Dean Baker
Truthout, May 21, 2018

Paul Krugman had an interesting blog post this morning in which he attributed the continuing weakness of wage growth to an increase in monopsony power. I'm a skeptic on this one since the collapse in wage growth happens to coincide with the Great Recession. The big issue is whether the labor market is again back to its prerecession level of tightness when wages were rising considerably more rapidly.

To argue the case that it is, Krugman follows Jason Furman in dismissing the drop in prime-age labor force participation as just being part of a longer-term trend. This leaves me uncomfortable for a couple of reasons.

First, it would be nice to have an explanation for the trend, instead of just pointing to it and saying "trend." We have clear explanations for trends like rising incomes through time or increases in life expectancy. What is the explanation for fewer men interested in working through time? Will this decline persist forever?

That brings me to the second reason I am uncomfortable with this story. Insofar as there had been an explanation, it was usually that the skills of less-educated men were less valued in the modern economy. We no longer need strong people to move things around, machines do that for us.

There undoubtedly is some truth to this story, except the drop in employment rates (EPOPs) since 2007, and especially since 2000, has been pretty much across the board. EPOPs have fallen for both men and women and at pretty much all education levels. These drops are departures from past trends. (Women's EPOPs had been rising until the 2001 recession.) A shortage of demand is the most simple explanation for why there would be a sudden drop in EPOPs hitting pretty much every demographic group.

Economists usually are inclined to trust the data coming out of the Federal Reserve Board and the government statistical agencies, but the NYT told us they are wrong in an article on trade negotiations with China. The article refers to a disputed promise by the Chinese government to reduce its annual trade deficit with the United States by $200 billion.

The piece explicitly dismisses the significance of this promise. It tells readers:

"Economists say that the purchase by China of $200 billion more in American goods per year — an amount equivalent to more than half of the annual American trade deficit with China — simply is not practical. 'The short answer is these are unrealistic numbers,” said Chad Brown, a senior fellow at the Peterson Institute for International Economics.'

"Even if the Chinese stopped buying other foreign products, like Airbus airplanes from the European Union or soybeans from Brazil, and purchased solely American products, it would add up to only a small fraction of the $200 billion total they are promising to purchase.

"'It would even be a stretch to get it to $50 billion,' Mr. Bown said.

"That is because the United States economy is already running near its full productive capacity, meaning it would not be able to produce enough new goods to meet Chinese demands, especially in the short term.

"In that scenario, the United States would probably stop selling airplanes, soybeans and other exports to other countries and sell them to China instead — shrinking the United States trade deficit with China but leaving the United States trade deficit with the entire world unchanged."

The claim advanced by Mr. Brown, which the piece implies is shared by all economists, implicitly assumes both that the US economy is at full employment and that the manufacturing sector cannot expand its output. Government data would indicate that neither claim is true.

Alexander MainNACLA, May 17, 2018

Jared Bernstein and I had a piece earlier this week discussing the problems that a government job guarantee would address along with some of the problems which make us reluctant to endorse one. I thought it would be useful to summarize the four areas in which we have serious concerns about the economic response:

1) The number of people currently employed who would opt for a guaranteed job.

Proponents of a guarantee argue that most private sector employers would improve their wage and benefit package to match the terms offered by a guaranteed job. Given the large portion of the workforce who stand to gain from a job with the terms being proposed ($15 an hour wage, plus genenefits), it isrous health care and other be possible that tens of millions of workers may see a guaranteed job as better than those on offer in the private sector.

2) The ability of the government to effectively manage a jump in the size of its workforce by at least 10 million and quite possibly two or three times this size. 

The issue here is whether the people doing jobs provided through the guarantee are actually doing useful work. This is not just a moral concern that people work for their pay. It will be pretty much impossible to maintain political support for a job guarantee if people employed under the program routinely come to work late, leave early, or don't show up at all, or alternatively sit around and do nothing when they are ostensibly employed. Since by definition many of these people will have little work experience, the task will be even harder.

Dean Baker
Truthout, May 14, 2018

Dean Baker and Jared Bernstein
The Washington Post, May 14, 2018

Eileen AppelbaumThe Hill, May 13, 2018

I was glad to see Paul’s short post explaining some of the economics of the US government negotiating drug prices with the drug companies: the route Donald Trump rejected. I thought I would add a few more points.

First, the monopoly profits earned by the drug companies provide a powerful incentive for rent-seeking. This is the standard story that economists always complain about with trade protection, except instead of talking about a tariff that raises the price of the protected item by 10 or 25 percent above the free market price, we’re talking about a government-granted monopoly that typically raises the price of a factor of ten or even a hundred compared with the free market price. These markups are equivalent to tariffs of 1000 percent or 10,000 percent.

This not only encourages behavior like the payoff from Novartis to Trump lawyer Michael Cohen, it also gives drug companies an enormous incentive to misrepresent the safety and effectiveness of their drugs. We frequently hear stories of drug companies withholding evidence that their drugs are less effective than claimed or even harmful for some patients. Perhaps the most famous was the case where Merck allegedly withheld evidence that its arthritis drug, Vioxx, increases the risk of heart attack and strokes for people with heart disease. Needless to say, the costs from this sort behavior are enormous.  

A second point is that we are not talking about a typical consumer buying decision, like buying a car or a cell phone. People buy drugs because they are in bad health and possibly facing death. As Krugman notes, there is typically a third-party payer, either an insurer or the government. Apart from the possibility that this can lead to excessive payments that Krugman discusses, there is also the perverse dynamics this creates.

The price that companies end up getting for their drugs, and if they get it all, depends on the ability of patients to lobby their insurer or the government. Naturally, the drug companies are happy to help in this effort. There is a whole set of industry-funded disease groups that are largely aimed at forcing insurers and the government to buy expensive drugs, often of questionable value, from the drug companies.

This also raises the point that it is pretty crazy that we expect people when they are sick or dying to pay for research that has already been done. In almost all cases, the cost of manufacturing and delivering drugs is cheap, we make it expensive with government-granted patent monopolies. If we asked questions about paying for possibly life-saving drugs at their actual production costs, it would almost always be a no-brainer. But when we have a cancer drug, which may not even work, that a drug company sells for several hundred thousand dollars, it becomes a tough question as to whether the government should pick up the tab or force insurers to do so.

Finally, there is an absurd view in this debate that somehow patent monopolies are the only way to finance innovation. There is no argument that we have to pay for research; no one expects highly skilled researchers to work for free. But we can and do have other mechanisms for paying for this work.

The government already spends more than $30 billion a year on biomedical research, primarily through the National Institutes of Health. This research is incredibly productive by all accounts. There is no reason, in principle, that we can’t double or triple the amount we spend on directly supported research. This would allow all new drugs to be sold at generic prices, without patent monopolies or related protections. By my calculations, this would save close to $380 billion a year (around 2.0 percent of GDP or more than five times the annual budget for the food stamp program). We would also benefit from having all the research findings in the public domain so that doctors and other researchers would have access to it when making decisions for their patients or planning future research.