medicare for All or free college by taxing away these people’s wealth, we will have to focus on policies that reduce the consumption of a far larger group of people.

 

Wealth and Political Power

Many of the critics of extreme wealth point out the enormous political power that someone like the Koch brothers can wield because of their immense wealth. The point is well-taken. There can be no doubt that extreme wealth is horribly corrupting of the democratic process. This corruption takes place not only, or even primarily, through the political candidates whose campaigns they support, but through the academic institutions and think tanks they establish or support, and the media outlets they own.  Many intellectually bankrupt ideas, like trickle-down economics, have survived and even thrived because deep-pocketed people were willing to support them in academia, policy circles, and the media.

But this diagnosis of the problem doesn’t mean that an attack on extreme wealth is the best solution. Suppose we cut the wealth of the richest 1,000 people in half. They would still be able to exercise a ridiculously outsize influence on the country’s politics.

The Koch brothers (or the surviving brother) with $25 billion would still have enough money to support all sorts of right-wing think tanks and issue groups. The same is true for the rest of this group. We don’t have a plausible path where we can hope to seriously limit their influence by reducing their wealth in any reasonable time-frame.

To my mind, a much more plausible route is to go in the opposite direction by increasing the voice of ordinary people. There are concrete steps that can be taken that go far here. The super-matches for campaign contributions that several cities have put in place and are part of the last Congress’s HR1 political rights bill are a great start. These proposals match small-dollar contributions by many multiples (HR1 puts the match at six to one) in exchange for candidates limiting their big-dollar contributions.

Seattle has gone a step further in giving its residents $75 “democracy vouchers” that can be donated to any candidate who agrees to limits on big-dollar contributions. The Seattle model can actually be taken a step further in providing tax credits for people to support journalism and creative work more generally. A modest tax credit applied nationwide, can provide an enormous amount of money to support creative work, including newspapers, radio, and television outlets, as well as think tanks and unaffiliated academics. This credit would ideally be put in place nationally but can be done at the state or even local level, as Seattle has done with its democracy voucher.

This will not allow for average people to outspend the billionaires, but it can ensure that they can have a serious voice in public debates. That is probably the best that we can hope for in the foreseeable future.

 

Big Wealth is a Big Distraction

To sum up, I would argue that the focus on the enormous fortunes of Elon Musk, Jeff Bezos, and others is an enormous distraction. It certainly is not good news to see the already incredibly rich get even richer, but wealth inequality should not be the main focus of progressives. The extent to which they actually drain resources from the economy is not well-measured by their wealth. And, we don’t have a plausible path for reining in their political power by reducing their wealth. The more promising path is by increasing the voice of everyone else.   

[1] Bond prices move inversely with interest rates.

[2] Typically, the insurance company or brokerage house managing a 401(k) charges a fee just to hold your money. That averages around 1.0 percent. However, the individual funds in which people invest their money, such as a stock fund or a bond fund, also have fees. For index funds, these fees tend to be low, usually between 0.1-0.2 percent. However, some actively traded funds charge considerably higher fees, sometimes exceeding 1.0 percent.   

I have been dismissive of many of the folks, mostly progressives, who highlight wealth inequality as a measure of overall inequality. As most of us know, the richest people in the country have gotten a lot richer since the start of the pandemic. (Of course, the story isn’t quite as dramatic if we use February of 2020, before the hit from the pandemic, as the base of comparison.) As much as I am not a fan of rich people, this doesn’t especially trouble me.

I have never considered wealth a very good measure of inequality for several reasons.

  • Wealth depends on financial asset values (e.g. stocks and bonds) that fluctuate wildly;
  • Wealth can be a very bad measure of people’s economic circumstances;
  • Wealth and social insurance are very direct substitutes.

There is also the very important issue of wealth translating into political power. I will get into that at the end of this essay.

 

The Fluctuating Value of Wealth

We have seen a sharp run-up in the price of stocks, bonds, and other financial assets in the pandemic, as the Federal Reserve Board pushed short-term interest rates to zero and also sought to lower long-term rates. Since the majority of these assets are held by the richest ten percent of households and close to half are held by the richest one percent, this meant there was a huge rise in wealth inequality. Should this bother us?

I would argue no, first because it is hard to disagree with the merits of the policy. The economy went into a steep recession last spring. Low interest rates have helped sustain demand in the economy since the onset of the pandemic. They have encouraged home buying and new construction. They also encouraged car buying. And millions of people are now saving thousands of dollars in interest payments each year because they were able to refinance their mortgage.

Lower rates also eased the financial situation of state and local governments, who were able to borrow at lower interest rates. They also likely led to somewhat more investment in both the public and private sectors. This is exactly the sort of increase in demand we needed in the economy.

Turning more directly to the wealth issue, Jeff Bezos and Elon Musk have more wealth now than would otherwise be the case, because the short-term interest rate is zero and the long-term rate on U.S. government bonds is around 1.0 percent. Let’s say that’s bad.

Suppose in a year or two, the economy has recovered and the interest rate on long-term bonds is up to something like 3.0 percent. Let’s imagine this knocks stock prices down by 20 percent and the price of bonds by even more.[1] Is everyone happy now?

If wealth inequality is the big evil that we want to combat, then we should be celebrating a drop in the stock market that lessens inequality. Perhaps the opponents of inequality will be out there dancing in the street if the market plunges, but somehow I doubt it. Just as a logical matter, you don’t get to be upset about a rise in the stock market increasing inequality and not then be happy with a fall in the stock market reducing inequality.

For my part, I find it hard to get too upset about fluctuations in wealth that are likely to be temporary. There was not a fundamental change in the structure of the economy that caused the soaring wealth of the last ten months. In all probability, it is a temporary fluctuation that will be reversed. (I’m not making stock market predictions, so I’m not advising everyone to go short.)

 

Wealth as a Measure of Well-Being

If we stacked everyone in the world by wealth, going from richest to poorest, those at the very bottom would be recent graduates of Harvard business and medical school. I’m not kidding. Many of these people have borrowed hundreds of thousands of dollars to pay for their education. Most of them have few if any assets. This means that on net, they are hundreds of thousands of dollars in the hole.

Should we be concerned about these very poor people? Since they are likely to be earning well over $100,000 a year and quite possibly over $200,000 a year, as soon as they start work, it is hard to feel terribly sorry for them.

In fact, many of the poorest people by this wealth measure, both internationally and nationally, are recent graduates who have taken out student loans. While many of these recent grads will have trouble paying off their debts, most won’t.

The number of people with large negative wealth creates silly scenarios where we can say that Jeff Bezos or Elon Musk has more wealth than the bottom 40 percent (or whatever) of the world’s population. That is dramatic, but it also doesn’t mean much.

I probably have more wealth than the bottom 20 percent of the world’s population. That isn’t because of my great wealth, it is simply due to the fact that I have some positive wealth and the bottom 20 percent taken as a whole does not.

Even beyond these theatrics, there is still the problem that student debt makes for calculating well-being. Is a 30-year-old college grad with $20,000 in debt worse off than a high school grad with no debt? The college grad almost certainly has much better earnings prospects, with the difference swamping the $20,000 debt, but if we just looked at wealth, the high school grad is much better off.

But even besides this issue, there is also a more general problem of what counts as wealth. Forty years ago, most middle-income workers (especially men), had traditionally defined benefit pensions. These pensions could typically guarantee these workers a middle-class standard of living in retirement.

Traditional pensions have largely disappeared, especially in the private sector. This means that if a worker hopes to maintain a middle-class standard of living in retirement, they have to accumulate assets in a 401(k) or some other retirement account.

The money in a retirement account is included in standard calculations of wealth. Traditional pensions generally are not. (We can impute values for these pensions, but this is generally not done in most wealth calculations.) This leads to a story where we would say that a person with a 401(k) is much wealthier than a person with a traditional pension, even if they have no better prospects for retirement income.

 

Social Insurance as a Substitute for Wealth

The pension issue is only part of the story, social insurance more generally can be seen as a substitute for wealth. In addition to needing wealth to support income in retirement, we also might need wealth to deal with spells of unemployment, unexpected medical expenses, to pay for their children’s college and to buy a house. Some people also have aspirations of starting a business, which also requires some wealth.

The extent to which wealth is needed in each of these areas depends on how we structure our system of social supports. As noted, a good Social Security and pension system make it unnecessary to accumulate a substantial amount of wealth in retirement. In the case of unemployment, if we have a healthy system of unemployment insurance, most workers can be kept whole through stretches of unemployment.

It’s also worth noting that the wealth accumulated by middle-class people is primarily in their homes. This matters because this wealth is not easily accessible during spells of unemployment. Banks will be reluctant to issue a mortgage or home equity loan to someone who is unemployed. If an unemployed worker is able to borrow at all, they will pay a substantial interest premium on what would be viewed as a risky loan. They would generally be far better off with a strong system of unemployment insurance.  

The same story applies to medical expenses. Bankruptcies due to medical expenses are virtually unheard of in Europe. The reason is these countries have national health insurance systems, which protect the vast majority of the population against major medical expenses.

The provision of a free or low-cost college education also makes it unnecessary to accumulate large amounts of money to pay for their children’s education. Even in a system with largely free public education, some people may still choose to pay the additional cost to send their kids to elite private schools. This sort of inequality in educational opportunity is unfortunate, but the better focus for public policy is ensuring that the public system is high quality and affordable.

In the United States, the vast majority of middle-class households are homeowners. While this does typically allow them to accumulate some wealth, the fact that ownership is a superior form of housing is largely due to our laws that effectively make renters a type of second-class citizen. In countries with stronger protections for renters, most notably Germany, homeownership rates are far lower.

There is nothing intrinsically desirable about homeownership. People want the security of tenure, so they know they can’t just be thrown out of their home on the whim of a landlord. They also want protection against unexpected jumps in rents. Both of these protections can be provided in a legal system that treats renters as full citizens. We actually see this to a limited extent in the United States, where some cities, most notably New York, provide strong rental protections. In these cases, we do see many solidly middle-class (and even affluent) people remain tenants for most of their life.

Beyond just making the point that strong systems of public support reduce the need for wealth in many areas, there is also the concrete matter that the instruments for accumulating wealth tend to divert large amounts of money to the financial sector. To just take the most obvious case, the annual fees on 401(k)s are often over 1.0 percent of the fund’s value.[2] When the fees from managing individual funds within an account are added in, many people pay close to 2.0 percent of their fund’s value to the financial industry each year.

This could mean that a person earning $60,000 a year, who has managed to accumulate $100,000 in a 401(k), is paying $2,000 a year to the financial industry, or more than 3.0 percent of their income. This is money and resources that would be saved if the Social Security system were instead designed to provide them with an adequate retirement income. There is a similar story with wealth being accumulated to meet other needs, such as health care costs and college tuition.

Homeownership may actually be the worst in this respect. The costs associated with buying and then selling a home can easily exceed ten percent of the purchase price. These costs may not be a big deal for a person that stays in the same house for twenty or thirty years, but they are enormous for someone who only lives in a house for two or three years.

If someone buys a house for $300,000 and then sells it two years later for roughly the same price, they will likely pay over $30,000 in realtor commissions, closing costs on a mortgage, title searches and insurance, and other expenses. This comes to $15,000 a year, for expenses that would be completely unnecessary if they had remained a renter through this period. In a society that is structured to favor homeownership, it is understandable that most people would want to be homeowners, but we must recognize that homeownership is not inherently good, and it can be very costly for people who are not in a stable employment or family situation.

It is also worth noting that house prices do sometimes fall, as folks who lived through the collapse of the housing bubble should know well. The idea that the wealth people have in a house will inevitably increase is simply wrong.

Policies to support the accumulation of wealth for low- and middle-income families will almost always be seen as alternatives to policies for better systems of social support. It is clear that the wealth accumulation track is better for the financial industry. The track of stronger social supports is likely to be better for almost everyone else.

Okay, I left out the need for wealth to start a business. This is a case where it is hard to see a system of social supports providing an alternative, although the opportunity for stable employment and protection from unexpected medical expenses and the need to save for retirement and children’s education, should provide opportunities to accumulate some wealth. And, the vast majority of people will actually never try to start their own business.

 

Taxing Wealth

The huge sums accumulated by the country’s wealthiest people have led many progressives to have dreams of the amount of social spending that could be supported with a wealth tax. As I have argued elsewhere, there are serious political, practical, and legal obstacles to implementing a wealth tax. But on this question, there is a more fundamental economic issue.

At the federal level, we need taxes to restrict consumption, not to literally pay the bills. As the Modern Monetary Theory crew reminds us, the government can print as much money as it wants. The limit is that if we create too much demand in the economy, it will lead to inflation. So, we tax to reduce consumption, by reducing the amount of money in people’s pockets.

If we think of the prospects of reducing consumption with a wealth tax, they don’t look very promising. Consider our latest round of incredibly rich people, like Elon Musk, Jeff Bezos, and Mark Zuckerberg, all of whom have over $100 billion in wealth. While I am sure these people all live very well, I doubt they spend substantially more on their own consumption in a year than your typical single-digit billionaire. There are only so many homes you can live in, cars you can drive, trips you take, etc.

This means that if we taxed away 10 percent, 20 percent, or even 50 percent of their wealth, it will have very little impact on their consumption. This means that it will not get us very far in freeing up resources for an expanded social welfare state. We will not be able to pay for Medicare for All or free college by taxing away these people’s wealth, we will have to focus on policies that reduce the consumption of a far larger group of people.

 

Wealth and Political Power

Many of the critics of extreme wealth point out the enormous political power that someone like the Koch brothers can wield because of their immense wealth. The point is well-taken. There can be no doubt that extreme wealth is horribly corrupting of the democratic process. This corruption takes place not only, or even primarily, through the political candidates whose campaigns they support, but through the academic institutions and think tanks they establish or support, and the media outlets they own.  Many intellectually bankrupt ideas, like trickle-down economics, have survived and even thrived because deep-pocketed people were willing to support them in academia, policy circles, and the media.

But this diagnosis of the problem doesn’t mean that an attack on extreme wealth is the best solution. Suppose we cut the wealth of the richest 1,000 people in half. They would still be able to exercise a ridiculously outsize influence on the country’s politics.

The Koch brothers (or the surviving brother) with $25 billion would still have enough money to support all sorts of right-wing think tanks and issue groups. The same is true for the rest of this group. We don’t have a plausible path where we can hope to seriously limit their influence by reducing their wealth in any reasonable time-frame.

To my mind, a much more plausible route is to go in the opposite direction by increasing the voice of ordinary people. There are concrete steps that can be taken that go far here. The super-matches for campaign contributions that several cities have put in place and are part of the last Congress’s HR1 political rights bill are a great start. These proposals match small-dollar contributions by many multiples (HR1 puts the match at six to one) in exchange for candidates limiting their big-dollar contributions.

Seattle has gone a step further in giving its residents $75 “democracy vouchers” that can be donated to any candidate who agrees to limits on big-dollar contributions. The Seattle model can actually be taken a step further in providing tax credits for people to support journalism and creative work more generally. A modest tax credit applied nationwide, can provide an enormous amount of money to support creative work, including newspapers, radio, and television outlets, as well as think tanks and unaffiliated academics. This credit would ideally be put in place nationally but can be done at the state or even local level, as Seattle has done with its democracy voucher.

This will not allow for average people to outspend the billionaires, but it can ensure that they can have a serious voice in public debates. That is probably the best that we can hope for in the foreseeable future.

 

Big Wealth is a Big Distraction

To sum up, I would argue that the focus on the enormous fortunes of Elon Musk, Jeff Bezos, and others is an enormous distraction. It certainly is not good news to see the already incredibly rich get even richer, but wealth inequality should not be the main focus of progressives. The extent to which they actually drain resources from the economy is not well-measured by their wealth. And, we don’t have a plausible path for reining in their political power by reducing their wealth. The more promising path is by increasing the voice of everyone else.   

[1] Bond prices move inversely with interest rates.

[2] Typically, the insurance company or brokerage house managing a 401(k) charges a fee just to hold your money. That averages around 1.0 percent. However, the individual funds in which people invest their money, such as a stock fund or a bond fund, also have fees. For index funds, these fees tend to be low, usually between 0.1-0.2 percent. However, some actively traded funds charge considerably higher fees, sometimes exceeding 1.0 percent.   

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