Corporate profits have done well in the lopsided recovery and the stock market is hovering near record highs. Working women and men have been left behind, however, as companies have failed to translate these improvements into robust job growth, rising wages or improvements in the quality of jobs. Income gains since the economy bottomed out in July 2009 have all gone to the top 1 percent of households.
Women lost fewer jobs than men in the recession; the slow recovery in men’s jobs requires far more attention from policy makers than it has received. But women have also fared poorly as job creation has predominantly occurred in low wage jobs as retail sales clerks, restaurant wait staff, child care workers, cashiers and food service. Protracted problems facing women workers that preceded the recession have only been exacerbated by slow employment growth.
Perhaps the most meaningful measure of women’s economic opportunity is the share of women between the ages of 25 and 54 – the prime years for both motherhood and employment – that actually have jobs. In 1990, the U.S. was a leader in terms of employment opportunities for women. Today, it is a laggard. In the years preceding the recession, 72.5 percent of prime age women in the U.S. held jobs. Now it is 69.2 percent – barely above its post-recession low of 69.0% in 2011 and the same as the employment rate of women in Japan, a country not known for providing women with economic opportunities. In fact, the U.S. ranks 24th out of 34 industrialized countries, behind not only the Nordic countries and the major countries of continental Europe, but behind the rest of the English-speaking world (Australia, Canada, Ireland, New Zealand and the U.K.).
July 24th will mark four years since the last increase in the federal minimum wage. By the most commonly used benchmarks – inflation, average wages and average productivity – the current $7.25-an-hour rate is well below the peak it hit five decades ago.
According to these benchmarks, the federal minimum wage peaked in 1968. If it had been indexed to the official Consumer Price Index (CPI-U) from that point forward, the minimum wage in 2013 would be $10.75 — $3.50 per hour higher than it actually is. If we measure inflation from 1968 forward using the same procedure we use today (the way we calculate inflation has been updated several times since the late 1960s), the 2013 value of the minimum wage would be $9.42 (see the figure below) — almost $2.25 higher than it is today.
During much of the 1960s, the minimum wage was close to 50 percent of the average production worker’s earnings. At its 1968 peak, the minimum wage was equal to 53 percent of what the average production worker made. If the minimum wage were at 50 percent of the production worker wage in 2013 (using a projection of the 2012 level to produce a full-year 2013 estimate), the federal minimum would be $10.06 per hour.
Next week marks four years since the last time that there was an increase in the federal minimum wage (currently $7.25 per hour). While we have argued here, here and here that the federal minimum-wage rate is too low, 19* states have taken matters into their own hands. These states have passed legislation to raise their minimum wage above the level set by the federal Fair Labor Standards Act (FLSA). The state of Washington has the highest state minimum wage at $9.19 (with the future level indexed to inflation). Oregon follows closely behind at $8.95 (also indexed). Ten of the 19 states have also linked their state minimum wage to the consumer price index, so that the rate automatically keeps pace with inflation each year (AZ, CO, FL, MO, MT, NV, OH, OR, VT, and WA).
State legislation has set a standard for higher minimum-wage rates linked to cost-of-living increases. It is past time for the federal government to follow suit.
Last night after watching my weekly fix of dancing contests on TV, I clicked around the channels and found myself engrossed in a new Frontline documentary hosted by Bill Moyers, "Two American Families." It's a fascinating profile of two Milwaukee families, one black and one white, struggling to stay in the middle class over 20-plus years. It brings to life -- with human faces and heartbreaking stories -- many of the statistics and analyses that CEPR produces about working people in this country.
My CEPR colleagues' frequent work work to define and examine the decline of "good" jobs in America came to mind throughout the film, as these families' stories mirror what the data indicates. In CEPR's reports, a "good" job is defined as $19 per hour with employer-provided health insurance and an employer-sponsored retirement plan. When we first meet the families in the early 1990s, three of the four parents have lost "good" union jobs in manufacturing (close to $20 per hour and benefits).
The film documents their struggles over the next two decades to find similar jobs to replace the ones they lost, and after watching them all bounce from one insecure, low-wage job to another, it appears that none of the parents ever manage to do so. They work days, nights, and multiple jobs -- usually manual labor -- and yet continually face financial hardship, even foreclosure and divorce.
By the end of the film, we get to see how the eight children across the two families have turned out as adults. From the descriptions of their work situations, it appears that only one (the eldest son in the Stanley family) definitely has a "good" job -- $45,000 per year assisting the Milwaukee common council president. Two of his siblings may have "good" jobs (we don't learn enough to know for sure) -- a sister who's working at a county clerk's office in Virgina, and a brother who, after failing to find work in Milwaukee, is in Afghanistan working for a military contractor.
Everyone has probably seen one of those silly debt clocks that is supposed to keep us apprised of how much money the federal government owes. That's what you buy when you're a Wall Street billionaire who has money to throw around and wants to scare people in supporting cuts for Social Security and Medicare.
But if you don't have any money but you do want to tell people what is going on with the economy, you create a "lost output clock." This clock tells us on ongoing basis the amount of goods and services that we have lost since the recession began in 2007, due to the economy operating below its capacity. This is the value of the education and health care that the economy could have provided, but didn't. The value of the housing, the infrastructure, the research and development and all the other areas of economic activity that did not happen because we are operating the economy at well below its potential level of output.
On the flip side, of course this lost potential output corresponds to the 8.5 million additional jobs we would have right now if the economy was operating at its potential. At potential GDP we would also see roughly 4 million part-time workers be able to get full-time jobs. And we would see workers at the middle and bottom of the wage ladder securing real wage gains, since they would have considerably more bargaining power.
We have known how to boost an economy out of a slump since Keynes wrote the General Theory more than 75 years ago. But because people with superstitutions about the flat earth and balanced budgets control economic policy, we continue to have an economy operating well below capacity with massive amounts of unnecessary unemployment and underemployment.
One of the simple facts of the economy that troubles many economists is the absence of any relationship between profits and investment. Economists like to tell people that if we make investment more profitable, we will have more investment. It turns out the world doesn't work that way.
Here's one of my favorite graphs of the economy going back to the early years right after World War II. It's about as simple as it gets. It shows the investment share of GDP. Then it shows the profit share of net value added in the corporate sector. The measure of profit here is the broad measure of business operating surplus. Using net takes away the downward bias in recent years that would result from a rising depreciation share of output. The last line is the after-tax profit share.
The first item worth noting here is that investment doesn't fluctuate all that much. It peaks at 13.4 percent of GDP in 1981. The closest it ever comes to this share again is in the looniness of the stock bubble when the ability to raise money on Wall Street for every crazy idea pushed the investment share up to 12.7 percent of GDP. Even this number is overstated by 0.3-0.4 percentage points because of the growth of car leasing in the 1990s. (A leased car is owned by the leasing company and therefore counts as investment. By contrast, when a consumer buys a car it is treated as consumption.)
The takeaway is that anyone who expects a huge uptick in investment to provide a major boost to demand is either smoking something serious or simply has never looked at the data. It hasn't happen in the last 65 years and it's not about to happen now.
The following highlights CEPR's latest research, publications, events and much more.
CEPR on Good Jobs for Black Workers
CEPR Research Associate Janelle Jones and Senior Economist John Schmitt released the latest in their series of reports on job quality. The new report focuses on African-American workers, noting that the big increases over the last three decades in educational attainment among black workers have not been matched by improvements in job quality. CEPR posted an infographic to Tumblr that breaks down the main points of the report.
CEPR on Edward Snowden, the NSA and Foreign Policy
CEPR Co-Directors Mark Weisbrot and Dean Baker have op-eds on The Guardian and Yahoo! Finance's The Exchange, respectively, on the case of whistleblower Edward Snowden. Mark wrote in his columns about Ecuador's principled consideration of asylum for Snowden and how it has been demonized in the media as a result. Dean wrote on how the case has exposed the privatization of national security. Mark followed up his Guardian piece with a new column in Aljazeera English examining the Obama administration’s shift in diplomatic strategy on Snowden. Mark also issued a statement and was on RT's Cross Talk to debate the case opposite Ariel Ratner of the Truman National Security Project .
CEPR’s Americas Blog has been monitoring Snowden's case with an eye toward U.S. foreign policy and the Americas. Posts by Mark Weisbrot so far have noted how the Obama administration’s initial approach of threatening other countries over Snowden backfired, while its media strategy of making Snowden appear to be a “spy” and a traitor has had success with the major media. Posts by International Communications Director Dan Beeton have examined U.S. policymakers’ threats to punish Ecuador by ending trade preferences – a threat that Ecuador preempted by abandoning the trade benefits so that they could not be used as leverage. The blog has also noted an appeal to Ecuadorean President Correa by Oliver Stone, Noam Chomsky, Tom Hayden, Daniel Ellsberg, Danny Glover, Shia LaBeouf and many others to grant Snowden asylum.
CEPR on How Volunteering Pays Off
A paper by CEPR Senior Research Associate Helene Jorgensen found a positive volunteer effect on the probability of employment for persons who were not employed and volunteered for more than 20 hours per year. The paper, “Does It Pay to Volunteer?”, also found that many volunteers did not actually volunteer in the professional field in which they were seeking employment, suggesting that volunteering may have signaled to prospective employers the applicant possessed desirable qualities such as motivation, creativity and reliability. Forbescovered the paper, and Helene wrote a blog post on the topic, comparing her paper to another study, “ Volunteering as a Pathway to Employment,” that was conducted by the government agency Corporation for National & Community Service (CNCS) and released the same week.
CEPR Research Associate Janelle Jones will be on Bloomberg's Bottom Line tonight at 7:40 p.m. to talk about her latest report with Senior Economist John Schmitt, "Has Education Paid Off for Black Workers?" According to the report, black workers today are better educated and older than they were three decades ago but are still less likely to be in a good job now than they were in 1979. The report examines the deterioration of job quality for black workers in the United States and evaluates several policies that could help to reverse the trend. The following graphic explains the report's findings.
Following up on last Wednesday’s item regarding downward revisions to gross domestic product (GDP) it is worth pointing out again that gross domestic income (GDI) is not a better measure of the economy. Though the two measures are in theory equal, each relies on different data sources and so the two differ by a “statistical discrepancy.”
As Dean and I noted previously, movements in the statistical discrepancy appear to be in part driven by misreported capital gains. Capital gains are not supposed to count toward GDI, which measures income with respect to production of current goods and services. However, it is likely that some amount of short-term capital gains are reported as ordinary income. (The IRS isn’t picky about such errors because it doesn’t really change taxes owed.) If a fixed percentage of capital gains is always misreported as ordinary income, then the absolute amount of misreporting will be larger when capital gains are larger. Thus, GDI becomes overstated and the statistical discrepancy--ordinarily positive—turns small or even negative.
Previously, we used quarterly data from the Federal Reserve to show how household net worth varied with the statistical discrepancy—specifically that the discrepancy fell during periods of stock market and housing bubbles. This relationship is seen in the graph below.
The median wage in 2012 (about $16.28/hr) was only 5.7 percent higher (in real, inflation adjusted dollars) than it had been in 1973. Part of this is explained by a 3.5 percent drop in the downturn, but the bigger story was the three prior decades of paltry wage growth.
The culprits in this story are legion and include--over the long haul--a collapse in private sector union density, a meager (in value and scope) minimum wage, workers-be-damned trade policy, and job growth crowded into low-wage service occupations. But a big part of the story is simply slack in the labor market. Over the past generation, the only respite from unrelenting downward pressure on wages came during a brief spell of full employment in the late 1990s. Those years saw wage gains across the board, closely resembling the shared prosperity of the 1947-1973 era. But on either side of that boom, when high rates of unemployment were the norm, wages (especially for those at the median and below) fell steadily.
We can see the importance of full employment at work in the relationship between wage growth and unemployment in the states across the boom of the late 1990s and across the last business cycle. The graph below plots the change in real wages for two seven year periods: from 1996-2002 and from 2006-2012 (the latter running from the year before the recession to the most recent available annual data) against each state’s unemployment rate at the midpoint of the period (1999 and 2009).
In the late 1990s, state unemployment rates clustered around that national rate of just over 4 percent, and only three states suffered unemployment rates over 6 percent. Workers at most deciles, accordingly, enjoyed robust wage growth. Full employment was especially important for workers at the bottom of the wage distribution. Wage growth—and the relationship between full employment and wage growth—was strongest at the 10th decile and weakest at the 90th.
Ben Casselman at the Wall Street Journal wondered last month whether the economy was doing better than the GDP numbers suggested. By contrast, we learn today that even GDP hasn’t done as well as those GDP numbers suggested.
The latest from the Bureau of Economic Analysis indicates that the economy was smaller in the first three months of 2013 than previously reported. In May, BEA reported 2.4 percent economic growth in the first quarter of the year. Today, that figure was revised down to 1.8 percent.
Domestic demand for all newly-produced goods and services contributed 1.3 percentage points to GDP growth—revised down from 2.0 percentage points in April’s estimate. All categories were revised downward, with personal consumption contributing 1.8 percentage points rather than 2.2, fixed investment contributing 0.4 percentage points instead of 0.5, and government expenditures subtracting 0.9 percentage points down from a previously reported -0.8.
Foreign demand was revised down as well. Though exports had been thought to have added 0.4 percentage points to GDP growth, BEA now reports that exports fell, subtracting 0.2 percentage points.
At least one observer had previously pointed to the rebound in inventory accumulations as indicating “future consumer spending” but that rebound was much smaller than initially thought— adding only 0.6 percentage points to economic growth, rather than 1.0.
All in all, this is very bad news for how the economy performed in early 2013. Major historical revisions are on the way next month. Perhaps the second quarter numbers will look better than the first. The downward revisions to the first quarter data makes that a lower bar.
While many are celebrating the Supreme Court’s decision granting marriage equality to same sex couples, some have been quick to highlight the potential budgetary costs of this decision. In particular, opponents of the court’s ruling are warning the public that it will lead to much higher costs for Social Security.
Before anyone rushes to push through a constitutional amendment, it would be worth trying to get an idea of the potential costs to Social Security resulting from this decision. Essentially the decision says that same sex couples have the right to be married and enjoy the same benefits and protection that Social Security provides to heterosexual couples.
There would be some issues involving children of spouses of disabled workers or workers who have an early death, but the bulk of the impact will be from spouses in same sex couples who will be entitled to a higher retirement benefit as a result of marriage. This takes two forms. First, in retirement a spouse is entitled to half of their married partner’s benefit if this would be larger than the benefit they would receive based on their own work history. Second, after a spouse dies, a retiree is entitled to the higher of either their own benefit or their spouses. By virtue of the fact that same sex couples will now be able to have the same rights in marriage as heterosexual couples, both of these channels will lead to higher benefit payouts.
Of course in the vast majority of cases, the wage-based benefit of the lower earning spouse will be more than half of the benefit of the higher earning spouse. The reason is that the benefit structure is very progressive. Suppose that a higher earning spouse had an average lifetime indexed-earnings of $100,000 in 2013 dollars. Under the current benefit formula this worker would be entitled to $2,500 a month or $30,000 a year, if he or she waited until age 66 to start collecting benefits.
In order for a worker’s wages to qualify them for at least half of this benefit or $1,250 a month, they would need average earnings of just $29,750 a year (@ $15 an hour for a full-year worker), less than one-third of their high earning spouse’s wages. While there continue to be large gaps between male and female earnings, the gaps are likely to be smaller between the earnings of two men or two women in a same sex marriage. Therefore it is likely that in the case of most same sex couples, the lower earning spouse will have a wage-based benefit that is at least half as high as that of the higher earning spouse. In the cases where this is not true, the bump up to half of the spouses benefit is likely to be small.
The Coalition for Sensible Safeguards (CSS) released a report this month detailing several would-be federal regulations currently delayed by bureaucratic logjams. Business interests lobby the White House Office of Information and Regulatory Affairs (OIRA) and draw out the rule-making process with lawsuits and meetings, often forcing OIRA and other agencies to miss important statutory deadlines. Aptly titled “Down the Regulatory Rabbit Hole: How Corporate Influence, Judicial Review and a Lack of Transparency Delay Crucial Rules and Harm the Public,” the report argues for numerous pending rules that would regulate automobile rearview visibility, silica dust exposure levels for construction workers, coal ash waste containment, imported foods, wage standards for homecare workers, energy efficiency standards and consumer financial protections. What holds this seemingly disparate list of demands together is an urgent cry for an effective federal regulatory system that protects workers and consumers from corporate interests.
At a time when the issue of jobs is a high national priority, one proposal around wage standards for homecare workers stands out. Specifically, CSS calls to expand the Fair Labor Standards Act (FLSA) to cover homecare workers, a change that has been under OIRA review for the past two years. Since 1974, homecare workers have been excluded from federal minimum wage and overtime requirements by an exemption intended for casual workers, such as teenage babysitters. However, this rule does not reflect the reality of today’s industry. As CSS reports, homecare is a growing and increasingly formalized industry made up of approximately 2.5 million workers nationally. Outdated labor standards mean that, according to Think Progress, “…many home care workers make below minimum wage and aren’t paid overtime, even if they live with their clients…[and] nearly 40 percent of these workers make so little that they turn to public benefits such as food stamps or Medicaid to get by.”
Prospects for homecare workers at the state level are mixed. While many homecare workers are protected by state minimum wage and overtime laws, 28 states have no such mandates. According to the Paraprofessional Health Institute and National Employment Law Project, in 2010, 15 states granted specific wage and overtime rights to homecare workers while seven states had wage minimums without overtime coverage. Moreover, many of the state wage and overtime protections exclude certain workers such as “personal attendants” and those employed directly by private households.
In the great state of California, approximately 360,000 largely unionized homecare workers are employed by In-Home Supportive Services, a state program subsiding homecare services for around 450,000 elderly, blind, and disabled residents. Since California already extends minimum wage requirements to homecare workers, revising the FLSA would impose new overtime rules on California, costing what detractors estimate at $150 million per year. Among them is California’s Governor Jerry Brown, who the Los Angeles Times reports would likely respond to the new rule by limiting the hours state homecare workers may work, effectively cutting the amount of care beneficiaries receive and pitting advocates for the disabled against labor.
As with the case of homecare workers and the FLSA, our regulatory system speaks to our national values. Rather than pay the true price of elder care, energy, construction, etc., we often opt for the absolute cheapest goods and services. Never mind the external costs to workers and consumers. A strong regulatory system lifts those costs off the backs of our neighbors, protects us from similar harm, and makes us all better off.
One of the most compelling lines put forward by those seeking cuts in Social Security and Medicare is that spending on the elderly is coming at the expense of our children. The people putting forward this argument typically point to the high percentage of children living near or below the poverty line. The argument is that if we could cut money for programs that primarily serve the elderly then we would free up money that could be spent to ensure that the young get a decent start on life.
There are many reasons this logic is faulty, most importantly by implying that there is any direct relationship between the money we spend on seniors and the money we spend on our children. Even if we were to cut funding for Social Security and Medicare there is no mechanism that ensures the money saved would go to helping children. It is entirely possible that the money would simply be diverted to tax cuts targeted to the wealthy or for some other purpose.
As a practical matter, if we look across countries we find that there is actually a positive relationship between spending on the elderly and spending on children. Countries that have been willing to commit a larger share of their output to ensuring that seniors enjoy a decent standard of living also seem willing to commit the necessary resources to ensure that their children have a good start in life.
While there may actually be no tradeoff between spending on seniors and spending on kids, there do appear to be other tradeoffs. For example, if we look at the share of GDP devoted to finance we find solid evidence of an inverse relationship with the willingness to support children.
Figure 1 graphs government spending per kid divided by per capita GDP against the share of GDP originating in the financial sector. There is a significant negative relationship, meaning the larger the share of the financial sector in the economy the less money is spent on kids. (The countries are all the OECD countries for which data is available, excluding former Soviet bloc countries.)
The chart clearly shows that countries with larger financial sectors are less generous to their children. While this hardly proves causation (it could be that if countries spend more money on their kids they won't go into finance), it certainly should raise questions as to whether financial interests are hostile to public spending on kids.
It is widely believed that volunteering improves people’s job prospects during economic downturns, however there is actually little research on the effect of volunteering on employment and pay – that is until now. This week not one, but two studies were released which found that volunteering increases the probability of employment of people who were not previously employed.
My study “Does It Pay to Volunteer?” and a study “Volunteering as a Pathway to Employment” conducted by the government agency Corporation for National & Community Service (CNCS) both examined this issue. Both studies relied on the BLS/Census survey on volunteering and used the same general methodology. And both studies found that volunteering improved the probability of employment significantly.
The two studies covered somewhat different groups of people. The CNCS study looked at people who wanted to work at the beginning of the 12-month period, while my study looked at everyone who was not previously working, including recent graduates who were not necessarily looking for work before they volunteered. The studies also looked at different time periods – my study looked specifically at the recession years, while the CNCS study looked at a 10-year period from 2002-2012. Finally, the studies looked at different age groups – my study looked only at the working-age population defined as 20-65 years old, while the CNCS study looked at everybody over the age of 16. Despite these differences, the overall findings are similar in the two studies, lending further support to the conclusion that volunteering does improve job prospects.
However, my study went one step further, and looked not only at the event of volunteering, but also the amount volunteered. It found that the number of hours that a volunteer engages in volunteer activities does matter. For people who volunteered less than 20 hours in a year, volunteering did not improve job prospects or at best had a small effect. However, for people who volunteered between 20 to 99 hours in a year, volunteering increased the probability of landing a job by 6.8 percentage point on average.
This is not really a surprising finding, since one would not expect that volunteering for a few hours, such as washing dishes in a homeless shelter at Thanksgiving, would be associated with much skill acquisition or network building. Moreover, brief volunteering would be a weak signal to prospective employers about a person’s abilities, motivation, initiative, creativity, or reliability.
The fact that volunteering only few hours is not associated with increased employment means that people who are more committed to servicing the community through volunteering and put in a substantial number of hours face even better odds of employment than the estimates in the CNCS study imply.
The study also found that there was no effect for people who volunteered more than 100 hours. Presumably these hardcore volunteers for the most part viewed volunteering as an alternative to paid employment.
In a post for Juncture, IPPR's Journal of Politics, economist Dean Baker, co-director of the Center for Economic and Policy Research, wrote a memo on how he would advise Mark Carney, the incoming governor of the Bank of England.
Since you’re no doubt getting a great deal of advice about how to address the current downturn, let me step back and look at the longer-term picture. Central bankers, including your predecessor, have fallen down on the job by not taking asset bubbles seriously. Contrary to the folklore that was popular during the days of the ‘Great Moderation’, it is not easy to clean up the mess after an asset bubble has burst.
Collapsed asset bubbles are likely to lead to periods of prolonged weakness, as we are now seeing in the UK, the eurozone and the United States. The basic point is simple: large asset bubbles distort the economy. In the case of the housing bubbles that afflicted most wealthy countries in the last decade, these led to excessive building and extraordinary levels of consumption through the housing wealth effect. There is no easy way to replace these sources of demand when a bubble bursts.
This means that it is incumbent on central banks to prevent the growth of dangerous bubbles. Higher interest rates are one possible tool, but it is worth trying less-drastic steps first.
The initial route is simple: talk. Central banks have the public’s ear. If they not only argue for the existence of a bubble but carefully document the case with research as well, it will be harder for the public to laugh off the evidence. This may not work, but what’s the downside? Talk is cheap.
Second, there are regulatory tools that can be used to try to stem the flow of finance that fuels a bubble. These should be used to their fullest possible extent.
Higher interest rates are a last resort, but are certainly preferable to the alternative, allowing bubbles to grow as large as those we saw in the last decade.
Targeting 2.0 per cent inflation is something that only matters to economics nerds and bankers – bubble-fighting is an agenda that makes a difference for the whole country.
It’s really hard to explain the outsized incomes of those at the top without pointing fingers at the government. Take N. Greg Mankiw. Earlier this month he produced a paper, “Defending the One Percent,” to be published in a major economics journal.* Mankiw opens with a little thought exercise about a world of perfect equality. He supposes that supply and demand in this world “happen to produce” such a market outcome and that the outcome is one of perfect efficiency.
Mankiw then goes on to suppose that an entrepreneur disturbs this “utopia” by producing new products which everybody likes, and so makes a whole lot of money and income is no longer equally distributed. He then wonders to what extent his or her income should be redistributed to everyone else.
Hilariously, Mankiw’s asks us to think of Steve Jobs, J.K. Rowling, and Steven Spielberg. All three have in real life amassed incredible wealth it is true. But none of the three could have amassed that kind of wealth in a free market. All three owe their incomes primarily due to government interference in the free market.
Spielberg may have great ideas for movies, and it may have cost millions of dollars to film an E.T., but the second copy and third copies cost almost nothing to produce. Yet this 31-year-old movie is $14.96 at Wal-Mart. Rowling’s Harry Potter series is available as an e-book. Copies of the complete series may be produced at zero cost—yet consumers must pay $57.54 for theirs. I enjoy Apple products, but once under production, a new iPod touch costs far less than $299.
In a classroom-economics sense, these kinds of gaps between what it costs to produce another unit and the price in the market should not exist—and is highly inefficient. People can copy DVDs for a couple cents or share e-books for nothing. And people frequently do. But Spielberg and Rowling are able to charge a relative fortune for copies of their work because the government makes it illegal for anyone to produce what they produce. Apple, at least, makes something physical in the iPod, but still suffers no competition. The government does not allow anyone else to make iPods—or indeed anything too similar.
This allows Universal, Sony, and Apple to charge much more than they could in a free market. Of course, all three examples required an enormous amount of up-front costs. The iPod had to be designed and redesigned by some rather creative folks, and setting up a factory to produce them requires large sums of money. Rowling couldn’t know that her stories would be so well received when she wrote them. E.T. cost an estimated $10.5 million to produce. Certainly, granting the creators of these products protection from any competition has allowed them to recoup their losses.
Certainly, these are works of value, and perhaps these works would never have been created but for the promises of government. However, I favor more efficient ways to finance creative works. Artistic Freedom Vouchers could support hundreds of thousands of people producing works for the public domain. The public already finances much of basic pharmaceutical research, and public financing of clinical trials could save tens or hundreds of billions of dollars per year in lower drug prices.
Still, the financial successes Mankiw offers cannot possibly be attributed to the free market. Mankiw should not be wondering if the government should get involved in redistributing income away from these entrepreneurs, but rather the degree to which the government already redistributes income to them. Mankiw surely knows his examples are terrible. Whether he has given it any thought is another matter.
* Thanks to Jurriaan Bendien for bringing this to my attention.