I would agree with pretty much all of Paul Krugman’s criticisms of Donald Trump’s trade war with China, but I would strongly disagree with one of his criticisms of China. He tells readers:
“In some ways, China really is a bad actor in the global economy. In particular, it has pretty much thumbed its nose at international rules on intellectual property rights, grabbing foreign technology without proper payment.”
The issue here is who set the rules and what is proper payment.
The problem is that it was largely the United States that has set the rules in this story and it is demanding ever more money for items protected by its patent and copyright monopolies. We do this through our control of trade arrangements, most importantly the WTO where we had the TRIPS provisions inserted as a late entry to the Uruguay Round that was concluded in 1994. These rules were about forcing developing countries to pay more money to companies like Pfizer and Microsoft for everything from drugs and medical equipment to seeds and software. It shouldn’t be surprising that developing countries like China might not like these rules.
The idea that developing countries would seek to get around rules established by their richer counterparts should not be alien to people in the United States. The United Kingdom had made it illegal to transfer blueprints for steam engines out of the country in order to preserve its competitive advantage. Francis Lowell famously memorized plans on a trip there in order to build the first steam-powered factory in the United States. The United States refused to recognize UK copyrights for much of the 19th century. So if China is not following the rules today, it has an important role model it can point to.
There is certainly a valid point that the cost of innovation must in some way be shared internationally. Certainly, the US shouldn’t be expected to foot the bill for the whole world. But does Krugman really want to argue that patent and copyright monopolies are the most efficient mechanisms available? We should be looking for more modern mechanisms that focus on sharing rather than bottling up knowledge, with China and other developing countries having a serious voice in their construction.
On this topic, it is important to note that China may have fired a serious shot over the bow this week. It announced a major initiative to promote the manufacture and use of generic drugs. I have no idea if this has anything to do with Donald Trump’s trade war, but this could be a very big deal if China is going to be aggressively pushing generic drugs both in its domestic market and internationally. The fact is, the “rules” in many areas are not very clear (it is much harder to get a patent on a drug in India than the United States) and if China is going to press the boundaries, look for a really big hit to Pfizer and Merck’s stock prices.
I would agree with pretty much all of Paul Krugman’s criticisms of Donald Trump’s trade war with China, but I would strongly disagree with one of his criticisms of China. He tells readers:
“In some ways, China really is a bad actor in the global economy. In particular, it has pretty much thumbed its nose at international rules on intellectual property rights, grabbing foreign technology without proper payment.”
The issue here is who set the rules and what is proper payment.
The problem is that it was largely the United States that has set the rules in this story and it is demanding ever more money for items protected by its patent and copyright monopolies. We do this through our control of trade arrangements, most importantly the WTO where we had the TRIPS provisions inserted as a late entry to the Uruguay Round that was concluded in 1994. These rules were about forcing developing countries to pay more money to companies like Pfizer and Microsoft for everything from drugs and medical equipment to seeds and software. It shouldn’t be surprising that developing countries like China might not like these rules.
The idea that developing countries would seek to get around rules established by their richer counterparts should not be alien to people in the United States. The United Kingdom had made it illegal to transfer blueprints for steam engines out of the country in order to preserve its competitive advantage. Francis Lowell famously memorized plans on a trip there in order to build the first steam-powered factory in the United States. The United States refused to recognize UK copyrights for much of the 19th century. So if China is not following the rules today, it has an important role model it can point to.
There is certainly a valid point that the cost of innovation must in some way be shared internationally. Certainly, the US shouldn’t be expected to foot the bill for the whole world. But does Krugman really want to argue that patent and copyright monopolies are the most efficient mechanisms available? We should be looking for more modern mechanisms that focus on sharing rather than bottling up knowledge, with China and other developing countries having a serious voice in their construction.
On this topic, it is important to note that China may have fired a serious shot over the bow this week. It announced a major initiative to promote the manufacture and use of generic drugs. I have no idea if this has anything to do with Donald Trump’s trade war, but this could be a very big deal if China is going to be aggressively pushing generic drugs both in its domestic market and internationally. The fact is, the “rules” in many areas are not very clear (it is much harder to get a patent on a drug in India than the United States) and if China is going to press the boundaries, look for a really big hit to Pfizer and Merck’s stock prices.
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I am Dawn Niederhauser, CEPR’s Director of Development, and I am highjacking Beat the Press to make an important announcement. Many of you regular readers of Beat the Press may have received an email from me about this, but in case you missed the news, I am writing to let you know that there is a new way to support Dean and Beat the Press!
As you may know, Dean stepped down as CEPR’s Co-Director in January so that he could devote more time to his writing. We are thrilled that he will continue to “beat the press” in his new position as a CEPR Senior Economist. And as CEPR’s Director of Development, I am particularly thrilled that he has agreed to provide additional commentary via the Beat the Press page on Patreon.
For those of you who are not familiar with Patreon, it is a membership platform that provides tools for creators to run a subscription content service. It allows writers and artists (and even economists!) to provide exclusive content to their subscribers, or “patrons.” Anyone who signs up to support Beat the Press via Patreon will have access to additional commentary and will be able to engage with other subscribers and with Dean. But the main purpose is to provide ongoing financial support for Beat the Press.
Click here to support Beat the Press on Patreon!
Beat the Press will continue in its current format and will be free to all, as always. Dean has always made my job really difficult by insisting that all of CEPR’s content, even his books, be available for free. So we are mindful that offering any content that is only available to subscribers could be seen as going against precedent.
But honestly? Times are tough. CEPR has relied on foundation funding for the bulk of its operating costs since its inception. Foundation funding is becoming harder and harder to come by. We are looking to find ways to expand our funding base. After evaluating all the options, we decided that Patreon was the best avenue for creating a dedicated funding stream for Beat the Press. That seemed to us to be a “fair trade.”
For those of you who are already monthly sustainers and want to switch to supporting Beat the Press through Patreon, please send an email to [email protected] and I will cancel your monthly donation. You can then sign up to support Beat the Press on Patreon, at any amount. The more you pledge, the more resources Dean will have to skewer the likes of Robert Samuelson.
A big thank you to those of you who have already signed up to become Beat the Press patrons! We really appreciate your support.
Okay, back to your regularly scheduled programming. And remember, don’t believe everything you read in the newspapers.
I am Dawn Niederhauser, CEPR’s Director of Development, and I am highjacking Beat the Press to make an important announcement. Many of you regular readers of Beat the Press may have received an email from me about this, but in case you missed the news, I am writing to let you know that there is a new way to support Dean and Beat the Press!
As you may know, Dean stepped down as CEPR’s Co-Director in January so that he could devote more time to his writing. We are thrilled that he will continue to “beat the press” in his new position as a CEPR Senior Economist. And as CEPR’s Director of Development, I am particularly thrilled that he has agreed to provide additional commentary via the Beat the Press page on Patreon.
For those of you who are not familiar with Patreon, it is a membership platform that provides tools for creators to run a subscription content service. It allows writers and artists (and even economists!) to provide exclusive content to their subscribers, or “patrons.” Anyone who signs up to support Beat the Press via Patreon will have access to additional commentary and will be able to engage with other subscribers and with Dean. But the main purpose is to provide ongoing financial support for Beat the Press.
Click here to support Beat the Press on Patreon!
Beat the Press will continue in its current format and will be free to all, as always. Dean has always made my job really difficult by insisting that all of CEPR’s content, even his books, be available for free. So we are mindful that offering any content that is only available to subscribers could be seen as going against precedent.
But honestly? Times are tough. CEPR has relied on foundation funding for the bulk of its operating costs since its inception. Foundation funding is becoming harder and harder to come by. We are looking to find ways to expand our funding base. After evaluating all the options, we decided that Patreon was the best avenue for creating a dedicated funding stream for Beat the Press. That seemed to us to be a “fair trade.”
For those of you who are already monthly sustainers and want to switch to supporting Beat the Press through Patreon, please send an email to [email protected] and I will cancel your monthly donation. You can then sign up to support Beat the Press on Patreon, at any amount. The more you pledge, the more resources Dean will have to skewer the likes of Robert Samuelson.
A big thank you to those of you who have already signed up to become Beat the Press patrons! We really appreciate your support.
Okay, back to your regularly scheduled programming. And remember, don’t believe everything you read in the newspapers.
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Donald Trump has proved the skeptics wrong, it seems that the American people stand to be big winners as a result of his trade war. The Chinese government announced a major initiative to promote the manufacture and use of generic drugs.
The reason this is potentially a big deal for the United States is that it could mean that China intends to push the envelope in replacing drugs protected by government-granted patent monopolies with drugs sold at free market prices. While the TRIPS provisions of the WTO do require members to respect patents and copyrights, there are flexibilities, such as compulsory licensing, to allow far more competition that what we see in the United States market.
Countries also have varying rules on what items can be patented. For example, India has far more stringent patent rules than the United States so that many drugs that are protected by patents in the US are sold in a free market in India.
This can matter hugely for people in the United States, since if China joins India as a mass producer of high-quality generic drugs, it will become increasingly difficult for the US drug companies to maintain an island of protected prices in the United States. The gap between the patent-protected price for drugs like the Hepatitis C drug Solvaldi and new cancer drugs is often more than 100 to 1 (equivalent to a 10,000 percent tariff) and can be as much as 1000 to 1.
There is an enormous amount of money at stake (in addition to people’s health) if we can get drugs at their free market price. We will spend more than $450 billion this year on prescription drugs that would likely sell for less than $80 billion in a free market. The difference of $370 billion is almost 2.0 percent of GDP. It is more than five times the entire food stamp budget.
We will need to have alternative mechanisms for financing the research and development of new drugs and having these costs shared internationally. But it is not difficult to develop mechanisms that are more efficient than the anachronistic patent monopoly system. If Trump’s trade war ends pushing us in this direction, the whole world will have won.
Donald Trump has proved the skeptics wrong, it seems that the American people stand to be big winners as a result of his trade war. The Chinese government announced a major initiative to promote the manufacture and use of generic drugs.
The reason this is potentially a big deal for the United States is that it could mean that China intends to push the envelope in replacing drugs protected by government-granted patent monopolies with drugs sold at free market prices. While the TRIPS provisions of the WTO do require members to respect patents and copyrights, there are flexibilities, such as compulsory licensing, to allow far more competition that what we see in the United States market.
Countries also have varying rules on what items can be patented. For example, India has far more stringent patent rules than the United States so that many drugs that are protected by patents in the US are sold in a free market in India.
This can matter hugely for people in the United States, since if China joins India as a mass producer of high-quality generic drugs, it will become increasingly difficult for the US drug companies to maintain an island of protected prices in the United States. The gap between the patent-protected price for drugs like the Hepatitis C drug Solvaldi and new cancer drugs is often more than 100 to 1 (equivalent to a 10,000 percent tariff) and can be as much as 1000 to 1.
There is an enormous amount of money at stake (in addition to people’s health) if we can get drugs at their free market price. We will spend more than $450 billion this year on prescription drugs that would likely sell for less than $80 billion in a free market. The difference of $370 billion is almost 2.0 percent of GDP. It is more than five times the entire food stamp budget.
We will need to have alternative mechanisms for financing the research and development of new drugs and having these costs shared internationally. But it is not difficult to develop mechanisms that are more efficient than the anachronistic patent monopoly system. If Trump’s trade war ends pushing us in this direction, the whole world will have won.
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As a long-term columnist at the NYT, Thomas Friedman apparently never feels the need to know anything about the topics on which he writes. This explains his sarcastic speculation that Putin could be a CIA agent since he has done so much to hurt Russia.
For all his authoritarian tendencies, it is likely that most Russians think primarily about Putin’s impact on the economy, just as is typically the case among voters in the United States. On that front, Putin has a very good record.
According to data from the I.M.F. Russia’s economy had plunged in the 1990s under the Yeltsin presidency. When Putin took over in 1998, per capita income in the country had shrunk by more than 40 percent from its 1990 level. This is a far sharper downturn than the United States saw in the Great Depression. Since Putin took power its per capita income has risen by more than 115 percent, an average annual growth rate of more than 3.9 percent.
While this growth has been very unequal, that was also the case even as Russia’s economy was collapsing under Yeltsin. The typical Russian has done hugely better in the last two decades under Putin than they did in the period when Yeltsin was in power.
For this reason, there are probably few Russians who would have sympathy for Friedman’s speculation about Putin’s ties to the CIA. The same would not be the case for Boris Yeltsin.
As a long-term columnist at the NYT, Thomas Friedman apparently never feels the need to know anything about the topics on which he writes. This explains his sarcastic speculation that Putin could be a CIA agent since he has done so much to hurt Russia.
For all his authoritarian tendencies, it is likely that most Russians think primarily about Putin’s impact on the economy, just as is typically the case among voters in the United States. On that front, Putin has a very good record.
According to data from the I.M.F. Russia’s economy had plunged in the 1990s under the Yeltsin presidency. When Putin took over in 1998, per capita income in the country had shrunk by more than 40 percent from its 1990 level. This is a far sharper downturn than the United States saw in the Great Depression. Since Putin took power its per capita income has risen by more than 115 percent, an average annual growth rate of more than 3.9 percent.
While this growth has been very unequal, that was also the case even as Russia’s economy was collapsing under Yeltsin. The typical Russian has done hugely better in the last two decades under Putin than they did in the period when Yeltsin was in power.
For this reason, there are probably few Russians who would have sympathy for Friedman’s speculation about Putin’s ties to the CIA. The same would not be the case for Boris Yeltsin.
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Jeff Stein’s Wonkblog piece might have misled readers about the complexity of New York’s new employer-side payroll tax as a workaround for Republican tax bill’s limit on the deduction for state and local taxes. The piece told readers:
“‘Employers can’t just slash salaries willy-nilly, even if there’s a good argument for it being to the employees’ benefit,’ wrote Jared Walczak of the Tax Foundation, a right-leaning think tank. ‘It might be an option for small groups of highly-compensated employees — think hedge funds and consultancies — but it’s a tough sell for a larger operation with a more diverse workforce.'”
While the logic is that an employer-side payroll tax reduces wages by a roughly equal amount, the one put forward by Governor Cuomo is unlikely to result in anyone getting a pay cut. The tax is phased in at a rate of 1 percent in 2018, and then 2 percent in both 2019 and 2020. Wages are rising an average of 2.5 percent annually. This is an average for all workers, the pay for workers who stay at the same employer is rising by more than 3.0 percent annually.
This means that workers at employers paying the tax are likely to see smaller wage gains rather than actual cuts. The Cuomo administration was quite conscious of this issue in designing the tax. (I had some discussions with Cuomo’s staff on the tax plan.)
While this plan has been described as too complicated it is much simpler than the Flexible Savings Account (FSA), which have proven very popular with employees. These accounts require lots of bookkeeping and also put workers at risk of losing unspent money. By contrast, the employer-side payroll tax is simply a one-time adjustment to workers’ pay.
It also allows for much larger potential savings than an FSA. A person earning $200,000 a year can save more than $3,000 a year on their taxes if their employer takes advantage of the employer-side payroll tax option. This is about four times as much as the maximum they can save on an FSA.
Jeff Stein’s Wonkblog piece might have misled readers about the complexity of New York’s new employer-side payroll tax as a workaround for Republican tax bill’s limit on the deduction for state and local taxes. The piece told readers:
“‘Employers can’t just slash salaries willy-nilly, even if there’s a good argument for it being to the employees’ benefit,’ wrote Jared Walczak of the Tax Foundation, a right-leaning think tank. ‘It might be an option for small groups of highly-compensated employees — think hedge funds and consultancies — but it’s a tough sell for a larger operation with a more diverse workforce.'”
While the logic is that an employer-side payroll tax reduces wages by a roughly equal amount, the one put forward by Governor Cuomo is unlikely to result in anyone getting a pay cut. The tax is phased in at a rate of 1 percent in 2018, and then 2 percent in both 2019 and 2020. Wages are rising an average of 2.5 percent annually. This is an average for all workers, the pay for workers who stay at the same employer is rising by more than 3.0 percent annually.
This means that workers at employers paying the tax are likely to see smaller wage gains rather than actual cuts. The Cuomo administration was quite conscious of this issue in designing the tax. (I had some discussions with Cuomo’s staff on the tax plan.)
While this plan has been described as too complicated it is much simpler than the Flexible Savings Account (FSA), which have proven very popular with employees. These accounts require lots of bookkeeping and also put workers at risk of losing unspent money. By contrast, the employer-side payroll tax is simply a one-time adjustment to workers’ pay.
It also allows for much larger potential savings than an FSA. A person earning $200,000 a year can save more than $3,000 a year on their taxes if their employer takes advantage of the employer-side payroll tax option. This is about four times as much as the maximum they can save on an FSA.
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A Washington Post article on the possibility that Donald Trump will have to disclose his finances may have misled readers. The piece told readers:
“Company officials argue it would have been impractical to untangle and sell all of Trump’s real estate holdings, and that doing so might have created additional conflicts of interest.”
It neglected to point out that this assertion by Trump’s employees is a lie. It is easy to design schemes under which Trump could disassociate himself from his business without creating conflicts of interest.
As I pointed out shortly after the election, this could be accomplished through a three-step process.
1) Donald Trump arranges to hire three auditors from an independent accounting firm. Each one does an independent assessment of Trump’s holdings and assigns it a value.
2) The middle assessment becomes a benchmark. Donald Trump buys an insurance policy that will guarantee him that he will get this amount of money when all assets are sold. If the total take is less than the benchmark, he collects on the insurance policy. Any money received in excess of the benchmark goes to a charity of Trump’s choosing (not the Trump Foundation).
3) All the proceeds from the sales are placed in a blind trust.
This would be a very straightforward process. We know that Trump has a hard time finding competent people to work for him, but the rest of us would have little difficulty solving his conflict of interest problem.
A Washington Post article on the possibility that Donald Trump will have to disclose his finances may have misled readers. The piece told readers:
“Company officials argue it would have been impractical to untangle and sell all of Trump’s real estate holdings, and that doing so might have created additional conflicts of interest.”
It neglected to point out that this assertion by Trump’s employees is a lie. It is easy to design schemes under which Trump could disassociate himself from his business without creating conflicts of interest.
As I pointed out shortly after the election, this could be accomplished through a three-step process.
1) Donald Trump arranges to hire three auditors from an independent accounting firm. Each one does an independent assessment of Trump’s holdings and assigns it a value.
2) The middle assessment becomes a benchmark. Donald Trump buys an insurance policy that will guarantee him that he will get this amount of money when all assets are sold. If the total take is less than the benchmark, he collects on the insurance policy. Any money received in excess of the benchmark goes to a charity of Trump’s choosing (not the Trump Foundation).
3) All the proceeds from the sales are placed in a blind trust.
This would be a very straightforward process. We know that Trump has a hard time finding competent people to work for him, but the rest of us would have little difficulty solving his conflict of interest problem.
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After all, the economy generates 200,000 jobs a month on net (more than five million gross), so what difference could it make if one million doctors and dentists were displaced through trade. If the idea that losing one million very high paying jobs wouldn’t be any big deal seems strange to you, then you don’t really understand how economists talk about trade.
Of course, the actual column, by Donald Boudreaux, an economics professor at George Mason University, wasn’t talking about doctors and dentists. These occupations are highly protected. It is very difficult for foreign-trained professionals, even those in countries with comparable standards, to practice in the United States. Unlike steelworkers and textile workers, doctors and dentists have enough political power to get politicians to support their protection and to get the “free trade” media outlets to pretend they don’t notice.
But the best part of the story is the economists. Folks like Boudreaux would argue that doctors and dentists are just being silly and don’t understand trade if they think it could hurt them. This is the argument that he and other economists make about the massive loss of manufacturing jobs due to trade in the last two decades. The issue, of course, goes beyond even the job loss, since reduced demand leads to downward pressure on the wages of those who still have jobs. This has been a major source of increased inequality, as manufacturing has historically been a source of relatively high-paying jobs for workers without college degrees. (To be clear, I want free trade in doctors and dentists, but it would reduce their pay and our health care costs.)
Trade can also lead to a major shortfall in demand when we get large trade deficits, as was the case in the last decade. This was a major source of the famed “secular stagnation” that even many mainstream economists acknowledged during the Great Recession. If we had a trade deficit of 1.0 percent of GDP instead of the deficit of 3.0 percent of GDP we had during most of the recession and recovery (or 6.0 percent in 2005–2006), then the economy would have been much closer to full employment. But hey, that was no big deal, only silly people worry about trade.
And yes, free traders should be furious about government granted patent and copyright monopolies. Making them longer and stronger is a central goal of current trade deals. These are extremely costly forms of protectionism, equivalent to tariffs of many thousand percent.
But you don’t hear much about patents and copyrights as protectionism because Pfizer and Microsoft have lots of power. Also, the people who write about trade and control major news outlets are far more likely to have family and friends who benefit from these forms of protection than to be close to the steelworkers and textile workers who lost jobs and/or pay due to international competition.
After all, the economy generates 200,000 jobs a month on net (more than five million gross), so what difference could it make if one million doctors and dentists were displaced through trade. If the idea that losing one million very high paying jobs wouldn’t be any big deal seems strange to you, then you don’t really understand how economists talk about trade.
Of course, the actual column, by Donald Boudreaux, an economics professor at George Mason University, wasn’t talking about doctors and dentists. These occupations are highly protected. It is very difficult for foreign-trained professionals, even those in countries with comparable standards, to practice in the United States. Unlike steelworkers and textile workers, doctors and dentists have enough political power to get politicians to support their protection and to get the “free trade” media outlets to pretend they don’t notice.
But the best part of the story is the economists. Folks like Boudreaux would argue that doctors and dentists are just being silly and don’t understand trade if they think it could hurt them. This is the argument that he and other economists make about the massive loss of manufacturing jobs due to trade in the last two decades. The issue, of course, goes beyond even the job loss, since reduced demand leads to downward pressure on the wages of those who still have jobs. This has been a major source of increased inequality, as manufacturing has historically been a source of relatively high-paying jobs for workers without college degrees. (To be clear, I want free trade in doctors and dentists, but it would reduce their pay and our health care costs.)
Trade can also lead to a major shortfall in demand when we get large trade deficits, as was the case in the last decade. This was a major source of the famed “secular stagnation” that even many mainstream economists acknowledged during the Great Recession. If we had a trade deficit of 1.0 percent of GDP instead of the deficit of 3.0 percent of GDP we had during most of the recession and recovery (or 6.0 percent in 2005–2006), then the economy would have been much closer to full employment. But hey, that was no big deal, only silly people worry about trade.
And yes, free traders should be furious about government granted patent and copyright monopolies. Making them longer and stronger is a central goal of current trade deals. These are extremely costly forms of protectionism, equivalent to tariffs of many thousand percent.
But you don’t hear much about patents and copyrights as protectionism because Pfizer and Microsoft have lots of power. Also, the people who write about trade and control major news outlets are far more likely to have family and friends who benefit from these forms of protection than to be close to the steelworkers and textile workers who lost jobs and/or pay due to international competition.
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