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.

Those Quaint Corporate Scandals in Japan

I was struck by a New York Times article on the disruptions within the corporate hierarchy at Nissan, the huge Japanese automaker. The article begins:

“An outside law firm investigating problems at Nissan, the troubled Japanese automaker, this summer discovered some potentially explosive information.

“Hari Nada, a powerful Nissan insider who was behind the ouster last year of Nissan’s chairman, Carlos Ghosn, over compensation issues, had been improperly overpaid himself, the firm found. A second insider involved in the corporate coup was responsible, the firm said, and had briefed Mr. Nada on what he had done.”

Reading on we discover:

“Mr. Nada, the head of Nissan’s legal department and security office, had in 2017 received about $280,000 in ‘unjust enrichment,’ the firm found.”

It also turns out that Hiroto Saikawa, the successor to Ghosn as CEO, had gotten $440,000 in compensation to which he was not entitled.

It is hard not to be struck by the small size of the payments that form the basis of this scandal. To be clear, this is real money, and in any case, top executives should not be stealing from the companies they manage.

But for comparison, consider the case of John Stumpf, the CEO of Wells Fargo. Mr. Stumpf was at the center of a fake account scandal where the bank created millions of fake accounts, presumably as part of an effort to boost its stock price. In spite of being the person overseeing this massive scandal, Stumpf walked away with $130 million, an amount that is almost 300 times the size of the improper payments that got Mr. Saikawa fired and more than 400 times the payments to Mr. Nada.

Clearly there are some differences between the United States and Japan on the accountability of CEOs and top management. 

 

I was struck by a New York Times article on the disruptions within the corporate hierarchy at Nissan, the huge Japanese automaker. The article begins:

“An outside law firm investigating problems at Nissan, the troubled Japanese automaker, this summer discovered some potentially explosive information.

“Hari Nada, a powerful Nissan insider who was behind the ouster last year of Nissan’s chairman, Carlos Ghosn, over compensation issues, had been improperly overpaid himself, the firm found. A second insider involved in the corporate coup was responsible, the firm said, and had briefed Mr. Nada on what he had done.”

Reading on we discover:

“Mr. Nada, the head of Nissan’s legal department and security office, had in 2017 received about $280,000 in ‘unjust enrichment,’ the firm found.”

It also turns out that Hiroto Saikawa, the successor to Ghosn as CEO, had gotten $440,000 in compensation to which he was not entitled.

It is hard not to be struck by the small size of the payments that form the basis of this scandal. To be clear, this is real money, and in any case, top executives should not be stealing from the companies they manage.

But for comparison, consider the case of John Stumpf, the CEO of Wells Fargo. Mr. Stumpf was at the center of a fake account scandal where the bank created millions of fake accounts, presumably as part of an effort to boost its stock price. In spite of being the person overseeing this massive scandal, Stumpf walked away with $130 million, an amount that is almost 300 times the size of the improper payments that got Mr. Saikawa fired and more than 400 times the payments to Mr. Nada.

Clearly there are some differences between the United States and Japan on the accountability of CEOs and top management. 

 

The NYT had a piece on U.S. Internet regulations, and efforts to apply them to other countries, that may have left some readers confused. The piece focused on Section 230 of the Communications Decency Act, which protects Internet intermediaries from many of the liabilities faced by conventional publishers.

Perhaps the most important one of these liabilities is exposure to libel law. In the case of standard publishers, if a publisher helps to spread a third party’s libelous claim, then they can be sued for libel. For example, if Rudy Giuliani writes a column in the NYT saying that Joe Biden killed his neighbor, it can be held responsible if Biden presents it with clear evidence that he didn’t kill his neighbor and it makes no effort to correct the libelous information.

By contrast, under Section 230, if Giuliani makes and spreads this claim through Facebook, Biden has no ability to sue Mark Zuckerberg, even if he introduces Zuckerberg to his still living neighbor. It is not clear why an Internet intermediary should enjoy immunity for spreading libelous claims that neither a print nor broadcast outlet have.

The NYT had a piece on U.S. Internet regulations, and efforts to apply them to other countries, that may have left some readers confused. The piece focused on Section 230 of the Communications Decency Act, which protects Internet intermediaries from many of the liabilities faced by conventional publishers.

Perhaps the most important one of these liabilities is exposure to libel law. In the case of standard publishers, if a publisher helps to spread a third party’s libelous claim, then they can be sued for libel. For example, if Rudy Giuliani writes a column in the NYT saying that Joe Biden killed his neighbor, it can be held responsible if Biden presents it with clear evidence that he didn’t kill his neighbor and it makes no effort to correct the libelous information.

By contrast, under Section 230, if Giuliani makes and spreads this claim through Facebook, Biden has no ability to sue Mark Zuckerberg, even if he introduces Zuckerberg to his still living neighbor. It is not clear why an Internet intermediary should enjoy immunity for spreading libelous claims that neither a print nor broadcast outlet have.

Donald Trump’s Trade War: Report from the Front

Donald Trump is bravely carrying on a trade war, not just with the bad guys with China, but with longtime allies like Canada and the European Union. Incredibly, the media just don’t seem that interested in reporting on the ongoing progress.

Last week the Commerce Department released trade data for August, and it got almost no attention whatsoever. The report showed that the trade deficit increased modestly from $54.0 billion in July to $54.9 billion in August. This is virtually identical to the deficit from August of 2018, so comparing these two months year over year, at least the trade deficit is not expanding.

Looking at a slightly bigger picture, in 2016, the last year of the Obama administration, the trade deficit was $518.8 billion, or 2.8 percent of GDP. The trade deficit expanded in both 2017 and 2018, reaching $638.2 billion in 2018, or 3.1 percent of GDP. It looks to come in slightly higher in 2019, with the deficit averaging $648.3 billion in the first half of 2019.

There are many factors behind the rise in the trade deficit. Growth in the U.S. has been somewhat faster than in major trading partners like the EU and Japan. The dollar has also risen in value, although most of that rise pre-dates Trump. But putting these aside, if Trump’s goal was to bring the trade deficit closer to balance, he’s been going the wrong way in the first two and half years of his administration.

If we look at his major nemeses in the international arena, there are not many signs of Trumpian success. Starting with China, in the last year of the Obama administration, the trade deficit in goods with China was $346.8 billion.[1] This had increased to $419.6 billion last year. It looks like the trade deficit is coming down somewhat in 2019, with the deficit for the first eight months at $231.6 billion, compared to just over $260.0 billion last year. Nonetheless, we are still likely to end up with a higher deficit with China in 2019 than we had in the last year of the Obama administration.

It is also worth remembering that it is difficult to calculate bilateral trade deficits with rigor. Suppose that iPhones, which had previously been assembled in China, are instead assembled in Thailand. If we imported the iPhone from China, the full value of the iPhone would have been recorded as an import from China, even though the assembly may have counted for less than 10 percent of the value added.

When the assembly shifts to Thailand, the reduction in our reported imports from China is equal to the full cost of the iPhones that we previously imported from China. The actual hit to China is just the small share of the value-added that is attributable to assembly.

If Trump’s battle with China is not going well, he seems to be doing even worse with other trade combatants. The trade deficit with Mexico was $63.3 billion in 2016. It hit $80.7 billion last year, and is virtually certain to come in even higher in 2019. The trade deficit with the European Union $146.7 billion in 2016. It had risen to $168.7 billion last year and is on a path to come in $10-$15 billion higher in 2019. The deficit with Canada rose from $11 billion in 2016 to $19.1 billion last year. It is likely to be roughly $1 billion higher in 2019.

In short, the trade war doesn’t look like it is going well for Donald Trump, at least by his chosen measure of success. If trade deficits mean other countries are ripping us off, then they are ripping us off considerably more under Trump than when Barack Obama was in the White House.  

 

[1] I’m just using goods, because these data are most readily available.

Donald Trump is bravely carrying on a trade war, not just with the bad guys with China, but with longtime allies like Canada and the European Union. Incredibly, the media just don’t seem that interested in reporting on the ongoing progress.

Last week the Commerce Department released trade data for August, and it got almost no attention whatsoever. The report showed that the trade deficit increased modestly from $54.0 billion in July to $54.9 billion in August. This is virtually identical to the deficit from August of 2018, so comparing these two months year over year, at least the trade deficit is not expanding.

Looking at a slightly bigger picture, in 2016, the last year of the Obama administration, the trade deficit was $518.8 billion, or 2.8 percent of GDP. The trade deficit expanded in both 2017 and 2018, reaching $638.2 billion in 2018, or 3.1 percent of GDP. It looks to come in slightly higher in 2019, with the deficit averaging $648.3 billion in the first half of 2019.

There are many factors behind the rise in the trade deficit. Growth in the U.S. has been somewhat faster than in major trading partners like the EU and Japan. The dollar has also risen in value, although most of that rise pre-dates Trump. But putting these aside, if Trump’s goal was to bring the trade deficit closer to balance, he’s been going the wrong way in the first two and half years of his administration.

If we look at his major nemeses in the international arena, there are not many signs of Trumpian success. Starting with China, in the last year of the Obama administration, the trade deficit in goods with China was $346.8 billion.[1] This had increased to $419.6 billion last year. It looks like the trade deficit is coming down somewhat in 2019, with the deficit for the first eight months at $231.6 billion, compared to just over $260.0 billion last year. Nonetheless, we are still likely to end up with a higher deficit with China in 2019 than we had in the last year of the Obama administration.

It is also worth remembering that it is difficult to calculate bilateral trade deficits with rigor. Suppose that iPhones, which had previously been assembled in China, are instead assembled in Thailand. If we imported the iPhone from China, the full value of the iPhone would have been recorded as an import from China, even though the assembly may have counted for less than 10 percent of the value added.

When the assembly shifts to Thailand, the reduction in our reported imports from China is equal to the full cost of the iPhones that we previously imported from China. The actual hit to China is just the small share of the value-added that is attributable to assembly.

If Trump’s battle with China is not going well, he seems to be doing even worse with other trade combatants. The trade deficit with Mexico was $63.3 billion in 2016. It hit $80.7 billion last year, and is virtually certain to come in even higher in 2019. The trade deficit with the European Union $146.7 billion in 2016. It had risen to $168.7 billion last year and is on a path to come in $10-$15 billion higher in 2019. The deficit with Canada rose from $11 billion in 2016 to $19.1 billion last year. It is likely to be roughly $1 billion higher in 2019.

In short, the trade war doesn’t look like it is going well for Donald Trump, at least by his chosen measure of success. If trade deficits mean other countries are ripping us off, then they are ripping us off considerably more under Trump than when Barack Obama was in the White House.  

 

[1] I’m just using goods, because these data are most readily available.

The Wall Street Journal ran a lengthy piece on how bond rating agencies are again giving inflated ratings, in this case to collateralized loan obligations that include tranches of a variety of bonds and loans. Inflated ratings were a major problem in the housing bubble years, with the major rating agencies giving investment-grade ratings to mortgage-backed securities that were filled with subprime mortgages.

The piece notes the basic incentive problem that the issuer pays the rating agency. This gives rating agencies an incentive to give higher ratings as a way to attract business.

There actually is a simple solution to this incentive problem: have a third party pick the rating agency. Senator Al Franken proposed an amendment to the Dodd-Frank bill that would have had the Securities and Exchange Commission (SEC) pick rating agencies rather than issuers. The amendment passed the Senate with 65 votes, getting strong bi-partisan support.

Under this provision, if JP Morgan wanted to have a new issue rated, instead of calling Moody’s or Standard and Poor, it would call the SEC, which would then decide which agency should do the rating. This means that rating agencies would have no incentive to inflate ratings to gain customers.

In spite of the strong bipartisan support in the Senate, then-Treasury Secretary Timothy Geithner did not want the provision to be included in the bill. As he boasts in his autobiography, he arranged to have it killed in the House-Senate conference. 

So, when we see the problem of inflated bond ratings re-emerging, we should all be saying “Thank you, Secretary Geithner.”

The Wall Street Journal ran a lengthy piece on how bond rating agencies are again giving inflated ratings, in this case to collateralized loan obligations that include tranches of a variety of bonds and loans. Inflated ratings were a major problem in the housing bubble years, with the major rating agencies giving investment-grade ratings to mortgage-backed securities that were filled with subprime mortgages.

The piece notes the basic incentive problem that the issuer pays the rating agency. This gives rating agencies an incentive to give higher ratings as a way to attract business.

There actually is a simple solution to this incentive problem: have a third party pick the rating agency. Senator Al Franken proposed an amendment to the Dodd-Frank bill that would have had the Securities and Exchange Commission (SEC) pick rating agencies rather than issuers. The amendment passed the Senate with 65 votes, getting strong bi-partisan support.

Under this provision, if JP Morgan wanted to have a new issue rated, instead of calling Moody’s or Standard and Poor, it would call the SEC, which would then decide which agency should do the rating. This means that rating agencies would have no incentive to inflate ratings to gain customers.

In spite of the strong bipartisan support in the Senate, then-Treasury Secretary Timothy Geithner did not want the provision to be included in the bill. As he boasts in his autobiography, he arranged to have it killed in the House-Senate conference. 

So, when we see the problem of inflated bond ratings re-emerging, we should all be saying “Thank you, Secretary Geithner.”

The NYT neglected to mention this fact in this piece talking about Japan’s economy. While the piece noted that Japan’s debt to GDP ratio is close to 250 percent, the highest for any wealthy country, it didn’t point out that the debt service burden is virtually zero.

In fact, because much of Japan’s debt carries a negative nominal interest rate, the I.M.F. projects that its burden will actually be negative as of 2021. This means that people will on net be paying Japan to lend it money so that the debt is a source of revenue.

The NYT neglected to mention this fact in this piece talking about Japan’s economy. While the piece noted that Japan’s debt to GDP ratio is close to 250 percent, the highest for any wealthy country, it didn’t point out that the debt service burden is virtually zero.

In fact, because much of Japan’s debt carries a negative nominal interest rate, the I.M.F. projects that its burden will actually be negative as of 2021. This means that people will on net be paying Japan to lend it money so that the debt is a source of revenue.

This is an important point to mention in reference to Bernie Sanders’ plan to tax corporations with large gaps between CEO pay and the pay of an average worker. High CEO pay is not based on their contribution to corporate profits or returns to shareholders, rather it is a result of their ability to control the corporate boards who set their pay. 

This means that the most likely response of companies to a tax on excessive pay gaps between the average and the median worker is to find ways to game the system. For example, they can contract out to other companies the lower-paying work that brings down the average or median pay (it is not clear which would be the reference point from this piece). If shareholders (or workers) had more control of corporations, they would have a strong incentive for reducing CEO pay, since it is coming at the expense of corporate profit and/or the pay of the typical worker.

In this context is important to remember that the excessive pay of CEOs is not just a question of the individual CEO’s salary, it also leads to a bloated pay structure for top executives across the board. This excessive pay for top executives is typically a substantial share (around 10 percent) of corporate profits.

This is an important point to mention in reference to Bernie Sanders’ plan to tax corporations with large gaps between CEO pay and the pay of an average worker. High CEO pay is not based on their contribution to corporate profits or returns to shareholders, rather it is a result of their ability to control the corporate boards who set their pay. 

This means that the most likely response of companies to a tax on excessive pay gaps between the average and the median worker is to find ways to game the system. For example, they can contract out to other companies the lower-paying work that brings down the average or median pay (it is not clear which would be the reference point from this piece). If shareholders (or workers) had more control of corporations, they would have a strong incentive for reducing CEO pay, since it is coming at the expense of corporate profit and/or the pay of the typical worker.

In this context is important to remember that the excessive pay of CEOs is not just a question of the individual CEO’s salary, it also leads to a bloated pay structure for top executives across the board. This excessive pay for top executives is typically a substantial share (around 10 percent) of corporate profits.

The Washington Post seems more than a bit out of touch with reality in this piece on China’s celebration of the 70th anniversary of the Communist revolution there. The article tells readers:

“China is now the world’s second-largest economy and could overtake the United States for top spot as soon as next year.”

According to the I.M.F., China’s economy passed the United States to become the world’s largest in 2015 and is now more than 25 percent larger than the U.S. economy.

The piece also gets China’s per capita income wrong, putting it at $10,000 a year. The I.M.F puts it at just over $17,000 a year in 2011 dollars, which would translate into more than $19,000 a year in 2019 dollars. While it is still much poorer than the United States on a per capita basis, it is now near the top of the middle income countries.

The Washington Post seems more than a bit out of touch with reality in this piece on China’s celebration of the 70th anniversary of the Communist revolution there. The article tells readers:

“China is now the world’s second-largest economy and could overtake the United States for top spot as soon as next year.”

According to the I.M.F., China’s economy passed the United States to become the world’s largest in 2015 and is now more than 25 percent larger than the U.S. economy.

The piece also gets China’s per capita income wrong, putting it at $10,000 a year. The I.M.F puts it at just over $17,000 a year in 2011 dollars, which would translate into more than $19,000 a year in 2019 dollars. While it is still much poorer than the United States on a per capita basis, it is now near the top of the middle income countries.

The Solution to the Country’s Debt and Deficit Problem

For most people, the country’s national debt and annual deficit are not major concerns. However, for a substantial portion of the policy types who make, write, and talk about economic and budget policy, debt and deficits are really big deals. And, the fact that our budget deficit and debt are both large by historic standards, and growing rapidly, is an especially big deal.

The list of people in this category is lengthy. It starts with the Peter J. Peterson Foundation (which displays the debt in big numbers right on its home page) and the many groups funded by them. The most important is the Committee for a Responsible Federal Budget, which is virtually guaranteed prominent placement in stories on the budget by major news outlets.

The Washington Post (both its news and opinion sections) has a high standing in deficit hawk circles. House Speaker Nancy Pelosi and other members of the Democratic leadership have at least one foot in the deficit hawk camp. And, of course, Republicans are big deficit hawks when a Democrat is in the White House.

In order to make these deficit hawks happy, I have a proposal – we’ll call it the “Baker Budget Fix” – that can eliminate debts and deficits forever. It’s fun, simple, and can give us balanced budgets for all eternity.

The basic point is that the government can sell off all sorts of patent and copyright monopolies and collect massive amounts of revenue. Regular readers know that I am not a big fan of patents and copyrights, but since I’ve made little headway in getting these policies questioned in public debate, why not just embrace them? After all, since everyone who matters seems to be just fine with ever longer and stronger patent and copyright protection, let’s use them to raise a ton of money for the government and make the deficit hawks happy.

The basic logic of patents and copyrights is that they are an alternative mechanism to direct spending that the government uses to provide incentives for innovation and creative work. However, unlike direct spending, which adds to our deficit and debt, no one ever includes any measure of future patent and copyright rents in our deficit or debt figures. The value of these monopolies is effectively free money in the accounting of the deficit hawks.

So, since these monopolies are a free monopoly, let’s get more of it. Suppose the government were to auction all sorts of valuable patents. We can start with the wheel. That should be worth a good chunk of money. Whoever owns the patent on a wheel can force the auto industry, the bicycle industry, and even manufacturers of wheelbarrows and toy cars to pay a big licensing fee on every one of their products they sell.

But the wheel is just the beginning. We can auction off patents on fire, ice, even chicken soup. This is a way to raise an almost infinite amount of money for reducing the deficit and debt.

And, if we aren’t getting enough money from patent sales, the government can also auction off copyright monopolies. We can issue and sell copyrights on longstanding works, like the writings of Shakespeare and the bible. Or, we can even sell off copyrights on individual words. Think how much the copyright for “and” and “the” would be worth.

For those concerned about the constitutionality of these sorts of copyrights, since they would seem to infringe on free speech, the Supreme Court has already given a green light. In reference to a copyright law written to ensure that Mickey Mouse did not pass out of copyright protection, the Supreme Court ruled that it was fine to extend copyrights retroactively, giving more incentive for people to do creative work seventy five years ago.   

Sure, this proliferation of patents and copyrights is incredibly wasteful, but we know that people involved in policy debates don’t give a damn. After all, how many politicians, columnists, or reporters ever point out that the only reason that a life-saving cancer drug might cost $300,000 is that the government has given the company producing it a patent monopoly? That basic fact almost never appears in public discussions, nor is anyone so rude as to point out that the drug would likely just sell for a few hundred dollars in a free market.

The same story applies to medical equipment. The latest scanning equipment would likely just cost a couplof hundred dollars per use, if the manufacturer did not have a patent monopoly. The same story would apply to dialysis machines and a wide range of other currently costly medical equipment. The fact that patent monopolies cause a huge gap between price and production costs is simply not a part of the discussion.

Nor does anyone mention the perverse incentives created by these monopolies. Even as states across the country have pressed lawsuits against Purdue Pharma and other opioid manufacturers for lying about the addictiveness of their drugs, no one has pointed out that the incentive to lie was a direct result of the patent monopolies granted by the government. If these drugs were selling as generic drugs in a free market, Purdue Pharma and the rest would have had much less reason to mislead doctors about the safety and effectiveness of their drugs.

But again, this inevitable problem stemming from government granted patent monopolies for prescription drugs and medical equipment is altogether absent from public debate. Therefore, we should infer that the people in power are not concerned about it.

The basic story is that policy types have no interest in the inefficiency and corruption that results from patent and copyright monopolies. They don’t want to talk about these issues and will not allow their media outlets to be used for this purpose.

Since they are concerned about debt and deficits then this policy seems an obvious winner for them. After all, I’m proposing a sure fire way to eliminate the debt and deficits. The only cost is that we get some more waste and corruption. Since these issues don’t register on the deficit hawks’ radar screen, what is the down side?  

Okay, thanks to the folks who have followed the argument this far. Let me give the two punch lines, one very big, and the other much bigger.

The very big punch line is that the people making arguments about the debt and deficit don’t know what they are talking about. If we want to ask the question of whether the deficit is too large, we have to look at the state of the economy.

Is it over-stimulated to the point that we are seeing serious inflationary pressures? If that is the case, then the deficit is too large even if we are running a budget surplus. We need to reduce demand in the economy. Of course, we can do this through other channels than reducing the deficit, most obviously by having the Fed raise interest rates.

What about the burdens created by the debt? Yes, the debt does imply future interest payments, and this can divert resources from other uses. People who own bonds have more spending power as a result of their interest income.

However, there are three important qualifications.

1) If the economy would be operating below its capacity with a lower deficit, then the deficit is likely increasing the economy’s future potential through higher investment and keeping workers employed developing new skills. If the larger debt causes another 1.0 percent of GDP to go to  interest payments, but GDP is 3.0 percent higher than it would have been otherwise, then even the non-interest earners are better off as a result of the higher debt and deficit.

2) A large debt does not necessarily mean high interest payments. Interest as a share of GDP is considerably lower now than in the early and mid-1990s, even though the debt to GDP ratio is much higher today. The reason for the difference is that interest rates are much lower today. In spite of its enormous debt to GDP ratio (over 250 percent), the I.M.F. projects that Japan will have a negative interest burden in 2021. The reason is that much of its debt carries a negative nominal interest rate.  

3) If someone is discussing the interest burden of the debt, and they ignore the burden of patent and copyright rents, then they are not being serious. The latter form of government created burdens is far larger. Anyone who is genuinely concerned about how we burden ourselves in the future based on current and past actions must add in these rents. Otherwise, they are not making any sense.

The bigger punch line is that our debates on economic policy are tremendously confused. I suppose regular readers won’t be surprised to hear me say this, but it is truly incredible that massive allocations of resources through patent and copyright monopolies get virtually zero attention in policy debates. We have endless debates on relatively small tax and spending items, while changes to patent and copyright law, which have hugely larger economic effects, pass unnoticed. Oh well.

For most people, the country’s national debt and annual deficit are not major concerns. However, for a substantial portion of the policy types who make, write, and talk about economic and budget policy, debt and deficits are really big deals. And, the fact that our budget deficit and debt are both large by historic standards, and growing rapidly, is an especially big deal.

The list of people in this category is lengthy. It starts with the Peter J. Peterson Foundation (which displays the debt in big numbers right on its home page) and the many groups funded by them. The most important is the Committee for a Responsible Federal Budget, which is virtually guaranteed prominent placement in stories on the budget by major news outlets.

The Washington Post (both its news and opinion sections) has a high standing in deficit hawk circles. House Speaker Nancy Pelosi and other members of the Democratic leadership have at least one foot in the deficit hawk camp. And, of course, Republicans are big deficit hawks when a Democrat is in the White House.

In order to make these deficit hawks happy, I have a proposal – we’ll call it the “Baker Budget Fix” – that can eliminate debts and deficits forever. It’s fun, simple, and can give us balanced budgets for all eternity.

The basic point is that the government can sell off all sorts of patent and copyright monopolies and collect massive amounts of revenue. Regular readers know that I am not a big fan of patents and copyrights, but since I’ve made little headway in getting these policies questioned in public debate, why not just embrace them? After all, since everyone who matters seems to be just fine with ever longer and stronger patent and copyright protection, let’s use them to raise a ton of money for the government and make the deficit hawks happy.

The basic logic of patents and copyrights is that they are an alternative mechanism to direct spending that the government uses to provide incentives for innovation and creative work. However, unlike direct spending, which adds to our deficit and debt, no one ever includes any measure of future patent and copyright rents in our deficit or debt figures. The value of these monopolies is effectively free money in the accounting of the deficit hawks.

So, since these monopolies are a free monopoly, let’s get more of it. Suppose the government were to auction all sorts of valuable patents. We can start with the wheel. That should be worth a good chunk of money. Whoever owns the patent on a wheel can force the auto industry, the bicycle industry, and even manufacturers of wheelbarrows and toy cars to pay a big licensing fee on every one of their products they sell.

But the wheel is just the beginning. We can auction off patents on fire, ice, even chicken soup. This is a way to raise an almost infinite amount of money for reducing the deficit and debt.

And, if we aren’t getting enough money from patent sales, the government can also auction off copyright monopolies. We can issue and sell copyrights on longstanding works, like the writings of Shakespeare and the bible. Or, we can even sell off copyrights on individual words. Think how much the copyright for “and” and “the” would be worth.

For those concerned about the constitutionality of these sorts of copyrights, since they would seem to infringe on free speech, the Supreme Court has already given a green light. In reference to a copyright law written to ensure that Mickey Mouse did not pass out of copyright protection, the Supreme Court ruled that it was fine to extend copyrights retroactively, giving more incentive for people to do creative work seventy five years ago.   

Sure, this proliferation of patents and copyrights is incredibly wasteful, but we know that people involved in policy debates don’t give a damn. After all, how many politicians, columnists, or reporters ever point out that the only reason that a life-saving cancer drug might cost $300,000 is that the government has given the company producing it a patent monopoly? That basic fact almost never appears in public discussions, nor is anyone so rude as to point out that the drug would likely just sell for a few hundred dollars in a free market.

The same story applies to medical equipment. The latest scanning equipment would likely just cost a couplof hundred dollars per use, if the manufacturer did not have a patent monopoly. The same story would apply to dialysis machines and a wide range of other currently costly medical equipment. The fact that patent monopolies cause a huge gap between price and production costs is simply not a part of the discussion.

Nor does anyone mention the perverse incentives created by these monopolies. Even as states across the country have pressed lawsuits against Purdue Pharma and other opioid manufacturers for lying about the addictiveness of their drugs, no one has pointed out that the incentive to lie was a direct result of the patent monopolies granted by the government. If these drugs were selling as generic drugs in a free market, Purdue Pharma and the rest would have had much less reason to mislead doctors about the safety and effectiveness of their drugs.

But again, this inevitable problem stemming from government granted patent monopolies for prescription drugs and medical equipment is altogether absent from public debate. Therefore, we should infer that the people in power are not concerned about it.

The basic story is that policy types have no interest in the inefficiency and corruption that results from patent and copyright monopolies. They don’t want to talk about these issues and will not allow their media outlets to be used for this purpose.

Since they are concerned about debt and deficits then this policy seems an obvious winner for them. After all, I’m proposing a sure fire way to eliminate the debt and deficits. The only cost is that we get some more waste and corruption. Since these issues don’t register on the deficit hawks’ radar screen, what is the down side?  

Okay, thanks to the folks who have followed the argument this far. Let me give the two punch lines, one very big, and the other much bigger.

The very big punch line is that the people making arguments about the debt and deficit don’t know what they are talking about. If we want to ask the question of whether the deficit is too large, we have to look at the state of the economy.

Is it over-stimulated to the point that we are seeing serious inflationary pressures? If that is the case, then the deficit is too large even if we are running a budget surplus. We need to reduce demand in the economy. Of course, we can do this through other channels than reducing the deficit, most obviously by having the Fed raise interest rates.

What about the burdens created by the debt? Yes, the debt does imply future interest payments, and this can divert resources from other uses. People who own bonds have more spending power as a result of their interest income.

However, there are three important qualifications.

1) If the economy would be operating below its capacity with a lower deficit, then the deficit is likely increasing the economy’s future potential through higher investment and keeping workers employed developing new skills. If the larger debt causes another 1.0 percent of GDP to go to  interest payments, but GDP is 3.0 percent higher than it would have been otherwise, then even the non-interest earners are better off as a result of the higher debt and deficit.

2) A large debt does not necessarily mean high interest payments. Interest as a share of GDP is considerably lower now than in the early and mid-1990s, even though the debt to GDP ratio is much higher today. The reason for the difference is that interest rates are much lower today. In spite of its enormous debt to GDP ratio (over 250 percent), the I.M.F. projects that Japan will have a negative interest burden in 2021. The reason is that much of its debt carries a negative nominal interest rate.  

3) If someone is discussing the interest burden of the debt, and they ignore the burden of patent and copyright rents, then they are not being serious. The latter form of government created burdens is far larger. Anyone who is genuinely concerned about how we burden ourselves in the future based on current and past actions must add in these rents. Otherwise, they are not making any sense.

The bigger punch line is that our debates on economic policy are tremendously confused. I suppose regular readers won’t be surprised to hear me say this, but it is truly incredible that massive allocations of resources through patent and copyright monopolies get virtually zero attention in policy debates. We have endless debates on relatively small tax and spending items, while changes to patent and copyright law, which have hugely larger economic effects, pass unnoticed. Oh well.

Yes folks, the Trump administration is fighting hard to put America first. Its threat to pull the U.S. out of an international postal agreement will save the United States between $300 million and $500 million annually, according to the New York Times. For those folks who aren’t used to dealing with hundreds of millions of dollars, this comes to approximately 0.0025 percent of GDP.

According to the article, “Peter Navarro, President Trump’s trade adviser, said the decision was a ‘huge victory for millions of American workers and businesses.'”

Yes folks, the Trump administration is fighting hard to put America first. Its threat to pull the U.S. out of an international postal agreement will save the United States between $300 million and $500 million annually, according to the New York Times. For those folks who aren’t used to dealing with hundreds of millions of dollars, this comes to approximately 0.0025 percent of GDP.

According to the article, “Peter Navarro, President Trump’s trade adviser, said the decision was a ‘huge victory for millions of American workers and businesses.'”

Is There Any Lesser Authority Than Alan Greenspan?

That is undoubtedly the question that readers of Robert Samuelson’s column on negative interest rates are asking. At one point Samuelson tells readers:

“No less a figure than former Federal Reserve chairman Alan Greenspan has suggested that it’s just a matter of time before negative rates come to the United States.”

For folks too young or too old to remember, Alan Greenspan was chair of the Fed as the housing bubble grew to ever-larger dimensions. He insisted everything was just fine, in fact, he even co-authored several papers touting the fact that people were spending based on the housing equity created by the bubble. There is no one who deserves more blame for the Great Recession, the largest economic disaster since the Great Depression, than Alan Greenspan.

But apart from his selection of authority figures, there is a more basic problem with Samuelson’s piece: it doesn’t make any sense. We sort of get the idea that he doesn’t like negative interest rates, but it’s not really clear why. The confusion shows itself most clearly in the concluding paragraph:

“The larger issue here is barely discussed — the dependence of U.S. economic growth on constant doses of “stimulus,” whether bloated budget deficits, super-low interest rates or negative rates. Their waning effectiveness raises hard questions of whether the economy can achieve adequate growth on its own.”

Okay, for folks keeping score at home, the first question we should be asking when we look at the macroeconomy is whether the issue is too much demand or too little demand. For folks like Robert Samuelson, who constantly whine about budget deficits, the problem should be too much demand.

Their story is that budget deficits are creating too much demand in the economy, forcing the Fed to either raise interest rates, and thereby crowd out investment and slow productivity growth, or alternatively to allow the economy to become overheated and generate inflation. Clearly this story cannot describe the current economy, where inflation remains well below the Fed’s 2.0 percent target, even as interest rates remain at historically low levels.

The other story is too little demand, which seems to be the case now. This is sort of what Samuelson is getting at in his last paragraph, but the implication is that if the economy has too little demand then “bloated” budget deficits are not a problem. If budget deficits were smaller we would see less demand and less growth, and more unemployment. Again, we know that Robert Samuelson doesn’t like budget deficits (I don’t like chocolate ice cream), but that has nothing to do with the issue at hand.

It is also worth having some fun with his comment about the economy achieving adequate growth “on its own.” There is no “on its own,” which should be obvious to fans of economics everywhere.

Suppose the government didn’t grant patent and copyright monopolies, would we see the same amount of investment in research and development and intellectual products? Presumably, we would not. (Pharma and the others may exaggerate the incentive effect here, but it obviously is not zero.) Direct spending is one way the government directs economy activity and boosts spending, but it is not the only way. People writing about economics for major news outlets should know this. 

That is undoubtedly the question that readers of Robert Samuelson’s column on negative interest rates are asking. At one point Samuelson tells readers:

“No less a figure than former Federal Reserve chairman Alan Greenspan has suggested that it’s just a matter of time before negative rates come to the United States.”

For folks too young or too old to remember, Alan Greenspan was chair of the Fed as the housing bubble grew to ever-larger dimensions. He insisted everything was just fine, in fact, he even co-authored several papers touting the fact that people were spending based on the housing equity created by the bubble. There is no one who deserves more blame for the Great Recession, the largest economic disaster since the Great Depression, than Alan Greenspan.

But apart from his selection of authority figures, there is a more basic problem with Samuelson’s piece: it doesn’t make any sense. We sort of get the idea that he doesn’t like negative interest rates, but it’s not really clear why. The confusion shows itself most clearly in the concluding paragraph:

“The larger issue here is barely discussed — the dependence of U.S. economic growth on constant doses of “stimulus,” whether bloated budget deficits, super-low interest rates or negative rates. Their waning effectiveness raises hard questions of whether the economy can achieve adequate growth on its own.”

Okay, for folks keeping score at home, the first question we should be asking when we look at the macroeconomy is whether the issue is too much demand or too little demand. For folks like Robert Samuelson, who constantly whine about budget deficits, the problem should be too much demand.

Their story is that budget deficits are creating too much demand in the economy, forcing the Fed to either raise interest rates, and thereby crowd out investment and slow productivity growth, or alternatively to allow the economy to become overheated and generate inflation. Clearly this story cannot describe the current economy, where inflation remains well below the Fed’s 2.0 percent target, even as interest rates remain at historically low levels.

The other story is too little demand, which seems to be the case now. This is sort of what Samuelson is getting at in his last paragraph, but the implication is that if the economy has too little demand then “bloated” budget deficits are not a problem. If budget deficits were smaller we would see less demand and less growth, and more unemployment. Again, we know that Robert Samuelson doesn’t like budget deficits (I don’t like chocolate ice cream), but that has nothing to do with the issue at hand.

It is also worth having some fun with his comment about the economy achieving adequate growth “on its own.” There is no “on its own,” which should be obvious to fans of economics everywhere.

Suppose the government didn’t grant patent and copyright monopolies, would we see the same amount of investment in research and development and intellectual products? Presumably, we would not. (Pharma and the others may exaggerate the incentive effect here, but it obviously is not zero.) Direct spending is one way the government directs economy activity and boosts spending, but it is not the only way. People writing about economics for major news outlets should know this. 

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