The Solution To The US Debt and Deficit Problem

The Solution To The US Debt and Deficit ProblemFor most people, the country’s national debt and annual deficit are not major concerns. However, for a substantial portion of the policy types who make, write, and talk about economic and budget policy, debt and deficits are really big deals. And, the fact that our budget deficit and debt are both large by historic standards, and growing rapidly, is an especially big deal.

The list of people in this category is lengthy. It starts with the Peter J. Peterson Foundation (which displays the debt in big numbers right on its home page) and the many groups funded by them. The most important is the Committee for a Responsible Federal Budget, which is virtually guaranteed prominent placement in stories on the budget by major news outlets.

The Washington Post (both its news and opinion sections) has a high standing in deficit hawk circles. House Speaker Nancy Pelosi and other members of the Democratic leadership have at least one foot in the deficit hawk camp. And, of course, Republicans are big deficit hawks when a Democrat is in the White House.


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In order to make these deficit hawks happy, I have a proposal – we’ll call it the “Baker Budget Fix” – that can eliminate debts and deficits forever. It’s fun, simple, and can give us balanced budgets for all eternity.

The basic point is that the government can sell off all sorts of patent and copyright monopolies and collect massive amounts of revenue. Regular readers know that I am not a big fan of patents and copyrights, but since I’ve made little headway in getting these policies questioned in public debate, why not just embrace them? After all, since everyone who matters seems to be just fine with ever longer and stronger patent and copyright protection, let’s use them to raise a ton of money for the government and make the deficit hawks happy.

The basic logic of patents and copyrights is that they are an alternative mechanism to direct spending that the government uses to provide incentives for innovation and creative work. However, unlike direct spending, which adds to our deficit and debt, no one ever includes any measure of future patent and copyright rents in our deficit or debt figures. The value of these monopolies is effectively free money in the accounting of the deficit hawks.

So, since these monopolies are a free monopoly, let’s get more of it. Suppose the government were to auction all sorts of valuable patents. We can start with the wheel. That should be worth a good chunk of money. Whoever owns the patent on a wheel can force the auto industry, the bicycle industry, and even manufacturers of wheelbarrows and toy cars to pay a big licensing fee on every one of their products they sell.

But the wheel is just the beginning. We can auction off patents on fire, ice, even chicken soup. This is a way to raise an almost infinite amount of money for reducing the deficit and debt.

And, if we aren’t getting enough money from patent sales, the government can also auction off copyright monopolies. We can issue and sell copyrights on longstanding works, like the writings of Shakespeare and the bible. Or, we can even sell off copyrights on individual words. Think how much the copyright for “and” and “the” would be worth.

For those concerned about the constitutionality of these sorts of copyrights, since they would seem to infringe on free speech, the Supreme Court has already given a green light. In reference to a copyright law written to ensure that Mickey Mouse did not pass out of copyright protection, the Supreme Court ruled that it was fine to extend copyrights retroactively, giving more incentive for people to do creative work seventy five years ago.   

Sure, this proliferation of patents and copyrights is incredibly wasteful, but we know that people involved in policy debates don’t give a damn. After all, how many politicians, columnists, or reporters ever point out that the only reason that a life-saving cancer drug might cost $300,000 is that the government has given the company producing it a patent monopoly? That basic fact almost never appears in public discussions, nor is anyone so rude as to point out that the drug would likely just sell for a few hundred dollars in a free market.

The same story applies to medical equipment. The latest scanning equipment would likely just cost a couplof hundred dollars per use, if the manufacturer did not have a patent monopoly. The same story would apply to dialysis machines and a wide range of other currently costly medical equipment. The fact that patent monopolies cause a huge gap between price and production costs is simply not a part of the discussion.

Nor does anyone mention the perverse incentives created by these monopolies. Even as states across the country have pressed lawsuits against Purdue Pharma and other opioid manufacturers for lying about the addictiveness of their drugs, no one has pointed out that the incentive to lie was a direct result of the patent monopolies granted by the government. If these drugs were selling as generic drugs in a free market, Purdue Pharma and the rest would have had much less reason to mislead doctors about the safety and effectiveness of their drugs.

But again, this inevitable problem stemming from government granted patent monopolies for prescription drugs and medical equipment is altogether absent from public debate. Therefore, we should infer that the people in power are not concerned about it.

The basic story is that policy types have no interest in the inefficiency and corruption that results from patent and copyright monopolies. They don’t want to talk about these issues and will not allow their media outlets to be used for this purpose.

Since they are concerned about debt and deficits then this policy seems an obvious winner for them. After all, I’m proposing a sure fire way to eliminate the debt and deficits. The only cost is that we get some more waste and corruption. Since these issues don’t register on the deficit hawks’ radar screen, what is the down side?  

Okay, thanks to the folks who have followed the argument this far. Let me give the two punch lines, one very big, and the other much bigger.

The very big punch line is that the people making arguments about the debt and deficit don’t know what they are talking about. If we want to ask the question of whether the deficit is too large, we have to look at the state of the economy.

Is it over-stimulated to the point that we are seeing serious inflationary pressures? If that is the case, then the deficit is too large even if we are running a budget surplus. We need to reduce demand in the economy. Of course, we can do this through other channels than reducing the deficit, most obviously by having the Fed raise interest rates.

What about the burdens created by the debt? Yes, the debt does imply future interest payments, and this can divert resources from other uses. People who own bonds have more spending power as a result of their interest income.

However, there are three important qualifications.

1) If the economy would be operating below its capacity with a lower deficit, then the deficit is likely increasing the economy’s future potential through higher investment and keeping workers employed developing new skills. If the larger debt causes another 1.0 percent of GDP to go to  interest payments, but GDP is 3.0 percent higher than it would have been otherwise, then even the non-interest earners are better off as a result of the higher debt and deficit.

2) A large debt does not necessarily mean high interest payments. Interest as a share of GDP is considerably lower now than in the early and mid-1990s, even though the debt to GDP ratio is much higher today. The reason for the difference is that interest rates are much lower today. In spite of its enormous debt to GDP ratio (over 250 percent), the I.M.F. projects that Japan will have a negative interest burden in 2021. The reason is that much of its debt carries a negative nominal interest rate.  

3) If someone is discussing the interest burden of the debt, and they ignore the burden of patent and copyright rents, then they are not being serious. The latter form of government created burdens is far larger. Anyone who is genuinely concerned about how we burden ourselves in the future based on current and past actions must add in these rents. Otherwise, they are not making any sense.

The bigger punch line is that our debates on economic policy are tremendously confused. I suppose regular readers won’t be surprised to hear me say this, but it is truly incredible that massive allocations of resources through patent and copyright monopolies get virtually zero attention in policy debates. We have endless debates on relatively small tax and spending items, while changes to patent and copyright law, which have hugely larger economic effects, pass unnoticed. Oh well.

About the Author

baker deanDean Baker co-founded CEPR in 1999. His areas of research include housing and macroeconomics, intellectual property, Social Security, Medicare and European labor markets. He is the author of several books, including Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. His blog, “Beat the Press,” provides commentary on economic reporting. He received his B.A. from Swarthmore College and his Ph.D. in Economics from the University of Michigan.

His analyses have appeared in many major publications, including the Atlantic Monthly, the Washington Post, the London Financial Times, and the New York Daily News.


Book By Dean Baker

0692793364Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.

There has been an enormous upward redistribution of income in the United States in the last four decades. In his most recent book, Baker shows that this upward redistribution was not the result of globalization and the natural workings of the market. Rather, it was the result of conscious policies that were designed to put downward pressure on the wages of ordinary workers while protecting and enhancing the incomes of those at the top. Baker explains how rules on trade, patents, copyrights, corporate governance, and macroeconomic policy were rigged to make income flow upward.

Click here for more info and/or to order this book on Amazon.

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