Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer by Dean Baker (2016) (read in 2017)

“Bill Clinton would have much less need to fly around the world for the Clinton Foundation had he not inserted the TRIPS (Trade Related Aspects of Intellectual Property Rights) provisions in the World Trade Organization (WTO) that require developing countries to adopt U.S.-style patent protections.”

“In short, there is no truth to the story that the job loss and wage stagnation faced by manufacturing workers in the United States and other wealthy countries was a necessary price for reducing poverty in the developing world.[5] This is a fiction that is used to justify the upward redistribution of income in rich countries.”

“Markets are never just given. Neither God nor nature hands us a worked-out set of rules determining the way property relations are defined, contracts are enforced, or macroeconomic policy is implemented. These matters are determined by policy choices. The elites have written these rules to redistribute income upward. Needless to say, they are not eager to have the rules rewritten — which means they also have no interest in even having them discussed.”

“The position of “deregulators” effectively amounted to arguing that they should not have to pay for the insurance they were receiving.”

“This means that the share of the 1 percent has more than doubled from its level during most of the period of the 1950s to 1980. Measured as a share of total income, this increase is roughly 10.0 percentage points. This would be sufficient to increase the income of everyone in the bottom 90 percent of the income distribution by more than 20 percent. It would be almost enough to double the income of the bottom 40 percent. In short, this upward redistribution has had a substantial impact on the living standards of the rest of the population.”

“A basic point of economic theory that economists don’t like to talk about is that reducing the rents going to a high-income person is a gain for the rest of us. This is a crucial point, since it is necessary to recognize that policies designed to reduce the incomes of high-end earners are not just a matter of being gratuitously nasty to those who were lucky enough to be successful. Whether or not these policies are nasty, it is important to recognize that the money enjoyed by these high-end earners comes from somewhere; it is not manna from heaven. And where it comes from is the pockets of the rest of us.”

“However, if the market distribution is indeed dependent on macroeconomic factors, like how close the economy is to its full-employment level of output, then we lose this independent point of reference. The distribution of income is then dependent on macroeconomic policies that determine the nearness to full employment. The market distribution is then inherently a function of policy decisions — there is no independent point of reference.”

“The basic logic behind this system was that, if the government is willing make up lost pay of workers when they are completely unemployed, why not pay workers when they are partially unemployed as a result of a reduction in work hours?[15]”

“Specifically, because health care insurance is mostly an employment-based benefit, rather than universally provided through the government, employers typically see it as a fixed cost per worker. So rather than hiring additional workers and paying for their health insurance, employers would generally prefer their existing workforce to work more hours.”

“If the average work year in the United States were comparable to those in Western Europe, more workers would be employed at relatively well-paying jobs in sectors like manufacturing, construction, and communications instead of being forced to accept lower-paying jobs in sectors like retail and restaurants. By reducing the supply of workers in the lower-paying sectors, the reduction in average hours would lead to higher wages in low-paying sectors for the workers who were left behind. In short, it is reasonable to believe that the longer average work year in the United States has been a factor contributing to inequality.”

“The beneficiaries of the upward redistribution may like the outcome, but it is not because they prefer leaving matters to the market. Rather, they prefer government interventions that have the effect of giving them more money.”

“Washington is filled with politicians and organizations that hyperventilate about government debt and the burden it imposes on our children, but they ignore the burdens imposed by patent and copyright monopolies granted by the government.”

“That is the effect of various types of budget rules. They are not imposing some principle of neutrality or non-intervention, they are just making it more difficult to understand the government’s role in the economy.”

“As the Fed restricted the growth of the M2 measure of money, the banking system developed new systems of payments that were not counted in M2.[18] As a result, the Fed could meet its targets for M2 but not accomplish its goal of restricting the effective supply of money.”

“As research from the IMF and elsewhere indicate, this upward redistribution leads to lower consumption, other things equal, since the wealthy spend a smaller share of their income than do the poor and middle class. Without deliberate government policy to boost demand, the result is a shortfall in demand.”

“The idea that a large financial sector might be a drag on growth has been supported by recent research”

“Contrary to what is often claimed, breaking up the banks would not be a complex administrative task. The government should not be micromanaging the project; the banks could do it themselves. The banks know their business and have an incentive to break themselves up in a way that maximizes shareholder value. The government need only set size caps and a timeline, as well as penalties for not meeting the timeline. The banks can figure out how best to downsize themselves.”

“The “buyer beware” argument in this story means that consumers would have to spend much more time reviewing contracts and that firms would devote more resources to deceiving customers. That is hardly an economically optimal outcome.”

“Since they are non-voting, the shares would give the government no control: the goal is to secure a claim to corporate profits, not to run companies. Apart from issues of control, the government’s shares would be treated just like other shares of common stock. If the company pays a dividend of $2 a share on its common stock, then it would also pay $2 a share on the stock held by the government. If it buys back 10 percent of outstanding shares at $100 per share, then it would buy back 10 percent of the shares held by the government at $100 per share. If a private equity firm buys out the company, paying $120 per share, then it would pay $120 for each share held by the government.”

“The Bayh-Dole Act of 1980 allowed for universities, research institutions, private companies, and individuals operating on government contracts to gain control of patents derived from their work, thereby creating the opportunity for universities to earn large rents from patents and for researchers to form their own companies, all relying on knowledge and expertise obtained on government contracts.”

“when the development of digital technologies and the Internet threatened the business model of the entertainment industry, the response was to pass laws to contain these technologies to preserve the sector’s mode of doing business. This is a great example of how it is not technology itself that is determining the distribution of income, but rather how various interest groups are able to write the laws governing the use of technology.”

“In effect, creative workers would be given the option of relying on one or the other system of support. They could choose to rely on copyrights to support their work or they could opt to join the tax-credit system, but they could not do both.”

“credit of $100 opted for by 90 percent of the adult population (a high percentage, but this is free money) would generate more than $22 billion a year to support books, movies, music, and other creative work. This amount would vastly exceed the amount currently going to creative workers through the copyright system, although it would total far less than the current subsidy for charitable contributions, which is likely in the neighborhood of at least $54 billion in 2016.[73]”

“The goal of the creative work tax credit is to make a large amount of material available to the public that can be transferred at zero cost. Putting more material in the public domain in different areas is a positive benefit, as long as people value this work. The ultimate check on the boundaries of the system is what people are prepared to support with their tax credits. If few people opted to support journalism or video games, then these industries would remain largely dependent on copyright protection.”

“There are good reasons for believing that an alternative would be at least as effective, especially in the case of patents. The prospect of having fully open research, where the incentive is for dissemination rather than secrecy, would almost certainly lead to more rapid progress than the current patent system.”

“More importantly, bringing prices in line with production costs would offer enormous gains, especially in the case of drugs and medical equipment. It is difficult to understand the logic of paying for innovation at the point where a patient needs a drug or access to medical equipment. Monopoly pricing imposes an enormous burden on people at precisely the time when they are least able to bear it.”

“Weakening or eliminating patent and copyright support for innovation and creative work would radically reduce waste. In a market system, the best way to make profits should be to produce better products, not to run to court. But the patent system increasingly supports this second path to profits.”

“Stockholders are a diffuse group of individuals and institutions, most with little direct stake in the running of the company since the dividends and capital gains are a small portion of their income. Organizing among shareholders to improve corporate practices and to change top management has high transaction costs, and so it is far easier for shareholders to simply sell the stock of a company if they are unhappy with its performance. In this environment, top management will often have effective control over the running of a company.”

“One of the champions in this area was Erskine Bowles, who served as Chief of Staff to President Clinton in his second term and later went on to be president of the University of North Carolina. While serving in this latter position, Bowles simultaneously sat on the boards of General Motors, Morgan Stanley, and Cousins Properties. The first two companies needed bailouts from the government to stay in business, but sitting on the board of two companies that faced bankruptcy did not damage the demand for Bowles as a director. After General Motors’ bankruptcy cost Bowles his directorship there, he added directorships at Norfolk Southern and Facebook to his portfolio.”

“Quigley, Crossland, and Campbell (2016) looked at the impact of unexpected CEO deaths, like from an airplane or car crash, on stock prices. The reason for focusing on unexpected deaths is that it takes away the possibility that the death may have been anticipated and its impact already reflected in the stock price, as might be the case when a CEO dies after a long illness. In almost half of the cases examined since 1990 (44.3 percent), the price of the company’s stock rose following the death of the CEO. If incumbent CEOs are uniquely talented individuals who cannot be easily replaced, then their loss should be unambiguously bad news for the company’s shareholders. In fact, the market might be expected to overreact on the negative side to the unexpected death of a CEO, since there might be the expectation that the CEO actually was a major asset to the company even in cases where it is not true. After all, why else would they be paying them so much money?”

“It is worth noting that pay at poorly governed companies will inevitably affect the pay at well-governed companies. While it is not common for CEOs to jump companies, having overpaid CEOs at poorly governed companies in the reference group for determining CEO pay will tend to increase the pay for CEOs at even the best-run companies. If the norm is for CEOs at large companies to be paid between $10 million and $20 million a year, a well-managed company will have a tough time retaining top-quality executives for $3 million to $4 million a year, even if that pay package were more appropriate given the marginal contribution of the CEO to profitability.”

“In fairness, many university presidents are paid largely for their ability to attract donations, and it is possible that these presidents were especially successful in attracting contributions. However, this is a skill that matters much more in an unequal society that depends on donations from the rich to support higher education. Being able to develop relationships with the wealthy is a much less valuable skill in a society where the wealthy have less money and education is supported through other channels.”

“However, should these highly visible athletic teams be getting special tax treatment as a result of their ties to the university? There is a solid argument for public subsidies for higher education, but the argument for subsidizing Ohio State’s football team is less clear cut.”

“The argument for the nonprofit sector is that these institutions are paying their top executives with public funds since they benefit from large tax subsidies. Just as the government puts all sorts of other restrictions on the activities of organizations receiving tax-exempt status, it can also make caps on pay a condition. Foundations and universities would still be free to pay their top executives whatever they wanted, but they wouldn’t be able to receive a subsidy if they violated the pay ceiling.”

“This chapter argues that the barriers to competition and high pay exist because the professionals who benefit have far more political power than ordinary workers. No economic rule states that doctors, dentists, lawyers, and other professionals at the top of the pay ladder should be protected from the wage-depressing effects of globalization.”

“Excessive pay for doctors and other high-end professionals, a group that makes up a large share of the top 1 percent of the wage distribution, should be thought of as a tax. The rest of the country is paying more than necessary for health care and a variety of other services. Freeing up markets for highly paid professionals can both reduce inequality and lead to more rapid economic growth.”

“Limiting the number of U.S. medical school positions and the number of residency positions, together with requiring a U.S. residency for licensure, are explicit efforts to limit the supply of doctors. At the same time, limiting the extent to which less highly paid medical professionals like nurse practitioners and nurse midwives are allowed to engage in tasks such as prescribing medicine or delivering babies increases the demand for physicians’ services. While there can be legitimate safety concerns associated with restrictions on the scope of practice of less highly trained professionals, the economic implications are straightforward: higher pay for doctors and higher health care costs for patients.”

“While the relatively large number of lawyers in the United States is a drain on the economy, factors unique to the United States might explain the higher ratio. Specifically, the rate of incarceration in the United States is far higher than in other wealthy countries, and so the demand for prosecutors and criminal defense lawyers is higher. In addition, the fact that the United States does not provide universal health insurance and has extraordinarily high health care costs means that people would have incentives that do not exist in other countries to pursue legal actions over physical injuries. Finally, regulation and litigation are alternative forms of protection. In countries with more extensive regulation for consumer protection and safety, there may be less need for legal action.”

“According to the Centers for Medicare and Medicaid Services, the average health care expenses of a person over 65 are 260 percent of the overall average (CMS 2010).[98]”

“According to the Centers for Medicare and Medicaid Services, the average health care expenses of a person over 65 are 260 percent of the overall average (CMS 2010).[98] As a result, in 2010 the over-65 population accounted for almost 34 percent of total spending even though they were just 13.0 percent of the population.[99] And this share is projected to rise rapidly over the next two decades, reaching 20.7 percent by 2035. Assuming no change in the distribution of health care costs by age implies that the over-65 population will account for more than 47 percent of health care spending in 2035 (Table 7-7).”

“How many retirees might opt to emigrate? As noted earlier, about 1.5 percent of Social Security beneficiaries already live in other countries, and it is reasonable to believe that this number will increase as incentives are implemented, as the percentage of the foreign born among the retired rises, as the quality of health care abroad increases, and as growing communities of retirees in places like Ireland and Mexico inspire more people to relocate.”

“Doctors, dentists, and lawyers don’t face the same downward pressure on their wages as textile workers, autoworkers, and retail clerks because the government’s policies are not trying to push their pay lower. We aren’t designing trade agreements to expose these professions to competition with lower-paid counterparts in the developing world. Nor are politicians constantly looking for new ways to alter regulations in ways that undermine these workers’ bargaining power. The workers in these professions sit near the top of the pay ladder not because of the inherent dynamics of globalization and the market economy, but because they have much more say than other workers in setting the rules.”

“There will always be genuine quality concerns in making these decisions, but if the assessment of quality issues is left to the professionals who stand to benefit, we can expect that these professionals will be enriching themselves at the expense of the rest of us.”

“Progressives have long been suspicious of the market. Some see it as an aberration to be contained, if not actually overcome. In the extreme case, the goal is some form of central planning in which the government makes the bulk of decisions on allocating resources. More tempered versions have the government taking possession of key industries, with smaller firms and less-consequential sectors left in private hands.”

“Both visions largely accept the view of the market held by Friedman-esque conservatives — that it is a fact of nature. Undesirable outcomes such as poverty or extreme inequality are givens, and the issue is the extent to which we want the government to supplant the market or ameliorate its effects. Markets are not fixed by nature; rather, they are infinitely malleable.”

“The enormous upward redistribution in the United States of the last four decades was not an inevitable outcome of technology or globalization. It was the result of deliberate policies, the purpose of which was to redistribute income upward.”

“If pension and health care benefits are no longer a per-worker cost, then employers have less incentive to force workers to put in longer hours rather than just hiring more workers.”

“Most other wealthy countries guarantee workers four to six weeks a year of paid vacation (Ray, Sanes, and Schmitt 2013), but the United States inadvertently put in place a structure of benefits that pushes workers toward taking the gains from higher productivity in the form of higher income rather than time off. There is nothing natural about this, and evidence suggests that many workers would value more leisure time even at the cost of income or less rapid income growth in the future.[107] But beyond these reasons, reducing average work hours spreads good jobs around more broadly and tightens up the labor market, improving workers’ bargaining positions.”

“For this reason, it is important to have policies that directly attack the source of high-end rents. Reducing the purchasing power of those at the top leaves more room for expanding the purchasing power of everyone else, without adding to inflation pressures.”

“It is unambiguously the case that the rest of the country comes ahead by having less of its savings effectively taxed away by the financial industry.”

“Companies would be allowed to issue a number of shares that is roughly proportionate to the percentage of the corporate income that it expected to pay. This policy could be enacted by states that have corporate income taxes. If states followed this practice, they would likely both be reducing their own enforcement costs and setting a model that could be copied elsewhere.”

“These industries, as currently structured, depend on an incredibly inefficient system of government-imposed monopolies. These monopolies make items that would otherwise be cheap, like prescription drugs and medical equipment, incredibly expensive. They also make it expensive to get recorded music, movies, and software — all items which could otherwise be transferred at zero cost. The”

“Even the major pharmaceutical companies could still profit through a system of publicly funded research, since they would likely be the major recipients of contracts. However, as long as these companies can make large profits under the current system, they will be uninterested in a new route, regardless of the costs their system imposes on the country and the world.”

“Suppose a city of 200,000 made available a credit of $50 per adult. To be eligible for the credit, a creative worker would not only have to forego copyright protection for a period of time, but he or she would also have to physically live in the city for at least eight or nine months of the year. Donations by three quarters of the population (a high share, but it’s free, since the donor gets a full tax credit) would create a pool of $7.5 million to support creative workers. Since these workers would be required to live in the city much of the year, they would have an incentive to perform their music or plays, conduct writing workshops, or perform other work that would both support them and increase their visibility to people deciding what to do with their tax credit. It is easy to envision a scenario in which this sort of influx brings in enough tourist revenue to more than cover the cost of the tax credit.”

“is not uncommon for their pay to cross $1 million, or more than 25 times the pay of the typical worker. As was noted in the chapter, this pay is largely subsidized by taxpayer dollars, since donations to these institutions are tax-exempt. This means that roughly 40 percent of their salaries came from taxpayers. In the case of a foundation or university president getting $1 million a year, effectively $400,000 is coming from taxpayers.”

“If taxpayers are paying the bill, it is reasonable to put limits on the top salaries that these institutions can pay. The President of the United States is paid $400,000 a year, which seems like a fair limit on the pay of people employed by tax-exempt institutions. Just to be clear, this is not limiting what nonprofit institutions can pay their presidents or other top officials. It is only limiting what they can pay them while getting a subsidy from taxpayers.”

“The fruit of lower pay for those at the top is lower tuition costs and more money available for other employees.”

“if the market is rigged to redistribute ever more income upward, it will be difficult to design tax and transfer policies to reverse this effect. And if the rigging efforts are never challenged, then they will impose an ever greater burden on those trying to reduce inequality through tax and transfer policy.”

“there should be little doubt that there is potential to have a large impact on the distribution of income through economically plausible restructurings of the market. The gainers in the top 1 percent have structured the market over the last four decades in ways that increase their share of income. This restructuring can be reversed.”

“Government policy shapes market outcomes. It determines aggregate levels of output and employment, which in turn affect the bargaining power of different groups of workers. Government policy structures financial markets, and the policy giving the industry special protections allows for some individuals to get enormously rich. Government policy determines the extent to which individuals can claim ownership of technology and how much they can profit from it. Government policy sets up corporate governance structures that let top management enrich itself at the expense of shareholders. And government policy determines whether highly paid professionals enjoy special protection from foreign and domestic competition.”

“Pretending that the distribution of income and wealth that results from a long set of policy decisions is somehow the natural workings of the market is not a serious position. It might be politically convenient for conservatives who want to lock inequality in place.”

“It is a more politically compelling position to argue that we should not interfere with market outcomes than to argue for a system that is deliberately structured to make some people very rich while leaving others in poverty.”

“Pretending that distributional outcomes are just the workings of the market is convenient for any beneficiaries of this inequality, even those who consider themselves liberal. They can feel entitled to their prosperity by virtue of being winners in the market, yet sufficiently benevolent to share some of their wealth with the less fortunate. For this reason, they may also find it useful to pretend that we have a set of market outcomes not determined by policy decisions.”

“But we should not structure our understanding of the economy around political convenience.”

“As a technical matter, the Federal Reserve Bank of New York is a private bank. It is owned by the banks that are members of the Federal Reserve System in the New York District.”

“Individual income tax filings is another area that provides a considerable amount of often unnecessary work for lawyers. It should be possible for the IRS to calculate the returns of most low- and moderate-income workers and send the completed forms back to the taxpayer for approval. This is the practice in several European countries. Adopting this approach would radically reduce the need for tax consultants and for lawyers to challenge the work of these consultants.”

“Developing countries face the risk of a brain drain if a large portion of the professionals emigrate to the United States or other wealthy countries. This could be countered by refunding a portion of the gains, for example, the income tax on the earnings of immigrant doctors, to the home country. Such a rule would allow for the training of several professionals for every one that comes to the United States.”

“There is also reason to believe that taking the benefits of productivity growth in leisure rather than income will have environmental benefits (Rosnick”