Joe Emersberger

How the Rich Are Getting Richer: Dean Baker

How the rich get richer and how the poor get poorer
How the Rich Are Getting Richer: Dean Baker

U.S. economist Dean Baker talked to Joe Emersberger about copyright, capitalism and global inequality.

In October, U.S. economist Dean Baker published a book entitled “Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.” The book can be downloaded from free from the website of the Center for Economic and Policy Research, CEPR, which he co-founded with Mark Weisbrot in 1999.

Emersberger: Why have you made this book, and others you’ve written recently, available for free on the CEPR website? Instead of “Copyright by Dean Baker” on the second page followed by a warning to only quote brief passages, your book says “Creative Commons by Dean Baker” and tells people they can copy what they like “provided that proper attribution is given.”

Baker: I want people to read the book. Copyright is a way of blocking access. This is one of the topics raised in my book. People who write or do creative work of various types need to be supported, but government-granted copyright monopolies are an incredibly inefficient mechanism for providing this support. They are about locking up material rather than granting access.

Copyrights are especially problematic in the Internet Age. Here we have technology that allows anyone in the world to get almost instantaneous access to written material, music, videos and data. Instead of taking advantage of this technology, we are writing laws to rein it in, imposing harsher penalties on people who violate copyright and requiring third parties, like Internet intermediaries to act as copyright cops.

In the book, I propose alternative mechanisms for financing creative work, most importantly an individual tax credit system modeled on the tax deduction for charitable contributions. It would not take a great deal of money to finance a large amount of creative work through this mechanism and all this material would be available at zero cost. This seems to me the best way to go both from an economic standpoint and from the standpoint of promoting a democratic culture and media. This system could also co-exist with the copyright system and we could then see which system people and creative workers liked better.

I also should mention, in response to your highlighting the issue about “proper attribution,” people sometimes see this proposal as in some denigrating the work of creative workers and encouraging plagiarism. I do not see that at all. We are simpler talking about an alternative mechanism for financing the work, but the creators absolutely deserve to be credited for their work. To make a simple point, the works of Shakespeare are no longer subject to copyright protection. This means that it is okay to reproduce the works of Shakespeare. It is not okay to say that you wrote the complete works of Shakespeare.

Your book says that in the United States “the reductions in pay seen by middle and lower income workers were for the most part passed on in lower prices, not pocketed by companies as higher profits.” You point out that the average CEO pay was 23 times higher than typical workers in 1973 but, as of 2015, was 276 times higher.

Someone who likes to see income distributed upward might look at those facts and say “There you go. CEO’s deserve all that money for delivering lower prices to consumers.” How would you respond?

It’s not that prices have dropped; it’s just that when there were cost savings due to lower wages of workers they were generally passed on lower prices. In a context of moderate inflation, this just meant that prices were rising less rapidly than if these savings were not passed on.

More importantly, from the standpoint of the economy, we are interested in how rapidly firms can achieve productivity gains. If the current crop of CEOs had a great record of rapid productivity growth then they would have at least some case for their high pay. However, productivity growth has actually been quite slow in the era of high CEO pay. It has averaged around 1.5 percent annually from 1980 to 2016. This compares to 3.0 percent in the quarter century from 1947 to 1973. Perhaps productivity growth would have been even slower with a less-talented group of CEOs, but the economic benefits produced the current crew certainly are not obvious.

You describe in detail how U.S. legislation made patent protection longer and stronger since the mid-1970s. You show hundreds of billions of dollars in savings to U.S. citizens if the government introduced free market reform combined with direct government contracting of medical research.

If U.S. health care spending were at the level of most other rich countries (which also achieve better health outcomes) the savings would be larger than the entire Pentagon budget. Are other countries mainly saving through weaker patent protection, or are they granting just as strong patent protection but also imposing price controls? They also pay their doctors less. How significant are those savings?

The patent rules are comparable in other wealthy countries, largely as a result of TRIPS and other trade agreements. The big difference in prices for drugs and medical equipment is that other countries have price controls or some form of government purchase that pushes down prices. This does account for much of the difference in health care costs between the U.S. and other rich countries — probably close to US$1,000 per person annually.

This system is much better than the U.S. system, but it still means many drugs are very expensive (half the cost of a cancer drug selling for US$150,000 a year in the U.S. is US$75,000 a year) and it leads to an enormous waste and opportunities for corruption in the process of negotiating for lower prices. It makes much more sense not to have patent monopolies that make drugs and medical equipment expensive in the first place.

As far as the doctors, we spend an extra US$100 billion a year or so on doctors compared to Europe. That’s around US$300 per person per year. That is not a small sum even for the U.S.

A key point of your book is that progressives need to focus way more on government policy that has made “market” (before-tax) income so much more unequal in the neoliberal era. One of your blog posts shows that inequality of market incomes in the United States is much higher than in Scandinavian countries. What are the quickest ways — given that speed matters when you have elections every few years — to “un-rig” U.S. markets?

Probably the biggest source of high and unjustified salaries is the financial sector. Our financial sector has almost quintupled in size relative to the rest of the economy since 1970. It is hard to argue that it is doing a better job allocating capital and providing a safe form of savings than it did 45 years ago. The top earners in the financial sector get tens of millions annually, with some hedge fund managers making hundreds of millions.

A financial transactions tax, FTT, would take away a large chunk of this income. Based on a large body of research we can pretty confident that most, if not all, of the revenue from an FTT would come from the pockets of the financial industry in the form of reduced trading volume. This trading adds nothing to the economy, the rest of us would not be harmed by trading less.

Of course, an FTT is not about to pass Congress, but one thing that can be done at the state and local level and by universities and foundations is to demand greater transparency in fees from the private equity and hedge fund managers who handle money from pension funds and university endowments. This is a straightforward demand without any serious counter-argument. People should know what they are paying for these services. (They are being ripped off in many cases.)

Another big source of excessive pay is corporate CEOs. As it stands corporate boards are almost always friendly with the CEOs and other top management. They never ask whether they could get someone as good for half the pay — they have zero incentive. If shareholders like pension funds and universities demanded that corporate directors actually represent their interest, and try to pay CEOs as little as possible given the quality of their work (as is the case for other workers), then we might see a sharp reduction in CEO pay. The salaries of other high-level execs would also fall.

In the United States, was it that explosion you mentioned in the size of its financial industry that mainly caused CEO pay to skyrocket or was driven mainly by changes in corporate governance?

I think it was mostly changes in corporate governance, but the Wall Street crew were certainly in the reference group of the CEOs. When they saw punk traders and hedge fund guys getting tens of million on Wall Street, it undoubtedly fueled their push for higher pay as well.

There is a great story about Dennis Kozlowski, who headed up the conglomerate Tyco. He ended up going to jail because he was stealing money from the company, having it pay for expensive art and incredibly lavish parties. According to the story, he found out that the guys from Goldman who were underwriting his bond issues were getting more than US$20 million a year. These were kids in their 20s or maybe early 30s. He was at that point well into his fifties and worked his way up to be the head of one of the largest companies in the country and he was making something like US$10 million. So, he felt he was being ripped off and therefore entitled to take some extra money out of the company to make things right.

This is clearly an extreme case, but certainly, CEOs could point to the Wall Street salaries as justification for raising their own pay.

You argue that reduced pay for those at the top would leave more “room” to expand the economy without driving up inflation. This suggests that the high inflation of the late 1970s should have been attacked through policies that reduced market incomes at the top even though they were already very low by today’s standards. Do you agree? I ask because the dreaded ghost of the late 1970s inflation rates is sometimes invoked (by some on the left as well as the right) to argue that the kind of reforms you advocate are unsustainable.

I think much of the inflation of the late 1970s was a result of one-time events, most importantly the OPEC price increases. These were reversed in the next few years as high prices led to a glut of oil on world markets. I don’t think there was an inflationary crisis in the late 1970s, although it was definitely a problem. I think we could have taken a much more gradual path to lower inflation than what actually happened with the Volcker recession pushing the unemployment rate to 11 percent.

I do think some of the deregulation of this period was positive. Much of the regulation in place needed to be modernized. That did not mean ending it, as was done in many industries like airlines, but the system in place at the time made it very difficult to innovate. Anyhow, a less regulated environment would have also put downward pressure on the inflation rate.

It’s hard to assess the claim that my proposals would lead to an unsustainable system. I would need to see the way in which the system is supposed to be unsustainable. I don’t see any reason to believe it would be.

By Joe Emersberger/teleSUR

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