June 28, 2021
I know I harp a lot on all the ways we structure the market to redistribute income upward, but that’s because we keep digging in deeper on these policies, and almost no one else talks about it. I get that it’s cool to talk about all sorts of tax and transfer schemes to redistribute some of the money we give to the rich and super-rich. But, I’m one of those old-fashion sorts who think it’s simpler just not to give them all the money in the first place. So, now that you have been warned, here again is my short list of ways to not give so much money to rich people.
Patent and Copyright Monopolies
The immediate issue that prompts this tirade was a request by President Biden for another $6.5 billion (0.15 percent of the budget) in 2022 to support research into diseases like cancer, diabetes, and Alzheimer’s. I’m not upset at all that the federal government is spending more money on research in these areas.
In fact, I think more federal funding of research into these and other areas of biomedical research is great. The problem is that we can be all but certain that all the breakthroughs that may be realized as a result of this spending will result in patent monopolies that will be very profitable for the companies that are awarded them.
If this is too abstract for people, then think of Moderna, a company that saw its stock price increase more than 1000 percent since the pandemic began, creating more than $80 billion in stock wealth. Obviously, the main reason for this run-up was its Covid vaccine, which was developed almost entirely on the taxpayer’s dime. We can get angry that so many people became millionaires or billionaires on taxpayer funded research, but when we pay for the research and then give the company a patent monopoly, what else did we think would happen?
The alternative is to pay for the research and have it placed in the public domain. This means both, that all the findings are fully public so that other researchers can learn from them and build on them, and also that all patents are placed in the public domain. That means that anything developed can be produced as a cheap generic from the day it is approved by the FDA.
With respect to the vaccines, it is also worth mentioning that if we had gone the open-source route, we could have required that all the technology involved in the production process would also be freely shared. One of the problems with increasing production of the vaccines is that, even if we removed patent protection, most manufacturers would not have the necessary technical expertise to begin producing the vaccines immediately. However, if a condition of getting public funding was that this technology would be freely shared, then potential producers anywhere in the world would be able to get technical assistance in setting up their facilities.[1]
Another huge advantage of going the open-source route came up with the FDA’s decision to approve the Alzheimer’s drug, Aduhelm. In approving this drug, the FDA overruled the recommendation of its advisory panel, a step which it rarely takes. The panel argued that the evidence for the drug’s effectiveness was very weak, and there are serious side effects, which means that many patients may be made worse off by taking the drug.
Biogen, the maker of Aduhelm, announced that it would price the drug at $56,000 for a year’s dosage. With over 6 million people suffering from Alzheimer’s, this could mean tens of billions a year in revenue for Biogen, with most of it paid by the federal government through Medicare and Medicaid.
But even beyond the issue of the money, there is also the concern that the FDA’s decision may have been influenced by the lobbying efforts of Biogen. Many researchers get support from Biogen, and it’s hard to believe that their assessment of the drug is not affected by the money they receive. If we took the money out of the equation and were looking at a situation where Adulhelm was going to be produced as a cheap generic, there would be little reason for researchers not to give their honest assessment of the evidence of the drug’s safety and effectiveness. This is a reason that open-source research is likely to lead to better outcomes.
Having cheap drugs and vaccines would not only mean that some of the rich are less rich, but it also raises incomes for everyone who is not benefitting from patent monopolies. If we pay less for drugs, then the real value of everyone’s paycheck goes up. If we had less of a role for patent monopolies, not only for prescription drugs, but also for medical equipment, computers, software, and other technologies, the price of a large set of goods and services would fall sharply, hugely increasing real wages.
Downsizing Finance
The United States has a hugely bloated financial sector, which is responsible for many of the country’s great fortunes. This should not be a source of pride.
To restate the Econ 101 definition for the purpose of the financial sector, it is about allocating capital to its best uses. Finance is an intermediate good, like trucking. Unlike final goods, like housing, medical care, or food, it provides no direct benefit to society. This means that we want the financial sector to be as small as possible, while still being able to serve its purpose.
In fact, the financial sector has exploded relative to the size of the economy over the last half century. The narrow financial sector, commodities and securities trading, and investment banking have quintupled as a share of GDP since the 1970s. If the trucking sector has similarly expanded, all our economists would be complaining about our incredibly inefficient trucking sector. Yet, there seems little appreciation of the fact that finance is a huge source of both waste and inequality.
The cost of running this bloated financial sector comes out of the pockets of the rest of us. It takes the forms of fees and commissions on trading stock and other assets, fees and penalties assessed by banks and other financial institutions, and fees assessed by private equity partners for managing the assets of pension funds and university endowments.
My favorite quick fix here is a financial transactions tax to downsize Wall Street. We could easily raise more than 0.5 percent of GDP ($60 billion a year) from such a tax, with the revenue coming almost entirely out the pocket of Wall Street. (To be clear, they will pass on the cost of the tax. They will lose because higher transactions costs will mean less trading, and therefore less revenue for Wall Street.)
We can hugely cut down on the fees earned by banks and bank-like companies both with better regulation and more competition. The best route for the latter would be for the Federal Reserve Board to offer digital accounts to every person and corporation in the country. This route is already being considered at the Fed. It would mean that we would no longer need accounts at traditional banks. We could have our paychecks and bills processed through the Fed at essentially zero cost.
Hedge fund and private equity partners justify their huge paychecks, which often run into the tens, or even hundreds, of millions by the claim that they are getting outsized returns for investors. It turns out that this is not true. In recent years, both hedge funds and private equity funds have typically underperformed the S&P 500. This means that their investors would have been better off just buying an S&P index fund than putting their money in private equity or hedge funds.
It is hard to pass laws that prevent investors from being stupid with their money but are things that can be done. In the case of public pension funds, we could have legislation requiring full disclosure of the terms of their contracts with private equity funds (and other investment managers), including the returns received. That way any reporter or interested person could look on the website and see how much money the state’s pension funds were paying some rich private equity types to lose the pension fund’s money.[2]
Universities have been losing large amounts of money paying hedge fund partners (overwhelmingly white males) to manage their endowments. Again, it would be hard to pass laws prohibiting Harvard, Yale, and the rest from throwing away their money, but if there were any progressive students or faculty on these campuses, they might be able to change the practice. After all, there is a reasonable case to be made that it is better to give money for financial aid to low- and moderate- income students than Wall Street types earning tens of millions a year.
Corporate Governance and Super-Rich CEOs
There has been a lot of discussion of the high pay that many CEOs have managed to pocket in the pandemic year. What is largely missing in the debate on CEO pay is that top executives are essentially ripping off the companies they work for.
Specifically, they do not contribute an amount to corporate bottom line that is commensurate with their pay. The implication is that companies can pay a CEO considerably less money, without concern that their profits would suffer. And, lower CEO pay would also mean pay cuts for the whole top tier of corporate executives. Lower pay for top tier corporate executives would also lead to lower pay for top management in the non-profit and university sector. In short, excessive pay for CEOs should be a big deal.
There is considerable evidence for the claim that CEOs don’t earn their pay. Some of it is cited in chapter six of Rigged. My own contribution to this literature was a paper with Jessica Schieder that looked at what happened to CEO pay in the health insurance industry after the ACA was passed. A provision of the law eliminated the deductibility of executive compensation (all compensation) in excess of $1 million. Since the nominal tax rate at the time was 35 percent, this change effectively raised the cost of CEO pay by more than 50 percent. If corporations were balancing pay CEO with their contribution to the company’s bottom line, this change should have unambiguously lowered pay. We tried a wide variety of specifications, controlling for revenue growth, profit growth, stock price appreciation, and other factors. In none of them was there any evidence that CEO pay in the health care industry fell relative to pay in other sectors.
If CEOs are ripping off the companies they work for, then shareholders should be allies in the effort to contain CEO pay. This seems an obvious conclusion, but there seems to be very little interest in policies that will increase the ability of shareholders to contain CEO pay. The labor market would look very different if CEOs earned 20 to 30 times the pay of the typical worker ($2 million to $3 million a year) rather than the current 200 to 300 times.
My favorite mechanism for bringing CEO pay down to earth is to put some teeth into the “Say on Pay” shareholder votes on CEO pay. These votes were required to take place every three years by a provision in the Dodd-Frank financial reform package. As it stands now, there is no consequence when a package is voted down. (Less than 3.0 percent are turned down.)
Suppose that directors lost their stipend (typically around $200k a year) if a CEO pay package was voted down. This would give directors some real incentive to ask questions about whether they could pay their CEO less. Anyhow, there are many other mechanisms that would increase shareholders’ ability to reduce CEO pay, but this is the direction we should be thinking.
Section 230 and Special Immunity for Mark Zuckerberg
If the New York Times runs a defamatory ad, it can face a large lawsuit for libel. If Mark Zuckerberg runs the same ad on Facebook, he faces no legal liability. Only the person who paid for the ad can be sued. It’s not obvious why we should think that an Internet intermediary bears no liability for spreading defamatory claims but a print or broadcast outlet does.
Clearly far more material is carried over Internet outlets, but that is the choice of the outlets. That doesn’t seem like a good reason to allow them to profit from defaming someone.
The reason Mark Zuckerberg doesn’t face liability and the New York Times does is that Congress gives him and other Internet intermediaries special protection. Section 230 of the 1996 Communications Decency Act, protects Internet intermediaries from liability for third party content. This protects it from being sued for both the ads it carries and also the posts from individual account holders.
We don’t have to give Facebook this special protection. We could make Zuckerberg liable for ads in the same way that the New York Times and CNN are liable for ads that they carry. This means that he would have to scrutinize ads for defamatory material in the same way that traditional media outlets have this responsibility.
We can also make Facebook libel for defamatory posts just like the New York Times is libel for defamatory statements that appear in letters to the editor. It would of course be impossible for Facebook to screen every post in advance. We can structure the liability to take the form of a takedown requirement after notification, just as is down now with material that is alleged to infringe on copyrights.[3] This will undoubtedly add considerable costs for a company operating on Facebook’s business model, but so what?
I had a series of Twitter exchanges in the last couple of weeks in which several people argued that this sort of change in the law would just benefit Facebook at the expense of smaller competitors since its size would make it better able to absorb the added costs. I had argued for continuing to exempt common carriers, who don’t control content, but we can draw the line somewhat differently.
We can exempt any intermediary that does not either sell advertising or personal information. This would mean that any intermediary that either made its money on a subscription basis or was operated as a public service, would not face liability for third party content. That should provide a substantial advantage to Facebook’s competitors who choose to structure themselves in a way that they could benefit from this protection.
If We Care About Inequality, Maybe We Should Stop Giving So Much Money to the Rich
At this point, I would usually give my tirade about how doctors make so much more money in the U.S. than in other wealthy countries because we protect them from competition, but this is enough for today. The point is that we have structured the market to redistribute an enormous amount of income upward.
I’m a big fan of progressive taxation, but the reality is that it is much easier to not give rich people so much money in the first place than to try to tax it back after the fact. It would be nice if more progressives paid some attention to the ways in which we give the rich money.
[1] I outline an alternative funding mechanism in chapter 5 of Rigged (it’s free).
[2] We can also pass legislation that cracks down on the some of the abusive tactics, like surprise medical billing, that private equity pursues to try to boost returns.
[3] There is a concern that Facebook would be over-zealous in removing items that have been challenged, as has been the case with intermediaries responding to notifications of copyright violations. While this is possible, the penalties for copyright violations are far more severe than defamation. Copyright violations carry statutory penalties, so that even trivial infringements, that cost the copyright holder just a few dollars, can result in thousands of dollars of damages and legal expenses. There is nothing comparable with libel law.
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