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Trade, Drugs and CEOs

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Dean Baker
Truthout, Feb. 20, 2007

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The plight of the middle class is the hip topic in Washington these days as politicians try to display concern for the demographic group that provides them with most of their votes. Several Congressional committees have held hearings on problems facing the middle class. Members of Congress and presidential candidates are running around the country extolling the virtues of hard-working middle-class families and pledging to make things better.

It remains to be seen whether anything real will come out of this middle-class serenade. While the middle class provides most of the votes on Election Day, the rich provide the vast majority of the money to pay for campaigns. And, as the pundits say, it takes big bucks to win an election. Therefore, serious politicians will be very reluctant to reverse the policies that have allowed the rich to benefit at the expense of the middle class.

However, in the event that we have any politicians who actually mean what they say about the middle class, I thought I would lay out policies in three areas that could advance their cause: trade, drugs, and CEOs.

The story with trade is simple. Over the last quarter-century, the United States has pursued a policy of selective protectionism that was intended to drive down the wages of less-educated workers to the benefit of highly paid professionals and capital. This policy was designed to make it as easy as possible to import manufactured goods produced by low-paid workers in the developing countries. This directly lowered the price of manufactured goods and indirectly also cheapened the cost of services provided by less-educated workers (e.g. retail clerks, restaurant workers, custodians), since they had to accept lower wages in these industries when they could no longer get jobs that paid well in manufacturing.

The impact of this selective protectionism can be easily reversed by simply promoting free trade in services provided by highly paid professionals, such as doctors, lawyers, accountants, and college professors. Free trade in these professions would reduce the cost of health care, college education, and many other services purchased by middle-class families, thereby raising their real wages.

The prescription drug industry stands out for its incredible inefficiency and as a drain of money from middle-class families to drug companies and a small number of wealthy scientists. The country spends almost $240 billion a year on prescription drugs. This is nearly two percent of GDP, or approximately $3,200 a year for an average family of four. Drugs are expensive because the government gives drug companies patent monopolies. If drugs were sold in a competitive market like other goods, the savings would be close to $170 billion a year. (Wal-Mart sells generics for $4 a prescription. Nearly all drugs could be sold at this price in the absence of patent monopolies.)

We need to finance drug research, but the patent system is an incredibly inefficient mechanism to accomplish this goal. It encourages drug companies to lie about the quality of their drugs, to conceal unfavorable research results, and to promote drugs for inappropriate uses. Any politician serious about helping the middle class would be considering alternative mechanisms for financing drug research .

Finally, politicians concerned about helping the middle class would be seeking ways to crack down on the outlandish paychecks drawn by CEOs. The problem here is simple. CEOs manage to exploit the fact that the people who determine their salaries are primarily their friends and associates who sit on corporate boards. The problem can be addressed by rewriting rules on corporate governance in ways that take away power from insiders and give it to shareholders. For example, if CEO compensation packages had to be sent out for shareholders at regular intervals, and had to be approved by majority vote, then it is likely that we would see fewer hundred-million-dollar compensation packages.

Outlandish CEO pay is important not only because of the money it directly drains from the economy, but also because it infects pay scales throughout the economy. Top executives of universities, hospitals, and even charities often demand compensation packages that can reach into the millions, based on the pay received by their counterparts in the corporate sector. Putting some discipline on CEO pay would restore sanity to pay structures throughout the economy.

There are many other areas in which policies can be designed to increase the living standard and the financial security of the middle class, but these three provide a good start. It would be nice to see Congress take up these issues, or for presidential candidates to put forward concrete proposals that would actually do something to improve the plight of the middle class. Instead, the middle class is likely to just see more empty rhetoric, and policy will continue to be determined by the folks who pay for the campaigns.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.