Restructuring Markets to Give People Better Lives

Markets are always somehow structured by government policy, and it matters significantly whether those markets are structured to benefit the wealthiest at the expense of everyone else.

The standard liberal approach to economic policy is to support government programs that counteract the inequities gen- erated by the market. Unfortunately, this narrow focus on government programs has effectively given the right free rein to restructure the market to redistribute an ever-larger share of income to the rich and very rich. While tax and transfer policies are important, if liberals had not ignored, or in many cases supported, the ways in which the right was restructuring the market, the existing levels of poverty and inequality that the government needs to address would be far lower.

In other words, liberals need to spend at least as much time on the rules that structure the market as they do on government programs that redress the problems it creates. This is because the idea that the extremes of wealth and poverty we see are inherent outcomes of the market is wrong. These extremes are the result of the way in which the market has been structured by the government.

Let’s start off with, perhaps, the most explicit example of this structuring: patent and copyright monopolies, which are entirely a government invention. There is nothing “free market” about Bill Gates’s enormous fortune. It’s because the government will arrest anyone who mass produces computers with Microsoft software without first paying the company licensing fees.

The Microsoft story is not unique. Huge sectors of our economy exist in their current form because of government-granted patent or copyright monopolies, including the pharmaceutical industry, the medical equipment industry, and the entertainment industry. These monopolies are not just long-fixed rules of the game. Government policy has made them both longer and stronger over the last almost four decades.

This government hand is seen clearly in the prescription drug industry, which has caused renewed outrage among the public in recent years. Spending on prescription drugs hovered near 0.4 percent of GDP, with no discernible trend from 1960 to 1980, when the Bayh-Dole Act was passed into law. It passed the Senate by a huge, bipartisan 91-4 margin and was signed into law by President Carter.

Bayh-Dole allowed private companies to obtain patent rights on research sponsored by the government. Prior to Bayh-Dole, the government retained control over research that it funded. The change was especially important for the pharmaceutical industry, because the government funds a large amount of bio-medical research through the National Institutes of Health (NIH) and other agencies. Since Bayh-Dole became law, spending on prescription drugs has skyrocketed to more than $440 billion in 2018 (2.2 percent of GDP); more than five times the share of GDP it took up in 1980.

We have benefitted from increased private spending on research as a result of Bayh-Dole, but granting these monopolies was only one of many possible mechanisms to provide incentives for new innovations. This is simply not the free market; it is deliberate government policy.

The implications of this point are enormous. Another important example: We continually hear the refrain that workers need more education and skills to succeed in the modern economy, but the extent to which the economy rewards education and skills is also a matter of government policy, not the endogenous course of technology. If we envision a world with no patent and copyright protection, we would not have a slew of Silicon Valley millionaires and billionaires nor NIH alumni becoming biotech tycoons.

Of course, it is important that we have incentives for innovation and creative work, but the point is that government policy can make those incentives greater or smaller. If we want more equality, and arguably a more efficient economy, we could make patents and copyrights shorter and weaker and have more direct funding to put research and creative work in the public domain immediately after it is produced. The Human Genome Project is one model, where results are posted nightly. If we did this with research into drug development, new drugs could be sold as generics, costing a tiny fraction of the price of patent-protected medicine.

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Finance is another area where government policy structured the market to support a bloated industry, one that creates large fortunes for a small number of people. The most dramatic incident in this respect was the massive bailout for the industry after the financial crisis. The magic of the market would have sent Goldman Sachs, Citigroup, and other financial behemoths into bankruptcy.

Instead, Congress and the Federal Reserve Board raced to supply the necessary loans and guarantees to keep the major banks afloat. (No, we did not risk a second Great Depression without the bailout. The Federal Deposit Insurance Corporation could have kept the normal flow of payments going. And we learned the secret to escaping a severe depression almost 80 years ago with the start of World War II. It’s called “spending money.”)

Beyond the bailout, government policy has structured finance to support an incredibly inefficient industry that unnecessarily makes some people very rich. Government policy literally rewrote the rules on bankruptcy to support mortgage-backed securities and derivative trading. Also worth noting is the fact that the financial industry would be dramatically downsized if financial transactions were not exempted from the sort of sales tax imposed on most other items in the economy. Again, it is clearly the rules that government puts in place that give so much money to the big winners in finance, not anything intrinsic to the market.

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Excessive CEO Pay Takes Money Away from Other Workers

The op-ed provides a good analysis of the problem with the economic structures that allow CEOs to be excessively overpaid — the substantial amount of money that the CEOs are overpaid with could instead be going to other lower-level workers. Wages in the United States have hardly increased in decades for most American workers, and the CEO pocket money would make a significant difference in their lives.

The problem is the structure of corporate governance. The people who most immediately determine the CEO’s pay are the corporation’s board of directors. These directors have incredibly cushy jobs. They typically get paid several hundred thousand dollars a year for perhaps 150 hours of work.

Members of corporate boards largely owe their jobs to the CEOs and top management. They almost never get booted out by shareholders; the reelection rate for board members running with board support is over 99 percent.

In this context, board members have no incentive to ask questions like, “Could we get someone as good as our CEO for half the pay?” There is basically no downward pressure on CEO pay and every reason to boost pay. After all, if you were sitting on some huge pot of other people’s money, wouldn’t you want to pay your friends well?

Of course, the CEO pay comes at the expense of returns to shareholders, and these have not been very good in recent years in spite of the best efforts of Trump and the Republicans to help them with tax cuts and pro-business regulation. In the last two decades, stock returns have averaged less than 4.7 percent annually above the rate of inflation. By contrast, in the long Golden Age from 1947 to 1973, real stock returns averaged 8.2 percent.

With the bulk of stock being held by the richest people in the country, there is no reason to shed tears for stockholders, but the fact is they are being ripped off by CEOs and other top management. Given the choice, we should prefer the money ends up in the hands of shareholders rather than CEOs. After all, people below the top 1 percent do own stock in their 401(k)s, as do public and private pension funds. By contrast, every dollar in additional CEO pay is going to someone in the top 0.001 percent of the income distribution.

More important than the money going to the CEOs is the impact that their outlandish pay has on pay structures in the economy more generally. When the CEO is pocketing $20 to $30 million a year, other top executives are likely earning close to $10 million and even the third-tier managers might be topping $1 million.

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If a successful CEO of a large company was pocketing $2-3 million a year, instead of $20 to $30 million, the ripple effect on the pay of others near the top would leave much more money for everyone else. This gives us very good reason to worry about excessive CEO pay.

If the structure of corporate governance makes it too difficult for shareholders to collectively act to limit CEO pay, threatening them with a return to the pre-Trump 35 percent tax rate might give them enough incentive to get the job done. It has always been in the interests of shareholders to pay their CEOs as little as possible, just as they want to pay as little as possible to their other employees.

If shareholders pay a CEO $20 million more than needed to get someone to run the company, it has the same impact on the bottom line as paying $2,000 extra to 10,000 workers. No company deliberately overpays their frontline workers.

Making Algorithms Less Biased and Reducing Inequalities of Power

Algorithms increasingly effect society, from employment (Amazon’s algorithms discriminated against women) to the criminal justice system (where they often discriminate against African-Americans), and making them less biased would reduce inequalities in power. This is also related to how research suggests that AI is able to independently develop its own prejudices.

With machine learning systems now being used to determine everything from stock prices to medical diagnoses, it’s never been more important to look at how they arrive at decisions.

A new approach out of MIT demonstrates that the main culprit is not just the algorithms themselves, but how the data itself is collected.

“Computer scientists are often quick to say that the way to make these systems less biased is to simply design better algorithms,” says lead author Irene Chen, a PhD student who wrote the paper with MIT professor David Sontag and postdoctoral associate Fredrik D. Johansson. “But algorithms are only as good as the data they’re using, and our research shows that you can often make a bigger difference with better data.”

Looking at specific examples, researchers were able to both identify potential causes for differences in accuracies and quantify each factor’s individual impact on the data. They then showed how changing the way they collected data could reduce each type of bias while still maintaining the same level of predictive accuracy.

“We view this as a toolbox for helping machine learning engineers figure out what questions to ask of their data in order to diagnose why their systems may be making unfair predictions,” says Sontag.

Chen says that one of the biggest misconceptions is that more data is always better. Getting more participants doesn’t necessarily help, since drawing from the exact same population often leads to the same subgroups being under-represented. Even the popular image database ImageNet, with its many millions of images, has been shown to be biased towards the Northern Hemisphere.

According to Sontag, often the key thing is to go out and get more data from those under-represented groups. For example, the team looked at an income-prediction system and found that it was twice as likely to misclassify female employees as low-income and male employees as high-income. They found that if they had increased the dataset by a factor of 10, those mistakes would happen 40 percent less often.

In another dataset, the researchers found that a system’s ability to predict intensive care unit (ICU) mortality was less accurate for Asian patients. Existing approaches for reducing discrimination would basically just make the non-Asian predictions less accurate, which is problematic when you’re talking about settings like healthcare that can quite literally be life-or-death.

Chen says that their approach allows them to look at a dataset and determine how many more participants from different populations are needed to improve accuracy for the group with lower accuracy while still preserving accuracy for the group with higher accuracy.

Is Brazil About to Become a Brutal Militaristic Regime?

Brazil may soon become a brutal regime reminiscent of its past atrocities, and the far-right will probably impose crippling austerity (it wants to freeze real government spending for decades, which will worsen public health and make recessions much worse) that will do significant harm to the working class.

For the past thirty years, Congressman Jair Bolsonaro was a fringe extremist in Brazilian politics, known mostly for outlandish, deliberately inflammatory quotes in which he paid homage to the most notorious torturers of the 1964-1985 military regime, constantly heralded the 1964 coup as a “defense of democracy,” told a female socialist colleague in Congress that she was too ugly to “deserve” his rape, announced that he’d rather learn that his son died in a car accident than was gay, and said he conceived a daughter after having four sons only due to a “moment of weakness.”

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His primary solution to the nation’s crime epidemic is to unleash the military and police into the nation’s slums and give them what he calls “carte blanche” to indiscriminately murder anyone they suspect to be criminals, acknowledging many innocents will die in the process. He has criticized monsters such as Chile’s Pinochet and Peru’s Fujimori – for not slaughtering more domestic opponents. He has advocated that mainstream Brazilian politicians be killed. He wants to chemically castrate sex offenders. In all respects, the hideous Brazilian military dictatorship that took over Brazil and ruled it for 21 years – torturing and summarily executing dissidents, with the support of the US and UK in the name of fighting Communists – is his model of governance.

As a result of last night’s truly stunning national election in Brazil, Jair Bolsonaro has been instantly transformed from marginalized clown into the overwhelmingly dominant force in the country’s political life. Bolsonaro himself fell just short of winning the 50% needed to win the presidency without a run-off.

But given the margin of victory, he is the overwhelming favorite to win on October 28 against the second-place candidate, ex-São Paulo Mayor Fernando Haddad. Haddad is the previously unknown, hand-picked successor anointed by Lula, the ex-two-term President who had been leading all polls until he was convicted on dubious corruption charges and quickly imprisoned so as to bar his candidacy, then silenced by Brazil’s right-wing judiciary with a series of remarkable prior restraint censorship orders barring all media outlets from interviewing him.

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In sum, it is virtually impossible to overstate the threat level posed to democracy and human rights in the world’s fifth most-populous country as a result of last night’s election. And unlike in the U.S. or in the UK, which have old, strong, long-established democratic institutions that can limit the excesses and worst abuses of demagogues and authoritarians, Brazil has none of that. Spiraling from multiple crises – suffocating economic inequality, an epidemic of violence worse than many war zones, and a corruption scandal so sweeping that it has infected the core of almost every faction of the ruling class – this is a country with little to no ability to impose limits on what Bolsonaro wants to do.

Add to that the sheer youth of Brazilian democracy – only 33 years old: the temporal equivalent of the U.S. in 1820 or so – and it’s remarkably easy to envision a quick return to the military rule that imposed so many atrocities on so many segments of the population. That all of this has been ushered in democratically should be, but likely will not be, another warning sign to western democracies that are confronting similar dynamics, albeit ones that are unfolding somewhat more gradually.

To be sure – as is true of Trump, Brexit, and the rise of right-wing extremism throughout Europe – some substantial minority of Bolsonaro voters are motivated by classic bigotry, racism, anti-LGBT animus, resentment toward the indigenous population, and just a general tribal anger that seeks scapegoats for their plight. But many, probably most, are none of those things.

Many, instead, are motivated by legitimate grievances toward an establishment ruling class that has failed them on all levels, that expresses indifference if not outright contempt for their suffering and loss of hope, that they blame, often with good reason, for enacting policies that have destroyed their futures while refusing to accept any responsibility for it. And once that framework is adopted, any perceived enemy of that ruling class becomes their friend, or at least someone whose vows of destruction become more appealing than vows to preserve the system they justifiably despise (the reality is that Bolsonaro (like Trump), with his Chicago-trained neoliberal economic guru, will serve the economic interests of the establishment with great devotion at the expense of his working-class voters, but the perception of his anti-establishment animus is what matters).

The standard establishment reaction in the face of rising demagogues like Bolsonaro is to denounce those who support them, to call them names, to heap scorn on them, to sanctimoniously lecture them that their choices are primitive, retrograde, ignorant and illegitimate. That only serves further to exacerbate the dynamic.

Some context for the 21st century:

The world is watching Brazil’s elections, probably as never before. “Latin America’s latest menace: Bolsonaro Presidente,” screams the headline on the cover of The Economist. This conservative UK magazine would love to see the Workers’ Party (PT) disappear from Brazilian politics, but even they cannot stomach Bolsonaro, who in 2016 dedicated his vote to impeach President Dilma Rousseff to the colonel responsible for her torture.

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By 2014, under the presidencies of Lula and Dilma, poverty had been reduced by 55 percent and extreme poverty by 65 percent, and unemployment hit a record low of 4.9 percent. Some of these gains were lost when the economy then went into a deep recession that year, and the right took advantage of that downturn to seize what it could not win at the ballot box in four consecutive elections.

They impeached Dilma and removed her from office without even accusing her of an actual crime; and then Judge Moro sent Lula to prison for a “bribe” he never accepted, in a “trial” without material evidence. The US government sent experts from its Justice Department to “help” with investigations, and quietly showed support for the removal of Dilma.

But the bulk of the Brazilian electorate could see that although all the major political parties were infected with corruption, the decapitation of the Workers’ Party was not about justice. Lula retained a commanding lead in the polls even after his conviction. And so it became necessary to bar Lula from running for president, to jail him, and restrict his access to the media.

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For the first time in decades, the threat of a military dictatorship is surfacing. No responsible journalism should ignore this threat, nor legitimize the extremism that strengthens it. And anyone who cares about democracy in Brazil would have to support Bolsonaro’s opponent in the second round of the election.

Patriotic Millionaires: “Just Tax Us More, PLEASE”

There’s really something wrong going on when there’s a group called the Patriotic Millionaires that advocates for left-leaning policies to help the general population.

According to a new report released yesterday by Medicare trustees, the program is projected to run out of funding three years earlier than previously expected, now running out of money by 2026. A partner report stated that the funding for Social Security would run out in 2035.

In response to this news the Patriotic Millionaires released the following statement:

“This is beyond absurd, this is morally bankrupt. The GOP is waging a war on everyday Americans on behalf of their donor class. Why else would they stand by and watch programs that 40% of Americans benefit from dry up all while signing a $1.9 trillion tax cut for the wealthy into law?

Millions of American seniors depend on these programs every day. Maybe GOP members of Congress are not thinking about those seniors, about 2026 or about 2035 because they plan to have skipped through the revolving door to lucrative K Street lobbying jobs by then. Whatever the reasoning, it’s become clear the the GOP has plans for the type of America they want to live in, and it is not the type of America we want to live in.

We want to live in an America with a healthy population, a population that is able to live in retirement with dignity, and a population that is not under constant attack by Republican lawmakers. So tax us more. Tax us more to fund these programs and give us a healthy workforce, to give us retirees who can afford to buy our goods and services, and to give us a country that we can be even prouder to call home.”

The group also has a good statement on the Supreme Court’s recent decision to unjustly diminish political democracy:

This afternoon, in response to the news that the Supreme Court upheld by a 5-4 decision Ohio’s process of purging individuals from its voter rolls, the most extreme in the nation, as not violating the National Voter Registration Act, the Chair of the Patriotic Millionaires Morris Pearl, former managing director at BlackRock, Inc., released the following statement:

“Today’s decision by the Supreme Court is not just a mistake, it is the latest blow in a war over the fate of our democracy. On one side, the people. On the other, the conservative officials and wealthy oligarchs who wants more money in politics and less voting. This decision does not make our elections safer or more fair, it just makes it harder for lawmakers to be held accountable by their constituents. At a time when public trust in government has never been lower, we need to make it easier, not harder, for people to vote.”

Interesting Inequality Article

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An interesting article on inequality. The journalist is probably of the class who feel some guilt for benefiting from the unjust, enormous upwards redistribution of income that’s happened in the last four decades. The income share of the top 1 percent in the U.S. has doubled from its share during most of the 1950s to 1980. This is an amount high enough to increase the income of people in the lowest 90 percent of the country’s income distribution by over 20 percent, and it’s nearly enough to double the income share of the bottom 40 percent.

I have my disagreements with the article, and it doesn’t offer many solutions relative to its lengthiness. In brief though, one of the most important ways to reduce inequality is to stop wealth from being distributed so unequally to begin with. Market structures have been rigged in all sorts of ways to benefit the wealthy, and instead of only focusing on tax and transfer policy, pre-tax distributions of income need to be focused on more.

Supreme Court to Hear Case and Probably Damage U.S. Public Sector Unions

The modern right-wing “conservatives” weakening unions is simply designed to reduce worker bargaining power, thus allowing for more upwards redistribution and therefore higher incomes among the richest people in the country. The graph below demonstrates this quite well, even if weakened unions aren’t the full story of U.S. wage disparity. Also, ironically enough, Republican president Dwight Eisenhower was a strong supporter of unions (and New Deal programs), which shows the rightward shift of U.S. politicians since the 1960s.

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In Janus vs. AFSCME, the court will reconsider its 1977 decision stating that public employees who choose not to join unions can still be required to pay partial union dues, to help fund unions’ collective bargaining negotiations, which hold benefits for all workers.

While AFSCME is the union that represents state and municipal workers, supporters fear that a decision in favor of Mark Janus—the individual plaintiff backed by a network of billionaires, corporate interests and right-wing ideologues determined to undermine organized workers—would threaten labor in all sectors across the country. As Andrew Hanna and Caitlin Emma wrote at Politico on Sunday:

The financial blow dealt by a Janus victory would far exceed the loss of nonmember fees, thanks to what economists call a “free rider” problem. Unions are compelled by law to represent all workers within a collective-bargaining unit—not just dues-paying union members. If workers are permitted to quit the union and still benefit from collective bargaining agreements without paying non-member fees, union non-membership will become much more attractive.