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If We Didn't Have Patents, How Would Major Companies Be Able to Harass Innovative Start-Ups? Print
Monday, 15 December 2014 07:50

A NYT article on Xiaomi, a fast-growing Chinese start-up that is now the number three seller of cell phones in the world, included the fascinating sentence:

"Xiaomi does not yet have much of a patent portfolio, leaving it vulnerable to lawsuits from competitors."

On its face, this sentence should have left readers baffled. Why would the lack of a patent portfolio make a company vulnerable to lawsuits? The answer of course is that patents are used as a harassing tactic. The idea is to bury your competitor with patent suits in the hope that one may actually get past summary judgement and go to trial. This can be time-consuming and expensive for a small company.

The advantage of having a large patent portfolio in this context is that you get to play tit for tat. You turn around and throw a pile of patent suits back at your competitor. The fight usually ends with both sides agreeing to drop suits, and occasionally some licensing fees being paid.

From an economic standpoint, these patent wars are a complete waste, but they nonetheless may prove profitable for a company that fights effectively. It's too bad that our "free traders" are so opposed to free trade, otherwise we could reduce this source of waste and upward redistribution (patent lawyers tend to be one percenters).

 
NYT Brings Adventures in Uninformative Budget Reporting to Kansas Print
Monday, 15 December 2014 05:43

Yes Toto, we're back in Kansas and we're discovering some folks really don't believe in reporting that provides meaningful information to readers. After all, what will most people make of an article on projected deficits in Kansas that told readers about Governor Brownback's schedule of tax cuts which are, "projected to cost $7 billion through the end of the 2019 fiscal year?" We are also told that the state faces a shortfall of nearly $280 million in the current fiscal year, which the governor proposes to address by, "cutting more than $70 million in agency spending and transferring more than $200 million into the state general fund from various reserves to plug the gap through the fiscal year ending in June."

Do you feel informed? In case you were one of the small minority of NYT readers who have no clue how large Kansas' budget is, the projection for the current fiscal year is roughly $14 billion, which puts the shortfall at 2 percent of projected spending. The $650 million shortfall projected for next year would be more than 4.0 percent of the state's budget.

The piece also refers to a $8 billion shortfall in the state's pension funding. This comes to less than 0.3 percent of the state's projected gross state product over the next three decades, the standard planning period for pension funds. The piece also tells readers about the governor's plans to make "changes" to the pension fund in order to "create a more sustainable long-term budget."

These sorts of changes would mean cuts, as in lower pensions or higher employee contributions. It is understandable that the governor and his allies would prefer euphemisms to conceal their agenda. It is not clear why the NYT would share the same motivations.

 

 
George Will and Tax Reform: If Only He Were Old Enough to Remember the Sixties Print
Sunday, 14 December 2014 17:34

George Will began a Washington Post column on tax reform by bemoaning the fact that we have defined success downward. He notes the celebration over the 321,000 job gain reported for November, then tells readers:

"In the 1960s, there were nine months in which more than 300,000 jobs were added, the last being June 1969, when there were about 117 million fewer Americans than there are now ."

While Will is right about the low bar for success (we should be seeing very rapid job growth following a steep downturn like the 2008-2009 recession), the sixties do not support his case for a need to cut tax rates. Through most of the 1960s the top individual tax rate was 70 percent, while the corporate rate was 50 percent. That compares to a top individual rate of 41 percent today, and a corporate tax rate of 35 percent. The top marginal tax rate in the first two months when we had 300k plus job gains was 90 percent. If Will wants to make the case for lower tax rates spurring job growth, he should not be citing the sixties.

Will then goes on to complain that one third of the people approaching retirement have no savings. This is indeed a serious problem, but it is hard to see it being cured by tax reform. Most of these people would have been in the zero, ten, or fifteen percent bracket for most of their working lives. Furthermore, they would have had the opportunity to put as much money as they plausibly would have been able into a tax deferred 401(k). It is very difficult to envision a tax reform that will enable these people to qualitatively increase their savings. Their main problem is not enough income, with close to four decades of stagnant wages.

Will also says the real estate industry really should support tax reform even if it caps the exemption for the mortgage interest deduction, because faster economic growth will lead to higher home prices. Both parts of this are wrong. Douglas Holtz-Eakin, who had been President George W. Bush's chief economist, examined all the standard macroeconomic models for the impact of large tax cuts on growth when he was head of the Congressional Budget Office. He found that even the most extreme assumptions implied that large tax cuts had only a modest effect on growth. 

Furthermore, economic growth is not associated with higher house prices. House prices only kept pace with inflation during the years of rapid growth in the 1950s and 1960s.

 
What's Complicated About a Government That Works to Benefit Rich People? Print
Sunday, 14 December 2014 07:53

The Washington Post ran part one of what promises to be a very good series on the plight of the middle class in the United States over the last four decades. After noting the lack of wage growth in the 2000s the piece tells readers:

"Jobs came back more slowly, if at all. Even before the 2008 crisis, the 2000s were on track to be the weakest decade for job creation since the Labor Department started tracking the statistics. The great mystery is: What happened? Why did the economy stop boosting ordinary Americans in the way it once did?"

It's not clear what is mysterious in this story. The economy was being driven by bubbles in both the late 1990s and the 2000s. When the stock bubble burst the only way to replace the demand was the housing bubble. When the housing bubble burst there was nothing to replace the more than $1 trillion in lost demand due to the collapse of residential construction and housing wealth driven consumption, as some of us said at the time.

The only mysterious aspect to this story is what anyone thought could replace this demand. Did they anticipate purchases of U.S.made goods and services by Martians?

More generally we have had a government committed to redistributing income upward for the last three decades. Currently President Obama is pursuing a trade deal that is designed to raise the price of drugs (current spending is around $400 billion a year -- this is real money) and get more money for the entertainment and software industry. He refuses to include any steps designed to reduce the trade deficit (i.e. lower the value of the dollar) which would be one obvious way to replace the demand lost by the collapse of the housing bubble.

And, these trade deals are likely to do almost nothing to increase trade in highly paid professional services, like those provided by doctors. (Many doctors are in the top one percent and virtually all are in the top two percent.) This allows pundits to run around saying that workers are losing out to an inevitable process of globalization and somehow never notice that doctors and other highly paid professionals have been deliberately protected.

And the Federal Reserve Board seems likely to raise interest rates next year for the purpose of slowing growth, which will prevent workers from getting jobs and seeing pay increases. The Fed has helped to keep the unemployment rate much higher in the years since 1980 than in the decades before as Jared Bernstein and I point out in our book.

In short, it seems pretty obvious what has happened to the middle class. The government has designed policies to help the rich at their expense. It's  not clear what part of this story is mysterious.

 
What the Fresher Data Show on Down Payments and Mortgage Default Rates Print
Saturday, 13 December 2014 09:36

Ron Lieber had a well-reasoned "Your Money" piece in the NYT that discussed the merits and pitfalls of buying a home with a low down payment. However it may have misled readers about the findings of the research.

It noted that some people have raised concerns about the risks of default on low down payment mortgages (it linked to a post by me) and then it referred to others disputing that low down payments are associated with higher risks, using "fresher data." The fresher data in question is a study by the Urban Institute which actually shows a strong inverse relationship between the size of the down payment and default risk for every year analyzed. 

For example, in 2001, people with strong credit scores (FICO above 750) had a 0.2 percent default rate if they put 20 percent or more down on their house, their default rate was six times as high, 1.2 percent, if their down payment was between 3-5 percent. For people with low credit scores (below 700), the default rate was 2.2 percent with a down payment of 20 percent or more, it was 5.1 percent for a down payment between 3-5 percent.

The comparable numbers for 2007 were 4.5 percent for people with strong credit scores and 20 percent or more down, compared to 13.5 percent for people with strong credit ratings and 3-5 percent down. For people with low credits scores, and putting 20 percent or more down, the default rate was 20.9 percent compared to 30.6 percent for those putting 3-5 percent down.

The way the study implies a weak relationship between down payment and default risk is by comparing default rates for people who put between 5-10 percent down and people who put 3-5 percent down. Since almost all the the people in the former category are putting just 5 percent down, the study is effectively telling us that the default rate is not much higher if people put 3 percent rather than 5 percent down. This is probably true.

 
That Horrible Debt Burden On Japanese Children Print
Saturday, 13 December 2014 09:15

Due to Japan's national debt, which is well more than twice its GDP, Japan's children are burdened with interest payments that are close to 0.8 percent of GDP. That sounds pretty awful right? How are the kids going to be able to make it?

If the sarcasm isn't obvious, then you need some basis of comparison here. The interest burden in the United States is now 1.4 percent of GDP. When our children were really being crushed by the burden of the debt back in the early 1990s the interest burden peaked at a bit more than 3.0 percent of GDP, a bit less than four times Japan's current burden. In fact, the figure of 0.8 percent of GDP overstates the true burden since much of this money is paid to Japan's central bank and then refunded to the government.

The prompt for this discussion is an article in the Washington Post about the prospects for Japan's Prime Minister Shinzo Abe and his economic program, now that he has called snap elections. To get an assessment of the impact of Japan's debt on the welfare of future generations the Post turned to Kayoko Kamiya, who is identified as "a 43-year-old housewife." 

"Well, we are only shifting the burden to my children, so it’s tricky, ... Raising the tax [a consumption tax increase that had been scheduled to go into effect in April, but now has been delayed by Abe] earlier would make things at least easier later. I feel unsure if it’s right that the current generation doesn’t take care of the debt."

The piece also tells us that the bond rating agencies (yes, those people who rated subprime mortgage backed securities as Aaa) are threatening to downgrade Japan's debt. It might have been worth pointing out that the financial markets appear to disagree with the bond rating agencies. The interest rate on 10-year Japanese government bonds is 0.40 percent.

In a piece providing an assessment of the economy's performance under Abe, it would have been worth noting that Japan's employment rate has risen by 2.2 percentage points since Abe took office at the end of the 2012. This would be the equivalent of adding more than 5 million workers in the United States.

 

Addendum:

This piece wrongly asserts that Japan has been in a deflationary spiral over the last 15 years. This is not true. It has consistently had very low inflation rates that did in some years turn negative. However, the deflation rate never exceeded -1.0 percent and it has not accelerated, as would be implied by a delfationary spiral. The basic problem in Japan is the same as in Europe, the inflation rate has been too low over the last two decades.

 
The Incompetence of Economic Policy Makers: Why U.S. Women Are Leaving the Labor Force Print
Saturday, 13 December 2014 08:39

The NYT seems intent on hiding the elephant in the living room. Yesterday it gave us a piece on why men are leaving the labor force, today it gives us a piece on why women are leaving the labor force.

Both articles raise some interesting and important issues. The article on women and work in particular gives an excellent discussion of how most other wealthy countries are far ahead of the United States in providing support for working mothers in the form of paid family leave, paid sick days, and affordable child care. (These are all areas in which CEPR has done considerable research.) 

The failure of the United States to meet the needs of working parents largely explains why so many countries have passed the United States in the percentage of prime age (ages 25-54) women who are employed. This figure now stands at 69.9 percent in the United States. By comparison, it is 78.4 percent in Denmark, 76.1 percent in France, and 72.0 percent in Japan.

But the failure of the United States to meet the needs of working parents doesn't respond to the headline of the piece, "why U.S. women are leaving jobs behind." The answer to this question is very clearly the state of the economy. After all, the employment to population ratio (EPOP) for prime age women peaked in 2000 at 74.2 percent, coincidentally the peak of the business cycle. After the stock bubble burst and threw the economy into recession in 2001 the EPOP for prime age women declined. It bottomed out at 71.8 percent in 2004 and then started to rise as the economy began to create jobs again. It peaked at 72.5 percent in 2006 and 2007 and then tumbled to a low of 69.0 percent in 2011. Since then it has inched up gradually as the labor market has begun to recover from the downturn.

Anyhow, it is good to see the NYT draw attention to the failure of the United States to provide adequate support for working families which leads to unnecessary hardships for both parents and children. But it is seriously misleading to imply that the causes of the drop in employment of women in this century can be found anywhere other than the failed macroeconomic policies originating in Washington.

In other words, U.S. women are leaving the labor force because Alan Greenspan and other financial regulators and the economics profession were too incompetent to recognize an $8 trillion housing bubble. And they are leaving the labor force because Washington politics are dominated by a cult of balanced budgets. This cult is so powerful that even the politicians who know it is nonsense are scared to challenge it. Washington politics is also dominated by powerful interest groups (e.g. Walmart, General Electric, the financial industry) who benefit from an over-valued dollar and don't care about the millions of jobs lost due to the resulting trade deficit.

Anyhow, these macroeconomic forces are not really questionable. Unfortunately they are rarely discussed in the media. Stories like the one today and yesterday badly mislead the public by largely ignoring these forces.

 
Global Warming: The United States Does More Harm Than Just Being the World's Largest Economy Print
Friday, 12 December 2014 07:40

A NYT article on a change in other countries' attitudes towards the United States role in global warming negotiations seriously understated the basis for other countries' anger toward the United States on this issue. It referred to reactions to President Obama's inability to get Congress to pass a law to reduce greenhouse gas emissions:

"the United States went back to being viewed as the world’s largest economy and largest historic greenhouse gas polluter, refusing to change course."

Actually, if the United States were just polluting in the same ratio to GDP as other wealthy countries that would be an enormous step forward. However, we have taken few of the steps that Europe has done over the last four decades to reduce energy consumption. In addition, because we have taken gains in productivity growth rather than leisure, we emit more than twice as much greenhouse gas (GHG) as people in western Europe, even though we have comparable living standards.

If it were just a question of the U.S. emitting a lot of GHG because we are the world's largest economy, those concerned about global warming would be much more pleasantly disposed toward the United States.

 
The Decline In Male Employment: Look to Large Trade Deficits and Small Budget Deficits Print
Friday, 12 December 2014 06:56

The NYT had an interesting piece on the decline in employment rates among prime age male workers. While it discusses many of the causes of this decline, it missed the most obvious: policy decisions that have depressed demand in the economy. Many readers of the piece may wrongly believe that the current low employment rate is primarily the result of a long-term trend. This is not true.

From 1979 to 2000 the employment to population ratio (EPOP) fell by 2.1 percentage points. If it had continued this pace of decline, it would have fallen by roughly 1.4 percentage points since 2000. In fact, it has dropped by 5.1 percentage points. The most obvious explanation for this more rapid rate of decline is weak demand. The weakness of demand is in turn caused by a decision to keep down the size of the budget deficit and to sustain an over-valued dollar. These are both policy decisions made in Washington that have nothing to do with the character and skills of the workers who do not have jobs.

It's also worth noting that wages for the jobs that these men may be able to get would be considerably higher if the government decided to run a high employment policy. As Jared Bernstein and I show in our book, wages for those at the bottom of the income distribution are strongly influenced by the unemployment rate.

 
Chronic Lyme Disease, the State of Science, and the Trans-Pacific Partnership Print
Wednesday, 10 December 2014 20:37

I apologize for a bit of a digression here for personal reasons (my wife has chronic Lyme disease), but if you'll bear with me, I think I can make some connections. The immediate prompt for this post is a snide article in Slate by Brian Palmer, warning readers that, "New York is about to change its medical misconduct law to protect quacks."

The "quacks" referred to in the article's sub-headline are doctors who provide long-term antibiotic treatment for people who have chronic Lyme disease. As the article tells us, chronic Lyme does not exist:

"The Infectious Diseases Society of America—the association of scientists and clinicians who study this sort of thing—has repeatedly characterized chronic Lyme disease as 'not based on scientific fact.'"

It's great that Palmer can be so confident of this assertion, but it turns out that the evidence is far weaker than the association of scientists and clinicians who study this sort of thing might lead you to believe. There are actually very few studies that have tried to evaluate the effectiveness of long-term antibiotic treatment of people who believe themselves to be suffering from chronic Lyme.

As explained in an analysis by Brown University researcher Allison DeLong, one of the studies was poorly designed so that it would have been almost impossible for it to have found a significant effect from antibiotic treatment. A second study did find evidence that treatment alleviated symptoms, however this finding was dismissed because the symptoms returned after the treatment stopped. (Effectively this study was testing whether six months of treatment would cure patients, some of whom had years of prior treatment. It really shouldn't have taken too much background in science to know the answer to that one would be no.)

The third study actually did find statistically significant evidence that treatment improved patients' outcomes by its main measure, a survey on fatigue. However it dismissed this finding because the researchers decided that the blind nature of the study had been compromised. When surveyed after the fact, 70 percent of the control group wrongly guessed that they had been treated. However two-thirds of the treatment group somehow recognized that they were being treated. Therefore the researchers decided that they could not accept the results, since the people in the treatment group knew they were being treated.

I'm not making this up. You can find the study here. It was published in a major medical journal and its negative findings are routinely cited by doctors arguing that chronic Lyme disease does not exist and long-term antibiotic treatment is pointless. (If you haven't figured it out yet, the study found exactly what you would want in the comparison between the control and the treatment group. The same percent of people in each group thought they were being treating. This means that the blind nature of the study was not compromised.) 

Read more...

 

 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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