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.

Jerome Powell’s term as chair of the Federal Reserve Board does not end until next January, but the debate on his reappointment has already begun. It would be good for the economy if Powell were reappointed and if Biden announced this decision as soon as possible.

In making the case for Powell, it is important to understand how much he has moved the Fed from where it has been in prior decades. I have long been in battles with the Fed over its willingness to raise interest rates, slowing growth and killing jobs, in order to head off the risk of higher inflation. It viewed its legal mandate for high employment as an afterthought, at best.

Powell has turned this around. He has quite explicitly said that he wants to have the economy run hot, pushing it as far he can without kicking off inflation. He has embraced the idea that many of us on the left had long maintained: low levels of unemployment disproportionately benefit those most disadvantaged in the labor market.

When the unemployment rate is low, Blacks, Latinos, people with disabilities, and people with criminal records are more able to find jobs. Employers don’t have the option to discriminate; these are the workers who are available.

Low rates of unemployment also give workers at the middle and bottom of the income distribution the bargaining power to obtain wage gains. We have seen this pattern repeatedly in the last four decades.

When the unemployment rate has been relatively high, for example in most of the 1980s, the early 1990s, the Great Recession, and the slow recovery that followed, real wages for most workers were stagnant. However, when the labor market tightened, in the late 1990s or in the four years before the pandemic, workers were able to secure wage gains in line with productivity growth. (This was the main focus of two books I wrote with Jared Bernstein.)  

While this view may seem like common sense – why not run the economy in a way that as many people as possible can have jobs – it is a world away from where the Fed has been in the not distant past, where the view was that the Fed had to focus on inflation. I recall being in a meeting in early 1994 with Alan Blinder and Janet Yellen (yes, that Janet Yellen), who were both recently appointed members of the Fed’s Board of Governors.

The immediate issue was that the unemployment rate was falling to the 6.0 percent level that was generally viewed as the point where inflation would begin to spiral upward. My colleagues and I were trying to convince Blinder and Yellen to hold off on raising rates and slowing the economy since we thought the risks of inflation were small relative to the benefit from millions of people being able to get jobs.

We weren’t able to move them. I will always recall arguing with Blinder that since we didn’t know for sure the impact of lower unemployment on inflation, it was worth taking the risk. Blinder responded that the Fed was legally mandated to pursue price stability. I pointed out that the Humphrey-Hawkins legislation, which was then still in effect, required the Fed to target 4.0 percent unemployment.

Blinder, who was one of most liberal and decent people to ever sit on Fed’s board, responded by saying that no one takes that mandate seriously. I then said that he doesn’t have to take the mandate for price stability seriously either, to which he said “yes, I do.”

Later that year, Blinder actually got caught up in a mini-scandal for suggesting that the Fed could act to boost employment when the economy was facing a recession. A major New York Times article implied that this was a major break with Fed policy since Blinder’s comments indicated that the Fed would not just be focused on inflation.

Anyhow, having a chair who sees the Fed’s priority as running the labor market as hot as possible without triggering inflation is a very different world. The change in views reflects a lot of work over the decades trying to impress on the Fed the importance of getting to full employment. Most notably, the Fed Up Coalition, consisting of labor and community groups, of which Ady Barkan was a lead organizer, played a major role in swaying the Fed. Janet Yellen, who was then chair of the Fed, met with the group several times, as did other board members and district bank presidents. They seemed to take our arguments seriously.

Yellen, and even her predecessor Ben Bernanke, had certainly moved the Fed from its inflation obsession, but Powell still took a qualitative leap forward. In saying that it is the Fed’s responsibility to have a tight labor market and get the unemployment rate as low as possible, he has totally reversed the Fed’s priorities. Having won a huge battle on economic policy, progressives should be anxious to defend our victory.

Powell and Regulation

Many people have pointed out that Powell has not been good in regulating the financial sector, which is another important responsibility of the Fed. This criticism is valid, but it really needs to be put in some context.

First, there is a seriously wrong myth about the Great Recession, which sees it as the result of failed regulation, that needs to be corrected. There were indeed many failures in regulation in the years before the Great Recession, but the problem was the collapse of a housing bubble that was driving the economy.

The distinction is important because the regulation story implies that we needed super-sleuths to uncover the fraudulent loans in the sub-prime market or the flood of credit default swaps being issued on mortgage backed securities by AIG and others. These abuses surely fed the bubble, but the bubble was sitting there in plain sight for anyone paying attention, and most importantly, it was easy to see that it was driving the economy.

We had an unprecedented run-up in house sale prices with no remotely corresponding increase in rents. And, this was occurring while vacancy rates were hitting record levels, which is hard to reconcile with claims that prices were being driven by the fundamentals of the market.

It was also easy to see that the bubble was driving the economy, as residential construction was hitting record shares of GDP. In addition, the wealth created by the bubble also led to a consumption boom, as homeowners were spending based on the ephemeral housing wealth created by the bubble. This could easily be seen in the GDP data published by the Commerce Department every quarter.

 

When the bubble burst, it was inevitable that we would face a serious recession, as there was no obvious source of demand that was going to replace the construction and consumption demand generated by the bubble.

To prevent the disaster of the Great Recession, we didn’t need the Fed to get into weeds of regulation. We needed a Fed that recognized the risk of a bubble that was driving the economy instead of cheering it on, as Greenspan largely did until he stepped down in 2006.

Bubbles are not dependent on bad finance.  The stock bubble in the late 1990s, whose collapse gave us the recession in 2001, did not depend to any substantial extent on credit. People put up their own money to buy ridiculously priced shares of stock.

The collapse of bubbles also doesn’t necessarily lead to a recession. This is only the case if the bubble was actually driving the economy, as was the case with the stock bubble in the 1990s and the housing bubble in the 2000s. If the $1 trillion market for Bitcoin collapsed completely tomorrow, we probably would not even be able to find its impact in the GDP data. (I discuss this issue in more detail here.)

Anyhow, even if bad regulation weren’t responsible for the Great Recession, we still should want a well-regulated financial system. There are three important reasons why regulation matters.

First, much of finance, for example subprime house and car loans or fees for financial services, is predatory. Contracts and loans are often designed deceptively so customers don’t realize the full costs and risks. Banks and other financial companies usually target low and moderate income people and people of color with these products.

Second, the financial sector is a major source of inequality. Many of the country’s biggest fortunes were made in the financial sector. We can debate how much money a person should get when they are responsible for a genuinely useful innovation, like an important drug or new software, but it’s hard to see a way to justify someone getting very rich off subprime mortgages.

The third reason regulation is important is that a bloated financial sector is inefficient. The financial sector provides an important service; it allocates capital and facilitates payments. But we should want this to be done with as few resources as possible. We should think of finance like we think of the trucking industry – we need to get goods from point A to point B – but we want as few people and trucks employed in this process as possible.

The same applies to the financial sector. The sector has quintupled relative to the size of the economy over the last five decades, with little obvious benefit. If we can limit the bloat with regulation, that makes the sector and the economy more efficient.

For these reasons, we should want a well-regulated financial sector and there are certainly grounds for criticism of Powell on this front. However, the more obvious target here would be finding a good vice-chair for regulation. The term of the current vice-chair, Randal Quarles, ends in October. It will be important to replace him with someone who takes regulation more seriously.

 

Other Issues: Climate and Cities

 

Some have complained that Powell has not made climate a factor in Fed policy. There also have been complaints that the municipal lending facility he created in the recession was barely used.

These complaints are not really fair to Powell or the Fed. It would be great to have a central bank that actively promoted clean energy and sought to penalize fossil fuel companies, but this is not a power that has been given to the Fed by Congress. While it can arguably do this with the power it has, it would be virtually certain to lose this power very quickly if it went this route.

We can be quite certain that every Republican in Congress would be up in arms if the Fed were to pursue this path, as would likely be the case with many Democrats. If this had happened with Donald Trump in the White House, we would also have the executive branch out for Powell’s head. It is hard to see the value in pursuing a policy that is virtually certain to be cut off before it can have any real impact and likely to lead to a Fed with much less autonomy.  

The same applies with lending to cities. In fact, the Fed’s policies led to a sharp reduction in the interest rates on municipal bonds between February and April of last year. The ability to borrow at lower interest rates helped many cities get through the pandemic. However, there were cities with bad credit ratings that benefitted less from the drop in interest rates.

It would have been great if Powell could have tossed these cities a lifeline by lending at well below market rates, but here too we have to look to the reaction from Congress. The Republicans in Congress, along with Donald Trump, were quite explicit in their efforts to keep “Democrat” cities from getting money. Had Powell tried to use the Fed as a backdoor, they would not have sat by and twiddled their thumbs helplessly. Again, they would have gone gunning for Powell and the Fed, and they would have likely succeeded in reining in the lending and weakening the Fed.

In both of these cases, we can argue whether the Fed had the legal authority to do more, but as a practical matter, it almost certainly would have been blocked in these efforts. The Fed’s main responsibility is the state of the macroeconomy, and I find it hard to argue that Powell should have put the Fed’s ability to be effective here at risk to pursue initiatives that were virtually certain to be shut down quickly.

 

Why Powell and Why Now

While Powell had brought about a remarkable shift in Fed policy, it could be argued that others, most notably Fed Governor Lael Brainard, could carry this shift forward as well or better. There are several reasons why ditching Powell would be a risky strategy.

Most importantly, Powell would have the best chance of getting confirmed by the Senate. The Republicans have made it fairly explicit that their agenda for the Biden presidency is sabotage. If Biden wants to appoint a Fed chair committed to full employment, they will look to block them. We can assume that all 50 Republican senators will vote no, on almost anyone that Biden puts forward. That means that if any of the centrist Democrats decide to get cute, Biden doesn’t have a Fed chair.

Powell has a huge advantage in this area in that he already secured the vote of almost every Republican in the Senate when Trump nominated him in 2017. (There were only four no votes from Republicans.) There are few limits to Republican shamelessness. Many may decide that if Biden wants Powell, then they don’t, but clearly the person Trump picked to be Fed chair has a better chance of winning their support than anyone else Biden might put forward.

There is also the question of the Fed chair’s authority at the Fed. Decisions on monetary policy are not made by the chair alone but rather by the Fed Open Market Committee (FOMC), which includes the other six governors and the twelve district bank presidents, five of whom vote at any given meeting. The chair usually gets their way, but they typically negotiate and work out compromises with the other members of the FOMC.

Powell, as the incumbent chair, would have much more authority in this situation than a new person just stepping into the position. There are still many inflation hawks among the district bank presidents. Powell will be much better situated to keep the priority on full employment than any possible replacement.

In terms of announcing his reappointment soon, Biden should want to do what he can to remove uncertainty and shore up Powell’s position in coming months. We know that the Republicans will do everything in their power to stir up fears of runaway inflation and to undermine the Fed’s authority. If Biden can give him a clear endorsement now, it would help Powell’s effort to keep the focus on full employment.

We know that there will be areas with jumps in prices due to a bounce back from pandemic drops or temporary shortages, as we saw in the April CPI report. We need the Fed to be able to look at the data clearly and respond accordingly. Powell will be most able to do this if there is no doubt about his reappointment.

This should be an easy one for Biden. He will be reappointing a chair with a proven track record. And, he can show his willingness to be bipartisan by handing over one of the most powerful positions in government to a Republican.

Jerome Powell’s term as chair of the Federal Reserve Board does not end until next January, but the debate on his reappointment has already begun. It would be good for the economy if Powell were reappointed and if Biden announced this decision as soon as possible.

In making the case for Powell, it is important to understand how much he has moved the Fed from where it has been in prior decades. I have long been in battles with the Fed over its willingness to raise interest rates, slowing growth and killing jobs, in order to head off the risk of higher inflation. It viewed its legal mandate for high employment as an afterthought, at best.

Powell has turned this around. He has quite explicitly said that he wants to have the economy run hot, pushing it as far he can without kicking off inflation. He has embraced the idea that many of us on the left had long maintained: low levels of unemployment disproportionately benefit those most disadvantaged in the labor market.

When the unemployment rate is low, Blacks, Latinos, people with disabilities, and people with criminal records are more able to find jobs. Employers don’t have the option to discriminate; these are the workers who are available.

Low rates of unemployment also give workers at the middle and bottom of the income distribution the bargaining power to obtain wage gains. We have seen this pattern repeatedly in the last four decades.

When the unemployment rate has been relatively high, for example in most of the 1980s, the early 1990s, the Great Recession, and the slow recovery that followed, real wages for most workers were stagnant. However, when the labor market tightened, in the late 1990s or in the four years before the pandemic, workers were able to secure wage gains in line with productivity growth. (This was the main focus of two books I wrote with Jared Bernstein.)  

While this view may seem like common sense – why not run the economy in a way that as many people as possible can have jobs – it is a world away from where the Fed has been in the not distant past, where the view was that the Fed had to focus on inflation. I recall being in a meeting in early 1994 with Alan Blinder and Janet Yellen (yes, that Janet Yellen), who were both recently appointed members of the Fed’s Board of Governors.

The immediate issue was that the unemployment rate was falling to the 6.0 percent level that was generally viewed as the point where inflation would begin to spiral upward. My colleagues and I were trying to convince Blinder and Yellen to hold off on raising rates and slowing the economy since we thought the risks of inflation were small relative to the benefit from millions of people being able to get jobs.

We weren’t able to move them. I will always recall arguing with Blinder that since we didn’t know for sure the impact of lower unemployment on inflation, it was worth taking the risk. Blinder responded that the Fed was legally mandated to pursue price stability. I pointed out that the Humphrey-Hawkins legislation, which was then still in effect, required the Fed to target 4.0 percent unemployment.

Blinder, who was one of most liberal and decent people to ever sit on Fed’s board, responded by saying that no one takes that mandate seriously. I then said that he doesn’t have to take the mandate for price stability seriously either, to which he said “yes, I do.”

Later that year, Blinder actually got caught up in a mini-scandal for suggesting that the Fed could act to boost employment when the economy was facing a recession. A major New York Times article implied that this was a major break with Fed policy since Blinder’s comments indicated that the Fed would not just be focused on inflation.

Anyhow, having a chair who sees the Fed’s priority as running the labor market as hot as possible without triggering inflation is a very different world. The change in views reflects a lot of work over the decades trying to impress on the Fed the importance of getting to full employment. Most notably, the Fed Up Coalition, consisting of labor and community groups, of which Ady Barkan was a lead organizer, played a major role in swaying the Fed. Janet Yellen, who was then chair of the Fed, met with the group several times, as did other board members and district bank presidents. They seemed to take our arguments seriously.

Yellen, and even her predecessor Ben Bernanke, had certainly moved the Fed from its inflation obsession, but Powell still took a qualitative leap forward. In saying that it is the Fed’s responsibility to have a tight labor market and get the unemployment rate as low as possible, he has totally reversed the Fed’s priorities. Having won a huge battle on economic policy, progressives should be anxious to defend our victory.

Powell and Regulation

Many people have pointed out that Powell has not been good in regulating the financial sector, which is another important responsibility of the Fed. This criticism is valid, but it really needs to be put in some context.

First, there is a seriously wrong myth about the Great Recession, which sees it as the result of failed regulation, that needs to be corrected. There were indeed many failures in regulation in the years before the Great Recession, but the problem was the collapse of a housing bubble that was driving the economy.

The distinction is important because the regulation story implies that we needed super-sleuths to uncover the fraudulent loans in the sub-prime market or the flood of credit default swaps being issued on mortgage backed securities by AIG and others. These abuses surely fed the bubble, but the bubble was sitting there in plain sight for anyone paying attention, and most importantly, it was easy to see that it was driving the economy.

We had an unprecedented run-up in house sale prices with no remotely corresponding increase in rents. And, this was occurring while vacancy rates were hitting record levels, which is hard to reconcile with claims that prices were being driven by the fundamentals of the market.

It was also easy to see that the bubble was driving the economy, as residential construction was hitting record shares of GDP. In addition, the wealth created by the bubble also led to a consumption boom, as homeowners were spending based on the ephemeral housing wealth created by the bubble. This could easily be seen in the GDP data published by the Commerce Department every quarter.

 

When the bubble burst, it was inevitable that we would face a serious recession, as there was no obvious source of demand that was going to replace the construction and consumption demand generated by the bubble.

To prevent the disaster of the Great Recession, we didn’t need the Fed to get into weeds of regulation. We needed a Fed that recognized the risk of a bubble that was driving the economy instead of cheering it on, as Greenspan largely did until he stepped down in 2006.

Bubbles are not dependent on bad finance.  The stock bubble in the late 1990s, whose collapse gave us the recession in 2001, did not depend to any substantial extent on credit. People put up their own money to buy ridiculously priced shares of stock.

The collapse of bubbles also doesn’t necessarily lead to a recession. This is only the case if the bubble was actually driving the economy, as was the case with the stock bubble in the 1990s and the housing bubble in the 2000s. If the $1 trillion market for Bitcoin collapsed completely tomorrow, we probably would not even be able to find its impact in the GDP data. (I discuss this issue in more detail here.)

Anyhow, even if bad regulation weren’t responsible for the Great Recession, we still should want a well-regulated financial system. There are three important reasons why regulation matters.

First, much of finance, for example subprime house and car loans or fees for financial services, is predatory. Contracts and loans are often designed deceptively so customers don’t realize the full costs and risks. Banks and other financial companies usually target low and moderate income people and people of color with these products.

Second, the financial sector is a major source of inequality. Many of the country’s biggest fortunes were made in the financial sector. We can debate how much money a person should get when they are responsible for a genuinely useful innovation, like an important drug or new software, but it’s hard to see a way to justify someone getting very rich off subprime mortgages.

The third reason regulation is important is that a bloated financial sector is inefficient. The financial sector provides an important service; it allocates capital and facilitates payments. But we should want this to be done with as few resources as possible. We should think of finance like we think of the trucking industry – we need to get goods from point A to point B – but we want as few people and trucks employed in this process as possible.

The same applies to the financial sector. The sector has quintupled relative to the size of the economy over the last five decades, with little obvious benefit. If we can limit the bloat with regulation, that makes the sector and the economy more efficient.

For these reasons, we should want a well-regulated financial sector and there are certainly grounds for criticism of Powell on this front. However, the more obvious target here would be finding a good vice-chair for regulation. The term of the current vice-chair, Randal Quarles, ends in October. It will be important to replace him with someone who takes regulation more seriously.

 

Other Issues: Climate and Cities

 

Some have complained that Powell has not made climate a factor in Fed policy. There also have been complaints that the municipal lending facility he created in the recession was barely used.

These complaints are not really fair to Powell or the Fed. It would be great to have a central bank that actively promoted clean energy and sought to penalize fossil fuel companies, but this is not a power that has been given to the Fed by Congress. While it can arguably do this with the power it has, it would be virtually certain to lose this power very quickly if it went this route.

We can be quite certain that every Republican in Congress would be up in arms if the Fed were to pursue this path, as would likely be the case with many Democrats. If this had happened with Donald Trump in the White House, we would also have the executive branch out for Powell’s head. It is hard to see the value in pursuing a policy that is virtually certain to be cut off before it can have any real impact and likely to lead to a Fed with much less autonomy.  

The same applies with lending to cities. In fact, the Fed’s policies led to a sharp reduction in the interest rates on municipal bonds between February and April of last year. The ability to borrow at lower interest rates helped many cities get through the pandemic. However, there were cities with bad credit ratings that benefitted less from the drop in interest rates.

It would have been great if Powell could have tossed these cities a lifeline by lending at well below market rates, but here too we have to look to the reaction from Congress. The Republicans in Congress, along with Donald Trump, were quite explicit in their efforts to keep “Democrat” cities from getting money. Had Powell tried to use the Fed as a backdoor, they would not have sat by and twiddled their thumbs helplessly. Again, they would have gone gunning for Powell and the Fed, and they would have likely succeeded in reining in the lending and weakening the Fed.

In both of these cases, we can argue whether the Fed had the legal authority to do more, but as a practical matter, it almost certainly would have been blocked in these efforts. The Fed’s main responsibility is the state of the macroeconomy, and I find it hard to argue that Powell should have put the Fed’s ability to be effective here at risk to pursue initiatives that were virtually certain to be shut down quickly.

 

Why Powell and Why Now

While Powell had brought about a remarkable shift in Fed policy, it could be argued that others, most notably Fed Governor Lael Brainard, could carry this shift forward as well or better. There are several reasons why ditching Powell would be a risky strategy.

Most importantly, Powell would have the best chance of getting confirmed by the Senate. The Republicans have made it fairly explicit that their agenda for the Biden presidency is sabotage. If Biden wants to appoint a Fed chair committed to full employment, they will look to block them. We can assume that all 50 Republican senators will vote no, on almost anyone that Biden puts forward. That means that if any of the centrist Democrats decide to get cute, Biden doesn’t have a Fed chair.

Powell has a huge advantage in this area in that he already secured the vote of almost every Republican in the Senate when Trump nominated him in 2017. (There were only four no votes from Republicans.) There are few limits to Republican shamelessness. Many may decide that if Biden wants Powell, then they don’t, but clearly the person Trump picked to be Fed chair has a better chance of winning their support than anyone else Biden might put forward.

There is also the question of the Fed chair’s authority at the Fed. Decisions on monetary policy are not made by the chair alone but rather by the Fed Open Market Committee (FOMC), which includes the other six governors and the twelve district bank presidents, five of whom vote at any given meeting. The chair usually gets their way, but they typically negotiate and work out compromises with the other members of the FOMC.

Powell, as the incumbent chair, would have much more authority in this situation than a new person just stepping into the position. There are still many inflation hawks among the district bank presidents. Powell will be much better situated to keep the priority on full employment than any possible replacement.

In terms of announcing his reappointment soon, Biden should want to do what he can to remove uncertainty and shore up Powell’s position in coming months. We know that the Republicans will do everything in their power to stir up fears of runaway inflation and to undermine the Fed’s authority. If Biden can give him a clear endorsement now, it would help Powell’s effort to keep the focus on full employment.

We know that there will be areas with jumps in prices due to a bounce back from pandemic drops or temporary shortages, as we saw in the April CPI report. We need the Fed to be able to look at the data clearly and respond accordingly. Powell will be most able to do this if there is no doubt about his reappointment.

This should be an easy one for Biden. He will be reappointing a chair with a proven track record. And, he can show his willingness to be bipartisan by handing over one of the most powerful positions in government to a Republican.

Jonathan Cohn is one the country’s best health care reporters. I’ve learned much over the years from reading his work in the New Republic and the Huffington Post, as well as Sick, his earlier book on the health care system.

For this reason, I was somewhat disappointed by his book on the passage of Obamacare and the subsequent effort by the Republicans to destroy it. The main reason is that Cohn wrote a different book than what I had expected. The overwhelming focus of the book is on the politics of the Affordable Care Act (ACA). Relatively little space is given to the substantive impact of the reforms and the debates around them.

I suppose you can’t blame an author for writing the book they wanted to write as opposed to the one I wanted them to write, so I will make a few comments about the book Cohn wrote and then get to some of the things I would have liked to see him discuss more.

The Book Cohn Wrote

First off, to be clear, Cohn has done an outstanding job of profiling the key players and describing their impact on the ACA, both in terms of their personal perspectives and their political agenda. He also tries hard to be fair to all involved, something which is difficult when many of the actors make it clear that their agenda is simply sabotage.

He also does a very good job of conveying the drama around the bill’s passage, a passage with no votes to spare in the Senate and perhaps one in the House.[1] The period leading up to the passage of the bill also included the death of Senator Ted Kennedy, for decades one of the leaders of the fight for national health care insurance, and then his replacement in the Senate by a Republican, who managed to catch the Massachusetts Democratic Party by surprise.

This resulted in the absurd situation where this massive bill never had a conference committee to hammer out differences between the House and Senate versions. Since the Democrats had lost their filibuster proof majority in the Senate, the only way that they could get the bill through Congress was to have the House pass the Senate bill unchanged. This situation made a far from perfect bill even less perfect, and it also created some of the legal issues that had to be battled out in several court cases.

In the news to me category, Cohn reports that several of Obama’s top advisers wanted him to abandon the ACA when the route to passage looked difficult. It is to Obama’s credit that he insisted on pushing forward. House Speaker Nancy Pelosi also comes off very well in the book. Her skills as a vote counter and arm-twister are well-known, but Cohn recounts in some detail the various deals she had to put together to get her majority in the House.

However, this is also an area where I will express some skepticism. When a member of the House faces a vote that would be politically difficult in their district, it’s common for them to tell the leadership that they will have their vote if it is needed, but would rather vote against the measure. 

There were 39 Democrats that voted against the bill on the key House vote. It is certainly possible that some of these had pledged to be yes votes if Pelosi needed them. I have no idea if that was the case, but Pelosi would certainly not force one of her members to take a politically dangerous vote if it were not needed. Cohn doesn’t raise this question. It would not hugely change the picture if Pelosi had four or five potential votes in reserve, but it would mean that the passage wasn’t quite as much of a nail biter as it appeared.   

There are some other places where more questions like this could be asked. For example, Obama’s chief of staff Rahm Emanuel struck a deal that was very favorable to the pharmaceutical industry. Was the issue that he could not have gotten more concessions out of them on pricing or that he did not want to?

There is also a question of whether he could not have secured some funding, say a few billion a year from the National Institutes of Health (NIH) budget, to support the actual development of new drugs, not just the more basic research typically funded by NIH. This funding would be comparable to the funding that Moderna received to develop a vaccine through Operation Warp Speed, except instead of giving companies a patent in addition to the government funding, the drugs developed would be in the public domain, and all the research would be fully open-source. This means that we might get some new breakthrough cancer drug selling for a few hundred dollars, instead of tens of thousands.

Okay, I realize that the question of experimenting with alternative research funding for prescription drugs and medical equipment was on no one’s agenda, but it is reasonable to ask “why not?” If we can’t talk about reallocating 0.1 percent of the country’s health care budget to a once in a generation health care reform, when can we talk about it?[2]

It’s also worth pressing the issue of the $1 trillion ten year cost limit (less than 0.6 percent of GDP) that Obama imposed on the bill, which he later lowered to $900 billion. Obama seemed to believe that this limit would win him goodwill for his fiscal prudence from Republicans or at least the media. It seems to have gained him nothing.

If there were another $100 billion in the bill, it could have been used to have larger subsidies in the exchange. With roughly 12 million people in the exchanges, an extra $10 billion a year would allow for a boost to subsidies that averaged $850 a person. This would have made insurance in the exchanges considerably more affordable.

Cohn does raise this issue, but it certainly could have been given more extensive treatment. It was perhaps the biggest unforced error the Obama administration made in pushing the bill.  

 

The Book I Wish Cohn Had Written

The focus of The Ten Year War is clearly on the politics around the passage of the ACA and the subsequent effort to repeal it. I would have liked to see more attention to the policy questions around the bill and some of the resulting debate.

 

What Happened to the Young Invincibles?

I recall a painful debate over the “young invincibles,” the question of whether young healthy people would buy insurance in the exchanges. By some accounts, the whole future of the program depended on the decision of healthy people in their twenties and thirties.

This debate was painful, because it was nonsense. The key issue for the exchanges was whether healthy people would buy into the exchanges, it didn’t matter whether they were young or not. The basic point here is straightforward: we can think of the premiums people pay effectively as a tax. The oldest pre-Medicare age group (ages 55 to 64) pay premiums that were three times as much as the youngest group.

Younger people on average have health care costs that are less than one third as high as this older group, meaning that they did face somewhat of a penalty. But, the fact is that most people in this older age group, like most young people, are healthy and have low medical expenses. This means that for every healthy older person in the exchanges, insurers collect three times as much as they do for healthy younger people, and they pay out the same in benefits – little or nothing.

What mattered for the program was skewing by health, not by age. This point was demonstrated in a simple analysis by the Kaiser Family Foundation. This analysis showed that even an extreme skewing by age would only raise costs by 2.4 percent. A more plausible skewing was unlikely to raise costs of the program by even one percent.

The question of what the young invincibles would do was highlighted endlessly as the exchanges were becoming operational in 2014. The Heritage Foundation sponsored an Obamacare card burning, where young people were burning mock Obamacare cards to show their contempt for the exchanges. (This was a takeoff of draft card burning during the Vietnam War years. Also, there were no Obamacare cards.)

I remember once being in an e-mail exchange with a group of young lefty Medicare for All supporters. They were threatening that they would not sign up for the exchanges. I explained the arithmetic to them and said I really didn’t care from the standpoint of the program, but it was probably a good idea for them to get insurance. Anyhow, I think it would have been worth spending a page or two on this silliness that played such an important role in the debate at the time.  

 

Where’s the Skin in the Game?

In the same vein, I don’t recall the expression “skin in the game” appearing anywhere in the book. There were certainly many on the Obama team who felt that it was important for patients to pick up a portion of the tab in order to control costs. The idea was that if insurers, or the government, paid the full bill, then people would use too much health care. On the other hand, if we could make patients pay 20 percent, or some significant share, they would be good “consumers” of health care and shop for better prices.

There was a great study a few years back that looked at people’s decisions on where to get non-emergency lower body MRIs. The reason this was a good test, is that lower body MRIs are a standardized product. This isn’t like looking for a cardiologist or a brain surgeon, who may have a range of skills for specific conditions. The study found that almost no one did comparative shopping, they went with referrals from their doctors.

If people aren’t going to comparison shop for lower body MRIs, it’s hard to believe that they will do comparison shopping for any other medical need they face. In other words, there is very little value in forcing people to have skin in the game.

I will qualify this view slightly. I know many people pushing for Medicare for All believe it is important that people not pay anything for their care, that money should not be an obstacle to seeing a doctor.

A doctor, or any health professional’s time, is valuable. We should not want people using it frivolously. To my view, it makes sense to require modest payments to encourage people to think twice before going to the doctor.

The model I envision is something along the lines of the five cent fee that is required in many states to get a plastic bag at the grocery store. This is not going to discourage anyone from getting a bag when they really need it for their groceries, but the evidence shows that it enormously reduces the demand for plastic bags.

Similarly, if we charged a ten or fifteen dollar fee to see a doctor, as opposed to having it be completely free, it will likely get people to think twice before going, without preventing people with serious health issues from getting the care they need. That isn’t really a skin in the game story; it’s just asking people to think twice.[3]   

Okay, that’s all a sidebar, but this is another case where a big item in the policy debate turned out to be largely silly. Skin in the game is not an effective way to control costs.

 

Slowing Health Care Cost Growth Can Pay for Biden’s Big Agenda

There is an incredibly important story on costs that has gone largely unnoticed. Health care cost growth has slowed dramatically in the years since Obamacare passed. In 2009, the Centers for Medicare and Medicaid Services projected that in 2019 we would spend $4.5 trillion, or 19.3 percent of GDP, on health care. In fact, we spent $3.8 trillion, or 17.7 percent of GDP, on health care in 2019. The difference of 1.6 percent of GDP is almost half of the military budget. It is roughly equal to the combined amount that President Biden is requesting for his infrastructure and American Families Plan. In short, it is real money.

Health care costs slowed sharply in the years following the passage of the ACA. This has meant that we have much more money for other things, as health care has risen only slightly as share of GDP. This is even though we had a substantial aging of the population over this period.

The ACA certainly is not responsible for all of this slowdown in health care costs. There has been a comparable slowing in most other wealthy countries. Also, the slowdown began before most of the elements of the ACA had gone into effect, so it is hard to give the credit exclusively to the program.

Nonetheless, there can be zero doubt that if costs had gone in the opposite direction, we would be hearing about it nonstop. If there had been some factor, unrelated to the ACA, that had led health care costs worldwide to accelerate, Obamacare certainly would have been blamed.

For this reason, it is very hard to understand why the Obama administration was not more anxious to tout the slowdown in costs that took place under Obama’s watch. It is a big deal and people should know about it.

 

The Affordable Care Act Was Family Friendly

Another item in this vein is the impact of Obamacare on the labor market. Prior to the passage of the ACA, there was a considerable literature on the phenomena of health care related job lock. The issue was that most workers got their health care insurance through their employer. If people with health conditions or family members with health conditions lost or left their jobs they risked losing health care insurance. Insurers would either refuse to issue insurance to someone with a health condition, or they would charge very high rates that would make it unaffordable.

By prohibiting insurers from discriminating based on pre-existing conditions, the ACA largely ended this problem. As a result, we should have expected to see more people leaving jobs with health insurance for jobs where they may not be getting insurance through their employer.

There is some evidence that this sort of shift did happen. In 2014, the first year of the ACA’s Medicaid expansion and the full operation of the exchanges, the share of the employed working part-time by choice rose 0.2 percentage points. While this is a very modest rise, for women with children the increase was 0.8 percentage points. For women with three or more children the increase was 1.4 percentage points. And, we also found, to no one’s surprise, that women working part-time spend more time providing care for family members.

Since part-time work generally does not provide health care insurance, this is consistent with the story that the ACA allowed workers to find jobs that better fit their needs, rather than staying at a job because of health insurance. For some reason the Obama administration never chose to highlight this effect of the ACA.

I should also add a difficult to quantify aspect of Obamacare. Those of us who are fortunate enough to have reasonably good paying jobs that provide insurance know that we are one health crisis away from losing both our job and our insurance. Even for this fortunate segment of the labor market, a debilitating injury or illness is likely to eventually lead to job loss. And, after a period of time, to loss of insurance.

The ACA provides a backup so that even in that situation we are likely to still be able to get insurance, either through Medicaid or through the subsidies provided to people in the exchanges. In effect, the ACA provides insurance that people can get insurance. Perhaps not many people appreciate this fact, but when you do work on the topic (and have a family member with health issues), it matters a great deal.

 

Conclusion

To sum up the book I wanted Cohn to write, there was a lot of silliness in the debate around Obamacare, but the program’s benefits have actually been undersold. As our current president rightly said, it is a big f**king deal. And, in important ways it is a bigger f**king deal than most people recognize, even its supporters. I wish this book had done more to make that clear.

 

 

[1] One Republican, Joseph Cao of Louisiana, voted for the bill in the House, but he waited until after all the votes were in, and it was clear that the bill had passed, to switch his vote from no to yes. He has publicly said that he would not have voted for the bill if his vote would have been decisive.

[2] I outline my proposal for direct public funding of research in chapter 5 of Rigged (it’s free).

[3] For low income people even a ten dollar fee can be a substantial cost. There are mechanisms that can address this. For example, they can be issued a $200 card at the start of each year, with the unused money going into a retirement account.  

Jonathan Cohn is one the country’s best health care reporters. I’ve learned much over the years from reading his work in the New Republic and the Huffington Post, as well as Sick, his earlier book on the health care system.

For this reason, I was somewhat disappointed by his book on the passage of Obamacare and the subsequent effort by the Republicans to destroy it. The main reason is that Cohn wrote a different book than what I had expected. The overwhelming focus of the book is on the politics of the Affordable Care Act (ACA). Relatively little space is given to the substantive impact of the reforms and the debates around them.

I suppose you can’t blame an author for writing the book they wanted to write as opposed to the one I wanted them to write, so I will make a few comments about the book Cohn wrote and then get to some of the things I would have liked to see him discuss more.

The Book Cohn Wrote

First off, to be clear, Cohn has done an outstanding job of profiling the key players and describing their impact on the ACA, both in terms of their personal perspectives and their political agenda. He also tries hard to be fair to all involved, something which is difficult when many of the actors make it clear that their agenda is simply sabotage.

He also does a very good job of conveying the drama around the bill’s passage, a passage with no votes to spare in the Senate and perhaps one in the House.[1] The period leading up to the passage of the bill also included the death of Senator Ted Kennedy, for decades one of the leaders of the fight for national health care insurance, and then his replacement in the Senate by a Republican, who managed to catch the Massachusetts Democratic Party by surprise.

This resulted in the absurd situation where this massive bill never had a conference committee to hammer out differences between the House and Senate versions. Since the Democrats had lost their filibuster proof majority in the Senate, the only way that they could get the bill through Congress was to have the House pass the Senate bill unchanged. This situation made a far from perfect bill even less perfect, and it also created some of the legal issues that had to be battled out in several court cases.

In the news to me category, Cohn reports that several of Obama’s top advisers wanted him to abandon the ACA when the route to passage looked difficult. It is to Obama’s credit that he insisted on pushing forward. House Speaker Nancy Pelosi also comes off very well in the book. Her skills as a vote counter and arm-twister are well-known, but Cohn recounts in some detail the various deals she had to put together to get her majority in the House.

However, this is also an area where I will express some skepticism. When a member of the House faces a vote that would be politically difficult in their district, it’s common for them to tell the leadership that they will have their vote if it is needed, but would rather vote against the measure. 

There were 39 Democrats that voted against the bill on the key House vote. It is certainly possible that some of these had pledged to be yes votes if Pelosi needed them. I have no idea if that was the case, but Pelosi would certainly not force one of her members to take a politically dangerous vote if it were not needed. Cohn doesn’t raise this question. It would not hugely change the picture if Pelosi had four or five potential votes in reserve, but it would mean that the passage wasn’t quite as much of a nail biter as it appeared.   

There are some other places where more questions like this could be asked. For example, Obama’s chief of staff Rahm Emanuel struck a deal that was very favorable to the pharmaceutical industry. Was the issue that he could not have gotten more concessions out of them on pricing or that he did not want to?

There is also a question of whether he could not have secured some funding, say a few billion a year from the National Institutes of Health (NIH) budget, to support the actual development of new drugs, not just the more basic research typically funded by NIH. This funding would be comparable to the funding that Moderna received to develop a vaccine through Operation Warp Speed, except instead of giving companies a patent in addition to the government funding, the drugs developed would be in the public domain, and all the research would be fully open-source. This means that we might get some new breakthrough cancer drug selling for a few hundred dollars, instead of tens of thousands.

Okay, I realize that the question of experimenting with alternative research funding for prescription drugs and medical equipment was on no one’s agenda, but it is reasonable to ask “why not?” If we can’t talk about reallocating 0.1 percent of the country’s health care budget to a once in a generation health care reform, when can we talk about it?[2]

It’s also worth pressing the issue of the $1 trillion ten year cost limit (less than 0.6 percent of GDP) that Obama imposed on the bill, which he later lowered to $900 billion. Obama seemed to believe that this limit would win him goodwill for his fiscal prudence from Republicans or at least the media. It seems to have gained him nothing.

If there were another $100 billion in the bill, it could have been used to have larger subsidies in the exchange. With roughly 12 million people in the exchanges, an extra $10 billion a year would allow for a boost to subsidies that averaged $850 a person. This would have made insurance in the exchanges considerably more affordable.

Cohn does raise this issue, but it certainly could have been given more extensive treatment. It was perhaps the biggest unforced error the Obama administration made in pushing the bill.  

 

The Book I Wish Cohn Had Written

The focus of The Ten Year War is clearly on the politics around the passage of the ACA and the subsequent effort to repeal it. I would have liked to see more attention to the policy questions around the bill and some of the resulting debate.

 

What Happened to the Young Invincibles?

I recall a painful debate over the “young invincibles,” the question of whether young healthy people would buy insurance in the exchanges. By some accounts, the whole future of the program depended on the decision of healthy people in their twenties and thirties.

This debate was painful, because it was nonsense. The key issue for the exchanges was whether healthy people would buy into the exchanges, it didn’t matter whether they were young or not. The basic point here is straightforward: we can think of the premiums people pay effectively as a tax. The oldest pre-Medicare age group (ages 55 to 64) pay premiums that were three times as much as the youngest group.

Younger people on average have health care costs that are less than one third as high as this older group, meaning that they did face somewhat of a penalty. But, the fact is that most people in this older age group, like most young people, are healthy and have low medical expenses. This means that for every healthy older person in the exchanges, insurers collect three times as much as they do for healthy younger people, and they pay out the same in benefits – little or nothing.

What mattered for the program was skewing by health, not by age. This point was demonstrated in a simple analysis by the Kaiser Family Foundation. This analysis showed that even an extreme skewing by age would only raise costs by 2.4 percent. A more plausible skewing was unlikely to raise costs of the program by even one percent.

The question of what the young invincibles would do was highlighted endlessly as the exchanges were becoming operational in 2014. The Heritage Foundation sponsored an Obamacare card burning, where young people were burning mock Obamacare cards to show their contempt for the exchanges. (This was a takeoff of draft card burning during the Vietnam War years. Also, there were no Obamacare cards.)

I remember once being in an e-mail exchange with a group of young lefty Medicare for All supporters. They were threatening that they would not sign up for the exchanges. I explained the arithmetic to them and said I really didn’t care from the standpoint of the program, but it was probably a good idea for them to get insurance. Anyhow, I think it would have been worth spending a page or two on this silliness that played such an important role in the debate at the time.  

 

Where’s the Skin in the Game?

In the same vein, I don’t recall the expression “skin in the game” appearing anywhere in the book. There were certainly many on the Obama team who felt that it was important for patients to pick up a portion of the tab in order to control costs. The idea was that if insurers, or the government, paid the full bill, then people would use too much health care. On the other hand, if we could make patients pay 20 percent, or some significant share, they would be good “consumers” of health care and shop for better prices.

There was a great study a few years back that looked at people’s decisions on where to get non-emergency lower body MRIs. The reason this was a good test, is that lower body MRIs are a standardized product. This isn’t like looking for a cardiologist or a brain surgeon, who may have a range of skills for specific conditions. The study found that almost no one did comparative shopping, they went with referrals from their doctors.

If people aren’t going to comparison shop for lower body MRIs, it’s hard to believe that they will do comparison shopping for any other medical need they face. In other words, there is very little value in forcing people to have skin in the game.

I will qualify this view slightly. I know many people pushing for Medicare for All believe it is important that people not pay anything for their care, that money should not be an obstacle to seeing a doctor.

A doctor, or any health professional’s time, is valuable. We should not want people using it frivolously. To my view, it makes sense to require modest payments to encourage people to think twice before going to the doctor.

The model I envision is something along the lines of the five cent fee that is required in many states to get a plastic bag at the grocery store. This is not going to discourage anyone from getting a bag when they really need it for their groceries, but the evidence shows that it enormously reduces the demand for plastic bags.

Similarly, if we charged a ten or fifteen dollar fee to see a doctor, as opposed to having it be completely free, it will likely get people to think twice before going, without preventing people with serious health issues from getting the care they need. That isn’t really a skin in the game story; it’s just asking people to think twice.[3]   

Okay, that’s all a sidebar, but this is another case where a big item in the policy debate turned out to be largely silly. Skin in the game is not an effective way to control costs.

 

Slowing Health Care Cost Growth Can Pay for Biden’s Big Agenda

There is an incredibly important story on costs that has gone largely unnoticed. Health care cost growth has slowed dramatically in the years since Obamacare passed. In 2009, the Centers for Medicare and Medicaid Services projected that in 2019 we would spend $4.5 trillion, or 19.3 percent of GDP, on health care. In fact, we spent $3.8 trillion, or 17.7 percent of GDP, on health care in 2019. The difference of 1.6 percent of GDP is almost half of the military budget. It is roughly equal to the combined amount that President Biden is requesting for his infrastructure and American Families Plan. In short, it is real money.

Health care costs slowed sharply in the years following the passage of the ACA. This has meant that we have much more money for other things, as health care has risen only slightly as share of GDP. This is even though we had a substantial aging of the population over this period.

The ACA certainly is not responsible for all of this slowdown in health care costs. There has been a comparable slowing in most other wealthy countries. Also, the slowdown began before most of the elements of the ACA had gone into effect, so it is hard to give the credit exclusively to the program.

Nonetheless, there can be zero doubt that if costs had gone in the opposite direction, we would be hearing about it nonstop. If there had been some factor, unrelated to the ACA, that had led health care costs worldwide to accelerate, Obamacare certainly would have been blamed.

For this reason, it is very hard to understand why the Obama administration was not more anxious to tout the slowdown in costs that took place under Obama’s watch. It is a big deal and people should know about it.

 

The Affordable Care Act Was Family Friendly

Another item in this vein is the impact of Obamacare on the labor market. Prior to the passage of the ACA, there was a considerable literature on the phenomena of health care related job lock. The issue was that most workers got their health care insurance through their employer. If people with health conditions or family members with health conditions lost or left their jobs they risked losing health care insurance. Insurers would either refuse to issue insurance to someone with a health condition, or they would charge very high rates that would make it unaffordable.

By prohibiting insurers from discriminating based on pre-existing conditions, the ACA largely ended this problem. As a result, we should have expected to see more people leaving jobs with health insurance for jobs where they may not be getting insurance through their employer.

There is some evidence that this sort of shift did happen. In 2014, the first year of the ACA’s Medicaid expansion and the full operation of the exchanges, the share of the employed working part-time by choice rose 0.2 percentage points. While this is a very modest rise, for women with children the increase was 0.8 percentage points. For women with three or more children the increase was 1.4 percentage points. And, we also found, to no one’s surprise, that women working part-time spend more time providing care for family members.

Since part-time work generally does not provide health care insurance, this is consistent with the story that the ACA allowed workers to find jobs that better fit their needs, rather than staying at a job because of health insurance. For some reason the Obama administration never chose to highlight this effect of the ACA.

I should also add a difficult to quantify aspect of Obamacare. Those of us who are fortunate enough to have reasonably good paying jobs that provide insurance know that we are one health crisis away from losing both our job and our insurance. Even for this fortunate segment of the labor market, a debilitating injury or illness is likely to eventually lead to job loss. And, after a period of time, to loss of insurance.

The ACA provides a backup so that even in that situation we are likely to still be able to get insurance, either through Medicaid or through the subsidies provided to people in the exchanges. In effect, the ACA provides insurance that people can get insurance. Perhaps not many people appreciate this fact, but when you do work on the topic (and have a family member with health issues), it matters a great deal.

 

Conclusion

To sum up the book I wanted Cohn to write, there was a lot of silliness in the debate around Obamacare, but the program’s benefits have actually been undersold. As our current president rightly said, it is a big f**king deal. And, in important ways it is a bigger f**king deal than most people recognize, even its supporters. I wish this book had done more to make that clear.

 

 

[1] One Republican, Joseph Cao of Louisiana, voted for the bill in the House, but he waited until after all the votes were in, and it was clear that the bill had passed, to switch his vote from no to yes. He has publicly said that he would not have voted for the bill if his vote would have been decisive.

[2] I outline my proposal for direct public funding of research in chapter 5 of Rigged (it’s free).

[3] For low income people even a ten dollar fee can be a substantial cost. There are mechanisms that can address this. For example, they can be issued a $200 card at the start of each year, with the unused money going into a retirement account.  

The Republicans’ complaint of the day is that the $300 weekly supplements to unemployment insurance benefits, which were included in President Biden’s recovery package, are keeping people from working. The argument is that because many workers in low-paying jobs can get more money from not working than they get on their job, they are choosing not to work.

This is actually an issue that several economists explored, and they found little evidence for this sort of disincentive effect last summer, when the supplement was $600 a week. But before turning to these studies, it’s worth making a couple of points about the nature of unemployment insurance benefits.

First, only workers who lose their jobs can get benefits. Workers are not eligible if they quit their jobs because they don’t like the work or don’t like their boss. To be eligible they have to be laid off, and it has to be for economic reasons. If a worker is fired for cause, say for stealing from the workplace or harassing another employee, they are not eligible for benefits.

The other point is that workers receiving benefits have to be actively looking for work. If they turn down a job comparable to the one they lost, they lose their benefits. One feature that has been extraordinary in this recession is that a very large share of the unemployed report being on temporary layoffs. This means that they expect their employer to call them back to their job. In April, this share was 21.3 percent of the unemployed, but it had been as high as 77.9 percent last April at the peak of the shutdowns. (The share is typically less than 10 percent.) The reason this matters is that if an employer calls a worker back to work, they lose their benefits if they do not go back.

Now, we know these provisions of the program are not perfectly enforced. But the point is that anyone who is making the calculation to not return to work because they can get so much money by staying on unemployment insurance is violating the rules of the program. It is also worth noting that the supplemental benefits end in the first week of September, so this cannot be a long-term plan for them. Even if the benefits might look good relative to working today, that may not be the case a few weeks down the road as we get closer to the expiration point for the supplements.

Fortunately, we do not have to just speculate on how workers behave; we have actual data. Three separate studies examined the impact of the original supplements in the CARES Act passed at the start of April 2020. These supplements were $600 a week, twice the size of the current supplements. All three found that the $600 supplements had little impact on the employment levels during the period in which they were in effect. For example, a study by several economists at the University of Chicago and J.P. Morgan Chase found that employment was 0.2 to 0.4 percentage points lower as a result of the supplements. It is reasonable to assume that the effect of supplements that are half as large would be considerably smaller.

In short, it is not plausible that the generosity of unemployment insurance benefits are a major factor affecting employers’ ability to find workers. While there are some people who are undoubtedly opting to take advantage of the benefits rather than work, based on the evidence from these studies, this number is fairly small.

If the same share of population were working today as before the pandemic, another 8.3 million people would have jobs. The reason the vast majority of these people don’t have jobs today is because the jobs are not there, not because they are happily getting unemployment benefits. 

The Republicans’ complaint of the day is that the $300 weekly supplements to unemployment insurance benefits, which were included in President Biden’s recovery package, are keeping people from working. The argument is that because many workers in low-paying jobs can get more money from not working than they get on their job, they are choosing not to work.

This is actually an issue that several economists explored, and they found little evidence for this sort of disincentive effect last summer, when the supplement was $600 a week. But before turning to these studies, it’s worth making a couple of points about the nature of unemployment insurance benefits.

First, only workers who lose their jobs can get benefits. Workers are not eligible if they quit their jobs because they don’t like the work or don’t like their boss. To be eligible they have to be laid off, and it has to be for economic reasons. If a worker is fired for cause, say for stealing from the workplace or harassing another employee, they are not eligible for benefits.

The other point is that workers receiving benefits have to be actively looking for work. If they turn down a job comparable to the one they lost, they lose their benefits. One feature that has been extraordinary in this recession is that a very large share of the unemployed report being on temporary layoffs. This means that they expect their employer to call them back to their job. In April, this share was 21.3 percent of the unemployed, but it had been as high as 77.9 percent last April at the peak of the shutdowns. (The share is typically less than 10 percent.) The reason this matters is that if an employer calls a worker back to work, they lose their benefits if they do not go back.

Now, we know these provisions of the program are not perfectly enforced. But the point is that anyone who is making the calculation to not return to work because they can get so much money by staying on unemployment insurance is violating the rules of the program. It is also worth noting that the supplemental benefits end in the first week of September, so this cannot be a long-term plan for them. Even if the benefits might look good relative to working today, that may not be the case a few weeks down the road as we get closer to the expiration point for the supplements.

Fortunately, we do not have to just speculate on how workers behave; we have actual data. Three separate studies examined the impact of the original supplements in the CARES Act passed at the start of April 2020. These supplements were $600 a week, twice the size of the current supplements. All three found that the $600 supplements had little impact on the employment levels during the period in which they were in effect. For example, a study by several economists at the University of Chicago and J.P. Morgan Chase found that employment was 0.2 to 0.4 percentage points lower as a result of the supplements. It is reasonable to assume that the effect of supplements that are half as large would be considerably smaller.

In short, it is not plausible that the generosity of unemployment insurance benefits are a major factor affecting employers’ ability to find workers. While there are some people who are undoubtedly opting to take advantage of the benefits rather than work, based on the evidence from these studies, this number is fairly small.

If the same share of population were working today as before the pandemic, another 8.3 million people would have jobs. The reason the vast majority of these people don’t have jobs today is because the jobs are not there, not because they are happily getting unemployment benefits. 

Since the Biden administration announced its decision to support a motion at the WTO to waive patent rights on vaccines for the duration of the pandemic, we have been deluged with statements by experts telling us that this cannot possibly increase vaccine production. The argument is that everyone who can produce vaccines is already producing them. Furthermore, there are bottlenecks in the production process, so that even if another manufacturer was prepared to produce vaccines, they could not get the necessary materials.

There are two big problems with these claims. First, it’s not clear what these experts envision as the end date of the pandemic. Surely no new production can come on line tomorrow, and probably not even in the next few months, but unfortunately, we are almost certainly looking at a much longer time-frame for getting the world vaccinated.

At the current pace, we would be very lucky to get most of the world vaccinated by the end of 2022, and it could very well be much later. Are we supposed to believe that making the technology freely available could not lead to an increase in production in eight months or even a year down the road? It’s important to remember, there were no vaccines in March of 2020, yet several companies had the capacity to produce large quantities by November.

It would have been great if we had gone the route of open source technology when South Africa and India first proposed suspending intellectual property rules back in October. Better yet, we could have taken the pandemic seriously and gone this route from the beginning last March. But even where we are now, there is good reason to believe that we can hasten the process of vaccinating the world by freely transferring technology.

The other point is that the production process is not set in stone. Pfizer announced back in February that it discovered a way to cut its production time nearly in half. It also discovered that its vaccine did not need to be super-frozen at temperatures below minus 90 degrees Fahrenheit; instead it can be kept in a normal freezer for up to two weeks. This greatly eases the process of transporting and delivering the vaccine. It also discovered that a typical vial contains six doses rather than five, which implies 20 percent more doses.

The point is that Pfizer’s engineers have repeatedly found ways to improve its production and delivery process. It is hard to believe that if its technology were open-sourced for engineers all over the world to review, that not one of them could find a way to further improve its production process. And, even small improvements, say five percent or ten percent, imply enormous benefits in reduced infections and deaths, as well as economic benefits.

The same story would, of course, apply to Moderna and the other manufacturers. It also applies to the suppliers of inputs that are in short supply. It’s pretty hard to imagine that, if these technologies were fully open and available for experts everywhere to review, there would not be further improvements.   

In short, it seems very likely that if we really got open source technology for the production of vaccines and the necessary inputs, we would have substantially more vaccines available in the not-distant future. Given the enormous potential gains, that’s a pretty good argument for open-sourcing the key technologies.

Since the Biden administration announced its decision to support a motion at the WTO to waive patent rights on vaccines for the duration of the pandemic, we have been deluged with statements by experts telling us that this cannot possibly increase vaccine production. The argument is that everyone who can produce vaccines is already producing them. Furthermore, there are bottlenecks in the production process, so that even if another manufacturer was prepared to produce vaccines, they could not get the necessary materials.

There are two big problems with these claims. First, it’s not clear what these experts envision as the end date of the pandemic. Surely no new production can come on line tomorrow, and probably not even in the next few months, but unfortunately, we are almost certainly looking at a much longer time-frame for getting the world vaccinated.

At the current pace, we would be very lucky to get most of the world vaccinated by the end of 2022, and it could very well be much later. Are we supposed to believe that making the technology freely available could not lead to an increase in production in eight months or even a year down the road? It’s important to remember, there were no vaccines in March of 2020, yet several companies had the capacity to produce large quantities by November.

It would have been great if we had gone the route of open source technology when South Africa and India first proposed suspending intellectual property rules back in October. Better yet, we could have taken the pandemic seriously and gone this route from the beginning last March. But even where we are now, there is good reason to believe that we can hasten the process of vaccinating the world by freely transferring technology.

The other point is that the production process is not set in stone. Pfizer announced back in February that it discovered a way to cut its production time nearly in half. It also discovered that its vaccine did not need to be super-frozen at temperatures below minus 90 degrees Fahrenheit; instead it can be kept in a normal freezer for up to two weeks. This greatly eases the process of transporting and delivering the vaccine. It also discovered that a typical vial contains six doses rather than five, which implies 20 percent more doses.

The point is that Pfizer’s engineers have repeatedly found ways to improve its production and delivery process. It is hard to believe that if its technology were open-sourced for engineers all over the world to review, that not one of them could find a way to further improve its production process. And, even small improvements, say five percent or ten percent, imply enormous benefits in reduced infections and deaths, as well as economic benefits.

The same story would, of course, apply to Moderna and the other manufacturers. It also applies to the suppliers of inputs that are in short supply. It’s pretty hard to imagine that, if these technologies were fully open and available for experts everywhere to review, there would not be further improvements.   

In short, it seems very likely that if we really got open source technology for the production of vaccines and the necessary inputs, we would have substantially more vaccines available in the not-distant future. Given the enormous potential gains, that’s a pretty good argument for open-sourcing the key technologies.

To repeat my standard disclaimer, I know this sort of comparison is silly, but I also know that Trump and the Republicans would be touting this to the sky if the shoe were on the other foot. So, here’s the latest, the economy has created approximately 1.6 million in three months under Biden. It lost almost 2.9 million jobs in the four years of the Trump administration.


Source: Bureau of Labor Statistics and author’s calculations.

To repeat my standard disclaimer, I know this sort of comparison is silly, but I also know that Trump and the Republicans would be touting this to the sky if the shoe were on the other foot. So, here’s the latest, the economy has created approximately 1.6 million in three months under Biden. It lost almost 2.9 million jobs in the four years of the Trump administration.


Source: Bureau of Labor Statistics and author’s calculations.

(This post first appeared on my Patreon page.)

President Biden made a huge step yesterday when his trade representative, Katherine Tai, announced that the United States would be supporting a resolution at the World Trade Organization (WTO), to suspend intellectual property rules on vaccines for the duration of the pandemic. This resolution had been introduced by India and South Africa back in October.

The United States had previously been leading wealthy countries in opposition to the resolution. With Biden now reversing the position of the Trump administration, the resolution is likely to be approved.

However, the approval is not necessarily a foregone conclusion. In reversing the U.S. position, Biden went against a major lobbying campaign by the pharmaceutical industry.  Many European countries also have large pharmaceutical companies. They are being every bit as vigorous in lobbying their own countries’ governments to get them to maintain their opposition to the resolution.

Since everything at the WTO has to be unanimous, a single country can block action on the resolution. Nonetheless, it is unlikely that any of the European countries, or even a small group of them, would want to be seen standing in the way of getting the world vaccinated as quickly as possible.

It is also important to recognize that Ambassador Tai’s announcement only indicated that the United States supported the proposal to end intellectual property protections on vaccines. The resolution introduced by India and South Africa also called for ending protections on treatments and tests for the duration of the pandemic. A suspension of IP protections in these other areas is needed to minimize the death and suffering from the pandemic, but we still should recognize the huge step taken by the Biden administration yesterday.

 

How We Got Here

While President Biden deserves enormous credit for this step, it is important to realize that it came about as a result of a great deal of work by activists here and around the world. First of all, the Indian and South African governments kicked it off with their WTO proposal. Many groups had been urging open source technology from the beginning of the pandemic, but this resolution gave activists and policy types a clear rallying point.   

I am tempted to list the groups and individuals who deserve congratulations for their efforts on this, but I am going to restrain myself out of the fear of leaving some important ones off the list. I will just say that this came about because of the efforts of many people in the United States and around the world, who argued that we have to do everything possible to limit the suffering from the pandemic.

The change in positions shows the potential for public pressure to have an impact. This calls to mind the possibly apocryphal story of when a group of progressives met with Franklin Roosevelt to press him on one of the important New Deal issues. He supposedly said something to the effect of, “you convinced me, now make me do it.”

We needed a president who was open to this sort of move for the pressure to succeed. But without the pressure from activists here and around the world, it is unlikely that Biden would have bucked the Big Pharma lobby.

 

What is Left to be Done

It is important to realize that the change in the U.S. position at the WTO doesn’t directly get a single shot in anyone’s arm. What is needed is a full-scale effort to not only remove the constraints of patent monopolies but also to push the drug companies to transfer their technology as quickly as possible.

Ideally, this would mean going full open-source. That would require Pfizer, Moderna, and the rest to post their manufacturing plans online, and then conduct webinars, and hands-on training with everyone capable of quickly getting manufacturing capacity up to speed.

It is unlikely that the Biden administration will go this route, but it should be seen as the gold standard here. Not only would this allow for the most rapid diffusion of the technology, but it would also open the door for further innovations that could hasten production.

Back in February, Pfizer announced that it had found ways to improve its production process so as to nearly double output. It also discovered that its vaccines did not need to be super-frozen, but could be safely stored in a normal freezer for up to two weeks. Unless we think that Pfizer’s engineers are the only people in the world who could improve its production and delivery process, making the information open-source is likely to lead to further improvements that could increase its rate of output.

Assuming that we do not go the open-source route, Biden should be prepared to use the Defense Production Act to force vaccine makers to enter into contracts with manufacturers around the world, in which they share the technology needed for them to start production as quickly as possible. He already did with Johnson and Johnson and Merck, with the latter now producing the vaccine developed by Johnson and Johnson. Biden needs to take the same step, forcing our manufacturers to transfer their technology to anyone with capacity anywhere in the world.

We also really need to collaborate with Russia and China, as well as any other country that has a vaccine that is shown to be safe and effective. We can have our political fights in other spheres, but we have a common interest in getting the world vaccinated as quickly as possible.

In addition to doing an inventory of the obstacles to ramping up production of the U.S.-European vaccines, we should also be addressing obstacles that prevent these countries from producing more of their vaccines. Ideally, they can also be pushed to have increased transparency on their clinical trial results. It is important to know which vaccines are most effective against each variant, and also the extent to which some are better or worse for different demographic groups.

The goal here should be getting the world vaccinated, not scoring propaganda points. If President Biden approaches the issue that way, hopefully, he can get his counterparts in other major powers to do the same.

 

Implications for the Longer Term

In my spare time, I have been writing on patent and copyright monopolies for a quarter-century. This is the first time I have ever seen IP issues get any substantial amount of attention from a general audience. Usually, the only people paying attention are the affected industries and a relatively narrow group of activists and policy types.

That matters hugely because when the affected industries dominate the debate, they can be pretty much guaranteed of being able to steer the policy in a way that benefits them. This is really the story of patent and copyright policy over the last four decades, with the inclusion of the TRIPS provisions in the WTO being the most notable example. TRIPS got added to the WTO because the drug companies wanted to impose U.S.-style patent protection on the developing world. There was no major public debate in the United States, or anywhere else, as to whether it was a good idea.

Now that we do have the public paying attention to IP issues, it is worth trying to press a few points.

First, we need to recognize that there are alternatives to patent monopolies for financing research and development. That should be obvious since the federal government already spends more than $40 billion a year on biomedical research through the National Institutes of Health (NIH). (That compares to roughly $90 billion spent by the industry.)

In addition, the government put up another $10 billion in the funding of pandemic-related research with Operation Warp Speed (OWS). While most of the NIH funding goes to more basic research (occasionally it has financed the development of new drugs), OWS was directly focused on developing treatments, tests, and vaccines. In the case of the Moderna vaccine, the government picked up the full tab for the development costs.

In principle, there is no reason why direct public funding cannot be the more standard route of paying for research. There are various ways this can be done (I discuss mechanisms in chapter 5 of Rigged [it’s free], see also this paper by Arjun Jayadev, Joe Stiglitz, and me), but the point is that we don’t have to rely on government-granted patent monopolies to provide incentives for developing drugs.

There are many advantages of direct public funding. First, if the government has paid the tab for the research, any new drugs or vaccines can be sold as cheap generics from the day they are approved. This means that nearly all drugs would be cheap. Instead of selling for hundreds or thousands of dollars a prescription, drugs would sell for ten or twenty dollars.

A second major advantage is that if the government is funding the research, it can require that it all be open-source. This means that not only are all patents placed in the public domain, but all research findings are posted on the web as soon as practical. That would allow researchers all over the world to quickly build on successes and learn from failures.

A third major benefit is that if all drugs were sold as cheap generics, it would take away the incentive that patent monopolies give drug companies to lie about the safety and effectiveness of their drugs. When a drug is selling for a mark-up of several thousand percent over production costs, companies have a huge incentive to push it as widely as possible. We saw this most recently with the opioid crisis, where several companies paid billions of dollars in settlements based on the allegation that they deliberately misled doctors about the addictiveness of the new generation of opioids.

 

A second important point is that we need to have a clear understanding of the economic importance of patent and copyright monopolies. By my calculations, we transfer over $1 trillion annually (half of all corporate profits) from the public as a whole to the beneficiaries of rents from patents and copyrights. This is a huge amount of money and a big part of the story of the rise in inequality over the last four decades.

While it can be argued that our rules on patents and copyrights promote economic growth (the counterfactual should be alternative incentive mechanisms, not no incentive mechanism) it is indisputable that these are government policies, not the market.

This means that when someone says that technology has been responsible for the upward redistribution over the last four decades, they are speaking nonsense. Technology did not make Bill Gates rich, the patent and copyright monopolies the government gave Microsoft on its software made him rich. These monopolies can be longer and stronger, or shorter and weaker, or they can be replaced by different mechanisms altogether. The fact that a substantial segment of the population was able to get very wealthy from these monopolies was due to policy choices, don’t blame the technology.

The rents created by government-granted patents and copyright monopolies are also a form of government debt. It is utterly bizarre that we have so many people complaining about the debt burden that government borrowing is creating for our children, while completely ignoring the burden created by patent and copyright monopolies.

It’s pretty nutty to claim that if we tax people $400 billion to pay debt service (roughly twice the current debt level of debt service), it’s a burden. But, if we give drug companies patent monopolies, that allow them to raise their prices by $400 billion above the free market level, it’s not a problem. Government-granted patent and copyright monopolies are alternatives to direct government spending. We cannot claim the debt from direct spending is a burden and then pretend the rents from these monopolies are not a problem.

Finally, we should be taking away some lessons from the pandemic for future trade policy, most importantly with China, our major competitor in the world economy. We have real and important differences with China.

China is not a democracy and it does not respect human rights. Critics of the government face serious risks of persecution and imprisonment. It has engaged in large-scale abuses against minority populations in Tibet and the Uygur population in Xinjiang. It also is reversing commitments it made to respect the autonomy of Hong Kong.

But it doesn’t follow that we would benefit from having a Cold War stance toward China, as we did with the Soviet Union for most of its existence. (One consideration for those wanting to go the Cold War route is that China’s economy is already almost 20 percent larger than the U.S. economy, the Soviet economy probably peaked at less than half of the size of the U.S. economy.) Many bad things, both domestically and internationally, were justified by the need to confront the Soviet Union. We should not want to see that story again in a Cold War with China.  

We should look to cooperate with China in the areas where we can, most obviously in health and climate change. This would mean a full sharing of technology. After all, in both cases, we gain if China gains and vice-versa. We are not harmed if China uses our technology to develop better ways to store energy or to treat cancer. Ideally, we would look to pool our resources in these, and possibly other areas, with all research findings being fully open. We should look to bring in the rest of the world as well to address the common problems that confront us.

I won’t claim to be an expert in political science and to make predictions about what impact greater sharing of technology can have on China, but I will note an argument that was often made to justify opening to trade with China in the 1990s and 2000s. Many supporters of removing trade barriers argued not just that there would be economic benefits, but also political ones, in that increased trade would lead to more openness in China and a move towards democracy.

While China is undoubtedly more open in some ways than it was three decades ago, it clearly is not a democracy. I never fully understood how increased U.S. imports of Chinese manufactured goods, which were often produced by very low-paid workers, with few rights, were supposed to lead to democracy, but this was the line parroted by many people in policy debates.

By contrast, if the plan is to have open cooperative research in health, climate, and possibly other areas, we will be creating a system in which large numbers of Chinese scientists and researchers would be in regular contact with their counterparts in the United States and West Europe. These scientists and researchers will be the brothers and sisters, sons and daughters, and fathers and mothers of the leaders in China. I don’t know if this contact is likely to have an impact on China’s policy towards democracy and the West, but I will speculate that it has a greater chance of having a positive impact than buying textiles produced by low-paid workers putting in long hours in unsafe conditions.  

But that is all just speculation. What is not speculation is that a relatively small group of people stand to benefit from continuing to make our patents longer and stronger and seeing health and climate as areas of competition with China. Most of us will be better off without these policies, and certainly without a new Cold War.

(This post first appeared on my Patreon page.)

President Biden made a huge step yesterday when his trade representative, Katherine Tai, announced that the United States would be supporting a resolution at the World Trade Organization (WTO), to suspend intellectual property rules on vaccines for the duration of the pandemic. This resolution had been introduced by India and South Africa back in October.

The United States had previously been leading wealthy countries in opposition to the resolution. With Biden now reversing the position of the Trump administration, the resolution is likely to be approved.

However, the approval is not necessarily a foregone conclusion. In reversing the U.S. position, Biden went against a major lobbying campaign by the pharmaceutical industry.  Many European countries also have large pharmaceutical companies. They are being every bit as vigorous in lobbying their own countries’ governments to get them to maintain their opposition to the resolution.

Since everything at the WTO has to be unanimous, a single country can block action on the resolution. Nonetheless, it is unlikely that any of the European countries, or even a small group of them, would want to be seen standing in the way of getting the world vaccinated as quickly as possible.

It is also important to recognize that Ambassador Tai’s announcement only indicated that the United States supported the proposal to end intellectual property protections on vaccines. The resolution introduced by India and South Africa also called for ending protections on treatments and tests for the duration of the pandemic. A suspension of IP protections in these other areas is needed to minimize the death and suffering from the pandemic, but we still should recognize the huge step taken by the Biden administration yesterday.

 

How We Got Here

While President Biden deserves enormous credit for this step, it is important to realize that it came about as a result of a great deal of work by activists here and around the world. First of all, the Indian and South African governments kicked it off with their WTO proposal. Many groups had been urging open source technology from the beginning of the pandemic, but this resolution gave activists and policy types a clear rallying point.   

I am tempted to list the groups and individuals who deserve congratulations for their efforts on this, but I am going to restrain myself out of the fear of leaving some important ones off the list. I will just say that this came about because of the efforts of many people in the United States and around the world, who argued that we have to do everything possible to limit the suffering from the pandemic.

The change in positions shows the potential for public pressure to have an impact. This calls to mind the possibly apocryphal story of when a group of progressives met with Franklin Roosevelt to press him on one of the important New Deal issues. He supposedly said something to the effect of, “you convinced me, now make me do it.”

We needed a president who was open to this sort of move for the pressure to succeed. But without the pressure from activists here and around the world, it is unlikely that Biden would have bucked the Big Pharma lobby.

 

What is Left to be Done

It is important to realize that the change in the U.S. position at the WTO doesn’t directly get a single shot in anyone’s arm. What is needed is a full-scale effort to not only remove the constraints of patent monopolies but also to push the drug companies to transfer their technology as quickly as possible.

Ideally, this would mean going full open-source. That would require Pfizer, Moderna, and the rest to post their manufacturing plans online, and then conduct webinars, and hands-on training with everyone capable of quickly getting manufacturing capacity up to speed.

It is unlikely that the Biden administration will go this route, but it should be seen as the gold standard here. Not only would this allow for the most rapid diffusion of the technology, but it would also open the door for further innovations that could hasten production.

Back in February, Pfizer announced that it had found ways to improve its production process so as to nearly double output. It also discovered that its vaccines did not need to be super-frozen, but could be safely stored in a normal freezer for up to two weeks. Unless we think that Pfizer’s engineers are the only people in the world who could improve its production and delivery process, making the information open-source is likely to lead to further improvements that could increase its rate of output.

Assuming that we do not go the open-source route, Biden should be prepared to use the Defense Production Act to force vaccine makers to enter into contracts with manufacturers around the world, in which they share the technology needed for them to start production as quickly as possible. He already did with Johnson and Johnson and Merck, with the latter now producing the vaccine developed by Johnson and Johnson. Biden needs to take the same step, forcing our manufacturers to transfer their technology to anyone with capacity anywhere in the world.

We also really need to collaborate with Russia and China, as well as any other country that has a vaccine that is shown to be safe and effective. We can have our political fights in other spheres, but we have a common interest in getting the world vaccinated as quickly as possible.

In addition to doing an inventory of the obstacles to ramping up production of the U.S.-European vaccines, we should also be addressing obstacles that prevent these countries from producing more of their vaccines. Ideally, they can also be pushed to have increased transparency on their clinical trial results. It is important to know which vaccines are most effective against each variant, and also the extent to which some are better or worse for different demographic groups.

The goal here should be getting the world vaccinated, not scoring propaganda points. If President Biden approaches the issue that way, hopefully, he can get his counterparts in other major powers to do the same.

 

Implications for the Longer Term

In my spare time, I have been writing on patent and copyright monopolies for a quarter-century. This is the first time I have ever seen IP issues get any substantial amount of attention from a general audience. Usually, the only people paying attention are the affected industries and a relatively narrow group of activists and policy types.

That matters hugely because when the affected industries dominate the debate, they can be pretty much guaranteed of being able to steer the policy in a way that benefits them. This is really the story of patent and copyright policy over the last four decades, with the inclusion of the TRIPS provisions in the WTO being the most notable example. TRIPS got added to the WTO because the drug companies wanted to impose U.S.-style patent protection on the developing world. There was no major public debate in the United States, or anywhere else, as to whether it was a good idea.

Now that we do have the public paying attention to IP issues, it is worth trying to press a few points.

First, we need to recognize that there are alternatives to patent monopolies for financing research and development. That should be obvious since the federal government already spends more than $40 billion a year on biomedical research through the National Institutes of Health (NIH). (That compares to roughly $90 billion spent by the industry.)

In addition, the government put up another $10 billion in the funding of pandemic-related research with Operation Warp Speed (OWS). While most of the NIH funding goes to more basic research (occasionally it has financed the development of new drugs), OWS was directly focused on developing treatments, tests, and vaccines. In the case of the Moderna vaccine, the government picked up the full tab for the development costs.

In principle, there is no reason why direct public funding cannot be the more standard route of paying for research. There are various ways this can be done (I discuss mechanisms in chapter 5 of Rigged [it’s free], see also this paper by Arjun Jayadev, Joe Stiglitz, and me), but the point is that we don’t have to rely on government-granted patent monopolies to provide incentives for developing drugs.

There are many advantages of direct public funding. First, if the government has paid the tab for the research, any new drugs or vaccines can be sold as cheap generics from the day they are approved. This means that nearly all drugs would be cheap. Instead of selling for hundreds or thousands of dollars a prescription, drugs would sell for ten or twenty dollars.

A second major advantage is that if the government is funding the research, it can require that it all be open-source. This means that not only are all patents placed in the public domain, but all research findings are posted on the web as soon as practical. That would allow researchers all over the world to quickly build on successes and learn from failures.

A third major benefit is that if all drugs were sold as cheap generics, it would take away the incentive that patent monopolies give drug companies to lie about the safety and effectiveness of their drugs. When a drug is selling for a mark-up of several thousand percent over production costs, companies have a huge incentive to push it as widely as possible. We saw this most recently with the opioid crisis, where several companies paid billions of dollars in settlements based on the allegation that they deliberately misled doctors about the addictiveness of the new generation of opioids.

 

A second important point is that we need to have a clear understanding of the economic importance of patent and copyright monopolies. By my calculations, we transfer over $1 trillion annually (half of all corporate profits) from the public as a whole to the beneficiaries of rents from patents and copyrights. This is a huge amount of money and a big part of the story of the rise in inequality over the last four decades.

While it can be argued that our rules on patents and copyrights promote economic growth (the counterfactual should be alternative incentive mechanisms, not no incentive mechanism) it is indisputable that these are government policies, not the market.

This means that when someone says that technology has been responsible for the upward redistribution over the last four decades, they are speaking nonsense. Technology did not make Bill Gates rich, the patent and copyright monopolies the government gave Microsoft on its software made him rich. These monopolies can be longer and stronger, or shorter and weaker, or they can be replaced by different mechanisms altogether. The fact that a substantial segment of the population was able to get very wealthy from these monopolies was due to policy choices, don’t blame the technology.

The rents created by government-granted patents and copyright monopolies are also a form of government debt. It is utterly bizarre that we have so many people complaining about the debt burden that government borrowing is creating for our children, while completely ignoring the burden created by patent and copyright monopolies.

It’s pretty nutty to claim that if we tax people $400 billion to pay debt service (roughly twice the current debt level of debt service), it’s a burden. But, if we give drug companies patent monopolies, that allow them to raise their prices by $400 billion above the free market level, it’s not a problem. Government-granted patent and copyright monopolies are alternatives to direct government spending. We cannot claim the debt from direct spending is a burden and then pretend the rents from these monopolies are not a problem.

Finally, we should be taking away some lessons from the pandemic for future trade policy, most importantly with China, our major competitor in the world economy. We have real and important differences with China.

China is not a democracy and it does not respect human rights. Critics of the government face serious risks of persecution and imprisonment. It has engaged in large-scale abuses against minority populations in Tibet and the Uygur population in Xinjiang. It also is reversing commitments it made to respect the autonomy of Hong Kong.

But it doesn’t follow that we would benefit from having a Cold War stance toward China, as we did with the Soviet Union for most of its existence. (One consideration for those wanting to go the Cold War route is that China’s economy is already almost 20 percent larger than the U.S. economy, the Soviet economy probably peaked at less than half of the size of the U.S. economy.) Many bad things, both domestically and internationally, were justified by the need to confront the Soviet Union. We should not want to see that story again in a Cold War with China.  

We should look to cooperate with China in the areas where we can, most obviously in health and climate change. This would mean a full sharing of technology. After all, in both cases, we gain if China gains and vice-versa. We are not harmed if China uses our technology to develop better ways to store energy or to treat cancer. Ideally, we would look to pool our resources in these, and possibly other areas, with all research findings being fully open. We should look to bring in the rest of the world as well to address the common problems that confront us.

I won’t claim to be an expert in political science and to make predictions about what impact greater sharing of technology can have on China, but I will note an argument that was often made to justify opening to trade with China in the 1990s and 2000s. Many supporters of removing trade barriers argued not just that there would be economic benefits, but also political ones, in that increased trade would lead to more openness in China and a move towards democracy.

While China is undoubtedly more open in some ways than it was three decades ago, it clearly is not a democracy. I never fully understood how increased U.S. imports of Chinese manufactured goods, which were often produced by very low-paid workers, with few rights, were supposed to lead to democracy, but this was the line parroted by many people in policy debates.

By contrast, if the plan is to have open cooperative research in health, climate, and possibly other areas, we will be creating a system in which large numbers of Chinese scientists and researchers would be in regular contact with their counterparts in the United States and West Europe. These scientists and researchers will be the brothers and sisters, sons and daughters, and fathers and mothers of the leaders in China. I don’t know if this contact is likely to have an impact on China’s policy towards democracy and the West, but I will speculate that it has a greater chance of having a positive impact than buying textiles produced by low-paid workers putting in long hours in unsafe conditions.  

But that is all just speculation. What is not speculation is that a relatively small group of people stand to benefit from continuing to make our patents longer and stronger and seeing health and climate as areas of competition with China. Most of us will be better off without these policies, and certainly without a new Cold War.

This is Dawn, Dean’s colleague here at CEPR. I just wanted to make sure you saw Dean’s recent BTP post about the New York Post reporter. In a story criticizing the great investigative work by our CEPR colleagues at the Revolving Door Project, he said that CEPR was, and I quote: “ a well-funded and influential left-wing think tank.”

OK, while I’m happy that he thinks we’re influential (we like to think so too), as CEPR’s Development Director I can assure you that (despite my absolute best efforts) we are not “well-funded”, especially if you compare our budgets to some other think tanks. The Heritage Foundation and the American Enterprise Foundation have budgets between $50 and $80 million with endowments in the hundreds of millions. The Center for American Progress’ budget is close to $50 million. CEPR’s? $2.5 million. And we don’t have an endowment.

As Dean mentioned in his piece there are thousands of Wall Street bankers and Hedge Fund gurus whose expense accounts are larger than our entire budget. Or put another way, the reporter who called us well-funded makes about 25% of our entire budget for salaries. The reporter surely hasn’t been following Dean or he would know not to lie about budget numbers.

Anyhow (as Dean likes to say), it made me think, hmmm, if this guy thinks we’re influential now, what if we really WERE well-funded? I know that a lot of you dear readers are also supporters of CEPR, either directly or though Dean’s Patreon page, but if you aren’t, please help us to become MORE influential AND well-funded by making a donation to CEPR here, or if you haven’t already, make a pledge to Dean on Patreon, here.

I’m sure that Dean would agree with me when I say success is the best revenge. And now back to your regularly scheduled program…

This is Dawn, Dean’s colleague here at CEPR. I just wanted to make sure you saw Dean’s recent BTP post about the New York Post reporter. In a story criticizing the great investigative work by our CEPR colleagues at the Revolving Door Project, he said that CEPR was, and I quote: “ a well-funded and influential left-wing think tank.”

OK, while I’m happy that he thinks we’re influential (we like to think so too), as CEPR’s Development Director I can assure you that (despite my absolute best efforts) we are not “well-funded”, especially if you compare our budgets to some other think tanks. The Heritage Foundation and the American Enterprise Foundation have budgets between $50 and $80 million with endowments in the hundreds of millions. The Center for American Progress’ budget is close to $50 million. CEPR’s? $2.5 million. And we don’t have an endowment.

As Dean mentioned in his piece there are thousands of Wall Street bankers and Hedge Fund gurus whose expense accounts are larger than our entire budget. Or put another way, the reporter who called us well-funded makes about 25% of our entire budget for salaries. The reporter surely hasn’t been following Dean or he would know not to lie about budget numbers.

Anyhow (as Dean likes to say), it made me think, hmmm, if this guy thinks we’re influential now, what if we really WERE well-funded? I know that a lot of you dear readers are also supporters of CEPR, either directly or though Dean’s Patreon page, but if you aren’t, please help us to become MORE influential AND well-funded by making a donation to CEPR here, or if you haven’t already, make a pledge to Dean on Patreon, here.

I’m sure that Dean would agree with me when I say success is the best revenge. And now back to your regularly scheduled program…

You can’t get a graduate education (or undergrad) in economics without hearing a thousand times that protectionism is bad. When you get to actually deal with policy issues, you discover that only protectionism that benefits ordinary workers is bad, protectionism that benefits high-end workers and corporate profits is sacred.

This is exactly the point of the Washington Post editorial condemning efforts to suspend patent monopolies and other protections of intellectual products on pandemic-related vaccines, treatments, and tests.  To make its case the Post does some name-calling and double-talk.

In the name-calling category, we are told the idea of a free people’s vaccine is “is more slogan than solution.” A little later it appears as a “chimera.” We get it, the Post doesn’t like it.

On the double-talk front, the Post tells us:

“The most salient fact is that patents on vaccines are not the central bottleneck, and even if turned over to other nations, would not quickly result in more shots. This is because vaccine manufacturing is exacting and time-consuming.”

Arguing over the “central bottleneck” is hardly worth anyone’s time. The demand is not just that patents be suspended, but that the technology needed to produce vaccines (and tests and treatments) be freely shared for the duration of the pandemic. It is amazing that the Post somehow does not realize this fact, or alternatively has deliberately decided to misrepresent the position it is criticizing.

The sharing of technology would mean that Pfizer, Moderna, and other producers of vaccines would share detailed descriptions of their manufacturing technology, conduct webinars, and provide hands-on assistance to manufacturers around the world to enable them to produce their vaccines on a large scale.  They can be paid for this, but they will have little choice in the matter. If they don’t agree, the government can offer large payments to their top engineers (e.g. $1 million a month) to share their knowledge directly, while indemnifying them from future legal actions by their former employers.

As far as the time involved, it’s not zero, but we know it is not all that long. The vaccines did not exist last March, yet these companies were able to produce large quantities by November. Presumably, we can assume at least the same speed going forward. Of course, it would have been much better if we had followed this path at the start of the pandemic, as some of us advocated at the time, or at least in October when South Africa and India introduced their resolution at the World Trade Organization.  

Perhaps the most stunning part of the editorial is the warning about incentives:

“It is true that pharmaceutical companies stand to profit handsomely from monopolies on individual patented vaccines. It is also true that stripping away their intellectual property now could discourage future innovation. The U.S. government spent some $10 billion in Operation Warp Speed to help that effort, among other things, but did not require companies to turn over their intellectual property to the government — or to share it.”

The companies involved have all made enormous profits on a relatively small short-term investment. The government put up much of the money and took much of the risk. That is not sufficient incentive?

Furthermore, we should assume that the people running pharmaceutical companies are not dumber than rocks. The law allows for the government to require the licensing of patents in emergencies (Section 1498 of the commercial code). Presumably, they know this. The loss of incentive story here is that if they hoped to get some pandemic super-bonanza in the future, they now know that they will just get extraordinarily large profits. Let’s cry for the drug companies.

I have argued that patent monopolies are actually a terrible way to finance drug research (see Rigged, chapter 5 [it’s free]). If we changed our mechanism for financing research, then we could ignore the issue of incentives here altogether. But that’s a longer discussion.

The reality is that much of the developing world is needlessly facing a humanitarian disaster because of vaccine nationalism and our protection of intellectual products. Furthermore, even the U.S. and other wealthy countries face an enormous risk that a new vaccine-resistant strain will develop (anyone want to go through another round of infections and lockdowns?), as long as the pandemic spreads unchecked anywhere in the world.

But to the Post, all of this is secondary to drug company profits.

You can’t get a graduate education (or undergrad) in economics without hearing a thousand times that protectionism is bad. When you get to actually deal with policy issues, you discover that only protectionism that benefits ordinary workers is bad, protectionism that benefits high-end workers and corporate profits is sacred.

This is exactly the point of the Washington Post editorial condemning efforts to suspend patent monopolies and other protections of intellectual products on pandemic-related vaccines, treatments, and tests.  To make its case the Post does some name-calling and double-talk.

In the name-calling category, we are told the idea of a free people’s vaccine is “is more slogan than solution.” A little later it appears as a “chimera.” We get it, the Post doesn’t like it.

On the double-talk front, the Post tells us:

“The most salient fact is that patents on vaccines are not the central bottleneck, and even if turned over to other nations, would not quickly result in more shots. This is because vaccine manufacturing is exacting and time-consuming.”

Arguing over the “central bottleneck” is hardly worth anyone’s time. The demand is not just that patents be suspended, but that the technology needed to produce vaccines (and tests and treatments) be freely shared for the duration of the pandemic. It is amazing that the Post somehow does not realize this fact, or alternatively has deliberately decided to misrepresent the position it is criticizing.

The sharing of technology would mean that Pfizer, Moderna, and other producers of vaccines would share detailed descriptions of their manufacturing technology, conduct webinars, and provide hands-on assistance to manufacturers around the world to enable them to produce their vaccines on a large scale.  They can be paid for this, but they will have little choice in the matter. If they don’t agree, the government can offer large payments to their top engineers (e.g. $1 million a month) to share their knowledge directly, while indemnifying them from future legal actions by their former employers.

As far as the time involved, it’s not zero, but we know it is not all that long. The vaccines did not exist last March, yet these companies were able to produce large quantities by November. Presumably, we can assume at least the same speed going forward. Of course, it would have been much better if we had followed this path at the start of the pandemic, as some of us advocated at the time, or at least in October when South Africa and India introduced their resolution at the World Trade Organization.  

Perhaps the most stunning part of the editorial is the warning about incentives:

“It is true that pharmaceutical companies stand to profit handsomely from monopolies on individual patented vaccines. It is also true that stripping away their intellectual property now could discourage future innovation. The U.S. government spent some $10 billion in Operation Warp Speed to help that effort, among other things, but did not require companies to turn over their intellectual property to the government — or to share it.”

The companies involved have all made enormous profits on a relatively small short-term investment. The government put up much of the money and took much of the risk. That is not sufficient incentive?

Furthermore, we should assume that the people running pharmaceutical companies are not dumber than rocks. The law allows for the government to require the licensing of patents in emergencies (Section 1498 of the commercial code). Presumably, they know this. The loss of incentive story here is that if they hoped to get some pandemic super-bonanza in the future, they now know that they will just get extraordinarily large profits. Let’s cry for the drug companies.

I have argued that patent monopolies are actually a terrible way to finance drug research (see Rigged, chapter 5 [it’s free]). If we changed our mechanism for financing research, then we could ignore the issue of incentives here altogether. But that’s a longer discussion.

The reality is that much of the developing world is needlessly facing a humanitarian disaster because of vaccine nationalism and our protection of intellectual products. Furthermore, even the U.S. and other wealthy countries face an enormous risk that a new vaccine-resistant strain will develop (anyone want to go through another round of infections and lockdowns?), as long as the pandemic spreads unchecked anywhere in the world.

But to the Post, all of this is secondary to drug company profits.

I was happy to see the New York Post take note of the work of the Revolving Door Project (RDP) at the Center for Economic and Policy Research. RDP has been very aggressive in vetting potential appointees in the Biden administration. It tries to prevent people with clear conflicts of interest from getting top-level jobs.

The immediate basis for the Post’s ire was the fact that Alex Oh was forced to step down from a top position at the Securities and Exchange Commission (SEC). Before getting the position at the SEC, Oh had worked at a major corporate law firm where she represented several of the country’s largest companies. One of these was Exxon-Mobil, which she defended in a suit claiming that claimed it was responsible for rape, torture, and murder committed by the Indonesian military in the vicinity of one of the company’s oil drilling operations. A judge in the case considered Oh’s conduct sufficiently egregious that he asked her to produce evidence that she should not be subject to sanctions. (Those interested in a fuller account of RDP’s case against Oh can read it here.)

The fact the Post did not agree with RDP’s position is not surprising, but what was striking was its description of the Center for Economic and Policy Research as a “well-funded and influential left-wing think tank.” While I like to think that CEPR is influential, as a co-founder and co-director for 18 years, I strongly dispute the claim that we are well-funded. My guess is that most senior Wall Street lawyers have annual salaries that exceed CEPR’s entire budget. Our office has a leaky roof, failing air conditioning and heating systems, and rodents.

The reality is that the people at CEPR do the work we do because we think it is important. We don’t get big bucks. People on the right may use politics as a path to personal enrichment, but that is not the way things work on our corner on the left. The Post is welcome to disagree with our work, but the idea that we are doing it for the money is a flat-out lie.

I was happy to see the New York Post take note of the work of the Revolving Door Project (RDP) at the Center for Economic and Policy Research. RDP has been very aggressive in vetting potential appointees in the Biden administration. It tries to prevent people with clear conflicts of interest from getting top-level jobs.

The immediate basis for the Post’s ire was the fact that Alex Oh was forced to step down from a top position at the Securities and Exchange Commission (SEC). Before getting the position at the SEC, Oh had worked at a major corporate law firm where she represented several of the country’s largest companies. One of these was Exxon-Mobil, which she defended in a suit claiming that claimed it was responsible for rape, torture, and murder committed by the Indonesian military in the vicinity of one of the company’s oil drilling operations. A judge in the case considered Oh’s conduct sufficiently egregious that he asked her to produce evidence that she should not be subject to sanctions. (Those interested in a fuller account of RDP’s case against Oh can read it here.)

The fact the Post did not agree with RDP’s position is not surprising, but what was striking was its description of the Center for Economic and Policy Research as a “well-funded and influential left-wing think tank.” While I like to think that CEPR is influential, as a co-founder and co-director for 18 years, I strongly dispute the claim that we are well-funded. My guess is that most senior Wall Street lawyers have annual salaries that exceed CEPR’s entire budget. Our office has a leaky roof, failing air conditioning and heating systems, and rodents.

The reality is that the people at CEPR do the work we do because we think it is important. We don’t get big bucks. People on the right may use politics as a path to personal enrichment, but that is not the way things work on our corner on the left. The Post is welcome to disagree with our work, but the idea that we are doing it for the money is a flat-out lie.

(This post first appeared on my Patreon page.)

There has been a lot of silliness around President Biden’s proposed infrastructure packages and the extent to which they are affordable for the country. First and foremost, there has been tremendous confusion about the size of the package. This is because the media have engaged in a feast of really big numbers, where they give us the size of the package with no context whatsoever, leaving their audience almost completely ignorant about the actual cost.

We have been told endlessly about Biden’s “massive” or “huge” proposal to spend $4 trillion. At this point, many people probably think that Biden actually proposed a “huge infrastructure” package, with “huge” or “massive,” being part of the proposal’s title.

While it would be helpful if media outlets could leave these adjectives to the opinion section, the bigger sin is using a very big number, which means almost nothing to its audience, without providing any context. In fact, much of the reporting doesn’t even bother to tell people that this spending is projected to take place over eight years, not one to two years, as was the case with Biden’s recovery package.

Over an eight-year period, Biden’s proposed spending averages $500 billion annually. This is a period in which GDP is projected to be more than $210 trillion, meaning that his package is projected to be around 1.9 percent of GDP. While that is hardly trivial, military spending is projected to be around 3.3 percent of GDP over this period. This means that Biden is proposing to increase infrastructure spending by an amount that is roughly 60 percent of projected military spending.

It is infuriating that most of the reporting on these proposals make no effort to put the spending in any context that would make it meaningful for people. Reporters all know that almost no one has any idea what $4 trillion over eight years means (especially if no one tells them it is over eight years), yet they refuse to take the two minutes that would be needed to add some context to make such really big numbers meaningful. Therefore, we have a large segment of the population that just thinks the program is massive or huge.

What Paying for Spending Really Means

As our MMT friends constantly remind us, a government that prints its own money, like the United States, does not need tax revenue to pay for its spending. This distinguishes the U.S. government from a household or state and local governments. Households and state and local governments actually need money in the bank to pay their bills. For them, more spending requires more income or taxes and/or more borrowing. The federal government does not have this constraint.

Nonetheless, the federal government does face a limit on its spending: the ability of the economy to produce goods and services. If the federal government spends so much that it pushes the economy beyond its ability to produce goods and services, we will see inflation. If this excessive spending is sustained over a substantial period of time then we could see the sort of inflationary spiral that we had in the 1970s.[1]

If the economy is already near its capacity when President Biden’s infrastructure package starts to come on line in 2022 and 2023, an increase in spending of a bit less than 2.0 percent of GDP could be large enough to create problems with inflation. This is the reason that we have to talk about “paying for” the infrastructure package. We need not be concerned about getting the money in the bank, we have to reduce demand in the economy by enough to make room for the additional spending in Biden’s infrastructure agenda. This is where a financial transactions tax comes in.

 

The Virtue of Financial Transactions Tax as a Pay For

The Biden tax proposals have focused on increasing the amount of money that corporations and wealthy individuals pay in taxes. This makes sense since they have been the big gainers in the economy over the last four decades.

His tax increases will just take back a fraction of the income that has been redistributed upward through a variety of government policies over this period. And, in the case of the corporate income tax, his proposal will just be partially reversing a tax cut that was put in place at the end of 2017 by Donald Trump and a Republican Congress. While taxing the economy’s big gainers is certainly fair, there is a problem with going this route to cover the cost of Biden’s program: the rich don’t spend a large share of their income.

This point is straightforward; if we give Jeff Bezos, Elon Musk, or any of the other super-wealthy another $100 million this year, it would likely not affect their consumption at all. They already have more than enough money to buy anything they could conceivably want, so even giving them a huge wad of money will not likely lead them to increase their consumption to any noticeable extent. Many of us are used to making this point when we argue that any stimulus payments in a recession should be focused on the middle class and the poor.

But this story also works in reverse, if we take $100 million away from the super-rich, it is not likely to reduce their spending to any noticeable extent. This means that Biden’s tax increases are not likely to have as much impact on reducing demand as tax increases that hit the poor and middle class. This is not an argument for hitting the people who have not fared well over the last four decades, it is just noting the impact of taxing the super-rich.

Financial transaction taxes (FTT) are qualitatively different in this respect. While the immediate impact of a financial transaction tax is hugely progressive, in the sense that the overwhelming majority of stock trading is done by the rich and very rich, the impact on the economy makes FTTs look even better.

Most research shows that the volume of stock trading falls roughly in proportion to the increase in the cost of trading. This means that if a FTT raises the cost of trading by 40 percent, the volume of trading will fall by roughly 40 percent. For a typical investor, that implies that they (or their fund manager) will be paying 40 percent more on each trade, but they will be doing 40 percent fewer trades. In other words, the total amount that they spend on trades with the tax in place will be roughly the same as the amount that they spent on trades before the tax is in place.

And investors will not be hurt by less trading. Every trade has a winner and a loser. If I’m lucky and dump my hundred shares of Amazon stock just before the price drops, it means that some unlucky sucker bought the stock a day too soon. Every trade is like this. The reality is that for the vast majority of investors, trades are a wash. Half the time they end up as winners, and half the time they end up as losers.

However, they do end up as losers by doing lots of trading, that’s because they are paying fees and commissions to the people in the financial industry carrying through the trades. This is why most financial advisers recommend that people buy and hold index funds so that they don’t waste money on trading.

A FTT reduces the money going to the financial industry to carry through trades by reducing the volume of trading. This very directly frees up resources in the economy. The number of people employed shuffling stocks, bonds, and various derivatives back and forth will be sharply reduced.

This is comparable to a situation where we found hundreds of thousands of people digging holes and filling them up again. A financial transactions tax, coupled with Biden’s infrastructure proposals, will be a way to redeploy these people to productive work elsewhere in the economy.

There is also a substantial amount of money here. According to the Congressional Budget Office, a tax of 0.1 percent (ten cents on a hundred dollars) would raise almost $800 billion over the course of a decade. I’ve calculated that a graduated tax, with different rates on different assets (0.2 percent on stock transactions, lower on everything else) could raise an amount of revenue equal to almost 0.6 percent of GDP over the course of a decade, or $1.6 trillion. My friend, Bob Pollin has calculated that a somewhat steeper tax, along the lines proposed by Senator Bernie Sanders, could raise close to twice as much. In short, this is real money.

That doesn’t mean that we should reject President Biden’s proposals to increase corporate income taxes and taxes on the top one or two percent. (My route for taxing corporations is better than his.) Even if Elon Musk might not change his consumption much as a result of paying another $100 million taxes, there are many moderately rich people, earning single-digit millions, who may have to forgo a third home or live-in cook, if we raise their taxes as President Biden proposed.

The bottom line is that Biden’s investment plan addresses longstanding needs in the country. We will likely have to reduce other spending in the economy to make room for it. A financial transactions tax is a great place to look for some of the offset.  

[1] People also often raise the issue of burdening our children with the debt. This is mostly an expression of extreme ignorance since the issue of debt service is incredibly trivial compared with the quality of the economy and society that we pass onto to our children. The debt service is also dwarfed by the rents created by government-granted patent and copyright monopolies, which are also a form of government debt passed on to our children. The debt whiners literally never talk about this massive implicit debt burden, which takes the form of higher prices on everything from drugs and software to video games and computers. In the case of prescription drugs alone, the rents come close to $400 billion annually, nearly twice the size of our debt service burden.

(This post first appeared on my Patreon page.)

There has been a lot of silliness around President Biden’s proposed infrastructure packages and the extent to which they are affordable for the country. First and foremost, there has been tremendous confusion about the size of the package. This is because the media have engaged in a feast of really big numbers, where they give us the size of the package with no context whatsoever, leaving their audience almost completely ignorant about the actual cost.

We have been told endlessly about Biden’s “massive” or “huge” proposal to spend $4 trillion. At this point, many people probably think that Biden actually proposed a “huge infrastructure” package, with “huge” or “massive,” being part of the proposal’s title.

While it would be helpful if media outlets could leave these adjectives to the opinion section, the bigger sin is using a very big number, which means almost nothing to its audience, without providing any context. In fact, much of the reporting doesn’t even bother to tell people that this spending is projected to take place over eight years, not one to two years, as was the case with Biden’s recovery package.

Over an eight-year period, Biden’s proposed spending averages $500 billion annually. This is a period in which GDP is projected to be more than $210 trillion, meaning that his package is projected to be around 1.9 percent of GDP. While that is hardly trivial, military spending is projected to be around 3.3 percent of GDP over this period. This means that Biden is proposing to increase infrastructure spending by an amount that is roughly 60 percent of projected military spending.

It is infuriating that most of the reporting on these proposals make no effort to put the spending in any context that would make it meaningful for people. Reporters all know that almost no one has any idea what $4 trillion over eight years means (especially if no one tells them it is over eight years), yet they refuse to take the two minutes that would be needed to add some context to make such really big numbers meaningful. Therefore, we have a large segment of the population that just thinks the program is massive or huge.

What Paying for Spending Really Means

As our MMT friends constantly remind us, a government that prints its own money, like the United States, does not need tax revenue to pay for its spending. This distinguishes the U.S. government from a household or state and local governments. Households and state and local governments actually need money in the bank to pay their bills. For them, more spending requires more income or taxes and/or more borrowing. The federal government does not have this constraint.

Nonetheless, the federal government does face a limit on its spending: the ability of the economy to produce goods and services. If the federal government spends so much that it pushes the economy beyond its ability to produce goods and services, we will see inflation. If this excessive spending is sustained over a substantial period of time then we could see the sort of inflationary spiral that we had in the 1970s.[1]

If the economy is already near its capacity when President Biden’s infrastructure package starts to come on line in 2022 and 2023, an increase in spending of a bit less than 2.0 percent of GDP could be large enough to create problems with inflation. This is the reason that we have to talk about “paying for” the infrastructure package. We need not be concerned about getting the money in the bank, we have to reduce demand in the economy by enough to make room for the additional spending in Biden’s infrastructure agenda. This is where a financial transactions tax comes in.

 

The Virtue of Financial Transactions Tax as a Pay For

The Biden tax proposals have focused on increasing the amount of money that corporations and wealthy individuals pay in taxes. This makes sense since they have been the big gainers in the economy over the last four decades.

His tax increases will just take back a fraction of the income that has been redistributed upward through a variety of government policies over this period. And, in the case of the corporate income tax, his proposal will just be partially reversing a tax cut that was put in place at the end of 2017 by Donald Trump and a Republican Congress. While taxing the economy’s big gainers is certainly fair, there is a problem with going this route to cover the cost of Biden’s program: the rich don’t spend a large share of their income.

This point is straightforward; if we give Jeff Bezos, Elon Musk, or any of the other super-wealthy another $100 million this year, it would likely not affect their consumption at all. They already have more than enough money to buy anything they could conceivably want, so even giving them a huge wad of money will not likely lead them to increase their consumption to any noticeable extent. Many of us are used to making this point when we argue that any stimulus payments in a recession should be focused on the middle class and the poor.

But this story also works in reverse, if we take $100 million away from the super-rich, it is not likely to reduce their spending to any noticeable extent. This means that Biden’s tax increases are not likely to have as much impact on reducing demand as tax increases that hit the poor and middle class. This is not an argument for hitting the people who have not fared well over the last four decades, it is just noting the impact of taxing the super-rich.

Financial transaction taxes (FTT) are qualitatively different in this respect. While the immediate impact of a financial transaction tax is hugely progressive, in the sense that the overwhelming majority of stock trading is done by the rich and very rich, the impact on the economy makes FTTs look even better.

Most research shows that the volume of stock trading falls roughly in proportion to the increase in the cost of trading. This means that if a FTT raises the cost of trading by 40 percent, the volume of trading will fall by roughly 40 percent. For a typical investor, that implies that they (or their fund manager) will be paying 40 percent more on each trade, but they will be doing 40 percent fewer trades. In other words, the total amount that they spend on trades with the tax in place will be roughly the same as the amount that they spent on trades before the tax is in place.

And investors will not be hurt by less trading. Every trade has a winner and a loser. If I’m lucky and dump my hundred shares of Amazon stock just before the price drops, it means that some unlucky sucker bought the stock a day too soon. Every trade is like this. The reality is that for the vast majority of investors, trades are a wash. Half the time they end up as winners, and half the time they end up as losers.

However, they do end up as losers by doing lots of trading, that’s because they are paying fees and commissions to the people in the financial industry carrying through the trades. This is why most financial advisers recommend that people buy and hold index funds so that they don’t waste money on trading.

A FTT reduces the money going to the financial industry to carry through trades by reducing the volume of trading. This very directly frees up resources in the economy. The number of people employed shuffling stocks, bonds, and various derivatives back and forth will be sharply reduced.

This is comparable to a situation where we found hundreds of thousands of people digging holes and filling them up again. A financial transactions tax, coupled with Biden’s infrastructure proposals, will be a way to redeploy these people to productive work elsewhere in the economy.

There is also a substantial amount of money here. According to the Congressional Budget Office, a tax of 0.1 percent (ten cents on a hundred dollars) would raise almost $800 billion over the course of a decade. I’ve calculated that a graduated tax, with different rates on different assets (0.2 percent on stock transactions, lower on everything else) could raise an amount of revenue equal to almost 0.6 percent of GDP over the course of a decade, or $1.6 trillion. My friend, Bob Pollin has calculated that a somewhat steeper tax, along the lines proposed by Senator Bernie Sanders, could raise close to twice as much. In short, this is real money.

That doesn’t mean that we should reject President Biden’s proposals to increase corporate income taxes and taxes on the top one or two percent. (My route for taxing corporations is better than his.) Even if Elon Musk might not change his consumption much as a result of paying another $100 million taxes, there are many moderately rich people, earning single-digit millions, who may have to forgo a third home or live-in cook, if we raise their taxes as President Biden proposed.

The bottom line is that Biden’s investment plan addresses longstanding needs in the country. We will likely have to reduce other spending in the economy to make room for it. A financial transactions tax is a great place to look for some of the offset.  

[1] People also often raise the issue of burdening our children with the debt. This is mostly an expression of extreme ignorance since the issue of debt service is incredibly trivial compared with the quality of the economy and society that we pass onto to our children. The debt service is also dwarfed by the rents created by government-granted patent and copyright monopolies, which are also a form of government debt passed on to our children. The debt whiners literally never talk about this massive implicit debt burden, which takes the form of higher prices on everything from drugs and software to video games and computers. In the case of prescription drugs alone, the rents come close to $400 billion annually, nearly twice the size of our debt service burden.

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