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Are Wage Increases Driving Inflation? Not This Time

Are Wage Increases Driving Inflation? Not This Time

A popular line on our recent surge of inflation is that an over-tight labor market has led to rapid wage growth, which in turn forces companies to raise prices. Higher prices in turn lead workers to demand higher wages, which will give us a wage-price spiral and soon lead to double-digit inflation.

While this was a story that plausibly fit the data in the 1970s, it is very hard to make the wage-price spiral fit the current situation for a simple reason: The wage share of income has fallen sharply since the pandemic. By wage share I mean total compensation to workers, including fringe benefits, not just cash wages and salaries.

Here’s the picture:

Worker Share of Net Income Decline chartFederal Bureau of Economic Analysis

As can be seen, the wage share of corporate income had been recovering gradually from the troughs it hit in 2014 following the Great Recession. However, we see a sharp reversal in 2021, with the wage share falling from 76.1 percent to 73.7 percent, a decline of 2.4 percentage points.

Perhaps some economists can tell a story where rapid wage growth is driving inflation even as the wage share of income is falling, but I’m not that good an economist. [Editor’s Note: “Good” as in dishonest.]

This still looks to me like a case where supply-side disruptions, associated with the economy reopening from the pandemic together with the war in Ukraine are driving inflation.

This view is consistent with the fact that year-over-year inflation in the European Union was 7.5 percent as of March. The EU countries did not have as big a stimulus as the United States and by most measures the EU labor market is not as tight as in the United States.

Published with permission from DC Reports. Dean Baker co-founded the Center for Economic and Policy Research in 1999. His areas of research include housing and macroeconomics, intellectual property, Social Security, Medicare and European labor markets. He is the author of several books, including "Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer."

Covid-19 vaccines

How Pharma's Greed Is Blocking Vaccination For The Whole World

Reprinted with permission from DC Report

The big drug companies are killing people.

I get to say this about the drug companies, now that President Joe Biden has said that Facebook is killing people by allowing people to use its system to spread lies about the vaccines. There is actually a better case against the drug companies.

After all, they are using their government-granted patent monopolies and their control over technical information about the production of vaccines to limit the supply of vaccines available to the world. As a result, most of the population in the developing world is not yet vaccinated. And, unlike the followers of Donald Trump, people in developing countries are not vaccinated because they can't get vaccines.

The TRIPS Waiver Charade

The central item in the story about speeding vaccine distribution in the developing world is the proposal put forward at the World Trade Organization last October (yes, that would be nine months ago), by India and South Africa, to suspend patents and other intellectual property rules related to vaccines, tests, and treatments for the duration of the pandemic. Since that time, the rich countries have been engaged in a massive filibuster, continually delaying any WTO action on the measure presumably with the hope that it will become largely irrelevant at some point.

The Biden administration breathed new life into the proposal when it endorsed suspending patent rights, albeit just for vaccines. This is the easiest sell for people in the United States and other rich countries since it is not just about humanitarian concerns for the developing world. If the pandemic is allowed to spread unchecked in the developing world it is likely only a matter of time before a vaccine-resistant strain develops. This could mean a whole new round of disease, death, and shutdowns in the rich countries until a new vaccine can be developed and widely distributed.

After the Biden administration indicated its support for this limited waiver, many other rich countries signed on as well. Germany, under longtime Chancellor Angela Merkel, has been largely left alone to aid the pharmaceutical industry in opposing the vaccine waiver.

I had the chance to confront the industry arguments directly last week in a web panel sponsored by the International Association for the Protection of Intellectual Property (link included when it becomes available). It's always educational to see these arguments up close and real people actually making them.

The first line of defense is that the waiver of patent rights by itself does not lead to any increase in vaccine production. This is of course true. Vaccines have to be manufactured; eliminating patent rights is not the same thing as manufacturing vaccines.

But once we get serious, the point is that many potential manufacturers of vaccines are being prevented from getting into the business by the threat of patent infringement lawsuits. In some cases, this might mean reverse-engineering the process, something that might be more feasible with the adenovirus vaccines produced by Johnson and Johnson and AstraZeneca, than with the mRNA vaccines. The manufacturing process for these vaccines is similar to ones already used by manufacturers in several countries in the developing world, as well as several in the rich countries that are not currently producing vaccines against the pandemic.

Another possible outcome from eliminating patent rights is that the drug companies may opt to do more voluntary licensing agreements under the logic that it is better to get something than nothing.

If manufacturers use reverse engineering to produce vaccines, the patent holders get nothing. They would be much better off with a limited royalty on a licensing agreement, even if it is less than they could have expected if they had been able to maintain an unchecked patent monopoly.

[Editor: Reverse engineering is how startup computer companies built clones of the early PCs or personal computers. They bought IBM personal computers and paid one set of engineers to take it apart and describe what they found. Then a second set of engineers used the descriptions to build a personal computer. Voila, no royalties to IBM.]

The other route that suspending patent monopolies may open is one where former employees of the pharmaceutical companies may choose to share their expertise with vaccine manufacturers around the world. In almost all cases these employees would be bound by non-disclosure agreements. This means that sharing their knowledge would subject them to substantial legal liability. But some of them may be willing to take this risk. From the standpoint of potential manufacturers, the patent waiver would mean that they would not face direct liability if they were to go this route, and the countries in which they are based would not face trade sanctions.

Open-Sourcing Technology

While suspending patent rights by itself could lead to a substantial increase in vaccine production, if we took the pandemic seriously, we would want to go much further. We would want to see the technology for producing vaccines fully open-sourced. This would mean posting the details of the manufacturing process on the web, so that engineers all over the world could benefit from them. Ideally, the engineers from the pharmaceutical companies would also be available to do webinars and even in-person visits to factories around the world, with the goal of assisting them in getting their facilities up-to-speed as quickly as possible.

The industry person on my panel didn't seem to understand how governments could even arrange to have this technology open-sourced. He asked rhetorically whether governments can force a company to disclose information.

As a legal matter, governments probably cannot force a company to disclose information that it chooses to keep secret. However, governments can offer to pay companies to share this information. This could mean, for example, that the U.S. government (or some set of rich country governments) offers Pfizer $1-$2 billion to fully open-source its manufacturing technology.

Suppose Pfizer and the other manufacturers refuse reasonable offers. There is another recourse. The governments can make their offers directly to the company's engineers who have developed the technology. They can offer the engineers say $1-$2 million a month for making their knowledge available to the world.

This sharing would almost certainly violate the non-disclosure agreements these engineers have signed with their employers. The companies would almost certainly sue engineers for making public disclosures of protected information. Governments can offer to cover all legal expenses and any settlements or penalties that they face as a result of the disclosure.

The key point is that we want the information available as soon as possible. We can worry about the proper level of compensation later. This again gets back to whether we see the pandemic as a real emergency.

Suppose that during World War II Lockheed, General Electric, or some other military contractor developed a new sonar system that made it easier to detect the presence of German submarines. What would we do if this company refused to share the technology with the U.S. government so that it was better able to defend its military and merchant vessels against German attacks?

While that scenario would have been almost unimaginable – no U.S. corporation would have withheld valuable military technology from the government during the war – it is also almost inconceivable that the government would have just shrugged and said, "Oh well, I guess there is nothing we can do." (That's especially hard to imagine since so much public money went into developing the technology.) The point is that the war was seen as a national emergency and the belief that we had to do everything possible to win as quickly as possible was widely shared. If we see the pandemic as a similar emergency, it would be reasonable to treat it in the same way as World War II.

Perhaps the most interesting part of this story is what the industry representative saw as the downside of making their technology widely available. The argument was that the mRNA technology was not actually developed to be used against Covid. Its value against the pandemic was just a fortunate coincidence. The technology was actually intended to be used for vaccines against cancer and other diseases.

From the industry perspective, the downside is that if they made their technology more widely available, then other companies may be able to step in and use it to develop their own vaccines against cancer and other diseases. In other words, the big fear is that we will see more advances in health care if the technology is widely available, pretty much the exact opposite of the story about how this would impede further innovation.

I gather most of us do not share the industry's concerns that open-sourcing technology could lead to a proliferation of new vaccines against deadly diseases, but it is worth taking a moment to think about the innovation process. The industry has long pushed the line that the way to promote more innovation is to make patent and related monopolies longer and stronger. The idea is that by increasing potential profits, we will see more investment in developing new vaccines, cures, and treatments.

But these monopolies are only one way to provide incentives, and even now they are not the only mechanism we use. We also spend over $40 billion a year in the United States alone on supporting biomedical research, primarily through the National Institutes of Health. Most of this money goes to more basic research, but many drugs and vaccines have been developed largely on the government dime, most notably the Moderna vaccine, which was paid for entirely through Operation Warp Speed.

If we put up more public money, then we need less private money. I have argued that we would be best off relying pretty much entirely on public money. This would take away the perverse incentives created by patent monopoly pricing, like the pushing of opioids that was a major factor in the country's opioid crisis. It would also allow for the open-sourcing of research, which should be a condition of public funding. This could create the world the industry fears, as many companies could jump ahead and take advantage of developments in mRNA technology to develop vaccines against a variety of diseases.

But even if we don't go the full public funding route, it is pretty much definitional that more public funding reduces the need for strong patent monopolies to provide incentives. If we put up more dollars for research, clinical testing, or other aspects of the development process, then we can provide the same incentive to the pharmaceutical industry with shorter and/or weaker monopoly protections.

In the vaccine context, open-source means not only sharing existing technology, but creating the opportunity for improving it by allowing engineers all of the world to inspect production techniques. While the industry would like to pretend that it has perfected the production process and possibilities for improvement do not exist, this is hardly plausible based on what is publicly known.

To take a few examples, Pfizer announced back in February that it found that changing its production techniques could cut production time in half. It also discovered that its vaccine did not require super-cold storage. Rather, it could be kept in a normal freezer for up to two weeks. In fact, Pfizer did not even realize that its standard vial contained six doses of the vaccine rather than five. This meant that one sixth of its vaccines were being thrown into the toilet at a time when they were in very short supply.

Given this history, it is hard to believe that Pfizer and the other pharmaceutical companies now have an optimal production system that will allow for no further improvements. As the saying goes, when did the drug companies stop making mistakes about their production technology?

Has Anyone Heard Of China?

It is remarkable how discussions of vaccinating the world so often leave out the Chinese vaccines. They are clearly not as effective as the mRNA vaccines, but they are nonetheless hugely more effective in preventing death and serious illness than no vaccines. And, in a context where our drug companies insist that they couldn't possibly produce enough vaccines to cover the developing world this year, and possibly not even next year, we should be looking to the Chinese vaccines to fill the gap.

China was able to distribute more than 560 million vaccines internally in the month of June, in addition to the doses it supplied to other countries. Unless the country had a truly massive stockpile at the start of the month, this presumably reflects capacity in the range of 500 million vaccines a month. The Chinese vaccines account for close to 50 percent of the doses given around the world to date.

It would be bizarre not to try to take advantage of China's capacity. There obviously are political issues in dealing with China, but America and other Western countries should try to put these aside, if we are going to be serious about vaccinating the world as quickly as possible.

'Mistakes Were Made' — NOT Our National Motto

If a vaccine-resistant strain of the coronavirus develops, and we have to go through a whole new round of disease, deaths, and shutdowns, it will be an enormous disaster from any perspective. The worst part of the story is that it is a fully avoidable disaster.

We could have had the whole world vaccinated by now, if the United States and other major powers had made it a priority. Unfortunately, we were too concerned about pharmaceutical industry profits and scoring points against China to go this route.

Nonetheless, we may get lucky. Current infection rates worldwide are down sharply from the peaks hit in April, but they are rising again due to the Delta variant. It is essential to do everything possible to accelerate the distribution of vaccines. It is long past time that we started taking the pandemic seriously.

Those Corporate Bosses Are Ridiculously Overpaid -- And Now There's Proof

Those Corporate Bosses Are Ridiculously Overpaid -- And Now There's Proof

Reprinted with permission from DCReport

A new study shows that the top five executives of major corporations pocketed 15 to 19 cents of every dollar their companies gained from two recent tax cuts. The paper, by Eric Ohrn at Grinnell College, should be a really big deal.

The basic point is CEOs and other top executives rip off their companies. The officers are not worth the $20 million or more that many of them pocket each year.

This is not a moral judgment about their value to society. It is a simple dollars-and-cents calculation about how much money they produce for shareholders. The piece suggests that it is nothing close to what they pocket.

This is a big deal because it is yet another piece of evidence that executives are able to pocket money that they did nothing to earn.

It is no more desirable to pay a CEO $20 million if someone just as effective can be hired for $2 million than to pay an extra $18 million for rent.
In the case of these tax cuts, company profits increased because of a change in government policy, not because their management had developed new products, increased market share or reduced production costs. Some of them presumably paid for lobbyists to push for the tax breaks, so their contribution to higher profits may not have been exactly nothing.There is much other work along similar lines. An analysis of the pay of oil company CEOs found that they got large increases in compensation when oil prices rose. Since the CEOs were not responsible for the rise in world oil prices, this meant they were getting compensated for factors that had little to do with their work. A more recent study found the same result.Another study found that CEO pay soared in the 1990s because it seemed that corporate boards did not understand the value of the options they were issuing.


A few years ago, Jessica Schieder and I wrote a paper showing that the loss of the tax deduction for CEO pay in the health insurance industry, which was part of the Affordable Care Act, had no impact on CEO pay.

The loss of this deduction effectively raised the cost of CEO pay to firms by more than 50 percent. If CEO pay were closely related to the value they added to the company's bottom line, we should have unambiguously expected to see some decline in CEO pay in the industry relative to other sectors. In a wide variety of specifications, we found no negative effect. Lucian Bebchuk and Jesse Fried's book, Pay Without Performance, presents a wide range of evidence on this issue.

Ripping Off Companies

As can be easily shown the bulk of the upward redistribution from the 1970s was not due to a shift from wages to profits, it was due to an upward redistribution among wage earners. Instead of money going to ordinary workers, it was going to those at the top end of the wage distribution, such as doctors and dentists, STEM [science, technology, engineering and math] workers, and especially to Wall Street traders and top corporate management. If we want to reverse this upward redistribution, then we have to take back the money from those who got it.

If top management actually earned their pay in the sense of increasing profits for the companies they led, then there would be at least some sort of trade-off. Reducing their pay would mean a corresponding loss in profit for these companies. It still might be desirable to see top executives pocket less money, but shareholders would be unhappy since they would have fewer profits.

But if CEOs and other top management are not increasing profits in a way that is commensurate with their pay, their excess pay is a direct drain on the companies that employ them.

From the standpoint of the shareholders, it is no more desirable to pay a CEO $20 million if someone just as effective can be hired for $2 million than to pay an extra $18 million for rent, utilities or any other input. It is money thrown in the garbage.

As I have argued in the past, the excess pay for CEOs is not just an issue because of a relatively small number of very highly paid top executives. It matters because of its impact on pay structures throughout the economy. When the CEO gets paid more, it means more money for those next to the CEO in the corporate hierarchy and even the third-tier corporate executives. That leaves less money for everyone else.

The Ohrn study found that 15 to 19 percent of the benefits of the tax breaks he examined went to the top five executives. If half this amount went to the next 20 or 30 people in the corporate hierarchy, it would imply that between 22 percent and 37 percent of the money gained from a tax break went to 25 of the highest paid people in the corporate hierarchy.

If the CEO is getting $20 million, then the rest of the top five executives are likely making close to $10 million; the next echelon making $1 to $2 million.

If we envision pay structures comparable to what we had in the 1960s and 1970s, CEOs would be getting $2 to $3 million. The next four executives likely would earn $1 to $2 million. The third tier would be paid in the high six figures. With the pay structures from the corporate sector carrying over to other sectors, such as government, universities and non-profits, we would be looking at a very different economy.

Arranging Their Own Pay

If CEOs really don't earn their pay, the obvious question is how do they get away with it? The answer is they largely control the boards of directors that determine their pay.

Top management typically plays a large role in getting people appointed to the board. Once there, the best way to remain on the board is to avoid pissing off your colleagues. More than 99 percent of the directors nominated for re-election by the board win their elections.

Being a corporate director is great work if you can get it.

As Steven Clifford documents in his book, The CEO Pay Machine, which is largely based on his experience at several corporate boards, being a director can pay several hundred thousand dollars a year for 200 to 400 hours of work. Directors typically want to keep their jobs, and the best way to do this is by avoiding asking pesky questions like, "Can we get a CEO who is just as good for half the money?"

While many people seem to recognize that CEOs rip off their companies, they fail to see the obvious implication that shareholders have a direct interest in lowering CEO pay.

For example, a common complaint about share buybacks is that they allow top management to manipulate stock prices to increase the value of their options. (Editor's note: Before 1982, buybacks were illegal, deemed a form of manipulation.)

If this is true, then shareholders should want buybacks to be more tightly restricted, since they are allowing top management to steal from the company. If shareholders actually wanted CEOs to get more money from their options, they would simply give them more options, not allow them to manipulate share prices. Yet, somehow buybacks in their current form are still seen as serving shareholders.

Shareholders Losing Out

As a practical matter, it is easy to show that the last two decades have not been a period of especially high returns for shareholders. This is in spite of the large cut in corporate taxes under the Trump administration.

There seems to be confusion on this point because there has been a large run-up in stock prices over this period. Much of this story is that shareholders are increasingly getting their returns in the form of higher share prices rather than dividends.

Before 1980, dividends were typically three to four percent of the share price, providing close to half of the return to shareholders. In recent years, dividend yields have dropped to not much over one percent, with the rest of the return coming from a rise in share prices. If we only look at the share price, the story looks very good for shareholders, but if we look at the total return, the opposite is the case.

If CEOs really are ripping off the companies they lead, then shareholders should be allies in the effort to contain CEO pay. This would mean that giving shareholders more ability to control corporate boards would result in lower CEO pay.

As with much past work, Ohrn's study found that better corporate governance reduced the portion of the tax breaks the CEO and other top executives were able to pocket.

There are many ways to increase the ability of shareholders to contain CEO pay, but my favorite is to build on the "Say on Pay," provision of the Dodd-Frank financial reform law. This provision required companies to submit their CEO compensation package to an up or down vote of the shareholders every three years. The vote is nonbinding, but it allows for direct input from shareholders. As it is, most pay packages are approved with less than 3% being voted down.

I would take the Say on Pay provision a step further by imposing a serious penalty on corporate boards when a pay package gets voted down. My penalty would be that they lose their own pay if the shareholders vote down the CEO pay package.

While a small share of pay packages get voted down, my guess is that if just one or two corporate boards lost their pay through this route, it would radically transform the way boards view CEO pay. They suddenly would take very seriously the question of whether they could get away with paying their CEO less money.

I also like this approach because it is no more socialistic than the current system of corporate governance. It would be hard to make an argument that giving shareholders more control over CEO pay is a step toward communism.

The basic point here is a simple one: The rules of corporate governance are unavoidably set by the government. There is no single way to structure these rules. As we have now structured them, they make it easy for CEOs to rip off their companies. We can make rules that make it harder for CEOs to take advantage of their employers and easier for shareholders to contain pay.

Progressives should strongly favor mechanisms that contain CEO pay because of the impact that high CEO pay has on wage inequality more generally. And, shareholders should be allies in this effort. There is no reason for us to feel sorry for shareholders, who are the richest people in the country. They can help us contain CEO pay and we should welcome their assistance.

Pharmacist preps Covid-19 vaccine

Why Nobody Is Accountable For The Global Vaccination Fiasco

Reprinted with permission from DC Report

The vaccine rollout worldwide has been a dismal failure. While U.S. distribution been painfully slow, other countries are in worse shape.

The culprits are world leaders who failed to encourage sharing of knowledge and resources. Donald Trump and his clown show are premier among them in failure to protect us. This situation cries out for accountability.

In the United States, more than 40 days after the first vaccine was approved for emergency use by the Food and Drug Administration, just over 6%of our population has been vaccinated with just the first shot.

Very few Americans have gotten the two shots needed to hit the targeted levels of immunity.

Thankfully, the pace of the vaccination program is picking up as kinks are worked out, and now that an administration cares about getting people vaccinated.

We still have to ask why the process has been so slow. We have an obvious answer in the United States: the Trump administration basically said that distribution wasn't its problem.

As Donald Trump once tweeted, he considered the distribution process the responsibility of the states, and gave the order: "Get it done."

What explains the failures in other wealthy countries?

As badly as the United States has done so far, we have vaccinated a larger share of our population than any country in Europe except the United Kingdom.

That's right, countries like Denmark, France and even Germany have done worse. And these countries ostensibly have competent leaders and all have national health care.

If Saving Lives Mattered

The pandemic is a worldwide crisis that requires a worldwide solution. This is a classic case where there are enormous benefits from collective action. There are few downsides.

This is not a case, like seizing oil or other natural resources, where if the United States gets more, everyone else gets less. Sharing knowledge about vaccines, treatments and best practices for prevention is costless.

The whole world benefits if the pandemic can be contained as quickly as possible. This point is being driven home as new strains develop through mutation, which may spread more quickly and possibly be more deadly and vaccine-resistant.

The logical path would have been to make public, or open-source, all research on treatments and vaccines. Progress could be made as quickly as possible, and intellectual property rights would not be an obstacle to large-scale production worldwide.

This would have required some collective agreement where countries agreed to both put up some amount of research funding, presumably based on size and per capita income.

All findings, including results from clinical trials, would be need to be posted right away on the web.

This sort of international cooperation was obviously not on Trump's agenda. Mr. "America First!" was not interested in the possibility that we might better be able to tame the pandemic if we acted in cooperation with other countries.

But it wasn't just Trump who rejected the idea of open research and international cooperation. It really wasn't on the agenda of any prominent politician, including progressives like Bernie Sanders and Elizabeth Warren.

It was an issue in the scientific community, but as we know, people in policy circles don't take science seriously.

I describe a mechanism for advanced funding of open-source research in chapter 5 of Rigged [it's free].

The big problem, of course, is that going this route of open-source research and international cooperation could call into question the merits of patent monopoly financing of prescription drug research.

After all, if publicly funded open-source research proved to be the best mechanism for financing the development of drugs and vaccines in a pandemic, maybe this would be the case more generally. No one in a position of power in American politics wanted to take this risk of a bad example.

Why Not Stockpile Vaccines?

If we had gone the route of publicly funded open-source research, then the scientific community would have access to all the clinical trial results of all the vaccines as they become available.

This would mean that countries could decide which vaccines they wanted to use based on the data. They could begin to produce and stockpile large quantities of vaccines as soon as they entered Phase 3 trials. Incredibly, it seems no country did this.

While we could not know that a vaccine entering Phase 3 trials will be shown to be safe and effective, the advantages of having a large stockpile available that can be quickly distributed dwarf the potential costs of buying large quantities of a vaccine that is not approved.

Suppose the United States had produced 400 million doses of a vaccine that turned out ineffective. With the production costs of a vaccine at around $2 per shot, this would mean that we had wasted $800 million. With the country seeing more than 4,000 deaths a day at the peak of the pandemic and the economic losses from the pandemic running into the trillions, the risk of spending $800 million on an ineffective vaccine seems rather trivial.

For whatever reason, no country went this stockpile route.

Just to be clear, there was no physical obstacle to producing billions of vaccines by the end of 2020. If we can build one factory to produce these vaccines, we can build 10 factories. If some of the inputs are in short supply, we can build more factories to produce the inputs. There may be questions of patent rights, but that is different than a question of physical limitations.

Apart from the physical availability of the vaccines, there is the issue of distributing the vaccine and actually getting the shots in peoples' arms. It seems that, rather than making preparations in advance, most governments acted like the approval of the vaccine was a surprise and only began to make plans for distribution after the fact.

This is really mind-boggling.

While we could not know the exact date a vaccine would be approved, it was known that several vaccines were approaching the endpoints of the Phase 3 trials. In that situation, it is hard to understand why governments would not have been crafting detailed plans for how they would get the vaccines to people as quickly as possible, once the authorization had been made.

This would have meant pre-positioning stockpiles as close as possible to inoculation locations. These locations should have been selected in advance, with plans to have the necessary personnel available to oversee and administer the shots. There are reports that there are shortages of people trained in administering the shots. The fall would have been a great time to train enough people.

In a normal flu season, close to 2 million shots are given every day, without any heroic efforts by the government. Given the urgency of getting the pandemic under control, it is hard to understand why we could not have administered shots at this pace, if not considerably faster.

The fact that it wasn't just the United States that missed this standard, but also every country in Europe, indicates an enormous failure of public health systems.

As a result, we will see millions of preventable infections and 10s of thousands of avoidable deaths. We will see hundreds of billions of dollars of lost economic output, as the pandemic will disrupt the economy for longer than necessary.

A Penalty For Failure?

I raise this issue primarily because I'm fairly confident the answer is no. To be clear, my point is that not being prepared for the mass distribution of vaccines as soon as they were approved was a massive policy failure both in the United States and Europe.

I have no idea who was responsible for the failure, but it was presumably several high-level people in each country. In any reasonable world, these people would suffer serious career consequences for not getting the vaccines out quickly.

This is not vindictiveness; I don't know any of these people. I just want to see elite workers held to the same standards as those lower down the ladder.

The dishwasher who breaks the dishes gets fired. The custodian who doesn't clean the toilet gets fired. Why doesn't the person who messes up vaccine distribution pay a price?

Unfortunately, the lack of accountability at the top is the rule, not the exception.

To take my favorite example in economics, Carmen Reinhart and Ken Rogoff suffered no consequences other than embarrassment for their famous and devastating Excel spreadsheet error.

To remind people, they produced a paper purporting to show that countries with debt-GDP ratios above 90 percent took a huge hit to GDP growth

It turned out that this result was driven entirely by an error in a spreadsheet. When the error was corrected, the result went away but great damage was done.

Reinhart and Rogoff's paper was used to justify austerity policies in Europe and the United States. Millions of people needlessly went unemployed and many important areas of social spending, like education and health care, saw serious cuts.

The error was surely an honest mistake. The men y are competent economists who could have come up with much better ways to fake results if that was their intention. But their failure to check their numbers was inexcusable.

As they explained after the error was uncovered, the mistake was the result of rushing to finish a paper for a conference presentation.

Mistakes like that happen, and most of us have committed similar errors. That is not a big deal. The big deal was that, as their work was being cited by members of Congress, finance ministers and central bankers, it never occurred to them to review their work.

Should Reinhart and Rogoff have lost their tenured positions at Harvard? Perhaps this would have been appropriate. At the very least, they should have lost their named chairs.

Accountability For Elites

As I have written endlessly, we have seen a massive upward redistribution of income in the United States over the last four decades. Other countries have seen increases in inequality over this period, although not as large.

I have argued that this upward redistribution was by design, not the natural development of the economy. But for this issue, the question of causes is beside the point.

The people who have been able to enjoy rising incomes and financial security over the last four decades ostensibly justify their better position by their greater contribution to the economy and society.

But when you mess up in your job in big ways that lead to major costs to the economy and society, that claim doesn't hold water.

We have seen a massive rise in right-wing populism where large numbers of less-educated workers reject the elites and all their claims about the world.

When we have zero consequences for massive elite mess-ups, as we see with vaccine distribution, the less advantaged grow resentful.

It is appalling that we have structured the economy in such a way that the elites can be protected from consequences for even the most extreme failures. The fact that few elite types even see this as a problem shows that the populists have a real case.

The economy is rigged against those left behind, and the people who control major news outlets, which include many self-described liberals or progressives, won't even talk about it.

covid-19 vaccine, coronavirus vaccine

Why Are We Paying Moderna Twice For An Unproven Vaccine?

Moderna, a relatively new biotech firm, generally is seen as the U.S. frontrunner in developing a coronavirus vaccine.

It trails several Chinese companies.

Based in Cambridge, MA, Moderna should certainly get an award for milking the government.

It doesn't matter if the vaccine works. Moderna already was paid twice over.

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What America Needs Is A Bold Plan To Improve Social Security

What America Needs Is A Bold Plan To Improve Social Security

The Social Security 2100 Act proposed by Connecticut Representative John Larson is getting closer to being passed by the House of Representatives. It now has more than 200 co-sponsors. If it were to be approved and become law, it would both improve the program’s benefit structure and its financial picture.

The biggest item on the benefit side is that it guarantees a benefit of at least 125 percent of the poverty level for anyone who has worked for at least 30 years. The logic here is straightforward; we should be able to ensure that anyone who has put in a full lifetime of work will not be in poverty in their retirement years.

The second big change on the benefit side is that it changes the cost-of-living formula for adjusting benefits by tying it to an index of consumption items purchased by the elderly rather than the overall Consumer Price Index. The inflation adjustment for Social Security benefits has long been a major issue, with many politicians wanting to change the formula to reduce benefits.

Updating the cost-of-living formula does not necessarily raise or lower benefits. It is simply an effort to make the indexation reflect the changes in the actual cost of living seen by the elderly. We know consumption patterns of senior citizens differ substantially from the population as a whole.

The third feature on benefits is a change in the formula that will increase average benefits for a bit less than $400 a year. This has provoked some opposition since this increase will go to not just lower-income seniors, but also middle-class and relatively affluent seniors.

Opponents of hiking benefits argue that typical seniors are actually doing quite well. New research from the Census Bureau, based on tax filings, found that seniors were actually doing somewhat better than data from surveys indicated.

While this was good news, there is an important qualification to this finding. By far the main reason that income for seniors was higher than previously reported is that the survey data missed a lot of income from traditional defined-benefit pensions. In other words, the Census study didn’t find seniors had hundreds of thousands in savings that were not being picked up in the surveys; the story was defined benefit pensions.

This matters because we know that traditional defined-benefit pensions are rapidly disappearing. This means that the picture of middle-class seniors retiring with little other than their Social Security to support them still looks right. The average benefit this year is just over $17,600, certainly not enough to maintain a middle-class lifestyle. For this reason, the modest benefit increase proposed by Larson is very reasonable.

Larson proposes to cover this increase, as well as the projected Social Security shortfall, by having a gradual increase in the payroll tax and applying the tax to very high-income workers. On the latter point, the income subject to the payroll tax is currently capped at just under $133,000. This means that someone earning millions of dollars each year would pay no more in Social Security taxes than someone earning $132,900. Larson’s bill would make wages over $400,000 subject to the tax.

His other change is an increase in the payroll tax of 0.1 percentage point annually, split between workers and employers. This increase would continue for 24 years, for a total increase of 1.2 percentage points on both the worker and the employer.

While this is a middle tax increase, it is much smaller than increases we saw in the decades of the 1950s, 1960s, 1970s, and 1980s. More importantly, if we can sustain decent wage growth, it is a tax that should be easy to bear.

After adjusting for prices, wages have risen 1.5 percent annually over the last five years. If we can continue this pace of wage growth, the Larson bill would take back much less than 10 percent of the pay increase in taxes. Of course, wage growth may not continue, but then our focus should be on getting decent wage growth, not blocking revenue needed for Social Security.

In short, this is a well-considered bill that would accomplish good for current and future retirees. Congress should move on it.

Dean Baker co-founded the Center for Economic and Policy Research (CEPR), where he is a senior economist. His areas of research include housing and macroeconomics, intellectual property, Social Security, Medicare and European labor markets. He is the author of several books, including Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. His blog, Beat the Press, provides commentary on economic reporting. He received his B.A. from Swarthmore College and his Ph.D. in economics from the University of Michigan.

This article was produced by Economy for All, a project of the Independent Media Institute.

 

Welfare For Wall Street: Fees On Retirement Accounts

Welfare For Wall Street: Fees On Retirement Accounts

Reprinted with permission from AlterNet.

Most of us are willing to help out those who are less well off. Whether it comes from religious belief or a sense of basic decency we feel are an obligation to provide the basic necessities of life for the poor. But how would we feel about being taxed $1,000 a year to provide six figure salaries to people in the financial sector? Although no candidate to my knowledge has ever run on this platform, this is the nature of the retirement system the federal government has constructed for us.

Twenty or thirty years ago, most middle-class workers had defined benefit pensions. This meant that they could count on a fixed benefit that was some fraction of their average salary during their working years. For example, a person who spent thirty years at a company may be entitled to a pension that was equal to 60 percent of their average salary over their final five years of work.

With a defined benefit pension system, most of the risk was born by the employer. The worker did not have to worry about the stock market being down when she chose to retire. Nor did it matter to her if the pension made bad investment choices; the employer was liable for the promised benefits, unless it went bankrupt.

The virtues of the defined pension system can be exaggerated, although recent research indicates it provided more retirement income than we had recognized. Workers who changed jobs frequently or worked part-time rarely qualified for pension coverage. This excluded many women, African American, and Hispanic workers. But for those who were eligible the defined benefit system provided a substantial degree of retirement security.

That is not the case with the system of 401(k)s and IRA(s) that replaced the defined benefit system. Many workers are never able to put enough into their retirement plans to accumulate much towards retirement. In addition, there is no way to completely avoid the risk that the stock market can take a plunge as workers approach retirement. And, some people will inevitably make bad investment choices.

However there is one item that can be controlled. This is the fees that workers pay on the money they have in these accounts. These fees average 1.0 percent a year on the almost $6 trillion in 401(k) accounts managed by employers. There is a wide range for the fees on the $8 trillion held in IRAs, but many people pay more than 1.0 percent annually on these accounts as well.

If a 1.0 percent annual fee seems like a small deal, then you should probably let someone else manage your account. Suppose you have accumulated $100,000 in a 401(k) or an IRA, a reasonable amount for a middle class person nearing retirement. A 1.0 percent fee means you are paying $1,000 a year for someone to hold your money and send you quarterly statements telling you how much money you have in your account.

It’s important to realize that this 1.0 percent fee is not for actually managing the money. These accounts typically offer a range of funds, each of which charges its own fee to cover the cost of managing the fund. For example, a 401(k) might offer a variety of stock, bond, and money market funds in which you can invest your money. Each of these funds will charge a fee that covers the cost of investing the money placed in the fund. The 1.0 percent fee charged by the 401(k) is an addition to these fees.

What is the actual cost of holding your money and sending out quarterly statements? Vanguard, the biggest of the investment funds, doesn’t charge its customers anything to manage their accounts. They skim a small amount off the fees charged by the individual funds to cover overhead costs. This means that the 1.0 percent, or $1,000 a year, that 401(k) holders pay to manage their account is entirely an excess charge.

Think of it like going up to a person begging on the street and handing them $1,000. Only in this case the person getting the money probably has more money than you do.

There are ways to rein in these costs. Several states, including California, Illinois, and Oregon, have passed legislation that allows workers in the private sector to buy into low cost funds managed through the state. These public systems are supposed to go into operation over the next few years. Presumably other states will follow this model if these systems prove successful.

At this point, the biggest question is whether these programs will get off the ground. The Trump administration has been trying to sabotage them, using an interpretation of the Employee Retirement Income Security Act (ERISA) that would ban the state-run funds. Apparently Trump is concerned that his friends in the financial industry could not survive if they faced competition from the government.

The future of these publicly-run systems is unclear at this point. It would be a huge step forward if 401(k) and IRA managers simply had to disclose their fees in their quarterly statements, but like cockroaches, they want to remain in the dark.

Anyhow, for now you should just get used to the idea of these big handouts to the financial industry. You can console yourself with the thought that these are people who probably could not earn an honest living without help from the government.

 

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

 

Trump And Ryan Racing To Wreck The Federal Government

Trump And Ryan Racing To Wreck The Federal Government

Reprinted with permission from the Center for Economic and Policy Research.

The budget proposal put forward by the Trump administration has been widely attacked on a variety of grounds. It is clearly making ridiculous assumptions on tax revenue, which don’t make sense even with its implausible assumptions on economic growth. It also calls for large cuts to a variety of programs on which low and moderate income families depend like food stamps and Medicaid.

But in addition to these features, the budget also calls for a major downsizing of the federal government as we know it. If we pull out Social Security, Medicare and Medicaid, and the military, the rest of the government is projected to shrink from 6.3 percent of GDP at present to 3.6 percent of GDP by 2027. This 3.6 percent of GDP includes the cost of education programs, infrastructure, the Justice Department, research and development, national parks, the Environmental Protection Agency, the Food and Drug Administration, TANF, foreign aid, and all the other things we think of as the federal government.

It doesn’t seem plausible that we can downsize the federal government by more than 40 percent relative to current levels and still expect it to function. As much as Republicans may hate the federal government, they still expect it to enforce laws, keep our food and drugs safe, ensure the infrastructure is usable, and support basic research in health care and other areas. This cannot be done if we downsize the government as projected in the Trump budget. This is either a joke or a plan to ensure that the government no longer provides basic services.

Unfortunately, the Trump budget is not the first time the Republicans have proposed largely eliminating the federal government. Paul Ryan went even further in the budgets that he repeatedly proposed as head of the House Budget Committee and got the Republican controlled House to approve.

Ryan’s budgets virtually eliminated everything except Social Security, Medicare and Medicaid, and the military by 2050. According to the Congressional Budget Office’s analysis of the Ryan budget (done under Mr. Ryan’s supervision), spending on everything other than Social Security, Medicare and Medicaid would be reduced to 3.5 percent of GDP in 2050. With military spending likely running in the neighborhood of 3.0 percent of GDP, this left around 0.5 percent of GDP for everything from education to foreign aid.

Rather than earning Ryan and the Republicans ridicule, these proposals for eliminating the federal government won him widespread applause in Washington policy circles. Folks like The Washington Post editorial page writers welcomed Ryan as a serious budget wonk. The deficit hawk Peter Peterson crew even gave Ryan an award for his budget plans.

Obviously, they could see that Ryan’s plan was either a ridiculous lie, assuming that he had no intention of following through on his plans, or alternatively incredibly dangerous if he was serious. But the Washington establishment types were so anxious to have a politician who was prepared to take an axe to large chunks of the government that they didn’t care about such details.

Given this background, the Trump administration can hardly be blamed for thinking that it could get away with the same sort of dishonesty that brought Paul Ryan to the top echelons of the Washington power structure. If it wants to show a budget that balances in a decade by making absurd assumptions on tax revenue and projects downsizing the federal government to the point of elimination, this is just par for the course in Washington policy debates.

In this sense, it would be nice if we could say that President Trump is bringing new levels of dishonesty to budget politics, but that is not true. The key problem is that the Washington elite types are dead set on sharp cutbacks to programs like Medicare, Medicaid and Social Security, which enjoy massive public support across the political spectrum. Even the vast majority of Republicans do not want to see cuts to these programs, which is a major reason they voted for Donald Trump in the primaries.

In order to overcome this mass based opposition, the elites are perfectly happy to lie to advance their agenda. They can hardly blame Donald Trump for adopting their tactic.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

Gripes About Excessive Regulations And Taxes Often Are Baseless

Gripes About Excessive Regulations And Taxes Often Are Baseless

By Dean Baker, Tribune News Service (TNS)

WASHINGTON — In the last couple of months we have seen the country whipped up into near hysteria over the virtually nonexistent threat of Ebola.

While the only people who contracted the disease in this country were those who treated a man who died of the disease, tens of millions of people became convinced they were in danger on airplanes and public buses and even routine visits to the supermarket.

Politicians have sought to exploit the same sort of fears with their rants about regulations and high taxes sinking the economy. These complaints have as much foundation in reality as the Ebola threat.

The regulation screed usually focuses on the number of pages in bills like the Affordable Care Act and the Dodd-Frank financial reform bill. While lengthy bills are unfortunate from the standpoint of the trees cut down for the paper, the length bears no relationship to the amount of regulation.

To take one example, the Volcker Rule, which prohibits banks with government insured deposits from engaging in risky speculation, ended up more than three times its original length as the industry carved out an array of exceptions. The greater length was associated with less regulation, not more.

Dodd-Frank was about curbing the sorts of abuses that gave us the financial crisis. Is the argument that we need corrupt banks to foster growth?

The screams over the ACA are equally misguided. The rules have little impact on large firms, the vast majority of whom already offered insurance that met ACA requirements. It might have been expected to affect mid-sized firms that did not previously offer insurance, but none of the complainers has yet presented any evidence that these mid-sized firms have been especially hard hit in the last few years.

The tax complaints require some serious amnesia. Tax rates were higher for most people in the 1990s when we saw the strongest growth in almost three decades. We then lowered taxes in 2001 and saw a weak recovery followed by the collapse in 2008.

The explanation for the continuing weakness is not a surprise to those of us who warned of the housing bubble before the crisis. The bubble had been driving the economy both directly through its impact on construction and indirectly through the impact that $8 trillion of housing bubble wealth had on consumption. When the bubble burst, the economy lost its driving force.

The building boom of the bubble years lead to enormous overbuilding of housing. When the bubble burst, construction didn’t just fall back to normal. It fell to the lowest levels in 50 years, costing the economy more than four percentage points of GDP, amounting to $700 billion annually in lost demand. The loss of housing wealth meant that consumption fell back to more normal levels.

While both housing and construction are up from their low-points in the recession, they are not going to return to bubble peaks, at least not without another bubble. This means that the economy continues to have a huge shortfall in demand. Cutting taxes and reducing regulation will not magically fill this gap in demand.

There are essentially two ways to increase demand. One is directly through more government spending. This is currently taboo in Washington since we are all supposed to hate budget deficits.

The other is by reducing the trade deficit. The way to reduce the trade deficit is to make U.S. goods more competitive with a lower-valued dollar. Talk of a lower dollar is also taboo in political circles.

In short, it is not difficult to find ways to boost the economy; the problem is that politics prevents them from being discussed. Instead we get silliness about taxes and regulation.

Dean Baker is a leading macroeconomist, co-founder of the Center for Economic Policy and Research (cepr.org) and earned a Ph.D. in economics from the University of Michigan in 1988. Readers may write him at CEPR, 1611 Connecticut Avenue, NW, Suite 400, Washington, DC 20009

Photo via Wikimedia Commons

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Campaigning Democrats Must Tell Voters: Obamacare Is Working

Campaigning Democrats Must Tell Voters: Obamacare Is Working

By Dean Baker, McClatchy-Tribune News Service

WASHINGTON — Most people don’t like to discuss their failures. The Democrats, however, seem unwilling to discuss their successes. This is the story of Obamacare.

For those who have forgotten, the Affordable Care Act was pushed through Congress almost entirely with Democratic votes. The Republicans objected, insisting the bill would destroy the health care system and the economy.

On the health care side, the Republicans issued dire warnings that the bill would lead to rationing of services, socialized medicine and death panels.

On the economics, they called the bill a massive job killer. It would deter businesses from hiring workers and the workers they did hire would be part time. Exploding health-care costs would both break the budget and the economy. The deficit would explode and insurance premiums would soar.

The widely predicted disaster did not happen.

In the data available so far, enrollment in the exchanges and Medicaid was higher than projected.

Over 8 million people enrolled in the exchanges through the first four months of 2014, far more than the 6 million that had been projected. Almost 5 million more benefited through the expansion of Medicaid. The percentage of people uninsured fell to the lowest level since 1997 in the first quarter of 2014 and is virtually certain to fall much further as enrollment continues to rise.

And costs have been far lower than expected. The Congressional Budget Office has repeatedly lowered its cost projections for the ACA and health care more generally. The savings for Medicare alone are projected to be well over $1 trillion in the next decade.

Private health-care costs have also risen at their slowest pace on record in the last five years, saving most families thousands of dollars on costs. All of the savings cannot be attributed to the ACA, but can anyone doubt that if cost growth had accelerated the Republicans would blame the ACA regardless of the actual cause?

The story of the ACA as a job killer also doesn’t hold water. No one can be happy about the current state of the labor market — we still have a long way to go to recover from the collapse of the housing bubble — but the weak economy can’t be blamed on the ACA.

In fact, job growth has accelerated to a pace of more than 2.5 million a year since the exchanges became operational in January. The faster job growth was almost certainly not caused by the ACA but again, if job growth had slowed the Republicans would be pointing their finger at the ACA.

The part-time story also turns out to be the exact opposite of what the Republicans predicted. The number of people who involuntarily work part time has fallen by more than 20 percent since the bill’s passage. However the number of people who chose to work part time is up.

In particular, the number of people with young children who now have the freedom to work part time because they don’t have to rely on their job for insurance is up by more than 11 percent since 2013.

Republicans used to tout family values, but apparently they no longer think it’s a good thing that parents get to spend time with their children, since it was Obamacare that made this possible.

By any reasonable measure the ACA has been far more successful than expected. However, most people don’t know the successes because the Democrats are too scared to talk about the ACA. They only hear the Republican horror stories, some of which are true and some of which are pure invention.

The reality is that the ACA is a massive program. As with any massive program there will be some bad stories, just as there are some bad stories with Social Security and Medicare.

We have the data to show these bad stories are the exception, but if the Democrats don’t start talking about the successes, most people will only hear the bad stories.

Dean Baker is a leading macroeconomist, co-founder of the Center for Economic Policy and Research (cepr.org) and earned a Ph.D. in economics from the University of Michigan in 1988. Readers may write him at CEPR, 1611 Connecticut Avenue, NW, Suite 400, Washington, DC 20009.

LeDawna’s Pics via Flickr

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GOP Using Whacky Strategies To Derail Affordable Health Care

GOP Using Whacky Strategies To Derail Affordable Health Care

By Dean Baker, McClatchy-Tribune News Service

WASHINGTON — Ever since its passage in 2010 the Republican Party has made it clear that it will do everything in its power to obstruct the implementation of the Affordable Care Act.

The Republican-controlled House of Representatives has voted 54 times to repeal the ACA. Among other ploys, they have:

-Made up fantasies about ACA created “death panels.”

-Come up with nonsense stories about the law creating a “part-time” nation and being a job-killer.

-Promoted stories about an explosion in insurance prices even as economists struggle to explain the sharp slowing of healthcare costs.

There is zero truth to most of the Republicans’ stories on the horrors of the ACA, but that has little relevance to their efforts to derail the program. They apparently believe that there is no more pressing problem facing the country than making sure that people do not get health insurance.

This is the backdrop that must be kept in mind when considering the Halbig v. Sebelius case that is currently moving through the court system. Most recently the anti-ACA forces got a 2-1 favorable ruling from a panel of the DC appellate court. The same day a Virginia panel ruled 3-0 against Halbig, arguing that the law can remain as is.

The issue in this case is fairly straightforward: there was a mistake in writing the law. The wording of the law says that subsidies in the exchanges are only available in the exchanges that were established by the states.

If interpreted literally, people enrolled in the federally run exchanges would not be eligible for subsidies. This would exclude people in the 34 states that chose not to establish their own exchanges. Only the people in the states that established exchanges would be allowed to receive subsidies.

There is zero doubt that this wording was a mistake. There is no record of any member of Congress, anyone connected with the administration or anyone involved in health care policy advocating that subsidies be restricted to people enrolled in the state exchanges.

Even the Congressional Budget Office assumed without question that the subsidies were intended to apply to people in the federal exchanges when it analyzed the budgetary impact.

In spite of efforts to be careful, there are sometimes mistakes in the writing of a law. Usually courts try to interpret a law in a way that makes sense even if is not literally what the law says.

If the rules on food stamps say beneficiaries can get $250,000 a month in benefits, instead of $250, judges usually would not insist that we give beneficiaries three quarters of a million dollars every month.

However the Republican efforts to sabotage the law have been joined by their allies on the courts, so normal legal rules do not apply. It is likely the case will eventually be decided by the Supreme Court and it is anyone’s guess how they will rule.

While the Republicans are obviously hoping to throw another monkey-wrench into the workings of the ACA, it is not clear this would really work to their advantage.

The people who would be losing subsidies are mostly in Republican-controlled states. They will be losing their subsidies because their governors and/or legislators didn’t want to cooperate with the ACA.

Taking away subsidies from these people will probably be about as popular as taking away Medicare from people in these states. But hey, the Republicans think it is important to keep people from getting insurance.

There are many problems with the ACA. There should be a Medicare-type public option available to people. The program could pay less to the drug companies, saving hundreds of billions of dollars.

But it will only be possible to address these and other issues when the Republicans accept that the ACA exists and stop trying to find whacky legal theories to undo it.

Dean Baker is a leading macroeconomist, co-founder of the Center for Economic Policy and Research (cepr.org) and earned a Ph.D. in economics from the University of Michigan in 1988. Readers may write him at CEPR, 1611 Connecticut Avenue, NW, Suite 400, Washington, DC 20009.

Photo: Speaker Boehner via Flickr

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