Serious people have long known the Washington Post as a pathetic propaganda organ when it comes to trade. After all, it was so shameless in its promotion of NAFTA that it ran an editorial back in 2007 claiming that NAFTA had been so great for Mexico that its GDP had quadrupled in the twenty years since 1987. The actual figure was 84.2 percent. (This has never been corrected.) It also has repeatedly run fantasy pieces about how NAFTA is creating a thriving middle class in Mexico, even though the period since NAFTA has been one of historically slow growth in Mexico.
For this reason, it was not surprising to see a piece by Fareed Zakaria touting the virtues of the trade deficit. While his point that the trade deficit has risen under Trump, contrary to his promise of a lower deficit, is correct, most of the rest of the piece is not.
Most importantly, he implies that there is no reason for anyone to be bothered by the trade deficit. As the trade deficit exploded in the years from 2000 to 2007 (before the Great Recession), the economy lost 3.4 million manufacturing jobs. That was 20 percent of total manufacturing employment. We also lost 40 percent of unionized manufacturing jobs. Anyone who gives a damn about the well-being of the country’s middle class should have been very worried about the trade deficit in these years. (There are some people who blame this massive job loss on technology. These people are known as “liars.” )
The impact of the trade deficit matters less on middle class living standards today than it did two decades ago, primarily because the effect of trade has substantially eroded manufacturing’s status as a source of relatively high-paying jobs for workers without college degrees. Manufacturing jobs actually pay slightly less than the private sector average, although if we factor in benefits and adjust for age and education, there likely is still a modest premium.
The trade deficit also matters from the standpoint of aggregate demand. Our current deficit of roughly 3.0 percent of GDP ($616.8 billion in 2019) means that we are generating demand in Europe, China, and elsewhere with our spending, not the United States. This is a large part of the story of “secular stagnation,” where we don’t have enough demand in the U.S. economy to push it to levels of output high enough to sustain full employment.
We can offset the demand lost as a result of the trade deficit with larger budget deficits, but then people, like the Washington Post editors, start hyperventilating about large budget deficits. If we did not face political obstacles to large budget deficits, secular stagnation would not be a problem, but we do.
The problems with Zakaria’s logic go much further. He implies that the fact that we have a surplus in trade in services is somehow helped by the fact that we have a deficit in goods:
“In fact, while the United States has a deficit in manufactured goods with the rest of the world, it runs a huge surplus in services (banking, insurance, consulting, etc.). And remember that 80 percent of American jobs are in the service sector. (Jobs in manufacturing as a percentage of overall jobs have been declining for 70 years at about the same pace.) The United States is also the world’s favorite destination to invest capital, by a large margin. As Martin points out, when you look at this entire picture, ‘the trade deficit should be something to brag about rather than denounce.'”
Actually, there is no logical connection between the two. If we had a stronger manufacturing sector, we would also see more demand from manufacturing for services, like computer technologies, innovations in biology and chemistry, and logistics. By implying that there is some sort of trade-off between having a strong service sector and a strong manufacturing sector, Zakaria is pushing a non sequitur.
It is also worth noting that our surplus on services was just $249.2 billion last year (1.2 percent of GDP). This surplus mattered much less to the service sector (80 percent of GDP) than the $867 billion trade deficit in goods (4.3 percent of GDP) mattered to the manufacturing sector (around 12 percent of GDP).
While Zakaria would have us believe that our service jobs are high-paying and high tech, the largest category of service exports is travel. This sector produced $214.1 billion in exports last year, more than a quarter of all service exports. These are largely jobs in hotels and restaurants, not generally thought of as high-paying high productivity employment.
One of the other major items in services was “charges for the use of intellectual property.” This earned the country $129.1 billion last year or roughly 0.6 percent of GDP. The irony of Zakaria, who is ostensibly a committed free trader, touting this export is that it is 100 percent protectionism. The U.S. gets money for the “use of intellectual property” because we give companies patent and copyright monopolies and require other countries to respect them. These monopolies raise the price of items like prescription drugs, medical equipment, and software by many thousand percent above their free market price.
Anyone who is upset by tariffs of 10 percent or 25 percent on items like imported cars or steel, should be apoplectic over what are effective government created barriers that are tens or even hundreds of times larger. Apparently Zakaria is just fine with these barriers, perhaps because he and his friends at the Washington Post are in the class of people that benefit from them, as opposed to tariffs on cars or steel.
Another major item in our service exports is financial services, which came to $113.9 billion last year (0.5 percent of GDP). This is largely money going to the folks on Wall Street. As with intellectual property, this is a major source of inequality in the U.S. economy. Again Zakaria might be happy about this (I know, we can count on hand-wringing columns decrying inequality), but there is little reason for most of us to applaud the financial industry getting even richer.
Anyhow, in the Jeff Bezos owned Washington Post, Zakaria’s column passes for a serious analysis of trade. That’s America in 2020.
Serious people have long known the Washington Post as a pathetic propaganda organ when it comes to trade. After all, it was so shameless in its promotion of NAFTA that it ran an editorial back in 2007 claiming that NAFTA had been so great for Mexico that its GDP had quadrupled in the twenty years since 1987. The actual figure was 84.2 percent. (This has never been corrected.) It also has repeatedly run fantasy pieces about how NAFTA is creating a thriving middle class in Mexico, even though the period since NAFTA has been one of historically slow growth in Mexico.
For this reason, it was not surprising to see a piece by Fareed Zakaria touting the virtues of the trade deficit. While his point that the trade deficit has risen under Trump, contrary to his promise of a lower deficit, is correct, most of the rest of the piece is not.
Most importantly, he implies that there is no reason for anyone to be bothered by the trade deficit. As the trade deficit exploded in the years from 2000 to 2007 (before the Great Recession), the economy lost 3.4 million manufacturing jobs. That was 20 percent of total manufacturing employment. We also lost 40 percent of unionized manufacturing jobs. Anyone who gives a damn about the well-being of the country’s middle class should have been very worried about the trade deficit in these years. (There are some people who blame this massive job loss on technology. These people are known as “liars.” )
The impact of the trade deficit matters less on middle class living standards today than it did two decades ago, primarily because the effect of trade has substantially eroded manufacturing’s status as a source of relatively high-paying jobs for workers without college degrees. Manufacturing jobs actually pay slightly less than the private sector average, although if we factor in benefits and adjust for age and education, there likely is still a modest premium.
The trade deficit also matters from the standpoint of aggregate demand. Our current deficit of roughly 3.0 percent of GDP ($616.8 billion in 2019) means that we are generating demand in Europe, China, and elsewhere with our spending, not the United States. This is a large part of the story of “secular stagnation,” where we don’t have enough demand in the U.S. economy to push it to levels of output high enough to sustain full employment.
We can offset the demand lost as a result of the trade deficit with larger budget deficits, but then people, like the Washington Post editors, start hyperventilating about large budget deficits. If we did not face political obstacles to large budget deficits, secular stagnation would not be a problem, but we do.
The problems with Zakaria’s logic go much further. He implies that the fact that we have a surplus in trade in services is somehow helped by the fact that we have a deficit in goods:
“In fact, while the United States has a deficit in manufactured goods with the rest of the world, it runs a huge surplus in services (banking, insurance, consulting, etc.). And remember that 80 percent of American jobs are in the service sector. (Jobs in manufacturing as a percentage of overall jobs have been declining for 70 years at about the same pace.) The United States is also the world’s favorite destination to invest capital, by a large margin. As Martin points out, when you look at this entire picture, ‘the trade deficit should be something to brag about rather than denounce.'”
Actually, there is no logical connection between the two. If we had a stronger manufacturing sector, we would also see more demand from manufacturing for services, like computer technologies, innovations in biology and chemistry, and logistics. By implying that there is some sort of trade-off between having a strong service sector and a strong manufacturing sector, Zakaria is pushing a non sequitur.
It is also worth noting that our surplus on services was just $249.2 billion last year (1.2 percent of GDP). This surplus mattered much less to the service sector (80 percent of GDP) than the $867 billion trade deficit in goods (4.3 percent of GDP) mattered to the manufacturing sector (around 12 percent of GDP).
While Zakaria would have us believe that our service jobs are high-paying and high tech, the largest category of service exports is travel. This sector produced $214.1 billion in exports last year, more than a quarter of all service exports. These are largely jobs in hotels and restaurants, not generally thought of as high-paying high productivity employment.
One of the other major items in services was “charges for the use of intellectual property.” This earned the country $129.1 billion last year or roughly 0.6 percent of GDP. The irony of Zakaria, who is ostensibly a committed free trader, touting this export is that it is 100 percent protectionism. The U.S. gets money for the “use of intellectual property” because we give companies patent and copyright monopolies and require other countries to respect them. These monopolies raise the price of items like prescription drugs, medical equipment, and software by many thousand percent above their free market price.
Anyone who is upset by tariffs of 10 percent or 25 percent on items like imported cars or steel, should be apoplectic over what are effective government created barriers that are tens or even hundreds of times larger. Apparently Zakaria is just fine with these barriers, perhaps because he and his friends at the Washington Post are in the class of people that benefit from them, as opposed to tariffs on cars or steel.
Another major item in our service exports is financial services, which came to $113.9 billion last year (0.5 percent of GDP). This is largely money going to the folks on Wall Street. As with intellectual property, this is a major source of inequality in the U.S. economy. Again Zakaria might be happy about this (I know, we can count on hand-wringing columns decrying inequality), but there is little reason for most of us to applaud the financial industry getting even richer.
Anyhow, in the Jeff Bezos owned Washington Post, Zakaria’s column passes for a serious analysis of trade. That’s America in 2020.
Read More Leer más Join the discussion Participa en la discusión
To my knowledge, he hasn’t said anything like that, but Buttigieg did say that he doesn’t accept the “fashionable” view that current deficits are not a problem. When he made this comment, many progressives denounced him for supporting deficit reducing policies that will slow growth and raise unemployment. Since most plans for deficit reduction also involve cuts to social programs (it’s compromise land), this is likely to mean additional hardships for the poor and elderly who are the primary beneficiaries of these programs.
The response of many centrists to these attacks (e.g. here) was to say that Buttigieg was just using campaign rhetoric, he doesn’t really mean it. Guessing what is in any politician’s head is always difficult, but it is especially hard with someone like Buttigieg, with a very short track record and few clear ideological convictions.
But whatever may be in Buttigieg’s head, we can certainly look at his words. He didn’t just indicate he disagreed with a view on deficits that has been largely embraced by the mainstream of the economics profession, he implied that this view was frivolous – a fashion that could change at any time.
This is more than a little annoying for those of us who have spent a lot of time in budget debates, especially in the dozen years since the collapse of the housing bubble gave us the Great Recession. The view that large deficits, like the one the country is now running, are not a problem came about as a result of an analysis of the evidence.
Ever since the collapse of the housing bubble, the economy has suffered from a persistent shortfall in demand. The loss of demand from the collapse of the bubble was enormous. At its peak in 2005, housing investment was 6.7 percent of GDP. In the most recent quarter it was just 3.8 percent of GDP. The difference of 2.9 percentage points of GDP translates into more than $600 billion in lost annual demand.
In addition, there was a falloff in consumption demand associated with the collapse of the housing bubble. The ephemeral wealth created by the housing bubble led to a surge in consumption spending, as people spent based on the newly generated wealth in their homes. At the peak in 2005, households consumed 97.5 percent of their disposable income. When the bubble burst and the housing wealth disappeared, so did the bubble driven consumption. In the most recent quarter, households were consuming just 92.3 percent of their disposable income. The difference in consumption shares translates into more than $800 billion annually of lost demand in today’s economy.
If we add the loss in annual demand from the falloff in housing investment and reduced consumption, it comes to more than $1,400 billion. As we have painfully learned since the Great Recession, there is no easy mechanism to replace this lost demand. The view formerly held by many economists, that the Fed could just lower interest rates and bring the economy back to full employment, has been shown to be clearly wrong. Even with the Fed’s interest rate at zero for seven years, the economy still did not rebound to anything like full employment.
This is the context in which much of the mainstream of the economics profession came to embrace the view that large budget deficits could be sustained for long periods of time. Given a persistent shortfall in demand in the economy (a.k.a. “secular stagnation”), there is no other sector that could provide the boost to growth necessary to bring the economy to full employment.
Rather than being a liability, large deficits are needed to lower the unemployment rate. And, low unemployment rates are especially important to African Americans, Hispanics and other disadvantaged groups in the labor market, since they disproportionately are the job gainers as the labor market tightens. In a tight labor market, employers have no choice but to employ people who would otherwise be the victims of discrimination. With the unemployment rate now well under 4.0 percent, there are accounts of employers even reaching out to people with criminal records who they might otherwise never consider employing.
Tight labor markets also give workers at the middle and bottom of the wage distribution the bargaining power needed to achieve wage gains. After seeing declines in real wages in the years immediately following the Great Recession, workers at the middle and bottom of the wage distribution have been seeing real gains of more than 1.0 percent annually over the last five years.
If we had smaller budget deficits, we would have seen less demand in the economy and less growth. This would have meant fewer jobs, higher unemployment, and less bargaining power for workers. That is the Pete Buttigieg world. He may not know this or he may not care, but we should be clear, this is what his call for lower budget deficits means.
The Story of Evil Deficits I
The conventional story of the evils of budget deficits is that they lead to higher interest rates, which then crowd out investment. Less investment (both public and private) is bad news because it means that productivity growth will be slower, leaving us poorer in the future than we would otherwise be.
This story clearly does not fit the current situation. The interest rate on 10-year Treasury bonds is just 1.6 percent. That compares to interest rates of 4.0-5.0 percent back in the late 1990s when we were running budget surpluses. With interest rates at historically low levels for the last decade, it is pretty hard to make the case that the deficit has been crowding out investment.
The conventional story would also hold that large deficits could lead to inflation, if the Fed failed to act by pushing up interest rates. This story also does not fit with the data. The inflation rate, as measured by the Consumer Price Index was 2.5 percent over the last year, but this reflects jumps in energy prices last fall. The inflation rate in the core personal consumption expenditure deflator, the rate targeted by the Federal Reserve Board, has been just 1.6 percent over the last year.
This is well below the Fed’s 2.0 percent target, which is meant to be an average. That means that the Fed would like to see the inflation rate occasionally be somewhat above 2.0 percent in order to balance out the periods of below 2.0 percent inflation. From the Fed’s standpoint, the problem has been that the inflation rate has been too low, not too high.
In short, we are not seeing either of the short-term problems usually attributed to large budget deficits. Interest rates are at historically low levels, so we can’t tell a story about deficits crowding out investment, and inflation has been consistently below its targeted rate, so there is no basis for complaints about the deficits causing inflation. So, if Buttigieg has a story about deficits doing harm to the economy, it is not one of the conventional stories economists tell.
The Story of Evil Deficits II
The other story often told about the budget deficit is that it will be a burden on our children, since they will have to pay interest on the debt. The story goes that our current publicly held debt of $16.9 trillion (79.2 percent of GDP) will impose an enormous burden as future generations struggle to pay it off. There are three points to be made on this.
First, these interest payments are an intragenerational issue, not an inter-generational issue. The debt is overwhelmingly held domestically. This means that the interest payments will be made by some of our children to the children of other people. In twenty or thirty years, ordinary workers may be paying taxes to pay the interest on the bonds held by the children of Bill Gates and Jeff Bezos. That could be a problem, but it is one that is easily solved by taxing the children of Bill Gates and Jeff Bezos. This is just saying that inequality can be a problem, which is obviously true, and if Bill Gates and Jeff Bezos’ kids hold lots of government bonds, the interest they get on those bonds could be part of the problem.
The second point is, that in spite of the large debt, the interest burden is relatively low, due to the extraordinarily low interest rates we have seen in recent years. The latest projections from the Congressional Budget Office show that interest payments, net of remittances from the Federal Reserve Board, will be just 1.4 percent of GDP in 2020. This compares to payments of more than 3.0 percent of GDP in the early and mid-1990s. It is pretty hard to get too upset about a burden that is less than half as large as what we faced three decades ago. And, that burden did not prevent the 1990s from being a relatively prosperous decade.
The final reason the debt interest burden argument richly deserves our ridicule is that it is very selective in choosing what burdens to consider and what burdens to ignore. Direct spending is only one mechanism the government uses to pay for things it wants done. It also gives out patent and copyright monopolies. These government-granted monopolies can be thought of as private taxes that the government allows companies to collect from the public in exchange for innovation and creative work.
The amount of money at stake in the rents from patent and copyright monopolies swamps payments of interest on the debt. In the case of prescription drugs alone the rents are going to be in the neighborhood of $400 billion in 2020 (1.8 percent of GDP). If we add in the rents from these monopolies in medical equipment, computer software, recorded music, movies, and video games, we are almost certainly over $1 trillion, or close 5.0 percent of GDP.
It doesn’t make any sense to hyperventilate about an interest burden of 1.3 percent of GDP, while ignoring rents from patent and copyright monopolies that are more than three times as large. If Buttigieg wants to make a big deal about the interest burden from the debt, then it is clearly not due to any objective reality. He is either appealing to prejudices or simply reflecting his own ignorance of budget and economic realities.
Yes, People Who Care About Economic Policy Should be Offended by Buttigieg’s Budget Comments
Only Buttigieg knows his actual motives for dismissing the lack of concern about budget deficits as a “fashion.” However, this lack of concern is based on hard data and clear theoretical thinking. Whatever reason Buttigieg has for saying that we should be concerned about budget deficits, those of us who have done our homework have every reason to be angry at Buttigieg, just as serious climate scientists are justified in their anger at the climate denialists.
To my knowledge, he hasn’t said anything like that, but Buttigieg did say that he doesn’t accept the “fashionable” view that current deficits are not a problem. When he made this comment, many progressives denounced him for supporting deficit reducing policies that will slow growth and raise unemployment. Since most plans for deficit reduction also involve cuts to social programs (it’s compromise land), this is likely to mean additional hardships for the poor and elderly who are the primary beneficiaries of these programs.
The response of many centrists to these attacks (e.g. here) was to say that Buttigieg was just using campaign rhetoric, he doesn’t really mean it. Guessing what is in any politician’s head is always difficult, but it is especially hard with someone like Buttigieg, with a very short track record and few clear ideological convictions.
But whatever may be in Buttigieg’s head, we can certainly look at his words. He didn’t just indicate he disagreed with a view on deficits that has been largely embraced by the mainstream of the economics profession, he implied that this view was frivolous – a fashion that could change at any time.
This is more than a little annoying for those of us who have spent a lot of time in budget debates, especially in the dozen years since the collapse of the housing bubble gave us the Great Recession. The view that large deficits, like the one the country is now running, are not a problem came about as a result of an analysis of the evidence.
Ever since the collapse of the housing bubble, the economy has suffered from a persistent shortfall in demand. The loss of demand from the collapse of the bubble was enormous. At its peak in 2005, housing investment was 6.7 percent of GDP. In the most recent quarter it was just 3.8 percent of GDP. The difference of 2.9 percentage points of GDP translates into more than $600 billion in lost annual demand.
In addition, there was a falloff in consumption demand associated with the collapse of the housing bubble. The ephemeral wealth created by the housing bubble led to a surge in consumption spending, as people spent based on the newly generated wealth in their homes. At the peak in 2005, households consumed 97.5 percent of their disposable income. When the bubble burst and the housing wealth disappeared, so did the bubble driven consumption. In the most recent quarter, households were consuming just 92.3 percent of their disposable income. The difference in consumption shares translates into more than $800 billion annually of lost demand in today’s economy.
If we add the loss in annual demand from the falloff in housing investment and reduced consumption, it comes to more than $1,400 billion. As we have painfully learned since the Great Recession, there is no easy mechanism to replace this lost demand. The view formerly held by many economists, that the Fed could just lower interest rates and bring the economy back to full employment, has been shown to be clearly wrong. Even with the Fed’s interest rate at zero for seven years, the economy still did not rebound to anything like full employment.
This is the context in which much of the mainstream of the economics profession came to embrace the view that large budget deficits could be sustained for long periods of time. Given a persistent shortfall in demand in the economy (a.k.a. “secular stagnation”), there is no other sector that could provide the boost to growth necessary to bring the economy to full employment.
Rather than being a liability, large deficits are needed to lower the unemployment rate. And, low unemployment rates are especially important to African Americans, Hispanics and other disadvantaged groups in the labor market, since they disproportionately are the job gainers as the labor market tightens. In a tight labor market, employers have no choice but to employ people who would otherwise be the victims of discrimination. With the unemployment rate now well under 4.0 percent, there are accounts of employers even reaching out to people with criminal records who they might otherwise never consider employing.
Tight labor markets also give workers at the middle and bottom of the wage distribution the bargaining power needed to achieve wage gains. After seeing declines in real wages in the years immediately following the Great Recession, workers at the middle and bottom of the wage distribution have been seeing real gains of more than 1.0 percent annually over the last five years.
If we had smaller budget deficits, we would have seen less demand in the economy and less growth. This would have meant fewer jobs, higher unemployment, and less bargaining power for workers. That is the Pete Buttigieg world. He may not know this or he may not care, but we should be clear, this is what his call for lower budget deficits means.
The Story of Evil Deficits I
The conventional story of the evils of budget deficits is that they lead to higher interest rates, which then crowd out investment. Less investment (both public and private) is bad news because it means that productivity growth will be slower, leaving us poorer in the future than we would otherwise be.
This story clearly does not fit the current situation. The interest rate on 10-year Treasury bonds is just 1.6 percent. That compares to interest rates of 4.0-5.0 percent back in the late 1990s when we were running budget surpluses. With interest rates at historically low levels for the last decade, it is pretty hard to make the case that the deficit has been crowding out investment.
The conventional story would also hold that large deficits could lead to inflation, if the Fed failed to act by pushing up interest rates. This story also does not fit with the data. The inflation rate, as measured by the Consumer Price Index was 2.5 percent over the last year, but this reflects jumps in energy prices last fall. The inflation rate in the core personal consumption expenditure deflator, the rate targeted by the Federal Reserve Board, has been just 1.6 percent over the last year.
This is well below the Fed’s 2.0 percent target, which is meant to be an average. That means that the Fed would like to see the inflation rate occasionally be somewhat above 2.0 percent in order to balance out the periods of below 2.0 percent inflation. From the Fed’s standpoint, the problem has been that the inflation rate has been too low, not too high.
In short, we are not seeing either of the short-term problems usually attributed to large budget deficits. Interest rates are at historically low levels, so we can’t tell a story about deficits crowding out investment, and inflation has been consistently below its targeted rate, so there is no basis for complaints about the deficits causing inflation. So, if Buttigieg has a story about deficits doing harm to the economy, it is not one of the conventional stories economists tell.
The Story of Evil Deficits II
The other story often told about the budget deficit is that it will be a burden on our children, since they will have to pay interest on the debt. The story goes that our current publicly held debt of $16.9 trillion (79.2 percent of GDP) will impose an enormous burden as future generations struggle to pay it off. There are three points to be made on this.
First, these interest payments are an intragenerational issue, not an inter-generational issue. The debt is overwhelmingly held domestically. This means that the interest payments will be made by some of our children to the children of other people. In twenty or thirty years, ordinary workers may be paying taxes to pay the interest on the bonds held by the children of Bill Gates and Jeff Bezos. That could be a problem, but it is one that is easily solved by taxing the children of Bill Gates and Jeff Bezos. This is just saying that inequality can be a problem, which is obviously true, and if Bill Gates and Jeff Bezos’ kids hold lots of government bonds, the interest they get on those bonds could be part of the problem.
The second point is, that in spite of the large debt, the interest burden is relatively low, due to the extraordinarily low interest rates we have seen in recent years. The latest projections from the Congressional Budget Office show that interest payments, net of remittances from the Federal Reserve Board, will be just 1.4 percent of GDP in 2020. This compares to payments of more than 3.0 percent of GDP in the early and mid-1990s. It is pretty hard to get too upset about a burden that is less than half as large as what we faced three decades ago. And, that burden did not prevent the 1990s from being a relatively prosperous decade.
The final reason the debt interest burden argument richly deserves our ridicule is that it is very selective in choosing what burdens to consider and what burdens to ignore. Direct spending is only one mechanism the government uses to pay for things it wants done. It also gives out patent and copyright monopolies. These government-granted monopolies can be thought of as private taxes that the government allows companies to collect from the public in exchange for innovation and creative work.
The amount of money at stake in the rents from patent and copyright monopolies swamps payments of interest on the debt. In the case of prescription drugs alone the rents are going to be in the neighborhood of $400 billion in 2020 (1.8 percent of GDP). If we add in the rents from these monopolies in medical equipment, computer software, recorded music, movies, and video games, we are almost certainly over $1 trillion, or close 5.0 percent of GDP.
It doesn’t make any sense to hyperventilate about an interest burden of 1.3 percent of GDP, while ignoring rents from patent and copyright monopolies that are more than three times as large. If Buttigieg wants to make a big deal about the interest burden from the debt, then it is clearly not due to any objective reality. He is either appealing to prejudices or simply reflecting his own ignorance of budget and economic realities.
Yes, People Who Care About Economic Policy Should be Offended by Buttigieg’s Budget Comments
Only Buttigieg knows his actual motives for dismissing the lack of concern about budget deficits as a “fashion.” However, this lack of concern is based on hard data and clear theoretical thinking. Whatever reason Buttigieg has for saying that we should be concerned about budget deficits, those of us who have done our homework have every reason to be angry at Buttigieg, just as serious climate scientists are justified in their anger at the climate denialists.
Read More Leer más Join the discussion Participa en la discusión
The New York Times had an interesting piece about three generations of an African American family, focusing on a man who moved from the South to Chicago in the mid-1950s. He had enjoyed a reasonably comfortable working class life in the city, but one of his daughters moved to the suburbs, because she saw it as a safer place to raise her daughter. The daughter eventually moved to Houston where she had better career prospects. This is given as an example of the outflow of African Americans from the city, which has numbered roughly 200,000 in the last five years.
At two important points the piece includes numbers, that are not adjusted for inflation, and therefore provide the bulk of its readers with no useful information. In one case it tells readers that Mr. White, the central figure in the piece, lost a job in a meat packing factory that paid $13.60 in 1992. Since most readers do not have a good idea of inflation over the last three decades, they likely would not realize that this was a relatively good-paying job. Prices have risen by more than 80 percent since 1992, which means that this job would have paid roughly $25.00 an hour in 2020 dollars.
The other number that likely makes little sense to readers is the $23,500 price that Mr. White, and his wife Velma, paid for their house in 1967. Since prices have risen by more than 580 percent since 1967, this would be equivalent to roughly $160,000 in today’s dollars.
This was obviously a piece that involved considerable time investigating. There is no reason that the reporter, or a staffer at the paper, could not have taken the ten minutes needed to put these numbers in a context that would be meaningful to its readers.
The New York Times had an interesting piece about three generations of an African American family, focusing on a man who moved from the South to Chicago in the mid-1950s. He had enjoyed a reasonably comfortable working class life in the city, but one of his daughters moved to the suburbs, because she saw it as a safer place to raise her daughter. The daughter eventually moved to Houston where she had better career prospects. This is given as an example of the outflow of African Americans from the city, which has numbered roughly 200,000 in the last five years.
At two important points the piece includes numbers, that are not adjusted for inflation, and therefore provide the bulk of its readers with no useful information. In one case it tells readers that Mr. White, the central figure in the piece, lost a job in a meat packing factory that paid $13.60 in 1992. Since most readers do not have a good idea of inflation over the last three decades, they likely would not realize that this was a relatively good-paying job. Prices have risen by more than 80 percent since 1992, which means that this job would have paid roughly $25.00 an hour in 2020 dollars.
The other number that likely makes little sense to readers is the $23,500 price that Mr. White, and his wife Velma, paid for their house in 1967. Since prices have risen by more than 580 percent since 1967, this would be equivalent to roughly $160,000 in today’s dollars.
This was obviously a piece that involved considerable time investigating. There is no reason that the reporter, or a staffer at the paper, could not have taken the ten minutes needed to put these numbers in a context that would be meaningful to its readers.
Read More Leer más Join the discussion Participa en la discusión
(This post originally appeared on my Patreon page.) Last month George Soros had a New York Times column arguing that Mark Zuckerberg should not be running Facebook. (Does the NYT reserve space on its opinion page for billionaires?) The gist of Soros’ piece is that Zuckerberg has made a deal with Trump. He will allow all manner of outrageous lies to be spread on Facebook to benefit Trump’s re-election campaign. In exchange, Trump will defend Zuckerberg from efforts to regulate Facebook.
Soros is of course right. Zuckerberg has said that Facebook will not attempt to verify the accuracy of the political ads that it runs. This is a greenlight for any sleazebag to push the most outrageous claims that they want in order to further the election of their favored candidate.
This will almost certainly benefit Donald Trump’s re-election, since the one area where he can legitimately take credit is in pushing outlandish lies. No one has pushed more lies more effectively than Donald Trump. The free rein promised by Zuckerberg is a re-election campaign contribution of enormous value.
While Soros is right on the substance of the issue, he is wrong to focus on the personality of Mark Zuckerberg. It would be good if we had a responsible forward-thinking person, who cared about the future of democracy, running Facebook, but that is not the normal course of things in a capitalist economy.
Businesses are run to make money. And, the bottom line here is that Facebook stands to make much more money spreading outlandish lies that help Trump’s campaign, than screening ads for their veracity. In this context, we should not be surprised that Facebook is taking the lie-spreading route. The problem is not that Zuckerberg is acting like a normal businessperson, the problem is that we made the lie-spreading route profitable.
In this respect it is worth pointing out that we don’t have the same problem with other media outlets. We don’t have to beg CNN, the New York Times, and other major news outlets to not take ads that they know to be false. They won’t do it, perhaps in part out of principle, but also because they could be sued for libel if they spread claims that were false and damaging.
For example, if I wanted to take out an ad asserting that Donald Trump is a rapist (which is likely true), most major news outlets would refuse to run it. Donald Trump could not only sue me for libel, he could also sue any news outlet that carried the ad. If I could not show that the claim was true, the news outlet that published the ad could be forced to pay substantial damages. For this reason, traditional news outlets do try to screen political ads for accuracy, and will not run an ad that they know to be false.
Facebook does not feel the same need to protect against libel because a law passed by Congress exempts it from the same sort of liability faced by traditional media outlets. Section 230 of the 1996 Communications Decency Act, protects Internet intermediaries from the liability rules that apply to traditional media outlets.
The logic that was used to justify this provision is that Internet intermediaries should be treated the same way as common carriers, like a phone company or the mail service. A common carrier does not have control over the content it carries, nor does it profit from specific content, except insofar as it increases demand for its service.
This was arguably an accurate description of Internet intermediaries in the early years of the web. For example, we would not have expected AOL to be responsible for whatever people chose to post in its chatrooms. But the web in general, and Facebook in particular, have evolved hugely in the years since Section 230 was put into law.
Facebook has complete control over content. It allows people to pay to have their posts sent to as many people as they choose. It allows them to target the recipients, based on location, age, education, gender, and any number of other characteristics. It is very hard to see how an outlet like CNN or the NYT can be held responsible for spreading libelous material, but Facebook should be exempt.
Whether or not Section 230 made sense in 1996, it clearly does not in era of Facebook. In effect it gives Facebook, and other Internet outlets, a special privilege that is not available to their broadcast or print competitors.
Of course, Zuckerberg will claim that it is not possible for Facebook to monitor the hundreds of millions of items that get posted every day. But the standard need not be that Facebook prevents libelous material from being posted. Rather, Facebook can be required to remove libelous material after it has been called to its attention. Furthermore, since Facebook’s system allows it to know exactly who has opened a post, it can be required to send a correction to anyone who originally received the libelous material.
Zuckerberg has also argued that they cannot be responsible for preventing false material from being spread through Facebook because they shouldn’t be in the position of determining what is true. Determining truth may seem hard for Zuckerberg, but this is precisely what every traditional media outlet does all the time, both when deciding on editorial content and when making decisions about accepting ads. If Zuckerberg’s team is that much less competent than those at traditional media outlets they can look to hire competent people away from these other outlets.
There really is nothing terribly complicated about Facebook’s situation, nor any grand questions of freedom of speech and freedom of the press that don’t come up all the time with traditional media. The basic story is that Facebook is now gaming a provision of a quarter-century old law to pretend it is a common carrier when that is clearly not the case.
If Facebook wants to be treated like a common carrier, then it should become one. That would mean not profiting from ads and boosted posts. It would also mean not selling personal information from its users. If it wants to be a common carrier then it can simply allow people to post as they please and not try to profit from content or personal information.
However, this is obviously not Facebook in its current form. Facebook is no more a common carrier than any major media outlet. As such it has to be subject to the same rules as other media outlets. That will require much more spending to police its network for false and libelous information, which will mean that Facebook will be much less profitable and Mark Zuckerberg will be much less rich.
But that is Mr. Zuckerberg’s problem. We should not be in the position of begging Zuckerberg to do the right thing as the CEO of Facebook or hoping that a more socially responsible person takes over the company. The law must be adjusted to take away Facebook’s special status. It is a media outlet and it is long past time that it be treated like one.
(This post originally appeared on my Patreon page.) Last month George Soros had a New York Times column arguing that Mark Zuckerberg should not be running Facebook. (Does the NYT reserve space on its opinion page for billionaires?) The gist of Soros’ piece is that Zuckerberg has made a deal with Trump. He will allow all manner of outrageous lies to be spread on Facebook to benefit Trump’s re-election campaign. In exchange, Trump will defend Zuckerberg from efforts to regulate Facebook.
Soros is of course right. Zuckerberg has said that Facebook will not attempt to verify the accuracy of the political ads that it runs. This is a greenlight for any sleazebag to push the most outrageous claims that they want in order to further the election of their favored candidate.
This will almost certainly benefit Donald Trump’s re-election, since the one area where he can legitimately take credit is in pushing outlandish lies. No one has pushed more lies more effectively than Donald Trump. The free rein promised by Zuckerberg is a re-election campaign contribution of enormous value.
While Soros is right on the substance of the issue, he is wrong to focus on the personality of Mark Zuckerberg. It would be good if we had a responsible forward-thinking person, who cared about the future of democracy, running Facebook, but that is not the normal course of things in a capitalist economy.
Businesses are run to make money. And, the bottom line here is that Facebook stands to make much more money spreading outlandish lies that help Trump’s campaign, than screening ads for their veracity. In this context, we should not be surprised that Facebook is taking the lie-spreading route. The problem is not that Zuckerberg is acting like a normal businessperson, the problem is that we made the lie-spreading route profitable.
In this respect it is worth pointing out that we don’t have the same problem with other media outlets. We don’t have to beg CNN, the New York Times, and other major news outlets to not take ads that they know to be false. They won’t do it, perhaps in part out of principle, but also because they could be sued for libel if they spread claims that were false and damaging.
For example, if I wanted to take out an ad asserting that Donald Trump is a rapist (which is likely true), most major news outlets would refuse to run it. Donald Trump could not only sue me for libel, he could also sue any news outlet that carried the ad. If I could not show that the claim was true, the news outlet that published the ad could be forced to pay substantial damages. For this reason, traditional news outlets do try to screen political ads for accuracy, and will not run an ad that they know to be false.
Facebook does not feel the same need to protect against libel because a law passed by Congress exempts it from the same sort of liability faced by traditional media outlets. Section 230 of the 1996 Communications Decency Act, protects Internet intermediaries from the liability rules that apply to traditional media outlets.
The logic that was used to justify this provision is that Internet intermediaries should be treated the same way as common carriers, like a phone company or the mail service. A common carrier does not have control over the content it carries, nor does it profit from specific content, except insofar as it increases demand for its service.
This was arguably an accurate description of Internet intermediaries in the early years of the web. For example, we would not have expected AOL to be responsible for whatever people chose to post in its chatrooms. But the web in general, and Facebook in particular, have evolved hugely in the years since Section 230 was put into law.
Facebook has complete control over content. It allows people to pay to have their posts sent to as many people as they choose. It allows them to target the recipients, based on location, age, education, gender, and any number of other characteristics. It is very hard to see how an outlet like CNN or the NYT can be held responsible for spreading libelous material, but Facebook should be exempt.
Whether or not Section 230 made sense in 1996, it clearly does not in era of Facebook. In effect it gives Facebook, and other Internet outlets, a special privilege that is not available to their broadcast or print competitors.
Of course, Zuckerberg will claim that it is not possible for Facebook to monitor the hundreds of millions of items that get posted every day. But the standard need not be that Facebook prevents libelous material from being posted. Rather, Facebook can be required to remove libelous material after it has been called to its attention. Furthermore, since Facebook’s system allows it to know exactly who has opened a post, it can be required to send a correction to anyone who originally received the libelous material.
Zuckerberg has also argued that they cannot be responsible for preventing false material from being spread through Facebook because they shouldn’t be in the position of determining what is true. Determining truth may seem hard for Zuckerberg, but this is precisely what every traditional media outlet does all the time, both when deciding on editorial content and when making decisions about accepting ads. If Zuckerberg’s team is that much less competent than those at traditional media outlets they can look to hire competent people away from these other outlets.
There really is nothing terribly complicated about Facebook’s situation, nor any grand questions of freedom of speech and freedom of the press that don’t come up all the time with traditional media. The basic story is that Facebook is now gaming a provision of a quarter-century old law to pretend it is a common carrier when that is clearly not the case.
If Facebook wants to be treated like a common carrier, then it should become one. That would mean not profiting from ads and boosted posts. It would also mean not selling personal information from its users. If it wants to be a common carrier then it can simply allow people to post as they please and not try to profit from content or personal information.
However, this is obviously not Facebook in its current form. Facebook is no more a common carrier than any major media outlet. As such it has to be subject to the same rules as other media outlets. That will require much more spending to police its network for false and libelous information, which will mean that Facebook will be much less profitable and Mark Zuckerberg will be much less rich.
But that is Mr. Zuckerberg’s problem. We should not be in the position of begging Zuckerberg to do the right thing as the CEO of Facebook or hoping that a more socially responsible person takes over the company. The law must be adjusted to take away Facebook’s special status. It is a media outlet and it is long past time that it be treated like one.
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Perhaps 2016 was too far back, but those of us old enough to remember recall Donald Trump making the trade deficit a huge campaign issue. He railed about how the United States was giving away so much money to China, Mexico, and other countries with whom we had trade deficits. He promised that this would end when he was in the White House.
For some reason, the issue of the trade deficit did not enter the Washington Post’s assessment of the extent to which Trump has followed through on his pledge to build “Fortress America.” The piece notes the reduction in immigration, fewer grants of asylum, and progress on building the wall on the border with Mexico, but it makes no mention of trade.
If it had talked about the trade the picture would not look very good for Trump. The trade deficit increased from $518.8 billion in 2016 to $632 billion in 2019. By this measure, Trump seems to be going in the wrong direction.
Even if we look at the trade deficit as a share of GDP, it is still going the wrong way under Trump. It was 2.8 percent of GDP in 2016 compared to 2.9 percent in 2019, after reaching 3.1 percent in 2018.
It is not clear why the trade deficit didn’t get included in the Washington Post’s report card on this topic, but if it did, they would have to give Trump a failing grade by his own standards.
Perhaps 2016 was too far back, but those of us old enough to remember recall Donald Trump making the trade deficit a huge campaign issue. He railed about how the United States was giving away so much money to China, Mexico, and other countries with whom we had trade deficits. He promised that this would end when he was in the White House.
For some reason, the issue of the trade deficit did not enter the Washington Post’s assessment of the extent to which Trump has followed through on his pledge to build “Fortress America.” The piece notes the reduction in immigration, fewer grants of asylum, and progress on building the wall on the border with Mexico, but it makes no mention of trade.
If it had talked about the trade the picture would not look very good for Trump. The trade deficit increased from $518.8 billion in 2016 to $632 billion in 2019. By this measure, Trump seems to be going in the wrong direction.
Even if we look at the trade deficit as a share of GDP, it is still going the wrong way under Trump. It was 2.8 percent of GDP in 2016 compared to 2.9 percent in 2019, after reaching 3.1 percent in 2018.
It is not clear why the trade deficit didn’t get included in the Washington Post’s report card on this topic, but if it did, they would have to give Trump a failing grade by his own standards.
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It is often said that intellectuals have a hard time dealing with new ideas. This is perhaps nowhere better demonstrated with the fixation with patent monopolies as the primary mechanism for financing the development of new drugs.
Bloomberg gave us a beautiful example of this narrow mindedness with a column from Max Nisen on the possibility that China may require the compulsory licensing of a patent on a drug developed by Gilead, in order to produce a treatment for the Coronavirus. A compulsory license means that sacrificing the monopoly Gilead had expected, which means it will only get a small fraction of the revenue it might have otherwise anticipated. Nisen is concerned that this lost revenue will reduce expected profit in the future, meaning that companies like Gilead would have much less incentive in developing cures for epidemics like the Coronavirus.
While drug companies do operate to make a profit, the part of the story that Nisen misses is that the profit does not have to be gained through patent monopolies. Suppose that the U.S. and other governments put up research funding, which private corporations like Gilead could bid on based on their expertise and track record. In this case, a condition of the research is that all patents would be in the public domain (the companies were already paid for their work) and all results would be fully public as soon as practical.
If anyone was seriously concerned about combating epidemics like the Coronavirus, this would seem to be the best route to go. We should want researchers all around the world to be sharing results and in other ways cooperating to solve a common problem. Advanced funding would encourage this sort of cooperation as opposed to the patent system, which encourages researchers to squirrel away findings so as not to give an edge to competitors.
That fact, and the other benefits should be obvious to anyone who writes on this issue, but as we know, intellectuals have a hard time dealing with new ideas.
It is often said that intellectuals have a hard time dealing with new ideas. This is perhaps nowhere better demonstrated with the fixation with patent monopolies as the primary mechanism for financing the development of new drugs.
Bloomberg gave us a beautiful example of this narrow mindedness with a column from Max Nisen on the possibility that China may require the compulsory licensing of a patent on a drug developed by Gilead, in order to produce a treatment for the Coronavirus. A compulsory license means that sacrificing the monopoly Gilead had expected, which means it will only get a small fraction of the revenue it might have otherwise anticipated. Nisen is concerned that this lost revenue will reduce expected profit in the future, meaning that companies like Gilead would have much less incentive in developing cures for epidemics like the Coronavirus.
While drug companies do operate to make a profit, the part of the story that Nisen misses is that the profit does not have to be gained through patent monopolies. Suppose that the U.S. and other governments put up research funding, which private corporations like Gilead could bid on based on their expertise and track record. In this case, a condition of the research is that all patents would be in the public domain (the companies were already paid for their work) and all results would be fully public as soon as practical.
If anyone was seriously concerned about combating epidemics like the Coronavirus, this would seem to be the best route to go. We should want researchers all around the world to be sharing results and in other ways cooperating to solve a common problem. Advanced funding would encourage this sort of cooperation as opposed to the patent system, which encourages researchers to squirrel away findings so as not to give an edge to competitors.
That fact, and the other benefits should be obvious to anyone who writes on this issue, but as we know, intellectuals have a hard time dealing with new ideas.
Read More Leer más Join the discussion Participa en la discusión
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It is popular for people, especially economist-type people, to claim that technology has been a major driver of the increase in inequality over the last four decades. This view is very convenient for those on the winning side of the inequality divide, since it implies that the growth in inequality was largely an organic process independent of government policy. Inequality might be an unfortunate outcome, but who would be opposed to the advance of technology?
However convenient the technology driving inequality story might be, it falls down on even the most simple examination of its logic. To take an example that has often been used, there is a concern that displacing workers with robots will lead to a transfer of income from workers to the people who own the robots.
While this comment is often treated as presenting the basic problem created by technology, in fact it does the exact opposite. “Owning” the robot is not a technical relationship, it is a legal one, and therefore one that depends on our laws.
To be more concrete, the income from owning a robot is not the result of owning the physical robot. Robots will generally be relatively cheap to manufacture. So people will not be deriving large incomes from owning the steel and other components of the robot. The reason some people might get very rich from owning robots is because they own patents and copyrights that are needed for the making of the robots. Without these patent and copyright monopolies, robots would be cheap, like washing machines, and there would be no large-scale upward redistribution associated with them.
A World Without Patent and Copyright Monopolies
If it is not already obvious, patent and copyright monopolies are instruments of public policy, not acts of god. We can make them stronger and longer if we want, or shorter and weaker, or not have them at all. The treatment of these monopolies in the constitution is a very good starting point for a clear understanding of the issues.
Patents and copyrights appear as one of the specific powers granted to Congress (Article I, Section 8, Clause 8). The clause states that Congress has the power:
“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”
Note that this is explicitly a power granted to Congress that it can either use or not use, like the power to tax or the power to declare war. Patents and copyrights are not guaranteed as individual rights, like the right to free speech or religion.
Patents and copyrights are also explicitly tied to the public purpose of promoting “the progress of science and the useful arts.” There is 180 degrees at odds with the idea that a person has an inherent right to get a patent or copyright.
Anyhow, let’s imagine that Congress chooses to eliminate patent and copyright monopolies tomorrow. But, we still have all the technologies that exist today, such as computers, smartphones, artificial intelligence and the rest. In this world, there would likely be little demand for people with skills as software engineers, bio-technicians, or skills in other STEM-related areas that are highly valued in the current economy. (We’ll assume no government funded research at the moment.)
After all, why would a drug company pay large amounts of money to people to develop new drugs if the drugs can be copied and sold by competitors from the day they enter the market? The same would be true of software developers, makers of medical equipment, computer manufacturers, smartphone companies, and any other product where the cost of research and development was a substantial portion of the price of the product.
The ending of patent and copyright protections would unambiguously send demand for these highly-skilled people through the floor. If we believe in markets, then the plunge in demand should also send the wages of people with college and advanced degrees in science, engineering, and other STEM areas through the floor.
In the same vein, the real wages for people not employed in these sectors should jump. If there are no patents or related protections on prescription drugs, instead of spending close to $500 billion this year, we would likely be spending less than $100 billion. Even the most expensive drugs would likely only sell for hundreds of dollars for a year’s prescription. The savings of $400 billion annually, would come to close to $3,000 per family. We would likely save another $100 to $150 billion a year (roughly, another $1,000 per family) on medical equipment, such as kidney dialysis machines, MRIs, and all sorts of other medical equipment which would now be cheap.
There would be a similar story with items like smart phones and computers. The newest iPhone may sell for $100 or less. The same would be true of high end computers that might sell for well over $1,000 today, due to patent and copyright protections. And, of course all of the television shows, movies, video games, and other copyrighted material, for which people now pay considerable sums, would be available at no cost.
These savings would hugely increase the real wage of workers without highly specialized skills in the STEM-related areas. We would likely be seeing a story in which typical workers were seeing the benefits of the economy’s gains in productivity, as had been true up until 1979. In this world, we would not have to worry about income going from workers to the people who owned the robots, since there would not be especially large returns to the people who owned the robots, just as the makers of washing machines are not making especially large profits.
The complete elimination of patents and copyrights is of course an extreme scenario, but it is a possible policy option. If we did choose this policy option, we would have a much more equal distribution of income, in spite of having the same technology. In short, the fact that there was a huge increase in inequality associated with the development of technology over the last four decades was the result of policy choices, not the technology.
Policy Choices on Promoting Innovation and Creative Work
If we acknowledge the extreme case, where we literally have no patent or copyright protection, then we have to recognize that there is nothing inherent in our technology that would cause inequality. It is entirely our rules on technology that can cause inequality to increase.
Basically, the strength and length of patent and copyright protections, and other forms of support for innovation and creative work can be thought of as being like a faucet, that we can turn higher or lower. As a practical matter, we have chosen to turn the faucet much higher in the last four decades.
We have extended the length of both patent and copyright protection repeatedly during this period. Incredibly, we have even extended the length of copyright protection retroactively, as though it makes sense to give someone incentives for actions long in the past.
We have also expanded the scope for both patents and copyrights. In the case of patents, we have allowed these monopolies to apply to new areas, such as life forms, software, and business methods. Copyrights were also applied to the Internet.
In addition, we attached very harsh punitive damages to copyright violations that can exceed the actual damages by many orders of magnitude. This is hugely important for their enforcement. For example, the royalties for an individual song run well under 1 cent per play. This means that even someone who was engaged in fairly large-scale copying, say transferring 10,000 copies, would be liable for actual damages of less than $100. No one would bother to pursue a lawsuit where they stand to gain less than $100, if they win.
However, the law allows for punitive damages that could reach into the tens of thousands of dollars in such cases. Whether or not this is good policy can be debated, but the fact that the harsh punitive damages associated with copyright violations is policy, is not debatable. This policy provides support for a wide range of industries, including movies and television, newspapers, and video games, in addition to recorded music.
Technology Policy, not Technology Creates Inequality
It will be a huge step forward when we can get economists and others involved in debates on inequality that it is our policy on technology that drives inequality, not the technology itself. That would both get rid of the strawman argument, that the losers in the modern economy somehow failed to adjust to technology, and also open the door to a more serious discussion of technology policy.
As it is, the changes in technology policy have largely taken place in dark corners far out of view of the public, even though the amount of money at stake swamps the amount at issue with contentious programs like food stamps and TANF. There should be serious public debate about both how strong we want patent and copyright protections to be and also whether they are always the best way to promote innovation and creative work, as opposed to alternatives like direct public funding (see Rigged, chapter 5 [it’s free].)
And, an important part of that debate should be the impact of these protections on inequality. It is not clear that we do have to make any sacrifices in the rate of progress of technology to lessen inequality, but it would be reasonable to ask if such sacrifices are worth making. However, raising such questions is not even possible until we talk about intellectual property in an honest way, something that has not happened to date in public policy debates.
It is popular for people, especially economist-type people, to claim that technology has been a major driver of the increase in inequality over the last four decades. This view is very convenient for those on the winning side of the inequality divide, since it implies that the growth in inequality was largely an organic process independent of government policy. Inequality might be an unfortunate outcome, but who would be opposed to the advance of technology?
However convenient the technology driving inequality story might be, it falls down on even the most simple examination of its logic. To take an example that has often been used, there is a concern that displacing workers with robots will lead to a transfer of income from workers to the people who own the robots.
While this comment is often treated as presenting the basic problem created by technology, in fact it does the exact opposite. “Owning” the robot is not a technical relationship, it is a legal one, and therefore one that depends on our laws.
To be more concrete, the income from owning a robot is not the result of owning the physical robot. Robots will generally be relatively cheap to manufacture. So people will not be deriving large incomes from owning the steel and other components of the robot. The reason some people might get very rich from owning robots is because they own patents and copyrights that are needed for the making of the robots. Without these patent and copyright monopolies, robots would be cheap, like washing machines, and there would be no large-scale upward redistribution associated with them.
A World Without Patent and Copyright Monopolies
If it is not already obvious, patent and copyright monopolies are instruments of public policy, not acts of god. We can make them stronger and longer if we want, or shorter and weaker, or not have them at all. The treatment of these monopolies in the constitution is a very good starting point for a clear understanding of the issues.
Patents and copyrights appear as one of the specific powers granted to Congress (Article I, Section 8, Clause 8). The clause states that Congress has the power:
“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”
Note that this is explicitly a power granted to Congress that it can either use or not use, like the power to tax or the power to declare war. Patents and copyrights are not guaranteed as individual rights, like the right to free speech or religion.
Patents and copyrights are also explicitly tied to the public purpose of promoting “the progress of science and the useful arts.” There is 180 degrees at odds with the idea that a person has an inherent right to get a patent or copyright.
Anyhow, let’s imagine that Congress chooses to eliminate patent and copyright monopolies tomorrow. But, we still have all the technologies that exist today, such as computers, smartphones, artificial intelligence and the rest. In this world, there would likely be little demand for people with skills as software engineers, bio-technicians, or skills in other STEM-related areas that are highly valued in the current economy. (We’ll assume no government funded research at the moment.)
After all, why would a drug company pay large amounts of money to people to develop new drugs if the drugs can be copied and sold by competitors from the day they enter the market? The same would be true of software developers, makers of medical equipment, computer manufacturers, smartphone companies, and any other product where the cost of research and development was a substantial portion of the price of the product.
The ending of patent and copyright protections would unambiguously send demand for these highly-skilled people through the floor. If we believe in markets, then the plunge in demand should also send the wages of people with college and advanced degrees in science, engineering, and other STEM areas through the floor.
In the same vein, the real wages for people not employed in these sectors should jump. If there are no patents or related protections on prescription drugs, instead of spending close to $500 billion this year, we would likely be spending less than $100 billion. Even the most expensive drugs would likely only sell for hundreds of dollars for a year’s prescription. The savings of $400 billion annually, would come to close to $3,000 per family. We would likely save another $100 to $150 billion a year (roughly, another $1,000 per family) on medical equipment, such as kidney dialysis machines, MRIs, and all sorts of other medical equipment which would now be cheap.
There would be a similar story with items like smart phones and computers. The newest iPhone may sell for $100 or less. The same would be true of high end computers that might sell for well over $1,000 today, due to patent and copyright protections. And, of course all of the television shows, movies, video games, and other copyrighted material, for which people now pay considerable sums, would be available at no cost.
These savings would hugely increase the real wage of workers without highly specialized skills in the STEM-related areas. We would likely be seeing a story in which typical workers were seeing the benefits of the economy’s gains in productivity, as had been true up until 1979. In this world, we would not have to worry about income going from workers to the people who owned the robots, since there would not be especially large returns to the people who owned the robots, just as the makers of washing machines are not making especially large profits.
The complete elimination of patents and copyrights is of course an extreme scenario, but it is a possible policy option. If we did choose this policy option, we would have a much more equal distribution of income, in spite of having the same technology. In short, the fact that there was a huge increase in inequality associated with the development of technology over the last four decades was the result of policy choices, not the technology.
Policy Choices on Promoting Innovation and Creative Work
If we acknowledge the extreme case, where we literally have no patent or copyright protection, then we have to recognize that there is nothing inherent in our technology that would cause inequality. It is entirely our rules on technology that can cause inequality to increase.
Basically, the strength and length of patent and copyright protections, and other forms of support for innovation and creative work can be thought of as being like a faucet, that we can turn higher or lower. As a practical matter, we have chosen to turn the faucet much higher in the last four decades.
We have extended the length of both patent and copyright protection repeatedly during this period. Incredibly, we have even extended the length of copyright protection retroactively, as though it makes sense to give someone incentives for actions long in the past.
We have also expanded the scope for both patents and copyrights. In the case of patents, we have allowed these monopolies to apply to new areas, such as life forms, software, and business methods. Copyrights were also applied to the Internet.
In addition, we attached very harsh punitive damages to copyright violations that can exceed the actual damages by many orders of magnitude. This is hugely important for their enforcement. For example, the royalties for an individual song run well under 1 cent per play. This means that even someone who was engaged in fairly large-scale copying, say transferring 10,000 copies, would be liable for actual damages of less than $100. No one would bother to pursue a lawsuit where they stand to gain less than $100, if they win.
However, the law allows for punitive damages that could reach into the tens of thousands of dollars in such cases. Whether or not this is good policy can be debated, but the fact that the harsh punitive damages associated with copyright violations is policy, is not debatable. This policy provides support for a wide range of industries, including movies and television, newspapers, and video games, in addition to recorded music.
Technology Policy, not Technology Creates Inequality
It will be a huge step forward when we can get economists and others involved in debates on inequality that it is our policy on technology that drives inequality, not the technology itself. That would both get rid of the strawman argument, that the losers in the modern economy somehow failed to adjust to technology, and also open the door to a more serious discussion of technology policy.
As it is, the changes in technology policy have largely taken place in dark corners far out of view of the public, even though the amount of money at stake swamps the amount at issue with contentious programs like food stamps and TANF. There should be serious public debate about both how strong we want patent and copyright protections to be and also whether they are always the best way to promote innovation and creative work, as opposed to alternatives like direct public funding (see Rigged, chapter 5 [it’s free].)
And, an important part of that debate should be the impact of these protections on inequality. It is not clear that we do have to make any sacrifices in the rate of progress of technology to lessen inequality, but it would be reasonable to ask if such sacrifices are worth making. However, raising such questions is not even possible until we talk about intellectual property in an honest way, something that has not happened to date in public policy debates.
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
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