Saturday, June 25, 2016

Capital vs. Labor: Capital Wins, but Then Also Loses

One can describe much of economic history over the past few centuries in terms of conflict between the owners of capital and those who provide labor.  A similar focus would also shed light on the evolution of society as a whole.  At this moment in time, it appears that capital has won a decisive victory.  If so, what does this mean for the futures of both capitalism and society?  Those are questions discussed by Mark Blyth in an article, Capitalism in Crisis, that appeared in the journal Foreign Affairs.  If capital has been victorious in exerting its dominance over labor, why would capitalism be considered to be in a state of crisis?

Blyth is Eastman Professor of Political Economy at Brown University.  Note the use of the term “political economy” in his title.  From Wikipedia:

“Political economy is a term used for studying production and trade, and their relations with law, custom, and government, as well as with the distribution of national income and wealth. Political economy originated in moral philosophy. It was developed in the 18th century as the study of the economies of states, or polities, hence the term political economy.”

The old economic masters recognized that economics and politics (“law, custom, and government”) were firmly coupled.  Consequently, there will always be a power struggle between those who wish to conduct business as they desire and those who wish to impose rules and regulations on business conduct.  Blyth expresses this fact.

“Ever since the emergence of mass democracy after World War II, an inherent tension has existed between capitalism and democratic politics; capitalism allocates resources through markets, whereas democracy allocates power through votes. Economists, in particular, have been slow to accept that this tension exists. Instead, they have tended to view markets as a realm beyond the political sphere and to see politics as something that gets in the way of an otherwise self-adjusting system. Yet how democratic politics and capitalism fit together determines today’s world. Politics is not a mistake that gets in the way of markets.”

Blyth provides this concise assessment of where we stand today.

“In the three decades that followed World War II, democracy set the rules, taming markets with the establishment of protective labor laws, restrictive financial regulations, and expanded welfare systems. But in the 1970s, a globalized, deregulated capitalism, unconstrained by national borders, began to push back. Today, capital markets and capitalists set the rules that democratic governments must follow.”

Given this state of affairs, how does the term “crisis” arise with respect to capitalism?

Blyth’s article discusses three recent books that provide different views on how and why capitalism has evolved to a crisis state.  One will be discussed here: Buying Time: The Delayed Crisis of Democratic Capitalism by Wolfgang Streeck.  Streeck provides interesting insight into the events of the 1970s that caused the pivot from social control of capitalism to capitalist control of society.  His analysis is based on a hypothesis formulated by the Polish economist Michal Kalecki and published in 1943.  Blyth summarizes:

“Kalecki published a remarkable article in 1943 that predicted the economic turmoil of the 1970s. Kalecki argued that if full employment ever became the norm, workers would be able to move freely from job to job. Not only would this undermine traditional authority relationships within firms; it would also push wages up regardless of productivity levels, since workers would have more leverage to demand higher wages.”

“In response, firms would have to raise prices, creating a spiral of inflation that would eat into profits and lower real wages, which would, in turn, promote greater labor unrest. Kalecki argued that to restore profits, capitalists would rebel against the system that promoted full employment. In its place, they would seek to create a regime in which market discipline, with a focus on price stability rather than full employment, would be the primary goal of policy. Welfare protections would be rolled back, and the discipline that unemployment provides would be restored.”

This is a rather accurate prediction of what actually occurred in the 1970s as the high growth postwar years transitioned to the period of “stagflation” characterized by high inflation and lower profits and lower real wages.  Conservative governments supported capital by reversing the recently acquired labor rights, bought into a small-government philosophy that reined in spending on social-welfare projects, deregulated much of the economy, and cut taxes dramatically for the wealthy.

The lost tax revenue due to the cuts meant the government was no longer able to cover the expenses of running the nation without borrowing money, providing additional influence to those in a position to provide the financing of public debt.

“This transformation has had pro­found political consequences. The increase in government debt has allowed transnational capitalists to override the preferences of domestic citizens everywhere: bond-market investors can now exercise an effective veto on policies they don’t like by demanding higher interest rates when they replace old debt with new debt.”

“The financial industry has become, Streeck writes, “the second constituency of the modern state,” one more powerful than the people.”

The net result of the revolutionary changes that began in the 1970s was the disruption of mass democracy in the western economies and a vast increase in economic inequality.  A crisis in democracy bodes ill for the future of capitalism as well.  As the wealthy are well aware, they are strongly outnumbered.  They need the democracies they control to remain stable.

“Streeck foresees a prolonged period of low growth and political turmoil ahead, in which states commanded by creditors, allied with transnational in­vestors, struggle to get resisting debtor states into line: think of Germany and Greece. ‘The clock is ticking for democ­racy,’ Streeck writes, but ‘it must remain an open question . . . whether the clock is also ticking for capitalism’.”

Streeck is correct in being concerned about the future of democracy and the possibility of a counterrevolution to regain power by the masses.  However, there is also a purely economic issue that has arisen in the age of globalization that suggests there is a very fundamental flaw in capitalism as it is now practiced. 

An understanding of macroeconomics requires an understanding of income flows.  The most fundamental of these flows is that between consumers and businesses.  Consumers provide income to businesses in return for goods and services.  Consumer expenditures are balanced by income from wages, rents, and dividends.  The effect of capital’s dominance over labor has been the stagnation of wages for the majority of the nation over several decades.  This has been exacerbated by globalization which has effectively transferred wages from the most productive consumers, the middle class, to relatively poor people in far off lands.  The result has been a vast increase in labor supply, but a decrease in potential consumer demand.

The second most important income flow is that between consumers, businesses, and government.  Streeck argued that the emergence of debtor nations was not caused by excessive public spending, but by tax cuts and financial bailouts of corporations.  By limiting governments’ abilities to raise revenue, capitalists have also limited governments’ abilities to spend funds as consumers in the general economy.

Capital’s victory has resulted in limiting the growth in consumption by its two biggest customers: workers and governments.

A state has been arrived at whereby businesses are earning high profits, but see little or no growth in demand.  If they are to see profits continue to increase, as the financiers demand, the options they have are to lower wage costs and/or taxes even further.  This cannot go on forever.

Capitalism seems to have reached a dead end.  A new contract must be reached with labor and with government if progress is to be renewed.  Hopefully, this can be attained within the context of mass democracy.

The interested reader might find this article informative:

Sunday, June 19, 2016

The AR-15 Rifle, Gun Manufacturers, and Negligent Entrustment

While mass murders with weapons designed for warfare escalate in scale and occur with a disturbing frequency, the ability to do anything to inhibit access to these weapons by dangerous or disturbed people seems to be beyond the reach of our political system.  However, Kristin Hussey and Lisa W. Foderaro provide an interesting discussion of a legal approach that has quietly been moving forward in Surprising Progress in Newtown Families’ Suit Against Maker of the AR-15 Rifle.  This article appeared in the New York Times.

“For two years, a group of families in Newtown, Conn., quietly laid the groundwork for a legal case against the maker and sellers of the assault rifle that on Dec. 14, 2012, claimed 26 lives — and shattered their own — in less than five minutes.”

“The shooting at Sandy Hook Elementary School was carried out with an AR-15, a military-style assault rifle that has surfaced in recent mass shootings, like Aurora, Colo., and San Bernardino, Calif. On the eve of a hearing to determine whether the lawsuit can proceed, a rifle similar to the AR-15 was used yet again — in an attack early Sunday at a gay nightclub in Orlando, Fla., the deadliest shooting in American history.”

Congress passed a bill in 2005 that was intended to protect gun manufacturers from liability should any of their products be use in a crime.  The lawsuit intends to find a path through that legal protection provided by congress and hold the manufacturers legally liable for the types of weapons provided to the civilian population.

“The lawsuit seeks to overcome the broad immunity given to gun makers and sellers under a 2005 federal law, protecting them from liability when guns are used in a crime. But there is a small window for holding companies accountable, including instances of so-called negligent entrustment, in which a gun is carelessly given or sold to a person posing a high risk of misusing it.”

“The 10 Newtown plaintiffs argue that the AR-15 is a weapon of war — its cousin, the M-16, was the rifle of choice in Vietnam — and therefore should never have been marketed to civilians. They say, in effect, that the availability of a high-velocity weapon capable of inflicting such rapid carnage constitutes such negligence.”

The argument being made is that the very idea of selling a weapon designed for wartime killing to the general public is a case of “negligent entrustment.”  Wikipedia provides a definition of this term.

“Negligent entrustment is a cause of action in tort law that arises where one party (the entrustor) is held liable for negligence because they negligently provided another party (the entrustee) with a dangerous instrumentality, and the entrusted party caused injury to a third party with that instrumentality. The cause of action most frequently arises where one person allows another to drive their automobile.”

“Similarly, if A lends his handgun to B, knowing that B has a propensity for violence, A may be held to have negligently entrusted the gun to B when B uses the gun to shoot someone during an argument.”

Usually applied to the actions of individuals, the lawsuit claims that the population as a whole is too dangerous to be allowed access to these weapons.

“’The novelty of the approach is that it doesn’t depend upon an argument that the manufacturer knows that a particular shooter is a high-risk buyer,’ said Heidi Li Feldman, a professor at Georgetown University Law School, who has followed the Newtown litigation. ‘The novelty is that it substitutes the general public for a particular individual’.”

As unlikely as success might be, the legal effort has continued to move forward.

“Eighteen months after it was filed, the lawsuit — naming the manufacturer, Remington; the wholesaler; and a local retailer — is still in the early stages. But the case has not yet been tossed out of court. Even some plaintiffs were startled when Judge Barbara N. Bellis of State Superior Court, who has yet to rule on a final effort to quash the case, set a trial date — two years from now — and ordered the defendants to disclose marketing materials and other internal documents.”

The order to exchange information on marketing could be critical.  If the plaintiffs can claim evidence that the manufacturers planned to market the AR-15 as a weapon of war (as it was used in Sandy Hook Elementary and other instances) rather than for sporting or individual self-defense uses, it could strengthen their case considerably. 

The manufacturers continue to contest the validity of the legal case.

“The defendants have been vigorously seeking to have the lawsuit thrown out, and they have one last chance at a hearing on Monday in which both sides will make their cases. The judge has until October to decide whether the case will go to trial.”

Can the Sandy Hook parents provide an argument to support the notion that the general public is too dangerous and thus should not have access to weapons such as the AR-15?  Perhaps.  Let’s consider one possible approach. 

The following chart appeared in an article in The Economist.  It was based on data tallied by the Southern Poverty Law Center.  It illustrates the number of antigovernment groups known to be in existence in the US, and how many of them are gun-carrying militias.

Isn’t it curious how comfortable the ignorant, the violent, and the bigoted are when there is a Republican president in office—and how riled up they get when a black Democrat enters office?

There are hundreds of these gun-wielding militias in existence.  And what is their intent?  Consider what can be easily obtained from the website Militia News.

These quotes were from a lead article by someone named Brandon Smith.

“Make no mistake, one day each and every one of us will be faced with a choice – to fight, or to throw our hands in the air and pray they don’t shoot us anyway. I certainly can’t speak for the rest of the movement, but in my opinion only those who truly believe in liberty will stand with rifle in hand when that time comes.”

“….you will discover multiple countries around the globe, including the U.S., on the verge of the same centralized and collectivized socialist occupation that the Finnish faced in 1939. The only difference is that while their invasion came from without, our invasion arose from within.”

These “freedom fighters” need weapons to defend themselves not from an external threat, but from an internal threat—from the government…from the rest of us. 

“The escalation of totalitarianism will eventually overtake the speed at which the movement can awaken the masses, if it has not done so already. There will come a time, probably sooner rather than later, when outreach will no longer be effective, and self defense will have to take precedence, even if that means subsections of the public will be shocked and disturbed by it. The sad fact is, the faster we wake people up, the faster the establishment will degrade social stability and destroy constitutional liberties. A physical fight is inevitable exactly because they MAKE it inevitable.”

And they believe the fight is not only necessary, but inevitable.  So when they buy an AR-15 it is with the express intent of using it to kill representatives of the US government.  The existence of these people is known to the gun manufacturers and to the NRA.  Guns designed for warfare are manufactured and sold so that these people can have access to them!  The NRA lobbies to defeat all gun control measures in order to assure the ability of these people to wage warfare against their government—against us!

Think about that for a moment.  Any person who is in law enforcement, public service, or in the military, or has a child in one of those occupations, should realize that selling AR-15s puts those weapons in the hands of people who spend their time training to use them to someday kill you, or someone like you, or your children. 

What could be more insane than enabling such people by providing them with access to weapons capable of mass murder?

So yes, making military style weapons available to these people should qualify as negligent entrustment!

Perhaps there is some hope for the Sandy Hook parents—and for us.

Sunday, June 12, 2016

Trump Was Inevitable, But Why? What Does His Candidacy Mean?

Donald Trump has now been selected by the voters in the Republican Party as their candidate for president.  There are those in the party who still hope and lobby for another candidate, but any other outcome is highly unlikely.  What is of note is that this result was deemed so improbable by media reporters and political pundits—those who claimed to know what was going on.  So what happened?

Ronald B. Rapoport, Alan I. Abramowitz, and Walter J. Stone produced an article in the New York Review of Books titled Why Trump Was Inevitable.  They make a compelling argument that Trump’s victory would have been obvious early on if only people had thought to ask the right questions—and believe the answers they received.

The authors commissioned a poll designed to assess the attitudes of people expected to vote in the Republican primaries.  The poll was taken way back at the time of the Iowa caucuses.

“In order to understand the Trump phenomenon, we commissioned YouGov to carry out a Web-based survey of a national sample of 1,000 Republicans and independents. Of this initial sample, 688 respondents identified themselves as certain to vote in a Republican primary.”

Using their polling data, the authors were able to deduce the results of hypothetical one-on-one contests and discovered that Trump would have emerged victorious against all other candidates.

“….no candidate finished ahead of Trump, and only one, Cruz, even came within 10 percentage points of Trump.”

While Trump was viewed in horror as “unelectable” by Republican Party leaders, their voters had come to a different conclusion.

“Notwithstanding the concerns of Republican elites, Trump was the only candidate a majority of GOP primary voters saw as “very likely” or “likely” to win the general election. Cruz and Rubio were the only other candidates that even a third of Republicans viewed as likely winners in November.”

What was most important about what emerged from the authors polling related to what Republican voters thought about Trump’s most controversial proposals.  Controversial, in particular, refers to identifying and deporting illegal immigrants, building a wall between the US and Mexico, and banning Muslims from entering the US.  Consider this chart provided by the authors.

While Trump supporters were most in favor of his policies, they were popular with a large majority of all Republican voters.

“On all three issues overwhelming majorities of likely Republican voters supported his positions: almost three quarters (73 percent) favored banning Muslims from entering the US, 90 percent favored identifying and deporting illegal immigrants as quickly as possible, and 85 percent favored building a wall on the Mexican border.”

Given the results the authors have presented, how could one be surprised that Trump went on to win the nomination in the primaries? 

It was as if the non-Republican voters and pundits were in a state of denial.  “How could the members of a major political party in our nation hold these beliefs?”

It is time to ask the question: “Given that Trump has succeeded, not in spite of his controversial proposals, but because of them, what does that say about our nation and its future?”

Mark Danner provides some interesting and relevant insights into the Trump phenomenon in The Magic of Donald Trump which also appeared in the New York Review of Books.  Danner suggests we immediately underestimate Trump if we label him merely another billionaire, or just a business tycoon.  His familiarity with the public is much more intimate than that.  He is better known to his followers as the character on the TV show The Apprentice.

“Observe the celebrity known as Donald Trump saunter onto the stage at Boca Raton, twenty minutes after his helicopter swoops in. The slow and ponderous walk, the extended chin, the pursed mouth, the slowly swiveling head, the exaggerated look of knowing authority: with the exception of the red “Make America Great Again” ball cap perched atop his interesting hair the entire passage is quoted whole cloth from the patented boardroom entrance of The Apprentice, something that does not escape the delirious fans, even if it does most journalists.”

“….The Apprentice debuted on NBC in 2004 with 20.7 million viewers, ranking it seventh among all primetime programs. Twenty-eight million people tuned in to watch the season finale. The numbers went down from there but still in today’s “fragmented entertainment marketplace” those numbers are, well, huge. Week after week for a dozen years millions of Americans saw Donald J. Trump portraying the business magus, the grand vizier of capitalism, the wise man of the boardroom, a living confection whose every step and word bespoke gravitas and experience and power and authority and…money. Endless amounts of money.”

Danner suggests that this TV image of Trump is what moves his supporters.  He then reminds us that when the first Republican debate was televised over 20 million viewers showed up—about the same as for Trump’s television show.

“We are told again and again: his is the most improbable political story in decades, perhaps in history. And yet that a reality television megastar, as Trump might put it, could outpoll sixteen dimly to barely known politicians, some new faces, many also-rans, seems less than shocking. Did tens of millions ever cast their eyes on the junior senators from Florida or Kentucky or Texas, or the governor of Ohio, not to mention the ex-governors of Arkansas or Florida, or the ex-CEO of Hewlett Packard, before they chanced to mount the stage for a debate with Donald J. Trump last August, a television event that drew the unheard-of viewership of 24 million? Those 24 million tuned in to see Trump. Only one man on stage had a name as famous and by then it was in such disrepute that he had seen fit to replace it with an exclamation point on his campaign posters.”

Danner also disabuses us of any notion that Trump is just a clever politician playing a role to please those who might vote for him.  He reminds us that Trump has been displaying his attitudes publicly for decades.  Consider one of his controversial policies that would require allies to reimburse the US for the protection it provides.

“Anyone tempted to regard these views as opportunistic might take a glance at a full-page advertisement that appeared in The New York Times, The Washington Post, and The Boston Globe in September 1987 entitled ‘An Open Letter from Donald J. Trump on Why America Should Stop Paying to Defend Countries That Can Afford to Defend Themselves’.”

Within two years of that article Trump returned again with his take on the treatment of those who might wish to harm us.

“Twenty months later, after the attack on the Central Park jogger, Trump was back with another full-page ad, this one entitled ‘Bring Back the Death Penalty. Bring Back Our Police’!”

Included was a claim that would foretell statements popping up in the current campaign.

“Trump tells us partly in all-caps: ‘Criminals must be told that their CIVIL LIBERTIES END WHEN AN ATTACK ON OUR SAFETY BEGINS!’ (As he declared last November about waterboarding terrorists, ‘You bet your ass I would!… It works…. If it doesn’t work they deserve it anyway for what they’re doing!’)….”

So we are left with the conclusion that the Trump we see is the real Trump—the one we would get if he were elected president.

Danner points out that Trump promises to solve all of our problems with simple solutions that he personally will implement.

“….the clear path to a restoration of greatness marked by simple, autocratic solutions (imposing tariffs, pulling out of NATO, bringing back torture, “bombing the shit” out of ISIS)—all of it springs from the populist toolbox, if not the fascist one, and the advertisements show that the roots of these positions and attitudes run very deep.”

“….as many have pointed out, he builds on and expresses loudly and clearly racist and nativist elements in Republican politics that have been central to the party’s appeal since at least the mid-1960s but that its leaders have preferred to signal rather than enunciate. Trump leaves the dog whistle behind, puts his fingers to his lips, and screeches.”

Danner resurrects a comment made by the philosopher Richard Rorty in 1997 concerning what can happen to a society in deep economic distress.

“….members of labor unions, and unorganized unskilled workers, will sooner or later realize that their government is not even trying to prevent wages from sinking or to prevent jobs from being exported. Around the same time, they will realize that suburban white-collar workers—themselves desperately afraid of being downsized—are not going to let themselves be taxed to provide social benefits for anyone else.”

“At that point, something will crack. The nonsuburban electorate will decide that the system has failed and start looking around for a strongman to vote for—someone willing to assure them that, once he is elected, the smug bureaucrats, tricky lawyers, overpaid bond salesmen, and postmodernist professors will no longer be calling the shots….”

“One thing that is very likely to happen is that the gains made in the past forty years by black and brown Americans, and by homosexuals, will be wiped out. Jocular contempt for women will come back into fashion…. All the resentment which badly educated Americans feel about having their manners dictated to them by college graduates will find an outlet.”

Rorty’s comments were based on studies of past history.  The analogy with earlier rises of fascism is obvious—as is the correlation with Trump’s campaign.

Danner leaves his readers with an image of Trump as a terrible danger to the nation.  Another author, Adam Gopnik picks up that theme and proceeds to elaborate on just how dangerous Trump is.  He presents his thoughts in an article for The New Yorker: The Dangerous Acceptance of Donald Trump.

Gopnik does not mince words.

“One can argue about whether to call him a fascist or an authoritarian populist or a grotesque joke made in a nightmare shared between Philip K. Dick and Tom Wolfe, but under any label Trump is a declared enemy of the liberal constitutional order of the United States—the order that has made it, in fact, the great and plural country that it already is.”

Many of Trump’s policies have traditionally fallen under the rubric of “Un-American.”

“He announces his enmity to America by word and action every day. It is articulated in his insistence on the rightness of torture and the acceptable murder of noncombatants. It is self-evident in the threats he makes daily to destroy his political enemies, made only worse by the frivolity and transience of the tone of those threats. He makes his enmity to American values clear when he suggests that the Presidency holds absolute power, through which he will be able to end opposition….”

Gopnik heads directly to Hitler and the politics of his rise to power in Germany.  In so doing he forces us to recognize the frightening similarity to politics in the US today.  Too many people are willing to conclude he can’t be as bad as he seems to be, or that everyone in politics is terrible—a pox on all their houses.

“He’s not Hitler, as his wife recently said? Well, of course he isn’t. But then Hitler wasn’t Hitler—until he was. At each step of the way, the shock was tempered by acceptance. It depended on conservatives pretending he wasn’t so bad, compared with the Communists, while at the same time the militant left decided that their real enemies were the moderate leftists, who were really indistinguishable from the Nazis. The radical progressives decided that there was no difference between the democratic left and the totalitarian right and that an explosion of institutions was exactly the most thrilling thing imaginable.”

Gopnik then leaves us with this warning.

“If Trump came to power, there is a decent chance that the American experiment would be over. This is not a hyperbolic prediction; it is not a hysterical prediction; it is simply a candid reading of what history tells us happens in countries with leaders like Trump. Countries don’t really recover from being taken over by unstable authoritarian nationalists of any political bent, left or right—not by PerĂ³ns or Castros or Putins or Francos or Lenins or fill in the blanks. The nation may survive, but the wound to hope and order will never fully heal. Ask Argentinians or Chileans or Venezuelans or Russians or Italians—or Germans. The national psyche never gets over learning that its institutions are that fragile and their ability to resist a dictator that weak. If he can rout the Republican Party in a week by having effectively secured the nomination, ask yourself what Trump could do with the American government if he had a mandate.”

Trump’s candidacy provides us with the opportunity to think carefully about what the foundational principles of our nation are.  Let us hope that enough of us come to the appropriate conclusions.

Wednesday, June 8, 2016

Drug Companies: Turning Charitable Giving Into Excessive Profits

When drug companies wish to perform a public service by helping those who cannot afford access to their products, they have two options.  The first is to donate the medicines to those in need, often through a charitable foundation.  This provides good public relations for the firm, but given the desire for ever-higher prices for their products, it provides only a charitable tax deduction.  There is a second path to helping patients gain access to their medicines that can be extremely profitable, presumably also tax deductable, and allows them to raise prices without suffering any loss of business.

Ben Elgin and Robert Langreth provided a lead article for Bloomberg Businesweek, How Big Pharma Uses Charity Programs to Cover for Drug Price Hikes.  They provided this lede.

“A billion-dollar system in which charitable giving is profitable.”

There are organizations commonly called “copay charities” whose goal is to provide assistance to those who are financially unable to gain access to needed drugs.  These outfits provide the funds necessary to keep private insurers and Medicare purchasing the drugs and providing them to the patient.  If the drug company can contribute the copay, which may be only a few percent of the cost of the drug, then they receive the revenue for the majority of the price.  This provides them an excellent return on a “charitable investment.”

These copay charities were often funded with the best of intentions, but the wealth of the drug companies seems to have converted them to service organizations for the pharmaceutical industry.

“’It looks great for pharmaceutical companies to say they are helping patients get the drugs,’ says Adriane Fugh-Berman, a doctor who’s studied pharma marketing practices for three decades and is an associate professor of pharmacology and physiology at Georgetown University. The intent of these donations, she says, is to ‘deflect criticism of high drug prices. Meanwhile, they’re bankrupting the health-care system’.”

“Fueled almost entirely by drugmakers’ contributions, the seven biggest copay charities, which cover scores of diseases, had combined contributions of $1.1 billion in 2014. That’s more than twice the figure in 2010, mirroring the surge in drug prices. For that $1 billion in aid, drug companies “get many billions back” from insurers, says Fugh-Berman.”

The federal government set the rules for this activity in 2003 when Medicare Part D was initiated.  It recognized that for drug companies to directly help Medicare patients buy their drugs would be equivalent to an illegal kickback, but legislators conveniently provided another mechanism for the drug companies to accomplish the same thing.

“….an act of Congress in 2003 allowed such charities to dramatically expand in scale. That year, lawmakers expanded Medicare, creating Medicare Part D to cover prescription drugs. This big, taxpayer-funded market came with a catch for drugmakers: They’re allowed to give direct help to patients covered by commercial insurers—and discount cards covering drug copays have become ubiquitous—but they can’t do the same for Medicare patients. Direct gifts to these people can be considered illegal kickbacks, improperly steering patients to a particular company’s drug instead of cheaper alternatives.”

“However, government policy does allow “bona fide, independent” charities to help Medicare patients with drug costs. Pharma companies can contribute to charities for specific diseases, provided they don’t exert any sway over how the nonprofits operate or allocate their funds.”

In principle, the drug companies exert no control over how their charitable contributions are distributed, but practice can be something quite different.

“The largest copay charity, the PAN Foundation, grew even faster, soaring from about $36 million in contributions in 2010 to more than $800 million last year. About 95 percent of PAN’s contributions come from the pharma industry, the charity says; in 2014, five unnamed drug companies kicked in more than $70 million apiece, according to PAN’s tax filing. With this eager stable of donors, PAN spent just $597,000 on fundraising in 2014. That’s less than 1 percent of the fundraising expense for similar-sized charities, like the American Cancer Society and the American Heart Association.”

“To ensure that charities and drug companies operate independently, federal regulators prohibit the charities from disclosing detailed information about their operations, which drug companies could use to calculate the impact of their donations to their bottom lines. However, data obtained through the Freedom of Information Act shows that pharma companies are able to sponsor funds that mostly support their own drugs. Over a 16-month period in 2013 and 2014, PAN Foundation had 51 disease funds, 41 of which got most of their money from single drug-company donors, according to data PAN provided to regulators. Of those 41, 24 funds paid most of their copay assistance claims for patients using drugs made and sold by their dominant donor.”

The drug companies and the copay charities seem to have arrived at a process that just barely escapes the designation “ illegal.”  The charities can rightfully claim that they are providing a much needed service, but they understand what makes the system work.  The authors quote Dana Kuhn, one of the originators of the charity model.

“If the government forced charities to expand their funds to include multiple diseases and more drugs, pharma companies might pull their support, he said. ‘Some foundations might have to close programs because they become so broad’.”

“Is that because drug companies won’t support charities if they can’t be sure they’re also helping themselves?”

“‘Of course,’ Kuhn said. ‘We live in a capitalistic society. Everyone needs to make a little bit of money’.”

What is insidious about this process is that drug companies can raise their prices as much as they want and use the charities to help maintain their profit margin on the much larger flow of revenue.

It has become another mechanism by which drug companies get rich at the expense of everyone else.
Should we be surprised?

The interested reader might find these articles informative:

Sunday, June 5, 2016

The Population of China and Absurd Economic Projections

One of Branko Milanovic’s tasks in completing his book Global Inequality: A New Approach for the Age of Globalization was to take current knowledge about global inequality and project what the future might hold.  In order to assess what his prospects for success might be, he went back and read a number of authors who had made similar attempts over the period from the late 1960s through the 1990s.  He was not encouraged by what he discovered.

“We know that purely economic forecasts tend to be very wrong.  But I thought that less formal discussions of the political and economic forces that were considered most important for shaping the future would provide more accurate insights and projections.  I discovered that was not the case.”

“To generalize, all of these works share three types of mistakes: the belief that trends that appear to be most relevant at a particular time will continue into the future, the inability to predict dramatic single events, and an exaggerated focus on key global players, especially the United States.”

In particular, none of the works read predicted the rise of China to its current stature.  China went unnoticed until it became too big to not be noticed.  And now, of course, any number of attempts are being made to project China’s future, all of which are hampered by the three errors observed by Milanovic.

One of the most troubling aspects of the various projections deals with China’s attempt to limit its population.  The standard economic assumptions are heavily influenced by the recent experience in Europe and the United States where support for the elderly is provided partly by contributions from the wages of those who are of working age.  The conclusion then is that a certain number of workers are required to support a given retired person.  A growing population will then have a growing number of elderly requiring support—provided longevity does not decrease.  Since longevity tends to increase over time, particularly in developing countries like China, the number of workers may have to increase proportionately to cover the greater fraction of the population that is elderly.

In other words, by this logic, an economically healthy country must have an increasing population—forever!

Howard W. French recently weighed in on China and its population in an article for The Atlantic: China’s Twilight Years.  According to French, China’s twilight is the result of China’s conscious attempt to limit its population.

“Indeed, China’s fertility rate began declining well before the coercive one-child restrictions were introduced in 1978. By hastening and amplifying the effects of this decline, the one-child policy is likely to go down as one of history’s great blunders.”

All developed nations seem to have concluded, via their fertility rates, they would prefer to have declining populations, or, at least, one no better than constant.  To make the world consistent with their boundary conditions, economists conclude that immigration will be required to maintain population growth and thus economic growth.  The fertility rate in the United States of natives hovers near or just below the replacement rate.  It is the immigrants and their higher initial birth rates that keep the population growing.  French believes that a growing population is inherently a good thing.

“With American Baby Boomers entering retirement, the United States has its own pressing social-safety-net costs. What is often neglected in debates about swelling entitlement spending, however, is how much better America’s position is than other countries’. Once again, numbers tell the story best: By the end of the century, China’s population is projected to dip below 1 billion for the first time since 1980. At the same time, America’s population is expected to hit 450 million. Which is to say, China’s population will go from roughly four and a half times as large as America’s to scarcely more than twice its size.”

Are we to conclude from this that French believes China would be better off if it had not limited its population and allowed it to grow to 2 billion in order to keep pace with the United States?  Apparently so.

“Even as China’s workforce shrinks, America’s is expected to increase by 31 percent from 2010 to 2050. This growing labor supply will boost economic growth, strengthen the tax base, and relieve pressure on the Social Security system. At the same time, Americans will continue to enjoy a substantial advantage over the Chinese in terms of per capita income. This advantage in wealth will continue to underwrite U.S. security commitments and capabilities around the world.”

Before discussing the absurdity of an economic model that demands ever increasing populations, let’s consider what the decline in population has meant to China.  Sheng Yun, as one of those born at the beginning of the one-child policy period has had the opportunity to observe and compare his generation with prior and succeeding generations.  He provides his insights in an article for the London Review of Books: Little Emperors.  Sheng Yun is an assistant research professor at the Shanghai Academy of Social Sciences and a contributing editor at the Shanghai Review of Books.

How about this for a beginning?

“By the 1950s China’s population growth had already outstripped the state’s ability to deliver services.”

Population pressure and bureaucratic incompetence led to famines that killed tens of millions of people in the late 1950s and early 1960s.  As with most countries, trouble in the fields led to growth in the cities. 

 Urban growth was too great to be sustainable and something had to be done to control it.  The solution chosen was to ship a generation of young people, including Yun’s parents, out to the countryside to live with the peasants for “reeducation.”  Yen would be born to them in 1980, the year China initiated its one-child policy and the year it terminated its “Down to the Countryside” movement.

“…we only children are a lot luckier than our parents and their many siblings (an average of between three and five). They were the rusticated youth or zhiqing, also known as the ‘lost generation’, who were sent to the countryside during the Cultural Revolution to be ‘re-educated’ among the peasants. My mother was 16 when she was sent away: she had barely finished middle school when she was told she would be leaving Shanghai for an unknown world and an uncertain future. But she set off in high spirits, eager to show initiative and prove she had the strength to break with her family of bourgeois intellectuals.  The Down to the Countryside movement was deemed necessary because the population had grown too quickly. Marauding bands of Red Guards were getting out of hand in the cities, and bands of jobless youngsters were roaming the streets. Many later poems and novels describe the tears shed by zhiqing as they boarded trains to the rural areas, but it’s not clear that all of them were sad. My mother wasn’t. But it was a radical experiment that robbed a whole generation of their right to education.”

When Yun’s parents were allowed to return from the country, China had changed.

“Some aspects of life in the 1980s were not so bad for those who’d returned to urban areas. The state was investing heavily in public housing so every working family had a roof over their heads and even if freedom from other kinds of want was rare, at least we were all poor together. There was also a surge in attention to reading, writing, the arts and philosophy, after the barrenness of the Cultural Revolution. It was a golden age; many European classics appeared in translation (often without permission), and every weekend my father took me to buy books. People queued for new arrivals and talked about writers and their work. Popular titles, both Chinese and foreign – usually philosophy or canonical literature – sold in the millions.”

A new emphasis on education meant competition for the best schools and the best jobs.  As always, there were way too many people for the number of positions available.  Yun’s parents were among the generation whose interrupted education left them unable to compete.

“When I was young I was angry with my parents for not continuing their education when they’d had the chance: I thought they were lazy. Now I see how arrogant and wrong I was. In 1977, the year the College Entrance Examination (gaokao) was reinstated (the Cultural Revolution had done away with the national educational system), 5.7 million people sat the tests and only 273,000 were given places. My parents didn’t exercise their right to sit the exam: they knew they wouldn’t stand a chance after so long in the rural areas.”

Things became worse for them when China’s economy began to take off.

“The 1990s hit my parents’ generation hard, and their difficulties lasted into the new century. They were not equipped to compete with the well-educated 1960s generation during the economic boom. Their lack of schooling meant, too, that they were forced to retire early (40-45 for women, 45-50 for men) to make room for younger workers. They are lost in modern China, digitally illiterate, casualties of a radical experiment. But compared to their parents, who could say that they are not fortunate?”

The 1990s would hit Yun’s generation hard also.  The single children of that period were pampered and fawned over as one might expect—thus the title “Little Emperors.”  But overpopulation would strike back at them as well.

“Some of us made it to a top university; we were aiming for a better life and hoping to ‘make a difference’. The irony is that we had already missed the boat: the opportunities associated with China’s opening up were shortlived. The 1990s were boom years for people born in the 1960s (Chinese count generations in ten-year intervals): young, energetic, ready to inherit the new China. Soon they would take all the key positions in the economy, the universities, the state administration, even the arts, leaving their successors with little room for manoeuvre.”

“For the 1960s crowd 1989 was the moment of transition. They were going through college at the time (often with their siblings) and were, on the whole, idealists, believing in reform and freedom. Tiananmen and 4 June changed everything.”

“From then on, instead of trying to change the political system they would focus on wealth creation. From the ashes of their hopes a shrewd, hard-nosed business elite emerged, driving China’s economic performance indicators to new heights. After 1989, foreign multinationals, impressed by the state’s iron determination and commitment to stability, began to invest heavily in the country. Before long, the children of the 1960s were basking in double-digit growth, and cleaning up as equity and property boomed. Few laws or regulations constrained venture capitalism, and China got its first good look at the filthy rich.”

“When the children of the 1980s hit the job market, we found ourselves in an unenviable situation. The rental on a small one-bedroom flat in a city like Shanghai is at least 5000 rmb a month (double that in the French Concession); buying would mean a mortgage for life. Many of us still live with our parents and are known as kenlaozu, ‘boomerang kids’: the little emperors are stuck at home, and not very different from the West’s generation of neets.”

Surprisingly, young girls would end up beneficiaries of the one-child policy.  Economically, the lower birthrate was compensated by making jobs in the modern economy available to both sexes.

“Traditionally females were used as domestic help, birth machines or clan assets to marry off or trade. Women didn’t go to school, and were encouraged to internalise the saying that ‘a woman without talent is virtuous.’ Illiteracy was their proper condition: they were there to clean, farm, and above all to give birth to a male heir. They could not dine with men at the same table.”

The one-child policy has been viewed as encouraging abortion and infanticide to ensure that the one child would be a boy.  Those things occurred, of course, but they had been occurring anyway due to the traditional Chinese patriarchy.  The one-child law forced parents of a single girl to reconsider how they viewed their female child, and, ultimately, helped emancipate girls from the limited lives they had known beforehand.

“These issues were deadly serious but they resulted less from the policy than from the nature of Chinese patriarchy, which the policy threw into sharp relief. People were willing to break the law, to pay a fine to have a second go at having a boy, even to murder or abandon female babies. Paradoxically the one-child policy undermined the atavism of tradition, even while seeming to encourage it. I grew up in Hefei, about 500 km west of Shanghai, where I remember a striking young girl from the countryside who attended a private violin class; she was the daughter of peasant parents who spoke poor Mandarin. Without the one-child policy, her father would have tried fanatically to conceive a second, third, fourth child, until the family produced a male heir. His daughters would have led miserable lives. Instead, he invested in his only child’s violin lessons.”

“The one-child policy meant that growing numbers of rural and urban female students attended universities, once a strictly male preserve. Before long we shall see more and more women in positions of responsibility in many fields.”

“The one-child policy also freed women from the burden of domestic work and childcare. Many more Chinese women go out to work than Indian women, and full-time housework is no longer a choice for the modern Chinese woman; only a few choose to quit their job after giving birth. When the one-child policy was wound up last year (it was replaced by a two-child policy), there was very little interest: Dinks (dual income, no kids) are quite common in big cities – none of the seven commissioning editors at the Shanghai Review of Books has children – and the one-child policy was becoming an irrelevance.”

Yun is aware of the arguments of people like Howard W. French that a falling population means fewer and more expensive laborers, and perhaps a less-competitive China, but is unmoved by the argument.

“I am not an economist, and so I can’t help wondering why it’s a good thing to exploit cheap labour, turn ourselves into a vast manufacturing hub for the world market, and destroy our own environment.”

Yun is personally more concerned with the difficulties involved in feeding the existing large Chinese population.

“If we had allowed our population to grow like India’s, we would be consuming far more of the planet’s grain and livestock than we are already (the Economist likes to remind us that, with our population at its current size, we eat half the world’s pigs).”

 He also provides an anecdote to force us to consider what a world with a couple of billion hungry Chinese might be like.

“After high levels of melamine were discovered in powdered milk in 2008, mainland mothers descended on Hong Kong and emptied the shelves, leaving Hong Kong mothers with nothing: it was a small illustration of what two or three billion Chinese could do to the Earth’s resources.”

Each country has an interesting story to tell.  Each country took different paths to the present, and each will take different paths to the future.

It was necessary for China to limit its population in order to maximize the common good—for both the Chinese and the world in general.  Economists who continue to argue for ever greater populations to ensure economic growth are foolish.  The notion that wealthy societies can increase their populations indefinitely by immigration to maintain growth is only sustainable if we assume that poor countries with high birthrates will be nurtured as sources of cheap labor forever.  That is not the kind of world anyone would wish to live in.

Yes, China will have a problem to face as its population ages.  All countries face the same problem, and they will have to deal with it.  Each country will likely come up with its own scheme, and the basic issue will be how to pay for it.  Fortunately, the globalized economy has produced and concentrated enormous amounts of wealth.  All we have to do is come up with a better way of distributing it.

The interested reader might find these articles informative:

Thursday, June 2, 2016

Capitalism and Inequality: What Does the Future Hold?

Thomas Piketty produced an enormously influential historical study of wealth during the capitalist era in Capital in the Twenty-First Century.  His work produced the conclusion that the return on investment in capital has historically been at the level of about 5%.  It dipped below that value during the period in the twentieth century marked by two world wars, the Great Depression and the post World War II recovery period.  Since that period, return on capital has returned to about the historical level.  Piketty’s study also concluded that the historical growth in income (on a per capita basis) was much lower except during that anomalous twentieth century period.  The high growth observed in the postwar years has since returned to the lower historical mean.

The obvious conclusion to be drawn from Piketty’s view is that capital (equivalent to wealth in Piketty’s reckoning) will continue to grow faster than the income earned from labor leading to ever greater inequality.  The lesson of the postwar years is that public policy, particularly with respect to taxation, led to diminished inequality and higher growth.  From Piketty:

“….it is important to note that the effect of the tax on capital income is not to reduce the total accumulation of wealth but to modify the structure of the wealth distribution over the long run.  In terms of the theoretical model, as well as in the historical data, an increase in the tax on capital income from 0 to 30 percent (reducing the net return on capital from 5 to 3.5 percent) may well leave the total stock of capital unchanged over the long run for the simple reason that the decrease in the upper centile’s share of wealth is compensated by the rise of the middle class.  This is precisely what happened in the twentieth century—although the lesson is sometimes forgotten today.”

The postwar European policies were much more aggressive than those in the US and led to greater growth of the middle class.  Tax policy was seen as the most effective way to alter inequality, provided taxes were used to provide services that were of value to all.  The middle class would be the ones who would benefit the most from the provided services.

“….modern redistribution does not consist in transferring income from the rich to the poor, at least not in so explicit a way.  It consists rather in financing public services and replacement incomes that are more or less equal for everyone, especially in the areas of health, education, and pensions.”

It should be noted that if the middle class benefits most from services provided by the government in the areas of health education, and pensions, it is the middle class that will suffer the most if those government services are scaled back or withdrawn.

Branko Milanovic has also tried his hand at providing understanding of inequality at the global level and predicting what the future might hold.  He has produced the very worthy and lucid book Global Inequality: A New Approach for the Age of Globalization.  Milanovic has collected a large amount of fascinating data on income levels around the world and tracked the evolution over recent decades.  This allows him to evaluate the effects globalization has had on incomes in both wealthy and non-wealthy countries, and to produce some interesting conclusions.

Milanovic also tries to produce an hypothesis to explain the dynamics that control economic evolution and predict how income inequality might change over time.  He believes that Picketty’s theory is inadequate to explain all the data, and suggests that a variation on and older idea presented by Simon Kuznets is more appropriate.  Kuznets was a very accomplished economist.  One of his deductions from perusal of the data available to him at the time was the existence of what came to be known as the Kuznets curve.  From Wikipedia:

“Among his several discoveries which sparked important theoretical research programs was the Kuznets curve, an inverted U-shaped relation between income inequality and economic growth (1955, 1963). In poor countries, economic growth increased the income disparity between rich and poor people. In wealthier countries, economic growth narrowed the difference. By noting patterns of income inequality in developed and underdeveloped countries, he proposed that as countries experienced economic growth, the income inequality first increases and then decreases. The reasoning was that in order to experience growth, countries had to shift from agricultural to industrial sectors. While there was little variation in the agricultural income, industrialization led to large differences in income. Additionally, as economies experienced growth, mass education provided greater opportunities which decreased the inequality and the lower income portion of the population gained political power to change governmental policies.”

Both Piketty and Kuznets would predict growing inequality in the nineteenth century, but without demonstrating it, Milanovic claims that the data on inequality in the UK and the US look to him like a Kuznets curve rather than anything Piketty could produce.  He then can claim, again without much in the way of justification, that, two world wars and the Great Depression notwithstanding, the postwar fall in inequality was merely following the economic evolution the Kuznets hypothesis predicted. 

Milanovic grants that Piketty correctly predicts the rise in inequality that occurred after the postwar period and continues to this day—which Kuznets could not.  In order to maintain his faith in the Kuznets curve he has to postulate that this rise must have been caused by a new industrial revolution that triggered a rise in inequality similar to that caused by the transition from an agricultural economy to a mechanized one.  Kuznets events can then come in waves.  Milanovic proposes that the rise of information technology has been responsible for this latest increase in inequality.  That conclusion is controversial.  Paul Krugman does a good job of trashing that notion in Challenging the Oligarchy.

It was not the intention to produce a detailed resolution of the differences between the views of Milanovic and Piketty.  The issue here relates to the quite different predictions for the future.  

Milanovic’s view suggests that there are economic mechanisms within the capitalist system itself by which inequality can be diminished.  He predicts that US inequality will begin to decline, although he describes the US as currently enduring a “perfect storm of inequality.” He seems to conclude that wars and revolutions are also “economic mechanisms,” consequently he may eventually be correct.

Piketty’s view suggests that the natural evolution of a capitalist society is to plutocracy unless inequality is explicitly constrained by society.  A Great Recession did little to convince our society of the need to rein in capitalism.  The only data we have suggests that a Great Depression and two world wars are necessary to do the trick.

Perhaps it is useful to remind ourselves what mindset emerged in Europe from the experience of a Great Depression and two world wars.  Tony Judt provides us with some insight from his book Postwar: A History of Europe Since 1945.

“The state, it was widely believed, would always do a better job than the unrestricted market: not just in dispensing justice and securing the realm, or distributing goods and services, but in designing and applying strategies for social cohesion, moral sustenance and cultural vitality.  The notion that such matters might better be left to enlightened self-interest and the workings of a free market in commodities and ideas was regarded in mainstream European political and academic circles as a quaint relic of pre-Keynesian times: at best a failure to learn the lessons of the Depression, at worst an invitation to conflict and a veiled appeal to the basest human instincts”

“The state, then, was a good thing; and there was a lot of it….The overwhelming bulk of the increase in spending went on insurance, pensions, health, education and housing.”

This attitude towards capitalism and economics generated an enormous growth in the middle class in Europe.  The subsequent rise in influence of market-based decisions has been gradually eliminating the middle class. 

There has to be an optimal middle ground between these extremes, but how do we get there?

The interested reader might find these articles informative:

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