Monday, May 22, 2023

Baker: Note on Debt Burden and the Burden of Patent and Copyright Monopolies

 via Patreon

Quick Note on the Debt Burden and the Burden of Patent and Copyright Monopolies

The debt whiners are out in full force these days as we face the risk of default at the start of next month. We hear them complain endlessly about the burden we are imposing on future generations. If we imagine for a moment that any of these people actually care about the future (anyone hear of global warming?), we should ask why none of them ever says anything about the burden of patent and copyright monopolies?

This may be too simple for great minds, but the granting of patent and copyright monopolies is a mechanism that the government uses to pay for innovation and creative work. It is an alternative to direct government spending. The government could directly pay companies for innovating and producing movies, writing books, and performing music, but instead it gives these companies monopolies that allow them to charge far more than the free market price for the duration of a patent or copyright.

In the case of prescription drugs, pharmaceutical companies will often charge ten or even 100 times the free market price of a drug for the period in which it holds a patent monopoly. This means that a drug that might sell for $10-$20 a prescription, instead sells for hundreds or thousands of dollars per prescription. There is a similar story with a wide range of other items, like medical equipment, seed, fertilizers, and pesticide. Patent monopolies make items expensive, that would otherwise be cheap.

The same is true of copyright. We could costlessly copy and transfer books, music, movies, software and many other types of creative work over the web, if it were not for the copyright monopolies granted by the government.

We can debate the merits of patents and copyrights as government mechanisms for financing innovation and creative work, but we can’t deny that they impose a large cost. Arguably, the higher prices we pay as a result of these monopolies comes to over $1 trillion a year, close to half of all after-tax corporate profits.

In the case of prescription drugs alone, patent monopolies and related protections will likely cost us over $400 billion this year. We will spendover $550 billion for drugs that would probably cost us less than $100 billion in a free market without government granted patent monopolies (National Income and Product Accounts, Table 2.4.5U, Line 121). By contrast, we are projectedto spend $663 billion in interest payments on the debt. If we added in the higher costs due to patent and copyright monopolies on other items, it would almost certainly dwarf the interest payments on the debt.

It is bizarre that people who endlessly obsess about the burden of the debt literally never talk about the burdens created by government-granted patent and copyright monopolies. This failure to address this massive burden created by government policy might cause one to question the sincerity of their concern about the burden of the debt.

Wednesday, May 17, 2023

Dean Baker: Will Biden Pull It Out in the 14th?

 I'm betting Dean is right on this......I think PK is having an elite-downer attack this week.

Will Biden Pull It Out in the 14th?

Like everyone else, I have been following the negotiations between the White House and House Republicans over the debt ceiling. I know that many of my comrades are worried that Biden is being played and will have to give up the store to save the economy. Paul Krugman laid out this case in his columntoday.

I understand their concerns, but remain an optimist on this. First, Biden has been around the block on this one more than anyone. He may well have been expecting respectable types to act a bit more respectable and to lean on the Republicans to reach a deal.

But, Biden also knows that these respectable types are totally willing to deal with Donald Trump, a vicious anti-Semite and racist, who has open contempt for American democracy and the rule of law. The elites in the media and the business community will not stick their necks out for the good of the country. He had every reason to expect that they would take the cautious route and do the “both sides” routine we see them doing now.

Surely Biden recognized this was a real possibility and was prepared for it. What does that mean? To my view, it means that after engaging in negotiations with Republicans, who are asking for absurd concessions based on their four-seat advantage in one house of Congress, he says that he will spend the money Congress told him spend, whether or not this means crashing the debt ceiling.

I don’t have any legal analysis to add to the work done by Lawrence Tribe and others. I do have to say that I find it delicious that the wording on the debt in the 14th Amendment was put there to deal with pretty much exactly the situation we face today: a gang of former confederates gain control of Congress and look to wreck the economy to avenge their defeat in the Civil War.

So, is Biden also thinking of invoking the 14thAmendment and saying that the government is not constrained by Republican efforts to default on the debt? I can’t say. I also can’t say what the Republican Supreme Court will do.

But many of us have underestimated Biden before. He managed to get an amazing amount of important legislation through a 50-50 Senate, and with only a narrow Democratic majority in the House. It doesn’t seem likely that he would walk into negotiations with a Republican Speaker indebted to the party’s biggest loons without a backup plan.

I guess we will know the answer on this one soon enough.

Saturday, May 13, 2023

Flush With Federal Money, Strings Attached, a Deep South Factory Votes to Unionize

Flush With Federal Money, Strings Attached, a Deep South Factory Votes to Unionize

Friday’s victory by the United Steelworkers at a factory building electric school buses was a test for Democratic hopes that clean-energy funding from Washington could bolster organized labor.

Workers at a rural Georgia factory that builds electric school buses under generous federal subsidies voted to unionize on Friday, handing organized labor and Democrats a surprise victory in their hopes to turn huge new infusions of money from Washington into a union beachhead in the Deep South.

The company, Blue Bird in Fort Valley, Ga., may lack the cachet of Amazon or the ubiquity of Starbucks, two other corporations that have attracted union attention. But the 697-to-435 vote by Blue Bird’s workers to join the United Steelworkers was the first significant organizing election at a factory receiving major federal funding under legislation signed by President Biden.

“This is just a bellwether for the future, particularly in the South, where working people have been ignored,” Liz Shuler, president of the A.F.L.-C.I.O., said Friday evening after the vote. “We are now in a place where we have the investments coming in and a strategy for lifting up wages and protections for a good high-road future.”

The three bills making up that investment include a $1 trillion infrastructure package, a $280 billion measure to rekindle a domestic semiconductor industry and the Inflation Reduction Act, which included $370 billion for clean energy to combat climate change.

Each of the bills included language to help unions expand their membership, and Blue Bird’s management, which opposed the union drive, had to contend with the Democrats’ subtle assistance to the Steelworkers.

Banners appeared outside the Blue Bird plant in the period leading up to the union vote.Credit...Jonathan Weisman/The New York Times

Blue Bird stands to benefit from the new federal funds. Last year, it hailed the $500 million that the Biden administration was providing through the infrastructure bill for the replacement of diesel-powered school buses with zero- and low-emission buses. Georgia school systems alone will get $51.1 million to buy new electric buses, but Blue Bird sells its buses across the country. Still more money will come through the Inflation Reduction Act, another law praised by the company.

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But that money came with strings attached — strings that subtly tilted the playing field toward the union. Just two weeks ago, for instance, the Environmental Protection Agency, which administers the Clean School Bus Program, pushed a demand on all recipients of federal subsidies to detail the health insurance, paid leave, retirement and other benefits they were offering their workers.

They also required the companies to have “committed to remain neutral in any organizing campaign and/or to voluntarily recognize a union based on a show of majority support.” And under the rules of the infrastructure bill, no federal money may to be used to thwart a union election.

The Steelworkers union used the rules to its advantage. In late April, it filed multiple unfair labor practice charges against Blue Bird’s management, citing $40 million in rebates the company had received from the E.P.A., which stipulated that those funds could not be used for anti-union activity.

“The rules say if workers want a union, you can’t use any money to hire anti-union law firms, or use people to scare workers,” Daniel Flippo, director of the Steelworkers district that covers the Southeast, said before the vote. “I’m convinced Blue Bird has done that.”

Politicians also got involved. Georgia’s two Democratic senators and southwestern Georgia’s Democratic House member also subtly nudged the plant’s management, in a union-hostile but politically pivotal state, to at least keep the election fair.

“I have been a longtime supporter of the USW and its efforts to improve labor conditions and living standards for workers in Georgia,” the Democratic congressman, Representative Sanford Bishop, wrote of the United Steelworkers in an open letter to Blue Bird workers. “I want to encourage you in your effort to exercise your rights granted by the National Labor Relations Act.”

Blue Bird’s management minimized such pressure in its public statements, even as it fought hard to beat back union organizers.

“Although we respect and support the right for employees to choose, we do not believe that Blue Bird is better served by injecting a labor union into our relationship with employees,” said Julianne Barclay, a spokeswoman for the company. “During the pending election campaign, we have voiced our opinion to our employees that a union is not in the best interest of the company or our employees.”

Friday’s union victory has the labor movement thinking big as the federal money continues to flow, and that could be good for Mr. Biden and other Democrats, especially in the pivotal state of Georgia.

“Workers at places like Blue Bird, in many ways, embody the future,” Mr. Flippo said after the vote, adding, “For too long, corporations cynically viewed the South as a place where they could suppress wages and working conditions because they believed they could keep workers from unionizing.”

The Blue Bird union shop, 1,400 workers strong, will be one of the biggest in the South, and union leaders said it could be a beachhead as they eyed new electric vehicle suppliers moving in — and potentially the biggest, most difficult targets: foreign electric vehicle makers like Hyundai, Mercedes-Benz and BMW, which have located in Georgia, Alabama and South Carolina in part to avoid unions.

“Companies move there for a reason — they want as smooth a path toward crushing unions as possible,” said Steve Smith, a national spokesman for the A.F.L.-C.I.O. “But we have federal money rolling in, a friendly administration and a chance to make inroads like we have never had before.”

Wednesday, May 10, 2023

Deen Baker defends the Biden Economy

We now have the greatest economy ever. I'm saying that because President Biden won't and everyone knows damn well that if Donald Trump was in the White House, and we had the same economic situation, he would be boasting about the greatest economy ever all the time. Every Republican politician in the country would be touting the greatest economy ever. And, all the political reporters would be writing stories about how the strong economy will make it difficult for the Democrats to beat Trump in the next election.[1]

Incredibly we are seeing stories about how the economy is a liability for Biden and the Democrats. We don't know what is in people's heads and how they think about the economy, but the basic points are very straightforward.

Starting with unemployment, the current unemployment rate of 3.4 percent is the lowest in more than half a century. More than any time in this period, people who want a job are able to get one. The unemployment rate for Blacks is at 4.7 percent, the lowest number on record. The unemployment rate for Black teens stands at 12.9 percent, which unfortunately, is the lowest on record.

We can flip this over and also talk about the good news with people getting jobs. Many people left the labor market during the pandemic, but we are now seeing comparable or higher rates of labor force participation and employment for most demographic groups.

The overall employment to population rate (EPOP) for prime age workers (ages 25 to 54) stood at 80.8 percent in April, 0.2 percentage points above its pre-pandemic peak. For prime age women the EPOP stood at 75.1 percent last month. This is not just higher than its pre-pandemic peak, it is the highest EPOP for prime age women ever.

Not only are people able to get jobs, but they have had unprecedented ability to leave jobs they don't like. The percentage of workers quitting their job in a month increased to 3.0 percent In October of 2021 and again last April. Its prior peak was 2.4 percent. It is now down to 2.5 percent, which is probably a more sustainable rate, but still above the previous peak.

There also was a huge boom in mortgage refinancing since the pandemic. Before interest rates began to rise last year, more than 20 million people were able to refinance their mortgages. The average interest savingfrom refinancing was over $2,000 a year.

We have also seen an explosion in the number of people working from home. Before the pandemic, roughly 5 percent of the workforce worked from home. Now the figure is closeto 30 percent. That comes to more than 45 million people. These people are saving themselves thousands of dollars a year in commuting costs and related expenses. In addition they are saving hundreds of hours a year they would have otherwise spent commuting.

While working from home is a benefit largely restricted to more educated and higher paid workers, lower paid workers have also been doing well in the recovery. Research by Arin Dube, David Autor, and Annie McGrew shows that much of the wage inequality we have seen grow in the last four decades has been reversed in the last three years. While there is still far to go, workers in the bottom 20 percent of the wage distribution are seeing their pay grow far more rapidly than those at the middle or top of the wage distribution.

The broader wage picture is more mixed. Workers were hit by the worldwide inflation resulting from the pandemic, but are again coming out ahead of inflation. For all workers, the average hourly wage, adjusted for inflation, just reached its pre-pandemic level last month, but over the last six months it has been growing at a 0.9 percent annual rate. In keeping with the Autor, Dube, and McGrew findings, the average hourly wage for production and non-supervisory workers, a category that excludes roughly 20 percent of mostly higher paid workers, is 1.3 percent above its pre-pandemic level. It has been rising at a 1.9 percent annual rate over the last six months.

We also have seen a large increase in homeownership from the period just before the pandemic. The overall rate of homeownership stoodat 60.0 percent in first quarter of this year, up from 65.1 percent in the fourth quarter of 2019, just before the pandemic. For people under age 35 the increase was 1.6 percentage points, from 37.6 percent to 39.3 percent in the most recent quarter. The homeownership rate for Black households increased by 1.8 percentage points from 44.0 percent to 45.8 percent.

The homeownership rate for Hispanics increased by 1.6 percentage points, from 48.1 percent to 49.7 percent. And, for households with incomes below the median, the homeownership rate increased by 2.0 percentage points, from 51.4 percent to 53.4 percent.

We are also seeing a hugely accelerated transition to clean energy. Electric car sales in the U.S. are up more than 70 percent from their year ago level. Solar energy installations in 2023 are expected to exceed their previous peak in 2021 by 40 percent. Wind power generation capacity is also increasingrapidly.

These are all really good stories that we can tell about the economy. They are especially impressive given that we have gone through a worldwide pandemic and are seeing the largest war among wealthy countries since World War II.

Does this amount to the greatest economy ever? That's a tough call. We expect living standards to improve over time as technology improves, people become better educated and we get a larger and better capital stock.

The real question is the rate of improvement. By that score, it would be hard to beat the decades of the fifties, sixties, and early seventies. We saw a quarter century of generally low unemployment and rapid economic growth, from which the gains were widely shared.

Also, while we have seen some gains for those in the bottom half of the income distribution, we are still seeing falling life expectancies for this group. That is not due to strictly economic factors, but clearly economics does play an important role.

But these realities would not have stopped Donald Trump from proclaiming the "greatest economy ever." They certainly didn't before the pandemic. So, grading on a curve, we can declare Biden's economy the greatest ever.

[1] Of course, Trump would not be eligible to run for a third term, but again, this is a hypothetical.

Monday, May 1, 2023

The Economic Costs of America’s Conflict with China

 via Project Syndicate:

The Economic Costs of America’s Conflict with China
Apr 24, 2023STEPHEN S. ROACH

In a wide-ranging speech on the US-China relationship, US Treasury Secretary Janet Yellen reversed the terms of engagement with China, prioritizing national-security concerns over economic considerations. The US case, however, rests not on hard evidence but on the presumption of China's nefarious intent.

NEW HAVEN – Five years into a once-unthinkable trade war with China, US Treasury Secretary Janet Yellen chose her words carefully on April 20. In a wide-ranging speech, she reversed the terms of US engagement with China, prioritizing national-security concerns over economic considerations. That formally ended a 40-year emphasis on economics and trade as the anchor to the world’s most important bilateral relationship. Yellen’s stance on security was almost confrontational: “We will not compromise on these concerns, even when they force trade-offs with our economic interests.”


Yellen’s view is very much in line with the strident anti-China sentiment that has now gripped the United States. The “new Washington consensus,” as Financial Times columnist Edward Luce calls it, maintains that engagement was the original sin of the US-China relationship, because it gave China free rein to take advantage of America’s deal-focused naiveté. China’s accession to the World Trade Organization in 2001 gets top billing in this respect: the US opened its markets, but China purportedly broke its promise to become more like America. Engagement, according to this convoluted but widely accepted argument, opened the door to security risks and human-rights abuses. American officials are now determined to slam that door shut.

There is more to come. President Joe Biden is about to issue an executive order that will place restrictions on foreign direct investment (FDI) by US firms in certain “sensitive technologies” in China, such as artificial intelligence and quantum computing. The US rejects the Chinese allegation that these measures are aimed at stifling Chinese development. Like sanctions against the Chinese telecoms giant Huawei and those being considered against the social-media app TikTok, this one, too, is being justified under the amorphous guise of national security.

The US case rests not on hard evidence but on the presumption of nefarious intent tied to China’s dual-purpose military-civilian fusion. Yet the US struggles with its own security fusion – namely, the fuzzy distinction between America’s under-investment in innovation and the real and imagined threats of Chinese technology.

Significantly, Yellen’s speech put both superpowers on the same page. At the Communist Party’s 20th National Congress last October, Chinese President Xi Jinping’s opening message also stressed national security. With both countries equally fearful of the security threat that each poses to the other, the shift from engagement to confrontation is mutual.

Yellen is entirely correct in framing this shift as a tradeoff. But she only hinted at the economic consequences of conflict. Quantifying these consequences is not simple. But the American public deserves to know what is at stake when its leaders rethink a vitally important economic relationship. Some fascinating new research goes a long way toward addressing this issue.

A just-published study by the International Monetary Fund (summarized in the April 2023 World Economic Outlook) takes a first stab at identifying the costs. IMF economists view the problem through the lens of “slowbalization”: the reduction of cross-border flows of goods and capital, reflected in geostrategic strategies of “reshoring” (bringing offshore production back home) and what Yellen herself has called “friend-shoring” (shifting offshore production from adversaries to like-minded members of alliances).

Such actions result in “dual bloc” FDI fragmentation. The IMF estimates that the formation of a US bloc and a China bloc could reduce global output by as much as 2% over the longer term. As the world’s largest economy, America will account for a significant share of foregone output.

European Central Bank President Christine Lagarde recently stressed a different channel through which an escalating US-China conflict could adversely affect economic performance. Drawing on research by ECB staff, she focuses on the higher costs and inflation resulting from supply-chain disruptions implied by conflict-driven FDI fragmentation. The ECB study concludes that geostrategic conflict could boost inflation by as much as 5% in the short run and around 1% over the longer term. Collateral effects on monetary policy and financial stability would follow.

Collectively, these model-based calculations of the costs of conflict imply a stagflationary combination of lower output and higher inflation – hardly a trivial consideration in today’s fragile economic climate. And they dovetail with economic theory. Countries trade with others to reap the benefits of comparative advantage. Both inward and outward flows of foreign investment seek to achieve similar benefits, offering offshore efficiencies for multinational corporations that face higher costs in their home markets and attracting foreign capital to support domestic capacity expansion and job creation. Regardless of their different political systems and economic structures, this is true for both America and China. It follows that conflict will reduce these benefits.

Yet there is an important twist for the US: a chronic shortfall of domestic saving casts the economic consequences of conflict with China in a very different light. In 2022, net US saving – the depreciation-adjusted saving of households, businesses, and the government sector – fell to just 1.6% of national income, far below the longer-term 5.8% average from 1960 to 2020. Lacking in saving and wanting to invest and grow, the US takes full advantage of the dollar’s “exorbitant privilege” as the world’s dominant reserve currency and freely imports surplus saving from abroad, running a massive current-account and multilateral trade deficit to attract foreign capital.

As such, the economic interests of saving-short America are tightly aligned with its outsize imbalances of trade and capital flows. Barring a highly unlikely resurgence of domestic US saving, compromising those flows for any reason – say, security concerns over China – is not without meaningful economic and financial consequences. The research cited above suggests those consequences will take the form of slower economic growth, higher inflation, and possibly a weaker dollar.

This is hardly an ideal outcome for a US economy that is already at a precarious point in the business cycle. The tradeoff for national security should not be taken lightly. Nor should the US penchant to over-hype the security threat be accepted on blind faith.