I have a birthday coming up, so it seems a good time to assess progress, or lack thereof, on the various issues that I have worked on over the decades. There is some big progress in at least a couple of areas, but not much to boast about in the others.
I’ll start with the success stories.
The Benefits of a Tight Labor Market
The big one, where I feel we really have made huge progress, is the battle for full employment. It might seem like ancient history, but a quarter century ago the absolute standard wisdom in the economics profession was that we could not get unemployment rates below 6.0 percent without ever accelerating inflation. To argue otherwise was to invite ridicule.
The reality repeatedly contradicted the theory. We sustained an unemployment rate of 4.0 percent in 2000, with only a very modest increase in the inflation rate. The recession caused by the collapse of the stock bubble drove the unemployment rate back up in 2001 and 2002, but we eventually did start to see it fall again, eventually reaching levels around 4.5 percent in 2007.
Unfortunately, this drop in unemployment was driven by a housing bubble, the collapse of which gave us the worst downturn since the Great Depression. The timid response to the recession by the Obama administration and the Republican Congress gave us a weak recovery. However, by the end of 2017, the unemployment rate was again approaching 4.0 percent.
The Federal Reserve Board had already begun raising interest rates, following the theory that an unemployment rate this low would trigger inflation. But inflation remained tame. In the summer of 2019, the Fed made the remarkable decision to lower rates, even though the unemployment rate was below 4.0 percent.
Fed Chair Jerome Powell said it was time to give the full employment side of the Fed’s mandate equal weight with the price stability side. He noted the huge benefits accruing to Blacks, Hispanics, people with less education, and people with criminal records from low unemployment. He said, given the huge benefits of low unemployment, he wanted to press the unemployment rate as low as possible, until there was clear evidence of inflation.
This was exactly the script that those of us on the left had been pushing for decades. It was great to hear it from the mouth of a Fed chair.
We saw this story further reinforced following the pandemic. Many leading lights of the economic profession denounced the Biden stimulus package and warned that it would take a prolonged period of high unemployment to bring inflation back down to acceptable levels.
Well, at this point we can say that the package, along with subsequent policies like the infrastructure bill and the Inflation Reduction Act, quickly boosted the economy back to full employment. While inflation did jump in 2021 and the first half of 2022, we are most of the way back down to the Fed’s 2.0 percent target, even as unemployment remains near its half century low. We are not necessarily out of the woods yet, as the Fed will likely have further rate hikes and we have not yet seen the full impact of past hikes, but thus far, things look pretty damn good.
Furthermore, the benefits of a tight labor market for those at the bottom are clearer than ever. Workby Arin Dube, David Autor, and Annie Mcgrew shows that as much as a quarter of the wage inequality that built up over the prior four decades has been reversed with the tight labor markets in the recovery from the pandemic recession. That is a really big deal.
We also have moved away from the idea that we need to weaken unions and reduce labor market supports, like minimum wages and unemployment benefits, to have a strong labor market. These were literally the policies being pushed on countries by the OECD in the 1990s and the start of the century. They reflected the consensus view in the economics profession.
This is no longer the case. Countries with very high unionization rates, like Denmark and Sweden, have managed to maintain high levels of employment and strong growth. It is also now generally recognized that reasonable levels of minimum wages are not impediments to employment. This is huge progress.
Saving Social Security
In the 1990s there was widespread agreement across party lines that Social Security was broken and needed to be “fixed.” Only the ramshackle left and most of the public wanted to protect the current benefit structure. Incredibly, in spite of efforts supported by presidents of both parties, there were no cuts to the program.
This was a period in which the program faced serious vulnerability because of its structure and the demographics of the populations. In the 1990s, and the first decade of this century, Social Security had a large annual surplus. This was due to the fact that the huge baby boom cohort was in its prime working years. The program was structured so that its trust fund would build up a large surplus in these decades, which could then be used to partially cover the cost of the baby boomers’ retirement.
This surplus also created a door for privatization. Instead of putting the money into the trust fund, the privatizers dreamed of turning it over to Wall Street, who could make tens of billions of dollars in fees managing individual accounts.
We managed to get through these decades without privatizing or cutting the program. Now a large portion of the baby boom generation is retired and receiving benefits, eliminating the annual surplus. Also, with this huge cohort either currently dependent on Social Security, or likely to be in the very near future, cuts to benefits will face more opposition than ever. This doesn’t mean that there can never be any cuts to the program, but the probability of cuts that hit a substantial segment of the poor or middle class seems very low.
Failed Efforts
Well, that’s my good news, the story with other issues that I worked on is much less bright.
Patent and Copyright Monopolies
In the effort to promote alternative mechanisms to patent and copyright monopolies for financing innovation and creative work, I would say that we have gotten pretty much nowhere. There is virtually no understanding of how these monopolies work and that there can in fact be alternative mechanisms. There is also almost no understanding of how much money is at stake.
On the first point, it is really hard to get people, including economist-type people, to understand that we don’t need to attach patents to innovation and copyrights to creative work. I don’t know how many times I have laid out a scheme to have the government pay for all the research and testing involved with developing a drug and then have someone ask “how long would the patent be?” [1]
Somehow people just can’t grasp that if the government pays for the research, there is no patent, there would be no point to a patent, and there would be no one to have a claim to one. Patent monopolies are a mechanism for providing incentive. If the government paid the money (as we did with the Moderna Covid vaccine), it already provided the incentive. If the money wasn’t adequate, then people didn’t have do the work.
I recall when I read Marx back when I was an undergrad. In Capital he talks about how people see it as natural that money gets interest, failing to recognize that lending money at interest is a social relationship. There seems to be a similar story with innovation and creative work and patents and copyrights. People seem to think that these government-granted monopolies are inherent to these processes, rather than an explicit policy choice.
There are obviously arguments for these mechanisms as policy tools, but it is impossible to have a serious discussion if people don’t even recognize that they are policy tools and not facts of nature. I don’t know how to advance this point, I just know that, to date, I and others have made very little progress.
I’m sure that part of the issue is that this hits very directly at people’s view of the economy and its fairness. It is absolutely conventional wisdom that the upward redistribution of the last four decades is explained in large part by the development of technology.
However, pointing out that who benefits from this technology and how much is a political decision, destroys that view. As a practical matter, we can make patent and copyright monopolies longer and stronger, or shorter and weaker. We don’t even need to have them at all.
In a world where these monopolies do not exist, there is zero reason to think that all the educated STEM-types would get rich at the expense of everyone else. That may not be a good way to structure the economy, but the point is that it is a possible way. The fact that people like Bill Gates can get hugely rewarded for his talent and work is the result of how we chose to structure the market. It was not “technology.”
The other part of the story is getting people to understand how much money is at stake. Here also the ignorance of well-educated people is astounding. If we had a world without patent and copyright monopolies, we would likely free up more than $1 trillion a year, close to half of all after-tax corporate profits.
In the case of prescription drugs alone we are likely talking about more than $450 billion a year. That comes to $3,000 per family or more than four times the annual food stamp budget. The money at stake with these monopolies swamps the amount at stake in almost all the political battles that take place in Washington.
Apart from the money involved, expecting someone with a serious illness to effectively pay for research that was done long ago should strike anyone as an act of irrational cruelty. Economists all go nuts if you talk about a tariff of 10-20 percent. Drug patents are effectively tariffs of several thousand percent. Furthermore, since we generally have third party payers (insurers or the government) this is not even a question of consumer choice. How can this policy possibly make any sense?
I have been around Washington long enough to know that you don’t just reshape the whole financing mechanism for prescription drugs, medical equipment, or anything else important in one big move. But it should be possible to get a foot, or ideally feet, in the door, pointing the way to alternatives. In recent months I have been hoping that it would be possible to secure funding for a trial of the open-source Covid vaccine developed by Drs. Peter Hotez and Maria Elena Bottari at Baylor College of Medicine and Texas Children’s Hospital.
This vaccine has already been used by over 100 million people in India and Indonesia, so they should not be too much question about its safety and effectiveness. It just needs a domestic trial to get FDA approval so that it can be used here.
If it were approved, the shots would likely cost less than $5 each (they cost $2 in India), compared to more than $100 a shot for the Moderna or Pfizer boosters. This contrast should help drive home the benefits of open-source funding of research, but it is an uphill battle.
For the most part, people, including progressives, can’t even conceive of a world where drugs are cheap. Their hope is largely that the U.S. government will limit drug prices in the same way that governments in Europe, Canada, and elsewhere limit them. But the idea that we would get the government to stop making drugs expensive by giving out patent monopolies, is not even within their realm of thinking. That’s a problem.
The Financial Industry Money Pit
Any economics textbook tells students that the purpose of the financial industry is to facilitate transactions and to allocate capital. That should be fairly straightforward, sort of like the purpose of the trucking industry is to move goods from one place to another.
Unfortunately, while most people grasp the purpose of the trucking industry pretty well, they seem to have forgotten the textbook story on finance the moment they leave the class. The point here is simple, but important. An efficient financial industry is a small financial industry.
We want to be able to conduct transactions quickly and safely. That means I should be able to buy my groceries, pay my rent or mortgage, or do other transactions in the least amount of time and with minimal risk of fraud or theft.
We also want capital allocated efficiently. That means when someone has a useful innovation, they should be able to get the money to market it on a large scale. People also need capital to buy homes, cars, and to pay for education.
The textbook tells us we want these tasks done with as few resources as possible, meaning a minimal number of workers and capital being used. If we applied this standard in thinking about the financial industry, many issues become simple.
Take Bitcoin and other crypto currencies. These currencies serve no purpose for the real economy, they are just a form of gambling. And, how do we deal with gambling? We tax it.
Suppose we had a 1.0 percent tax on all crypto trades. That should radically downsize the industry, while raising a nice chunk of revenue for the government, with no negative effects on the real economy at all.
I know that crypto proponents insist it will eliminate racial discrimination in the financial industry and in other ways create heaven on earth. It’s hard to take these folks seriously, but let’s put it this way. In Utah, I paid 8.0 percent sales tax when I bought a pair of shoes. Surely if crypto is the way to heaven on earth, a 1.0 percent tax won’t stand in the way.
It’s the same story with the financial industry more generally. We will have roughly $40 trillion in stock trades this year, or $160 billion a day. Does anyone think capital would be less efficiently allocated if we cut this in half to $20 trillion a year? A financial transaction tax that cut the volume in trading in half would free up roughly $120 billion a year (0.5 percent of GDP) that is now spent carrying through these trades.
The same goes for other parts of the financial industry. We may not outlaw private equity, but we need not structure our tax laws to give the industry special tax advantages like the carried interest tax break. We could also look to have the Fed offer everyone digital bank accounts so that we could save tens of billions annually in bank fees. And, we could have the federal government offer low cost IRAs, like the federal employees’ Thrift Savings Plan, which would save people tens of billions annually on needless management fees charged by brokerage houses and insurance companies.
On this issue, there is some progress to report. Several states now let private sector employees buy into their state employees retirement system, effectively giving them a low-cost IRA/401(k) option.
But progress in this and other areas would be so much easier if we could just get everyone to remember their intro econ treatment of finance. We want it simple and we want it cheap: full stop.
In this vein, I should probably also mention the ideaof converting the basis of the corporate income tax from profits to the returns companies provide to shareholders (dividends and capital gains). The logic of this is straightforward, corporate accountants tell us how much profit the company made. We can get returns to shareholders from any financial website.
This would effectively be a tax that would be impossible to avoid. The I.R.S. could calculate every company’s tax liability on a single spreadsheet. (That is, all companies tax liability could be calculated on the same spreadsheet.)
Not only does this mean that we could be sure to get the tax rate we targeted, it would also destroy the tax gaming industry. The tens of billions of dollars that companies currently spend on gaming the tax code could instead go to productive uses.
We actually have made serious progress on this sort of switch. As part of the Inflation Reduction Act, we now have a 1.0 percent tax on share buybacks. I’m sure that this tax was not put in place as a step towards shifting the basis for the corporate income tax to returns to shareholders, it could end up being a big step in this direction.
Since buybacks are 100 percent transparent (companies can’t very well keep them a secret), this will be the easiest tax ever from the standpoint of enforcement. When people recognize how simple and easy it is to collect a tax that is based on returns to shareholders, there could be momentum to increase the portion of the income tax that is based on buybacks, dividends, and capital gains. It’s always best to tax things we can see directly, as opposed to a number manufactured by corporate accountants.
Reining in CEO Pay
It is common to see people on Twitter and elsewhere complain about the tens of millions pulled down each year by the CEOs of major corporations. While the complaints are certainly justified, they rarely go beyond moral indignation. Few make the point that CEOs are not worth their paychecks, at least in the very narrow sense that they do not produce for their companies an amount of value equal to their $20 million or $30 million paycheck.
This point is important, since it means CEOs are ripping off the companies they work for. That implies that the shareholders of these companies should be allies in the effort to rein in CEO pay.
While that point would seem obvious, there is almost no recognition of this logical inference from most progressives. Even people who complain about CEOs using stock buybacks to manipulate stock prices and increase the value of their options, rarely take the next step and say shareholders should be upset about CEOs taking money from them.
In my view, the key to bringing down CEO pay is to give shareholders more ability to rein it in. As it stands, the corporate board of directors are supposed to be the ones who act on shareholders’ behalf to limit CEO pay. But a recent survey found that these boards don’t even see it as their responsibility to rein in CEO pay. Rather they see their job as helping top management.
We should be focused on making it easy for shareholders to pressure boards to take CEO pay seriously. I have suggested that the “Say on Pay” votes on CEO pay, which were part of the Dodd-Frank financial reform act, have a bit more teeth.
As it stands, there is no consequence for a no vote on a CEO compensation package, except for a bit of embarrassment. Suppose that directors lost their pay if a vote went down. My guess is that if two or three packages went down, and boards felt some real consequence from overpaying their CEOs, they would start to ask questions like “can we get someone just as good for less money?” That could end the upward spiral of CEO pay and start to bring it back down to earth.
This is not just a question of a small number of top execs getting too much money. The bloated pay for CEOs affects pay structures throughout the economy. If the CEO gets $20 million, the rest of C-suite might get close to $10 million, and third tier execs can get $2 million or $3 million. This also affects pay outside the corporate sector. It is now common for presidents of universities or major charities to get several million dollars a year for their work.
The world would look very different if we had not seen the explosion of CEO pay relative to ordinary workers. If we still had the ratios of 20 or 30 to 1, that we had in the 1960s and 1970s, CEOs would be getting $2 million to $3 million a year. The lower pay for the top end of the income distribution would free up lots of money for everyone else. Unfortunately, we cannot even get a serious discussion of this issue.
Free Trade for Doctors and High-End Professionals
It has become gospel that the United States has pursued a policy of free trade for the last four decades. This is a lie.
Our trade policy has been focused on removing barriers to trade in manufactured goods. This has the effect of putting U.S. manufacturing workers in direct competition with low-paid workers in the developing world. This has the predicted and actual effect of reducing the number of manufacturing jobs in the United States and reducing the pay for the jobs that remain.
While this policy can be justified by pointing to the benefits for consumers in the form of lower prices, we could have gone the same route of “free trade” when it came to doctors and other highly paid professionals. The models showing the gains from trade work the same way when we talk about physicians’ or dentists’ services as when we talk about cars and clothes.
However, our trade negotiators never had free trade in physicians’ services on their agenda. That is understandable, since they probably all have friends and relatives who work as doctors, dentists, or as other highly paid professionals.
But, even if we have to recognize the power relations that are behind trade deals that have the effect of redistributing income upward, there is no excuse for covering up the true story by calling it “free trade.” Trade rules were constructed to redistribute income upward. No one involved in the process had any interest in real free trade.
Anyhow, we continue to get these absurd battles over “free trade.” It’s sort of like debating Catholic or Jewish theology where you first have to accept the tenets of the faith before you can be admitted into the discussion. For now, the participants in trade debates all must pretend that we have a free trade policy, instead of a policy of selective protectionism designed to screw ordinary workers.
Saving Journalism
I raise this one because there is not even a debate on the topic, simply a steady drumbeat of stories about how local newspapers are closing around the country and how national news outlets, both print and broadcast, are laying off reporters because they can’t make money in the current system. While there apparently is a big market for pieces bemoaning the current situation, there is very little interest in discussing policies that could alter the picture and revitalize reporting.
This is unfortunate, because these ideasdo exist. The basic story is finding some way to get public funds to people doing journalism. For whatever reason, we can’t get a serious discussion in major news outlets about how to repair the news system.
I should also mention another aspect to this issue. Many people rightly complain about the outsize power that the rich have in politics. Under the current system, billionaires can basically contribute as much as they want to support their favored candidates or causes.
Here also, there is a lot of ink spilled decrying the situation, but almost no discussion of serious remedies. Not only would it be almost impossible to limit political contributions given the current makeup of the Supreme Court, it’s not clear it would make much difference even if we could.
Suppose no one was allowed to give more than $1,000 to a candidate and/or a PAC or PAC-equivalent. Is anyone proposing measures that would prevent right-wing billionaires from creating another Fox News, or two or three Fox News networks? Alternatively, are there proposals to prevent right-wing billionaires from buying up CBS, NBC, CNN and every other major news outlets?
If right-wing billionaires controlled all the major news outlets, they could effectively run ads for their favored candidates as “news.” They would have no reason to make campaign contributions to get their candidates elected. Their news shows would be far more effective in pushing the case.
If progressives want to be serious about countering the political power of billionaires, there is no alternative to finding mechanisms that give more voice to ordinary people. No one has even conceived of an effective way to restrict billionaires’ political power, much less put forward a proposal that would have prayer in hell of becoming law in anyone’s lifetime.
While we are on the topic of the political power of the rich, it would also be a good idea to have a serious discussion of restructuring Section 230 protection for Internet platforms. There is no obvious reason that Internet platforms should be protected from liability for defamation suits based on third party content, when print and broadcast media don’t enjoy this protection.
Although it is not feasible for these platforms to preemptively screen content for defamatory material, they could be subject to take-down rules in the same way that is now the case for allegations of copyright infringement. We can also write the rules in ways that are likely to disadvantage giants like Facebook and Twitter and benefit smaller sites.
Anyhow, there are an infinite number of ways to slice and dice a Section 230 repeal, but the key thing is to get it on the agenda. As of now, it isn’t. All we get are complaints about the way billionaire jerks run their platforms, as though the rest of us are powerless in the story.
Changing the Narrative Is not Easy
It is not easy to move policy debates, as most people recognize. As the old saying goes, “intellectuals have a hard time dealing with new ideas.” And, as we know, intellectuals control the outlets where these issues get debated, which means it’s hard to find an entry point to even try to move the debate. Anyhow, I will keep trying and maybe the picture will look better on my next birthday.
[1]See Rigged chapter 5 for an outline of my alternative mechanisms. (It’s free.)
