Beat The Press

Changes that Would Make a Difference in the Biden Administration

I’m not going to get too into mapping out an agenda for the Biden administration. I still remember speaking at the zombie conferences (stealing that line from my friend, Josh Bivens) in November and December of 2016. We had all sorts of great plans for the Clinton administration. But there are still some points that can be usefully made even if Biden doesn’t win. (Okay, I realize the world will look pretty scary if Trump gets four more years and can let loose the fury of hell on anyone who doesn’t kiss his rear.)

The key point is the one I make all the time: the bad guys have deliberately structured the market in ways that redistribute income upward. While it is understandable that the right likes to pretend that the rich getting all the money was just a happy outcome of the natural forces of globalization and technology, it is malpractice for a progressive to go along with this charade.  

It is also important to reduce the huge flows to the top. While proposals to raise the minimum wage, drastically improve welfare state provision of items like child care and health care, and make it easier for workers to organize, are hugely important, there is a limit to how much we can improve living standards at the bottom and middle if we don’t take a whack at the top.

I realize many folks think we can do this with more progressive taxes. While we can and should make the tax system more progressive, we rarely collect as much from taxing the rich as we expect when we pass the taxes. The rich are very good at evading and avoiding taxes. Some will argue that we just need better enforcement. We do need better enforcement, but the idea that we will somehow succeed in collecting taxes on the rich, in a way that all previous generations have failed, seems more than a bit far-fetched.

It makes much more sense to not structure the market in a way that gives the rich so much money in the first place. This seems a much better approach both practically and politically. As a practical matter, it is far easy to alter the structure of the market so that it is not generating so much inequality than trying to tax back the excessive fortunes that we dropped in rich peoples’ laps.

On the political side, the market does enjoy tremendous legitimacy. This is for good cause; it is a very effective tool for generating wealth. It should be an easier political sell to propose changes that both make the market more efficient and generate less inequality, than to propose taxing away the vast fortunes that the rich earned because of the way we structured the market.

 

Three Market Reorienting Baby Steps for Biden to Reduce Inequality

Over the last four decades we have altered market structures in numerous ways that have had the effect of shifting more income to the top. (This is the point of Rigged [it’s free].) I’ll hit on three of the themes in that book:

  • a corrupt corporate governance structure that allows CEOs to rip off the companies they work for;
  • the system of patent and copyright monopolies, which transfers over $1 trillion a year from everyone else to beneficiaries of these rents;
  • a bloated financial system that allows some people to get tremendously wealthy while providing no service to the real economy.

I have a maximalist agenda in all three areas, most of which I discuss in Rigged, but I know that Joe Biden is no radical. So, I will instead lay out some simple steps that hopefully will be politically feasible, and can be a foot in the door for further changes later.

Giving Corporate Boards Incentive to Do Their Job

I will start with the corporate governance structure, in part because I think this problem has been horribly neglected by progressives. As I have argued many times, CEOs rip off the companies for which they work. They get their $20 million paychecks not because they produce $20 million in value for shareholders, but because the boards that set their pay primarily owe their allegiance to the CEO and top management, not to shareholders.

While it is standard to say that companies are run to maximize shareholder value, this claim is hard to reconcile with the fact that returns to shareholders have not been particularly good over the last two decades. And, the relatively modest returns of the last two decades enjoyed a substantial boost due to the large reduction in the corporate income tax over this period, not the hard work of CEOs.

It is more than a bit bizarre that the fact that CEOs work to maximize their own pay, rather than shareholder value is not more widely recognized. We routinely see CEOs manipulating stock prices to maximize the value of their options or walking away with huge severance packages after they have nearly wrecked the companies for which they work. This is not maximizing shareholder value.

This is not an argument for crying for shareholders, since we all know the enormous skewing of share ownership. Nonetheless, a dollar in the pocket of shareholders, which includes pension funds and middle-class people with 401(k)s, is better than a dollar in the pocket of CEOs, all of whom are in the top 0.001 percent.

But more importantly, the exorbitant pay at the top contaminates pay structures throughout the economy. If CEOs got paid $2-$3 million, as they did before the enormous upward redistribution of the last four decades, we would see much lower pay for the second and third tier executives as well. And presidents of universities and non-profits would likely get closer to $500k than the $1-$2 million many now pocket. Other top-level administrators would see their pay correspondingly reduced. And, as fans of arithmetic everywhere know, less money for those at the top means more for everyone else.

The fact that shareholders stand to gain from reining in the pay of CEOs and other top execs means that they are allies in this effort. To my mind, the big issue is changing the incentives for corporate boards. As it stands now, they have little incentive to rein in the pay of their friend, the CEO.    

My plan on this is to add a little bite to the “Say on Pay” provision that was part of the Dodd—Frank financial reform bill. This provision requires companies to submit their CEO pay package to a non-binding vote of the shareholders every three years. The vast majority of packages are approved, since it is hard to organize shareholders and there is not much consequence to having one turned down.

My proposal is to change the rules so that directors lose their annual stipend (which is often in the range of $200,000 to $300,000) if a CEO pay package is voted down. My guess is that if even one or two packages go down, we will see boards start asking the questions they are supposed to be asking, like “can we get away with paying our CEO a few million less?” or “is there someone just as qualified who would do the job for half the pay?”  

The job of directors is first and foremost to keep top management in check by asking questions like this, but it is a safe bet that almost none ever do. If we could change incentives, so they did start putting serious downward pressure on CEO pay, we might be looking at a very different pay structure in the not distant future.

I also like the logic. Will the right call people socialists for proposing that shareholders have more control over the companies they own? 

Playing with a Post-Patent World

It is amazing how many people, including progressive-type people, view patent and copyright monopolies as just part of the natural order of things. These government-granted monopolies are quite explicitly forms of government intervention in the market. They hugely raise the price of items like prescription drugs, medical equipment, and software. They also redistribute an enormous amount of income upward, likely more than $1 trillion a year (half of all corporate profits). But no one would expect Joe Biden to make a frontal assault on this bulwark of inequality and waste.

But, we can maybe envision a modest step that could end being a big foot in the door. Suppose the National Institutes of Health were to substantially ramp up funding in one specific area, with the explicit condition that all the results would be fully open and all patents in the public domain. (Cancer research would be an obvious candidate, since Biden’s son died of cancer and he seems to feel strongly about developing effective treatments and cures.)

In this case, new treatments would be available at generic prices from the day they were approved by the FDA. Instead of the next breakthrough cancer drug selling for hundreds of thousands of dollars for a year’s dosage, it might sell for hundreds of dollars, or at worst a figure in the low thousands. Drugs are almost always cheap to manufacture and distribute. It is government-granted patent monopolies that make them expensive.

If we could get some serious funding for open-source cancer research and it paid off with successful treatments, it would set a great example. This would likely lead to enormous pressure to do the same with the development of drugs to treat other conditions. Ideally we would have gone this route with developing vaccines and treatments for the coronavirus, but the idea of collaborative research was obviously alien to Donald Trump and his team. 

Making the Financial Sector More Efficient

The financial sector is also an enormous source of waste and inequality. While we need a well-functioning financial sector to make payments and allocate capital, an efficient financial sector is a small financial sector. Unlike sectors like health care and housing, which provide direct value to people, finance is an intermediate sector, like trucking. While we need trucking to get goods from one place to another, if our trucking sector increased five-fold relative to the size of the economy over five decades (as has finance), it would likely mean we have a very inefficient trucking system.

Not only is the financial system inefficient, it also has generated many of the great fortunes in the economy. It is hard to argue that these great fortunes were earned by producing great value for the economy, rather they are a story of being able to game the system to get money at the expense of others.

I have long argued for a financial transactions tax as a great way to downsize the financial sector and get a large amount of revenue. Biden has also indicated his support for a FTT. I hope that he does push for one, although he will certainly have a difficult fight in Congress.

While a FTT is hopefully on the table, there are two smaller, but nonetheless important, measures that Biden can look to pursue. The first is to have the IRS prepare tax returns for people, instead of forcing them to do it themselves, or pay hundreds of dollars to tax preparers.

This should be a hugely popular measure. No one enjoys filling out a tax return or paying money to a tax preparer. The idea here is that IRS would fill out a return for every taxpayer, based on the information it already has from W-2s and other tax forms, and mail it to everyone for their review. If people were satisfied that their taxes were calculated accurately, they would just accept the calculation and either pay what they owe or get the refund the IRS had calculated.

If they were convinced the IRS had erred, they would have to complete their own return, with the necessary documentation. In the vast majority of cases, people would likely accept the IRS calculation, meaning that they did not have to do anything.

This should not be rocket science, many European countries have had this sort of system in place for more than two decades. This would save people a huge amount of grief, as well as tens of billions paid each year to tax preparation services. The only losers in this story are H&R Block and the other companies that provide these services and/or software.

In the same vein, Biden could look to establish a national system of low-cost 401(k)-type accounts that people could contribute to on a voluntary basis. The idea here is that the current system is often complicated and expensive. Many accounts charge people over 1 percent annually just to hold their money. (Individual funds, held through these accounts, charge additional fees.) This means that someone with $100k in a retirement account is paying $1,000 a year or more, for essentially nothing.

The government already offers this sort of account for government workers through its Thrift Savings Plan. The cost is less than one-tenth of one percent annually. Illinois, California, New York and other states are setting up these systems at the state level. The federal government can do this at an even lower cost and allow people to remain in the same system throughout their whole working lives, even if they move across state borders.

Here again the only losers are the financial industry players that made a fortune gouging workers. If $2 trillion were shifted from high cost accounts to a government account, the savings would be on the order of $20 billion a year. Also, since roughly half of all workers do not even have the option to contribute to a retirement account at their workplace, we would likely see many more workers contributing to retirement accounts.

There are of course other areas in finance where a Biden administration could and should look to crack down on the industry. Private equity has a whole bag of tricks that largely depends on tax games and running up debts that can be dumped off on other parties, like workers and suppliers. Reining in these abuses should be on the administration’s agenda. Simplifying the tax code, ideally by changing the target of the corporate income taxes from profits to returns to shareholders, should radically reduce the resources devoted to tax avoidance and evasion.

There are other ways in which Biden can and should look to rein in finance, but this should be a very good beginners list for a moderate president. Besides, I don’t want to spend too much time writing up proposals for a second Trump administration to ignore.

We’ll see what happens next week. Let’s hope we can have some great battles to fight with the Wall Street Democrats. 

The post Changes that Would Make a Difference in the Biden Administration appeared first on Center for Economic and Policy Research.

Donald Trump and Jair Bolsonaro Plot to Get Brazilians Killed

It’s not normal for a president of the United States to make plans with the president of an allied country, that is likely to get tens of thousands of people in that country killed. But we’re not talking about ordinary presidents; we’re talking about Donald Trump and Jair Bolsonaro.

The goal of the Trump-Bolsonaro plot was to keep Brazil from getting access to a vaccine developed in China. China is apparently somewhat ahead of the United States in developing an effective vaccine. While the pharmaceutical companies in the United States have approached a vaccine by developing a new RNA method, the leading Chinese companies have pursued an old-fashioned dead virus approach.

This allowed these companies to move more quickly with their testing and get to the final Phase 3 stage of clinical trials before the U.S. companies. They also went the route of picking countries with high infection rates, like Brazil, to conduct their trials. A high infection rate makes it easier to determine how effective a vaccine is in preventing infections.

Now that Sinovac, one of the leading Chinese companies, is concluding its trials, it is negotiating large sales of the vaccine to Brazil. Joao Doria, the governor of Sao Paulo, had negotiated a major purchase for the people in his state. Bolsonaro, has sought to nix the deal.

According to a press account, Bolsonaro made this decision after meeting with Trump’s national security adviser, Robert O’Brien. Trump apparently would consider it a setback in his contest with China for global stature, if Brazil were to adopt a vaccine developed by a Chinese company.

Brazil ranks second to the United States in total deaths from the pandemic and is seeing close to 400 deaths a day. This means a delay in getting a vaccine of even a month can mean over 10,000 additional deaths. If the delay is longer, as seems likely, the number of needless deaths would increase accordingly.

Bolsonaro’s claim is that he doesn’t want his country to be “anyone’s guinea pig.” But this is hardly the issue. Large-scale purchases of the Sinovac vaccine would come only after Brazil’s regulatory authority had determined that the vaccine was safe and effective. Bolsonaro’s move was purely an effort to satisfy his friend Donald Trump. He apparently has no more respect for the lives of the people in Brazil than Trump does for people in the United States.  

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Washington Reports on How Top Execs at Bankrupt Companies Get Large Bonuses

The Post had a nice piece reported on how the top executives of major companies that went into bankruptcy were able to get large bonuses. As the piece points out, the bonuses are not tied to performance outcomes, like getting the companies out of bankruptcy in a specific time-frame. Of course, ordinary workers at these companies are not so lucky, with many being laid off with little or nothing by way of severance pay.

While the piece does not make this point explicitly, these sorts of payouts to CEOs and top executives are hard to reconcile with a story where companies are being run to maximize shareholder value. They are more consistent with a story where CEOs are able to use their power to rip off the companies for which they work.

This matters because the bloated pay of CEOs affects pay structures throughout the economy. When CEOs get $15 to $20 million, the CFOs and other top execs might get $10-$12 million, and the third tier execs can get $1 to $3 million. This also leads to million dollar paychecks for top execs in non-profits and universities. The world would be very different if we had the pay differentials from the 1960s and 1970s, in which case the CEOs would earn $2 to $3 million. And, the bloated pay at the top affects pay for everyone else, since fans of arithmetic know that more money for the top, means less money for those at the middle and the bottom.

If high CEO pay was associated with strong returns for shareholders, there would at least be a rationale for it, but as this and many other accounts indicate, this is not the case. Bloated CEO pay is simply corruption that generates inequality, and shareholders should be allies in stopping it.

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Yet Another Diatribe on Patent Monopolies and How They Are Not Talked About in Polite Company

I had a short vacation last week, so my comments are both late and short. I will yet again take a shot at patent monopolies as a mechanism for financing the development of prescription drugs. This is because it is in the news, both with Purdue Pharma’s settlement in the opioid case and also with China’s moving forward in distributing a coronavirus vaccine.

 

Patents and Lying

 

Starting with the Purdue Pharma settlement, I did not see any mention anywhere of the fact that government-granted patent monopolies give companies like Purdue incentive to push their drugs. While I would not expect every article that reported on the settlement, or the opioid crisis more generally, I would expect that we would see references to this obvious point at least some of the time.

It would be as though news reports on the low agricultural output in the Soviet Union never made reference to its system of central planning, which seems to be ill-suited to promoting high productivity agriculture. Again, we would not necessarily expect every news report talking about a poor harvest in the Soviet Union to give a diatribe on the failures of central planning, but we would expect that there would be occasional references to the issue. And that certainly was the case in my memory of the reporting.

In case the point is not entirely clear, by raising drug prices far above the free market price, patent monopolies provide a powerful incentive for drug companies to push their drugs, even in contexts where they may not be safe or the most effective treatment for a specific condition. This is Econ 101. People respond to incentives, the high prices allowed by patent monopolies give companies large incentives to sell as many prescriptions as possible.

While generic companies also make a profit, and also have an incentive to sell as many prescriptions as possible, the margins for a generic manufacturer don’t provide anywhere near the incentives provided by patent monopoly prices. In the former case, we may be looking at markups of, say 100 percent, over the costs of manufacturing and distribution. In the case of patent protected drug, the markups can easily be several thousand percent. For those sorts of profits, companies are willing to lie about the safety and effectiveness of their drugs.

The opioid crisis is an extreme case, but we see instances where drug companies provide misleading information all the time. A famous example from the now somewhat distant past was when Merck was accused of withholding information indicating that its arthritis drug Vioxx, may be dangerous for people with heart disease. This was a particularly big deal since there is a large overlap of people with heart conditions and people suffering from arthritis.

We did a paper on this topic a few years back. The point is both that lying about the safety and effectiveness of drugs is a 100 percent predictable result of patent monopolies and, that such lying occurs all the time, with very real health consequences.

 

Incentives for Secrecy Impede Progress

 

I have been jumping up and down, here in Southern Utah, complaining that we did not pursue a collaborative process for developing vaccines and treatments for the coronavirus. The argument is that, since we are paying for much of the research upfront, we should require that it all be open so that everyone could benefit from other companies’ research findings. This sort of collaboration should have been negotiated on an international basis, which is the sort of thing a competent administration could have done. This would have both expanded the pool of useful research and limiting free-riding.

The latest news in this area is that China continues to move forward with the development and distribution of a vaccine. It is now in the process of mass distribution of one of its vaccines, although it has not yet completed Phase 3 testing.

While not waiting until all the results of a Phase 3 trial are available may not be a good practice, if we had gone a collaborative route, people in the United States would have full access to a Chinese vaccine as soon as it was determined to be safe and effective (by our standards, not theirs.) Since we are now back to over 70,000 infections a day, and one thousand deaths, even a month’s gain in the use of a vaccine would make a large difference in terms of prevented deaths and infections.

It is unfortunate that Trump insisted an America First approach, and allowing companies like Moderna to get patent monopolies even when pretty much the entire research costs were picked up by the government. It will be a needless tragedy if tens of thousands of people die and hundreds get infected as a result of this decision.

 

Patents and Inequality

It is now accepted wisdom in most circles that growing inequality is a serious problem and that we should be taking steps to try to reduce inequality or at least limit it. Incredibly, patent and copyright monopolies never come up in discussions of inequality.  

This is sort of mind-boggling since they are so obviously a contributor to inequality. High income people benefit from patent and copyright monopolies. There are not a lot of current or former autoworkers and dishwashers who draw substantial income from patent rents. That they redistribute income from lower income people to higher income people is not really a debatable proposition. I have argued that they redistribute a very large amount of income, likely more than $1 trillion a year, or roughly half of before-tax corporate profits.

And the other obvious point is that patents, and their twin copyright monopolies, are explicit government policy. We can make them longer and stronger, or shorter and weaker. Or we can choose to have alternative mechanisms to finance research and creative work. How much income is redistributed upward through these government-granted monopolies is entirely a matter of policy. It is not a fact of nature.

Nonetheless, you can go through the endless volumes on inequality and almost never see a reference to patents or copyrights. They are simply ignored.

Question for Discussion: Why Don’t People Talk About Patents?

 

So, this brings us back to the topic of why? When the abuses and inequality resulting from the patent system kick us in the face on daily basis, why does no one ever talk about it?  Does it really not occur to any of the economic, legal, or health care reporters that cover the Purdue Pharma settlement that patents might be relevant to the story. Did no one writing on the progress of the U.S. and China in developing a vaccine ever think that it may have been good for both countries and humanity if we had worked together? Did no one who writes on inequality ever think that Bill Gates might be less wealthy f the government didn’t give Microsoft copyright and patent monopolies on its software?

I really have no idea what the answer to this question is. I don’t know why reporters, economists, and other policy types don’t talk about the abuses and waste created by patent and copyright monopolies. I just know that they don’t. Maybe I will come up with some good answers on my next vacation.  

 

 

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Red State Governors Still Flunk Coronavirus Testing

A few weeks back I did a post noting that states governed by Republicans had the highest positive test rates, while the states with the lowest positive rates were mostly governed by Democrats. I argued that positive test rates are a good measure of how serious the governors are in trying to bring the pandemic under control.

While they can take measures to limit the actual spread, such as longer and stronger lockdowns and mask requirements, many factors determining the spread are outside their control. By contrast, they do have control over the amount of testing, although legislatures can play a role, since they can appropriate or restrict funding. Testing has also become a political issue, since Donald Trump explicitly said that he wanted to see testing slowed so as to reduce the number of cases identified.

I thought it was worth an update to see what the story looks like as the country is now experiencing a huge surge in infections. Here’s the more recent picture showing the ten states with the highest infection rates and the ten states with the lowest rates, based on the John Hopkins Coronavirus Resource Center, 7-day moving averages. (Data are for October 26, 2020.)

Source: John Hopkins Coronavirus Resource Center.

Eight of the ten states with the highest rates have Republican governors. Kansas and Nevada, which come in 8th and 9th, both have Democratic governors.[1] While Democrats also control the legislature in Nevada, the legislature in Kansas is overwhelmingly Republican.

The story is more mixed among the states with the lowest positive rates, with five having Democratic governors and five having Republican governors. However, it is worth noting that all five of the states with Republican governors have legislatures that are controlled by the Democrats.

In short, by this measure of efforts at getting the pandemic under control, Democrats seem far more serious than Republicans.

[1] The 100 percent positive rate shown for Mississippi is the result of the way John Hopkins reports the data. They show the number of positives as a percentage of the tests given in the period, not as a percentage of the results reported that day.

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