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.

Okay, those were not exactly Mr. Cueni’s words, and they weren’t specifically directed at Bill Gates, but that is the gist of an assertion that Cueni made about the international effort to vaccinate the world against the Coronavirus.

In a debate last week, Cueni asserted that at a conference held this month, everyone agreed that the major obstacle to vaccinations in the developing world was not the availability of vaccines, but rather the availability of vials, syringes, and other items needed for transporting and administering the vaccines. (Listen to his comments starting at about 21:10 minutes.)

Note that this is March of 2021 that he was talking about, not March of 2020. If we accept Mr. Cueni’s assertion at face value, we must believe that Bill Gates, and the highly credentialed public health experts at his foundation, COVAX, the WHO and elsewhere, didn’t realize that we would need billions of syringes and huge volumes of other ancillary items to administer the billions of vaccines that would be needed. Alternatively, we would have to believe that even with a year of preparation, and billions of dollars at their disposal, they were not able to arrange the manufacture of these mundane items.

If either of these happens to be true, then “moron” would certainly be the right description. Of course, there is another possibility. Mr. Cueni may be trying to deflect attention from the fact that his organization is trying to block efforts to override the government-granted patent monopolies held by the members of his organization.

Okay, those were not exactly Mr. Cueni’s words, and they weren’t specifically directed at Bill Gates, but that is the gist of an assertion that Cueni made about the international effort to vaccinate the world against the Coronavirus.

In a debate last week, Cueni asserted that at a conference held this month, everyone agreed that the major obstacle to vaccinations in the developing world was not the availability of vaccines, but rather the availability of vials, syringes, and other items needed for transporting and administering the vaccines. (Listen to his comments starting at about 21:10 minutes.)

Note that this is March of 2021 that he was talking about, not March of 2020. If we accept Mr. Cueni’s assertion at face value, we must believe that Bill Gates, and the highly credentialed public health experts at his foundation, COVAX, the WHO and elsewhere, didn’t realize that we would need billions of syringes and huge volumes of other ancillary items to administer the billions of vaccines that would be needed. Alternatively, we would have to believe that even with a year of preparation, and billions of dollars at their disposal, they were not able to arrange the manufacture of these mundane items.

If either of these happens to be true, then “moron” would certainly be the right description. Of course, there is another possibility. Mr. Cueni may be trying to deflect attention from the fact that his organization is trying to block efforts to override the government-granted patent monopolies held by the members of his organization.

(This post first appeared on my Patreon page.)

One item in President Biden’s recovery package that deserves more attention is the increased subsidies for people buying health insurance through the exchanges created by the Affordable Care Act (ACA). These subsides will make insurance purchased on the exchanges far more affordable, by capping the cost at 8 percent of income. It also removes the current income cap on subsidies, so that even upper middle-income people can benefit under this proposal.

The increased subsidies will lower the cost of insurance purchased in the exchanges for most people but will likely have the largest impact for older middle-income people. Before the American Recovery Act (ARA) was passed, there were no subsides available for anyone earning more than four times the poverty level. For a single individual, this cutoff was just under $50,000 last year.

This meant that a person earning $50,000 a year had to pay the full price for whatever insurance plan they purchased in the exchanges. For a person in the oldest age group (55 to 64), the average cost of a silver plan without the ARA subsidies would be $12,900 a year. However, the ARA caps the payment at 8.5 percent of income, which means this person would pay just $4,250 for a silver plan, a savings of $8,650 a year.

Even a person earning $100,000 would only pay $8,500 a year for a silver plan under the ARA, a savings of $4,400 a year. In short, for the vast majority of people, the ARA makes health care far more affordable than the subsidy schedule in the ACA.

Under the ARA, these expanded subsidies only apply to the remainder of 2021 and 2022, but many hope that they can be made permanent. This would be great if it could be done, but the cost will likely be far higher than is immediately apparent.

The Congressional Budget Office (CBO) put the cost of the expanded subsidies in the ARA at $35.5 billion, with most of that cost being in 2022, since the larger subsidies will be in place for the full year. This cost comes to less than 0.8 percent of the federal budget, an amount that should be easily doable, whether it means a larger deficit or finding some tax increases and spending cuts as offsets.

However, the cost of sustaining subsidies of this size over a longer period of time will almost certainly be considerably higher than this $35.5 billion figure. The reason is that, for a single year of a subsidy, most people are not likely to change their health insurance arrangements.

The vast majority of the pre-Medicare age population gets health insurance through their employer. Workers are not likely to leave an employer who offers a plan they like, in order to take advantage of the lower cost of insurance on the exchanges, if the subsidies will only be there for a year. But, if they expect the enhanced subsidies to be in place indefinitely, then getting insurance through the exchanges becomes a far more attractive option.

Employers are likely also in many cases to stop offering insurance in order to effectively share the savings with their workers. The pattern of subsidies in the ACA, which cut off altogether for workers earning more than four times the poverty level, meant that employers would effectively be giving upper middle-income workers a substantial pay cut if they handed them the money previously paid towards their premiums, and then told them to buy insurance on the exchange. (The real world generally does not work this way, but the point is that we can envision employers doing this sort of calculation.)

However, the expansion of subsidies in the ARA puts out a large pot of money that employers can effectively look to share with their workers. In most cases, employers could probably increase pay by an amount equal to half of their current health care premiums, and still leave workers purchasing insurance through the exchanges far better off, since the subsidies would make plans relatively cheap for most workers.

This sort of move away from employer-provided insurance would be a great thing. There is no reason to want an employer to be an intermediary in workers’ insurance. Also, the link between employment and insurance creates the difficult situation we saw during the pandemic, where people who lose their job also lose their insurance. So, if enhanced subsidies in the exchanges substantially lessen the reliance on employer-provided insurance, that should be seen as a positive development.

The flip side of increased reliance on the exchanges is that the cost of the subsidies will increase substantially. If we are subsidizing policies by $7,000 or $8,000 a piece and then see tens of millions more people getting their insurance through the exchanges, then we could be seeing the annual cost of the subsidies rise by hundreds of billions of dollars. This is not an expense that can be easily swept under the rug. If we end up paying another 2 percent or so of GDP ($420 billion in today’s economy) in subsidies, then we almost certainly need to raise some serious taxes to offset the increased expenses.

 

Getting Costs Down: The Alternative to Large Tax Increases

Needless to say, large tax increases are not likely to be popular, even if they are structured to be relatively progressive. As an alternative we can try to get our costs more in line with the costs in other wealthy countries. The OECD put per capita health care spending in the United States at $11,100 in 2019. That compares to $6,600 in Germany, $5,400 in France, and $4,700 in the United Kingdom. The latter two are less than the $6,100 in public per capita public health care expenditures that the Center for Medicare and Medicaid Services reported for the United States for 2019, and Germany’s spending is only modestly higher. In other words, if health care cost the same here as in other wealthy countries, the government would already be spending enough to provide universal health care.

As I’ve written elsewhere, the reasons for the higher costs in the United States are not a big secret: we pay twice as much for our drugs, our doctors, and our medical equipment. In addition, we face $400 billion to $500 billion annually in excessive administrative costs due to our system of private insurance, that can be avoided with a simpler Medicare type system.

I go through prospects for potential savings in each of these areas here and here. The basic story is that with drugs and medical equipment we have to move away from the current system where research and development is supported by government-granted patent monopolies. The point that needs to be endlessly emphasized is that drugs are cheap; it is patent monopolies that make them expensive. The same is true for medical equipment.

But it is also important for Biden to start making progress in reducing the waste in excessive administrative costs due to our system of private health insurance. The problem here is a fairly basic one: insurers can best increase their profits by not insuring people who are likely to have major medical bills and to avoid paying those bills when they do get sick. This is not consistent with ensuring that people have adequate access to health care.

Of course, we do regulate insurers. This limits the extent to which they can avoid insuring people with health conditions or paying the bills for which they are supposed to be responsible, but people who believe in the ingenuity of the private sector know that government efforts to prevent insurers from screwing patients will never be completely successful.  

If those last two paragraphs sound like vague ideological accusations, then you have never heard of surprise medical billing. This is the story where out-of-network providers, like anesthesiologists or testing services, hit patients with huge bills for medical procedures that should have been covered by their insurers. The insurers get off the hook with these by saying that they are not responsible because the patient chose (not really the right word for someone getting an emergency medical procedures) a provider that is not in their network. Anyhow, insurers have a thousand and one ways to screw patients, and they use them all the time.

 

Improving and Expanding Medicare

The best way for Biden to start to squeeze out the waste from the insurance sector is to carry through on one of his campaign promises. He should offer a Medicare buy-in option to everyone. This would save a huge amount of money on administrative fees for the people who took advantage of this option.

Since this option would be available through the exchanges, it could reduce the cost of providing insurance for those already in the exchanges, in addition to making it possible to add people at lower cost. The potential savings are substantial, since the overhead costs (administration and profit) of private insurers are between 20 and 25 percent of the medical expenses they pay, while the administrative costs for Medicare are close to 2.0 percent.

However, there is a further issue that has to be addressed to make a Medicare option attractive; the traditional Medicare program has to be modernized. I have written about this elsewhere, but the key points are to have a cap on out-of-pocket spending (e.g. $6,000) and to combine at least Part A and Part D to make the program simpler. Ideally, Part B could be folded in as well, but since this division dates back to the creation of the program, it would be more complicated to end it. Also, Medicare must be expanded to include essential items like hearing aids in its coverage.

As it stands, nearly 40 percent of new beneficiaries opt for private Medicare Advantage plans rather than the traditional Medicare program. If we offer the option to buy into an unreformed Medicare program, most people would likely still go with private insurance. That would rule out the possibility of large savings on administrative costs.

If Biden did offer a buy-in option to a reformed Medicare program, there would likely be a large number of people switching from private insurers. There could well be a snowballing effect, where instead of doctors and other providers refusing to take Medicare because of the lower rates, they refuse to take private insurance to avoid the additional paper work. There are real advantages for providers from only having to deal with one insurance system rather than the dozens now operating, each with its own forms and coverage rules.

As a political matter, improving the existing Medicare program should be quite popular. Currently, most people in the traditional program have to pay for supplemental private plans. If the program was improved so that these private plans were no longer necessary, it will be a very real and visible gain for millions of beneficiaries.

As important as it is to reduce the waste on administrative costs associated with private insurers, the Biden administration should be aggressive in taking steps to reduce prices for drugs and medical equipment and increase competition to bring the pay of our doctors more in line with pay in other wealthy countries.

It is also worth noting that lower prices for medical inputs also makes insurance issues easier. We would want our insurers, whether public or private, to be careful in authorizing drugs that cost several hundred thousand dollars a year. We would want to be very sure that these drugs were medically necessary. However, if these drugs were selling for a few hundred dollars, as cheap generics, there would be less reason to scrutinize the decision made by a doctor in prescribing them. Bringing the cost of drugs and other items under control makes everything else in health care much easier.  

 

Making the Exchanges Affordable Is Only the First Part of the Problem

While progressives have almost universally applauded the expanded subsidies that are part of Biden’s rescue package and have called for making them permanent, we must recognize that this is only the beginning of what is likely to be a major transformation of the U.S. health care system. If health insurance is much cheaper in the exchanges than in the private health care system for most people, it will be only a matter of time before people migrate to the exchanges.

This will be a positive development, since it will move us away from a system where people’s insurance depended on their employment. But it also means that the cost of the subsidies will grow much larger through time. It is essential to have measures in place that will contain costs so that health care does not become an unaffordable burden for the country. The routes for containing costs are well-known, but the affected industry groups are very powerful. This will be a difficult battle.

(This post first appeared on my Patreon page.)

One item in President Biden’s recovery package that deserves more attention is the increased subsidies for people buying health insurance through the exchanges created by the Affordable Care Act (ACA). These subsides will make insurance purchased on the exchanges far more affordable, by capping the cost at 8 percent of income. It also removes the current income cap on subsidies, so that even upper middle-income people can benefit under this proposal.

The increased subsidies will lower the cost of insurance purchased in the exchanges for most people but will likely have the largest impact for older middle-income people. Before the American Recovery Act (ARA) was passed, there were no subsides available for anyone earning more than four times the poverty level. For a single individual, this cutoff was just under $50,000 last year.

This meant that a person earning $50,000 a year had to pay the full price for whatever insurance plan they purchased in the exchanges. For a person in the oldest age group (55 to 64), the average cost of a silver plan without the ARA subsidies would be $12,900 a year. However, the ARA caps the payment at 8.5 percent of income, which means this person would pay just $4,250 for a silver plan, a savings of $8,650 a year.

Even a person earning $100,000 would only pay $8,500 a year for a silver plan under the ARA, a savings of $4,400 a year. In short, for the vast majority of people, the ARA makes health care far more affordable than the subsidy schedule in the ACA.

Under the ARA, these expanded subsidies only apply to the remainder of 2021 and 2022, but many hope that they can be made permanent. This would be great if it could be done, but the cost will likely be far higher than is immediately apparent.

The Congressional Budget Office (CBO) put the cost of the expanded subsidies in the ARA at $35.5 billion, with most of that cost being in 2022, since the larger subsidies will be in place for the full year. This cost comes to less than 0.8 percent of the federal budget, an amount that should be easily doable, whether it means a larger deficit or finding some tax increases and spending cuts as offsets.

However, the cost of sustaining subsidies of this size over a longer period of time will almost certainly be considerably higher than this $35.5 billion figure. The reason is that, for a single year of a subsidy, most people are not likely to change their health insurance arrangements.

The vast majority of the pre-Medicare age population gets health insurance through their employer. Workers are not likely to leave an employer who offers a plan they like, in order to take advantage of the lower cost of insurance on the exchanges, if the subsidies will only be there for a year. But, if they expect the enhanced subsidies to be in place indefinitely, then getting insurance through the exchanges becomes a far more attractive option.

Employers are likely also in many cases to stop offering insurance in order to effectively share the savings with their workers. The pattern of subsidies in the ACA, which cut off altogether for workers earning more than four times the poverty level, meant that employers would effectively be giving upper middle-income workers a substantial pay cut if they handed them the money previously paid towards their premiums, and then told them to buy insurance on the exchange. (The real world generally does not work this way, but the point is that we can envision employers doing this sort of calculation.)

However, the expansion of subsidies in the ARA puts out a large pot of money that employers can effectively look to share with their workers. In most cases, employers could probably increase pay by an amount equal to half of their current health care premiums, and still leave workers purchasing insurance through the exchanges far better off, since the subsidies would make plans relatively cheap for most workers.

This sort of move away from employer-provided insurance would be a great thing. There is no reason to want an employer to be an intermediary in workers’ insurance. Also, the link between employment and insurance creates the difficult situation we saw during the pandemic, where people who lose their job also lose their insurance. So, if enhanced subsidies in the exchanges substantially lessen the reliance on employer-provided insurance, that should be seen as a positive development.

The flip side of increased reliance on the exchanges is that the cost of the subsidies will increase substantially. If we are subsidizing policies by $7,000 or $8,000 a piece and then see tens of millions more people getting their insurance through the exchanges, then we could be seeing the annual cost of the subsidies rise by hundreds of billions of dollars. This is not an expense that can be easily swept under the rug. If we end up paying another 2 percent or so of GDP ($420 billion in today’s economy) in subsidies, then we almost certainly need to raise some serious taxes to offset the increased expenses.

 

Getting Costs Down: The Alternative to Large Tax Increases

Needless to say, large tax increases are not likely to be popular, even if they are structured to be relatively progressive. As an alternative we can try to get our costs more in line with the costs in other wealthy countries. The OECD put per capita health care spending in the United States at $11,100 in 2019. That compares to $6,600 in Germany, $5,400 in France, and $4,700 in the United Kingdom. The latter two are less than the $6,100 in public per capita public health care expenditures that the Center for Medicare and Medicaid Services reported for the United States for 2019, and Germany’s spending is only modestly higher. In other words, if health care cost the same here as in other wealthy countries, the government would already be spending enough to provide universal health care.

As I’ve written elsewhere, the reasons for the higher costs in the United States are not a big secret: we pay twice as much for our drugs, our doctors, and our medical equipment. In addition, we face $400 billion to $500 billion annually in excessive administrative costs due to our system of private insurance, that can be avoided with a simpler Medicare type system.

I go through prospects for potential savings in each of these areas here and here. The basic story is that with drugs and medical equipment we have to move away from the current system where research and development is supported by government-granted patent monopolies. The point that needs to be endlessly emphasized is that drugs are cheap; it is patent monopolies that make them expensive. The same is true for medical equipment.

But it is also important for Biden to start making progress in reducing the waste in excessive administrative costs due to our system of private health insurance. The problem here is a fairly basic one: insurers can best increase their profits by not insuring people who are likely to have major medical bills and to avoid paying those bills when they do get sick. This is not consistent with ensuring that people have adequate access to health care.

Of course, we do regulate insurers. This limits the extent to which they can avoid insuring people with health conditions or paying the bills for which they are supposed to be responsible, but people who believe in the ingenuity of the private sector know that government efforts to prevent insurers from screwing patients will never be completely successful.  

If those last two paragraphs sound like vague ideological accusations, then you have never heard of surprise medical billing. This is the story where out-of-network providers, like anesthesiologists or testing services, hit patients with huge bills for medical procedures that should have been covered by their insurers. The insurers get off the hook with these by saying that they are not responsible because the patient chose (not really the right word for someone getting an emergency medical procedures) a provider that is not in their network. Anyhow, insurers have a thousand and one ways to screw patients, and they use them all the time.

 

Improving and Expanding Medicare

The best way for Biden to start to squeeze out the waste from the insurance sector is to carry through on one of his campaign promises. He should offer a Medicare buy-in option to everyone. This would save a huge amount of money on administrative fees for the people who took advantage of this option.

Since this option would be available through the exchanges, it could reduce the cost of providing insurance for those already in the exchanges, in addition to making it possible to add people at lower cost. The potential savings are substantial, since the overhead costs (administration and profit) of private insurers are between 20 and 25 percent of the medical expenses they pay, while the administrative costs for Medicare are close to 2.0 percent.

However, there is a further issue that has to be addressed to make a Medicare option attractive; the traditional Medicare program has to be modernized. I have written about this elsewhere, but the key points are to have a cap on out-of-pocket spending (e.g. $6,000) and to combine at least Part A and Part D to make the program simpler. Ideally, Part B could be folded in as well, but since this division dates back to the creation of the program, it would be more complicated to end it. Also, Medicare must be expanded to include essential items like hearing aids in its coverage.

As it stands, nearly 40 percent of new beneficiaries opt for private Medicare Advantage plans rather than the traditional Medicare program. If we offer the option to buy into an unreformed Medicare program, most people would likely still go with private insurance. That would rule out the possibility of large savings on administrative costs.

If Biden did offer a buy-in option to a reformed Medicare program, there would likely be a large number of people switching from private insurers. There could well be a snowballing effect, where instead of doctors and other providers refusing to take Medicare because of the lower rates, they refuse to take private insurance to avoid the additional paper work. There are real advantages for providers from only having to deal with one insurance system rather than the dozens now operating, each with its own forms and coverage rules.

As a political matter, improving the existing Medicare program should be quite popular. Currently, most people in the traditional program have to pay for supplemental private plans. If the program was improved so that these private plans were no longer necessary, it will be a very real and visible gain for millions of beneficiaries.

As important as it is to reduce the waste on administrative costs associated with private insurers, the Biden administration should be aggressive in taking steps to reduce prices for drugs and medical equipment and increase competition to bring the pay of our doctors more in line with pay in other wealthy countries.

It is also worth noting that lower prices for medical inputs also makes insurance issues easier. We would want our insurers, whether public or private, to be careful in authorizing drugs that cost several hundred thousand dollars a year. We would want to be very sure that these drugs were medically necessary. However, if these drugs were selling for a few hundred dollars, as cheap generics, there would be less reason to scrutinize the decision made by a doctor in prescribing them. Bringing the cost of drugs and other items under control makes everything else in health care much easier.  

 

Making the Exchanges Affordable Is Only the First Part of the Problem

While progressives have almost universally applauded the expanded subsidies that are part of Biden’s rescue package and have called for making them permanent, we must recognize that this is only the beginning of what is likely to be a major transformation of the U.S. health care system. If health insurance is much cheaper in the exchanges than in the private health care system for most people, it will be only a matter of time before people migrate to the exchanges.

This will be a positive development, since it will move us away from a system where people’s insurance depended on their employment. But it also means that the cost of the subsidies will grow much larger through time. It is essential to have measures in place that will contain costs so that health care does not become an unaffordable burden for the country. The routes for containing costs are well-known, but the affected industry groups are very powerful. This will be a difficult battle.

I mention this because the implication seems to have been missed by news outlets reporting on the 3.0 percent decline reported for February. The Post told us that the 3.0 percent decline was considerably larger than the 0.5 percent drop expected by economists.

But unless these economists were expecting an upward revision to the January data, their expectation for the February number would have been 0.5 percent lower than the number previously reported for January. As it turned out, the February figure was 0.7 percent lower than the number previously reported for February, which is pretty close to right on the mark.

I mention this because the implication seems to have been missed by news outlets reporting on the 3.0 percent decline reported for February. The Post told us that the 3.0 percent decline was considerably larger than the 0.5 percent drop expected by economists.

But unless these economists were expecting an upward revision to the January data, their expectation for the February number would have been 0.5 percent lower than the number previously reported for January. As it turned out, the February figure was 0.7 percent lower than the number previously reported for February, which is pretty close to right on the mark.

The Federal Reserve Board released an item of good news that might be missed. The Financial Accounts for the fourth quarter showed a decline in profit share of national income to 12.0 percent, the lowest annual share since 2009. It is far too early to know if this shift will be enduring, but it is encouraging in any case. On the plus side, wages have been growing rapidly in recent months, so this shift to wages may continue for the immediate future.

 

Source: Bureau of Economic Analysis, National Income Product Accounts, Table 1.13.

 

The Federal Reserve Board released an item of good news that might be missed. The Financial Accounts for the fourth quarter showed a decline in profit share of national income to 12.0 percent, the lowest annual share since 2009. It is far too early to know if this shift will be enduring, but it is encouraging in any case. On the plus side, wages have been growing rapidly in recent months, so this shift to wages may continue for the immediate future.

 

Source: Bureau of Economic Analysis, National Income Product Accounts, Table 1.13.

 

In his New York Times column Neil Irwin gave 17 reasons why we should be optimistic about the economy’s near and medium-term prospects. He raises good and important points, but I would add one more that he and others have largely overlooked.

More than 20 percent of workers now report that they are working from home at least part-time as a result of the pandemic. While many of these workers may end up returning to their offices when the pandemic is under control, or at least going in more frequently, there is little doubt that we will be seeing substantially more telecommuting even when the pandemic is fully under control. This implies a large gain in well-being that is not picked up in GDP.

As I have pointed out before, there are two issues involved here. First there are substantial work-related expenses that these workers will no longer be making. The most obvious are the costs associated directly with the commute to work. This means paying for the wear and tear on a car, the gas for the trip, parking, or money spent on trains and busses. These are counted as consumption in GDP, but they provide little benefit to the commuter, apart from getting them to work.

There are always expenses associated with spending a day at the office that may provide some benefit, but can be largely avoided for people working at home. This would include restaurant meals bought before, during, or just after work, clothes needed for work, trips to a hair salon, and other expenses that are higher due to having to be in a work environment.

Child care is a very large expenditure in this category, although it is somewhat ambiguous. People working at home may also need someone to care for their young children to give them the time needed to get work done, however they will almost certainly need fewer hours of childcare for the simple reason that they are spending less time commuting.

This brings up the second source of unmeasured gain from working at home. If people are spending less time commuting, they have more time for other activities. To take a simple case, if someone had a daily commute that averaged one hour each way, and they are now able to work from home, they effectively have another ten hours of week of free time.

This is effectively a reduction of ten hours in the length of their workweek, which comes to 20 percent if a 40-hour work-week was the starting point (10 hours saved commuting measured against a combined 50 hours spent working and commuting). This is a very substantial benefit to these workers.

In short, we are likely to see large benefits from increased telecommuting that are not picked up in GDP. These take the form of substantial reductions in work-related expenses (these will appear as a drop in GDP) and an increase in leisure time. To be clear, these are not complete saving – many people value being able to have lunch with work colleagues and not all commutes are unenjoyable (I usually rode my bike in DC) – but there can be little doubt that most people would be happy to save the money they previously spent on dry cleaning bills and the time they no longer spend in rush hour traffic jams.

If we are thinking about making people’s lives better, and not just higher GDP, a permanent increase in telecommuting is likely to be a big deal. However, there is an important qualification. This will also increase inequality. It will tend to be higher paying office jobs that allow telecommuting.  

People who work in construction, manufacturing, serving foods in restaurants, or cleaning up in stores and offices will not have the option to work at home. This point about inequality in work environments should already have been driven home during the pandemic, as most lower paid workers had to risk exposure at their workplace, while higher paid workers largely had the luxury of remaining at home.

This issue will remain, even if the consequences are less severe, after the pandemic is contained. The time higher paid workers are compensated for will reflect the time they have to commit to their jobs. Lower paid workers must also spend hours commuting each week, and pay additional expenses associated with working away from home. This is an important factor to consider in issues like setting the minimum wage or public support for child care.

Anyhow, we should recognize the gains associated with increased telecommuting as a large increase in well-being that will not show up in our GDP measures. And, we should also recognize these benefits will accrue to a large number of people but still a minority of the workforce. The option to telecommute is yet another factor setting a large segment of the population further behind.  

In his New York Times column Neil Irwin gave 17 reasons why we should be optimistic about the economy’s near and medium-term prospects. He raises good and important points, but I would add one more that he and others have largely overlooked.

More than 20 percent of workers now report that they are working from home at least part-time as a result of the pandemic. While many of these workers may end up returning to their offices when the pandemic is under control, or at least going in more frequently, there is little doubt that we will be seeing substantially more telecommuting even when the pandemic is fully under control. This implies a large gain in well-being that is not picked up in GDP.

As I have pointed out before, there are two issues involved here. First there are substantial work-related expenses that these workers will no longer be making. The most obvious are the costs associated directly with the commute to work. This means paying for the wear and tear on a car, the gas for the trip, parking, or money spent on trains and busses. These are counted as consumption in GDP, but they provide little benefit to the commuter, apart from getting them to work.

There are always expenses associated with spending a day at the office that may provide some benefit, but can be largely avoided for people working at home. This would include restaurant meals bought before, during, or just after work, clothes needed for work, trips to a hair salon, and other expenses that are higher due to having to be in a work environment.

Child care is a very large expenditure in this category, although it is somewhat ambiguous. People working at home may also need someone to care for their young children to give them the time needed to get work done, however they will almost certainly need fewer hours of childcare for the simple reason that they are spending less time commuting.

This brings up the second source of unmeasured gain from working at home. If people are spending less time commuting, they have more time for other activities. To take a simple case, if someone had a daily commute that averaged one hour each way, and they are now able to work from home, they effectively have another ten hours of week of free time.

This is effectively a reduction of ten hours in the length of their workweek, which comes to 20 percent if a 40-hour work-week was the starting point (10 hours saved commuting measured against a combined 50 hours spent working and commuting). This is a very substantial benefit to these workers.

In short, we are likely to see large benefits from increased telecommuting that are not picked up in GDP. These take the form of substantial reductions in work-related expenses (these will appear as a drop in GDP) and an increase in leisure time. To be clear, these are not complete saving – many people value being able to have lunch with work colleagues and not all commutes are unenjoyable (I usually rode my bike in DC) – but there can be little doubt that most people would be happy to save the money they previously spent on dry cleaning bills and the time they no longer spend in rush hour traffic jams.

If we are thinking about making people’s lives better, and not just higher GDP, a permanent increase in telecommuting is likely to be a big deal. However, there is an important qualification. This will also increase inequality. It will tend to be higher paying office jobs that allow telecommuting.  

People who work in construction, manufacturing, serving foods in restaurants, or cleaning up in stores and offices will not have the option to work at home. This point about inequality in work environments should already have been driven home during the pandemic, as most lower paid workers had to risk exposure at their workplace, while higher paid workers largely had the luxury of remaining at home.

This issue will remain, even if the consequences are less severe, after the pandemic is contained. The time higher paid workers are compensated for will reflect the time they have to commit to their jobs. Lower paid workers must also spend hours commuting each week, and pay additional expenses associated with working away from home. This is an important factor to consider in issues like setting the minimum wage or public support for child care.

Anyhow, we should recognize the gains associated with increased telecommuting as a large increase in well-being that will not show up in our GDP measures. And, we should also recognize these benefits will accrue to a large number of people but still a minority of the workforce. The option to telecommute is yet another factor setting a large segment of the population further behind.  

A story on All Things Considered last night told listeners:

“In the early ’90s, President Bill Clinton’s administration was troubled by this looming problem. Year after year, both government deficits and interest rates were going up. Here’s one of his top economic advisers, Laura Tyson.

“LAURA TYSON: ‘And then he said, oh, my goodness, if we don’t get a hold of this federal deficit going forward, then those rates will continue upward. That was a very significant concern.'”

That’s actually not what happened in the early 1990s when Bill Clinton was president. Here’s the picture for the interest rate on 10-year Treasury bonds.

As can be seen, interest rates were falling sharply through the whole period from the third quarter of 1990 to the fourth quarter of 1993. Bill Clinton passed his big deficit reduction package in the third quarter of 1993. Interest rates did start to rise in 1994, but the most obvious explanation was that Alan Greenspan began raising short-term interest rates, as the unemployment rate was falling towards the 6.0 percent range, the level at the time generally believed by economists to be the non-accelerating inflation rate of unemployment. (He raised the overnight interest rate from 3.0 percent to 6.0 percent between February of 1994 and March of 2005.)

Budget deficits were actually falling through this whole period, so the link between rising budget deficits and rising interest rates told in this piece is completely at odds with the data.

A story on All Things Considered last night told listeners:

“In the early ’90s, President Bill Clinton’s administration was troubled by this looming problem. Year after year, both government deficits and interest rates were going up. Here’s one of his top economic advisers, Laura Tyson.

“LAURA TYSON: ‘And then he said, oh, my goodness, if we don’t get a hold of this federal deficit going forward, then those rates will continue upward. That was a very significant concern.'”

That’s actually not what happened in the early 1990s when Bill Clinton was president. Here’s the picture for the interest rate on 10-year Treasury bonds.

As can be seen, interest rates were falling sharply through the whole period from the third quarter of 1990 to the fourth quarter of 1993. Bill Clinton passed his big deficit reduction package in the third quarter of 1993. Interest rates did start to rise in 1994, but the most obvious explanation was that Alan Greenspan began raising short-term interest rates, as the unemployment rate was falling towards the 6.0 percent range, the level at the time generally believed by economists to be the non-accelerating inflation rate of unemployment. (He raised the overnight interest rate from 3.0 percent to 6.0 percent between February of 1994 and March of 2005.)

Budget deficits were actually falling through this whole period, so the link between rising budget deficits and rising interest rates told in this piece is completely at odds with the data.

The Interview Continues

You can get more of my thoughts here.

You can get more of my thoughts here.

That is the takeaway readers of this piece on efforts to reform Section 230 would likely get. Section 230 is the provision of the Communications Decency Act, which protects Internet intermediaries from liability for third-party content. While the New York Times or CNN could get sued if they ran an ad or ran a letter or commentary that defamed an individual or corporation, because of Section 230, Facebook would face no risk from carrying the same material. Repealing Section 230 would mean that Facebook would be subject to the same liability rules as its print and broadcast competitors. (Here’s my longer discussion of the issue.)

While the piece begins by noting that both Trump and Biden called for the repeal of Section 230, there is no one cited in the piece who advocates this position. It does include a quote from Representative Anna G. Eshoo telling readers:

“When someone says eliminate Section 230, the first thing it says to me is that they don’t really understand it.”

People who can remember back to the 2020 election may recall appeals to Mark Zuckerberg and Jack Dorsey to take steps to limit the amount of disinformation spread over Facebook and Twitter. Both of them actually did make efforts to block false claims from being carried over their networks. However, they had no legal obligation to do so. If, for example, someone decided to spend a billion dollars on ads asserting that Joe Biden was a pedophile, Mark Zuckerberg would have every legal right to pocket the cash.

Apparently, Representative Eshoo thinks it is fine to have a political system that relies on the goodwill of billionaires, but people who believe in democracy are troubled by this, and many of them do know what they are talking about.

That is the takeaway readers of this piece on efforts to reform Section 230 would likely get. Section 230 is the provision of the Communications Decency Act, which protects Internet intermediaries from liability for third-party content. While the New York Times or CNN could get sued if they ran an ad or ran a letter or commentary that defamed an individual or corporation, because of Section 230, Facebook would face no risk from carrying the same material. Repealing Section 230 would mean that Facebook would be subject to the same liability rules as its print and broadcast competitors. (Here’s my longer discussion of the issue.)

While the piece begins by noting that both Trump and Biden called for the repeal of Section 230, there is no one cited in the piece who advocates this position. It does include a quote from Representative Anna G. Eshoo telling readers:

“When someone says eliminate Section 230, the first thing it says to me is that they don’t really understand it.”

People who can remember back to the 2020 election may recall appeals to Mark Zuckerberg and Jack Dorsey to take steps to limit the amount of disinformation spread over Facebook and Twitter. Both of them actually did make efforts to block false claims from being carried over their networks. However, they had no legal obligation to do so. If, for example, someone decided to spend a billion dollars on ads asserting that Joe Biden was a pedophile, Mark Zuckerberg would have every legal right to pocket the cash.

Apparently, Representative Eshoo thinks it is fine to have a political system that relies on the goodwill of billionaires, but people who believe in democracy are troubled by this, and many of them do know what they are talking about.

A friend sent me a new study showing that the top five executives of major corporations pocketed between 15 and 19 cents of every dollar their companies gained from two recent tax cuts. This paper, by Eric Ohrn at Grinnell College, should be a really big deal.

The basic point is one that I, and others, have been making for a long time. CEOs and other top executives rip off the companies they work for. They are not worth the $20 million or more that many of them pocket each year. Again, this is not a moral judgment about their value to society. It is a simple dollars-and-cents calculation about how much money they produce for shareholders, and this piece suggests that it is nothing close to what they pocket.

The reason why this finding is a big deal is that it is yet another piece of evidence that executives are able to pocket money that they did nothing to earn. In the case of these tax cuts, company profits increased because of a change in government policy, not because their management had developed new products, increased market share, or reduced production costs. (Some of them presumably paid for lobbyists to push for the tax breaks, so their contribution to higher profits may not have been exactly nothing.)

There is much other work along similar lines. An analysis of the pay of oil company CEOs found that they got large increases in compensation when oil prices rose. Since the CEOs were not responsible for the rise in world oil prices, this meant they were getting compensated for factors that had little to do with their work. A more recent study found the same result. Another study found that CEO pay soared in the 1990s because it seemed that corporate boards did not understand the value of the options they were issuing.

A few years ago, Jessica Schieder and I did a paper showing that the loss of the tax deduction for CEO pay in the health insurance industry, which was part of the Affordable Care Act, had no impact on CEO pay. The loss of this deduction effectively raised the cost of CEO pay to firms by more than 50 percent. If CEO pay was closely related to the value they added to the company’s bottom line, we should have unambiguously expected to see some decline in CEO pay in the industry relative to other sectors. In a wide variety of specifications, we found no negative effect. (Bebchuk and Fried’s book, Pay Without Performance, presents a wide range of evidence on this issue.)

 

It Matters for Inequality if Top Executives are Ripping Off Their Companies

As can be easily shown the bulk of the upward redistribution from the 1970s was not due to a shift from wages to profits, it was due to an upward redistribution among wage earners. Instead of money going to ordinary workers, it was going to those at the top end of the wage distribution, such as doctors and dentists, STEM workers, and especially to Wall Street trader types and top corporate management. If we want to reverse this upward redistribution then we have to take back the money from those who got it.

If top management actually earned their pay, in the sense of increasing profits for the companies they worked for, then there would be at least some sort of trade-off. Reducing their pay would mean a corresponding loss in profit for these companies. It still might be desirable to see top executives pocket less money, but shareholders would be unhappy in this story since they will have fewer profits as a result.

But if CEOs and other top management are not increasing profits in a way that is commensurate with their pay, their excess pay is a direct drain on the companies that employ them. From the standpoint of the shareholders, it is no more desirable to pay a CEO $20 million, if someone just as effective can be hired for $2 million than to pay an extra $18 million for rent, utilities, or any other input. It is money thrown in the garbage.

As I have argued in the past, the excess pay for CEOs is not just an issue because of a relatively small number of very highly paid top executives. It matters because of its impact on pay structures throughout the economy. When the CEO gets paid more, it means more money for those next to the CEO in the corporate hierarchy and even the third-tier corporate executives. That leaves less money for everyone else.

The Ohrn study found that 15 to 19 percent of the benefits of the tax breaks he examined went to the top five executives. If half this amount went to the next twenty or thirty people in the corporate hierarchy, it would imply between 22 and 37 percent of the money gained from a tax break went to twenty-five or thirty-five highest paid people in the corporate hierarchy.

To throw some numbers around, if the CEO is getting $20 million, then the rest of the top five executives are likely making close to $10 million, with the next echelon making $1 to $2 million. If we envision pay structures comparable to what we had in the 1960s and 1970s, CEOs would be getting $2 to $3 million. The next four executives likely earning between $1 to $2 million, and the third tier getting paid in the high six figures. With the pay structures from the corporate sector carrying over to other sectors, such as government, universities, and non-profits, we would be looking at a very different economy.

 

Why Do CEOs Walk Away with the Store?

If CEOs really don’t earn their pay, the obvious question is how do they get away with it? The answer is easy to see, they largely control the boards of directors that determine their pay. Top management typically plays a large role in getting people appointed to the board, and once there, the best way to remain on the board is to avoid pissing off your colleagues. More than 99 percent of the directors nominated for re-election by the board win their elections.

Being a corporate director is great work if you can get it. As Steven Clifford documents in his book, the CEO Pay Machine, which is largely based on his experience at several corporate boards, being a director can pay several hundred thousand dollars a year for 200 to 400 hours of work. Directors typically want to keep their jobs, and the best way to do this is by avoiding asking pesky questions like, “can we get a CEO who is just as good for half the money?”

While many people seem to recognize that CEOs rip off their companies, they fail to see the obvious implication, that shareholders have a direct interest in lowering CEO pay. For example, a common complaint about share buybacks is that they allow top management to manipulate stock prices to increase the value of their options.

If this is true, then shareholders should want buybacks to be more tightly restricted, since they are allowing top management to steal from the company. If shareholders actually wanted CEOs to get more money from their options, they would simply give them more options, not allow them to manipulate share prices. Yet, somehow buybacks in their current form are still seen as serving shareholders.

As a practical matter, it is easy to show that the last two decades have not been a period of especially high returns for shareholders. This is in spite of the large cut in corporate taxes under the Trump administration.

There seems to be confusion on this point because there has been a large run-up in stock prices over this period. Much of this story is that shareholders are increasingly getting their returns in the form of higher share prices rather than dividends.

Before 1980, dividends were typically 3-4 percent of the share price, providing close to half of the return to shareholders. In recent years, dividend yields have dropped to not much over 1 percent, with the rest of the return coming from a rise in share prices. If we only look at the share price, the story looks very good for shareholders, but if we look at the total return, the opposite is the case.[1]

 

Stockholders as Allies in Containing CEO Pay

If CEOs really are ripping off the companies they lead, then shareholders should be allies in the effort to contain CEO pay. This would mean that giving shareholders more ability to control corporate boards would result in lower CEO pay. (As with much past work, Ohrn’s study found that better corporate governance reduced the portion of the tax breaks the CEO and other top executives were able to pocket.)

There are many ways to increase the ability of shareholders to contain CEO pay, but my favorite is to build on the “Say on Pay,” provision of the Dodd-Frank financial reform law. This provision required companies to submit their CEO compensation package to an up or down vote of the shareholders every three years. The vote is nonbinding, but it allows for direct input from shareholders. As it is, the vast majority of pay packages are approved with less than 3.0 percent being voted down.

I would take the Say on Pay provision a step further by imposing a serious penalty on corporate boards when a pay package gets voted down. My penalty would be that they lose their own pay if the shareholders vote down the CEO pay package.

While a small share of pay packages get voted down, my guess is that if just one or two corporate boards lost their pay through this route, it would radically transform the way boards view CEO pay. They suddenly would take very seriously the question of whether they could get away with paying their CEO less money.   

I also like this approach because it is no more socialistic than the current system of corporate governance. It would be hard to make an argument that giving shareholders more control over CEO pay is a step towards communism.

The basic point here is a simple one: the rules of corporate governance are unavoidably set by the government. There is no single way to structure these rules. As we have now structured them, they make it easy for CEOs to rip off the companies they work for. We can make rules that make it harder for CEOs to take advantage of their employers and easier for shareholders to contain pay.

Progressives should strongly favor mechanisms that contain CEO pay because of the impact that high CEO pay has on wage inequality more generally. And, shareholders should be allies in this effort. There is no reason for us to feel sorry for shareholders, who are the richest people in the country, but they can help us contain CEO pay and we should welcome their assistance.   

 

 

 

[1] There is an interesting question as to whether paying money to shareholders through buybacks, rather than as dividends, has led to a rise in price-to-earnings ratios. If we believe in efficient markets, the form of the payout should not matter (ignoring possible information effects), but given the extraordinary runups in price-to-earnings ratios in the last three decades, the possibility that buybacks have played a role cannot be ruled out. If this is in fact the case, it creates a scenario in which management would prefer the buyback route to maximize the value of their options, current shareholders are largely indifferent between getting payouts as buybacks or dividends, but future shareholders are disadvantaged by having to buy stock at a higher price-to-earnings ratio.   

A friend sent me a new study showing that the top five executives of major corporations pocketed between 15 and 19 cents of every dollar their companies gained from two recent tax cuts. This paper, by Eric Ohrn at Grinnell College, should be a really big deal.

The basic point is one that I, and others, have been making for a long time. CEOs and other top executives rip off the companies they work for. They are not worth the $20 million or more that many of them pocket each year. Again, this is not a moral judgment about their value to society. It is a simple dollars-and-cents calculation about how much money they produce for shareholders, and this piece suggests that it is nothing close to what they pocket.

The reason why this finding is a big deal is that it is yet another piece of evidence that executives are able to pocket money that they did nothing to earn. In the case of these tax cuts, company profits increased because of a change in government policy, not because their management had developed new products, increased market share, or reduced production costs. (Some of them presumably paid for lobbyists to push for the tax breaks, so their contribution to higher profits may not have been exactly nothing.)

There is much other work along similar lines. An analysis of the pay of oil company CEOs found that they got large increases in compensation when oil prices rose. Since the CEOs were not responsible for the rise in world oil prices, this meant they were getting compensated for factors that had little to do with their work. A more recent study found the same result. Another study found that CEO pay soared in the 1990s because it seemed that corporate boards did not understand the value of the options they were issuing.

A few years ago, Jessica Schieder and I did a paper showing that the loss of the tax deduction for CEO pay in the health insurance industry, which was part of the Affordable Care Act, had no impact on CEO pay. The loss of this deduction effectively raised the cost of CEO pay to firms by more than 50 percent. If CEO pay was closely related to the value they added to the company’s bottom line, we should have unambiguously expected to see some decline in CEO pay in the industry relative to other sectors. In a wide variety of specifications, we found no negative effect. (Bebchuk and Fried’s book, Pay Without Performance, presents a wide range of evidence on this issue.)

 

It Matters for Inequality if Top Executives are Ripping Off Their Companies

As can be easily shown the bulk of the upward redistribution from the 1970s was not due to a shift from wages to profits, it was due to an upward redistribution among wage earners. Instead of money going to ordinary workers, it was going to those at the top end of the wage distribution, such as doctors and dentists, STEM workers, and especially to Wall Street trader types and top corporate management. If we want to reverse this upward redistribution then we have to take back the money from those who got it.

If top management actually earned their pay, in the sense of increasing profits for the companies they worked for, then there would be at least some sort of trade-off. Reducing their pay would mean a corresponding loss in profit for these companies. It still might be desirable to see top executives pocket less money, but shareholders would be unhappy in this story since they will have fewer profits as a result.

But if CEOs and other top management are not increasing profits in a way that is commensurate with their pay, their excess pay is a direct drain on the companies that employ them. From the standpoint of the shareholders, it is no more desirable to pay a CEO $20 million, if someone just as effective can be hired for $2 million than to pay an extra $18 million for rent, utilities, or any other input. It is money thrown in the garbage.

As I have argued in the past, the excess pay for CEOs is not just an issue because of a relatively small number of very highly paid top executives. It matters because of its impact on pay structures throughout the economy. When the CEO gets paid more, it means more money for those next to the CEO in the corporate hierarchy and even the third-tier corporate executives. That leaves less money for everyone else.

The Ohrn study found that 15 to 19 percent of the benefits of the tax breaks he examined went to the top five executives. If half this amount went to the next twenty or thirty people in the corporate hierarchy, it would imply between 22 and 37 percent of the money gained from a tax break went to twenty-five or thirty-five highest paid people in the corporate hierarchy.

To throw some numbers around, if the CEO is getting $20 million, then the rest of the top five executives are likely making close to $10 million, with the next echelon making $1 to $2 million. If we envision pay structures comparable to what we had in the 1960s and 1970s, CEOs would be getting $2 to $3 million. The next four executives likely earning between $1 to $2 million, and the third tier getting paid in the high six figures. With the pay structures from the corporate sector carrying over to other sectors, such as government, universities, and non-profits, we would be looking at a very different economy.

 

Why Do CEOs Walk Away with the Store?

If CEOs really don’t earn their pay, the obvious question is how do they get away with it? The answer is easy to see, they largely control the boards of directors that determine their pay. Top management typically plays a large role in getting people appointed to the board, and once there, the best way to remain on the board is to avoid pissing off your colleagues. More than 99 percent of the directors nominated for re-election by the board win their elections.

Being a corporate director is great work if you can get it. As Steven Clifford documents in his book, the CEO Pay Machine, which is largely based on his experience at several corporate boards, being a director can pay several hundred thousand dollars a year for 200 to 400 hours of work. Directors typically want to keep their jobs, and the best way to do this is by avoiding asking pesky questions like, “can we get a CEO who is just as good for half the money?”

While many people seem to recognize that CEOs rip off their companies, they fail to see the obvious implication, that shareholders have a direct interest in lowering CEO pay. For example, a common complaint about share buybacks is that they allow top management to manipulate stock prices to increase the value of their options.

If this is true, then shareholders should want buybacks to be more tightly restricted, since they are allowing top management to steal from the company. If shareholders actually wanted CEOs to get more money from their options, they would simply give them more options, not allow them to manipulate share prices. Yet, somehow buybacks in their current form are still seen as serving shareholders.

As a practical matter, it is easy to show that the last two decades have not been a period of especially high returns for shareholders. This is in spite of the large cut in corporate taxes under the Trump administration.

There seems to be confusion on this point because there has been a large run-up in stock prices over this period. Much of this story is that shareholders are increasingly getting their returns in the form of higher share prices rather than dividends.

Before 1980, dividends were typically 3-4 percent of the share price, providing close to half of the return to shareholders. In recent years, dividend yields have dropped to not much over 1 percent, with the rest of the return coming from a rise in share prices. If we only look at the share price, the story looks very good for shareholders, but if we look at the total return, the opposite is the case.[1]

 

Stockholders as Allies in Containing CEO Pay

If CEOs really are ripping off the companies they lead, then shareholders should be allies in the effort to contain CEO pay. This would mean that giving shareholders more ability to control corporate boards would result in lower CEO pay. (As with much past work, Ohrn’s study found that better corporate governance reduced the portion of the tax breaks the CEO and other top executives were able to pocket.)

There are many ways to increase the ability of shareholders to contain CEO pay, but my favorite is to build on the “Say on Pay,” provision of the Dodd-Frank financial reform law. This provision required companies to submit their CEO compensation package to an up or down vote of the shareholders every three years. The vote is nonbinding, but it allows for direct input from shareholders. As it is, the vast majority of pay packages are approved with less than 3.0 percent being voted down.

I would take the Say on Pay provision a step further by imposing a serious penalty on corporate boards when a pay package gets voted down. My penalty would be that they lose their own pay if the shareholders vote down the CEO pay package.

While a small share of pay packages get voted down, my guess is that if just one or two corporate boards lost their pay through this route, it would radically transform the way boards view CEO pay. They suddenly would take very seriously the question of whether they could get away with paying their CEO less money.   

I also like this approach because it is no more socialistic than the current system of corporate governance. It would be hard to make an argument that giving shareholders more control over CEO pay is a step towards communism.

The basic point here is a simple one: the rules of corporate governance are unavoidably set by the government. There is no single way to structure these rules. As we have now structured them, they make it easy for CEOs to rip off the companies they work for. We can make rules that make it harder for CEOs to take advantage of their employers and easier for shareholders to contain pay.

Progressives should strongly favor mechanisms that contain CEO pay because of the impact that high CEO pay has on wage inequality more generally. And, shareholders should be allies in this effort. There is no reason for us to feel sorry for shareholders, who are the richest people in the country, but they can help us contain CEO pay and we should welcome their assistance.   

 

 

 

[1] There is an interesting question as to whether paying money to shareholders through buybacks, rather than as dividends, has led to a rise in price-to-earnings ratios. If we believe in efficient markets, the form of the payout should not matter (ignoring possible information effects), but given the extraordinary runups in price-to-earnings ratios in the last three decades, the possibility that buybacks have played a role cannot be ruled out. If this is in fact the case, it creates a scenario in which management would prefer the buyback route to maximize the value of their options, current shareholders are largely indifferent between getting payouts as buybacks or dividends, but future shareholders are disadvantaged by having to buy stock at a higher price-to-earnings ratio.   

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