The New York Times had an interesting piece on aging societies in Asia and elsewhere. The piece rightly points out that as the elderly comprise a larger share of the population, societies will have to make adjustments to meet their needs. This is not some sort of crisis, as it is often portrayed, by rather a challenge that has to be recognized, similar to other challenges posed by past demographic changes.
The NYT piece noted that older people are likely to need more medical care than younger adults. Also, many will face chronic conditions like dementia, which will be difficult to deal with, especially for those without children or other family members to help them. It also pointed out that many older people are forced to work late in life because they don’t have a sufficient income on which to retire.
These are real and important problems, but this will not be the first time that demographics has created a burden for the country. Specifically, the baby boomers imposed a major burden on the country when we were young.
The baby boom cohorts flooded the schools in the years from 1950 to 1982, leading to an enormous increase in spending on elementary and secondary education. In 1946, before any baby boomers had entered kindergarten, government at all levels spent less than 1.3 percent of GDP on K-12 education. This figure rose rapidly through the 1950s and 1960s, peaking at 3.8 percent of GDP in 1970. It then leveled off and edged slightly downward in the 1970s and early 1980s as the cohorts that followed the baby boom were somewhat smaller. This pattern is shown below.
Source: Bureau of Economic Analysis and Statistical Abstract.
This increase in spending on K-12 education of 2.5 percentage points of GDP over 24 years is considerably larger than the 1.8 percentage point projected increase in spending on Social Security in the forty years from 2000 to 2040. Also, as many began to attend college in the mid-sixties, there was an even larger increase, in own percent, in spending on college education, by both government and households.
Of course, the huge influx of baby boomers into schools created problems. I remember my second grade class in Chicago had fifty kids. They also put mobile classrooms into our playground, since the school had more kids enrolled than the building could accommodate. And, there were tax increases to cover the costs of educating more children.
And, paying for schools was just the start of it. Young children had to be looked after. At the time, formal child care was rare, so this responsibility typically fell to parents (generally mothers) and other relatives.
Responsibility for raising children kept tens of millions of women out of the labor force. In the 1950s, labor force participation rates for women between the ages of 20 to 24 averaged around 45 percent. Currently, they are over 70 percent. For women between the ages of 25 to 34, labor force participation rates rose from the mid-40s in the 1950s to peaks of over 78 percent in recent years. This translated into hundreds of millions of lost work years from the standpoint of the paid labor market.
In short, the baby boom cohorts imposed a major burden on both the government and families when they were young. Nonetheless, the decades of the 1950s and 1960s were periods of general prosperity, which saw rapid economic growth that was widely shared across the income distribution. Dealing with an enormous growth in a dependent population of young children did not prevent substantial economic progress.
The Burden of An Aging Population
This short discussion of the baby boomers’ youth is helpful in thinking about the burden posed by an aging population. Just as was the case with the young baby boomers, we will have to reallocate resources to meet the needs of aging baby boomers. It is far from an impossible burden if dealt with intelligently, but clearly it will impose costs.
Most immediately we will have to divert a large share of national income to support a growing population of retirees. We are already far along this path. The increase in the share of GDP going to Social Security between 2000 and 2023 is larger than the projected increase between 2023 and 2040, so this is clearly a manageable burden.
There is an issue that the Social Security trust fund is projected to face a shortfall starting in a bit more than a decade. This is a problem of allocation, not a direct drain of resources. The amount of resources needed to support the elderly population is determined by the number of elderly. We have been meeting this burden without major strains for well over a decade. Our economy can continue to do so, however, we have to decide how to allocate money to the Social Security program.
We can do that with designated taxes, as we have done since the program was created, or we can allocate money from general revenue. This is a political choice, but from an economic standpoint we clearly have the resources to pay benefits.
There is also a question of whether the benefits should be raised. The New York Times piece described incidents where elderly people were doing physically demanding jobs, presumably because they could not afford to retire. A modest increase in Social Security benefits (10-20 percent), for lower income retirees, would carry a relatively small price tag. This would make a large difference in the retirement prospects for lower paid workers, and mean that fewer would be forced to continue working late in life or when they are in bad health.
It would also help enormously if we could have serious discussions of tax increases, and not just for richest one percent. (We should definitely increase their taxes.) The Social Security tax was increased repeatedly over the five decades following its inception, from 2.0 percent in 1937 to 12.4 percent in 1990. It has not been increased at all in more than thirty years.
Part of the reason it was possible politically to increase taxes so much was that, at least through the first thirty-five years of the program’s existence, real wages were rising at a healthy pace. Taxing away a portion of the wage gains workers receive every year is an easier matter than asking workers to give up a portion of paychecks that are stagnant or even declining.
Fortunately, it appears that real wages are back on an upward path. Beginning in the middle of the last decade, real wages were rising at a rate of close to 1.0 percent annually for the typical worker. Pandemic inflation briefly stopped this growth, but it appears that real wages are again rising, especially for those in the bottom portion of the wage ladder. If this trend continues, modest increases in Social Security taxes should be a possibility, if that proves necessary.[1]
Getting Health Care Costs Under Control
A big part of the story of making the burden of an aging population manageable is getting our health care costs under control. The scare stories of the economy being crushed by a flood of retiring baby boomers were actually more a story of exploding health care costs than an increase in the ratio of retirees to workers. The proponents of the scare stories were simply being dishonest. Unfortunately, because of their standing in policy circles, their scare stories were taken seriously by the media.[2]
Fortunately, health care costs have not risen anywhere near as much as projected. In fact, in the last few years they have actually fallen slightly as a share of GDP. Nonetheless, we still pay more than twice as much per person as the average for other wealthy country countries. If we can get our health care costs closer to OECD average, it will make it far easier to care for a growing elderly population.
The basic story of our health care is that we pay far more for just about everything than people in other wealthy countries. The most glaring difference is with prescription drugs, where we often pay two or three times as much, for the same drug, as people in Europe and Canada.
The reason for this disparity is that we give drug companies patent monopolies, or related protections, and then, unlike any other country, tell the drug companies they can charge whatever they want. Every other wealthy country has some sort of price regulation that goes along with these government-granted monopolies.
We can get our prices down by adopting the same sort of restrictions on patent monopolies that Europe and Canada have. We will spend around $550 billion this year on prescription drugs. This is equal to 2.2 percent of GDP or more than 60 percent of the military budget. If we got our prices down to European levels we would pay around half of this amount. There is a similar story with medical equipment, although we only spend around $200 billion a year there.
Even better than reducing our payments for patent-protected drugs, we can stop relying on patent monopoly financing altogether for the development of new drugs. We can pay for the research upfront, as we did with the development of Moderna’s Covid vaccine. (We also allowed them to maintain a monopoly on the vaccine, in effect paying them twice.)
The government already spends over $50 billion a year on biomedical research through the National Institutes of Health. We could substantially increase the amount of public funding, but add the provision that all the drugs, vaccines, and other products developed must be fully open-source, so that they could be sold as cheap generics from the day they are approved.
We already have a great example of this model. Peter Hotez and Elena Bottazzi, two highly respected researchers at Baylor University and Texas Children’s Hospital, developed a simple to produce, 100 percent open-source Covid vaccine. It uses well-established technologies that are not complicated (unlike mRNA). Their vaccine has been widely used in India and Indonesia, with over 100 million people getting the vaccine to date.
Their vaccine sells for less than $2 a dose in India. If the FDA were to approve it here (it would likely cost around $10 million for the clinical trials needed to get approval) it would probably sell for less than $5 a shot. This compares to $110 to $130 dollars that Pfizer and Moderna want to charge for their boosters. If we got 100,000 people to take the Hotez-Bottazzi vaccine rather than the Pfizer-Moderna shot, it would cover the cost of the trials. If we got 1 million to take their vaccine it would cover the cost ten times over, and if ten million people took their vaccine it would cover the cost one hundred times over.
It is not just money we would save by going this open-source route. The huge markups that drug companies can charge due to patent monopolies give them an enormous incentive to lie about the safety and effectiveness of their drugs. We see this problem all the time, most notably with the opioid crisis where drug companies deceived doctors about the addictiveness of their drugs.
Another prominent example is the Alzheimer’s drug Adulhelm. Biogen, the manufacturer of the drug, was pushing the FDA for an accelerated approval, in spite of limited evidence of its effectiveness and serious harmful side effects. Their plan was thwarted after the resignation of several members of an FDA advisory committee. Biogen had planned to sell the drug for $56,000 for a year’s treatment. If Adulhelm was developed with open-source funding, and would be sold as a cheap generic upon approval, there would have been little incentive to try to get the FDA to ignore concerns about the drug’s safety and effectiveness.
Open-source drugs would also have a substantial impact on income inequality. The people who benefit from patent monopolies and related protections are almost all in the top 10 percent of the income distribution and many are in the top one percent. Forbes magazine calculated that the Moderna vaccine alone created five billionaires.
Aging Is a Distraction
We should recognize that the aging of the population will pose problems, but these problems are not qualitatively different, and almost certainly smaller in size, than the problems created by the baby boom cohorts when they were young. These problems are dwarfed by the problems created by inequality.
They are also aggravated by inequality. In a less unequal society, tens of millions of people would approach old age in better health. This is not only good for them, but it also means that paying for their health care would require fewer resources than if we continue on our current track.
Obviously, those who benefit from the extreme inequality we see at present would prefer that policy instead be focused on aging, as though this is a crisis. But their interests do not change the reality.
[1] Many economists, most notably former Treasury Secretary Larry Summers, have argued that the biggest problem facing an aging society is “secular stagnation.” This is a story where there is not enough demand to keep the economy operating at its potential and to keep workers fully employed. This is 180 degrees at odds with the story that we won’t have the resources needed to support a growing elderly population. If Summers’ secular stagnation view proves correct, then there would be no reason to have tax increases, since the economy is suffering from too little demand, not too much.
[2] The classic work in this vein was Peter Peterson’s mid-nineties gem, Will America Grow Up Before It Grows Old: How the Coming Social Security Crisis Threatens You, Your Family, and Your Country.
The New York Times had an interesting piece on aging societies in Asia and elsewhere. The piece rightly points out that as the elderly comprise a larger share of the population, societies will have to make adjustments to meet their needs. This is not some sort of crisis, as it is often portrayed, by rather a challenge that has to be recognized, similar to other challenges posed by past demographic changes.
The NYT piece noted that older people are likely to need more medical care than younger adults. Also, many will face chronic conditions like dementia, which will be difficult to deal with, especially for those without children or other family members to help them. It also pointed out that many older people are forced to work late in life because they don’t have a sufficient income on which to retire.
These are real and important problems, but this will not be the first time that demographics has created a burden for the country. Specifically, the baby boomers imposed a major burden on the country when we were young.
The baby boom cohorts flooded the schools in the years from 1950 to 1982, leading to an enormous increase in spending on elementary and secondary education. In 1946, before any baby boomers had entered kindergarten, government at all levels spent less than 1.3 percent of GDP on K-12 education. This figure rose rapidly through the 1950s and 1960s, peaking at 3.8 percent of GDP in 1970. It then leveled off and edged slightly downward in the 1970s and early 1980s as the cohorts that followed the baby boom were somewhat smaller. This pattern is shown below.
Source: Bureau of Economic Analysis and Statistical Abstract.
This increase in spending on K-12 education of 2.5 percentage points of GDP over 24 years is considerably larger than the 1.8 percentage point projected increase in spending on Social Security in the forty years from 2000 to 2040. Also, as many began to attend college in the mid-sixties, there was an even larger increase, in own percent, in spending on college education, by both government and households.
Of course, the huge influx of baby boomers into schools created problems. I remember my second grade class in Chicago had fifty kids. They also put mobile classrooms into our playground, since the school had more kids enrolled than the building could accommodate. And, there were tax increases to cover the costs of educating more children.
And, paying for schools was just the start of it. Young children had to be looked after. At the time, formal child care was rare, so this responsibility typically fell to parents (generally mothers) and other relatives.
Responsibility for raising children kept tens of millions of women out of the labor force. In the 1950s, labor force participation rates for women between the ages of 20 to 24 averaged around 45 percent. Currently, they are over 70 percent. For women between the ages of 25 to 34, labor force participation rates rose from the mid-40s in the 1950s to peaks of over 78 percent in recent years. This translated into hundreds of millions of lost work years from the standpoint of the paid labor market.
In short, the baby boom cohorts imposed a major burden on both the government and families when they were young. Nonetheless, the decades of the 1950s and 1960s were periods of general prosperity, which saw rapid economic growth that was widely shared across the income distribution. Dealing with an enormous growth in a dependent population of young children did not prevent substantial economic progress.
The Burden of An Aging Population
This short discussion of the baby boomers’ youth is helpful in thinking about the burden posed by an aging population. Just as was the case with the young baby boomers, we will have to reallocate resources to meet the needs of aging baby boomers. It is far from an impossible burden if dealt with intelligently, but clearly it will impose costs.
Most immediately we will have to divert a large share of national income to support a growing population of retirees. We are already far along this path. The increase in the share of GDP going to Social Security between 2000 and 2023 is larger than the projected increase between 2023 and 2040, so this is clearly a manageable burden.
There is an issue that the Social Security trust fund is projected to face a shortfall starting in a bit more than a decade. This is a problem of allocation, not a direct drain of resources. The amount of resources needed to support the elderly population is determined by the number of elderly. We have been meeting this burden without major strains for well over a decade. Our economy can continue to do so, however, we have to decide how to allocate money to the Social Security program.
We can do that with designated taxes, as we have done since the program was created, or we can allocate money from general revenue. This is a political choice, but from an economic standpoint we clearly have the resources to pay benefits.
There is also a question of whether the benefits should be raised. The New York Times piece described incidents where elderly people were doing physically demanding jobs, presumably because they could not afford to retire. A modest increase in Social Security benefits (10-20 percent), for lower income retirees, would carry a relatively small price tag. This would make a large difference in the retirement prospects for lower paid workers, and mean that fewer would be forced to continue working late in life or when they are in bad health.
It would also help enormously if we could have serious discussions of tax increases, and not just for richest one percent. (We should definitely increase their taxes.) The Social Security tax was increased repeatedly over the five decades following its inception, from 2.0 percent in 1937 to 12.4 percent in 1990. It has not been increased at all in more than thirty years.
Part of the reason it was possible politically to increase taxes so much was that, at least through the first thirty-five years of the program’s existence, real wages were rising at a healthy pace. Taxing away a portion of the wage gains workers receive every year is an easier matter than asking workers to give up a portion of paychecks that are stagnant or even declining.
Fortunately, it appears that real wages are back on an upward path. Beginning in the middle of the last decade, real wages were rising at a rate of close to 1.0 percent annually for the typical worker. Pandemic inflation briefly stopped this growth, but it appears that real wages are again rising, especially for those in the bottom portion of the wage ladder. If this trend continues, modest increases in Social Security taxes should be a possibility, if that proves necessary.[1]
Getting Health Care Costs Under Control
A big part of the story of making the burden of an aging population manageable is getting our health care costs under control. The scare stories of the economy being crushed by a flood of retiring baby boomers were actually more a story of exploding health care costs than an increase in the ratio of retirees to workers. The proponents of the scare stories were simply being dishonest. Unfortunately, because of their standing in policy circles, their scare stories were taken seriously by the media.[2]
Fortunately, health care costs have not risen anywhere near as much as projected. In fact, in the last few years they have actually fallen slightly as a share of GDP. Nonetheless, we still pay more than twice as much per person as the average for other wealthy country countries. If we can get our health care costs closer to OECD average, it will make it far easier to care for a growing elderly population.
The basic story of our health care is that we pay far more for just about everything than people in other wealthy countries. The most glaring difference is with prescription drugs, where we often pay two or three times as much, for the same drug, as people in Europe and Canada.
The reason for this disparity is that we give drug companies patent monopolies, or related protections, and then, unlike any other country, tell the drug companies they can charge whatever they want. Every other wealthy country has some sort of price regulation that goes along with these government-granted monopolies.
We can get our prices down by adopting the same sort of restrictions on patent monopolies that Europe and Canada have. We will spend around $550 billion this year on prescription drugs. This is equal to 2.2 percent of GDP or more than 60 percent of the military budget. If we got our prices down to European levels we would pay around half of this amount. There is a similar story with medical equipment, although we only spend around $200 billion a year there.
Even better than reducing our payments for patent-protected drugs, we can stop relying on patent monopoly financing altogether for the development of new drugs. We can pay for the research upfront, as we did with the development of Moderna’s Covid vaccine. (We also allowed them to maintain a monopoly on the vaccine, in effect paying them twice.)
The government already spends over $50 billion a year on biomedical research through the National Institutes of Health. We could substantially increase the amount of public funding, but add the provision that all the drugs, vaccines, and other products developed must be fully open-source, so that they could be sold as cheap generics from the day they are approved.
We already have a great example of this model. Peter Hotez and Elena Bottazzi, two highly respected researchers at Baylor University and Texas Children’s Hospital, developed a simple to produce, 100 percent open-source Covid vaccine. It uses well-established technologies that are not complicated (unlike mRNA). Their vaccine has been widely used in India and Indonesia, with over 100 million people getting the vaccine to date.
Their vaccine sells for less than $2 a dose in India. If the FDA were to approve it here (it would likely cost around $10 million for the clinical trials needed to get approval) it would probably sell for less than $5 a shot. This compares to $110 to $130 dollars that Pfizer and Moderna want to charge for their boosters. If we got 100,000 people to take the Hotez-Bottazzi vaccine rather than the Pfizer-Moderna shot, it would cover the cost of the trials. If we got 1 million to take their vaccine it would cover the cost ten times over, and if ten million people took their vaccine it would cover the cost one hundred times over.
It is not just money we would save by going this open-source route. The huge markups that drug companies can charge due to patent monopolies give them an enormous incentive to lie about the safety and effectiveness of their drugs. We see this problem all the time, most notably with the opioid crisis where drug companies deceived doctors about the addictiveness of their drugs.
Another prominent example is the Alzheimer’s drug Adulhelm. Biogen, the manufacturer of the drug, was pushing the FDA for an accelerated approval, in spite of limited evidence of its effectiveness and serious harmful side effects. Their plan was thwarted after the resignation of several members of an FDA advisory committee. Biogen had planned to sell the drug for $56,000 for a year’s treatment. If Adulhelm was developed with open-source funding, and would be sold as a cheap generic upon approval, there would have been little incentive to try to get the FDA to ignore concerns about the drug’s safety and effectiveness.
Open-source drugs would also have a substantial impact on income inequality. The people who benefit from patent monopolies and related protections are almost all in the top 10 percent of the income distribution and many are in the top one percent. Forbes magazine calculated that the Moderna vaccine alone created five billionaires.
Aging Is a Distraction
We should recognize that the aging of the population will pose problems, but these problems are not qualitatively different, and almost certainly smaller in size, than the problems created by the baby boom cohorts when they were young. These problems are dwarfed by the problems created by inequality.
They are also aggravated by inequality. In a less unequal society, tens of millions of people would approach old age in better health. This is not only good for them, but it also means that paying for their health care would require fewer resources than if we continue on our current track.
Obviously, those who benefit from the extreme inequality we see at present would prefer that policy instead be focused on aging, as though this is a crisis. But their interests do not change the reality.
[1] Many economists, most notably former Treasury Secretary Larry Summers, have argued that the biggest problem facing an aging society is “secular stagnation.” This is a story where there is not enough demand to keep the economy operating at its potential and to keep workers fully employed. This is 180 degrees at odds with the story that we won’t have the resources needed to support a growing elderly population. If Summers’ secular stagnation view proves correct, then there would be no reason to have tax increases, since the economy is suffering from too little demand, not too much.
[2] The classic work in this vein was Peter Peterson’s mid-nineties gem, Will America Grow Up Before It Grows Old: How the Coming Social Security Crisis Threatens You, Your Family, and Your Country.
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• Economic Crisis and RecoveryCrisis económica y recuperaciónHealth and Social ProgramsLos Programas Sociales y de SaludInequalityLa DesigualdadUnited StatesEE. UU.
In a lengthy piece on Republican proposals for cutting the food stamp program, the Washington Post found room to tell us that we spent $119 billion on food stamps last year, and it did not find any room to put this figure in a context that might make it meaningful to its readers.
Yeah, $119 billion is a lot of money, more than almost anyone other than Elon Musk (pre-Twitter) will ever see, but is it a big deal for the federal government? We can debate what is “big” or “small,” but the federal government spent $6,272 billion last year, which means that the food stamp program accounted for a bit less than 1.9 percent of total spending.
If the Republicans cut the program by 20 percent, a large cut, it would reduce federal spending by $24.8 billion, or a bit less than 0.4 percent. It would have been helpful to provide this context since it would make the point clear that Republicans will not get very far toward balancing the budget with cuts to the food stamp program.
It also would have been worth noting that research on the proposal for strengthening food stamp work requirements, a measure discussed at length in the piece, shows that these requirements have no impact on work. They do reduce the number of people getting benefits.
This research indicates that if the point of these requirements is to encourage work, they are not successful. However, if the point is to reduce the number of people benefitting from the program, the requirements will have this effect.
In a lengthy piece on Republican proposals for cutting the food stamp program, the Washington Post found room to tell us that we spent $119 billion on food stamps last year, and it did not find any room to put this figure in a context that might make it meaningful to its readers.
Yeah, $119 billion is a lot of money, more than almost anyone other than Elon Musk (pre-Twitter) will ever see, but is it a big deal for the federal government? We can debate what is “big” or “small,” but the federal government spent $6,272 billion last year, which means that the food stamp program accounted for a bit less than 1.9 percent of total spending.
If the Republicans cut the program by 20 percent, a large cut, it would reduce federal spending by $24.8 billion, or a bit less than 0.4 percent. It would have been helpful to provide this context since it would make the point clear that Republicans will not get very far toward balancing the budget with cuts to the food stamp program.
It also would have been worth noting that research on the proposal for strengthening food stamp work requirements, a measure discussed at length in the piece, shows that these requirements have no impact on work. They do reduce the number of people getting benefits.
This research indicates that if the point of these requirements is to encourage work, they are not successful. However, if the point is to reduce the number of people benefitting from the program, the requirements will have this effect.
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• Economic Crisis and RecoveryCrisis económica y recuperaciónPricesUnited StatesEE. UU.
On a lazy Friday afternoon, a person’s thoughts naturally turn to car price indexes. There is actually a reason that I became interested in this topic. I noticed that in the January Consumer Price Index, the new vehicle index rose 0.2 percent. The December measure was revised up due to new seasonal adjustment factors so that what had been reported as a 0.1 percent decline last month is now reported as a 0.6 percent increase.
I was inclined to think this was an aberration and that we would see the downward trend that had previously been apparent in the data reappear in another month or two. However, I noticed that the Manheim index for used vehicle prices showed a sharp uptick for January and the first half of February. This was after a full year in which declining prices were reversing much of the pandemic run-up. Perhaps my expectation that vehicle prices, both new and used, would soon look like they were back on their pre-pandemic path was wrong.
Vehicle prices are a big deal in the CPI. Together the new and used vehicle components comprise just under 7.0 percent of the overall index and 8.8 percent of the core index. As a result, it will have a big impact on our inflation measures if vehicle prices are on a downward path, as it seemed when we got the December CPI.
I thought I would look at a bit of history and pull in the index for imported vehicles. (This is not entirely apples to apples since the import index includes car parts.) Here’s the picture.
Source: Bureau of Labor Statistics.
As can be seen, the price index for imported vehicles somewhat outpaced the new vehicle index for the U.S. in the two decades prior to the pandemic. Currency values explain at least part of this movement. The dollar fell in value against the currencies of our trading partners from 2000 to 2012. It then began to rise modestly, which is the period when saw the gap close slightly. Still, by 2019 there was still a gap of roughly 7.0 percentage points, with the import price index rising by 9.8 percentage points since 2000, compared to an increase of just 2.8 percent in the new vehicle price index.
There was a larger gap between the new vehicle price index and the used vehicle price index. The used vehicle price index was actually 10.3 percent below its 2000 value in 2019, implying a gap of 13.1 percentage points between the new and used vehicle indexes over this 19-year period.
This story gets completely reversed in the years since the pandemic. Used vehicle prices are up by 37.2 percent, new vehicle prices are up by 20.1 percent, while the index for imported vehicles has increased by just 6.9 percent. This raises the question of whether there is some fundamental factor that has led to a lasting change in the pattern of new, used, and imported vehicles or whether this is a temporary story that will revert back to the pre-pandemic path in time.
Offhand, I can’t see any fundamental factor that has changed in a way that would affect these price trends. The dollar did rise in 2021 and earlier in 2022, which would lower imported car prices in the United States, but it is now pretty much back to its pre-pandemic level against most currencies, so currency valuations can’t explain much of the picture.
And, currency values won’t tell us anything about the far more rapid rise in used vehicle prices than new vehicle prices. This is easily explained in the context of pandemic shortages of cars, driving up used car prices, but if we envision a post-pandemic future where automakers can produce enough vehicles to meet demand, presumably, we will see the former pattern restored.
There may well be something that I am missing (suggestions welcome), but it still looks to me like we should expect the new vehicle index to converge towards the imported vehicle index and the used vehicle index to again drop below the new vehicle index. This path may take longer than I had expected, but it still seems likely.
That means that we should expect vehicle prices to be constraining inflation going forward. That may not be the case in the next couple of months, but it is likely to be true later in 2023 and into 2024.
On a lazy Friday afternoon, a person’s thoughts naturally turn to car price indexes. There is actually a reason that I became interested in this topic. I noticed that in the January Consumer Price Index, the new vehicle index rose 0.2 percent. The December measure was revised up due to new seasonal adjustment factors so that what had been reported as a 0.1 percent decline last month is now reported as a 0.6 percent increase.
I was inclined to think this was an aberration and that we would see the downward trend that had previously been apparent in the data reappear in another month or two. However, I noticed that the Manheim index for used vehicle prices showed a sharp uptick for January and the first half of February. This was after a full year in which declining prices were reversing much of the pandemic run-up. Perhaps my expectation that vehicle prices, both new and used, would soon look like they were back on their pre-pandemic path was wrong.
Vehicle prices are a big deal in the CPI. Together the new and used vehicle components comprise just under 7.0 percent of the overall index and 8.8 percent of the core index. As a result, it will have a big impact on our inflation measures if vehicle prices are on a downward path, as it seemed when we got the December CPI.
I thought I would look at a bit of history and pull in the index for imported vehicles. (This is not entirely apples to apples since the import index includes car parts.) Here’s the picture.
Source: Bureau of Labor Statistics.
As can be seen, the price index for imported vehicles somewhat outpaced the new vehicle index for the U.S. in the two decades prior to the pandemic. Currency values explain at least part of this movement. The dollar fell in value against the currencies of our trading partners from 2000 to 2012. It then began to rise modestly, which is the period when saw the gap close slightly. Still, by 2019 there was still a gap of roughly 7.0 percentage points, with the import price index rising by 9.8 percentage points since 2000, compared to an increase of just 2.8 percent in the new vehicle price index.
There was a larger gap between the new vehicle price index and the used vehicle price index. The used vehicle price index was actually 10.3 percent below its 2000 value in 2019, implying a gap of 13.1 percentage points between the new and used vehicle indexes over this 19-year period.
This story gets completely reversed in the years since the pandemic. Used vehicle prices are up by 37.2 percent, new vehicle prices are up by 20.1 percent, while the index for imported vehicles has increased by just 6.9 percent. This raises the question of whether there is some fundamental factor that has led to a lasting change in the pattern of new, used, and imported vehicles or whether this is a temporary story that will revert back to the pre-pandemic path in time.
Offhand, I can’t see any fundamental factor that has changed in a way that would affect these price trends. The dollar did rise in 2021 and earlier in 2022, which would lower imported car prices in the United States, but it is now pretty much back to its pre-pandemic level against most currencies, so currency valuations can’t explain much of the picture.
And, currency values won’t tell us anything about the far more rapid rise in used vehicle prices than new vehicle prices. This is easily explained in the context of pandemic shortages of cars, driving up used car prices, but if we envision a post-pandemic future where automakers can produce enough vehicles to meet demand, presumably, we will see the former pattern restored.
There may well be something that I am missing (suggestions welcome), but it still looks to me like we should expect the new vehicle index to converge towards the imported vehicle index and the used vehicle index to again drop below the new vehicle index. This path may take longer than I had expected, but it still seems likely.
That means that we should expect vehicle prices to be constraining inflation going forward. That may not be the case in the next couple of months, but it is likely to be true later in 2023 and into 2024.
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• Affordable Care ActHealth and Social ProgramsLos Programas Sociales y de SaludSocial SecurityUnited StatesEE. UU.
A New York Times article on the economics and politics around Social Security and Medicare begins by telling readers:
President Biden scored an early political point this month in his fight with congressional Republicans over taxes, spending and raising the federal debt limit: He forced Republican leaders to profess, repeatedly, that they will not seek cuts to Social Security and Medicare.
In the process, Mr. Biden has effectively steered a debate about fiscal responsibility away from two cherished safety-net programs for seniors, just as those plans are poised for a decade of rapid spending growth.
It is not clear that “fiscal responsibility” has anything to do with this debate. First, it is not clear what that expression means. Would it have been fiscally responsible to have more deficit reduction in the years following the Great Recession, with the economy recovering slowly and unemployment remaining high?
In those circumstances, more deficit reduction would have meant slower growth and higher unemployment. Perhaps the New York Times would define deficit reduction that hurts the economy as being “fiscally responsible,” but it is not clear that most people would accept that definition.
The other part of the story is that Republicans have repeatedly demonstrated by their actions that they don’t care about budget deficits. Every time the Republicans have regained the White House in the last four decades, they have pushed through large tax cuts that resulted in large increases in the budget deficit.
Seeing this behavior, it is absurd to imagine that the leaders of the Republican Party are concerned about budget deficits (if this is how we are defining fiscal responsibility). They may claim to be concerned about budget deficits, but it would be irresponsible to imply that they actually are concerned about budget deficits.
In short, this is alleged to be a debate over “fiscal responsibility” or budget deficits. There is little reason to believe, at least on the Republican side, that this is actually a debate over budget deficits.
Spending on Social Security and Medicare Has Been Far Less Than Projected
It is also worth noting that the dynamics of the shortfalls facing Social Security and Medicare are somewhat different than implied by this piece. Social Security spending has already been rising rapidly, since most of the baby boom cohorts have already reached retirement age. Social Security spending rose from 4.19 percent of GDP in 2000 to 5.09 percent of GDP in 2023, an increase of 0.9 percentage points. It is projected to increase to 5.95 percent of GDP by 2040, a further rise of 0.84 percentage points.
This means that, in terms of its economic impact, we will not be seeing anything qualitatively different from what we had been seeing from Social Security. There is a different story going forward in that the dedicated trust fund built from the Social Security tax is projected to face a shortfall, but that is an issue of allocating governmental resources, not a question of requiring a more rapid diversion of resources to Social Security than we have been seeing for decades.
It is also worth noting that the cost increases for both Social Security and Medicare have been far less than had earlier been projected. The 2000 Social Security Trustees Report projected that Social Security spending would increase by 2.07 percentage points by 2025, to 6.26 percent of GDP. The 2022 Trustees report shows costs increasing by just 1.17 percentage points to 5.26 percent of GDP in 2025.
While there have not been explicit cuts to Social Security, changes in both practices and society have led to slower-than-projected cost growth. In the former category, a far higher rate of denial for disability claims has substantially reduced the cost of the disability program. In the latter category, the slower growth in life expectancy, especially for non-college-educated workers, has reduced the cost of the Social Security program. These are not necessarily positive developments, but they mean that Social Security is now costing far less than had been projected in the not-so-distant past.
There is a similar story with Medicare cost growth. Its spending was projected to rise by 0.61 percentage points to 2.0 percent of GDP in 2025. Its costs are now projected to rise to 1.68 percent of GDP in 2025, an increase of just 0.29 percentage points. This smaller increase is the result of a sharp slowing in healthcare cost growth after the passage of the Affordable Care Act in 2010. Here also, we have seen substantial savings against projected spending, even if there were no explicit cuts in the program.
Upward Redistribution Has Been a Major Factor in the Projected Social Security Shortfall
It is also worth noting that much of the projected shortfall in the Social Security program is due to the upward redistribution of income over the last four decades. In 1982, when the last major changes to Social Security were put into place, 90 percent of wage income fell below the cap on taxable wages (currently $160,200).
In the last two decades, just over 82 percent of wage income was subject to the Social Security tax (see page 148). There was also a redistribution from wage income to profit income, which further reduced Social Security tax revenue. Together, this upward redistribution accounts for more than 40 percent of the program’s projected shortfall over its 75-year planning horizon. If we had not shifted so much income to high-end earners and to profits, closing the projected shortfall in Social Security would be a far more manageable task.
A New York Times article on the economics and politics around Social Security and Medicare begins by telling readers:
President Biden scored an early political point this month in his fight with congressional Republicans over taxes, spending and raising the federal debt limit: He forced Republican leaders to profess, repeatedly, that they will not seek cuts to Social Security and Medicare.
In the process, Mr. Biden has effectively steered a debate about fiscal responsibility away from two cherished safety-net programs for seniors, just as those plans are poised for a decade of rapid spending growth.
It is not clear that “fiscal responsibility” has anything to do with this debate. First, it is not clear what that expression means. Would it have been fiscally responsible to have more deficit reduction in the years following the Great Recession, with the economy recovering slowly and unemployment remaining high?
In those circumstances, more deficit reduction would have meant slower growth and higher unemployment. Perhaps the New York Times would define deficit reduction that hurts the economy as being “fiscally responsible,” but it is not clear that most people would accept that definition.
The other part of the story is that Republicans have repeatedly demonstrated by their actions that they don’t care about budget deficits. Every time the Republicans have regained the White House in the last four decades, they have pushed through large tax cuts that resulted in large increases in the budget deficit.
Seeing this behavior, it is absurd to imagine that the leaders of the Republican Party are concerned about budget deficits (if this is how we are defining fiscal responsibility). They may claim to be concerned about budget deficits, but it would be irresponsible to imply that they actually are concerned about budget deficits.
In short, this is alleged to be a debate over “fiscal responsibility” or budget deficits. There is little reason to believe, at least on the Republican side, that this is actually a debate over budget deficits.
Spending on Social Security and Medicare Has Been Far Less Than Projected
It is also worth noting that the dynamics of the shortfalls facing Social Security and Medicare are somewhat different than implied by this piece. Social Security spending has already been rising rapidly, since most of the baby boom cohorts have already reached retirement age. Social Security spending rose from 4.19 percent of GDP in 2000 to 5.09 percent of GDP in 2023, an increase of 0.9 percentage points. It is projected to increase to 5.95 percent of GDP by 2040, a further rise of 0.84 percentage points.
This means that, in terms of its economic impact, we will not be seeing anything qualitatively different from what we had been seeing from Social Security. There is a different story going forward in that the dedicated trust fund built from the Social Security tax is projected to face a shortfall, but that is an issue of allocating governmental resources, not a question of requiring a more rapid diversion of resources to Social Security than we have been seeing for decades.
It is also worth noting that the cost increases for both Social Security and Medicare have been far less than had earlier been projected. The 2000 Social Security Trustees Report projected that Social Security spending would increase by 2.07 percentage points by 2025, to 6.26 percent of GDP. The 2022 Trustees report shows costs increasing by just 1.17 percentage points to 5.26 percent of GDP in 2025.
While there have not been explicit cuts to Social Security, changes in both practices and society have led to slower-than-projected cost growth. In the former category, a far higher rate of denial for disability claims has substantially reduced the cost of the disability program. In the latter category, the slower growth in life expectancy, especially for non-college-educated workers, has reduced the cost of the Social Security program. These are not necessarily positive developments, but they mean that Social Security is now costing far less than had been projected in the not-so-distant past.
There is a similar story with Medicare cost growth. Its spending was projected to rise by 0.61 percentage points to 2.0 percent of GDP in 2025. Its costs are now projected to rise to 1.68 percent of GDP in 2025, an increase of just 0.29 percentage points. This smaller increase is the result of a sharp slowing in healthcare cost growth after the passage of the Affordable Care Act in 2010. Here also, we have seen substantial savings against projected spending, even if there were no explicit cuts in the program.
Upward Redistribution Has Been a Major Factor in the Projected Social Security Shortfall
It is also worth noting that much of the projected shortfall in the Social Security program is due to the upward redistribution of income over the last four decades. In 1982, when the last major changes to Social Security were put into place, 90 percent of wage income fell below the cap on taxable wages (currently $160,200).
In the last two decades, just over 82 percent of wage income was subject to the Social Security tax (see page 148). There was also a redistribution from wage income to profit income, which further reduced Social Security tax revenue. Together, this upward redistribution accounts for more than 40 percent of the program’s projected shortfall over its 75-year planning horizon. If we had not shifted so much income to high-end earners and to profits, closing the projected shortfall in Social Security would be a far more manageable task.
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There were several news stories on the 3.0 percent jump in retail sales the Commerce Department reported for January that took this as evidence that the economy was still very strong. In fact, since the January rise followed two months where reported sales fell sharply, the picture is far more ambiguous.
Reported sales fell by more than 1.0 percent in both November and December. As a result, reported sales in January were just 0.7 percent higher than those reported in October. Since these are nominal sales, it means that real retail sales have been close to flat over the last three months.
Likely, nominal sales did not really fall by more than 1.0 percent in November and December and then jumped by 3.0 percent in January. This is more likely an issue of seasonal adjustments for holiday shopping. Seasonal adjustments are always difficult, but post-pandemic shopping patterns make it harder for the Commerce Department to distinguish between sales changes reflected growth or weakness, as opposed to normal seasonal patterns.
In any case, when we get large changes like the 3.0 percent jump in sales reported in January, it is important to look back over the recent past to put them in context. No one looking at retail sales over the past three months can be concerned that they are growing too rapidly, even if the January jump, taken in isolation, might imply that.
There were several news stories on the 3.0 percent jump in retail sales the Commerce Department reported for January that took this as evidence that the economy was still very strong. In fact, since the January rise followed two months where reported sales fell sharply, the picture is far more ambiguous.
Reported sales fell by more than 1.0 percent in both November and December. As a result, reported sales in January were just 0.7 percent higher than those reported in October. Since these are nominal sales, it means that real retail sales have been close to flat over the last three months.
Likely, nominal sales did not really fall by more than 1.0 percent in November and December and then jumped by 3.0 percent in January. This is more likely an issue of seasonal adjustments for holiday shopping. Seasonal adjustments are always difficult, but post-pandemic shopping patterns make it harder for the Commerce Department to distinguish between sales changes reflected growth or weakness, as opposed to normal seasonal patterns.
In any case, when we get large changes like the 3.0 percent jump in sales reported in January, it is important to look back over the recent past to put them in context. No one looking at retail sales over the past three months can be concerned that they are growing too rapidly, even if the January jump, taken in isolation, might imply that.
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According to news reports, Moderna is considering a price in the range of $110 to $130 for shots of its Covid booster. People may recall that we paid Moderna close to $450 million to develop its Covid vaccine. We then paid another $450 million for the clinical trials that were needed to determine its effectiveness.
Moderna has already made a good return on our tax dollars, selling the initial set of shots at around $20 a piece. According to Forbes, the company’s soaring stock price had already produced five billionaires by the summer of 2021.
Who knows how many Moderna billionaires we will have if the company gets away with charging $110-$130 for its new booster. Of course, this money will come out of the pockets of the rest of us, or at least those of us who are not prevented from getting boosters by these high prices.
Fortunately, there is an alternative if the Biden administration is prepared to challenge Moderna and drug companies more generally on their monopoly pricing. Peter Hotez and Elena Bottazzi, two highly respected researchers at Baylor University and Texas Children’s Hospital, developed a simple to produce, 100 percent open-source Covid vaccine. It uses well-established technologies that are not complicated (unlike mRNA). Their vaccine has been widely used in India and Indonesia, with over 100 million people getting the vaccine to date.
If we want to see the vaccine used here it would need to be approved by the Food and Drug Administration (FDA). In principle, the FDA could rely on the clinical trials used to gain approval in India, but it indicated that they want U.S. trials. (In fairness, India’s trials are probably lower quality.)[1]
However, the government could fund a trial of Hotez-Bottazzi vaccine (Corbevax) with pots of money left over from Operation Warp Speed, or alternatively from the budgets of National Institutes of Health or other agencies like Biomedical Advanced Research and Development Authority (BARDA). With tens of billions of dollars of government money going to support biomedical research each year, the ten million or so needed for a clinical trial of Corbevax would be a drop in the bucket.
The arithmetic on this is incredible. Shots of Corbevax cost less than $2 a piece in India. If it costs two and a half times as much in the U.S., that still puts it a $5 a shot. That implies savings of more than $100 a shot. That means that if we get 100,000 people to take the Corbevax booster, rather than the Modern-Pfizer ones (Pfizer is planning to also charge over $100 for its booster), we’ve covered the cost of the trials. If we get 1 million to take Corbevax, we’ve covered the cost ten times over, and if 10 million people get the Corbevax booster, we will have saved one hundred times the cost of the clinical trial.
There is also the advantage that, since at least some of the reason for vacine hesitancy is fears of mRNA vaccines. We may get some vaccine hesitant people to take Corbevax, who wouldn’t take the mRNA vaccines.
It is understandable that the pharmaceutical industry would be very unhappy if the Biden administration were to put up the money for a clinical trial of Corbevax. Not only would FDA approval seriously cut into the gold mine they were anticipating from selling boosters at more than $100 a shot, it would also be a dangerous example for the industry.
It would show that it is possible to develop effective vaccines without relying on government-granted patent monopolies. (Hotez and Bottazzi supported their research on small grants from the government and private foundations.) And, it would be a great reminder that vaccines (and drugs) are cheap. It is rare that it is actually expensive to manufacture and distribute a drug or vaccine. Drugs are expensive because we give companies patent monopolies, or other forms of protection.
If we pay for the research up front, we don’t have to gouge patients to recover development costs. And, we don’t give drug companies an enormous incentive to lie, cheat, and steal to maximize the value of their patent monopolies.
The Biden administration has a great opportunity to hugely advance public health, and set an incredibly important example, by putting up the money for a clinical trial of Corbevax. Bernie Sanders, as chair of the Senate Health Committee, can also get on the case. He has been critical of Moderna for charging outrageous prices for a vaccine developed with taxpayer money.
Sanders’ anger is quite justified. But rather than just haranguing the company into lowering its price, we can take away its ability to get away with charging $130 a shot by giving them some competition. Competition is great for capitalism, even if it may not be good for individual capitalists.
[1] It seems as though the pharmaceutical industry may also be working to slow the use of Corbevax outside of the United States. Hotez and Bottazzi have been unable to get the World Health Organization (WHO) to move on their request for pre-qualification, which they submitted back in June. They have been given no reason for the delay. This matters hugely for developing countries, because their health agencies are reluctant to approve a vaccine that the WHO has not pre-qualified.
According to news reports, Moderna is considering a price in the range of $110 to $130 for shots of its Covid booster. People may recall that we paid Moderna close to $450 million to develop its Covid vaccine. We then paid another $450 million for the clinical trials that were needed to determine its effectiveness.
Moderna has already made a good return on our tax dollars, selling the initial set of shots at around $20 a piece. According to Forbes, the company’s soaring stock price had already produced five billionaires by the summer of 2021.
Who knows how many Moderna billionaires we will have if the company gets away with charging $110-$130 for its new booster. Of course, this money will come out of the pockets of the rest of us, or at least those of us who are not prevented from getting boosters by these high prices.
Fortunately, there is an alternative if the Biden administration is prepared to challenge Moderna and drug companies more generally on their monopoly pricing. Peter Hotez and Elena Bottazzi, two highly respected researchers at Baylor University and Texas Children’s Hospital, developed a simple to produce, 100 percent open-source Covid vaccine. It uses well-established technologies that are not complicated (unlike mRNA). Their vaccine has been widely used in India and Indonesia, with over 100 million people getting the vaccine to date.
If we want to see the vaccine used here it would need to be approved by the Food and Drug Administration (FDA). In principle, the FDA could rely on the clinical trials used to gain approval in India, but it indicated that they want U.S. trials. (In fairness, India’s trials are probably lower quality.)[1]
However, the government could fund a trial of Hotez-Bottazzi vaccine (Corbevax) with pots of money left over from Operation Warp Speed, or alternatively from the budgets of National Institutes of Health or other agencies like Biomedical Advanced Research and Development Authority (BARDA). With tens of billions of dollars of government money going to support biomedical research each year, the ten million or so needed for a clinical trial of Corbevax would be a drop in the bucket.
The arithmetic on this is incredible. Shots of Corbevax cost less than $2 a piece in India. If it costs two and a half times as much in the U.S., that still puts it a $5 a shot. That implies savings of more than $100 a shot. That means that if we get 100,000 people to take the Corbevax booster, rather than the Modern-Pfizer ones (Pfizer is planning to also charge over $100 for its booster), we’ve covered the cost of the trials. If we get 1 million to take Corbevax, we’ve covered the cost ten times over, and if 10 million people get the Corbevax booster, we will have saved one hundred times the cost of the clinical trial.
There is also the advantage that, since at least some of the reason for vacine hesitancy is fears of mRNA vaccines. We may get some vaccine hesitant people to take Corbevax, who wouldn’t take the mRNA vaccines.
It is understandable that the pharmaceutical industry would be very unhappy if the Biden administration were to put up the money for a clinical trial of Corbevax. Not only would FDA approval seriously cut into the gold mine they were anticipating from selling boosters at more than $100 a shot, it would also be a dangerous example for the industry.
It would show that it is possible to develop effective vaccines without relying on government-granted patent monopolies. (Hotez and Bottazzi supported their research on small grants from the government and private foundations.) And, it would be a great reminder that vaccines (and drugs) are cheap. It is rare that it is actually expensive to manufacture and distribute a drug or vaccine. Drugs are expensive because we give companies patent monopolies, or other forms of protection.
If we pay for the research up front, we don’t have to gouge patients to recover development costs. And, we don’t give drug companies an enormous incentive to lie, cheat, and steal to maximize the value of their patent monopolies.
The Biden administration has a great opportunity to hugely advance public health, and set an incredibly important example, by putting up the money for a clinical trial of Corbevax. Bernie Sanders, as chair of the Senate Health Committee, can also get on the case. He has been critical of Moderna for charging outrageous prices for a vaccine developed with taxpayer money.
Sanders’ anger is quite justified. But rather than just haranguing the company into lowering its price, we can take away its ability to get away with charging $130 a shot by giving them some competition. Competition is great for capitalism, even if it may not be good for individual capitalists.
[1] It seems as though the pharmaceutical industry may also be working to slow the use of Corbevax outside of the United States. Hotez and Bottazzi have been unable to get the World Health Organization (WHO) to move on their request for pre-qualification, which they submitted back in June. They have been given no reason for the delay. This matters hugely for developing countries, because their health agencies are reluctant to approve a vaccine that the WHO has not pre-qualified.
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• Economic Crisis and RecoveryCrisis económica y recuperaciónEconomic GrowthEl DesarolloInequalityLa DesigualdadUnited StatesEE. UU.
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Okay, that’s not exactly what the NYT told us. A piece, headlined “The Medicine is a Miracle, but only if You Can Afford It,” told readers how patients struggle to pay for drugs that sell for tens, or even hundreds, of thousands a dollars a year. The piece describes people taking out GoFundMe pages or seeking out foundations that would pay for treatments that can improve their health and/or save their lives.
While the piece tells us that drug companies invest lots of money in developing these drugs or treatments, it neglects to mention that the we could eliminate this problem if we simply paid for the research up front. This would mean having the government pick up the tab for the research, as it already does with over $50 billion a year of funding to the National Institutes of Health, and then having all new drugs and treatments available as cheap generics. In that situation, we would not be forcing people with serious illnesses to run around begging for money to get effective treatments.
Okay, that’s not exactly what the NYT told us. A piece, headlined “The Medicine is a Miracle, but only if You Can Afford It,” told readers how patients struggle to pay for drugs that sell for tens, or even hundreds, of thousands a dollars a year. The piece describes people taking out GoFundMe pages or seeking out foundations that would pay for treatments that can improve their health and/or save their lives.
While the piece tells us that drug companies invest lots of money in developing these drugs or treatments, it neglects to mention that the we could eliminate this problem if we simply paid for the research up front. This would mean having the government pick up the tab for the research, as it already does with over $50 billion a year of funding to the National Institutes of Health, and then having all new drugs and treatments available as cheap generics. In that situation, we would not be forcing people with serious illnesses to run around begging for money to get effective treatments.
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• HealthcareIntellectual PropertyPropiedad IntelectualUnited StatesEE. UU.
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