Beat the Press

Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

It might have been helpful if we had some context … instead of just trying to scare readers with the really big numbers.
It might have been helpful if we had some context … instead of just trying to scare readers with the really big numbers.
For those who might not be intimately familiar with the size of the UK economy or budget, the tax cut would be a bit less than 2 percent of the UK's projected GDP for 2023.
For those who might not be intimately familiar with the size of the UK economy or budget, the tax cut would be a bit less than 2 percent of the UK's projected GDP for 2023.
Jason Furman has been tweeting about how real disposable personal income has been falling behind its trend growth. After the August data came out last week, Jason tweeted that per capita real disposable income was 8.0 percent below its pre-pandemic trend growth pace. Since Jason is generally very careful in his work, and this would […]
Jason Furman has been tweeting about how real disposable personal income has been falling behind its trend growth. After the August data came out last week, Jason tweeted that per capita real disposable income was 8.0 percent below its pre-pandemic trend growth pace. Since Jason is generally very careful in his work, and this would […]

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It is a complete article of faith in intellectual circles that the market is responsible for the rise in inequality that we have seen in the United States and elsewhere over the last half-century. Intellectual types literally cannot even consider the alternative that inequality was the result of government policies, not the natural workings of the market.

The standard line is that technology and globalization were responsible for the increasing gap in income between people with college, especially advanced, degrees and non-college-educated workers. This belief that market forces drove inequality and not policy is apparently central to the identity of its beneficiaries, who determine what appears in major news outlets.

In this way, the belief in the market causes of inequality can be similar to the belief among Trumpers that the 2020 election was stolen from Trump. They simply do not even want to see the issue debated.

Spencer Bokat-Lindell: The Latest Perp

My current prompt to make my standard complaint is a column by New York Times columnist Spencer Bokat-Lindell which raises the question, “Is liberal democracy dying?” While the causes of growing inequality are not directly the piece’s topic, the issue comes up at several points.

For example, in discussing the rise of authoritarian sentiments among the masses, he tells readers:

“How does class come into the picture? Some scholars have theorized a link between democratic backsliding and the Great Recession, if not global free-market capitalism itself.”

Later the piece continues with a similar theme:

“Yet there are also those who believe technocratic fixes are unequal to the problem [of rising support for authoritarianism]. In a 2016 essay, the Indian writer Pankaj Mishra presented the declining health of democracy around the world as a crisis for the ideology of modern market-based liberalism itself: A ‘religion of technology and G.D.P. and the crude 19th-century calculus of self-interest,’ it can neither account for nor provide an answer to the anger of those who feel left behind by the disruptions and inequalities wrought by globalized capitalism.”

To be clear, I am not picking on Bokat-Lindell because he is the exception. I am picking on him because he is repeating a dogma that goes almost entirely unquestioned in major media outlets, including the New York Times.

Let’s Say Policy, not the Market, Drove Inequality

I will briefly restate my case for how policy drove inequality (this can be found in Rigged [it’s free]), but first, let’s think about the rise of right-wing populism, assuming it is true. This means that we had government policies that prevented more than half of the workforce from seeing any substantial gains from productivity growth over the last half-century. This is a period in which productivity more than doubled.

While the bottom 60 percent of the workforce saw little gains from productivity growth, the top ten percent were doing great. Those in the 90-95th percentile of the wage distribution saw gains at least in step with productivity growth. Workers in the 95th to 99th percentile had wage gains that far outstripped productivity growth, and those in the top 1 percent were getting wage gains that were close to double the rate of productivity growth.

Now, suppose that that massive upward redistribution was all by design. The government put in place policies designed to take money from the bottom 60 percent of the population and give it to those at the top.

Furthermore, suppose that the mechanisms that caused this upward redistribution were prohibited from being discussed. We instead had people like Bokat-Lindell, and thousands of others, filling news stories, columns, and other ruminations on inequality in major media outlets as simply an unfortunate outcome of natural market processes. The idea that government policies actually caused inequality would virtually never be discussed or even contemplated.

In this scenario, would it be surprising that tens of millions of people would be angry at the government for acting to make them worse off? Is it surprising that they might distrust mainstream news outlets like the New York Times or National Public Radio, which endlessly tell them they are losers, but they feel very badly about that fact?

To my mind, in this scenario, it is not the least bit surprising that tens of millions would turn to a despicable demagogue like Donald Trump, or his foreign equivalents, who tell them it is not their fault. Their explanations might be nonsensical racism and/or nationalism, but he is at least pointing his finger somewhat in the right direction. (Trump’s rich backers of course benefitted hugely from the upward redistribution of the last half century.)

The right-wing populists are blaming the people who have benefitted from upward redistribution along with the targeted minority groups. Howard Jarvis, the originator of California’s anti-tax initiative Proposition 13, laid out the case perfectly. He said that “in the battle of us against them, I’m for us.” Jarvis made it very clear, “them” in this story were welfare cheats (read minorities) and pointy-headed bureaucrats (read professionals). “Us” was good old white guys. This is the theme that Trump and other right-wing populists harp on endlessly.

Against this red meat, mainstream liberals want to have policies that modestly increase the size of the welfare state, subject of course to budget limits. And, we also have to worry about inflation. If that gets too high, well the Fed will just have to raise interest rates and throw millions of working-class people out of work and push down the pay of those able to keep their jobs.

Pretty amazing that the working class isn’t signing up to get Democrats elected, huh?

The Story on Policy and Inequality

I know I give this all the time, but for the folks who have never read my other stuff, and don’t intend to, let me give the super-brief version. Let’s start with intellectual property. This is the clearest case and probably the most important in terms of upward redistribution.

Imagine a world where there are no government-granted patent or copyright monopolies or related protections. This means that anyone who wants to can manufacture any drug they want, without getting the permission of the patent holder. (This has nothing to with safety requirements, which could be left in place.)

Everyone would be able to make copies of software they liked, and even resell them. They could make and sell copies of books, recorded music, movies, and video games and never have to worry about compensating a copyright holder.

Now, I know many people are screaming that in this world no one would ever innovate, develop new drugs, perform music, or make movies. Stop screaming for a moment and think about the issue at hand. We could have a market economy without government-granted patent and copyright monopolies.

These monopolies are government policies to promote innovation and creative work. We can and should argue about whether these government-granted monopolies are the best mechanisms for promoting innovation, but the fact that patents and copyrights are government policy, and are not inherent features of the market is not a debatable point.

This means that the extent to which people are able to benefit from these monopolies is determined by the government, not the market. Bill Gates is one of the richest people in the world because the government will arrest people who make copies of Microsoft’s software without his permission. It was not the market that made Bill Gates insanely rich, it was a government policy.

The same story applies to the idea that technology has benefitted more educated workers at the expense of those without college degrees. There would be much less money to be shared by all those software designers, computer engineers, and biotech inventors in a world without patent and copyright monopolies.

The fact that these people have done very well in the last half-century was due to the decision to not only have these government-granted monopolies, but also policy choices that made them longer and stronger. Just to take the case of prescription drugs, Congress approved the Bayh-Dole Act in 1980, which made it much easier for drug companies to get control of government-funded research.

In the last four decades, spending on prescription drugs exploded from 0.4 percent of GDP to 2.2 percent of GDP. The difference comes to $450 billion a year, more than ten times the money at stake in the Inflation Reduction Act.  

To be clear, we had other changes to policy beyond Bayh-Dole. Also, there were undoubtedly many important drugs that were incentivized by this and other policy changes that strengthened intellectual property in drugs. But, we are paying a huge amount more for drugs as a result of policy changes, not the natural workings of the market.

There is a similar story with medical equipment, computers, software, and a wide range of other items. To be clear, I don’t dispute that we should provide incentives for innovation and creative work (my preferred route with prescription drugs is more direct public funding, as we do with NIH), but the structure and size of these incentives are a matter of public policy. It is not a market outcome as the New York Times tells us.

There are other areas where policy has quite obviously shaped distribution. We could have structured globalization differently. Instead of focusing on removing barriers to trade in manufactured goods, so that our manufacturing workers had to compete with low-cost labor in the developing world, we could have focused on promoting free trade in professional services.

In this scenario, our trade teams would be working 24-7 to develop mechanisms that would allow smart ambitious kids in India, Mexico, and elsewhere to train to U.S. standards and then practice medicine in the United States, just like a native-born doctor. How much would doctors here earn, if a half million foreign-educated doctors were working here? My guess is that the sum would be substantially less than the $300,000 plus a year that the average doctor makes now. We could tell the same story for other highly-paid professionals.

The fact that globalization, as we pursued it, was designed to lower the pay of less-educated workers and not the most highly educated and highly paid, was a policy choice. It was not a natural outcome of the market.

When the Elite Lie About Taking Money from the Bottom Half, is it a Surprise the Masses are Mad?

I could go on with other economic policies that allowed for the massive upward redistribution of the last half century, those who are interested can look at Rigged, but the basic point should be clear. The upward redistribution of the last half century was the result of policies designed by the sort of people who write for and edit publications like the New York Times. They refuse to acknowledge this fact.

Let me just preempt a silly comment I have heard when raising this point. I AM ABSOLUTELY CERTAIN THAT ALMOST NO WORKING-CLASS PEOPLE VOTE BASED ON PATENT POLICY. (All caps to make it more difficult to ignore.)

The argument is that working-class voters see themselves as being screwed in the economy of the last half century and are convinced that it was something that was done to them by the elites. They are entirely right in this view, even if they (like our public intellectuals) have little understanding of the processes. And, you can’t make this claim in polite circles. And, for that reason, they are very angry.

It is a complete article of faith in intellectual circles that the market is responsible for the rise in inequality that we have seen in the United States and elsewhere over the last half-century. Intellectual types literally cannot even consider the alternative that inequality was the result of government policies, not the natural workings of the market.

The standard line is that technology and globalization were responsible for the increasing gap in income between people with college, especially advanced, degrees and non-college-educated workers. This belief that market forces drove inequality and not policy is apparently central to the identity of its beneficiaries, who determine what appears in major news outlets.

In this way, the belief in the market causes of inequality can be similar to the belief among Trumpers that the 2020 election was stolen from Trump. They simply do not even want to see the issue debated.

Spencer Bokat-Lindell: The Latest Perp

My current prompt to make my standard complaint is a column by New York Times columnist Spencer Bokat-Lindell which raises the question, “Is liberal democracy dying?” While the causes of growing inequality are not directly the piece’s topic, the issue comes up at several points.

For example, in discussing the rise of authoritarian sentiments among the masses, he tells readers:

“How does class come into the picture? Some scholars have theorized a link between democratic backsliding and the Great Recession, if not global free-market capitalism itself.”

Later the piece continues with a similar theme:

“Yet there are also those who believe technocratic fixes are unequal to the problem [of rising support for authoritarianism]. In a 2016 essay, the Indian writer Pankaj Mishra presented the declining health of democracy around the world as a crisis for the ideology of modern market-based liberalism itself: A ‘religion of technology and G.D.P. and the crude 19th-century calculus of self-interest,’ it can neither account for nor provide an answer to the anger of those who feel left behind by the disruptions and inequalities wrought by globalized capitalism.”

To be clear, I am not picking on Bokat-Lindell because he is the exception. I am picking on him because he is repeating a dogma that goes almost entirely unquestioned in major media outlets, including the New York Times.

Let’s Say Policy, not the Market, Drove Inequality

I will briefly restate my case for how policy drove inequality (this can be found in Rigged [it’s free]), but first, let’s think about the rise of right-wing populism, assuming it is true. This means that we had government policies that prevented more than half of the workforce from seeing any substantial gains from productivity growth over the last half-century. This is a period in which productivity more than doubled.

While the bottom 60 percent of the workforce saw little gains from productivity growth, the top ten percent were doing great. Those in the 90-95th percentile of the wage distribution saw gains at least in step with productivity growth. Workers in the 95th to 99th percentile had wage gains that far outstripped productivity growth, and those in the top 1 percent were getting wage gains that were close to double the rate of productivity growth.

Now, suppose that that massive upward redistribution was all by design. The government put in place policies designed to take money from the bottom 60 percent of the population and give it to those at the top.

Furthermore, suppose that the mechanisms that caused this upward redistribution were prohibited from being discussed. We instead had people like Bokat-Lindell, and thousands of others, filling news stories, columns, and other ruminations on inequality in major media outlets as simply an unfortunate outcome of natural market processes. The idea that government policies actually caused inequality would virtually never be discussed or even contemplated.

In this scenario, would it be surprising that tens of millions of people would be angry at the government for acting to make them worse off? Is it surprising that they might distrust mainstream news outlets like the New York Times or National Public Radio, which endlessly tell them they are losers, but they feel very badly about that fact?

To my mind, in this scenario, it is not the least bit surprising that tens of millions would turn to a despicable demagogue like Donald Trump, or his foreign equivalents, who tell them it is not their fault. Their explanations might be nonsensical racism and/or nationalism, but he is at least pointing his finger somewhat in the right direction. (Trump’s rich backers of course benefitted hugely from the upward redistribution of the last half century.)

The right-wing populists are blaming the people who have benefitted from upward redistribution along with the targeted minority groups. Howard Jarvis, the originator of California’s anti-tax initiative Proposition 13, laid out the case perfectly. He said that “in the battle of us against them, I’m for us.” Jarvis made it very clear, “them” in this story were welfare cheats (read minorities) and pointy-headed bureaucrats (read professionals). “Us” was good old white guys. This is the theme that Trump and other right-wing populists harp on endlessly.

Against this red meat, mainstream liberals want to have policies that modestly increase the size of the welfare state, subject of course to budget limits. And, we also have to worry about inflation. If that gets too high, well the Fed will just have to raise interest rates and throw millions of working-class people out of work and push down the pay of those able to keep their jobs.

Pretty amazing that the working class isn’t signing up to get Democrats elected, huh?

The Story on Policy and Inequality

I know I give this all the time, but for the folks who have never read my other stuff, and don’t intend to, let me give the super-brief version. Let’s start with intellectual property. This is the clearest case and probably the most important in terms of upward redistribution.

Imagine a world where there are no government-granted patent or copyright monopolies or related protections. This means that anyone who wants to can manufacture any drug they want, without getting the permission of the patent holder. (This has nothing to with safety requirements, which could be left in place.)

Everyone would be able to make copies of software they liked, and even resell them. They could make and sell copies of books, recorded music, movies, and video games and never have to worry about compensating a copyright holder.

Now, I know many people are screaming that in this world no one would ever innovate, develop new drugs, perform music, or make movies. Stop screaming for a moment and think about the issue at hand. We could have a market economy without government-granted patent and copyright monopolies.

These monopolies are government policies to promote innovation and creative work. We can and should argue about whether these government-granted monopolies are the best mechanisms for promoting innovation, but the fact that patents and copyrights are government policy, and are not inherent features of the market is not a debatable point.

This means that the extent to which people are able to benefit from these monopolies is determined by the government, not the market. Bill Gates is one of the richest people in the world because the government will arrest people who make copies of Microsoft’s software without his permission. It was not the market that made Bill Gates insanely rich, it was a government policy.

The same story applies to the idea that technology has benefitted more educated workers at the expense of those without college degrees. There would be much less money to be shared by all those software designers, computer engineers, and biotech inventors in a world without patent and copyright monopolies.

The fact that these people have done very well in the last half-century was due to the decision to not only have these government-granted monopolies, but also policy choices that made them longer and stronger. Just to take the case of prescription drugs, Congress approved the Bayh-Dole Act in 1980, which made it much easier for drug companies to get control of government-funded research.

In the last four decades, spending on prescription drugs exploded from 0.4 percent of GDP to 2.2 percent of GDP. The difference comes to $450 billion a year, more than ten times the money at stake in the Inflation Reduction Act.  

To be clear, we had other changes to policy beyond Bayh-Dole. Also, there were undoubtedly many important drugs that were incentivized by this and other policy changes that strengthened intellectual property in drugs. But, we are paying a huge amount more for drugs as a result of policy changes, not the natural workings of the market.

There is a similar story with medical equipment, computers, software, and a wide range of other items. To be clear, I don’t dispute that we should provide incentives for innovation and creative work (my preferred route with prescription drugs is more direct public funding, as we do with NIH), but the structure and size of these incentives are a matter of public policy. It is not a market outcome as the New York Times tells us.

There are other areas where policy has quite obviously shaped distribution. We could have structured globalization differently. Instead of focusing on removing barriers to trade in manufactured goods, so that our manufacturing workers had to compete with low-cost labor in the developing world, we could have focused on promoting free trade in professional services.

In this scenario, our trade teams would be working 24-7 to develop mechanisms that would allow smart ambitious kids in India, Mexico, and elsewhere to train to U.S. standards and then practice medicine in the United States, just like a native-born doctor. How much would doctors here earn, if a half million foreign-educated doctors were working here? My guess is that the sum would be substantially less than the $300,000 plus a year that the average doctor makes now. We could tell the same story for other highly-paid professionals.

The fact that globalization, as we pursued it, was designed to lower the pay of less-educated workers and not the most highly educated and highly paid, was a policy choice. It was not a natural outcome of the market.

When the Elite Lie About Taking Money from the Bottom Half, is it a Surprise the Masses are Mad?

I could go on with other economic policies that allowed for the massive upward redistribution of the last half century, those who are interested can look at Rigged, but the basic point should be clear. The upward redistribution of the last half century was the result of policies designed by the sort of people who write for and edit publications like the New York Times. They refuse to acknowledge this fact.

Let me just preempt a silly comment I have heard when raising this point. I AM ABSOLUTELY CERTAIN THAT ALMOST NO WORKING-CLASS PEOPLE VOTE BASED ON PATENT POLICY. (All caps to make it more difficult to ignore.)

The argument is that working-class voters see themselves as being screwed in the economy of the last half century and are convinced that it was something that was done to them by the elites. They are entirely right in this view, even if they (like our public intellectuals) have little understanding of the processes. And, you can’t make this claim in polite circles. And, for that reason, they are very angry.

There were headlines all over the place yesterday telling us how the Congressional Budget Office (CBO) estimated that Biden’s student debt forgiveness plan would cost $400 billion. I suspect that sounded very scary to lots of people who heard it. After all, those not named Elon Musk will never see anything like $400 billion over our lifetimes.

But suppose reporters had to work for a living. They might have taken two minutes to read the three-page CBO report (actually a letter to two members of Congress).

If they had done that, they might have noticed that this is the discounted cost projected over a 40-year time horizon. Much of the reporting might have led people to believe it was over a year, and more informed types might have assumed it is over CBO’s usual 10-year budget time horizon. The period over which the cost is incurred does matter.

The reports also could have included some context since most people would not have a clear idea in their heads of how large $400 billion is over a forty-year time horizon. Here also reading the three-page report would have been of great help. Page 2 of the report has a very nice graph showing the reduction in student loan payments from the forgiveness package measured as a share of GDP.

It peaks at a bit more than 0.09 percent of GDP in 2023-25. That is less than one-thirtieth of the military budget. It falls to around 0.07 percent of GDP by 2032 and then drops further to 0.02 percent of GDP by 2042.

It would help if reporters covering budget issues saw it as their responsibility to convey information to their audiences rather than just engaging in fraternity rituals of writing down big numbers that are meaningless to almost everyone.  

There were headlines all over the place yesterday telling us how the Congressional Budget Office (CBO) estimated that Biden’s student debt forgiveness plan would cost $400 billion. I suspect that sounded very scary to lots of people who heard it. After all, those not named Elon Musk will never see anything like $400 billion over our lifetimes.

But suppose reporters had to work for a living. They might have taken two minutes to read the three-page CBO report (actually a letter to two members of Congress).

If they had done that, they might have noticed that this is the discounted cost projected over a 40-year time horizon. Much of the reporting might have led people to believe it was over a year, and more informed types might have assumed it is over CBO’s usual 10-year budget time horizon. The period over which the cost is incurred does matter.

The reports also could have included some context since most people would not have a clear idea in their heads of how large $400 billion is over a forty-year time horizon. Here also reading the three-page report would have been of great help. Page 2 of the report has a very nice graph showing the reduction in student loan payments from the forgiveness package measured as a share of GDP.

It peaks at a bit more than 0.09 percent of GDP in 2023-25. That is less than one-thirtieth of the military budget. It falls to around 0.07 percent of GDP by 2032 and then drops further to 0.02 percent of GDP by 2042.

It would help if reporters covering budget issues saw it as their responsibility to convey information to their audiences rather than just engaging in fraternity rituals of writing down big numbers that are meaningless to almost everyone.  

As every graduate of Econ 101 can tell you, tariffs lead to corruption. The basic point is that if the government puts a 25 percent tariff on imports of say, steel or shoes, domestic producers are able to sell their products at a price that is 25 percent higher than the world price.

This both creates incentives to try to bring in items without paying the tariff, for example misclassifying the product, and for companies to effectively pay off politicians to extend and increase the tariff. If all items were imported tariff-free, then these opportunities for corruption would disappear.

It’s the same story with government-granted patent monopolies on prescription drugs, except the effective tariffs are much larger, as is the amount of money at issue. Patent monopolies on prescription drugs can often raise the price of a drug by 20 or 30 times the free market price, making them equivalent to tariffs of 2000—3000 percent.

Also, the amount of money we spend on prescription drugs dwarfs spending on almost any other item. We are on a track to spend over $530 billion on prescription drugs this year, more than $4,000 per family. These drugs would likely sell for less than $100 billion in a free market without patent monopolies or other protections.

Given the huge gap between the patent-protected price and the free market price, it would be surprising if we did not see a great deal of corruption. Therefore, when the New York Times ran a piece on how an inner city hospital in Richmond, Virginia had shut down its intensive care unit and stopped providing many other services, it should not have been a shock to discover that the exploitation of a government program on prescription drugs was the source of the problem.

According to the piece, the government provides hospitals located in depressed areas with drugs at a discount below their patent-protected price. This allows the hospital to profit by selling the drugs at the patent-protected price.

The piece gives one example of this scam:

“Thanks to 340B, Richmond Community Hospital can buy a vial of Keytruda, a cancer drug, at the discounted price of $3,444, according to an estimate by Sara Tabatabai, a former researcher at Memorial Sloan Kettering Cancer Center.

“But the hospital charges the private insurer Blue Cross Blue Shield more than seven times that price — $25,425, according to a price list that hospitals are required to publish. That is nearly $22,000 profit on a single vial. Adults need two vials per treatment course.”

The free market price of Keytruda (no patent monopolies or related protection) would likely be just a few hundred dollars per vial, providing little opportunity for scamming. However, when a government-granted patent monopoly allows the drug to sell for a price that could be a hundred times its free market price, it creates enormous opportunities for corruption. In this case, the company that owns the hospital found it more profitable to run this scam than to serve the patients in the community in which it is located.

It would be good if we could have a serious discussion of alternatives to patent monopoly financing of prescription drugs, to end this sort of corruption. Unfortunately, major media outlets don’t want to raise this issue on their pages. Instead, we just get hand-wringing over the resulting corruption and the usual “what can you do?”

 

As every graduate of Econ 101 can tell you, tariffs lead to corruption. The basic point is that if the government puts a 25 percent tariff on imports of say, steel or shoes, domestic producers are able to sell their products at a price that is 25 percent higher than the world price.

This both creates incentives to try to bring in items without paying the tariff, for example misclassifying the product, and for companies to effectively pay off politicians to extend and increase the tariff. If all items were imported tariff-free, then these opportunities for corruption would disappear.

It’s the same story with government-granted patent monopolies on prescription drugs, except the effective tariffs are much larger, as is the amount of money at issue. Patent monopolies on prescription drugs can often raise the price of a drug by 20 or 30 times the free market price, making them equivalent to tariffs of 2000—3000 percent.

Also, the amount of money we spend on prescription drugs dwarfs spending on almost any other item. We are on a track to spend over $530 billion on prescription drugs this year, more than $4,000 per family. These drugs would likely sell for less than $100 billion in a free market without patent monopolies or other protections.

Given the huge gap between the patent-protected price and the free market price, it would be surprising if we did not see a great deal of corruption. Therefore, when the New York Times ran a piece on how an inner city hospital in Richmond, Virginia had shut down its intensive care unit and stopped providing many other services, it should not have been a shock to discover that the exploitation of a government program on prescription drugs was the source of the problem.

According to the piece, the government provides hospitals located in depressed areas with drugs at a discount below their patent-protected price. This allows the hospital to profit by selling the drugs at the patent-protected price.

The piece gives one example of this scam:

“Thanks to 340B, Richmond Community Hospital can buy a vial of Keytruda, a cancer drug, at the discounted price of $3,444, according to an estimate by Sara Tabatabai, a former researcher at Memorial Sloan Kettering Cancer Center.

“But the hospital charges the private insurer Blue Cross Blue Shield more than seven times that price — $25,425, according to a price list that hospitals are required to publish. That is nearly $22,000 profit on a single vial. Adults need two vials per treatment course.”

The free market price of Keytruda (no patent monopolies or related protection) would likely be just a few hundred dollars per vial, providing little opportunity for scamming. However, when a government-granted patent monopoly allows the drug to sell for a price that could be a hundred times its free market price, it creates enormous opportunities for corruption. In this case, the company that owns the hospital found it more profitable to run this scam than to serve the patients in the community in which it is located.

It would be good if we could have a serious discussion of alternatives to patent monopoly financing of prescription drugs, to end this sort of corruption. Unfortunately, major media outlets don’t want to raise this issue on their pages. Instead, we just get hand-wringing over the resulting corruption and the usual “what can you do?”

 

Catherine Rampell’s latest Washington Post column argued that lower-income people have been hardest hit by inflation, so they will benefit most if the Fed gets inflation under control. The argument is that items that they must buy, like food, gas, and rent, have risen most rapidly in price. Furthermore, since lower-income people tend to already be buying lower-priced brands, they have little ability to protect themselves against inflation by switching to less expensive alternatives.

There are two problems with this logic. As many of us have noted, and Rampell acknowledges, workers at the bottom end of the wage distribution have seen wage increases well above the average over the last two years. If the unemployment rate were to rise by a percentage point or more (it could rise by much more), we would almost certainly see the more rapid wage gains at the bottom come to an end.

In fact, the story could well go into reverse. Over the last four decades, wage gains for the bottom half of the wage distribution trailed average wage growth, this is especially true during periods of high unemployment. In fairness, if the unemployment rate stays under 5.0 percent, this would still qualify as a period of relatively low unemployment, but there is no guarantee that workers at the bottom would be seeing wage gains equal to the average pace of wage growth.

There is also the issue of the distribution of unemployment. Relatively few doctors and computer scientists are likely to face unemployment as a result of the Fed’s rate hikes. The people who lose their jobs will be disproportionately retail and restaurant workers and others employed in a low-paying sector.

The Black unemployment rate is on average twice as high as the unemployment rate for whites. For Hispanics, the ratio is roughly 1.5 times as high. If the unemployment rate for whites rises by 1.0 percentage points, this means we can expect a rise in the unemployment rate for Blacks of around 2.0 percentage points and 1.5 percentage points for Hispanics.

It is very difficult to see how families who have one or more member going from being employed to being unemployed can benefit from the Fed’s fight against inflation. These families will be unambiguous losers in this story. Also, since most spells of unemployment are short, there will actually be a large number of families who are in this situation over the course of a year or two.

Will the Fed’s Fight Slow Inflation in the Staples?

If we want to make the argument that the Fed has to fight inflation to help lower-income people, then we would have to believe that higher rates will be especially effective in slowing inflation in food, energy, and rent. That is not obviously the case.

Starting with food, the jump in prices since the pandemic was largely a worldwide phenomenon. We saw big increases in the price of wheat and many other commodities associated with supply chain disruptions from both the pandemic and the war in Ukraine.

These prices are now headed downward as the world economy is adjusting to these disruptions. Reducing demand in the United States can help relieve the stress in these markets, but U.S. demand has only a limited impact on the world market.

In some cases, the Fed’s rate hikes will provide almost no benefit. For example, Avian flu devastated the U.S. chicken stock, pushing up both the price of chicken and eggs. Fed rate hikes will not help this story much. In short, it is not likely that the Fed’s rate hikes will save people much on food.

There is a similar story with gas and energy more generally. These prices are determined on a world market. The U.S. is a major user of energy, but still only accounts for around a fifth of world demand. Reducing U.S. consumption by 2-3 percent (a large reduction) will not have a big impact on world prices.

There is an issue of the “crack spread,” the gap between the price of a gallon of gasoline and the cost of the oil contained in it. That had exploded earlier this year, arguably because of oil companies using monopoly power to limit supply, but has now fallen back to more normal levels. This spread can be affected somewhat by domestic demand, but it accounts for less than 20 percent of the price of a gallon of gas.

Finally, there is rent. The Fed’s rate hikes had an immediate and large impact on home sales. Mortgage rates have more than doubled from their year-ago level. This has led to a sharp drop in sales. This decline in sales has only had a limited effect on sale prices to date, but with inventories of unsold homes rising rapidly, it seems inevitable that prices will soon decline.

There is likely to be a spillover from the sale market to the rental market. Many of the houses that go unsold are likely to end up as rentals. An increased supply of rental units will put downward pressure on rents.

We are seeing some evidence of slower rental inflation in some private indexes, but this process will take time to work through. This will definitely help low and moderate-income households, but the good news is that the Fed has pretty much done its work in this area.

With mortgage rates now over 6.0 percent, it is not clear that pushing rates still higher will have much additional impact on the housing market. We are likely to see some improvement in the rental market over the next six months to a year.

However, getting prices down to more affordable levels is a longer-term story that depends on more construction. In this area, Fed rate hikes are a clear negative. Housing starts are already down by double-digit levels against their year-ago pace. Further hikes are likely to slow construction even more. That is not a good story for housing affordability.

Fed Rate Hikes Are Bad News at the Bottom

To sum up the story, we know with absolute certainty that Fed rate hikes will disproportionately hit lower-paid workers. They are both the ones most likely to lose their jobs and the ones to see the biggest impact on wage growth.

Insofar as lower-income families are seeing the biggest hit from inflation, due to rising prices in necessities, Fed policy is likely to be of limited help. The rate hikes have slowed inflation in the housing sector, which is huge, but it is not clear that further hikes will provide much benefit in the form of lower rents for moderate-income households. In short, it is hard to make the case that Fed rate hikes will somehow help lower-income households.

We all understand the Fed’s responsibility for preventing inflation from spiraling to dangerous levels. There can be reasonable differences on the extent of this threat currently, but we should be clear on the trade-offs involved in Fed policy. Those at the bottom end of the income distribution will be paying the biggest price for the Fed’s anti-inflation policy, and it is important to recognize this fact.

Catherine Rampell’s latest Washington Post column argued that lower-income people have been hardest hit by inflation, so they will benefit most if the Fed gets inflation under control. The argument is that items that they must buy, like food, gas, and rent, have risen most rapidly in price. Furthermore, since lower-income people tend to already be buying lower-priced brands, they have little ability to protect themselves against inflation by switching to less expensive alternatives.

There are two problems with this logic. As many of us have noted, and Rampell acknowledges, workers at the bottom end of the wage distribution have seen wage increases well above the average over the last two years. If the unemployment rate were to rise by a percentage point or more (it could rise by much more), we would almost certainly see the more rapid wage gains at the bottom come to an end.

In fact, the story could well go into reverse. Over the last four decades, wage gains for the bottom half of the wage distribution trailed average wage growth, this is especially true during periods of high unemployment. In fairness, if the unemployment rate stays under 5.0 percent, this would still qualify as a period of relatively low unemployment, but there is no guarantee that workers at the bottom would be seeing wage gains equal to the average pace of wage growth.

There is also the issue of the distribution of unemployment. Relatively few doctors and computer scientists are likely to face unemployment as a result of the Fed’s rate hikes. The people who lose their jobs will be disproportionately retail and restaurant workers and others employed in a low-paying sector.

The Black unemployment rate is on average twice as high as the unemployment rate for whites. For Hispanics, the ratio is roughly 1.5 times as high. If the unemployment rate for whites rises by 1.0 percentage points, this means we can expect a rise in the unemployment rate for Blacks of around 2.0 percentage points and 1.5 percentage points for Hispanics.

It is very difficult to see how families who have one or more member going from being employed to being unemployed can benefit from the Fed’s fight against inflation. These families will be unambiguous losers in this story. Also, since most spells of unemployment are short, there will actually be a large number of families who are in this situation over the course of a year or two.

Will the Fed’s Fight Slow Inflation in the Staples?

If we want to make the argument that the Fed has to fight inflation to help lower-income people, then we would have to believe that higher rates will be especially effective in slowing inflation in food, energy, and rent. That is not obviously the case.

Starting with food, the jump in prices since the pandemic was largely a worldwide phenomenon. We saw big increases in the price of wheat and many other commodities associated with supply chain disruptions from both the pandemic and the war in Ukraine.

These prices are now headed downward as the world economy is adjusting to these disruptions. Reducing demand in the United States can help relieve the stress in these markets, but U.S. demand has only a limited impact on the world market.

In some cases, the Fed’s rate hikes will provide almost no benefit. For example, Avian flu devastated the U.S. chicken stock, pushing up both the price of chicken and eggs. Fed rate hikes will not help this story much. In short, it is not likely that the Fed’s rate hikes will save people much on food.

There is a similar story with gas and energy more generally. These prices are determined on a world market. The U.S. is a major user of energy, but still only accounts for around a fifth of world demand. Reducing U.S. consumption by 2-3 percent (a large reduction) will not have a big impact on world prices.

There is an issue of the “crack spread,” the gap between the price of a gallon of gasoline and the cost of the oil contained in it. That had exploded earlier this year, arguably because of oil companies using monopoly power to limit supply, but has now fallen back to more normal levels. This spread can be affected somewhat by domestic demand, but it accounts for less than 20 percent of the price of a gallon of gas.

Finally, there is rent. The Fed’s rate hikes had an immediate and large impact on home sales. Mortgage rates have more than doubled from their year-ago level. This has led to a sharp drop in sales. This decline in sales has only had a limited effect on sale prices to date, but with inventories of unsold homes rising rapidly, it seems inevitable that prices will soon decline.

There is likely to be a spillover from the sale market to the rental market. Many of the houses that go unsold are likely to end up as rentals. An increased supply of rental units will put downward pressure on rents.

We are seeing some evidence of slower rental inflation in some private indexes, but this process will take time to work through. This will definitely help low and moderate-income households, but the good news is that the Fed has pretty much done its work in this area.

With mortgage rates now over 6.0 percent, it is not clear that pushing rates still higher will have much additional impact on the housing market. We are likely to see some improvement in the rental market over the next six months to a year.

However, getting prices down to more affordable levels is a longer-term story that depends on more construction. In this area, Fed rate hikes are a clear negative. Housing starts are already down by double-digit levels against their year-ago pace. Further hikes are likely to slow construction even more. That is not a good story for housing affordability.

Fed Rate Hikes Are Bad News at the Bottom

To sum up the story, we know with absolute certainty that Fed rate hikes will disproportionately hit lower-paid workers. They are both the ones most likely to lose their jobs and the ones to see the biggest impact on wage growth.

Insofar as lower-income families are seeing the biggest hit from inflation, due to rising prices in necessities, Fed policy is likely to be of limited help. The rate hikes have slowed inflation in the housing sector, which is huge, but it is not clear that further hikes will provide much benefit in the form of lower rents for moderate-income households. In short, it is hard to make the case that Fed rate hikes will somehow help lower-income households.

We all understand the Fed’s responsibility for preventing inflation from spiraling to dangerous levels. There can be reasonable differences on the extent of this threat currently, but we should be clear on the trade-offs involved in Fed policy. Those at the bottom end of the income distribution will be paying the biggest price for the Fed’s anti-inflation policy, and it is important to recognize this fact.

I have long been a big fan of reduced work time, whether it take the form of more vacations, more time for paid leaves, such as family leave and sick days, or shorter workweeks. The basic logic is that, as our economy gets more productive, we should get some of the benefit in the form of more leisure, instead of just higher income. (Yeah, I know about income inequality, and that most workers have not seen much in terms of higher income in the last half century, but let’s leave that one aside for the moment.)

Anyhow, four-day workweeks always seemed an especially interesting way to reduce work hours, since they also eliminated one day of commuting. If everyone commuted 20 percent less, it would save a huge amount in commuting costs. And, not only would people be commuting fewer days, but by having fewer trips, we would have less congestion and less energy wasted by cars sitting in traffic. That sounds like a really good deal all around. (Of course, working from home, and not commuting at all, is even better.)

One issue is what happens to the productivity of workers who work a four-day week rather than a five-day week. The New York Times had a piece on an experiment in the United Kingdom, where 70 companies switched to a four-day week at the start of the year.

According to the piece, a private foundation covered the cost of paying workers for a fifth day, even when they were only coming in four days a week. The piece reports that the experience has been overwhelmingly positive, with the vast majority reporting that they intend to stick to a four-day workweek even after the experiment is over.

While this is very positive news for fans of a four-day workweek, the piece is very unclear about its measure of productivity. According to the piece, productivity did not fall at the companies that switched to a four-day workweek. But it is not clear how productivity is being measured.

Ordinarily, economists measure productivity as output per hour of work. Is the piece using this measure of productivity? This means that if workers were putting in four eight-hour days, then their output would be 20 percent less than when they were working five eight-hour days. If this is the case, it would be difficult to see how employers could pay them the same amount per week, unless they had extraordinary profits before the experiment.

It’s possible that workers are putting longer days now. Perhaps they are working 10-hour days, so their four-day workweeks still correspond to a 40-hour workweek. In that case, we can be encouraged that the longer day didn’t mean any decline in productivity, and if workers prefer one fewer day of work per week, that would be great.

It’s also possible that workers are putting in fewer hours in their four-day week than they did in their five-day week, but still managing to produce the same amount of output. There is some evidence than when France adopted a 35-hour standard workweek in the late 1990s it was associated with an increase in the rate of productivity growth. Perhaps we are seeing the same story with a four-day week.

However, to assess the extent to which productivity might have been increased in the companies switching to a four-day week, we have to know how many hours workers are putting in each day. It is not at all clear from this NYT piece (or the linked site for the organization coordinating the experiment), how many hours people are working.

If we take the extreme case, where workers are still putting in eight-hour days, the four-day week would imply a 25 percent increase in productivity. This is almost impossible to imagine. Economists would be thrilled by any policy that would increase aggregate productivity by just 1.0 percent over a period of years. That would imply an increase of $250 billion a year in annual output, that would be a really big deal.

A policy that could lead to an increase in productivity of 25 percent, overnight, is impossibly great. Even if workers were putting in nine-hour days and maintaining the same level of output it would imply an extraordinary 11.1 percent increase in productivity. That would be a really huge deal, as would an increase in productivity of even half this size.

Anyhow, it is hugely important for those advocating four-day workweeks to know what its impact is on productivity. Unfortunately, this piece provides no real basis for making that assessment.   

 

Addendum

I was happy to hear that my friend, Juliet Schor, is the lead researcher on this project. They are in fact making an effort to measure productivity, or at least revenue. Since many of these companies produce software, that should be pretty much the same thing.

She has informed me that while the bulk have gone to four eight-hour days a few have increased hours per day, so that they have not gone from a 40-hour week to a 35 or 36 hour-week. This would still imply very substantial productivity gains if they can maintain output levels.

According to Schor, even the ones that have gone from 40 to 32 hours are still managing to maintain the same level of output. They did this by planning for several months in advance and finding tasks (mostly meetings) that could be eliminated without reducing output.

In any case, Schor is a serious researcher and I’m confident that we will get useful data from this experiment after it is completed at the end of the year. Hopefully, the New York Times will do a follow up piece when the final report is available.

 

I have long been a big fan of reduced work time, whether it take the form of more vacations, more time for paid leaves, such as family leave and sick days, or shorter workweeks. The basic logic is that, as our economy gets more productive, we should get some of the benefit in the form of more leisure, instead of just higher income. (Yeah, I know about income inequality, and that most workers have not seen much in terms of higher income in the last half century, but let’s leave that one aside for the moment.)

Anyhow, four-day workweeks always seemed an especially interesting way to reduce work hours, since they also eliminated one day of commuting. If everyone commuted 20 percent less, it would save a huge amount in commuting costs. And, not only would people be commuting fewer days, but by having fewer trips, we would have less congestion and less energy wasted by cars sitting in traffic. That sounds like a really good deal all around. (Of course, working from home, and not commuting at all, is even better.)

One issue is what happens to the productivity of workers who work a four-day week rather than a five-day week. The New York Times had a piece on an experiment in the United Kingdom, where 70 companies switched to a four-day week at the start of the year.

According to the piece, a private foundation covered the cost of paying workers for a fifth day, even when they were only coming in four days a week. The piece reports that the experience has been overwhelmingly positive, with the vast majority reporting that they intend to stick to a four-day workweek even after the experiment is over.

While this is very positive news for fans of a four-day workweek, the piece is very unclear about its measure of productivity. According to the piece, productivity did not fall at the companies that switched to a four-day workweek. But it is not clear how productivity is being measured.

Ordinarily, economists measure productivity as output per hour of work. Is the piece using this measure of productivity? This means that if workers were putting in four eight-hour days, then their output would be 20 percent less than when they were working five eight-hour days. If this is the case, it would be difficult to see how employers could pay them the same amount per week, unless they had extraordinary profits before the experiment.

It’s possible that workers are putting longer days now. Perhaps they are working 10-hour days, so their four-day workweeks still correspond to a 40-hour workweek. In that case, we can be encouraged that the longer day didn’t mean any decline in productivity, and if workers prefer one fewer day of work per week, that would be great.

It’s also possible that workers are putting in fewer hours in their four-day week than they did in their five-day week, but still managing to produce the same amount of output. There is some evidence than when France adopted a 35-hour standard workweek in the late 1990s it was associated with an increase in the rate of productivity growth. Perhaps we are seeing the same story with a four-day week.

However, to assess the extent to which productivity might have been increased in the companies switching to a four-day week, we have to know how many hours workers are putting in each day. It is not at all clear from this NYT piece (or the linked site for the organization coordinating the experiment), how many hours people are working.

If we take the extreme case, where workers are still putting in eight-hour days, the four-day week would imply a 25 percent increase in productivity. This is almost impossible to imagine. Economists would be thrilled by any policy that would increase aggregate productivity by just 1.0 percent over a period of years. That would imply an increase of $250 billion a year in annual output, that would be a really big deal.

A policy that could lead to an increase in productivity of 25 percent, overnight, is impossibly great. Even if workers were putting in nine-hour days and maintaining the same level of output it would imply an extraordinary 11.1 percent increase in productivity. That would be a really huge deal, as would an increase in productivity of even half this size.

Anyhow, it is hugely important for those advocating four-day workweeks to know what its impact is on productivity. Unfortunately, this piece provides no real basis for making that assessment.   

 

Addendum

I was happy to hear that my friend, Juliet Schor, is the lead researcher on this project. They are in fact making an effort to measure productivity, or at least revenue. Since many of these companies produce software, that should be pretty much the same thing.

She has informed me that while the bulk have gone to four eight-hour days a few have increased hours per day, so that they have not gone from a 40-hour week to a 35 or 36 hour-week. This would still imply very substantial productivity gains if they can maintain output levels.

According to Schor, even the ones that have gone from 40 to 32 hours are still managing to maintain the same level of output. They did this by planning for several months in advance and finding tasks (mostly meetings) that could be eliminated without reducing output.

In any case, Schor is a serious researcher and I’m confident that we will get useful data from this experiment after it is completed at the end of the year. Hopefully, the New York Times will do a follow up piece when the final report is available.

 

There is a common myth that Germany’s hyperinflation led to the collapse of democracy in Germany and the rise of Hitler. That is a nice story for pushing the inflation hawks’ agenda, but it doesn’t correspond to reality.

The hyperinflation had ended by 1924 and Germany’s economy stabilized with moderate rates of inflation and unemployment. The economic event that most directly was associated with Hitler’s rise to power was the Great Depression and surge in unemployment that followed the crash of the US stock market in 1929.

This reality didn’t stop Jonathan Wiseman, in a NYT “political memo,” from invoking this myth in a piece on the political consequences of inflation.

“’From bitter historical experience, we know how quickly inflation destroys confidence in the reliability of political institutions and ends up endangering democracy,’ Helmut Kohl, the chancellor of Germany, said in 1995, harking back to the hyperinflation of the Weimar Republic.”

The piece also blames Jimmy Carter’s failed re-election effort on the inflation in 1979 and 1980.

“Four years later, Jimmy Carter’s dreams of a second term were vaporized by 13.5 percent inflation.”

While high inflation surely hurt Carter’s re-election prospects, we also had a severe recession in 1980.

 

The unemployment rate soared from 6.0 percent in December of 1979, to 7.8 percent in July of 1980. This was one of the fastest surges of unemployment in the country’s history. The run-up in unemployment, just months before the election, surely had a large impact on Carter’s prospects. It is very misleading to imply that it was just inflation that sank Carter.

There is a common myth that Germany’s hyperinflation led to the collapse of democracy in Germany and the rise of Hitler. That is a nice story for pushing the inflation hawks’ agenda, but it doesn’t correspond to reality.

The hyperinflation had ended by 1924 and Germany’s economy stabilized with moderate rates of inflation and unemployment. The economic event that most directly was associated with Hitler’s rise to power was the Great Depression and surge in unemployment that followed the crash of the US stock market in 1929.

This reality didn’t stop Jonathan Wiseman, in a NYT “political memo,” from invoking this myth in a piece on the political consequences of inflation.

“’From bitter historical experience, we know how quickly inflation destroys confidence in the reliability of political institutions and ends up endangering democracy,’ Helmut Kohl, the chancellor of Germany, said in 1995, harking back to the hyperinflation of the Weimar Republic.”

The piece also blames Jimmy Carter’s failed re-election effort on the inflation in 1979 and 1980.

“Four years later, Jimmy Carter’s dreams of a second term were vaporized by 13.5 percent inflation.”

While high inflation surely hurt Carter’s re-election prospects, we also had a severe recession in 1980.

 

The unemployment rate soared from 6.0 percent in December of 1979, to 7.8 percent in July of 1980. This was one of the fastest surges of unemployment in the country’s history. The run-up in unemployment, just months before the election, surely had a large impact on Carter’s prospects. It is very misleading to imply that it was just inflation that sank Carter.

I was glad to see Ezra Klein’s piece today touting the Biden administration’s creation of ARPA-H. This is the Advanced Research Projects Agency-Health, a DARPA-type agency explicitly designed to promote the development of health-related innovations, like vaccines, drugs, and medical equipment.

Like Ezra, I’m a big fan of increased public funding for biomedical research. However, he goes a bit astray in his thinking near the end of the piece. He notes proposals, like those put forward by Bernie Sanders, for a cash prize to take the place of a patent monopoly. The government hands out $100 million, $500 million or $1 billion, and then allows the drug, vaccine, or whatever to be sold as a cheap generic. That likely means breakthrough cancer drugs selling for hundreds of dollars rather than hundreds of thousands of dollars.

“The government could identify, say, 12 conditions that it wants to see a drug developed for. The first group to develop and prove out such a drug would get a princely sum — $100 million, or $500 million, or a billion dollars, depending on the condition and the efficacy. In return, that drug would be immediately off-patent, available for any generic drug producer to manufacture for a pittance (and available for other countries, particularly poor countries, to produce immediately).”

I think the Sanders’ proposal is a great improvement over the current system. But coming in the middle of a discussion of a plan for more direct government funding, it makes the famous Moderna mistake: paying companies twice.

For folks who may have forgotten, we paid Moderna $450 million to develop its coronavirus vaccine. We then paid it another $450 million to cover the cost of the phase 3 testing needed for FDA approval. We then allowed it to claim intellectual property in the vaccine, which meant tens of billions of dollars in revenue. It also led to the creation of at least five Moderna billionaires. Tell me again how technology creates inequality.

It really shouldn’t not sound too radical to say that companies only get paid once for their work. If the government pays for the research, it doesn’t also give you a patent monopoly. These are alternative funding mechanisms, not part of a smorgasbord that we throw at innovators to allow them to get incredibly rich at the expense of the rest of us.

Like Ezra, I applaud the Biden administration’s commitment to increase government support for developing new technologies, but we should not be doing this in a way that makes our inequality problem even worse. We can argue over the best mechanisms.

I personally prefer direct public funding to a Sanders-type prize system. The main reason is that we can require everything be fully open-sourced as quickly as possible under a direct funding system, allowing science to advance more quickly.

Also, I suspect that awarding the prizes will prove to be a huge legal and moral nightmare. It is not always clear who actually met the prize conditions and also who made the biggest contribution to getting there. For example, a researcher may make a huge breakthrough that allows pretty much anyone to come along and cross the finish line and claim the prize. Direct upfront funding removes this problem. (I discuss this issue in chapter 5 of the good book, Rigged [it’s free].)

In any case, we can debate the best mechanism through which public funding can take place, patent monopolies, prizes, or direct funding, but the idea that you only get paid once should not be controversial. It is unfortunate that Ezra doesn’t address this issue in his piece, since he does know better (he reads my stuff). There is a huge amount of money at stake in who gets the gains from innovation, likely more than $1 trillion a year, and it would be an incredible failing of the political process if the issue is not even discussed.

 

 

I was glad to see Ezra Klein’s piece today touting the Biden administration’s creation of ARPA-H. This is the Advanced Research Projects Agency-Health, a DARPA-type agency explicitly designed to promote the development of health-related innovations, like vaccines, drugs, and medical equipment.

Like Ezra, I’m a big fan of increased public funding for biomedical research. However, he goes a bit astray in his thinking near the end of the piece. He notes proposals, like those put forward by Bernie Sanders, for a cash prize to take the place of a patent monopoly. The government hands out $100 million, $500 million or $1 billion, and then allows the drug, vaccine, or whatever to be sold as a cheap generic. That likely means breakthrough cancer drugs selling for hundreds of dollars rather than hundreds of thousands of dollars.

“The government could identify, say, 12 conditions that it wants to see a drug developed for. The first group to develop and prove out such a drug would get a princely sum — $100 million, or $500 million, or a billion dollars, depending on the condition and the efficacy. In return, that drug would be immediately off-patent, available for any generic drug producer to manufacture for a pittance (and available for other countries, particularly poor countries, to produce immediately).”

I think the Sanders’ proposal is a great improvement over the current system. But coming in the middle of a discussion of a plan for more direct government funding, it makes the famous Moderna mistake: paying companies twice.

For folks who may have forgotten, we paid Moderna $450 million to develop its coronavirus vaccine. We then paid it another $450 million to cover the cost of the phase 3 testing needed for FDA approval. We then allowed it to claim intellectual property in the vaccine, which meant tens of billions of dollars in revenue. It also led to the creation of at least five Moderna billionaires. Tell me again how technology creates inequality.

It really shouldn’t not sound too radical to say that companies only get paid once for their work. If the government pays for the research, it doesn’t also give you a patent monopoly. These are alternative funding mechanisms, not part of a smorgasbord that we throw at innovators to allow them to get incredibly rich at the expense of the rest of us.

Like Ezra, I applaud the Biden administration’s commitment to increase government support for developing new technologies, but we should not be doing this in a way that makes our inequality problem even worse. We can argue over the best mechanisms.

I personally prefer direct public funding to a Sanders-type prize system. The main reason is that we can require everything be fully open-sourced as quickly as possible under a direct funding system, allowing science to advance more quickly.

Also, I suspect that awarding the prizes will prove to be a huge legal and moral nightmare. It is not always clear who actually met the prize conditions and also who made the biggest contribution to getting there. For example, a researcher may make a huge breakthrough that allows pretty much anyone to come along and cross the finish line and claim the prize. Direct upfront funding removes this problem. (I discuss this issue in chapter 5 of the good book, Rigged [it’s free].)

In any case, we can debate the best mechanism through which public funding can take place, patent monopolies, prizes, or direct funding, but the idea that you only get paid once should not be controversial. It is unfortunate that Ezra doesn’t address this issue in his piece, since he does know better (he reads my stuff). There is a huge amount of money at stake in who gets the gains from innovation, likely more than $1 trillion a year, and it would be an incredible failing of the political process if the issue is not even discussed.

 

 

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