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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Instead of Only Taxing the Rich More, Change Pre-Tax Income Distribution So They Receive Less

Instead of just trying to tax the rich more, it would be better to prevent the distribution of income from being so unjust to begin with. Markets have been rigged in numerous ways to redistribute income upward to the wealthiest members of society.

Given the enormous increase in inequality over the last four decades, and the reduction in the progressivity of the tax code, it is reasonable to put forward plans to make the system more progressive. But, the bigger source of the rise in inequality has been a growth in the inequality of before-tax income, not the reduction in high–end tax rates. This suggests that it may be best to look at the factors that have led to the rise in inequality in market incomes, rather than just using progressive taxes to take back some of the gains of the very rich.

There have been many changes in rules and institutional structures that have allowed the rich to get so much richer. (This is the topic of the free book Rigged.) Just to take the most obvious — government-granted patent and copyright monopolies have been made longer and stronger over the last four decades. Many items that were not even patentable 40 years ago, such as life forms and business methods, now bring in tens or hundreds of billions of dollars to their owners.

If the importance of these monopolies for inequality is not clear, ask yourself how rich Bill Gates would be if there were no patents or copyrights on Microsoft software. (Anyone could copy Windows into a computer and not pay him a penny.) Many other billionaires get their fortune from copyrights in software and entertainment or patents in pharmaceuticals, medical equipment and other areas.

The government also has rules for corporate governance that allow CEOs to rip off the companies for which they work. CEO pay typically runs close to $20 million a year, even as returns to shareholders lag. It would be hard to argue that today’s CEOs, who get 200 to 300 times the pay of ordinary workers, are doing a better job for their companies than CEOs in the 1960s and 1970s who only got 20 to 30 times the pay of ordinary workers.

Another source of inequality is the financial sector. The government has aided these fortunes in many ways, most obviously with the bailout of the big banks a decade ago. It also has deliberately structured the industry in ways that facilitate massive fortunes in financial engineering.

There is no reason to design an economy in such a way as to ensure that most of the gains from growth flow upward. Unfortunately, that has largely been the direction of policy over the last four decades.

Why the Fed Raising Interest Rates Matters

The Federal Reserve is the central bank of the United States. There are many valid criticisms of it as an institution, but it can act as a valuable force for the public interest if used properly.

As is the standard of central banks, the Fed has a powerful tool that allows it to have a major impact on short-term interest rates. Interest rates are basically bread and butter to the number of people who have jobs in the economy.

Raising interest rates has the effect of slowing the economy and keeping people — potentially millions of them, as shown in recent years — from finding jobs. Higher interest rates naturally mean less loans to businesses and organizations that could use them to hire more workers. The standard argument for raising interest rates though is to control inflation, as higher interest rates reduce pressure in the labor market, which then leads to workers having less bargaining power for pay increases.

The problem with the argument to control inflation is that inflation has already been quite low in past years, well below the Federal Reserve’s 2.0 percent annual target. The 2.0 percent target is supposed to be an average, and considering recent years, it hasn’t even been near that target. The Federal Reserve was set up with the dual mandate of both adequately controlling prices and maintaining what’s known as full employment. Full employment basically means a strong labor market with low unemployment, where workers can have good access to jobs with fair wages, and it’s quite important as a policy measure. (Due to slow wage growth among most, the U.S. economy clearly isn’t at full employment now, contrary to what you’d likely read in the newspapers.)

If unemployment is low, it means that there will be an increased demand for labor, which should both mean higher wages for workers and that the economy’s resources are being used decently well. The increased demand for labor raising wages is because employers cannot so easily hire other workers if their employees happen to leave the firm. Without enough employees, the firm risks being losing profitability to its competition and going out of business. This situation would allow an existing employee to say something like “Give me a raise or I will find a job elsewhere,” and it would potentially allow a prospective employee to refuse a job unless the wage is adequate enough.

The increase in worker bargaining power leading to higher wages and then higher inflation is due to firms needing or deciding to raise prices some after seeing that workers generally can pay more. There is nuance needed in this description, and it should be noted that wages for most workers in the U.S. have been mainly stagnant for decades due to the policy-driven upwards redistribution of income to the wealthy, but it’s a standard point. If the policy is actually directed towards the interest of the general public, the increases in prices will be more than offset by the increases in wages, however. There is evidence of this worker-friendly approach doing well in the U.S. from about 1947 to 1973.

It should also be noted that the only times that many American workers have experienced even minor real wage increases in the last four decades have been when there were tighter labor markets. This occurred in the later 1990s and over the past several years, and it points to the immense importance of the Fed keeping interest rates low.

Alan Greenspan was the economist at the head of the Fed in the 1990s, and for whatever reason, he decided against raising interest rates as the unemployment rate got lower. This was at a time when it was standard in the economics profession to claim that the unemployment rate couldn’t go below about 6 percent without leading to rapid inflation. Inflation never got that high in the 1990s though, and even if Greenspan deserves serious criticism for failing to contain the housing bubble that was the main cause of the devastating economic crash and Great Recession, he does deserve praise for doing this one thing to help low- and middle-income workers.

Janet Yellen’s chair appointment at the Fed also saw the institution keeping interest rates quite low for her tenure, which is clearly one of the main reasons that the U.S. economy is doing decently well now in 2018 relative to the last four decades. Driving around America now would allow someone to see many more help wanted signs than in at almost any other time thus far in the 21st century, and there’s an advantage to this that may not be so obvious: Disadvantaged workers (typically those from minority ethnic groups or with disabilities) will have an easier time finding jobs. The increased demand for labor means that there’s less room for discrimination against them. As proof of this, the disabilities application rate and the unemployment rate for African-Americans have fallen to historically low levels.

The unemployment rate does of course have its flaws. It measures workers looking for jobs, not the amount of people who have dropped out of the labor force and are no longer looking for employment. There is plenty of good work that needs to be done, and there are idle hands that want to do it, but the dysfunctional American economy isn’t putting the two together enough. So while the unemployment rate is an important measure, there are other relevant indicators (such as the labor force participation rate among prime-age workers) that should be considered in assessing the economy.

But if the majority of workers benefit most from lower rather than higher interest rates, why does the Fed continue to raise them then? It’s largely because financial institutions exert significant control over the Fed, and their preference is to keep inflation as low as possible. More worker bargaining power via lower interest rates can mean a shift from net corporate profits to wages for workers, and bank loans also stand to depreciate in value with higher inflation.

The after-tax corporate profit share of national income has almost doubled since 2000, and this to a significant extent is because of wages for workers being diverted into corporate profits that are largely pocketed by executives and major shareholders. According to one reputable estimate, if the after-tax corporate profit share was back at its 2000 level, it would translate to nearly $4000 more per U.S. worker in wages, a fact that is undoubtedly quite disturbing.

Since the loans of banks and other financial corporations typically are set at a fixed rate, the repayments of those loans will be worth less to them if inflation rises. For one example, if a bank offered a 5 percent home loan while expecting that inflation would be 1 percent, the bank would assume that it would receive a real interest rate of 4 percent. If the inflation rate actually becomes 2 percent, the bank will take a considerable profit loss (receiving a 3 percent real interest rate) compared to what it expected.

In sum though, the issue of the central bank raising interest rates has historically been one that’s favored powerful financial corporations at the expense of the working class, and it’s a very significant issue that should be kept in mind more.

Wages of the Top 1% Still Growing at the Expense of Others

Who the economies of the world were rigged to benefit most. The latest data confirms the trend of the upwards redistribution of income often seen over the last several decades.

The world’s largest economies have grown at a steady pace and unemployment has consistently fallen in the years following the greed-driven global financial crisis of 2008, but income gains during the so-called recovery have been enjoyed almost exclusively by the top one percent while most workers experience “unprecedented wage stagnation.”

That’s according to the OECD’s 2018 Employment Outlook (pdf) published Wednesday, which examines recent economic trends and finds that wage growth for most citizens in the 35 industrialized nations studied is “missing in action” due to a number of factors, including the the rapid rise of temporary low-wage jobs and the relentless corporate assault on unions.

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In a statement on Tuesday, OECD Secretary General Angel Gurría said “[t]his trend of wageless growth in the face of a rise in employment highlights the structural changes in our economies that the global crisis has deepened, and it underlines the urgent need for countries to help workers.”

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The Bernie Sanders Media Network is Doing Well

An encouraging sign that issues of real importance are gaining more attention, especially considering the outsized influence corporate mass media still has in promoting nonsensical trivialities.

The Vermont senator, who’s been comparing corporate television programming to drugs and accusing it of creating a “nation of morons” since at least 1979 — and musing to friends about creating an alternative news outlet for at least as long — has spent the last year and a half building something close to a small network out of his office in the Dirksen Senate Office Building on Capitol Hill.

He understands, but resents, the comparison to the man who’s described the news media as the “enemy of the people.” His take is different, and he has his own plans. “[Am I concerned] that people might see me and Trump saying the same thing? Yes, I am,” Sanders conceded, leaning back in a leather chair in a conference room in his office on a recent Tuesday, as footage of Mark Zuckerberg’s testimony one building over played on TVs throughout his office. Wearing his standard uniform — long tie, jacket in need of a few swipes with a lint roller — he launched into the critique now familiar to anyone who’s watched one of his rallies. “My point of view is a very, very different one. My point of view is the corporate media, by definition, is owned by large multinational corporations: their bottom line is to make as much money as they can. They are part of the Establishment. There are issues, there are conflicts of interest in terms of fossil fuel advertising — how they have been very, very weak, in terms of climate change.” Needless to say, the content he produces is not sponsored by advertisers.

Sanders hosts an interview show (“The Bernie Sanders Show”) that he started streaming over Facebook Live on a semi-regular basis after his staff got the idea in February of 2017 to film the senator chatting with the activist Rev. Dr. William Barber. After they posted that simple clip and it earned hundreds of thousands of views with no promotion, they experimented with more seriously producing Sanders’s conversation days later with Bill Nye.

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Things escalated. Audio recordings of his conversations, repackaged as a podcast, have since occasionally reached near the top of iTunes’ list of popular programs. Sanders’s press staff — three aides, including Armand Aviram, a former producer at NowThis News, and three paid interns — published 550 original short, policy-focused videos on Facebook and Twitter in 2017 alone. And, this year, he has begun experimenting with streaming town-hall-style programs on Facebook. Each of those live events has outdrawn CNN on the night it aired.

“The idea that we can do a town meeting which would get a significantly larger viewing audience than CNN at that time is something I would not have dreamed of in a million years, a few years ago,” Sanders says.

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“Because people turn on the television, and they’re working longer hours for lower wages, they don’t have health care, their kids can’t afford to go to college, and they’re watching TV: ‘Hey! What about me? You know, I don’t care that Trump fired somebody else today, what about my life or my kids’ lives?’ So what we do, is we look at media in a different sense, we try to figure out what are the issues that impact ordinary people, and how can we provide information to them?”

Patents and Copyrights as Plutocratic Tariffs That are Relics of the Medieval Guild System

A useful analysis rarely seen in the debate.

Many pundits have attacked Trump’s focus on steel and manufacturing because they argue, we should be more concerned about protecting US corporations’ patents and copyrights overseas. This doesn’t make sense.

At the most basic level, stronger and longer patent and copyright protection means that people in other countries have to pay more money. These government-granted monopolies often allow companies to raise the price of the protected items by a factor of 10 or even a 100. In this way, they are equivalent to tariffs of several thousand percent.

Just to be clear, this is not a point that can be honestly disputed by economists. If a government barrier raises the price of a good, it doesn’t matter whether we call that barrier a “tariff” or a “patent,” the impact on the market is the same.

This means if Pfizer’s patent protection on a drug allows it to raise the price it charges for a drug in China or some other developing country by a factor of 10 over the free market price, it is equivalent to imposing a tariff of 1000 percent on the drug. The difference is that instead of the tariff revenue going to the government, it goes back to Pfizer as higher profits.

It’s obvious that higher profits for Pfizer are good for its shareholders and top executives, but why should the rest of us be happy about people in developing countries paying more money to Pfizer for its drugs? Many of us care more about poor people being able to get drugs than Pfizer’s profits.

The story gets even worse. The more money that Pfizer and other US companies collect overseas for their patents and copyrights, the less these people have to spend on other goods and services. In effect, because Pfizer can charge more for its drugs, people in China and other countries have less money to spend on US-made cars and planes. How is this good for most of the people in the United States?

The pushers of stronger and longer patent and copyright protection will undoubtedly claim that higher profits will provide more incentive for research and creative work. This is true, but what are the numbers? If Pfizer gets another $1 billion in profit will they invest one percent of it in research?

That would be an increase, but that means the world would be spending $1 billion in higher drug prices to get an additional $10 million in research. That’s not a very good deal. And, even this research could be largely wasted on developing copycat drugs that are intended to gain a portion of a competitor’s patent earnings by duplicating a successful drug. Again, that could be good for Pfizer, but it is not especially helpful for the rest of us who want to see research focused on developing treatments for conditions where there is not already an effective drug.

To be clear, we do need a mechanism for financing research and creative work, but there is little reason to believe that patent and copyright monopolies are the most effective tool. These are relics of the Medieval guild system. We can do better in the 21st century.

Analysis Finds Only 6% of Corporate Tax Cut Gains Spent on Workers

Tax cuts for the large corporations who wrote the Republican tax scam legislation haven’t even lead to any increase in investment. In January, orders for non-defense capital goods actually fell by about 1.5 percent, and since orders take little time to initiate, they should have increased if the tax cuts were to spur investment. The reality of what a scam this whole ordeal was must be remembered for fighting off the same problem in the future.

While many corporations immediately launched aggressive PR campaigns crediting the tax plan Trump signed in December with new “investments” in employees, a study by the nonprofit group JUST Capital published on Wednesday found that the sensational headlines touting worker bonuses obscured the fact that the vast majority of the law’s benefits have gone straight to the pockets of wealthy shareholders.

“Post-tax cut raises, bonuses, and other worker investments announced by 90 of the largest publicly-traded corporations average just six percent of the total windfall these companies have received from the biggest tax cut in U.S. history,” the group found.

The analysis also showed that 56 percent of these worker investments came in the form of one-time bonuses, not permanent pay raises.

Additionally, the vast majority of companies examined invested none of their windfall into new jobs, while just a few companies said they invested a large percentage—making it appear that all of the companies invested more in jobs than they actually did.

Bolstering JUST Capital’s study was a New York Times analysis published on Monday, which found that rather than investing their tax windfalls, companies are using the extra cash to buy their own shares—a practice that further enriches already wealthy executives and investors but does little to nothing for workers or the overall economy.

“American companies have announced more than $178 billion in planned buybacks—the largest amount unveiled in a single quarter, according to Birinyi Associates, a market research firm,” notes Matt Phillips of the Times.

That amount dwarfs the relatively small gains workers are seeing from the tax law.

As the economists Rick Wartzman and William Lazonick noted in a recent op-ed for the Washington Post, the “nation’s workers are getting woefully little, at least relatively speaking.”

“Peeking beyond the PR, our analysis finds that major corporations are planning to spend more than 30 times what they are putting in the wallets of employees on buying back their own stock,” Wartzman and Lazonick concluded.