Friday, January 27, 2023

Dean Baker contra Fed recession plans....


via Patreon

After Fourth Quarter GDP, Economy Looks Solid Unless Fed Derails Economy

While the media keep touting the prospects for a recession, it is difficult to see why there would be one in the immediate future. Just to start with the basic picture, growth in the fourth quarter was a very solid 2.9 percent, following a slighter stronger 3.1 percent in the third quarter. This is very far from the negative growth that we see in a recession.

When we look at the individual components the picture is somewhat mixed. Inventory accumulation accounted for half the growth, adding 1.46 percentage points to growth in the quarter. This obviously will not be sustained and after the rapid growth in the fourth quarter, we are likely to see inventories as a drag on growth in future quarters.

However, the flip side is that some of the items dragging growth down in the fourth quarter will have less of negative impact in future quarters. Housing stands out here. The drop in residential investment knocked 1.29 percentage points off the quarter’s growth, after lowering third quarter growth by 1.42 percentage points.

The reason for thinking the hit to growth will be much smaller in future quarters is that housing has already fallen so far. The 1.38 million rate of starts in December is roughly the same as the pre-pandemic pace. The December figure was only a small drop from the November rate, so for the moment the rapid plunges of the summer and fall seem to be behind us.

New home sales actually rose slightly in the last two months. And, with vacancy rates still near historic lows, it’s hard to envision builders cutting back on construction much further from what is already a slow pace of construction. In addition, mortgage interest rates have been falling in the last couple of months and are likely to fall further, barring a big hawkish turn by the Fed.

Another bright spot for housing is that mortgage refinancing has fallen back to almost zero. The costs associated with refinancing a mortgage count as residential investment. The plunge in refinancing and new mortgages accounted for 34.6 percent of the decline in residential investment over the last year.

Non-residential investment is also likely to look better in future quarters. It rose at just a 0.7 percent annual rate in the fourth quarter. It was held down by a 3.7 percent drop in equipment investment. This component will likely turn around in 2023 due to a surge in airplane orders.

Structure investment seems to also be turning upward. There was a sharp falloff in most categories of structure investment in the pandemic, especially office buildings and hotels. These components seem to have hit bottom. A recent surge in factory construction is likely to pull this component further into positive territory in 2023. Overall structure investment grew at a 0.4 percent rate in the fourth quarter.

Consumption is the bulk of the story for GDP, and here we should see a picture of continuing modest growth. Consumption grew at a 2.1 percent rate in the fourth quarter, nearly identical to the 2.0 percent rate of the second quarter and 2.3 percent rate of the third quarter.

The data on unemployment claims indicate we are not seeing any noticeable jump in unemployment, in spite of some large layoff announcements. With a healthy pace of jobs growth, and rising real wages, there is no reason to expect any sharp downturn in consumption.

This stable growth rate has gone along with a rebalancing of consumption back to services after a sharp rise in goods consumption in the pandemic. Goods consumption rose at a 1.1 percent annual rate in the fourth quarter after declining in the prior three quarters. Services rose at 2.6 percent annual rate.

The share of goods consumption in GDP is still roughly 2.0 percentage points above its pre-pandemic level. It is likely to continue to decline modestly, with the growth in services more than offsetting it, and keeping overall consumption growth in positive territory.

The drop in goods consumption will also have the benefit of leading to a smaller trade deficit. After rising sharply during the pandemic, the trade deficit has been decreasing for the last three quarters. As we see less demand for consumption goods, and also a reduction in the pace of inventory accumulation, we should see further declines in imports in 2023.

The dollar has also been dropping in the last couple of months, losing close to 10 percent of its value against the euro and other major currencies. While the dollar is still well above its pre-pandemic level, the recent drop in the dollar should help to reduce the trade deficit by making U.S. goods and services more competitive.

In addition, the fact that Europe’s economy is looking better than had been generally expected, and that China’s economy is now largely reopened, should be a boost to U.S. exports. Together, these factors should mean that the trade deficit continues to shrink and be a positive factor in growth.

The most recent data also suggest continued improvement on inflation. The core PCE rose at a 3.9 percent rate in Q4, down from 4.7 percent in Q3. This is still well above the Fed’s 2.0 percent target, but we know that rental inflation will be slowing sharply in coming months, which will be a huge factor lowering the core inflation rate.

Also, the fourth quarter GDP report provided more evidence to support the view that wage growth is moderating. Total labor compensation grew at a 4.9 percent annual rate in the fourth quarter. If we assume that hours grew at 1.5 percent rate, that translates into a 3.4 percent pace of growth in average hourly compensation. This would be very much consistent with the Fed’s 2.0 percent target.

This is especially true with productivity growth in the range of 1.5 percent. After falling in the first half of 2022, productivity grew at a modest 0.8 percent rate in the third quarter. If hours growth comes around 1.5 percent (the index of aggregate hours increased at a 1.1 percent rate, but there was a sharp rise in reported self-employment), then productivity growth should be close to 1.5 percent in the quarter.

Compared to the falling productivity in the first half, even a modest pace of positive growth will go far towards alleviating inflationary pressure. And of course, with modest positive productivity growth, we can sustain a modest rate of real wage growth without causing inflation.

In short, the world is looking good, we just have to keep the Fed from messing it up.

Wednesday, January 11, 2023

Dean Baker refutes the Summers-Fed thesis on the recession threat

 via Patreon

The Good and Better News About the Economy
Dean Baker

Everyone who carefully follows the news about the economy knows that we are in the middle of the Second Great Depression. On the other hand, those who read less news, but deal with things like jobs, wages, and bills probably think the economy is pretty damn good. We got more evidence on the pretty damn good side with the December jobs report and other economic data released in the last week.

The most important part of the jobs report was the drop in the unemployment rate to 3.5 percent. This equals the lowest rate in more than half a century. While many in the media insist that only elite intellectual types care about jobs, not ordinary workers, since the ability to pay for food, rent, and other bills is tightly linked to having a job, it seems that at least some workers might care about being able to work.

For these people, the tight labor market we have seen as the economy recovered from the pandemic recession is really good news. Not only do people have jobs, but the strong labor market means they can quit bad jobs. If the pay is low, the working conditions are bad, the boss is a jerk, workers can go elsewhere.

And, they are choosing to do so in large numbers. In November, the most recent month for which we have data, 2.7 percent of all workers, 4.2 million people, quit their job. This is near the record high of 3.0 percent reported at the end of 2021, and still above the highs reached before the pandemic and at the end of the 1990s boom.

The ability to quit bad jobs has predictably led to rising wages. Employers must raise pay to attract and retain workers. Real wages were dropping at the end of 2021 and the first half of 2022, as inflation outpaced wage growth, but as inflation slowed in the last half year, real wages have been rising at a healthy pace.

From June to November, the real average hourly wage has increased by 0.9 percent, a 2.2 percent annual rate. (We don’t have December price data yet.) Workers lower down the pay scale have done even better. The real average hourly wage for production and non-supervisory workers, a category that excludes managers and other highly paid workers, has risen by 1.4 percent since June, a 3.3 percent annual rate of increase. In the hotel and restaurant sectors, real pay has risen by 1.8 percent since June, a 4.4 percent annual rate of increase.

These real pay gains follow declines in 2021 and first half of 2022, but for many workers pay is already above the pre-pandemic level. For production and non-supervisory workers, the real average hourly wage is 0.3 percent above the February, 2020 level.  For production and non-supervisory workers in the hotel and restaurant sectors real pay is up by 4.7 percent. The overall average for all workers is only down by 0.3 percent, a gap that will likely be largely eliminated by the wage growth reported for December.

While we may still have problems with inflation going forward, the sharp slowing in recent months was an unexpected surprise. We saw gas prices fall most of the way back to pre-pandemic levels. Many of the items where prices rose sharply due to supply chain problems, like appliances and furniture, are now seeing rapid drops in prices. Rents, which are a huge factor in the Consumer Price Index (CPI) and people’s budgets, have slowed sharply and are now falling in many areas. It will be several months before this slowing shows up in the CPI because of its methodology for measuring rental inflation, but based on private indexes of marketed housing units, we can be certain we will see rents rising much more slowly soon.

In short, there are good reasons for believing that we will see much slower inflation going forward. If we continue to see moderate nominal wage growth in 2023, that will translate into a healthy pace of real wage growth.


Also, contrary to what is widely reported, we had a largely positive picture on housing in the last three years. While current mortgage rates are pricing many people out of the market, homeownership did rise rapidly since the pandemic

The overall homeownership rate increasedby 1.0 percentage point from the fourth quarter of 2019 to the third quarter of 2022. For Blacks, it rose by 1.2 percentage points, from 44.0 percent to 45.2 percent. For young people it rose by 1.7 percentage points, from 37.6 percent to 39.3 percent.  For lower income households it rose by 1.3 percentage points from 51.4 percent to 52.7 percent.

It is striking that this rise in homeownership, especially for the most disadvantaged groups, is 180 degrees at odds with whatis being reportedin the media. These data come from the Census Bureau, which is generally considered an authoritative source. Nonetheless, the media have insisted that this has been a period in which young people, minorities, and low-income households have faced extraordinary difficulties in buying houses.

Income Growth

The media have also frequently told us that people are being forced to dip into their savings and that the saving rate is now at a record low. While the saving rate has fallen sharply in the last year, a major factor is that people have sold stock at large gains and are now paying capital gains taxes on these gains. Capital gains do not count as income, but the taxes paid on these gains are deducted from income in the national accounts, thereby lowering the saving rate. It’s not clear that people who sold stock at a gain, and then pay tax on that gain, are suffering severe financial hardship.

We also have the story of rapidly rising credit card debt. This has been presented as another indication of financial hardship. There actually is a simple and very different story. In 2020 and 2021, tens of millions of homeowners took advantage of extraordinarily low mortgage rates to refinance their homes. When they refinanced, they often would borrow more than their original mortgage to pay for various expenses they might be facing.

The Fed’s rate hikes have largely put an end to refinancing, including cash-out refinancing. With this channel closed to households, people that formerly would have looked to borrow by refinancing mortgage are instead turning to credit cards. This is hardly a crisis. Furthermore, tens of millions of families that were paying thousands more in mortgage interest, now have additional money to spend or save. This is not reflected in aggregate data.

It’s also worth noting one reason that inflation may have left many people strapped: the cost-of-living adjustments for Social Security are only paid once a year. This meant the checks beneficiaries were getting could buy around 7.0 percent less in December than they had the start of the year. However, Social Security beneficiaries are seeing an 8.7 percent increase in the size of their checks this month. That should make life considerably easier for tens of millions of retirees, and also modestly boost the saving rate.

Productivity Growth and Working from Home

Other bright spots in the economy include the return of healthy productivity growth and the huge increase in the number of people working from home. We saw two quarters of negative productivity growth in the first half of last year.

Productivity growth is poorly measured and highly erratic, but there seems little doubt that productivity growth was very poor in the first and second quarters of 2022. This added to the inflationary pressure that businesses were seeing.

This situation was reversed in the third quarter, with productivity growth coming in at close to 1.0 percent, roughly in line with the pre-pandemic trend. It looks like productivity growth will be even better in fourth quarter. GDP growth is now projected to be well over 3.0 percent, while payroll hours grew at just a 1.0 percent annual rate, implying a productivity growth rate close to 2.0 percent. This would be great news if it can be sustained, but as always, a single quarter’s data has to be viewed with great caution.

The other big positive in the economic picture is the huge increase in the number of people working from home. One recent paper estimated that 30 percent of all workdays are now remote, up from around 10 percent before the pandemic. While that number may prove somewhat high, it is clear that tens of millions of workers are now saving thousands a year on commuting costs and hundreds of hours formerly spent commuting. That is also a huge deal which is not picked up in our national accounts.

If the Economy Is Great, Why Do People Say They Think It Is Awful?

I’m not going to try to answer that one, other than to note that there has been a “horrible economy” echo chamber in the media, where facts have often been distorted or ignored altogether. I don’t know if that explains why so many people say they think the economy is bad, I’m an economist, not a social psychologist.

I will say that people are not acting like they think the economy is bad. They are buying huge amounts of big-ticket items like appliances and furniture, and until very recently houses. They are also going out to restaurantsat a higher rate than before the pandemic. This is not behavior we would expect from people who feel their economic prospects are bleak.

To be clear, there are tens of millions of people who are struggling. Many can’t pay the rent, buy decent food and clothes for their kids, or pay for needed medicine or medical care. That is a horrible story, but this unfortunately is true even in the best of economic times. Until we adopt policies to protect people facing severe hardship we will have tens of millions of people struggling to get the necessities of life.

But this is not the horrible economy story the media is telling us. That is one that is suppose to apply to people higher up the income ladder. And, thankfully that story only exists in the media’s reporting, not in the economic data.

Dean, while you are correct that the media is more interested in clickbait than informing the public, one place where the economy still looks dismal is Wall Street. My IRA lost the price of a new Bentley last year. For a retiree - 2021 was a very bad year for retirement investments. Also, many of the COLAs only start to kick in this month - ergo many checkbooks might not yet be balancing. Lastly, we have been bombarded by GOP claims that the US economy is in terrible financial shape due to radical liberal Democrats. We need to drastically cut federal spending and balance the budget immediately. Of course, as Stephanie Kelton points out in her book the Deficit Myth, zero deficits usually trigger a recession.

Thursday, December 22, 2022

CR Rent Trends

 From housing economist Tom Lawler:

Recently released data from various private entities that track US rent trends indicate that US rent growth has weakened considerably this Fall, and several measures suggest that rents have fallen by more than the seasonal norm over the last few months.

Here is a table showing monthly % changes in the Apartment List Rent Index (ALRI, not smoothed), the Zillow Observed Rent Index (ZORI, smoothed via 3-month moving average), and the CoreLogic Single Family Rent Index (CLSFRI, smoothed via 3-month moving average.)  I’ve included the ALRI on a 3-month moving average basis to be comparable to the other two indices.

As the table indicates, all three rent indices have shown recent declines over the last few months.  Another provider of “same-store” rent indices, RealPage, reported that its national rent index declined by 0.59% in November, the third straight monthly decline.

RealPage said that its apartment rent index was up 6.5% YOY in November, a huge drop from the 15.9% YOY gain in March 2022.  (Sadly, I don’t have access to RealPage’s historical data).  RealPage noted that the decline in rents over the past two months was larger than the “normal” seasonal decline for that time of year.

And speaking of seasonality, all the above-mentioned rent indices display modest but statistically significant seasonal fluctuations, with seasonal peaks occurring around August and seasonal troughs occurring around January.  Only Zillow reports its rent index on a seasonally adjusted basis, but below is a table showing my estimates for monthly seasonally adjusted % changes in the other indices.

Here is a chart from RealPage showing the YOY % change in its rent index, as well as the YOY % changes in the rent indices for Phoenix and Las Vegas.

These rent indices show not only has US rent growth slowed sharply, but that rents have actually begun to fall this Fall, and by more than the seasonal norm.

Note: The above was from housing economist Tom Lawler.

Wednesday, November 30, 2022

Dean Baker: OMG, a Right-Wing Jerk Can Buy Twitter! Media Concentration Matters

 via Patreon

It’s more than a bit bizarre that until Elon Musk bought Twitter, most policy types apparently did not see a risk that huge platforms like Facebook and Twitter could be controlled by people with a clear political agenda. While just about everyone had some complaints about the moderation of these and other commonly used platforms, they clearly were not pushing Fox News style nonsense.

With Elon Musk in charge, that may no longer be true. Musk has indicated his fondness for racists and anti-Semites, and made it clear that they are welcome on his new toy. He also is apparently good with right-wing kooks making up stories about everything from Paul Pelosi to Covid vaccines. (Remember, with Section 230 protection, Musk cannot be sued for defaming individuals and companies by mass-marketing lies, only the originators face any legal liability.)

If the hate and lies aren’t enough to make Twitter unattractive to the reality-based community, the right-wing crazies are putting together their lists of people to be purged. We don’t know who they will come up with, and what qualifies in their mind for banishment. We also don’t know whether the self-proclaimed free speech absolutist Elon Musk will go along, but there certainly is a risk that Musk will want to keep his friends happy.

In that case, Twitter may go the way of Truth Social and Parlor, which would be unfortunate, but probably better than having a massive social media platform subject to Elon Musk’s whims. But we should still be asking how we can get in a situation where one right-wing jerk can have so much power?

The Problem of Media Concentration Is Not New

The Musk problem is hardly new. After all, Rupert Murdoch has been broadcasting his imaginary world to the country for decades, highlighting pressing national issues like the War on Christmas and President Obama’s tan suit.

But the problem goes well beyond Murdoch. Media outlets are owned and controlled by rich people and/or large corporations. They exist first and foremost to make money. While there are some cases where owners may genuinely have a commitment to using their news outlet to serve the public, for example the Sulzberger family, which has controlled the New York Times for more than a century, these are the exceptions.

And, even with the exceptions, their perception of the public good is an extremely wealthy person’s perception of the public good. That may not be the same as the perception of an average working person struggling to get by.

As far as the for-profit enterprises, news outlets have to be concerned about getting advertising. That may make them less likely to report news that will reflect poorly on major advertisers. That means things like both-siding the role of the fossil fuel industry in global warming, or downplaying the windfall that corporations got from Trump’s 2017 tax cut.

This ownership structure could reasonably cause us to question the neutrality of news from outlets like CNN (owned by AT&T), ABC (owned by Disney), or NBC (owned by GE). But Musk’s takeover of Twitter takes the problem a step further. The viewership of each of the networks’ news shows numbers in the single digit millions. Twitter has almost 80 million active users in the United States. This means it matters much more if Twitter is taken over by a right-wing jerk than your average television network.

Alternatives to Corporate Control

Even though the media are incredibly important in shaping people’s view of the world, there has been remarkably little attention to the issue from most liberals or progressives. There are some small, and poorly funded, organizations, like Fairness and Accuracy in Reporting and Media Matters, which do focus on the issue. And there are a few prominent intellectuals who have written on the topic, like Rick McChesneyDan Froomkin, and Jay Rosen, but for the most part the issue of media control gets little attention from the left of center.

Ironically, campaign finance reform, which is almost certainly an exercise in futility given recent Supreme Court rulings, gets far more attention. The absurdity of the focus on campaign finance reform should be apparent to anyone who gives the issue a moment’s thought.

Suppose through some miracle Congress passed, and the Supreme Court upheld, a bill that limited billionaires’ abilities to buy political ads for their favorite candidate. Is anything going to stop these billionaires from buying up newspapers and television stations and running the ads supporting their favored candidates as news stories?

There is no remotely satisfying answer to that question, and it is ridiculous that campaign finance reformers haven’t recognized this fact. Limiting campaign spending by rich people will do nothing if we don’t do something to limit their ability to influence public opinion through the media.

Fortunately, there are some ideasfor challengingthe control the rich have on the media. The basic story is that we are not going to be able to prevent the rich from buying and owning media outlets. Instead, we will have to go the other way and allow the non-rich to have a voice.[1]

The idea is that we can give every person some amount of money (e.g. $100 to $200) to support the media outlet(s), or possibly a broader category of creative workers, of their choice. This system could be modelled along the lines of the charitable contribution tax deduction, where the government draws out general conditions for being eligible to receive the funds.

This means that the government specifies the types of organizations that can qualify to receive the funds. In the case of the charitable deduction, an organization has to indicate that it’s a church, or it provides food for the poor, or does something else that qualifies it to be a charitable organization.

The government doesn’t try to determine whether it’s a good church or whether the food it provides is high quality, the only question is whether the organization does what it claims. A similar policy could be applied to the recipients of funds allocated through this system. (In my view, I would make not getting copyright protection a condition of getting funding – the government gives you one subsidy, not two – but that is the sort of issue that could be resolved down the road.)

This sort of system could provide a large amount of money to sustain media organizations that are not owned by rich people. For example, if the credit were $200, and 10 million people chose to support a specific television network with their full credit, the organization would have $2 billion a year to cover its operating expenses. That is roughly equal to CNN’s annual operating revenue.

This credit could create enormous opportunities for the non-rich to finance newspapers/websites, television stations and other outlets that could compete with the current ones owned and controlled by billionaires. This path also has the great benefit that it could put adopted piecemeal, with states and even local governments, giving their residents the opportunity to support new types of news outlets.

If enough people could gain support for this type of program, they could get a more progressive state, like California or Massachusetts to pave the way, or a city like San Francisco or Seattle. Just as the movement for a higher minimum wage has spread from successes in these places, the same could happen with a tax credit system to support alternative media.

Fun with Elon Musk and Twitter

Even if it proves to be possible to advance a tax credit system to support alternatives to the billionaires’ media, we still have the problem of massive platforms like Facebook and Twitter being owned by rich people, who can essentially do what they want in accordance with their whims. The big problem here is the issue of network effects.

The idea of network effects is that people benefit from being part of a massive network, since they want to be able to see what a large number of other people are posting, and they may hope that a large number of people will see what they post. These effects can be exaggerated. For example, the overwhelming majority of users will never have their Facebook pages or Twitter posts viewed by more than a small number of people. Nonetheless, they are real. This makes it hard to dislodge a Facebook or Twitter, once it has become dominant.

One route to go is to make the playing field less hospitable to large platforms. This can be done by removing Section 230 protections for websites that either sell advertising or personal information. This means that the big platforms could be held liable for defamatory material that they circulated over their platform.

In this scenario, if election deniers wrote posts on Twitter saying that Dominion voting machines had switched votes from Trump to Biden, Elon Musk could be sued by Dominion for defamation, just as Fox News is now being sued. The same would apply to the vaccine deniers claiming that Pfizer and Moderna vaccines have killed huge numbers of people.

Taking away Section 230 protection from these platforms would not just help large actors. As it stands now, if some racist asshole started posting on their Facebook page that a restaurant owned by Blacks or Asians had poisoned their family and sent them to the hospital, the restaurant owner would have no legal recourse against Facebook. They could sue the racist, who may not have much money, but they could not even force Facebook to take down the post.

By contrast, if a television station or newspaper had allowed the person to speak or printed a letter to the editor along the same lines, they would face liability. They could be forced to issue a correction to avoid being named in a defamation suit.

There are clearly complications with going this route. A platform with billions of posts daily could not be expected to monitor posts in advance for potentially defamatory material. This problem has been solved (imperfectly) with copyright, under the Digital Millennium Copyright Act (DMCA), by requiring platforms to remove violating material in a timely manner after being notified by the copyright holder.

There could be a similar requirement for Internet sites. The evidence from the DMCA is that websites are overly cautious and err on the side of removing material even when the claim of violation is extremely weak. That may also prove to be the case with Internet platforms like Facebook and Twitter when it comes to allegedly defamatory material, but that is in part the point.

Part of the point of removing Section 230 protection from sites that rely on advertising or selling personal information is to put them at a disadvantage relative to sites that rely on subscriptions or donations to stay in business. In that case, people could count on posting material on a smaller site that might be removed by Facebook or Twitter. This would give sites operating on an alternative model a large advantage relative to the current Internet giants.

In any case, taking away Section 230 protection would clearly raise costs for the major Internet platforms. Given that Twitter was already struggling even before Elon Musk took it over, this sort of increase in costs would clearly be a serious blow.

Undoubtedly, changing the law on Section 230 protection would hurt some other sites as well. While some could probably switch over to a subscription model relatively easily, others may find it difficult. Sites will of course develop new modes of operation. For example, a site like Airbnb could require users to sign away their right to sue for defamation as a condition of usage.

As a practical matter, it is impossible to guarantee that there will be no negative outcomes from this change, just as is true of every policy that actually does anything in the world. The question is whether some number of sites either being seriously downsized, or going out of business altogether, is a price worth paying to prevent rich jerks from being able to operate huge platforms according to their whims.

To my view, it would be worth the price, but your mileage may vary. In any case, it is distressing to see we are now in a situation where this is the reality, not just a hypothetical. It speaks volumes about the quality of intellectual debate in this country, that this possibility apparently caught so many of our leading policy types by surprise.

[1] I also discuss this in chapter 5 of Rigged (it’s free).

Friday, November 25, 2022

Dean Baker: The Pandemic Treaty, Crypto, and Inequality (via Patreon)


The Pandemic Treaty, Crypto, and Inequality

Dean Baker, via Patreon

The World Health Organization is in the early phases of putting together an international agreement for dealing with pandemics. The goal is to ensure both that the world is prepared to fend off future pandemics by developing effective vaccines, tests, and treatments; and that these products are widely accessible, including in low-income countries that don’t have large amounts of money available for public health expenditures.

While the drafting of the agreement is still in its early phases, the shape of the main conflicts is already clear. The public health advocates, who want to ensure widespread access to these products, are trying to limit the extent to which patent monopolies and other protections price them out of the reach of developing countries. On the other side, the pharmaceutical industry wants these protections to be as long and as strong as possible, in order to maximize their profits. As Pfizer and Moderna know well, pandemics can be great for business.

The shape of this battle is hardly new. We saw the same story not just in the Covid pandemic, but also in the AIDS pandemic in the 1990s, when millions of people needlessly died in Sub-Saharan Africa because the U.S. and European pharmaceutical industry tried to block widespread distribution of AIDS drugs.

Although the battle lines are familiar, one disturbing feature is the continuing failure of those concerned about inequality to take part in this debate. In the United States, we have plenty of groups and individuals who will spend endless hours fighting over clauses in the tax code that may give a few hundred million dollars to the rich. This is generally a good fight, but it is hard to understand the lack of interest in the structuring of a pandemic treaty that could mean hundreds of billions of dollars going to the rich.

This is not fanciful speculation. After the U.S. government paid Moderna $450 million to develop its Covid vaccine, and then another $450 million for the Phase 3 clinical trials, it then let the company have intellectual property rights in the vaccine. The stock price then increased more than ten-fold, creating at least five Moderna billionaires.

The extent of government support for the Moderna vaccine is extraordinary, but the basic story of drug companies getting huge profits, and select employees getting very rich, as a result of government research and government-granted patent monopolies, is very much the norm. The United States will pay close to $525 billion for prescription drugs in 2022.[1]It would likely be paying less than $100 billion in a free market, without patent monopolies and other forms of protection. The difference of $425 billion is more than half the size of the defense budget, it comes to more than $3,000 per family. And, it makes a relatively small number of people very rich.

The issue of intellectual property claims in the context of a pandemic preparedness agreement will not directly overturn the whole structure of the pharmaceutical industry, but it is likely to involve a substantial chunk of money, if a future pandemic is similar to the Covid pandemic. It also could establish an alternative path for financing drug development.

If there was an agreement that publicly funded research would be freely shared across countries, and that anyone with the manufacturing capabilities could produce the drugs, vaccines, and tests that were produced by the research, it could establish the feasibility of a clear alternative to patent monopoly financed research. This could become a model for drug development more generally, which would jeopardize the huge fortunes being generated in the pharmaceutical industry.

For this reason, there is potentially an enormous amount of money at stake, with large impacts on inequality, in how a pandemic preparedness agreement is structured. In short, there is plenty here that should warrant the interest of the individuals and organizations that focus on inequality; they should be paying attention.

Of course, this doesn’t take away from the fact that the main focus of a pandemic agreement should be on saving lives. But the delays in sharing technology in the Covid pandemic strongly suggest that the path of open source research and free market production will be best both from the standpoint of reducing inequality and saving lives.

The Crypto Meltdown: Just Tax Gambling

I’ve been following economic debates long enough to have seen lots of craziness. In the 1990s stock bubble, I heard PhD economists telling me that we could count on the stock market going up 10 percent a year, even when price-to-earnings ratios were already at record highs. In the 00s, we had financial experts saying that housing was a safe investment because, even if the price plummeted, you could always live in your home.

The crypto craze has both bubbles beat, as the price of absolutely nothing soared to incredible levels. Other than possibly facilitating illegal transactions (I’ve heard law enforcement experts claim that crypto can now be traced relatively easily), there is no remotely plausible use for crypto. In other words, its price is pure speculation. Bitcoin and other crypto currencies have no intrinsic value, therefore the price can very possibly fall to zero, once the promoters run out of suckers, or “the brave,” as Matt Damon calls them.

Anyhow, this one really should not be hard from a policy standpoint. Putting money in crypto is gambling, pure and simple. We don’t make it illegal for people to gamble. They can gamble in Las Vegas bet on sports events and elections, or play the lottery. We just tax gambling so the government can get a cut and we try to make sure that people understand what they are doing – that they are playing a game that is structured so that they will lose.

In this sense, taxing crypto trades seems like an ideal policy. It will be way to both get tax revenue and also to inform people that they are gambling, not investing. It looks like we presently have around $2 trillion a year in crypto trades. If we tax each trade at 1.0 percent rate (half paid by the buyer and half by the seller), that would raise $20 billion a year, or $200 billion over a ten-year budget window.

A tax of this size (still far lower than taxes on casino gambling or lotteries) would hugely reduce the volume of trading, so the government may end up collecting half this amount, or even less. But, by reducing the resources that are tied up in crypto trading, we will be freeing up resources for productive uses, even if the government is not collecting the money in taxes. Think of it as anti-inflation policy.

The good part of this story is that there really is no downside. When we tax things like food or gas, we make it more difficult for people to buy items that they need to get by. But who cares if it is more expensive for people to speculate with crypto?

The folks who run the crypto exchanges will be unhappy, as well as the celebrities who might get fewer dollars for their ads, but these people can instead try to channel their energy into something that is productive. People make money pushing heroin also, but no one feels bad about reducing opportunities in the heroin industry.

There also is a side benefit from a tax on crypto. It may get people to think more clearly about the financial sector generally. We need a financial sector to carry through transactions and to allocate capital, but we have seen the size of the financial sector explode (relative to the economy) in the last half century. This hugely bloated financial sector is an enormous drain of resources from the economy and a major source of inequality.

A tax on crypto can be a step towards implementing financial transactions taxes more generally. A tax on trades of stocks, bonds, and other assets would have to be far lower, since there would be an economic cost from eliminating these trades altogether. But we could have a tax of, say 0.1 percent on stock trades, which would just raise trading costs back to their 1990s levels. This would eliminate much short-term speculative trading, and could raise close to $100 billion a year.

We are very far from having the political support for a broad financial transactions tax, but perhaps the FTX meltdown can create enough anger to build momentum for a tax on crypto trades. It certainly seems like it’s worth a try.

Can Progressives Learn to be Opportunists?

The pandemic preparedness treaty and the crypto collapse might seem pretty far removed, but both present opportunities to crack down on major sources of waste and inequality in the economy. The right has been very clever in finding ways to undermine progressive structures and sources of power.

For example, they managed to destroy traditional defined benefit pensions by inserting an obscure provision in the tax code, which created 401(k) defined contribution retirement accounts. They hugely undermined manufacturing unions by pursuing fictious “free-trade” agreements, which subjected manufacturing workers to international competition, while protecting high-end professionals and increasing protections for patent and copyright monopolies.

The pandemic agreement provides a great opportunity to weaken patent monopolies and related protections, while increasing the prospect that billions of people in the developing world will be able to survive the next pandemic. The crypto meltdown provides a window through which people may see the enormous waste and corruption in the financial sector. It would be great if progressives could take advantage of these opportunities.

[1]This figure comes from the Bureau of Economic Analysis, National Income and Product Accounts, Table 2.4.5U Line 121. The calculation of the cost without patent monopolies can be found here.

Sunday, November 13, 2022

Don't Let Geopolitics Kill the World Economy

When advocating their interests in a globalized world, great powers should calibrate their trade and technology polices carefully, eschewing measures that are designed for the express purpose of weakening their competitors' development prospects. With its latest moves against China, America has failed this test.

CAMBRIDGE – At the Communist Party of China's 20th National Congress last month, the country's one-man rule under Xi Jinping became fully entrenched. Though communist China has never been a democracy, its post-Mao leaders kept their ears to the ground, paid attention to voices from below, and thus were able to reverse failing policies before they became disastrous. Xi's centralization of power represents a different approach, and it does not bode well for how the country will deal with its mounting problems – the tanking economy, the costly zero-COVID policies, growing human-rights abuses, and political repression.

US President Joe Biden has significantly added to these challenges by launching what Edward Luce of the Financial Times has appropriately called "a full-blown economic war on China." Just before the Party Congress, the US announced a vast array of new restrictions on the sale of advanced technologies to Chinese firms. As Luce notes, Biden has gone much further than his predecessor, Donald Trump, who had targeted individual companies such as Huawei. The new measures are astounding in their ambition, aiming at nothing less than preventing China's rise as a high-tech power.

The United States already controls some of the most critical nodes of the global semiconductor supply chain, including "chokepoints" such as advanced chip research and design. As Gregory C. Allen of the Center for Strategic and International Studies puts it, the new measures entail "an unprecedented degree of US government intervention to not only preserve chokepoint control but also begin a new US policy of actively strangling large segments of the Chinese technology industry – strangling with an intent to kill."

As Allen explains, the Biden strategy has four inter-related parts, targeting all levels of the supply chain. The goals are to deny the Chinese artificial-intelligence industry's access to high-end chips; prevent China from designing and producing AI chips at home by restricting access to US chip design software and US-built semiconductor manufacturing equipment; and block Chinese production of its own semiconductor manufacturing equipment by barring supplies of US components.

The approach is motivated by the Biden administration's view, on which there is broad bipartisan agreement, that China poses a significant threat to the US. But a threat to what? Here is how Biden expresses it in the preface to his recently released National Security Strategy: "The People's Republic of China harbors the intention and, increasingly, the capacity to reshape the international order in favor of one that tilts the global playing field to its benefit."

So, to be clear, China is a threat not because it undermines any fundamental US security interests, but because it will want to exercise influence over the rules of the global political and economic order as it gets richer and more powerful. Meanwhile, "the United States remains committed to managing the competition between our countries responsibly," which really means that the US wants to remain the unchallenged force in shaping global rules in technology, cybersecurity, trade, and economics.

By responding this way, the Biden administration is doubling down on US primacy instead of accommodating the realities of a post-unipolar world. As the new export controls make clear, the US has given up on distinguishing between technologies that directly help the Chinese military (and hence might pose a threat to US allies) and commercial technologies (which might produce economic benefits not just for China but for others as well, including American firms). Those arguing that it is impossible to separate military from commercial applications have won.

The US has now crossed a line. Such a broad-brush approach raises significant dangers of its own – even if it can be partly justified by the intertwined nature of China's commercial and military sectors. Correctly viewing the new US restrictions as an aggressive escalation, China will find ways to retaliate, raising tensions and further heightening mutual fears.

Great powers (and indeed all countries) look out for their interests and protect their national security, taking countermeasures against other powers as necessary. But as Stephen M. Walt and I have argued, a secure, prosperous, and stable world order requires that these responses be well calibrated. That means they must be clearly linked to the damage inflicted by the other side's policies and intended solely to mitigate those policies' negative effects. Responses should not be pursued for the express purpose of punishing the other side or weakening it in the long run. Biden's export controls on high-tech do not pass this test.

The new US approach toward China also creates other blind spots. The National Security Strategy emphasizes "shared challenges," such as climate change and global public health, where cooperation with China will be critical. But it does not acknowledge that pursuing an economic war against China undermines trust and the prospects of cooperation in those other areas. It also distorts the domestic economic agenda by elevating the objective of outcompeting China over worthier goals. Investing in highly capital- and skill-intensive semiconductor supply chains – on which US industrial policy currently focuses – is just about the costliest way of creating good jobs in the US economy for those who most need them.

To be sure, the Chinese government is not an innocent victim. It has become increasingly aggressive in projecting its economic and military power, though its actions have mostly been confined to its own neighborhood. Despite previous assurances, China has militarized some of the artificial islands it built in the South China Sea. It imposed economic sanctions on Australia when that country called for an investigation into COVID-19's origins. And its human-rights violations at home certainly do warrant condemnation by democratic countries.

The trouble with hyper-globalization was that we let big banks and international corporations write the rules of the world economy. It is good that we are now moving away from that approach, given how damaging it was to our social fabric. We have the opportunity to shape a better globalization. Unfortunately, the great powers seem to have chosen a different, even worse path. They are now handing the keys to the global economy to their national-security establishments, jeopardizing both global peace and prosperity.

Dani Rodrik, Professor of International Political Economy at Harvard Kennedy School, is President of the International Economic Association and the author of Straight Talk on Trade: Ideas for a Sane World Economy (Princeton University Press, 2017).

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