New Thinking on the Economy
Jeff Faux, my former boss at the Economic Policy Institute, tells a story from his days as a foot soldier in President Johnson's War on Poverty. Johnson was asked by a delegation from Alaska if he had an anti-poverty program for their state. Johnson assured the delegation that he had a "great big program" for Alaska. As soon as the delegation left, Johnson rushed into Jeff's office and told them that they needed to come up with a program for Alaska.
Unfortunately, many liberals have not moved beyond Lyndon Johnson's thinking on the role of the government in the economy. They still tie progressive outcomes - the guarantee of good quality health care, education, childcare, housing and a secure retirement - directly to big government. While the government must play a role in ensuring these outcomes, the point should be to have good government, not big government, as we usually conceive it.
There is a long list of ways in which the rules set by the government determine economic outcomes. While these rules have an enormous impact on the economy, they do not amount to "big government" in the sense of a large amount of taxes and spending.
Perhaps the most obvious example along these lines is patent protection for prescription drugs. The Centers for Medicare and Medicaid Services projects that the country will spend more than $330 billion in 2012 for prescription drugs. These same drugs would cost roughly $30 billion in the absence of patent protection. This means that the government's patent monopolies will be redistributing roughly $300 billion in 2012 from patients to the drug companies. (There are alternatives to patent monopolies for financing the research and development of prescription drugs.)
To put this sum into perspective, after-tax corporate profits are projected to be less than $1,400 billion in 2012, so the amount at stake in preserving patent protection for prescription drugs will be more than 20 percent of all corporate profits. Alternatively, imagine getting Congress to appropriate $300 billion a year, or $3 trillion over a 10-year budget window, for our favorite government program(s).
However, in spite of the enormous amount of money at stake, this issue has received almost no attention from the vast majority of progressives. In fact, most progressives have probably never even gave the issue of patent protection for prescription drugs a moment's consideration.
It is easy to find other examples of ways in which government rules determine who gets the money. Along the same lines as patent protection, the entertainment industry and software industry survive in their current form because of the government's copyright protection. This form of government intervention has made thousands of people, from Rupert Murdoch to Bill Gates, very rich at the expense of the rest of us.
The trade agreements over the last three decades have been deliberately designed to put manufacturing workers, and noncollege educated workers more generally, directly in competition with low-paid workers in the developing world. The predicted and actual result of this policy is to lower the wages of noncollege educated workers in the United States.
Do we want to rebalance the field? Why not set trade rules that put highly paid medical specialists and other big "winners" in direct competition with their low-paid counterparts in the developing world. We can debate whether this is good policy, but there is no dispute that we can use this "market" outcome to bring down the wages of those at the top.
And speaking of wages of those at the top, we can also rewrite the rules of corporate governance so that CEOs and other top executives don't get to write their own paychecks. The compensation packages of the top five paid executives could be subject to regular approval by shareholders in a vote where unreturned proxies do not count. My guess is that with these rules much less money would go to those at the top.
There are many other ways in which we can change the rules so that less money flows to those on top, leaving more for the rest of us. Changing the rules does not require big government in the sense of large portions of GDP being collected in tax revenue.
It does require that government take an active role in the economy, but it is already taking an active role in the economy in these areas. The difference is that, currently, the conservatives have been setting these rules, while progressives have been polite enough not to pay attention. Instead, they have mostly focused their energy on matters that will have far less impact.
The economic crisis brought on by the collapse of the housing bubble offers progressives unprecedented opportunities. But we have to be prepared to actually think big, and not just think about big programs.
Wage and price controls? This is your big plan? Oh yeah, that'll work. If Cuba is you idea of paradise. LOL.
February 9, 2009 12:06 PM | Reply | Permalink
shooter,
he's attacking government welfare for Corporations and the wealthy, not promoting wage and price controls.
Wingnuttery Tactic Handbook, page 23;
Purposely misinterpret what the opposition says then attack your misinterpretation.
heh heh heh
February 9, 2009 3:35 PM | Reply | Permalink
Thanks for reminding us that the soi-disant "free market" is anything but. It's got rules made by those who had the money and foresight to buy legislation and regulation that favored them.
One question that occurs to me: should progressives look for big changes to these stacked rules, or for relatively simple hacks (for example, freer trade in high-paid labor or an end to free privatization of government-funded discoveries) that may have big ultimate effects? A combination of both? Good Cop/Bad Cop?
February 9, 2009 12:14 PM | Reply | Permalink
There are two issues which get conflated. The first is one of goals. The "liberal" position is that we should provide health care for all, that's the goal.
The second issue is how we allocate profits. We can have a health system which continues to allocate profits in a very unequal way, but which provides health care for all. Several of the proposals do this.
This is entirely acceptable as long as the decision is made democratically. Japan subsidies marginal rice farmers because they feel that it is a social good to keep these people in their traditional occupations. Everyone pays higher rice prices to cover this. An ethical decision, not one based upon economic "efficiency".
If we chose to keep a million people employed in the health care industry as middlemen as we now do then we can consider that as a parallel to the Japanese farmers.
The problem is that these social choices are not made democratically, but are the result of the buying of politicians through the cost of funding election campaigns. The other problem is that we don't achieve our goal of universal health care.
So we have the worst of both, an imbalanced profit allocation and insufficient services.
There is a slight difference between health care and entertainment. One is vital and the other isn't. There is no one forcing a buyer to shell out $16 for a CD of their favorite, and as we can see the public is pushing back against this model.
If it seems that vital services will always be subject to manipulation by the wealthy and powerful then we need to have a discussion as to whether these functions should be state-managed. Social Security was an attempt to remedy the lack of a viable retirement system. It only provided a partial solution because the business interests won't allow it to take on a bigger role.
It is, however, better than the private competition.
February 9, 2009 12:38 PM | Reply | Permalink
There was no mention of wage and price controls in this post. You must be commenting on something else.
February 9, 2009 1:10 PM | Reply | Permalink
.
Yes... Mr. Baker
Shooter lives in some other time warp -- about 30 to 45 degrees right of the center-line. He actually believes that Reagan personally knew more about economics than God.
~OGD~
February 9, 2009 1:33 PM | Reply | Permalink
I don't know Dean, you're making progress. Never thought I'd see opening markets to foreign labor competition and subjecting executive compentsation to shareholder democracy described as "wage and price controls!"
February 9, 2009 1:53 PM | Reply | Permalink
.
Now to the issue . . .
The majority of the consuming population cannot see the fairness of the true competition of a plan for balancing the playing field between large pharmecuetical corporate interests funded by government granted patent monopolies versus alternative incentive mechanisms on innovation and research.
Competition is the truest form of developing new product that is effective, both in price and therapeutic value.
Why are the large companies in fear of competition? As Mr. Baker points out in his report that he linked, "The current reliance on patent monopolies is due to the fact that the system is a surviving legacy of the feudal guild system, it is not the result of economic analysis demonstrating its superiority."
~OGD~
February 9, 2009 2:07 PM | Reply | Permalink
That's true. You just outline ways Government can skin people by doing away with intellectual property rights, and propose other ways to limit compensation of people you deem overpaid. In short, controls on wages and prices. If it walks like a duck....
The part I really find surprising is this...
This sounds like you consider economies and wealth a zero-sum game. You know it isn't.
In addition, if you don't want Windows or the WSJ nobody is forcing anyone else to buy them. Murdoch and Gates are rich not because they took something from somebody but because they had something to offer that people want. Where do you get off making them bad guys?
It's all the more surprising coming from an author. Should we demand you put your books on the web for free, because we don't want to pay for them? Tsk.
February 9, 2009 5:01 PM | Reply | Permalink
"Murdoch and Gates are rich not because they took something from somebody but because they had something to offer that people want."
Murdoch and Gates are as rich as they are because they are monopolists. They don't earn their market share because their products attract vast public demand. No, they extort their share thanks to laws — and vast governmental agencies to enforce them — that allow them to monopolise markets regardless of the value, or lack thereof, of their products.
Are there people more clueless and pathetic than monopolists than those who, while being ripped off by them, yet defend them?
February 9, 2009 7:01 PM | Reply | Permalink
LOL. There's some one forcing people to use Windows and read the WSJ? That's news to me, but then again it's all a Government plot. Right?
February 9, 2009 7:40 PM | Reply | Permalink
shooter242: Don't you read the news? The WSJ is a MASSIVE money pit for Murdoch. I think he wrote off billions because of the WSJ last week... (Can't give you link; trying to watch Pres. Obama...)
February 9, 2009 8:03 PM | Reply | Permalink
1. Require that FDA testing of a new drug demonstrate that it is more effective than currently available drugs before the new drug is approved.
2. Require that the generic version of a drug be used, unless the proprietary branded version is less expensive.
3. Require that the equivalent over-the-counter version be used instead of the prescription version.
February 9, 2009 2:36 PM | Reply | Permalink
"the point should be to have good government, not big government, as we usually conceive it."
Yes. Obama has called for smart government. Smart and good are not the same thing, but smart and well-guided is close.
"There is a long list of ways in which the rules set by the government determine economic outcomes"
I'd like to see more about how Government can stimulate the economy aka deal with this "crisis" recession/depression via rule changes instead of merely via massive borrowing/printing of money to be spent wildly. There have been some proposals to change bankruptcy and foreclosure laws, for instance. And government investment, not just spending. For instance, offer to take equity shares in some homes. It's like stock injection for Main St. The homeowner uses the cash to buy out the mortgage to help sell the house or refinance. Financed by the Feds, run by States and Counties.
Let's see government solve this "crisis" using smarts not wads of cash.
February 9, 2009 2:36 PM | Reply | Permalink
Reading this stimulated some thought on my part: why shouldn't an inability to pay monthly mortgage payments be seen as a failure of both the mortgagee and mortgagor? Looking at it that way one would not allow a "bank" to take possession of a piece of property on which they failed to use due diligence in appraising both the property and the ability of the owner to pay. Instead, one would reach a compromise that penalized both parties equally, if not penalizing the party who should by all rights have known better at a higher rate.
This also reminds me: real estate appraisers are licensed by the state, in my state, so there are supposed to be some professional standards governing how they do their jobs. Appraising property at a value that drops 50% in a year cannot possibly be consistent with those standards. Have any such appraisers been suitably fined for these mistakes?
February 9, 2009 3:27 PM | Reply | Permalink
I've been in favor of changing laws to allow, or even force, both lenders and borrowers to take losses on some problematic home loans. I also suggested that lease-option with angel investors be legitimized, incl. governments taking equity positions in some houses.
It's very complicated because there are many different scenarios. Homeowners who lose equity and/or residence get penalized normally. Lenders who have closing costs and resell at a lower price than the loan face value take a hit. Housing prices are down widely, not just those deals which were bad or shaky. There are over 1.8 million residences vacant and the rental vacancy rate is also up.
February 9, 2009 5:11 PM | Reply | Permalink
The alternatives in your report sound interesting and important. I wonder what it would take to initiate a movement to make such a large but necessary adjustment in the cost of prescription drugs.
I used to run a relief agency and you had better believe that the cost of drugs is a major life and death issue and is a major barrier to retaining any employment. The effects are more widespread than most people would know, even among workers that can no longer afford their share of health insurance premiums provided through their employer.
This is really serious!
Do any of the proposed alternatives have much support? Is there a way to support any of them?
Bob Spencer
February 9, 2009 3:18 PM | Reply | Permalink
You make some interesting points Dean. Correct me if I'm wrong but doesn't much of the research used to develop these drugs come from our publicly funded universities? If so, it seems criminal that we are being sold back the fruits of our tax dollars at such an inflated rate.
Also, a thumbs-up to Paul Krugman for his nod to your observation on the proposed tax credit for home buyers "stimulus", in today's New York Times.
February 9, 2009 6:10 PM | Reply | Permalink
I would think Obama would like to characterize it as "smart government" over the characterization from the Republicans as "big government" (coded wording for social programs that benefit the poor and people of color in particular).
Today, Obama did his best to scare the crap out of Washington to let them know what the dire consequences would be if the stimulus package isn't enacted. Recent CNN polling has Obama's handling of the stimulus agenda at 76%, with Pew Research polling at 64%; thus averaging out to 70% between the two polling numbers, indicating a 6% drop from the 76% or so approval of Obama right after the inauguration.
February 9, 2009 6:30 PM | Reply | Permalink
"The economic crisis brought on by the collapse of the housing bubble offers progressives unprecedented opportunities. But we have to be prepared to actually think big, and not just think about big programs."
Think big and think out of the box. Think Henry George. (His Progress and Poverty is free on the Web.) No patents. Very narrow, limited copyrights.
The biggest problem progressives have is the absence of a political economics worthy of the name. They have the right sentiments. They don't have a sane, simple, actually workable system of economics that allows their sentiments to be realised.
Henry George outlined just such a system over a hundred years ago. Why do so few progressives know little, or more likely nothing, about him?
February 9, 2009 6:45 PM | Reply | Permalink
Dean is right!! Please read the Mother Jones Jan/Feb. where David Cay Johnston talks about the many sly ways that the government renders rich and corporate welfare give aways. This is mostly thanks to the conservative/republican rule for the last 25 odd years, ( Clinton admininstration is partially responsible also.) Let's face it, starting with Reagan's election, the government has been instrumental in making a feudal system, where the top 1% makes the rules. Also, please read, in the same magazine, James Galbraith's article which makes the point that stimulus which helps the bottom (like food stamps) stimulates more effectively than policies such as tax cuts.
February 10, 2009 9:31 AM | Reply | Permalink
"That's true. You just outline ways Government can skin people by doing away with intellectual property rights, and propose other ways to limit compensation of people you deem overpaid. In short, controls on wages and prices. If it walks like a duck...."
My compliments to the creator of the comedic character 'shooter242'.
Because only while wearing a big red nose, a funny wig and giant floppy shoes could allowing all employees' wages to be subject to the forces of supply and demand be 'limiting compensation and controls on wages and prices'. Likewise, only a true clown could believe that giving the *owners* of a public company a meaningful say in what they pay their employees be considered 'limiting the pay of those [Dean] considers overpaid'.
And maybe somebody could tell 'shooter242' that Dean the loony Communist DID in fact put his book on the web for free:
http://www.conservativenannystate.org/
Maybe some nights before bedtime, shooter242's Mommy could read him some of it (free of charge!) and he could learn something.
February 10, 2009 12:17 PM | Reply | Permalink
I don't think we have a free market at all, i think we have a very poorly regulated market. I don't think we need too much *more* regulation, I just think we need better, smarter regulation. I also agree with Dean Baker's point in an essay of his I read in Thinking Big (a book, the Economic Policy Institute helped put it out) that there are structural conflicts of interest in the financial sector, and we need to remove incentive to bias a report to favor the party that is paying the bill (financial, housing, bond).
February 13, 2009 1:34 PM | Reply | Permalink
Great post! Fellow progressives, take note!
February 13, 2009 10:52 PM | Reply | Permalink