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Home Publications Blogs CEPR Blog Economics 101 for the Debt Fixers

Economics 101 for the Debt Fixers

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Written by Dean Baker   
Friday, 30 November 2012 06:33

Many economists have pointed out that the Campaign to Fix the Debt and the rest of the austerity crew seem badly confused about basic economics. The most obvious item that they seem to be missing is that large current deficits are the result of the downturn that was caused by the collapse of the housing bubble.

We did not go on a sudden spending spree and tax cutting orgy in 2008. The deficits exploded from a completely sustainable 1.2 percent of GDP in 2007 to levels close to 10 percent of GDP in 2009 and 2010 because the downturn sent tax collections plummeting and increased spending on programs like unemployment insurance. Were it not for the downturn, the deficits would again be relatively small. Rather than posing a risk to the economy, the deficits are sustaining demand and growth, keeping unemployment lower than it would otherwise be.

The markets understand this, which is why investors are willing to lend the United States trillions of dollars at interest rates that are just over 1.5 percent. But this is far from the only problem with the debt fixers' understanding of the economy.

While they obsess about the debt as imposing a burden of future interest payments on our children (who will also receive these future interest payments), they somehow manage to ignore other commitments that the government is making for the future. The most important one is patent and copyright monopolies. While these payments do not appear in the government's books, they imply enormous flows of income from the rest of us to patent and copyright holders.

In the case of pharmaceuticals alone, patent monopolies are likely to lead to a transfer of more than $3 trillion over the next decade from consumers to the pharmaceutical industry. If we added in flows of income stemming from patents and copyrights in other sectors, like crop seeds, software, recorded music and video material, the sums would almost certainly be 2 or 3 times as large. In other words, it is real money.

Furthermore, there can be real trade-offs between the official debt and the patent rents. Suppose that we could have the government spend $500 billion in upfront research on developing new drugs (in addition to the $300 billion we are already projected to spend) to replace the research by the industry. If we could then buy all drugs at the free market price we would save ourselves $2.5 trillion over the decade ($3 trillion in reduced drug costs, minus the $500 billion in government research spending). 

While that policy would be a clear winner to folks who know economics, it would flunk in the debt fixers' calculations since they only pay attention to the $500 billion addition to the government debt, not commitments like providing patent monopolies for long periods of time. Now if someone could just teach this simple point to the debt fixers then maybe they would be using their millions to push better policy.

 

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