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.

It is bizarre how reporters continually feel the need to tell us about politicians’ philosophies. Why on earth would they think that politicians are guided by any philosophy? Politicians get elected by getting the support of key constituencies, not by having wonderful philosophies. I would not think that is a seriously contested claim.

This is why everyone should be upset at a Washington Post article on the prospects for another big economic rescue package when it tells us:

“As some states move to reopen, a deep philosophical divide has emerged between the two parties about the proper role for the federal government in producing an economic recovery. Many Republicans say they should focus on creating the best conditions possible for people to go back to work. That would include steps such as limiting liability protections for businesses and reducing regulations, issues that a group of House Republicans discussed with Trump Friday at the White House, participants said. 

“Democrats, by contrast, believe they need to keep pumping money into the economy. House Speaker Nancy Pelosi (D-Calif.) is working to assemble another enormous relief bill with a price tag likely to top $2 trillion that she could bring up for a vote as soon as this coming week.”

Why on earth would anyone believe that this dispute has anything to do with philosophy? Republicans have the overwhelming support of business people. The proposal to exempt them from liability to workers and customers is an enormous gift to this powerful group of supporters. If a politician gives a big real estate tax break to a big contributor who is heavily invested in real estate would the conclusion be that the politician has a philosophy that it is important to give tax breaks to real estate?

Similarly, the Democratic Party receives considerable support from unions and poor and minority communities that are likely to benefit hugely from a new rescue bill that will provide substantial relief to state and local governments, to the Postal Service, and extend the unemployment benefits put in place last month. Whatever Pelosi’s personal philosophy, it is likely that her need to respond to these constituencies is playing a more important role in her actions right now.

It is also worth mentioning that “creating the best conditions possible for people to go back to work,” likely means actually creating safe workplaces for workers. By reducing the incentive to create safe workplaces, the Republican efforts to remove liability for employers with unsafe workplaces goes in the opposite direction of the goal this article attributes to them.

It is bizarre how reporters continually feel the need to tell us about politicians’ philosophies. Why on earth would they think that politicians are guided by any philosophy? Politicians get elected by getting the support of key constituencies, not by having wonderful philosophies. I would not think that is a seriously contested claim.

This is why everyone should be upset at a Washington Post article on the prospects for another big economic rescue package when it tells us:

“As some states move to reopen, a deep philosophical divide has emerged between the two parties about the proper role for the federal government in producing an economic recovery. Many Republicans say they should focus on creating the best conditions possible for people to go back to work. That would include steps such as limiting liability protections for businesses and reducing regulations, issues that a group of House Republicans discussed with Trump Friday at the White House, participants said. 

“Democrats, by contrast, believe they need to keep pumping money into the economy. House Speaker Nancy Pelosi (D-Calif.) is working to assemble another enormous relief bill with a price tag likely to top $2 trillion that she could bring up for a vote as soon as this coming week.”

Why on earth would anyone believe that this dispute has anything to do with philosophy? Republicans have the overwhelming support of business people. The proposal to exempt them from liability to workers and customers is an enormous gift to this powerful group of supporters. If a politician gives a big real estate tax break to a big contributor who is heavily invested in real estate would the conclusion be that the politician has a philosophy that it is important to give tax breaks to real estate?

Similarly, the Democratic Party receives considerable support from unions and poor and minority communities that are likely to benefit hugely from a new rescue bill that will provide substantial relief to state and local governments, to the Postal Service, and extend the unemployment benefits put in place last month. Whatever Pelosi’s personal philosophy, it is likely that her need to respond to these constituencies is playing a more important role in her actions right now.

It is also worth mentioning that “creating the best conditions possible for people to go back to work,” likely means actually creating safe workplaces for workers. By reducing the incentive to create safe workplaces, the Republican efforts to remove liability for employers with unsafe workplaces goes in the opposite direction of the goal this article attributes to them.

The pandemic crisis created a rare economic opportunity. In effect, the whole economy was thrown up for grabs, with the winners and losers determined by who had the political power to get a nice bailout. Needless to say, those who were already rich got the big handouts, those at the bottom got crumbs if anything at all. 

Suppose we had let the market work its magic on the airlines, on the hotel chains, the restaurant chains, the aircraft industry (i.e. Boeing), and on the oil industry. With few exceptions, the big actors in these sectors would all have been bankrupt. The companies would have been reorganized, with the ones that were otherwise viable being restructured. Debtors would take large haircuts only collecting a fraction of what they had been owed. Shareholders would be wiped it, losing trillions of dollars of equity. Many top executives would have likely been sent packing, and would no longer be able to count on paychecks in the millions or tens of millions.

Of course, things didn’t turn out this way because almost no one in policy circles actually believes in the market. That’s just something they tell children and liberal policy wonks. The people in power believe in using the government to give themselves as much money as possible. Usually, they can do this by structuring the market so that money flows upward. 

This is perhaps most clear in the case of government-granted patent and copyright monopolies. These government-granted monopolies in areas like prescription drugs, medical equipment, software, pesticides, fertilizers, and other items likely transfer more than $1 trillion a year from the pockets of ordinary people to those who own these monopolies. Over the last four decades, these monopolies have been made longer and stronger, with almost no one paying attention, in spite of the huge amount of money at stake. 

It is easy to point to market structuring in other areas, most notably finance and corporate governance, which have allowed for the accumulation of great fortunes at the expense of the rest of us. Again, the rule changes that allow for massive upward redistribution were mostly done with little public attention, even though large amounts of money were at stake. 

I go through these issues in more detail in Rigged [it’s free], but the point is simple: the rich have structured the market in ways that hugely increase their share of income. They pretend that this was just a natural market outcome. Many liberals accommodate this fiction, complaining that conservatives are “market fundamentalists” who dislike government. 

Anyhow, the bailout from the pandemic required surrendering the illusion. The industries that were hardest hit rushed to Congress and the White House and demanded, and got handouts. The sums involved were enormous. The airline industry got $17.5 billion (more than 10 million food stamp person-years) in grants and another $7.5 billion in government-subsidized loans. The cargo airline industry got $4 billion in grants and subsidized loans. The oil industry is getting a large bailout that is still being mapped out. Boeing was designated to get $17 billion in grants and subsidized loans.

This is all in full public view. While many workers will be left unemployed, with meager unemployment benefits (once the initial $600 a week bonus period ends), billionaire shareholders will have the value of their portfolios propped by the government. CEOs and other high-level executives, who pocket millions or even tens of millions in pay annually, will remain secure in their high-paying jobs and will be able to maintain their lavish lifestyles as though nothing had happened.

Congress could have prevented this massive handout, either by requiring bankruptcies and supporting companies through the process, as happened with the auto bailout in the Great Recession, or by restricting executive pay and dividend payouts at companies that received bailouts. As it turned out there were no effective restrictions imposed on these companies. 

In fact, Congress decided to throw in a little something extra to help wealthy contributors get through the crisis. It put in a tax break for real estate investors, which will give $170 billion over the next decade to people in the top 1 percent of the income distribution. The beneficiaries of this gift include people like Jared Kushner and the Trump family.

While serious people should do their best to monitor the bailouts and limit corruption, we have to recognize that the rich have largely won this battle. They have managed to ensure that most of them will not only be kept whole through this crisis, but many will also come out ahead. In a period where millions are losing jobs, with many struggling to be able to pay the rent and get enough to eat, the rich have managed to feast off the public purse.

If we can’t pull the rich away from the trough while Donald Trump is still in the White House, we can propose remedies that a Biden administration should pursue. There are two simple and easier ones: a special one-time tax for high-income households and a corporate profit tax tied to stock returns.

For the one-time tax, we can add ten percentage points to the income tax for the top bracket of households for 2020 and 2021. (This would apply to income above roughly $300k for an individual and $500k for a couple.)  This tax would be in addition to whatever longer-term changes to the tax code that a Biden administration might want to make. This tax should apply to all income, including capital gains, both realized and unrealized. 

The latter would be a new innovation that many tax analysts have advocated for some time. There is no obvious reason to allow someone to defer their taxes on capital gains just because they choose not to sell their stock or real estate. The I.R.S. can gain valuable experience in assessing unrealized capital gains. One obvious mechanism would be to assign a value based on the gains in comparable assets (e.g. a stock index or changes in real estate prices in the area of the property held). The difference between the tax liability for the actual capital gain and the imputed gain can be corrected at the time the asset is sold.

This one-time tax should raise more than $350 billion a year which is a bit more than 1.5 percent of GDP or more than 200 million food stamp person-years. In other words, it is real money, although a bit less than we would save if we had no patent monopolies on prescription drugs.

The other gift to the rich would be a 10 percentage point excess profits tax which would take the form of a tax tied to the returns on their stock. Since companies have gotten very good at hiding their profits from the I.R.S. this tax makes it easy for them. We simply tax away ten percent of returns to shareholders, either in the form of dividends or higher share prices, using the halfway point between the start of the year share price and crisis trough as a reference point. 

This means that the companies can hide their profits wherever they want and it doesn’t affect their tax liability unless they also manage to hide them from their shareholders. In that case, the I.R.S. would have a powerful ally in collecting the taxes it is owed. With a market capitalization of U.S. corporations near $40 trillion, if the stock gains under this formula average 8 percent annually over 2020 and 2021, it should net the government another $320 billion for each of these two years. 

These two fun fixes should go a long way towards taking back the money that we gave to the rich in the bailout. I usually don’t look to taxes as the primary mechanism for addressing inequality, but rather restructuring the market so that it doesn’t generate so much inequality, but when we are creating massive inequality through direct government transfers to the very rich, it is entirely appropriate to look to taxes to take this money back. 

We also don’t have to worry about the long-term impact of creating a massive tax evasion/avoidance industry since this is only a two-year story. We can still count on the rich to lie, cheat, and steal to get out of their taxes for these two years, but it doesn’t make sense for them to make long-term plans to avoid a one-time hit to their income. 

I would not count on a Biden administration to be anxious to take back the bailout loot secured by the rich and powerful, but it is possible it can be pressured in this direction. The first step is to put the menu on the table.     

The pandemic crisis created a rare economic opportunity. In effect, the whole economy was thrown up for grabs, with the winners and losers determined by who had the political power to get a nice bailout. Needless to say, those who were already rich got the big handouts, those at the bottom got crumbs if anything at all. 

Suppose we had let the market work its magic on the airlines, on the hotel chains, the restaurant chains, the aircraft industry (i.e. Boeing), and on the oil industry. With few exceptions, the big actors in these sectors would all have been bankrupt. The companies would have been reorganized, with the ones that were otherwise viable being restructured. Debtors would take large haircuts only collecting a fraction of what they had been owed. Shareholders would be wiped it, losing trillions of dollars of equity. Many top executives would have likely been sent packing, and would no longer be able to count on paychecks in the millions or tens of millions.

Of course, things didn’t turn out this way because almost no one in policy circles actually believes in the market. That’s just something they tell children and liberal policy wonks. The people in power believe in using the government to give themselves as much money as possible. Usually, they can do this by structuring the market so that money flows upward. 

This is perhaps most clear in the case of government-granted patent and copyright monopolies. These government-granted monopolies in areas like prescription drugs, medical equipment, software, pesticides, fertilizers, and other items likely transfer more than $1 trillion a year from the pockets of ordinary people to those who own these monopolies. Over the last four decades, these monopolies have been made longer and stronger, with almost no one paying attention, in spite of the huge amount of money at stake. 

It is easy to point to market structuring in other areas, most notably finance and corporate governance, which have allowed for the accumulation of great fortunes at the expense of the rest of us. Again, the rule changes that allow for massive upward redistribution were mostly done with little public attention, even though large amounts of money were at stake. 

I go through these issues in more detail in Rigged [it’s free], but the point is simple: the rich have structured the market in ways that hugely increase their share of income. They pretend that this was just a natural market outcome. Many liberals accommodate this fiction, complaining that conservatives are “market fundamentalists” who dislike government. 

Anyhow, the bailout from the pandemic required surrendering the illusion. The industries that were hardest hit rushed to Congress and the White House and demanded, and got handouts. The sums involved were enormous. The airline industry got $17.5 billion (more than 10 million food stamp person-years) in grants and another $7.5 billion in government-subsidized loans. The cargo airline industry got $4 billion in grants and subsidized loans. The oil industry is getting a large bailout that is still being mapped out. Boeing was designated to get $17 billion in grants and subsidized loans.

This is all in full public view. While many workers will be left unemployed, with meager unemployment benefits (once the initial $600 a week bonus period ends), billionaire shareholders will have the value of their portfolios propped by the government. CEOs and other high-level executives, who pocket millions or even tens of millions in pay annually, will remain secure in their high-paying jobs and will be able to maintain their lavish lifestyles as though nothing had happened.

Congress could have prevented this massive handout, either by requiring bankruptcies and supporting companies through the process, as happened with the auto bailout in the Great Recession, or by restricting executive pay and dividend payouts at companies that received bailouts. As it turned out there were no effective restrictions imposed on these companies. 

In fact, Congress decided to throw in a little something extra to help wealthy contributors get through the crisis. It put in a tax break for real estate investors, which will give $170 billion over the next decade to people in the top 1 percent of the income distribution. The beneficiaries of this gift include people like Jared Kushner and the Trump family.

While serious people should do their best to monitor the bailouts and limit corruption, we have to recognize that the rich have largely won this battle. They have managed to ensure that most of them will not only be kept whole through this crisis, but many will also come out ahead. In a period where millions are losing jobs, with many struggling to be able to pay the rent and get enough to eat, the rich have managed to feast off the public purse.

If we can’t pull the rich away from the trough while Donald Trump is still in the White House, we can propose remedies that a Biden administration should pursue. There are two simple and easier ones: a special one-time tax for high-income households and a corporate profit tax tied to stock returns.

For the one-time tax, we can add ten percentage points to the income tax for the top bracket of households for 2020 and 2021. (This would apply to income above roughly $300k for an individual and $500k for a couple.)  This tax would be in addition to whatever longer-term changes to the tax code that a Biden administration might want to make. This tax should apply to all income, including capital gains, both realized and unrealized. 

The latter would be a new innovation that many tax analysts have advocated for some time. There is no obvious reason to allow someone to defer their taxes on capital gains just because they choose not to sell their stock or real estate. The I.R.S. can gain valuable experience in assessing unrealized capital gains. One obvious mechanism would be to assign a value based on the gains in comparable assets (e.g. a stock index or changes in real estate prices in the area of the property held). The difference between the tax liability for the actual capital gain and the imputed gain can be corrected at the time the asset is sold.

This one-time tax should raise more than $350 billion a year which is a bit more than 1.5 percent of GDP or more than 200 million food stamp person-years. In other words, it is real money, although a bit less than we would save if we had no patent monopolies on prescription drugs.

The other gift to the rich would be a 10 percentage point excess profits tax which would take the form of a tax tied to the returns on their stock. Since companies have gotten very good at hiding their profits from the I.R.S. this tax makes it easy for them. We simply tax away ten percent of returns to shareholders, either in the form of dividends or higher share prices, using the halfway point between the start of the year share price and crisis trough as a reference point. 

This means that the companies can hide their profits wherever they want and it doesn’t affect their tax liability unless they also manage to hide them from their shareholders. In that case, the I.R.S. would have a powerful ally in collecting the taxes it is owed. With a market capitalization of U.S. corporations near $40 trillion, if the stock gains under this formula average 8 percent annually over 2020 and 2021, it should net the government another $320 billion for each of these two years. 

These two fun fixes should go a long way towards taking back the money that we gave to the rich in the bailout. I usually don’t look to taxes as the primary mechanism for addressing inequality, but rather restructuring the market so that it doesn’t generate so much inequality, but when we are creating massive inequality through direct government transfers to the very rich, it is entirely appropriate to look to taxes to take this money back. 

We also don’t have to worry about the long-term impact of creating a massive tax evasion/avoidance industry since this is only a two-year story. We can still count on the rich to lie, cheat, and steal to get out of their taxes for these two years, but it doesn’t make sense for them to make long-term plans to avoid a one-time hit to their income. 

I would not count on a Biden administration to be anxious to take back the bailout loot secured by the rich and powerful, but it is possible it can be pressured in this direction. The first step is to put the menu on the table.     

It was a very bizarre choice of words. In a useful and lengthy article on Republican efforts to cut food stamp benefits, we are told:

“The Republican distrust of food stamps has now collided with a monumental crisis. Cars outside food banks have lined up for miles in places as different as San Antonio, Pittsburgh and Miami Beach.”

The piece gives no evidence whatsoever that Republicans “distrust” food stamps. It provides plenty of evidence that they dislike food stamps, just as they dislike anything that helps low and moderate-income people.

It would be good if the paper stopped its mind-reading and just told readers that the Republicans have continually tried to cut food stamps and not imply that there is any question of trust at issue.

It was a very bizarre choice of words. In a useful and lengthy article on Republican efforts to cut food stamp benefits, we are told:

“The Republican distrust of food stamps has now collided with a monumental crisis. Cars outside food banks have lined up for miles in places as different as San Antonio, Pittsburgh and Miami Beach.”

The piece gives no evidence whatsoever that Republicans “distrust” food stamps. It provides plenty of evidence that they dislike food stamps, just as they dislike anything that helps low and moderate-income people.

It would be good if the paper stopped its mind-reading and just told readers that the Republicans have continually tried to cut food stamps and not imply that there is any question of trust at issue.

I know the media are prohibited from stating this obvious truth, but it seemed a good time to remind folks. The NYT posted an article about how Japan’s prime minister, Shinzo Abe, is promoting a drug produced by a subsidiary of Fujifilm, a large Japanese company, as a treatment for the coronavirus. According to the piece, there is little evidence that the drug, Avigan, is an effective treatment, although the drug is known to cause birth defects. The piece also reports that Fujifilm has been aggressive in touting the drug, in spite of the lack of evidence and its known side effects.

If the drug were available as a cheap generic, so it sold at prices comparable to generic aspirin, it is unlikely that Fujifilm would be anxious to promote it, unless its benefits were clearer. Economists usually believe that people respond to incentives, but for some reason, they never point out that the high prices resulting from government-granted patent monopolies give drug companies incentive to lie about the safety and effectiveness of their drugs.  

 

I know the media are prohibited from stating this obvious truth, but it seemed a good time to remind folks. The NYT posted an article about how Japan’s prime minister, Shinzo Abe, is promoting a drug produced by a subsidiary of Fujifilm, a large Japanese company, as a treatment for the coronavirus. According to the piece, there is little evidence that the drug, Avigan, is an effective treatment, although the drug is known to cause birth defects. The piece also reports that Fujifilm has been aggressive in touting the drug, in spite of the lack of evidence and its known side effects.

If the drug were available as a cheap generic, so it sold at prices comparable to generic aspirin, it is unlikely that Fujifilm would be anxious to promote it, unless its benefits were clearer. Economists usually believe that people respond to incentives, but for some reason, they never point out that the high prices resulting from government-granted patent monopolies give drug companies incentive to lie about the safety and effectiveness of their drugs.  

 

Daniel W. Drezner used his Washington Post column to contribute to the confusion around the stock market and the economy. He picks up from prior pieces by Paul Krugman and Desmond Lachman as to whether the recent run-up in the economy means investors are expecting a strong recovery.

(Drezner unfortunately refers to the question of a V-shaped recovery. The Congressional Budget Office projects that the economy will shrink at a 39.6 percent annual rate in this quarter, and then grow at 23.5 percent and 10.5 percent annual rates in the third and fourth quarters, respectively. It would be hard not to view the projected 3rd and 4th quarter growth rates as “V-shaped,” but they would still leave the economy more than five percent smaller than it was in the fourth quarter of 2019. The question is not really the shape, as opposed to the size of the right side of the “V.”) 

Anyhow, in his subsequent discussion Drezner focuses on projections for the state of the economy, ignoring what the stock market is supposed to price — the value of future after-tax profits. If a change in policy has zero positive impact on economic growth, like a cut in corporate income taxes or a strong anti-union measure, but is expected to increase after-tax profits, we would expect it to lead to a rise in stock prices.

The willingness of Congress and the president to give a massive bailout that looks very favorable to corporate interests likely was viewed by investors as a signal that the politicians in Washington were determined to limit the damage that corporations faced as a result of the pandemic. There is little reason to believe that they were looking at how well the economy would do. (Krugman’s line, that they expect a very weak economy and therefore very low interest rates, is an exception to this view.)

Anyhow, no reasonable person would make a serious economic projection based on the Yankees prospects for winning the World Series, nor should they make economic projections based on fluctuations in the stock market.

Daniel W. Drezner used his Washington Post column to contribute to the confusion around the stock market and the economy. He picks up from prior pieces by Paul Krugman and Desmond Lachman as to whether the recent run-up in the economy means investors are expecting a strong recovery.

(Drezner unfortunately refers to the question of a V-shaped recovery. The Congressional Budget Office projects that the economy will shrink at a 39.6 percent annual rate in this quarter, and then grow at 23.5 percent and 10.5 percent annual rates in the third and fourth quarters, respectively. It would be hard not to view the projected 3rd and 4th quarter growth rates as “V-shaped,” but they would still leave the economy more than five percent smaller than it was in the fourth quarter of 2019. The question is not really the shape, as opposed to the size of the right side of the “V.”) 

Anyhow, in his subsequent discussion Drezner focuses on projections for the state of the economy, ignoring what the stock market is supposed to price — the value of future after-tax profits. If a change in policy has zero positive impact on economic growth, like a cut in corporate income taxes or a strong anti-union measure, but is expected to increase after-tax profits, we would expect it to lead to a rise in stock prices.

The willingness of Congress and the president to give a massive bailout that looks very favorable to corporate interests likely was viewed by investors as a signal that the politicians in Washington were determined to limit the damage that corporations faced as a result of the pandemic. There is little reason to believe that they were looking at how well the economy would do. (Krugman’s line, that they expect a very weak economy and therefore very low interest rates, is an exception to this view.)

Anyhow, no reasonable person would make a serious economic projection based on the Yankees prospects for winning the World Series, nor should they make economic projections based on fluctuations in the stock market.

No one wants to die, but hey, who wouldn’t be willing to sacrifice their life to protect someone’s patent monopoly? That is a question that is implicitly raised in this New York Times piece on the race to develop an effective vaccine against the coronavirus. Near the beginning the piece tells readers:

“In an era of intense nationalism, the geopolitics of the vaccine race are growing as complex as the medicine. The months of mutual vilification between the United States and China over the origins of the virus have poisoned most efforts at cooperation between them. The U.S. government is already warning that American innovations must be protected from theft — chiefly from Beijing.”

Okay, what does “theft” by China, or anyone else, mean in this context? Would China be preventing U.S. scientists from moving ahead with the development of a vaccine? Would it be preventing drug companies from manufacturing and distributing the vaccine?

Of course, neither of these possibilities makes any sense. Nothing China might do with knowledge gained from U.S. researchers would obstruct our own development of a vaccine. The only “risk” here is that China might jump ahead and be able to vaccinate its own people, and possibly people in other countries (including the U.S.) before a U.S. produced vaccine is available. This could be an embarrassment to Donald Trump and may also reduce the potential profits of U.S. drug companies, but it could mean that hundreds of thousands of lives are saved.

Apparently the New York Times didn’t think it was worth mentioning that the Trump administration’s policies might lead to massive loss of life to protect his ego and industry profits, but that is the unavoidable implication of the information in the article.

No one wants to die, but hey, who wouldn’t be willing to sacrifice their life to protect someone’s patent monopoly? That is a question that is implicitly raised in this New York Times piece on the race to develop an effective vaccine against the coronavirus. Near the beginning the piece tells readers:

“In an era of intense nationalism, the geopolitics of the vaccine race are growing as complex as the medicine. The months of mutual vilification between the United States and China over the origins of the virus have poisoned most efforts at cooperation between them. The U.S. government is already warning that American innovations must be protected from theft — chiefly from Beijing.”

Okay, what does “theft” by China, or anyone else, mean in this context? Would China be preventing U.S. scientists from moving ahead with the development of a vaccine? Would it be preventing drug companies from manufacturing and distributing the vaccine?

Of course, neither of these possibilities makes any sense. Nothing China might do with knowledge gained from U.S. researchers would obstruct our own development of a vaccine. The only “risk” here is that China might jump ahead and be able to vaccinate its own people, and possibly people in other countries (including the U.S.) before a U.S. produced vaccine is available. This could be an embarrassment to Donald Trump and may also reduce the potential profits of U.S. drug companies, but it could mean that hundreds of thousands of lives are saved.

Apparently the New York Times didn’t think it was worth mentioning that the Trump administration’s policies might lead to massive loss of life to protect his ego and industry profits, but that is the unavoidable implication of the information in the article.

There has been some discussion of whether we should anticipate deflation or inflation as a result of the impact of the pandemic. I have been in the camp arguing the latter, based on the idea that precautionary measures will raise costs in major areas of the economy while reducing supply. (This is not an argument against stimulatory policies that are needed to restore employment. The inflation is a one-time price rise that will be reversed when we get effective treatments and/or a vaccine. It is not an inflationary spiral story.)

However, it did occur to me that there is an important measurement issue that could affect how we view higher prices. To see the issue, let’s imagine we had Donald Trump’s bar and grill. As Trump has advocated, we have people tightly packed together, eating their burgers and fries. There are also long lines at the door, with no one practicing social distancing.

Now, imagine that Dr. Fauci takes over the restaurant after it goes bankrupt (this is a Trump business) because so many of the customers were getting sick. Under Dr. Fauci, the restaurant adopts safe practices. This means operating at only one quarter capacity, having sufficient time between parties to ensure that the tables, chairs, and surrounding areas are fully sanitized, and having checkers at the door taking people’s temperatures and asking about their health and contacts. To cover his higher costs, Dr. Fauci raises prices by 50 percent.

So, the question for inflation hawks everywhere is whether this 50 percent price increase should be treated as inflation? The counterargument is that Dr. Fauci’s restaurant is providing a better product than Donald Trump’s restaurant. Customers can eat their dinner with a much lower risk of catching the coronavirus. This should be worth a premium, just like people are willing to pay more money for a car with automatic braking or other safety features. In effect, this is a quality improvement, not an increase in price.

My guess is that the folks at the Bureau of Labor Statistics will not see it that way and treat safety-related price increases as inflation. I’m not knocking them, they would have to develop the methodologies to make the adjustments. That takes time and we’re seeing the price increases now. I’m just trying to call attention to a conceptual problem here.

While the problem is extraordinarily stark in this case, it is not a new one. I used to point out that AIDS led to a reduction in the measured rate of inflation. The reason is that when expensive new treatments came into use, their price was not picked up as an increase in the CPI or other price indices. (We only measure the change in price of existing drugs, not the cost of new drugs.) When these drugs came off patent, and their prices plunge, their price decline would be included in the CPI, lowering the overall rate of inflation.

There is no real solution to this sort of problem. The CPI is inherently individualistic. It measures the change in quality-adjusted prices as though the world around us is unchanging. However, we know it does change constantly and the value assigned to goods and services changes enormously as a result. (Hey, does anyone want a lava lamp or a bean bag chair?) And it’s not just fashions. Our need for major items like cars, cell phones, and Internet access depends hugely on the social environment.

For this reason, we can’t really say that the CPI is measuring changes in the cost of living. It is a price index. Oddities, like the treatment of safety-related price increases that are a result of the pandemic, may bring this point home, but the problem is always there even if we choose to ignore it.

There has been some discussion of whether we should anticipate deflation or inflation as a result of the impact of the pandemic. I have been in the camp arguing the latter, based on the idea that precautionary measures will raise costs in major areas of the economy while reducing supply. (This is not an argument against stimulatory policies that are needed to restore employment. The inflation is a one-time price rise that will be reversed when we get effective treatments and/or a vaccine. It is not an inflationary spiral story.)

However, it did occur to me that there is an important measurement issue that could affect how we view higher prices. To see the issue, let’s imagine we had Donald Trump’s bar and grill. As Trump has advocated, we have people tightly packed together, eating their burgers and fries. There are also long lines at the door, with no one practicing social distancing.

Now, imagine that Dr. Fauci takes over the restaurant after it goes bankrupt (this is a Trump business) because so many of the customers were getting sick. Under Dr. Fauci, the restaurant adopts safe practices. This means operating at only one quarter capacity, having sufficient time between parties to ensure that the tables, chairs, and surrounding areas are fully sanitized, and having checkers at the door taking people’s temperatures and asking about their health and contacts. To cover his higher costs, Dr. Fauci raises prices by 50 percent.

So, the question for inflation hawks everywhere is whether this 50 percent price increase should be treated as inflation? The counterargument is that Dr. Fauci’s restaurant is providing a better product than Donald Trump’s restaurant. Customers can eat their dinner with a much lower risk of catching the coronavirus. This should be worth a premium, just like people are willing to pay more money for a car with automatic braking or other safety features. In effect, this is a quality improvement, not an increase in price.

My guess is that the folks at the Bureau of Labor Statistics will not see it that way and treat safety-related price increases as inflation. I’m not knocking them, they would have to develop the methodologies to make the adjustments. That takes time and we’re seeing the price increases now. I’m just trying to call attention to a conceptual problem here.

While the problem is extraordinarily stark in this case, it is not a new one. I used to point out that AIDS led to a reduction in the measured rate of inflation. The reason is that when expensive new treatments came into use, their price was not picked up as an increase in the CPI or other price indices. (We only measure the change in price of existing drugs, not the cost of new drugs.) When these drugs came off patent, and their prices plunge, their price decline would be included in the CPI, lowering the overall rate of inflation.

There is no real solution to this sort of problem. The CPI is inherently individualistic. It measures the change in quality-adjusted prices as though the world around us is unchanging. However, we know it does change constantly and the value assigned to goods and services changes enormously as a result. (Hey, does anyone want a lava lamp or a bean bag chair?) And it’s not just fashions. Our need for major items like cars, cell phones, and Internet access depends hugely on the social environment.

For this reason, we can’t really say that the CPI is measuring changes in the cost of living. It is a price index. Oddities, like the treatment of safety-related price increases that are a result of the pandemic, may bring this point home, but the problem is always there even if we choose to ignore it.

The NYT had its second piece in a week on how business owners can’t use the money from the paycheck protection program (PPP) to build their businesses. While it is understandable that business owners would like a handout from the government, that is not the purpose of the PPP.

The point of the PPP is to get workers their paychecks, or at least a large fraction thereof, not to support businesses. The businesses are essentially an intermediary. It should be a large help to these businesses to be able to keep workers on their payroll and have their rent covered, but the program is not designed to get businesses through the crisis, it’s designed to get their workers through.

For some reason, the NYT and much of the rest of the media can’t seem to understand this point. Obviously many businesses will struggle to get through this crisis, and a lot won’t make it, but the PPP is not designed for this purpose. This is not news.

The NYT had its second piece in a week on how business owners can’t use the money from the paycheck protection program (PPP) to build their businesses. While it is understandable that business owners would like a handout from the government, that is not the purpose of the PPP.

The point of the PPP is to get workers their paychecks, or at least a large fraction thereof, not to support businesses. The businesses are essentially an intermediary. It should be a large help to these businesses to be able to keep workers on their payroll and have their rent covered, but the program is not designed to get businesses through the crisis, it’s designed to get their workers through.

For some reason, the NYT and much of the rest of the media can’t seem to understand this point. Obviously many businesses will struggle to get through this crisis, and a lot won’t make it, but the PPP is not designed for this purpose. This is not news.

(This post first appeared on my Patreon page.)

Last week the Boston Review (BR) published an exchange on a wealth tax that included a proposal from Berkeley economists Emmanuel Saez and Gabriel Zucman, with a number of responses, including one from me. I was critical of the proposal for both political reasons and because I think avoidance and evasion will be massive problems.

On the political side, in addition to the difficulty of getting a wealth tax through Congress, there is the virtual certainty that the current Supreme Court will rule it unconstitutional. This is not an abstract question of whether a wealth tax should be viewed as constitutional. I realize that many legal scholars have argued that such a tax is not inconsistent with the power to tax granted to Congress by the constitution. This is a very concrete question as to whether the current Supreme Court would rule that a wealth tax is constitutional. I don’t think anyone with a straight face could argue that it would.

We can of course talk about various plans to pack the court, either by adding new justices or through some rotation scheme of judges across federal courts. These may be interesting and worthwhile strategies to pursue against a corrupt court, but if we’re thinking of a timeline of a presidential term in which we hope to get important legislation passed, they are not likely to be helpful. 

Even if we can implement an effective strategy for ending the right-wing lock on the court, it is not likely to be quick enough to allow a measure like a wealth tax to be implemented in the same presidential term. If this is at the center of a progressive president’s agenda, they will have to find a way to get re-elected without passing this important measure. 

My other reason for objecting is that I think a wealth tax will prove very difficult to enforce. We have experience with income taxes and estate taxes. The enforcement of these is far from perfect, but at least the apparatus is in place. We would be starting from scratch with a wealth tax and the rich will have a very strong incentive to avoid or evade it. My guess is that they would be fairly successful, undermining the goal of the tax as well as confidence in the tax system. 

As I pointed in the BR piece, one foolproof mechanism for avoidance is renouncing citizenship. While Saez and Zucman have a 47 percent exit tax as part of their proposal, this would not apply to people who renounce their citizenship before the tax is enacted. In their response, Saez and Zucman suggest that the tax could be imposed even on those who have already left. While they have a good moral argument, as a practical matter, the probability of collecting large amounts of retroactive taxes from someone who has fled to a tax haven does not seem very high. 

Stopping Extreme Wealth at Its Source

While I don’t think a wealth tax is an effective mechanism to contain excessive wealth, I strongly agree with Saez and Zucman that it is a serious problem for both economic and political reasons. However, I have focused my own work on changing the economic structures that allow for the accumulation of extreme wealth. 

I won’t go through the whole story here (this is the point of Rigged [it’s free]), but the basic argument is that over the last four decades we have structured the economy in ways that allow for the accumulation of massive amounts of wealth. There is nothing inevitable about this structuring, we can structure the economy differently so that its benefits are more broadly shared instead of flowing so disproportionately to those at the top.  

My poster child for the impact of the structuring of the economy is Bill Gates. Gates is one of the richest people in the world because we have patent and copyright monopolies. If the government didn’t grant these monopolies, and anyone who wanted to could freely copy Microsoft’s software, Bill Gates would probably still be working for a living.

Patents and copyrights serve a purpose, they provide an incentive for innovation and creative work, but there are other ways to provide these incentives. And even if we decide to use patent and copyright monopolies, they could be shorter and weaker, so that they don’t redistribute so much income to their holders. 

The place where I have spent the most effort combatting these government-granted monopolies is with prescription drugs. This is both where they cause the greatest amount of corruption — think of the opioid crisis, a direct result of the incentive created by patent monopoly prices to push drugs — and where they lead to the most obscene outcomes: people being unable to afford cheap drugs because patent monopolies make them expensive.

The pandemic should provide a great opportunity to challenge patent monopolies in prescription drugs. There is an unprecedented amount of international cooperation, as well as public funding, in the efforts to develop treatments and an effective vaccine against the coronavirus. Given this collective effort, it would be utterly absurd to give the company that happened to be the first to the patent office a monopoly on a treatment or vaccine. 

The only sensible solution is that the drugs and vaccines that are developed through this collective effort be in the public domain so that they can be sold as cheap generics, where the price is the cost of manufacturing and distribution, and a normal profit. We should not be in the position of begging a patent holder to make a drug or vaccine available at an affordable price.

If we could go this route with the coronavirus then it should raise the obvious question of why this should not be the standard practice – publicly funded, open-source research with everything placed in the public domain. And, what is really neat about this approach is that we don’t even have to stop drug companies from pursuing patent-supported research. They would just face the risk that any drugs they do develop will face competition from a drug that is as good or better and selling as a generic at one percent of the price they planned to charge. That risk would likely shut down most patent-supported research very quickly.

The amount at stake here is enormous, as I continually point out. In the case of prescription drugs alone, it is close to $400 billion a year, roughly 20 percent of all corporate profits.

I could be wrong, but it strikes me as a far smaller political lift to say that the government should increase its funding for the development of prescription drugs (we already spend $40 billion a year through NIH), and have everything developed in the public domain, than imposing a wealth tax. And there is no issue of its constitutionality. 

As I point out in Rigged, there are also measures we can do to radically reduce the big fortunes built-in finance, most obviously by imposing a modest financial transaction tax. We can hugely reduce Mark Zuckerberg’s fortune by repealing Section 230 of the Communications Decency Act, thereby subjecting Facebook and other Internet intermediaries to the same legal liabilities as their competitors in traditional media. 

We don’t need to structure our economy in a way that leads to massive inequality. There has been a conscious choice made by those designing policy in the last four decades. Our top priority should be to change this design.

Leveling the Political Playing Field

Saez and Zucman are entirely correct in pointing out that the enormous amount of wealth at the top gives these people hugely outsized political influence. While this is true, we are not going to be able to easily reverse this, even with a wealth tax. Jeff Bezos and Bill Gates could still wield ridiculous amounts of political influence if we managed to tax away half of their wealth.

Our efforts can’t be focused just on bringing the top down, we have to bring everyone else up. Fortunately, there are models for doing this. Seattle gives every voter a $75 voucher to support the candidate(s) of their choice in city council elections. Several cities now have super-matches, where small campaign contributions are matched three or four to one. I have outlined a plan where everyone would have a $100 voucher to support journalism or any other creative work they choose.  

There are many other directions in which these sorts of proposals can be developed, but the point is that, with a relatively small amount of public funds, we can hugely democratize politics, as well as journalism and creative work more generally. Getting more input from those at the middle and bottom is likely to be a far more productive path towards counterbalancing the influence of the rich than trying to take away their money. And, this can be done piecemeal, one city or state at a time. 

Keeping Our Eye on the Ball

In contrast to the right, progressives get relatively few bites at the apple. The right can have a George W. Bush, who lied us into a pointless war in Iraq and then allowed the economy to collapse under his watch and then get back in control of the White House and both houses of Congress eight years later. If a progressive presidency had led to similar foreign policy and domestic disasters, the left could look forward to a half-century in the wilderness, maybe longer. 

For this reason, we have to make sure our bites at the apple are all good ones. A huge political battle for a wealth tax that ultimately ended in defeat in Congress or a loss at the Supreme Court would be a disaster. We need battles that are winnable and produce tangible near-term results. There are an infinite number of ways that we can turn to reverse the upward redistribution of the last four decades. This should be the focus of progressive economic policy. 

 
 
 
 

(This post first appeared on my Patreon page.)

Last week the Boston Review (BR) published an exchange on a wealth tax that included a proposal from Berkeley economists Emmanuel Saez and Gabriel Zucman, with a number of responses, including one from me. I was critical of the proposal for both political reasons and because I think avoidance and evasion will be massive problems.

On the political side, in addition to the difficulty of getting a wealth tax through Congress, there is the virtual certainty that the current Supreme Court will rule it unconstitutional. This is not an abstract question of whether a wealth tax should be viewed as constitutional. I realize that many legal scholars have argued that such a tax is not inconsistent with the power to tax granted to Congress by the constitution. This is a very concrete question as to whether the current Supreme Court would rule that a wealth tax is constitutional. I don’t think anyone with a straight face could argue that it would.

We can of course talk about various plans to pack the court, either by adding new justices or through some rotation scheme of judges across federal courts. These may be interesting and worthwhile strategies to pursue against a corrupt court, but if we’re thinking of a timeline of a presidential term in which we hope to get important legislation passed, they are not likely to be helpful. 

Even if we can implement an effective strategy for ending the right-wing lock on the court, it is not likely to be quick enough to allow a measure like a wealth tax to be implemented in the same presidential term. If this is at the center of a progressive president’s agenda, they will have to find a way to get re-elected without passing this important measure. 

My other reason for objecting is that I think a wealth tax will prove very difficult to enforce. We have experience with income taxes and estate taxes. The enforcement of these is far from perfect, but at least the apparatus is in place. We would be starting from scratch with a wealth tax and the rich will have a very strong incentive to avoid or evade it. My guess is that they would be fairly successful, undermining the goal of the tax as well as confidence in the tax system. 

As I pointed in the BR piece, one foolproof mechanism for avoidance is renouncing citizenship. While Saez and Zucman have a 47 percent exit tax as part of their proposal, this would not apply to people who renounce their citizenship before the tax is enacted. In their response, Saez and Zucman suggest that the tax could be imposed even on those who have already left. While they have a good moral argument, as a practical matter, the probability of collecting large amounts of retroactive taxes from someone who has fled to a tax haven does not seem very high. 

Stopping Extreme Wealth at Its Source

While I don’t think a wealth tax is an effective mechanism to contain excessive wealth, I strongly agree with Saez and Zucman that it is a serious problem for both economic and political reasons. However, I have focused my own work on changing the economic structures that allow for the accumulation of extreme wealth. 

I won’t go through the whole story here (this is the point of Rigged [it’s free]), but the basic argument is that over the last four decades we have structured the economy in ways that allow for the accumulation of massive amounts of wealth. There is nothing inevitable about this structuring, we can structure the economy differently so that its benefits are more broadly shared instead of flowing so disproportionately to those at the top.  

My poster child for the impact of the structuring of the economy is Bill Gates. Gates is one of the richest people in the world because we have patent and copyright monopolies. If the government didn’t grant these monopolies, and anyone who wanted to could freely copy Microsoft’s software, Bill Gates would probably still be working for a living.

Patents and copyrights serve a purpose, they provide an incentive for innovation and creative work, but there are other ways to provide these incentives. And even if we decide to use patent and copyright monopolies, they could be shorter and weaker, so that they don’t redistribute so much income to their holders. 

The place where I have spent the most effort combatting these government-granted monopolies is with prescription drugs. This is both where they cause the greatest amount of corruption — think of the opioid crisis, a direct result of the incentive created by patent monopoly prices to push drugs — and where they lead to the most obscene outcomes: people being unable to afford cheap drugs because patent monopolies make them expensive.

The pandemic should provide a great opportunity to challenge patent monopolies in prescription drugs. There is an unprecedented amount of international cooperation, as well as public funding, in the efforts to develop treatments and an effective vaccine against the coronavirus. Given this collective effort, it would be utterly absurd to give the company that happened to be the first to the patent office a monopoly on a treatment or vaccine. 

The only sensible solution is that the drugs and vaccines that are developed through this collective effort be in the public domain so that they can be sold as cheap generics, where the price is the cost of manufacturing and distribution, and a normal profit. We should not be in the position of begging a patent holder to make a drug or vaccine available at an affordable price.

If we could go this route with the coronavirus then it should raise the obvious question of why this should not be the standard practice – publicly funded, open-source research with everything placed in the public domain. And, what is really neat about this approach is that we don’t even have to stop drug companies from pursuing patent-supported research. They would just face the risk that any drugs they do develop will face competition from a drug that is as good or better and selling as a generic at one percent of the price they planned to charge. That risk would likely shut down most patent-supported research very quickly.

The amount at stake here is enormous, as I continually point out. In the case of prescription drugs alone, it is close to $400 billion a year, roughly 20 percent of all corporate profits.

I could be wrong, but it strikes me as a far smaller political lift to say that the government should increase its funding for the development of prescription drugs (we already spend $40 billion a year through NIH), and have everything developed in the public domain, than imposing a wealth tax. And there is no issue of its constitutionality. 

As I point out in Rigged, there are also measures we can do to radically reduce the big fortunes built-in finance, most obviously by imposing a modest financial transaction tax. We can hugely reduce Mark Zuckerberg’s fortune by repealing Section 230 of the Communications Decency Act, thereby subjecting Facebook and other Internet intermediaries to the same legal liabilities as their competitors in traditional media. 

We don’t need to structure our economy in a way that leads to massive inequality. There has been a conscious choice made by those designing policy in the last four decades. Our top priority should be to change this design.

Leveling the Political Playing Field

Saez and Zucman are entirely correct in pointing out that the enormous amount of wealth at the top gives these people hugely outsized political influence. While this is true, we are not going to be able to easily reverse this, even with a wealth tax. Jeff Bezos and Bill Gates could still wield ridiculous amounts of political influence if we managed to tax away half of their wealth.

Our efforts can’t be focused just on bringing the top down, we have to bring everyone else up. Fortunately, there are models for doing this. Seattle gives every voter a $75 voucher to support the candidate(s) of their choice in city council elections. Several cities now have super-matches, where small campaign contributions are matched three or four to one. I have outlined a plan where everyone would have a $100 voucher to support journalism or any other creative work they choose.  

There are many other directions in which these sorts of proposals can be developed, but the point is that, with a relatively small amount of public funds, we can hugely democratize politics, as well as journalism and creative work more generally. Getting more input from those at the middle and bottom is likely to be a far more productive path towards counterbalancing the influence of the rich than trying to take away their money. And, this can be done piecemeal, one city or state at a time. 

Keeping Our Eye on the Ball

In contrast to the right, progressives get relatively few bites at the apple. The right can have a George W. Bush, who lied us into a pointless war in Iraq and then allowed the economy to collapse under his watch and then get back in control of the White House and both houses of Congress eight years later. If a progressive presidency had led to similar foreign policy and domestic disasters, the left could look forward to a half-century in the wilderness, maybe longer. 

For this reason, we have to make sure our bites at the apple are all good ones. A huge political battle for a wealth tax that ultimately ended in defeat in Congress or a loss at the Supreme Court would be a disaster. We need battles that are winnable and produce tangible near-term results. There are an infinite number of ways that we can turn to reverse the upward redistribution of the last four decades. This should be the focus of progressive economic policy. 

 
 
 
 

(I have corrected the numbers in this post in response to a comment by Joe pointing out my mistake.)

Apparently the New York Times thinks we should give this person lots of money or at least that we should hear her argument that we should give her lots of money. Jackie Victor, the owner of a bakery that had employed 135 people is unhappy that the loan she got through the Paycheck Protection Program will only be forgiven for the portion spent on wages, rent, and other limited categories of expenses.

Ms. Victor complains that this money must be spent within 60 days, which apparently is finding difficult to do. The portion not spent on designated expenses over this period is a near zero interest loan that must be paid back over the next 18 months. Ms. Victor thinks this is too short a period of time she wants it to be ten years.

Let’s see how much money Ms. Victor gets under this program. If her workers’ compensation averaged $40,000 a year, then she would be eligible for a loan of $1,225,000 under the program. Let’s say that she is not able to maintain her full staff (she indicates that some do not want to come back to work because of health or family considerations, also demand has fallen sharply).

Suppose she only spends $1 million on salary and the other allowable expenses. This $1 million is then forgiven. It’s a grant. The other $225,000 is a loan on which she will pay 1.0 percent annual interest over the 18 month term of the loan. Let’s say, generously, that she otherwise could have borrowed money at a 4.0 percent interest. This means that we have effectively given her another $6,750 as an interest rate subsidy. That makes the total amount given to Ms. Victor to maintain her business is $1,006,750 or a bit less than 630 food stamp person years.

This may be a reasonable payment in order to keep 135 people employed through this crisis, but if Ms. Victor is not going to keep anywhere near this number of people employed, then perhaps we are paying too much. We have a clear public interest in keeping these bakery workers employed, we have no obvious interest in ensuring that Ms. Victor is able to maintain a profitable business.

The paycheck protection program is appropriately designed to keep workers employed through the crisis. If it doesn’t meet Ms. Victor’s needs for restructuring her business, it is hard to see that as a problem.

 

 

(I have corrected the numbers in this post in response to a comment by Joe pointing out my mistake.)

Apparently the New York Times thinks we should give this person lots of money or at least that we should hear her argument that we should give her lots of money. Jackie Victor, the owner of a bakery that had employed 135 people is unhappy that the loan she got through the Paycheck Protection Program will only be forgiven for the portion spent on wages, rent, and other limited categories of expenses.

Ms. Victor complains that this money must be spent within 60 days, which apparently is finding difficult to do. The portion not spent on designated expenses over this period is a near zero interest loan that must be paid back over the next 18 months. Ms. Victor thinks this is too short a period of time she wants it to be ten years.

Let’s see how much money Ms. Victor gets under this program. If her workers’ compensation averaged $40,000 a year, then she would be eligible for a loan of $1,225,000 under the program. Let’s say that she is not able to maintain her full staff (she indicates that some do not want to come back to work because of health or family considerations, also demand has fallen sharply).

Suppose she only spends $1 million on salary and the other allowable expenses. This $1 million is then forgiven. It’s a grant. The other $225,000 is a loan on which she will pay 1.0 percent annual interest over the 18 month term of the loan. Let’s say, generously, that she otherwise could have borrowed money at a 4.0 percent interest. This means that we have effectively given her another $6,750 as an interest rate subsidy. That makes the total amount given to Ms. Victor to maintain her business is $1,006,750 or a bit less than 630 food stamp person years.

This may be a reasonable payment in order to keep 135 people employed through this crisis, but if Ms. Victor is not going to keep anywhere near this number of people employed, then perhaps we are paying too much. We have a clear public interest in keeping these bakery workers employed, we have no obvious interest in ensuring that Ms. Victor is able to maintain a profitable business.

The paycheck protection program is appropriately designed to keep workers employed through the crisis. If it doesn’t meet Ms. Victor’s needs for restructuring her business, it is hard to see that as a problem.

 

 

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