An item in Ezra Klein’s NYT column yesterday really grabbed by attention. Ezra cited a Wall Street Journal column that claimed that the Federal Reserve Board’s stress tests would not have detected Silicon Valley Bank’s (SVB) problems, because its stress tests did not consider interest rate risk.
This struck me as close to crazy. How could a stress test not consider interest rate risk? I recalled the stress tests that the Fed and Treasury performed very publicly in March of 2009, in the middle of the financial crisis. These tests did not consider interest rate risk for the simple reason that, at that point in time, soaring interest rates seemed about as likely as a Martian invasion.
I had not been following the Fed’s stress tests since that time, but I assumed that they did adjust them for circumstances. I recall back in 2002, when I first became concerned about the housing bubble, being on a radio show with the chief economist from Fannie Mae. He assured me that they could not have serious problems with a decline in housing prices, since they regularly stress test their assets. Their tests included a large rise in interest rates. (When the bubble finally burst, Fannie Mae, along with Freddie Mac, collapsed in the summer of 2008 and have been in conservatorship ever since.)
Anyhow, this exchange led me to believe that regulators applied some common sense to their stress test exercises and examined how bank assets would fare in all bad, but plausible, circumstances. In the years 2020-21, when 10-year Treasury rates were at times flirting with 1.0 percent, a sharp rise in interest rates had to be seen as a plausible, even if unlikely, possibility.
Incredibly, the Fed stress tests did not consider this scenario. This means that the Fed’s stress tests would not have detected the vulnerability of SVB to the sort of jump in interest rates that we have seen over the last year. That means that it is possible that, even if Dodd-Frank had not been weakened in 2018 to reduce the regulation to which SVB was subject, the Fed still would not have detected its problems.
I said “possible,” rather than asserting that the Fed would not have caught the bank’s vulnerabilities, because even without a stress test some items should have been apparent to anyone giving the bank careful scrutiny, as would have been required before the 2018 law weakening Dodd-Frank.
First and foremost, the bank had well over 90 percent of its liabilities in uninsured deposits. That has to be a red flag to any bank regulator. These are the deposits that are more likely to run in a crisis, since insured deposits have no reason to flee. Also, most banks have more of their liabilities in the form of bonds or other fixed term debt that cannot run.
The fact that the bank’s customers were highly concentrated in a single industry, the tech sector, also should have been a red flag. This is especially the case because tech has a long history as being a boom-bust industry.
Third, the bank’s assets had nearly tripled in size from the fourth quarter of 2019 to the fourth quarter of 2021. Again, any regulator with some clear eyes should have been asking if SVB was doing anything risky to bring about such extraordinary growth. As an old line goes, they should use their University of Chicago common sense: “If what we’re doing is not risky, why is the good lord being so nice to us?”
Anyhow, I mention these points since it still seems likely to me that if the Fed was applying the strict scrutiny to SVB, that had been required before the passage of the 2018 law weakening Dodd-Frank, it would have caught the bank’s vulnerabilities and required measures to shore up its capital and/or reduce its deposits. However, the stress tests the Fed was using would have been utterly worthless in detecting its problems.
This should be an important reminder that regulation does not necessarily solve market problems. Sometimes liberals seem to work from the assumption that if the market outcomes are getting things wrong, somehow bringing in the government will set things right.
This is often not the case. When I think back to my exchange with Fannie Mae’s chief economist, he insisted that a nationwide plunge in house prices was not even a possibility, since the country had never seen anything like that. While that was partly true (they did fall sharply in the Great Depression), we also had never seen the sort of nationwide run-up in house prices we were experiencing at the time.
But the key point was that he could not even consider the possibility that we were seeing a housing bubble, where house prices were being driven by irrational exuberance, rather than the fundamentals of the market. That was true of almost all the economists I encountered in those years. Even my friends largely did not buy the story, although they might politely nod when I made the case.
Anyhow, if we had more thoroughgoing regulation of the financial system in the years when the housing bubble was growing, there is little reason to think the regulators necessarily would have caught the financial system’s problems. After all, if the house price growth we saw in the bubble years made sense, then the banks’ behavior would not have been especially risky.
To my view, while we need government regulators in many circumstances, the most important part of the story is to structure the market to get the incentives right. That is why I have argued for a system where the Fed gives everyone an account which they can use for getting their paychecks, paying their bills, and other transactions.
This would be enormously more efficient than the current system, eliminating tens of billions in fees paid annually to the banks. The amount saved could be two or three times the price of Biden’s student loan debt forgiveness. It would also eliminate the problem of bankers sitting on huge pots of money where they can make great fortunes by taking big risks.
This is also the story with the pharmaceutical industry. If we paid for the development costs upfront, as we already do with more than $50 billion a year going to the National Institutes of Health, we would not only make drugs cheap (all drugs would be available as generics the day they are approved), we would also eliminate the incentive for drug companies to lie about their safety and effectiveness.
I have my longer tirade on this topic in chapter 5 of Rigged [it’s free], along with a discussion of other sectors. (See also here.) But the key point is that we can’t count on government regulation to right the wrongs of a badly structured market. Regulators can both make mistakes and also be corrupted by the industry they are regulating.
The most important reform is to structure the markets right in the first place, so that we can minimize the need for regulatory oversight. We need regulation in many circumstances, but even the best regulation will not correct the problems of a badly structured market.
An item in Ezra Klein’s NYT column yesterday really grabbed by attention. Ezra cited a Wall Street Journal column that claimed that the Federal Reserve Board’s stress tests would not have detected Silicon Valley Bank’s (SVB) problems, because its stress tests did not consider interest rate risk.
This struck me as close to crazy. How could a stress test not consider interest rate risk? I recalled the stress tests that the Fed and Treasury performed very publicly in March of 2009, in the middle of the financial crisis. These tests did not consider interest rate risk for the simple reason that, at that point in time, soaring interest rates seemed about as likely as a Martian invasion.
I had not been following the Fed’s stress tests since that time, but I assumed that they did adjust them for circumstances. I recall back in 2002, when I first became concerned about the housing bubble, being on a radio show with the chief economist from Fannie Mae. He assured me that they could not have serious problems with a decline in housing prices, since they regularly stress test their assets. Their tests included a large rise in interest rates. (When the bubble finally burst, Fannie Mae, along with Freddie Mac, collapsed in the summer of 2008 and have been in conservatorship ever since.)
Anyhow, this exchange led me to believe that regulators applied some common sense to their stress test exercises and examined how bank assets would fare in all bad, but plausible, circumstances. In the years 2020-21, when 10-year Treasury rates were at times flirting with 1.0 percent, a sharp rise in interest rates had to be seen as a plausible, even if unlikely, possibility.
Incredibly, the Fed stress tests did not consider this scenario. This means that the Fed’s stress tests would not have detected the vulnerability of SVB to the sort of jump in interest rates that we have seen over the last year. That means that it is possible that, even if Dodd-Frank had not been weakened in 2018 to reduce the regulation to which SVB was subject, the Fed still would not have detected its problems.
I said “possible,” rather than asserting that the Fed would not have caught the bank’s vulnerabilities, because even without a stress test some items should have been apparent to anyone giving the bank careful scrutiny, as would have been required before the 2018 law weakening Dodd-Frank.
First and foremost, the bank had well over 90 percent of its liabilities in uninsured deposits. That has to be a red flag to any bank regulator. These are the deposits that are more likely to run in a crisis, since insured deposits have no reason to flee. Also, most banks have more of their liabilities in the form of bonds or other fixed term debt that cannot run.
The fact that the bank’s customers were highly concentrated in a single industry, the tech sector, also should have been a red flag. This is especially the case because tech has a long history as being a boom-bust industry.
Third, the bank’s assets had nearly tripled in size from the fourth quarter of 2019 to the fourth quarter of 2021. Again, any regulator with some clear eyes should have been asking if SVB was doing anything risky to bring about such extraordinary growth. As an old line goes, they should use their University of Chicago common sense: “If what we’re doing is not risky, why is the good lord being so nice to us?”
Anyhow, I mention these points since it still seems likely to me that if the Fed was applying the strict scrutiny to SVB, that had been required before the passage of the 2018 law weakening Dodd-Frank, it would have caught the bank’s vulnerabilities and required measures to shore up its capital and/or reduce its deposits. However, the stress tests the Fed was using would have been utterly worthless in detecting its problems.
This should be an important reminder that regulation does not necessarily solve market problems. Sometimes liberals seem to work from the assumption that if the market outcomes are getting things wrong, somehow bringing in the government will set things right.
This is often not the case. When I think back to my exchange with Fannie Mae’s chief economist, he insisted that a nationwide plunge in house prices was not even a possibility, since the country had never seen anything like that. While that was partly true (they did fall sharply in the Great Depression), we also had never seen the sort of nationwide run-up in house prices we were experiencing at the time.
But the key point was that he could not even consider the possibility that we were seeing a housing bubble, where house prices were being driven by irrational exuberance, rather than the fundamentals of the market. That was true of almost all the economists I encountered in those years. Even my friends largely did not buy the story, although they might politely nod when I made the case.
Anyhow, if we had more thoroughgoing regulation of the financial system in the years when the housing bubble was growing, there is little reason to think the regulators necessarily would have caught the financial system’s problems. After all, if the house price growth we saw in the bubble years made sense, then the banks’ behavior would not have been especially risky.
To my view, while we need government regulators in many circumstances, the most important part of the story is to structure the market to get the incentives right. That is why I have argued for a system where the Fed gives everyone an account which they can use for getting their paychecks, paying their bills, and other transactions.
This would be enormously more efficient than the current system, eliminating tens of billions in fees paid annually to the banks. The amount saved could be two or three times the price of Biden’s student loan debt forgiveness. It would also eliminate the problem of bankers sitting on huge pots of money where they can make great fortunes by taking big risks.
This is also the story with the pharmaceutical industry. If we paid for the development costs upfront, as we already do with more than $50 billion a year going to the National Institutes of Health, we would not only make drugs cheap (all drugs would be available as generics the day they are approved), we would also eliminate the incentive for drug companies to lie about their safety and effectiveness.
I have my longer tirade on this topic in chapter 5 of Rigged [it’s free], along with a discussion of other sectors. (See also here.) But the key point is that we can’t count on government regulation to right the wrongs of a badly structured market. Regulators can both make mistakes and also be corrupted by the industry they are regulating.
The most important reform is to structure the markets right in the first place, so that we can minimize the need for regulatory oversight. We need regulation in many circumstances, but even the best regulation will not correct the problems of a badly structured market.
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The New York Times seems to think it is a newspaper’s job to promote bank panics wherever possible. It would be difficult to explain its reporting on the Silicon Valley Bank’s (SVB) collapse any other way.
Last week it ran a piece implying that Silicon Valley’s tech sector was going to be seriously crippled by the collapse of the bank. The crippling would occur both, because they would lose a large chunk of their assets, which were in uninsured accounts at SVB, and also because they would lose access to a bank which was a major source of credit.
The first point was not plausibly true even at the time the NYT posted the story. When it seized the bank a week ago Friday, the FDIC issued a notice that it would give depositors an advance payment against the uninsured funds in their account the next week. It also said that it would give them a certificate for the remaining funds, the value of which would depend on how much it was able to collect by selling the bank’s assets.
The advance payment would almost certainly have been an amount equal to at least 50 percent of the uninsured deposits and quite possibly over 70 percent. The certificate would cover some fraction of the remaining amount.
While the depositors would have to wait for the FDIC to complete its resolution process to know how much they would ultimately get from their certificates, they would almost certainly be able to sell them to investors the day they were issued. This would likely mean a loss to these depositors, but we are almost certainly talking about less than 15 percent, and quite likely something close 5.0 percent. (The bonds of the bank were still selling for 30 cents on the dollar after the FDIC seizure was announced. No bond holder will collect a penny on their bonds, unless the depositors are paid in full.)
In short, the idea that Silicon Valley businesses would see their accounts zeroed out was always nonsense. Losing 5-15 percent of holdings above $250k would surely be a blow, but it is hard to believe this would devastate an otherwise thriving business.
On the second point, while other banks may not give quite the same service to Silicon Valley business people as SVB, banks are generally happy to make loans to thriving businesses. Also, part of the loss is personal to these people, not about their businesses.
“SVB’s home loans were significantly better than those from traditional banks, four people who received them said. The loans were $2.5 million to $6 million, with interest rates under 2.6 percent. Other banks had turned them down or, when given quotes for interest rates, offered over 3 percent, the people said.”
Anyhow, in a follow up today, the NYT gave us the timeline for Sara Mauskopf, a small business owner who had an account at SVB. The timeline goes over her experiences from first hearing about the bank’s troubles through the announcement on Sunday afternoon that everyone would have immediate access to the full amount in their accounts.
Incredibly, the piece never once mentions the FDIC’s statement when it took over the bank, that it would issue an advance payment within days and a certificate for the rest of the money. It is possible that Ms. Mauskopf did not know about this statement and the promise that most of the funds in her account would be available almost immediately.
If that is true, that would be a great story for a serious news outlet to pursue. Was Ms. Mauskopf typical among SVB depositors in not knowing that most of her account would be available to her the week after the bank had been seized?
If so, why were depositors not better informed about this fact? It could be because news outlets like the New York Times were more interested in promoting panic than in providing information, but that would just be speculation.
The New York Times seems to think it is a newspaper’s job to promote bank panics wherever possible. It would be difficult to explain its reporting on the Silicon Valley Bank’s (SVB) collapse any other way.
Last week it ran a piece implying that Silicon Valley’s tech sector was going to be seriously crippled by the collapse of the bank. The crippling would occur both, because they would lose a large chunk of their assets, which were in uninsured accounts at SVB, and also because they would lose access to a bank which was a major source of credit.
The first point was not plausibly true even at the time the NYT posted the story. When it seized the bank a week ago Friday, the FDIC issued a notice that it would give depositors an advance payment against the uninsured funds in their account the next week. It also said that it would give them a certificate for the remaining funds, the value of which would depend on how much it was able to collect by selling the bank’s assets.
The advance payment would almost certainly have been an amount equal to at least 50 percent of the uninsured deposits and quite possibly over 70 percent. The certificate would cover some fraction of the remaining amount.
While the depositors would have to wait for the FDIC to complete its resolution process to know how much they would ultimately get from their certificates, they would almost certainly be able to sell them to investors the day they were issued. This would likely mean a loss to these depositors, but we are almost certainly talking about less than 15 percent, and quite likely something close 5.0 percent. (The bonds of the bank were still selling for 30 cents on the dollar after the FDIC seizure was announced. No bond holder will collect a penny on their bonds, unless the depositors are paid in full.)
In short, the idea that Silicon Valley businesses would see their accounts zeroed out was always nonsense. Losing 5-15 percent of holdings above $250k would surely be a blow, but it is hard to believe this would devastate an otherwise thriving business.
On the second point, while other banks may not give quite the same service to Silicon Valley business people as SVB, banks are generally happy to make loans to thriving businesses. Also, part of the loss is personal to these people, not about their businesses.
“SVB’s home loans were significantly better than those from traditional banks, four people who received them said. The loans were $2.5 million to $6 million, with interest rates under 2.6 percent. Other banks had turned them down or, when given quotes for interest rates, offered over 3 percent, the people said.”
Anyhow, in a follow up today, the NYT gave us the timeline for Sara Mauskopf, a small business owner who had an account at SVB. The timeline goes over her experiences from first hearing about the bank’s troubles through the announcement on Sunday afternoon that everyone would have immediate access to the full amount in their accounts.
Incredibly, the piece never once mentions the FDIC’s statement when it took over the bank, that it would issue an advance payment within days and a certificate for the rest of the money. It is possible that Ms. Mauskopf did not know about this statement and the promise that most of the funds in her account would be available almost immediately.
If that is true, that would be a great story for a serious news outlet to pursue. Was Ms. Mauskopf typical among SVB depositors in not knowing that most of her account would be available to her the week after the bank had been seized?
If so, why were depositors not better informed about this fact? It could be because news outlets like the New York Times were more interested in promoting panic than in providing information, but that would just be speculation.
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David Wallace-Wells just wrote a column describing measures being passed in state legislatures controlled by Republicans, which will make it more difficult for governments to implement measures like temporary business closures or mask and vaccine mandates, all as tools to contain a deadly pandemic. While these laws may seem like an exercise in ungodly stupidity, the New York Times would not allow mention in its paper of restrictions that are likely to pose an even greater risk to public health in the next pandemic.
Of course, I am talking about intellectual property rules. Yes, I have been hitting this one hard in the last few days, but that is just because I find the arrogant ignorance on this issue so infuriating. And it matters.
We don’t know what the next deadly pandemic will look like, and with luck it will be many decades in the future. But we can envision what might have been different about the course of this pandemic if we went the open-source route, where all the science and technology was freely available for others to build on and to use to manufacture vaccines, tests, and treatments.
And, to be clear, this doesn’t mean that companies would not be compensated for their investments in developing the needed technology. The compensation would just take a different form, as a check from the government, rather than charging monopoly prices on vaccines or other products. Of course, companies could sue in court if they considered the compensation inadequate.
If we had gone down this route, all the information for making all vaccines, tests, and treatments would have been available for any manufacturer in the world. Governments interested in slowing the spread of the pandemic would also pay to produce and stockpile these products, especially vaccines, in advance of their approval by the FDA and other countries regulatory agencies.
This would be a very low risk proposition, since the vaccines were cheap to manufacture, less than $2 a shot in most cases. The potential loss from having to throw out 200 million vaccines that proved to be ineffective is trivial compared to the incredible benefits of having 200 million vaccines that could be quickly put into people’s arms once a vaccine was approved.
By pooling technology, we could ensure that people have a choice of vaccines. If people had refused to get vaccinated due to fears of mRNA vaccines (rational or otherwise), there were a number of vaccines based on well-established technologies that could have been made available as an alternative. (The FDA did approve non-mRNA vaccines manufactured by Johnson and Johnson and Novavax, but there were also non-mRNA vaccines widely used in other countries that in principle could have been available here.)
If a range of vaccines had been produced and stockpiled in vast quantities in 2020, when they were being tested for approval, we would have begun large-scale world-wide vaccination campaigns in late 2020 and the first months of 2021. This would have rapidly slowed the spread of the virus, almost certainly preventing the development of the omicron strain and quite possibly the delta strain.
That would have saved millions of lives and avoided trillions of dollars in economic damage. If we adopted the same approach to tests and treatments, this would both further reduce the spread and also the likelihood of death or serious illness among people who got infected.
But, any discussion of suspending intellectual property rules is strictly verboten in the New York Times. They only have space for trashing the Trumpers doing theatrics over banning pandemic mitigation measures. While these Trumpers do certainly deserve the criticism Wallace-Wells directs towards them, it would be great if we could have a discussion of the policies that do far more serious damage to public health, even if they mean big profits to the drug industry.
David Wallace-Wells just wrote a column describing measures being passed in state legislatures controlled by Republicans, which will make it more difficult for governments to implement measures like temporary business closures or mask and vaccine mandates, all as tools to contain a deadly pandemic. While these laws may seem like an exercise in ungodly stupidity, the New York Times would not allow mention in its paper of restrictions that are likely to pose an even greater risk to public health in the next pandemic.
Of course, I am talking about intellectual property rules. Yes, I have been hitting this one hard in the last few days, but that is just because I find the arrogant ignorance on this issue so infuriating. And it matters.
We don’t know what the next deadly pandemic will look like, and with luck it will be many decades in the future. But we can envision what might have been different about the course of this pandemic if we went the open-source route, where all the science and technology was freely available for others to build on and to use to manufacture vaccines, tests, and treatments.
And, to be clear, this doesn’t mean that companies would not be compensated for their investments in developing the needed technology. The compensation would just take a different form, as a check from the government, rather than charging monopoly prices on vaccines or other products. Of course, companies could sue in court if they considered the compensation inadequate.
If we had gone down this route, all the information for making all vaccines, tests, and treatments would have been available for any manufacturer in the world. Governments interested in slowing the spread of the pandemic would also pay to produce and stockpile these products, especially vaccines, in advance of their approval by the FDA and other countries regulatory agencies.
This would be a very low risk proposition, since the vaccines were cheap to manufacture, less than $2 a shot in most cases. The potential loss from having to throw out 200 million vaccines that proved to be ineffective is trivial compared to the incredible benefits of having 200 million vaccines that could be quickly put into people’s arms once a vaccine was approved.
By pooling technology, we could ensure that people have a choice of vaccines. If people had refused to get vaccinated due to fears of mRNA vaccines (rational or otherwise), there were a number of vaccines based on well-established technologies that could have been made available as an alternative. (The FDA did approve non-mRNA vaccines manufactured by Johnson and Johnson and Novavax, but there were also non-mRNA vaccines widely used in other countries that in principle could have been available here.)
If a range of vaccines had been produced and stockpiled in vast quantities in 2020, when they were being tested for approval, we would have begun large-scale world-wide vaccination campaigns in late 2020 and the first months of 2021. This would have rapidly slowed the spread of the virus, almost certainly preventing the development of the omicron strain and quite possibly the delta strain.
That would have saved millions of lives and avoided trillions of dollars in economic damage. If we adopted the same approach to tests and treatments, this would both further reduce the spread and also the likelihood of death or serious illness among people who got infected.
But, any discussion of suspending intellectual property rules is strictly verboten in the New York Times. They only have space for trashing the Trumpers doing theatrics over banning pandemic mitigation measures. While these Trumpers do certainly deserve the criticism Wallace-Wells directs towards them, it would be great if we could have a discussion of the policies that do far more serious damage to public health, even if they mean big profits to the drug industry.
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• Economic Crisis and RecoveryCrisis económica y recuperación
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It really is bizarre how elite policy types have such a hard time thinking clearly about intellectual property. Earlier this week, I was beating up on the NYT for having two columns on preparing for the next pandemic, neither of which mentioned even once the issue of intellectual property.
This issue of intellectual property in a pandemic should not seem like an obscure topic. In the fall of 2020, India and South Africa proposed a resolution at the WTO that all intellectual property claims on vaccines, tests, and treatments be suspended for the duration of the pandemic.
More than 100 countries eventually signed on to the resolution. The United States and other wealthy countries subsequently filibustered the resolution to the point of irrelevance.
However, the idea that questions of intellectual property might be important in the next pandemic should not seem far-fetched. If we had eliminated all IP barriers (this would include both suspending patent monopolies and other forms of exclusivity, as well as not enforcing non-disclosure agreements), we quite likely could have had enough people around the world vaccinated quickly enough to have prevented the development of the Omicron strain of the coronavirus. It is even possible that we could have slowed the spread enough to prevent the Delta strain.
Imagine the millions of lives that could have been saved and the trillions of dollars of economic losses that would have been averted if these mutations had not developed. You might think this would be sufficient to interest the great minds that write about pandemics for the New York Times.
Just to be clear — suspending IP doesn’t mean that companies forego their profits from these claims. The idea is that the suspension would allow for the free flow of knowledge and technology to address the pandemic. After the fact, the companies would receive compensation from the government, and of course they would have every right to sue in court if they felt the compensation was inadequate. The point is that all effort should be focused on stopping the pandemic, and the money issues can be dealt with later.
Okay, it was pretty amazing to see this extraordinary neglect in the NYT, but Planet Money on NPR arguably went one better. It actually had a very interesting piece on drug costs and innovation, but then walked away from the big question it raised.
The piece pointed out that the United States pays more than any other country in the world because we grant drug companies patent monopolies and then let them charge whatever they want for their drugs. It then discussed President Biden’s plan to negotiate drug prices in Medicare, which the Congressional Budget Office (CBO) projected would save $25 billion a year.
It also noted that CBO projected that the reduction in drug company profits would result in a reduction of one percent in the number of drugs being developed. Since we develop roughly 45 new drugs a year, this would mean one less drug every two years. If that lost drug was an important treatment for cancer, diabetes, or some other serious illness, that would be a big loss.
But then the NPR piece cites another CBO study that calculates that we could offset the reduction in drug company research spending by increasing spending on NIH research by $1 billion. The piece then comments:
“So the policies together would save the government billions of dollars overall with minimal harm to innovation,” and then moves on.
Okay folks, let’s slow down and look at what NPR just told us. They said that $1 billion in government spending on research would offset the impact of a $25 billion reduction in drug prices. That is a 25 to 1 return on investment. In cost-benefit analyses, this would be off-the-charts crazy. A ratio of 1.1 is considered good, and 1.5 to 1 is great. If you can get to 2 to 1, that’s really fantastic. This is 25 to 1.
Maybe we should be asking if we can push this further and have the government pick up the whole tab for the research that is currently supported by patent monopolies (a bit over $100 billion a year at present), and let all new drugs be sold as cheap generics as soon as they are approved by the FDA. This could easily save us over $400 billion a year in spending on prescription drugs.
And, not only would drugs be cheap, we would also have removed the enormous incentive to be dishonest about the safety and effectiveness of drugs which results from patent monopoly pricing. We would also radically reduce the amount of money spent researching copycat drugs, and could instead direct more money into exploring cures and treatments that may not involve patentable products.
I wouldn’t necessarily expect this piece to go all the way down this road, but it is more than a bit incredible that they tell us that increased spending on NIH research can have a 2500 percent return on investment, and then just walk away from the issue. Is it not possible for people to think clearly about alternatives to patent monopolies for supporting the development of new drugs?
There is a lot of money, as well as peoples’ lives and health, at issue. It should be possible for our leading news outlets to think about the problem seriously and not let prejudices about intellectual property get in the way.
It really is bizarre how elite policy types have such a hard time thinking clearly about intellectual property. Earlier this week, I was beating up on the NYT for having two columns on preparing for the next pandemic, neither of which mentioned even once the issue of intellectual property.
This issue of intellectual property in a pandemic should not seem like an obscure topic. In the fall of 2020, India and South Africa proposed a resolution at the WTO that all intellectual property claims on vaccines, tests, and treatments be suspended for the duration of the pandemic.
More than 100 countries eventually signed on to the resolution. The United States and other wealthy countries subsequently filibustered the resolution to the point of irrelevance.
However, the idea that questions of intellectual property might be important in the next pandemic should not seem far-fetched. If we had eliminated all IP barriers (this would include both suspending patent monopolies and other forms of exclusivity, as well as not enforcing non-disclosure agreements), we quite likely could have had enough people around the world vaccinated quickly enough to have prevented the development of the Omicron strain of the coronavirus. It is even possible that we could have slowed the spread enough to prevent the Delta strain.
Imagine the millions of lives that could have been saved and the trillions of dollars of economic losses that would have been averted if these mutations had not developed. You might think this would be sufficient to interest the great minds that write about pandemics for the New York Times.
Just to be clear — suspending IP doesn’t mean that companies forego their profits from these claims. The idea is that the suspension would allow for the free flow of knowledge and technology to address the pandemic. After the fact, the companies would receive compensation from the government, and of course they would have every right to sue in court if they felt the compensation was inadequate. The point is that all effort should be focused on stopping the pandemic, and the money issues can be dealt with later.
Okay, it was pretty amazing to see this extraordinary neglect in the NYT, but Planet Money on NPR arguably went one better. It actually had a very interesting piece on drug costs and innovation, but then walked away from the big question it raised.
The piece pointed out that the United States pays more than any other country in the world because we grant drug companies patent monopolies and then let them charge whatever they want for their drugs. It then discussed President Biden’s plan to negotiate drug prices in Medicare, which the Congressional Budget Office (CBO) projected would save $25 billion a year.
It also noted that CBO projected that the reduction in drug company profits would result in a reduction of one percent in the number of drugs being developed. Since we develop roughly 45 new drugs a year, this would mean one less drug every two years. If that lost drug was an important treatment for cancer, diabetes, or some other serious illness, that would be a big loss.
But then the NPR piece cites another CBO study that calculates that we could offset the reduction in drug company research spending by increasing spending on NIH research by $1 billion. The piece then comments:
“So the policies together would save the government billions of dollars overall with minimal harm to innovation,” and then moves on.
Okay folks, let’s slow down and look at what NPR just told us. They said that $1 billion in government spending on research would offset the impact of a $25 billion reduction in drug prices. That is a 25 to 1 return on investment. In cost-benefit analyses, this would be off-the-charts crazy. A ratio of 1.1 is considered good, and 1.5 to 1 is great. If you can get to 2 to 1, that’s really fantastic. This is 25 to 1.
Maybe we should be asking if we can push this further and have the government pick up the whole tab for the research that is currently supported by patent monopolies (a bit over $100 billion a year at present), and let all new drugs be sold as cheap generics as soon as they are approved by the FDA. This could easily save us over $400 billion a year in spending on prescription drugs.
And, not only would drugs be cheap, we would also have removed the enormous incentive to be dishonest about the safety and effectiveness of drugs which results from patent monopoly pricing. We would also radically reduce the amount of money spent researching copycat drugs, and could instead direct more money into exploring cures and treatments that may not involve patentable products.
I wouldn’t necessarily expect this piece to go all the way down this road, but it is more than a bit incredible that they tell us that increased spending on NIH research can have a 2500 percent return on investment, and then just walk away from the issue. Is it not possible for people to think clearly about alternatives to patent monopolies for supporting the development of new drugs?
There is a lot of money, as well as peoples’ lives and health, at issue. It should be possible for our leading news outlets to think about the problem seriously and not let prejudices about intellectual property get in the way.
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There are two key points that people should recognize about the decision to guarantee all the deposits at Silicon Valley Bank (SVB):
The first point is straightforward. We gave a government guarantee of great value to people who had not paid for it.
We will get a lot of silly game playing on this issue, just like we did back in 2008-09. The game players will tell us that this guarantee didn’t cost the government a penny, which will very likely end up being true. But that doesn’t mean we didn’t give the bank’s large depositors something of great value.
If the government offers to guarantee a loan, it makes it far more likely that the beneficiary will be able to get the loan and that they will pay a lower interest rate for this loan. In this case, the people who held large uninsured deposits at SVB apparently decided that it was better, for whatever reason, to expose themselves to the risk by keeping these deposits at SVB, rather than adjusting their finances in a way that would have kept their money better protected.
This would have meant either parking their deposits at a larger bank that was subject to more careful scrutiny by regulators, or adjusting their assets so that they were not so exposed to a single bank. They also could have taken ten minutes to examine SVB’s financial situation, which was mostly a matter of public record.
For whatever reason, the bank’s large depositors chose to expose themselves to serious risk. When their bet turned out badly, they in effect wanted the government to provide the insurance that they did not pay for.
This brings us to the second point; this is Donald Trump’s bailout. The reason this is a bailout is that the government is providing a benefit that the depositors did not pay for. It also is, in effect, a subsidy to other mid-sized banks, since it tells their depositors that they can count on the government covering their deposits, even though they are not insured and the bank is not subject to the same scrutiny as the largest banks.
This is where the fault lies with Donald Trump. It was his decision to stop scrutinizing banks with assets between $50 billion and $250 billion that led to the problems at SVB.
Prior to the passage of this bill, a bank the size of SVB would have been subject to stricter rules and regular stress tests. A stress test means projecting how a bank would fare in various bad situations, like the rise in interest rates that apparently sank SVB. The 2018 changes exempted banks with assets under $100 billion from undergoing stress tests (SVB had been in this category until 2021), and said that banks with assets between $100 billion and $250 billion had to undergo “periodic” stress tests.
If regulators had subjected to SVB to a stress test, they would have almost surely recognized its problems. They then would have required it to raise more capital and/or shed deposits.
But Trump pulled the regulators off the job. This is wrongly described as “deregulation.” It isn’t.
Deregulation would mean both eliminating the scrutiny of SVB and ending insurance for the bank. (In principle that would mean ending all deposit insurance, not the just the insurance for large accounts that is at issue here.)
What happened in 2018 was effectively allowing SVB to still benefit from insurance without having to pay for it. It is comparable to telling drivers that they don’t have to buy auto insurance, but will still be covered if they are in an accident. Or, perhaps a better example would be telling a restaurant that it is covered by fire insurance, but it doesn’t have to adhere to safety standards.
It is dishonest to describe this as “deregulation.” It is the government giving a subsidy to the banks in question. It is understandable that the banks prefer to describe their subsidy as deregulation, but it is not accurate.
Anyhow, this bailout is the Donald Trump bailout. He touted the 2018 bill when he signed it. We are now seeing the fruits of his action.
Note: An earlier version said that the 2018 changes would have exempted SVB from stress tests altogether.
There are two key points that people should recognize about the decision to guarantee all the deposits at Silicon Valley Bank (SVB):
The first point is straightforward. We gave a government guarantee of great value to people who had not paid for it.
We will get a lot of silly game playing on this issue, just like we did back in 2008-09. The game players will tell us that this guarantee didn’t cost the government a penny, which will very likely end up being true. But that doesn’t mean we didn’t give the bank’s large depositors something of great value.
If the government offers to guarantee a loan, it makes it far more likely that the beneficiary will be able to get the loan and that they will pay a lower interest rate for this loan. In this case, the people who held large uninsured deposits at SVB apparently decided that it was better, for whatever reason, to expose themselves to the risk by keeping these deposits at SVB, rather than adjusting their finances in a way that would have kept their money better protected.
This would have meant either parking their deposits at a larger bank that was subject to more careful scrutiny by regulators, or adjusting their assets so that they were not so exposed to a single bank. They also could have taken ten minutes to examine SVB’s financial situation, which was mostly a matter of public record.
For whatever reason, the bank’s large depositors chose to expose themselves to serious risk. When their bet turned out badly, they in effect wanted the government to provide the insurance that they did not pay for.
This brings us to the second point; this is Donald Trump’s bailout. The reason this is a bailout is that the government is providing a benefit that the depositors did not pay for. It also is, in effect, a subsidy to other mid-sized banks, since it tells their depositors that they can count on the government covering their deposits, even though they are not insured and the bank is not subject to the same scrutiny as the largest banks.
This is where the fault lies with Donald Trump. It was his decision to stop scrutinizing banks with assets between $50 billion and $250 billion that led to the problems at SVB.
Prior to the passage of this bill, a bank the size of SVB would have been subject to stricter rules and regular stress tests. A stress test means projecting how a bank would fare in various bad situations, like the rise in interest rates that apparently sank SVB. The 2018 changes exempted banks with assets under $100 billion from undergoing stress tests (SVB had been in this category until 2021), and said that banks with assets between $100 billion and $250 billion had to undergo “periodic” stress tests.
If regulators had subjected to SVB to a stress test, they would have almost surely recognized its problems. They then would have required it to raise more capital and/or shed deposits.
But Trump pulled the regulators off the job. This is wrongly described as “deregulation.” It isn’t.
Deregulation would mean both eliminating the scrutiny of SVB and ending insurance for the bank. (In principle that would mean ending all deposit insurance, not the just the insurance for large accounts that is at issue here.)
What happened in 2018 was effectively allowing SVB to still benefit from insurance without having to pay for it. It is comparable to telling drivers that they don’t have to buy auto insurance, but will still be covered if they are in an accident. Or, perhaps a better example would be telling a restaurant that it is covered by fire insurance, but it doesn’t have to adhere to safety standards.
It is dishonest to describe this as “deregulation.” It is the government giving a subsidy to the banks in question. It is understandable that the banks prefer to describe their subsidy as deregulation, but it is not accurate.
Anyhow, this bailout is the Donald Trump bailout. He touted the 2018 bill when he signed it. We are now seeing the fruits of his action.
Note: An earlier version said that the 2018 changes would have exempted SVB from stress tests altogether.
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Word from the grapevine is that the risk of contagion may cause the Fed or the FDIC to engineer some sort of bailout of uninsured deposits, where they get paid back in full, instead of being forced to accept a partial loss on deposits over $250k. That would be unfortunate, since the people who run these companies that have large deposits are supposed to be brilliant whizzes, who should be able to understand things like FDIC deposit insurance limits.
Their incessant whining, that losing 10-20 percent of their deposits, would shut down Silicon Valley and the country’s tech sector, made for good laughs. However, the risk of a nationwide series of bank runs is a high price to pay to teach these people about the limits on deposit insurance.
We know that the view of most of our policy elites (the politicians who make policy, their staff, and the people who write about it in major news outlets) is that the purpose of government is to make the rich richer. But, there are alternative ways to structure the financial system for people who care about fairness and efficiency.
The most obvious solution would be to have the Federal Reserve Board give every person and corporation in the country a digital bank account. The idea is that this would be a largely costless way for people to carry on their normal transactions. They could have their paychecks deposited there every two weeks or month. They could have their mortgage or rent, electric bill, credit card bill, and other bills paid directly from their accounts.
This sort of system could be operated at minimal cost, with the overwhelming majority of transactions handled electronically, requiring no human intervention. There could be modest charge for overdrafts, that would be structured to cover the cost of actually dealing with the problem, not gouging people to make big profits.
Former Fed economist (now at Dartmouth), Andy Levin, has been etching the outlines of this sort of system for a number of years. The idea would be to effectively separate out the banking system we use for carrying on transactions from the system we use for saving and financing investment.
We would have the Fed run system to carry out the vast majority of normal financial transactions, replacing the banks that we use now. However, we would continue to have investment banks, like Goldman Sachs and Morgan Stanley, that would borrow on financial markets and lend money to businesses, as well as underwriting stock and bond issues. While investment banks still require regulation to prevent abuses, we don’t have to worry about their failure shutting down the financial system.
Not only would the shift to Fed banking radically reduce the risk the financial sector poses to the economy, it would also make it hugely more efficient. We waste tens of billions of dollars every year maintaining the structure of a financial system that technology has made obsolete.
It is easy to see why this waste persists. The financial system as currently structured offers enormous rewards for people who get to the top. The Silicon Valley Bank (SVB) makes this case very clearly. The graph below shows the pay of the top seven executives at SVB alongside the pay of a minimum wage worker putting in 40 hours a week for 50 weeks. (It’s really there.)
Source: SVB and author’s calculations.
Greg Becker, the President and Chief Executive Officer, gets top pay among this group, pulling down 9,922,000 in SVB’s 2021 fiscal year (the most recent year for which I could find the data). That would be roughly 684 times what a minimum wage worker would earn for a full year’s work. (Top execs at the largest banks can earn three or four times this amount.) If we think that a worker has a 45-year working lifetime, then Mr. Becker pulls down more in a year than what a minimum wage worker would get in 15 working lifetimes. Yes, but we know the argument, how many minimum wage workers could threaten major financial upheaval, even in 15 working lifetimes?
We can go down the list, but the point should be clear. We maintain an enormously wasteful financial system because a relatively small number of people get very rich from it. And, these people use their money to lobby members of Congress to make sure no one talks about modernizing the system in a way that would take away the big bucks. (For those wondering about public sector comparisons, Fed Chair Jerome Powell gets $226,000 a year, just over 2.2 percent of Mr. Becker’s paycheck.)
And, our rich bankers have plenty of allies in the media and academic circles. Some of this is due to the fact that they can finance the voices of people who will tout their wisdom, but part of it is likely ideological bias. Plenty of neoliberal types, who will go on the warpath over a policy that helps workers or low-income people that they claim to be wasteful, can manage to completely ignore the massive waste in our financial system that is a major contributor to inequality.
Anyhow, we are not about to overturn the massive power of the rich in the financial system and the enormous network of elite opinion makers that supports them, but perhaps we can at least make the failure of SVB a teaching moment.
The rich are ripping us off big time. They are not lucky winners in a market competition due to their intelligence and hard work. They are people who have managed to rig the game to put big bucks in their pocket. That is the reality. We just have to find ways to change it. A key place to start is to stop pretending that their great wealth has anything to do with a free market.
Word from the grapevine is that the risk of contagion may cause the Fed or the FDIC to engineer some sort of bailout of uninsured deposits, where they get paid back in full, instead of being forced to accept a partial loss on deposits over $250k. That would be unfortunate, since the people who run these companies that have large deposits are supposed to be brilliant whizzes, who should be able to understand things like FDIC deposit insurance limits.
Their incessant whining, that losing 10-20 percent of their deposits, would shut down Silicon Valley and the country’s tech sector, made for good laughs. However, the risk of a nationwide series of bank runs is a high price to pay to teach these people about the limits on deposit insurance.
We know that the view of most of our policy elites (the politicians who make policy, their staff, and the people who write about it in major news outlets) is that the purpose of government is to make the rich richer. But, there are alternative ways to structure the financial system for people who care about fairness and efficiency.
The most obvious solution would be to have the Federal Reserve Board give every person and corporation in the country a digital bank account. The idea is that this would be a largely costless way for people to carry on their normal transactions. They could have their paychecks deposited there every two weeks or month. They could have their mortgage or rent, electric bill, credit card bill, and other bills paid directly from their accounts.
This sort of system could be operated at minimal cost, with the overwhelming majority of transactions handled electronically, requiring no human intervention. There could be modest charge for overdrafts, that would be structured to cover the cost of actually dealing with the problem, not gouging people to make big profits.
Former Fed economist (now at Dartmouth), Andy Levin, has been etching the outlines of this sort of system for a number of years. The idea would be to effectively separate out the banking system we use for carrying on transactions from the system we use for saving and financing investment.
We would have the Fed run system to carry out the vast majority of normal financial transactions, replacing the banks that we use now. However, we would continue to have investment banks, like Goldman Sachs and Morgan Stanley, that would borrow on financial markets and lend money to businesses, as well as underwriting stock and bond issues. While investment banks still require regulation to prevent abuses, we don’t have to worry about their failure shutting down the financial system.
Not only would the shift to Fed banking radically reduce the risk the financial sector poses to the economy, it would also make it hugely more efficient. We waste tens of billions of dollars every year maintaining the structure of a financial system that technology has made obsolete.
It is easy to see why this waste persists. The financial system as currently structured offers enormous rewards for people who get to the top. The Silicon Valley Bank (SVB) makes this case very clearly. The graph below shows the pay of the top seven executives at SVB alongside the pay of a minimum wage worker putting in 40 hours a week for 50 weeks. (It’s really there.)
Source: SVB and author’s calculations.
Greg Becker, the President and Chief Executive Officer, gets top pay among this group, pulling down 9,922,000 in SVB’s 2021 fiscal year (the most recent year for which I could find the data). That would be roughly 684 times what a minimum wage worker would earn for a full year’s work. (Top execs at the largest banks can earn three or four times this amount.) If we think that a worker has a 45-year working lifetime, then Mr. Becker pulls down more in a year than what a minimum wage worker would get in 15 working lifetimes. Yes, but we know the argument, how many minimum wage workers could threaten major financial upheaval, even in 15 working lifetimes?
We can go down the list, but the point should be clear. We maintain an enormously wasteful financial system because a relatively small number of people get very rich from it. And, these people use their money to lobby members of Congress to make sure no one talks about modernizing the system in a way that would take away the big bucks. (For those wondering about public sector comparisons, Fed Chair Jerome Powell gets $226,000 a year, just over 2.2 percent of Mr. Becker’s paycheck.)
And, our rich bankers have plenty of allies in the media and academic circles. Some of this is due to the fact that they can finance the voices of people who will tout their wisdom, but part of it is likely ideological bias. Plenty of neoliberal types, who will go on the warpath over a policy that helps workers or low-income people that they claim to be wasteful, can manage to completely ignore the massive waste in our financial system that is a major contributor to inequality.
Anyhow, we are not about to overturn the massive power of the rich in the financial system and the enormous network of elite opinion makers that supports them, but perhaps we can at least make the failure of SVB a teaching moment.
The rich are ripping us off big time. They are not lucky winners in a market competition due to their intelligence and hard work. They are people who have managed to rig the game to put big bucks in their pocket. That is the reality. We just have to find ways to change it. A key place to start is to stop pretending that their great wealth has anything to do with a free market.
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The New York Times had two pieces on Sunday talking about what we should do the next time we face a pandemic. Incredibly, neither said one word about waiving patents and other forms of intellectual property.
The NYT might have missed it, but this was actually a major issue in the developing world, as poor countries lacked access to vaccines, tests, and treatments. This was the reason that South Africa and India introduced a resolution at the WTO in October of 2020 calling for intellectual property rules to be waived for the duration of the pandemic.
I would hope that the NYT was aware of this issue, since it did affect a few billion people. It even featured a column on the resolution that was co-authored by Achal Prabhala, Arjun Jayadev, and me.
The logic of waiving intellectual property is probably too simple for the great minds that write for the NYT. The basic point is that we should want free exchanges of science to develop the best tools to combat the pandemic as quickly as possible.
And, we should want the technology to be dispersed as quickly as possible, both to directly protect lives, but also to stem the spread of the pandemic. We may not have seen the delta and omicron waves of the Covid pandemic if we had worked to disperse vaccines as quickly as possible.
Millions of lives would have been saved in this case. We would also have avoided trillions of dollars in economic losses worldwide.
I think government-granted patent monopolies are a terrible way to finance the development of drugs and vaccines for reasons I have listed in numerous pieces (e.g. see Rigged [it’s free] chapter 5 and here). To my mind, it is close to crazy to use the power of government to make drugs and vaccines, that are essential for people’s health, expensive when they are cheap to produce and distribute.
But that is not even the issue here. A temporary waiver does not preclude compensating companies for their patents and other claims to intellectual property. It just means that we don’t allow the intellectual property to interfere with the production and distribution of vaccines, tests, and treatments during the pandemic.
We instead make the focus treating people and slowing the spread of the pandemic as rapidly as possible. After the fact, we can work out the appropriate compensation for the companies with intellectual property claims. Presumably most of the payments would be negotiated, but companies would obviously have the option to sue the government if they didn’t feel the proposed compensation was adequate.
Could this mean that a Moderna or Pfizer ends up with less money than they felt they were entitled to? Sure, that is a possibility, but so what?
In any case, one might think that this would be the sort of issue that the NYT would discuss in the context of preparing for the next pandemic. But I suppose not. Some ideas just can’t be discussed in the pages of the New York Times. They apparently raise issues that hit too close to home.
The New York Times had two pieces on Sunday talking about what we should do the next time we face a pandemic. Incredibly, neither said one word about waiving patents and other forms of intellectual property.
The NYT might have missed it, but this was actually a major issue in the developing world, as poor countries lacked access to vaccines, tests, and treatments. This was the reason that South Africa and India introduced a resolution at the WTO in October of 2020 calling for intellectual property rules to be waived for the duration of the pandemic.
I would hope that the NYT was aware of this issue, since it did affect a few billion people. It even featured a column on the resolution that was co-authored by Achal Prabhala, Arjun Jayadev, and me.
The logic of waiving intellectual property is probably too simple for the great minds that write for the NYT. The basic point is that we should want free exchanges of science to develop the best tools to combat the pandemic as quickly as possible.
And, we should want the technology to be dispersed as quickly as possible, both to directly protect lives, but also to stem the spread of the pandemic. We may not have seen the delta and omicron waves of the Covid pandemic if we had worked to disperse vaccines as quickly as possible.
Millions of lives would have been saved in this case. We would also have avoided trillions of dollars in economic losses worldwide.
I think government-granted patent monopolies are a terrible way to finance the development of drugs and vaccines for reasons I have listed in numerous pieces (e.g. see Rigged [it’s free] chapter 5 and here). To my mind, it is close to crazy to use the power of government to make drugs and vaccines, that are essential for people’s health, expensive when they are cheap to produce and distribute.
But that is not even the issue here. A temporary waiver does not preclude compensating companies for their patents and other claims to intellectual property. It just means that we don’t allow the intellectual property to interfere with the production and distribution of vaccines, tests, and treatments during the pandemic.
We instead make the focus treating people and slowing the spread of the pandemic as rapidly as possible. After the fact, we can work out the appropriate compensation for the companies with intellectual property claims. Presumably most of the payments would be negotiated, but companies would obviously have the option to sue the government if they didn’t feel the proposed compensation was adequate.
Could this mean that a Moderna or Pfizer ends up with less money than they felt they were entitled to? Sure, that is a possibility, but so what?
In any case, one might think that this would be the sort of issue that the NYT would discuss in the context of preparing for the next pandemic. But I suppose not. Some ideas just can’t be discussed in the pages of the New York Times. They apparently raise issues that hit too close to home.
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The failure of Silicon Valley Bank yesterday overtook the really big event of the day, the February jobs report. The 311,000 jobs were far more than I had expected. I thought the huge January number was a fluke of seasonal adjustments and unusually good winter weather. For that reason, I expected the February number to be very weak, not because I thought the labor market had crashed, but just as a correction to the high number in January.
I was wrong in a very big way. The January number was obviously real and the economy is still creating jobs at a very rapid clip.
This is somewhat concerning in that there is no way the economy can keep creating jobs at this pace without seeing some serious inflationary pressure, but this is where the other part of the good news story comes in. Wage growth slowed in February. The slower growth in February, combined with a downward revision to the January number, gave us a 3.6 percent annual rate of wage growth over the last three months.
This pace of wage growth is consistent with the Fed’s 2.0 percent inflation target. We had wage growth at this pace through much of 2018 and 2019 even as inflation was coming in slightly under the targeted rate.
I ordinarily would not be cheering slower wage growth, but the reality is that the Fed is determined to bring inflation down towards its target. If wages are growing at a pace that is faster than is consistent with its target, it will keep raising rates, and throwing people out of work, until wage growth slows.
If wage growth is now more or less in line with the 2.0 percent target, then the Fed can hold off on further rate hikes. Hopefully, it would then allow the economy to continue to grow with the unemployment rate remaining near 3.5 percent.
Of course, we do need to see real wage growth and inflation has been running faster than 3.5 percent. However, there are good reasons for believing that inflation will be slowing in the months ahead. Most importantly, we know that inflation in rents will slow sharply, as private indexes measuring rents of units coming up on the market have showed little or no inflation in recent months. The CPI rent index, which measures the rent of all units (both those that come up on the market and those with a continuing tenant) follows these indices with a lag of 6-12 months.
It is also likely that we will see further drops in many of the supply chain goods, most importantly cars, where temporary shortages sent prices soaring in the pandemic. This will help put downward pressure on inflation in goods, and also services like car repairs, where the cost of goods is a large part of the price.
And, we are also likely to see less inflation in food prices. The wholesale prices of many items, most notably eggs, has fallen sharply in the last couple of months. This should show up in lower prices in stores.
If we have a story where wages are rising at a 3.6 percent annual rate, and inflation falls to under 2.5 percent, then we would be seeing a respectable pace of real wage growth. We can hope for better, and also that we continue to see disproportionate growth at the bottom, but low unemployment and modest real wage growth is a pretty good picture.
The failure of Silicon Valley Bank yesterday overtook the really big event of the day, the February jobs report. The 311,000 jobs were far more than I had expected. I thought the huge January number was a fluke of seasonal adjustments and unusually good winter weather. For that reason, I expected the February number to be very weak, not because I thought the labor market had crashed, but just as a correction to the high number in January.
I was wrong in a very big way. The January number was obviously real and the economy is still creating jobs at a very rapid clip.
This is somewhat concerning in that there is no way the economy can keep creating jobs at this pace without seeing some serious inflationary pressure, but this is where the other part of the good news story comes in. Wage growth slowed in February. The slower growth in February, combined with a downward revision to the January number, gave us a 3.6 percent annual rate of wage growth over the last three months.
This pace of wage growth is consistent with the Fed’s 2.0 percent inflation target. We had wage growth at this pace through much of 2018 and 2019 even as inflation was coming in slightly under the targeted rate.
I ordinarily would not be cheering slower wage growth, but the reality is that the Fed is determined to bring inflation down towards its target. If wages are growing at a pace that is faster than is consistent with its target, it will keep raising rates, and throwing people out of work, until wage growth slows.
If wage growth is now more or less in line with the 2.0 percent target, then the Fed can hold off on further rate hikes. Hopefully, it would then allow the economy to continue to grow with the unemployment rate remaining near 3.5 percent.
Of course, we do need to see real wage growth and inflation has been running faster than 3.5 percent. However, there are good reasons for believing that inflation will be slowing in the months ahead. Most importantly, we know that inflation in rents will slow sharply, as private indexes measuring rents of units coming up on the market have showed little or no inflation in recent months. The CPI rent index, which measures the rent of all units (both those that come up on the market and those with a continuing tenant) follows these indices with a lag of 6-12 months.
It is also likely that we will see further drops in many of the supply chain goods, most importantly cars, where temporary shortages sent prices soaring in the pandemic. This will help put downward pressure on inflation in goods, and also services like car repairs, where the cost of goods is a large part of the price.
And, we are also likely to see less inflation in food prices. The wholesale prices of many items, most notably eggs, has fallen sharply in the last couple of months. This should show up in lower prices in stores.
If we have a story where wages are rising at a 3.6 percent annual rate, and inflation falls to under 2.5 percent, then we would be seeing a respectable pace of real wage growth. We can hope for better, and also that we continue to see disproportionate growth at the bottom, but low unemployment and modest real wage growth is a pretty good picture.
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As regular BTP readers know, I constantly harangue news outlets to put really big numbers in context. As these outlets know, none of their readers has any idea of what spending or taxing $2 trillion over a decade means. It is a huge number and if they added or subtracted a zero at the end, it would still be a huge number and probably mean the same thing to the vast majority of their audience.
Therefore, I have always advocated putting these numbers in some context, like a percent of the budget, a percent of GDP, or per person cost. This should require all of about 15 seconds from the reporter doing the piece, and add maybe 15 words to a typical story, but for some reason, the New York Times, Washington Post, National Public Radio, and the rest seem unable to do it.
New York Times columnist Christopher Caldwell got my message but used it to lie to his readers. In a column making a reasonable complaint about presidents abusing “emergency” powers, he tells readers:
“President Biden’s plan [for student loan forgiveness] would forgive a quarter of the roughly $1.6 trillion in federal student debt held by some 43 million Americans — about $400 billion, or roughly 2 percent of gross domestic product.”
The lie in this sentence is the reference to 2 percent of GDP. The $400 billion figure is roughly 2.0 percent of this year’s GDP (actually a bit more than 1.5 percent), but the impact of the reduced loan repayments will actually be felt over the next forty years.
According to an analysis from the Congressional Budget Office (CBO), the cost of forgiveness peaks at a bit more than 0.09 percent of GDP in the years 2023-25. That is less than one-thirtieth of the size of the military budget. It falls to around 0.07 percent of GDP by 2032 and then drops further to 0.02 percent of GDP by 2042.
The peak of 0.09 percent of GDP is less than one-twentieth the figure that Mr. Caldwell gave to readers. As an accounting measure, CBO does list the full $400 billion figure in the year the forgiveness takes place, but its economic impact will be felt over the full period in which students will have lower student loan payments.
It is possible that Caldwell is not familiar with how the economic impact of loan forgiveness would be felt, but it is reasonable to expect that New York Times columnists would have some idea of what they are talking about when they write their columns. Therefore, it qualifies as a “lie” at BTP.
As regular BTP readers know, I constantly harangue news outlets to put really big numbers in context. As these outlets know, none of their readers has any idea of what spending or taxing $2 trillion over a decade means. It is a huge number and if they added or subtracted a zero at the end, it would still be a huge number and probably mean the same thing to the vast majority of their audience.
Therefore, I have always advocated putting these numbers in some context, like a percent of the budget, a percent of GDP, or per person cost. This should require all of about 15 seconds from the reporter doing the piece, and add maybe 15 words to a typical story, but for some reason, the New York Times, Washington Post, National Public Radio, and the rest seem unable to do it.
New York Times columnist Christopher Caldwell got my message but used it to lie to his readers. In a column making a reasonable complaint about presidents abusing “emergency” powers, he tells readers:
“President Biden’s plan [for student loan forgiveness] would forgive a quarter of the roughly $1.6 trillion in federal student debt held by some 43 million Americans — about $400 billion, or roughly 2 percent of gross domestic product.”
The lie in this sentence is the reference to 2 percent of GDP. The $400 billion figure is roughly 2.0 percent of this year’s GDP (actually a bit more than 1.5 percent), but the impact of the reduced loan repayments will actually be felt over the next forty years.
According to an analysis from the Congressional Budget Office (CBO), the cost of forgiveness peaks at a bit more than 0.09 percent of GDP in the years 2023-25. That is less than one-thirtieth of the size of the military budget. It falls to around 0.07 percent of GDP by 2032 and then drops further to 0.02 percent of GDP by 2042.
The peak of 0.09 percent of GDP is less than one-twentieth the figure that Mr. Caldwell gave to readers. As an accounting measure, CBO does list the full $400 billion figure in the year the forgiveness takes place, but its economic impact will be felt over the full period in which students will have lower student loan payments.
It is possible that Caldwell is not familiar with how the economic impact of loan forgiveness would be felt, but it is reasonable to expect that New York Times columnists would have some idea of what they are talking about when they write their columns. Therefore, it qualifies as a “lie” at BTP.
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