Getting Radical with Markets

1. Patent and Copyright Policy

Given their importance in directing flows of income it is remarkable how little attention patent and copyright policy receives from economists and especially progressive economists. In the case of prescription drugs alone, patent protection is likely to cost the United States in the neighborhood of $270 billion in higher drug prices in 2012 compared to a situation where all drugs were sold in a free market. ² This is more than 5 times the amount of money at stake in extending the Bush tax cuts to the richest 2 percent of the population.

Adding in the higher costs associated with patent protection in the high tech sector, as well as copyrights for recorded books, music, software, and video games, it is likely that the direct increase in costs to consumers due to these protections is at least $600 billion a year or 4 percent of GDP. By comparison, corporate profits in the United States in 2010 were just over $1.4 trillion. ³ In other words, the amount of income transferred to the beneficiaries of patent and copyright protection likely exceeds 40 percent of before-tax corporate profits, yet it has received almost no attention from progressive economists. This is a serious oversight.

Prescription drugs probably provide the best example, not only because the amount of money involved is largest, but also because patent monopolies have such horrible consequences for public health. At the most basic level, high drug prices mean that many people have difficulty paying for the drugs they need. Even if they have insurance, insurers often find ways to avoid paying for expensive drugs. This can lead to absurd situations where patients, doctors, and sometimes pharmacists struggle to outsmart the insurance company’s restrictions in order to allow a patient to get a lifesaving drug that would cost $5 per prescription in a free market.

But the excessive cost is only part of the story. As everyone who sat through an intro econ class knows, when government restrictions allow a drug company to sell a drug for $5,000 that has a marginal cost of production of $5, the drug company has enormous incentive to lie, cheat, and steal in order to increase the sales of their drug. This means withholding evidence that the drug is ineffective or possibly even harmful. It can mean making payoffs of different types to doctors to get them to prescribe the drug. It means creating massive marketing networks to push the drugs. ⁴ Drug companies will also lobby politicians to have state and federal programs pay for their drugs, and ideally exclude competitors.

Patents also distort research efforts. A major breakthrough drug will inevitably attract research interest from competitors. While the marginal benefit of the copycat drugs they develop may be small, the potential for patent rents could be large. And of course the secrecy surrounding research results will inevitably slow the pace of medical progress.

There are alternative ways to finance the development of prescription drugs. ⁵ The federal government already spends $30 billion a year on bio-medical research through the National Institutes of Health, so it should not sound strange to suggest that research can be supported outside the patent system. Getting beyond drug patent monopolies would also be a great policy for the developing world as the health care systems in many countries struggle to pay for patent protected drugs that are needed to treat diseases like AIDS.

We should also be looking to alternatives to patents and copyrights more generally. In many areas of high tech, patents simply provide an excuse to try to derail competition with patent infringement lawsuits. Copyright enforcement is becoming increasingly difficult in the Internet Age, leading to ever more repressive legislation, like the Stop Online Piracy Act.

2. Corporate Governance

The top executives in major U.S. corporations typically draw paychecks in the tens of millions and sometimes in the hundreds of millions of dollars. This can be the case even when they perform poorly by narrow measures such as stock price appreciation or profit growth. This is not the case for most other wealthy countries. While CEOs are well-paid everywhere, in Japan and Western Europe the top executives of the largest corporations will typically get paychecks in the millions, 30-40 times the pay of their typical employee, not the multiples of 300-400 that are common in the United States.

It would be hard to explain the higher pay of U.S. CEOs by better performance. The more obvious explanation is a failure of the corporate governance structure. While banks and other long-term investors often play a major role in overseeing the operation of large corporations in Europe and East Asia, there are no comparable checks on the behavior of top executives in the United States. Typically the CEO is answerable to a corporate board that he or she largely appointed. The board itself gets outsized paychecks for attending a small number of meetings each year, a deal that gives them little incentive to clamp down on excessive pay for top executives.

A corporate governance structure that made top management more directly accountable to shareholders would be a big step forward in reining in excessive pay. This would be important not only for reining in pay at these companies but also for scaling back pay for top managers throughout the economy. The extraordinary pay for top executives in corporate America inflates pay for top executives in government, universities, and even charities.

This would not imply a new government intervention; there are already extensive rules on corporate governance, most of which have the purpose of protecting minority shareholders. The issue here would be to write rules that protect shareholders from abuses by top management. Since corporations are chartered at the state level, new rules could be pushed through the federal tax code, with corporations that have charters that ensure shareholder control paying a lower tax rate than corporations that do not.

3. Labor Law

The enforcement of labor laws that protect workers has become somewhat of a joke over the last three decades. It is standard practices for companies to fire workers involved in organizing drives because they know the consequences are trivial (Schmitt and Zipperer 2008). It can take years for a complaint to get heard by the National Labor Relations Board, and even if the complaint proves successful the employers’ potential liability is typically trivial: the difference between the pay at the job from which they are fired and the pay in whatever job they held subsequently.

This fact has been highlighted by the labor movement and its supporters. The lack of protection for workers was the main motivation for the Employee Free Choice Act. However, it is worth noting that employers do not have the same difficulty getting labor laws enforced and having harsh penalties imposed when they are violated. An employer facing a wildcat strike or a secondary boycott can typically count on quick legal action by the courts. In this case the penalties would take the form of harsh fines and even the imprisonment of union officers, if the action continues.

In short, there is not a problem of weak labor laws. The labor laws that protect management are quick, strong, and effective. The problem is that the laws that were designed to protect workers are weak and ineffective. The government plays a big role in this realm, but overwhelmingly on the side of protecting management.

4. Using Trade Policy to Depress Wages

A main focus of trade policy over the last three decades has been to remove barriers that make it difficult for U.S. corporations to set up manufacturing operations overseas to take advantage of the lower wages in the developing world. This has had the predicted effect of lowering wages for manufacturing workers in the United States. Since manufacturing has historically been a source of relatively high-paying jobs for workers without college degrees, the loss of jobs in this sector has put downward pressure on the wages of less-educated workers more generally.

There was nothing inevitable about this pattern of globalization. The exact same arguments for trade could have been used to justify trade agreements to eliminate the barriers that protect our most highly educated workers. Trade negotiations could have focused on eliminating the barriers that make it difficult for smart kids in Mexico, India, or China to train to U.S. standards and then work in the United States as doctors, lawyers, dentists, architects, or other highly paid professionals. This would have led to enormous gains to consumers and the economy as the cost of these services would plummet.

Of course this policy would also imply lower wages for the most highly educated workers. This pattern of globalization would lead to more equality rather than less. The fact that the United States did not follow this path to globalization was a policy decision, not something intrinsic to the globalization process. Progressives can push for free trade in highly paid professional services as a way of both increasing economic growth and reducing inequality.

5. The Over-Valued Dollar

The dollar rose sharply in the late ‘90s against the currencies of most U.S. trading partners. This was deliberate policy. Then Treasury Secretary Robert Rubin openly touted his high dollar policy, reversing the course of his predecessor Lloyd Bentsen, who was happy to see the dollar fall in value in order to reduce the trade deficit. Rubin argued that a high dollar was beneficial since it helped to keep inflation low.

While there was some increase in the value of the dollar in the period immediately after Rubin took over as Treasury secretary in 1995, the big rise followed in the wake of the East Asian financial crisis. Rubin took advantage of U.S. control of the I.M.F. to impose harsh bailout terms on the crisis countries. These countries were forced to pay off their debts in full. However to allow them to earn the necessary foreign exchange, they were essentially given an open door to the U.S. market. With their currencies having plummeted they were able to quickly take advantage of this opening as their exports were now hyper-competitive.

It was not only the East Asian countries that began to accumulate large amounts of foreign exchange. Countries throughout the developing world switched course from earlier in the decade and suddenly became large exporters of capital. They wanted to accumulate reserves in order to ensure that they would not find themselves in the same situation as the East Asian countries: forced to turn to the I.M.F. in desperate need of a bailout (Baker and Walentin 2001).

The policy of having an over-valued dollar in a context in which only parts of the economy are fully open to trade has the effect of magnifying the extent to which trade promotes inequality. It leads to further job loss and downward pressure on the wages of manufacturing workers. The high dollar also benefits corporations that are planning to expand overseas, either to establish an export platform to service the U.S. market or to serve foreign markets directly. Put simply, a higher dollar will go farther.

For these reasons, a lower valued dollar has not been a high priority in national politics. There continue to be powerful interests that lobby to maintain an over-valued dollar. If the dollar fell enough to get trade close to balanced, it would create close to 5 million jobs in manufacturing. This would likely have a significant impact on the labor market, both directly and indirectly, substantially increasing the number of decent paying jobs available to people without college degrees. In the current economic context, the value of the dollar can be seen as an important weapon in class warfare.

6. The Federal Reserve Board

It is remarkable and unfortunate that most of the public complaints about the Fed have come from the right. The Fed has enormous influence over the state of the economy and the state of the labor market. When it raises interest rates to combat inflation, the mechanism through which this works is by raising the unemployment rate. This in turn puts downward pressure on the wages of less-educated workers. It is retail clerks and manufacturing workers who disproportionately lose their jobs when the unemployment rate goes up, not doctors and lawyers.

While progressive economists understand this fact, almost no one else does. This is why the Fed is widely viewed as a neutral body that should operate outside of the realm of politics. It is essential that this be changed. The Fed’s bias towards maintaining low rates of inflation, which makes it willing to maintain high rates of unemployment to avoid even the risk of an increase in the inflation rate, seriously limits the bargaining power of less-educated workers.

It is not easy to reverse Fed policy, but the first part of the story has to be to get the Fed on the political radar screen. Here the right-wing opponents of the Fed can be quite helpful. The drive to get the Fed to release the details of its special lending programs during the financial crisis only succeeded because of the strong support coming from the right. While few progressives would have much sympathy for the end goal of the right (eliminating the Fed), there is much room for common cause in efforts to increase transparency and accountability. The public must realize the importance of the Fed and also the extent to which it is currently tilted to serve the interests of finance.

7. Conclusion: The Market Can Produce Progressive Outcomes

Over the last three decades the right has pursued an incredibly effective strategy in rigging the market so as to redistribute income upward. This approach has not only succeeded in redistributing income upward, it has done it in a way that left few fingerprints. There is very little public understanding of the fact that the upward redistribution of this period was the result of conscious policy rather than just the natural workings of the market. As a result, public debate focuses on using tax and transfer policy to reverse outcomes that appear to be the natural result of the market.

Progressives should learn from the success of the right. Markets can be structured so that most of the benefits from growth go to those at the middle and bottom of the income distribution. This restructuring of markets is preferable as economic policy to an approach that relies entirely on taxes and transfers. It is also likely to be a far more effective political strategy.