While meandering the streets of Paris, New York Times columnist Paul Krugman apparently awakened to the fact that the assignment of claims to wealth through patents, copyrights, and other forms of intellectual property is a really big deal. This is good news for those who have been jumping up and down yelling about this fact for the last 15 years or so.

There is really big money in this area. Just to take my favorite one, we spend $340 billion a year on drugs, more than 2 percent of GDP ($295 billion on prescription drugs, $45 billion on non-prescription drugs). We would probably spend about one-tenth this amount in the absence of patent protection. The difference is equal to about 20 percent of after-tax corporate profits.

And this huge gap between price and marginal cost gives drug companies enormous incentive to push their drugs as much as possible. This means concealing evidence that they are ineffective or even harmful. We routinely see stories about the drug companies responding exactly as economic theory predicts.

Of course the huge gap between price and marginal cost leads to all the predicted distortions on the consumer side as well. People have to struggle to find the money to pay for drugs that cost hundreds or even thousands of dollars a prescription when the price would be largely a non-issue if they sold for the generic price.

In the case of the tech sector, Google, Apple, Microsoft, and Samsung compete at least as much in their legal departments as in the quality of the products they develop. Patents are more often used to harass competitors than to protect innovation – and that is what the business press says.

In the realm of copyright, we have the efforts by the entertainment industry to turn as all into junior copyright cops through measures like SOPA (Stop Online Piracy Act) or PIPA (Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act, or Protect IP Act).

So intellectual property is a really big deal in the modern economy. And what is neat about it is that these property relations are almost infinitely malleable. (Okay, all property relations are malleable, but IP seems to offer much more room.) That’s the key point that we all have to understand because the bad guys want to convince us that patents and copyrights came to us from on high and that it is our obligation to enforce them in their current or strengthened form, otherwise we are dirty communists.

It’s great to see that Krugman may now be on the case. Perhaps he will be able to teach the economists a bit of economics. (Hint: An intro textbook goes far here. Large gaps between price and marginal cost are bad in trade. Much larger gaps between price and marginal cost are really bad when it comes to intellectual property.)

In polite circles in the United States’ support for free trade is a bit like proper bathing habits. It is taken for granted. Only the hopelessly crude and unwashed would not support free trade.

There is some ground for this attitude. Certainly the United States has benefited enormously by being able to buy a wide range of items at lower cost from other countries. However this doesn’t mean that most people in the country have always benefited from every opening to greater trade.

And it certainly doesn’t mean that the country will benefit from everything that those in power label as “free trade.” That is the story we are seeing now as the Obama administration is pursuing two major “free trade” agreements that in fact have very little to do with free trade and are likely to hurt those without the money and power to be part of the game.

The deals in questions, the Trans-Pacific Partnership (TPP) and the U.S.–European Union “Free Trade” Agreement are both being pushed as major openings to trade that will increase growth and create jobs. In fact, eliminating trade restrictions is a relatively small part of both agreements, since most tariffs and quotas have already been sharply reduced or eliminated.

Rather, these deals are about securing regulatory gains for major corporate interests. In some cases, such as increased patent and copyright protection, these deals are 180 degrees at odds with free trade. They are about increasing protectionist barriers.

All the arguments that trade economists make against tariffs and quotas apply to patent and copyright protection. The main difference is the order of magnitude. Tariffs and quotas might raise the price of various items by 20 or 30 percent. By contrast, patent and copyright protection is likely to raise the price of protected items 2,000 percent or even 20,000 percent above the free market price. Drugs that would sell for a few dollars per prescription in a free market would sell for hundreds or even thousands of dollars when the government gives a drug company a patent monopoly.

In the case of drug patents, the costs go beyond just dollars and cents. Higher drug prices will have a direct impact on the public’s health, especially in some of the poorer countries that might end up being parties to these agreements.

There are also a wide variety of regulatory issues that are being pursued through these agreements in large part because there would be difficulty getting them accepted through the normal political process. For example, the sort of government-mandated Internet policing that was part of the shipwrecked Stop Online Piracy Act is likely to reappear in one or both agreements.

It is also likely that rules that limit the power of governments to restrict fracking could be in the agreements. Such rules could prohibit not only the federal government, but also state or county governments, from imposing restrictions designed to protect the public’s health.

These are the sorts of restrictions that may appear in the TPP and U.S.-EU Free Trade Agreement. The reason for using tentative language is that none of the specifics of the deal have yet been made public. The Obama administration is negotiating these pacts in secret. It has made almost nothing about the negotiating process public and has shared none of the proposed text with the relevant committees in Congress. (Public Citizen has posted information on the TPP based on leaked documents.)

Incredibly, it has shared portions of the proposed TPP with the relevant industry groups. While elected representatives in Congress may not be able to find out anything about proposed rules on drug patents or restrictions on fracking, Pfizer and Merck will have the opportunity to weigh in on patent rules and the major oil and gas companies will help to draft language on fracking that serves their interests.

The idea is that once a deal is completed there will be enormous political pressure for Congress to approve it no matter what it contains. In addition to the campaign contributions that supporters of the deals will get from the special interest groups who stand to benefit, news outlets like The Washington Post will use both their news and opinion sections to bash members of Congress who oppose a deal. They will be endlessly portrayed as ignorant Neanderthals who do not understand economics.

The reality, of course, is that it is the “free traders” who either do not understand economics or deliberately choose to ignore it. Many of the provisions that we are likely to see in these deals, like stronger patent protections, will slow growth and cost jobs.

These deals will also lead to more upward redistribution of income. The more money that people in the developing world pay to Pfizer for drugs and Microsoft for software, the less money they will pay for the products that we export, as opposed to “intellectual property rights.” These payments are great if you own lots of stock in drug or software companies, but for the vast majority of the nation’s workers who are not big stockholders, extracting money from people in the developing world for these corporate giants is not good news.

This is yet another case where the government is working for a tiny elite against the interests of the bulk of the population. And it is doing it in a way that would be difficult to caricature: making powerful corporate interests direct negotiating partners, while excluding democratically elected representatives from the process.

It is tempting to say that Washington couldn’t get more corrupt, but it probably will.

Most of us accept that the earth goes around the sun. This is impressive since we can look up in the sky and see the sun going around the earth. We believe the opposite because we have been told about the research of astronomers over the centuries showing that what we can see with our own two eyes is wrong. Instead we accept that the motion of the stars and planets can be much better explained by the earth going around the sun.

Suppose for a moment that astronomers and people who write on astronomy did not agree on earth or solar orbits. Imagine that a substantial group of these people, including many of the most prominent astronomers, insisted that the sun goes around the earth, as anyone can plainly see. In that case there would likely be huge numbers of people who refused to accept that the earth goes around the sun. This is the state of modern economics.

A new study by three researchers at the University of Massachusetts found major arithmetic errors in the widely cited paper by Carmen Reinhart and Ken Rogoff, “Growth in a Time of Debt,” that purports to show high levels of government debt sharply slow growth. This study has been widely cited by political figures demanding deficit reduction, in spite of the fact that the unemployment rate remains high and interest rates are at extraordinarily low levels.

When the errors in the Reinhart and Rogoff study are corrected, the strong relationship between high debt levels and slower growth disappears. In other words, there is little obvious reason that we need fear higher debt levels. We can have the government make investments in infrastructure and education that will boost growth, create jobs, and increase future productivity.

If economics were like astronomy, the experts in the field would all be calling for the government to spend what is needed to boost growth. But economics is not like astronomy. When this key piece of evidence arguing for austerity was discredited, many experts just doubled down.

If any prominent economists reversed their support for austerity, they did so quietly, but the best comment came from Erskine Bowles, the co-chair of President Obama’s deficit commission:

What it doesn’t change is the common sense and my own personal experience in both the public and private sector that when any organization has too much debt that is an enormous risk factor and your risks go up then people lending you money will want more money for their money.

In other words, Bowles told the public to ignore the state of economic research; we can all see the sun goes around the earth.

Of course economists could explain how governments are not like people. In principle, governments do not die. A country such as the United States borrows in its own currency so it literally can never go bankrupt as long as it knows how to print dollar bills. And, unlike an individual, the government has the obligation to support the economy when private sector demand collapses as it did after the housing bubble burst. But hey, Erskine Bowles knows from his personal experience we are borrowing too much and the sun goes around the earth.

It may help explain the difference between debates in astronomy and economics that many people can profit from slow growth and high unemployment. The after-tax profit share of GDP is at its highest level more than 60 years. For those who own lots of stock and are at the top of the income ladder, times are good. These people may see efforts to lower unemployment as posing a risk. With lower unemployment workers may be able to get a larger share of productivity growth. This may be good for most of the country and mean increased economic growth, but it would mean less for the one percent.

In the current situation, the blame for the bad economic situation of much of the workforce turns to the failure of individual workers. There is no shortage of news articles that blame workers for lacking the skills needed to succeed in the modern economy, as opposed to blaming policymakers for failing to design policies that keep the economy operating at its capacity.

It is probably worth noting that playing the role of an Erskine Bowles and spreading confusion about basic economics carries large financial rewards. According to the New York Times, Erskine Bowles gets paid $40,000 for many of his speeches.

In addition, Bowles has collected millions of dollars sitting as a director on corporate boards. Perhaps most notable are the hundreds of thousands of dollars that he pocketed as a director of Morgan Stanley, one of the too-big-to-fail banks that would have gone bankrupt in 2008 had it not been saved by the Fed. He also was pocketed hundreds of thousands of dollars as director of General Motors until it actually did go bankrupt in 2009.

The point is that there is lots of money on the table for those who are willing to use their status to help spread confusion and convince the public that there is nothing that can be done about continuing high unemployment and stagnant wages. And every economist knows that if there is money sitting on the table someone will take it. There will be no shortage of reputable economists and economic pundits prepared to yell about the risks of the debt, even if they have no evidence to support their concerns.

That’s the question millions will be asking when they see the new paper by my friends at the University of Massachusetts, Thomas Herndon, Michael Ash, and Robert Pollin. Herndon, Ash, and Pollin (HAP) corrected the spreadsheets of Carmen Reinhart and Ken Rogoff. They show the correct numbers tell a very different story about the relationship between debt and GDP growth than the one that Reinhart and Rogoff have been hawking.

Just to remind folks, Reinhart and Rogoff (R&R) are the authors of the widely acclaimed book on the history of financial crises, This Time is Different. They have also done several papers derived from this research, the main conclusion of which is that high ratios of debt to GDP lead to a long periods of slow growth. Their story line is that 90 percent is a cutoff line, with countries with debt-to-GDP ratios above this level seeing markedly slower growth than countries that have debt-to-GDP ratios below this level. The moral is to make sure the debt-to-GDP ratio does not get above 90 percent.

There are all sorts of good reasons for questioning this logic. First, there is good reason for believing causation goes the other way. Countries are likely to have high debt-to-GDP ratios because they are having serious economic problems.

Second, as Josh Bivens and John Irons have pointed out, the story of the bad growth in high debt years in the United States is driven by the demobilization after World War II. In other words, these were not bad economic times, the years of high debt in the United States had slow growth because millions of women opted to leave the paid labor force.

Third, the whole notion of public debt turns out to be ill-defined. Countries can sell off assets to pay down debts, would this avoid the R&R high debt twilight zone of slow growth? In fact, even the value of debt itself is not constant.Long-term debt issued in times of low interest rates will fall in value when interest rates rise. If there is a high debt twilight zone effect as R&R claim, then we can just buy back bonds at steep discounts and send our debt-to-GDP ratio plummeting.

But HAP tells us that we need not concern ourselves with any arguments this complicated. The basic R&R story was simply the result of them getting their own numbers wrong.

After being unable to reproduce R&R’s results with publicly available data, HAP were able to get the spreadsheets that R&R had used for their calculations. It turns out that the initial results were driven by simple computational and transcription errors. The most important of these errors was excluding four years of growth data from New Zealand in which it was above the 90 percent debt-to-GDP threshold. When these four years are added in, the average growth rate in New Zealand for its high debt years was 2.6 percent, compared to the -7.6 percent that R&R had entered in their calculation.

Since R&R country weight their data (each country’s growth rate has the same weight), and there are only seven countries that cross into the high debt region, correcting this one mistake alone adds 1.5 percentage points to the average growth rate for the high debt countries. This eliminates most of the falloff in growth that R&R find from high debt levels. (HAP find several other important errors in the R&R paper, however the missing New Zealand years are the biggest part of the story.)

This is a big deal because politicians around the world have used this finding from R&R to justify austerity measures that have slowed growth and raised unemployment. In the United States many politicians have pointed to R&R’s work as justification for deficit reduction even though the economy is far below full employment by any reasonable measure. In Europe, R&R’s work and its derivatives have been used to justify austerity policies that have pushed the unemployment rate over 10 percent for the euro zone as a whole and above 20 percent in Greece and Spain. In other words, this is a mistake that has had enormous consequences.

In fairness, there has been other research that makes similar claims, including more recent work by Reinhardt and Rogoff. But it was the initial R&R papers that created the framework for most of the subsequent policy debate. And HAP has shown that the key finding that debt slows growth was driven overwhelmingly by the exclusion of 4 years of data from New Zealand.

If facts mattered in economic policy debates, this should be the cause for a major reassessment of the deficit reduction policies being pursued in the United States and elsewhere. It should also cause reporters to be a bit slower to accept such sweeping claims at face value.

(Those interested in playing with the data itself can find it at the website for the Political Economic Research Institute.)

Originally posed at CEPR.Net.

The Washington Post seems to have a quota for pieces that spread misinformation on manufacturing. Today’s piece by Robert Samuelson fills the quota for the day.

The gist of the piece is that manufacturing employment has been declining in importance in the U.S. for decades and also everywhere else around the world. Therefore we should not expect any substantial boost to manufacturing employment.

This is the sort of three-card Monte story that people expect from the Post when discussing economic issues that are relevant to working people. Yes, manufacturing has declined in importance everywhere and yes, it has long been declining in the United States. However the issue is the rate of decline.

According to the Bureau of Labor Statistics, from 1973 to 1989 manufacturing employment declined at an annual rate of 0.3 percent. By contrast, it declined at a rate of 1.7 percent annually between the years of 1989 to 2012. If we had simply maintained the earlier rate of decline we would have another 4.7 million manufacturing jobs.

These years are business cycle peaks, however we get an ever sharper picture if we put the break in 1997 when Robert Rubin was able to put muscle behind his high dollar policy through his control of the IMF’s bailout of the East Asian countries from their financial crisis. The annual rate of decline from 1973 remains the same at 0.3 percent, however the decline since 1997 has been 2.5 percent. If we had maintained the 1973 to 1997 rate of decline through 2012 we would have 4.9 million more manufacturing jobs today. That would be more than a 40 percent increase in manufacturing employment.

This post originally appeared on Beat the Press, the Center for Economic and Policy Research blog.

In societies across the globe, men demonstrate their manhood in different ways. There are many wonderful tracts on the topic. However, in the culture of Washington DC, the best way to demonstrate your manhood is to express your willingness to cut Medicare and Social Security. There is no better way to be admitted into the club of the Very Serious People.

This is the reason that we saw White House spokesman Jay Carney tell a press conference. He told the reporters that President Obama is still willing to cut Social Security benefits by using the chained CPI as the basis for the annual cost of living adjustment (COLA). This willingness to cut the benefits of retirees establishes President Obama as a serious person in elite Washington circles.

While most of the DC insiders probably don’t understand the chained CPI, everyone else should recognize that this technical fix amounts to a serious cut in benefits. It reduces benefits compared to the current schedule by 0.3 percent annually. This adds up through time. After someone has been getting benefits for 10 years, the cut in annual benefits is 3 percent. After 20 years, people would be seeing a benefit that is 6 percent lower, and after 30 years their benefit would be reduced by 9 percent. (AARP has a nice calculator which shows how much retirees can expect to lose from the chained CPI.)

We can debate whether the chained CPI benefit cut should be viewed as “large,” but there is no debate that chained CPI cut is a bigger hit to the typical retiree than the ending of the Bush tax cuts were to the typical high-end earner. Social Security provides more than half of the income for almost 70 percent of retirees. This means that the 3 percent cut in Social Security benefits amounts to a reduction in their income of more than 1.5 percent.

By contrast, if a wealthy couple has an income of $500,000 a year, as a result of President Obama’s tax hikes, they would be paying an addition three percentage points in taxes, or $3,000, on the income above $400,000. That comes to just 0.6 percent of their income.

If the proponents of using the chained CPI to cut Social Security want to claim that this cut is not a big deal, then they must also believe that the tax increases on the wealthy were not a big deal. That’s what the arithmetic says, and there is no way around it.

The other fact that there is no way around is that they cannot claim that the cut is based on a desire to have a more accurate COLA. There are reasons for claiming that the chained CPI provides a better measure of inflation for the population as a whole. But we know that the elderly have different consumption patterns from the overall population.

Specifically, they consume more health care and housing and fewer new cars and computers.

The Bureau of Labor Statistics (BLS) has an experimental elderly index that shows the current CPI actually understates the inflation rate experienced by the elderly. BLS also has done research that shows that the impact of substitution -the key issue with the chained CPI in which consumers substitute less expensive products and services during periods of inflation – varies for different demographic groups. This could mean, for example, that many people may have large opportunities to substitute to goods whose prices are rising more slowly.

However, the elderly with a consumption basket that disproportionately consists of housing and medical expenses may have fewer opportunities for such substitutions.

While this research, as well as the experimental elderly index, is far from conclusive, there is an obvious solution to anyone genuinely concerned about accuracy: have BLS construct a full elderly index. But talk of a full elderly CPI is strictly verboten among the macho men in Washington DC. They want to cut Social Security and they don’t have time for no stinkin’ research.

So there we have it: a Democratic president in the White House, along with many of the top Democrats in Congress, who is willing to give seniors a larger hit to their income than he is to the income of the wealthy. It sure makes you admire their toughness.

Plus, then we don’t have to speculate on whether the CPI or the chained CPI is a more accurate measure of their inflation rate.

Originally posted at TruthOut.Org.

Originally published at TruthOut.

One of the major growth industries in Washington is the promotion of budget hysteria. Well-funded groups have weekly, if not daily, events designed to hype the country’s budget situation. Much of the national media, most importantly the Washington Post, have enlisted in this effort, devoting both their opinion and news sections toward this goal.

Unfortunately for the deficit-crisis industry, the facts may stubbornly refuse to cooperate. Any discussion of the deficit requires separating out the short-term and the long-term story. The short-term story is very simple. The economy collapsed in 2008 when the housing bubble burst. That is the story of the large budget deficits that we have seen in the last five years: full stop.

Fans of the Congressional Budget Office (CBO) can go back to see their projections from January of 2008, before CBO recognized the consequences of the bursting bubble. The deficit had been a modest 1.2 percent of GDP in 2007. The deficit was projected to stay near 1.0 percent of GDP over the next three years until the end of the Bush tax cuts was projected to push the budget into surplus in 2012. Even if the Bush tax cuts had not been allowed to expire the country can literally run deficits of 1.0-2.0 percent of GDP forever.

There were no huge new permanent spending programs or tax cuts put in place in 2008 or 2009. The deficit soared because the recession sent tax revenue plummeting and caused spending on programs such as unemployment benefits to jump. There were also temporary measures designed to counteract the downturn, like stimulus spending and the payroll tax cut. However had it not been for the downturn, these policies never would have been implemented.

This means that in the absence of the downturn, there is no short-term deficit problem. There would be nothing for the deficit crisis industry to do.

In the longer term the deficit-crisis industry can point to scary projections of large deficits in the next decade and even bigger ones further out. These deficits were overwhelmingly driven by projections of exploding health care costs. The United States already pays more than twice as much per person for its health care as do people in other wealthy countries with nothing much to show for it in the way of outcomes. The scary deficit projections assume that this gap in health care costs will continue to grow.

However it now looks like health care costs may not be following the path assumed by CBO and other official forecasters. The GDP data for the third quarter released last week showed that real spending on health care fell for the second consecutive quarter and that nominal spending grew at just a 0.5 percent annual rate.

In fact, the rate of growth of health care spending has been remarkably muted for several years. Nominal spending on health care services has risen by just 4.5 percent over the last year and a half. This compares with an 11.0 percent increase in overall consumption spending during the same period. Spending had been projected to grow at nearly twice this rate.

While it is still too early to draw definitive conclusions, it seems that health care costs in the United States may actually be stabilizing. If this pattern continues then we won’t have a long-term deficit problem. If our health care costs were in line with those in other countries, we would be looking at projections of long-term budget surpluses.

Bringing health care costs in the United States in line with costs in other wealthy countries should not be an impossible task. After all, the U.S. can’t be that much more corrupt than Italy, Spain, or the other countries that have managed to contain their health care costs. However most of us thought it would take major policy changes to contain health care costs, such as a universal Medicare system or at least giving people the option to buy into the existing Medicare system.

If it turns out to be the case that the existing structure – perhaps with a push from the reforms included in the Affordable Care Act – is sufficient to contain costs, that would really be great. At least some of the money that employers would have otherwise used to pay insurance premiums will now go to higher wages. And the long-term budget horror stories will largely disappear.

Of course this improved budget outlook would be bad news for the deficit-crisis industry. After building up so much momentum over the years and raising so much money from millionaires and billionaires, they would suddenly lack a purpose. This could cause the deficit crisis industry to go out of business. It is always unfortunate when people lose their jobs, but in this case it would be for a good cause.  

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The End of Loser Liberalism: Making Markets Progressive. He also has a blog, “Beat the Press,” where he discusses the media’s coverage of economic issues.