Dean Baker, senior economist with the Center for Economic and Policy Research, talks about how geopolitical and economic tensions between the US and China benefit powerful elite sectors in the US, but are bad for working people.
Transcript
Rob Johnson:
I’m here today with an old friend and a great economist, Dean Baker. Dean is a senior economist at the Center for Economic Policy Research based in Washington, DC, though he lives in Utah. He’s out there as a dog lover and nature lover. And Dean has worked with me and with others exploring how the United States, I’ll say, economy functions, what kind of distributional questions arise. And in this particular episode, I was inspired by his recent September 9th article in CounterPunch called “The US, China and the New Cold Warriors.” Dean, thanks for joining me today.
Dean Baker:
Thanks lot for having me on, Rob.
Rob Johnson:
So let’s go to your vision of what’s really going on in the struggle between the US and China at this juncture.
Dean Baker:
Well, I do worry very much about the issue of a new Cold War with China. Now, some of this is Trump’s craziness, and obviously now that’s not the outcome of the election. But even if Trump were to be removed, we have a renewed hostility against China, which I worry very much will persist, say, into a Biden Administration. And it comes from different sources. So some of it’s kind of straightforward that … I’m thinking back to the old Cold War and old enough to have grown up with that and remember it quite well. Obviously the military. The military industrial complex. So it’s not a secret, if we have big military spending, you have a lot of military contractors that will make a lot of money on that. That’s hardly a secret.
Dean Baker:
You also have a lot foreign policy types, I call them in the piece Henry Kissinger wannabes, that they see the world as a chess map and they want to be the big player on there and have the countries as the pieces. And obviously, that was Henry Kissinger’s view of the world. He saw all these countries, mostly in developing world, as pawns that he would manipulate as seen fit. And again, we shouldn’t have the world be open for games of people get off that way. So those are big actors, and I’m making fun of the Henry Kissinger wannabes. That’s a big thing, though, because these are the people who write columns in the New York Times, Washington Post, and are treated as the authorities on foreign policy. That was certainly the case back in the Cold War, and I’m sure it’ll be the case again, if we get to into a more hostile situation with China.
Dean Baker:
So those are the most visible actors. But what worried me and what I highlight in this piece more was the perhaps less visible ones, and these are the economic interests that stand to gain. And in particular, I focused on those who stand to gain from patent copyrights, intellectual property, and having our intellectual property rules imposed on China and the rest of the world. And this is an area that just has not gotten anywhere near the attention it deserves, and it’s really kind of striking here. Because people tend to view patents and copyrights as just facts of nature. And we have this concern, you’ll read about all the time in the Washington Post, New York Times, other sort of mainstream, even liberal publications, but of China stealing our intellectual property.
Dean Baker:
And the point I made in this piece, and I made many other writings, they can only be stealing it because we’ve made it property. And if this sounds weird to people, it doesn’t have to be property. This is knowledge. And if we didn’t protect this as property, there’d be nothing to steal. And just to take the most obvious case that’s in the news today, a vaccine for the coronavirus. There have been any number of pieces, I’ve read them in both the Post and Times, heard on National Public Radio, about how China’s trying to steal our vaccine. Now, apart from that being a little silly, we can go into this. China seems to be ahead of us. So I don’t know why they’d be stealing work that actually is behind where they are.
Dean Baker:
But if we had treated this as a cooperative effort, if we said, “Look, we have this worldwide problem. We have a pandemic. We need to get a vaccine as quickly as possible. Why don’t we pool all our research?” So, in the case of the United States different from ordinarily, we paid for most of the research up front. So Moderna, which is generally considered the leading vaccine candidate here, at least in the United States, we paid close to a billion dollars for their research. That should pretty much cover it. I mean, I don’t know … They haven’t opened their books for me, but it’d be a little hard pressed for me to believe they spent more than a billion dollars on their research and tests to date. So we basically paid for their research up front. We paid for a lot of other research upfront.
Dean Baker:
And in that context, there’s no reason we couldn’t have said, “Okay, we’re paying for research. The Chinese government’s paying for research. Of course, Germany, other countries. Why don’t we all pool that, and we could try to parcel out who should pay what, but if we don’t get exactly right, who cares?” But the point is you pool all the research, and as soon as anyone has results, post on the web. Everyone could look at it. They could learn from it if it’s a success. If it’s a failure, they learn from that too so they don’t go down the same route. And that way we could look to get a vaccine as quickly as possible. And of course, once a vaccine’s developed, anyone who could manufacture it and distribute it would be free to do so. And that’s presumably what we would want to do here. We want to get as many people as possible vaccinated as quickly as possible. And unfortunately, we’ve gone a completely different route.
Dean Baker:
But the point here is simply we do not have to have patent copyrights as mechanisms for financing innovation and creative work. There’s simply one way to do it. There’s lots of good reasons for thinking they aren’t the best way to do it. And one outcome of patent and copyright monopolies is they lead to enormous redistribution of income because the people who tend to benefit from them are those at the top. You don’t have a lot of low income people who have patent and copyright grants. So my favorite example here, Bill Gates, he’d probably still be working for a living if the government didn’t give Microsoft patent and copyright monopolies on their software.
Dean Baker:
So this is a debate that I think we should have both because it’s important for us to have a clearer understanding of patents and copyrights domestically, but also the idea that we’re going to have some huge competition, and more than just a competition, hostile race competition, whatever, to Cold War with China, because we want to make them respect our intellectual property. That’s a very frightening story to me. So I think it’s important people understand what’s at stake there.
Rob Johnson:
Let me bore into this a little bit. In the question of intellectual property, some would argue that creating copyrights and patents of some significant duration is what creates the incentive to innovate. Others would say that when these copyrights and patents are, how do I say, too long, too strong, it actually deters the innovation. It deters the competition to climb to and find the best, and then after a certain intermediate level, find something even better. And I also sense that there’s a great deal of tension in a time like a pandemic that protecting somebody’s rights from this country versus that country can cost a lot of lives, because if the people we favor relative to another nation, or the Germans favor relative to another nation, are stopped, then if they were the first to what you might call find the solution, those delays would be very costly, not just in monetary terms, but in the number of people who survived.
Dean Baker:
Yeah, no, that’s a very good point. So let me take the second issue first, in terms of the urgency of dealing with this pandemic. Even if we thought patents were the best way to support biomedical research, I would argue there’s a very strong case that that would not be true in the current context, just because there is such an urgency. Which isn’t to say there isn’t always some urgency. I mean, we’re looking at cancer, we’re looking at AIDS, whatever the disease. I mean, we don’t want people to have to suffer from them a day more than they have to, but it’s not quite on the same order of magnitude as what we’re seeing with the pandemic.
Dean Baker:
So the idea that you’d say, “Okay, we have to do this as quickly as possible,” I should just point out, I mean, this has been recognized. I mean, I haven’t heard people objecting to the government spending. I think the number for Operation Warp Speed, the total bill is somewhere in the order of 10 billion. I haven’t heard a lot of people objecting that. So that’s very explicitly saying, “This isn’t the normal order of things we have to do this quickly. We have to break the norms. It’s important to get both treatments and a vaccine as quickly as possible.” So in that context, the idea that we might say, “Okay, maybe patents are the best ordinarily, but in this context, because there’s so much at stake, it’s really important that we work together, we work collectively and try to get something as quick as possible.”
Dean Baker:
And actually … I’m not a scientist, so I don’t know all the details of mapping the virus and all the details on these things. But I can read the scientific literature on it. It was remarked on … There was an editorial in Nature Magazine, I think it was back in early April, about how, because there was so much international cooperation, so much more than would ordinarily be the case, they were able to get an understanding of the coronavirus much more quickly than otherwise would’ve been the case. And you would’ve liked to have seen that continue. You would’ve liked to have seen open research on whatever treatments and, of course, a vaccine. So you wouldn’t get into this absurd situation where someone can claim ownership of vaccine.
Dean Baker:
And it’s really important to understand what we’re talking about here. We’re not talking about we’re worried that Chinese are going to run and steal our stocks of the vaccine or we’re advocating stealing their stocks or whatever. We’re just talking about making the knowledge available. And what that means is just anyone who could manufacture it would be able to do so. Now, there’ll still be an issue because you have very poor countries in the world, of course, a Sudan or Ethiopia. And there’s a number of countries where even paying for an open source vaccine, where you’re just paying for the physical vaccine, where that would be a significant expense. So we’d still have to talk about how we can make sure that these poor countries could have access to the vaccine as well.
Dean Baker:
But we’re at a step prior to that. So we’re in a situation where let’s say we have the facilities here. We have a factory, it’s ready to go, could produce hundreds of millions of doses of the vaccine in weeks or a month or whatever it might be. They can’t do it because they don’t have the rights to it. And vice versa. There’ll be factories in Germany and other countries. They won’t be able to do it because they don’t have the rights to do it. And that’s just an absurd situation to be in. We shouldn’t have people who are going to die, get sick and die, because they don’t have rights to a vaccine. And that’s what we’re talking about here.
Dean Baker:
Now, getting back to the basic question that you’d asked on incentives, of course, patents, copyrights do provide incentives. But again, just a very, very simple point here, they aren’t the only way to do that. And I have a great time arguing with economics professors about this, because they say, “Oh, we need patents or people wouldn’t have incentive to be creative.” So I go, “Well, are you creative?” No one wants to say they’re not creative. I go, “Well, how much money have you made from patents? Or copyrights, if you like?” And they have to acknowledge, they get paid a salary. I mean they might write a book and get few thousand dollars from it, but that’s not how they’re supporting themselves.
Dean Baker:
And there’s plenty of examples of people have done brilliant work. The polio vaccine, of course, Dr. Salk invented that. He was paid. He got a salary. He didn’t patent it. He didn’t look to get incredibly rich, make himself a billionaire. But he got paid. I gather he lived a comfortable life. I think he was a well paid … He was a great researcher, of course. I think he was rewarded for that. But he didn’t need a patent monopoly. So it’s not that we don’t think people should have incentive. Of course they should have incentive. Of course they should be paid. But the question is whether the patent’s the best way to do it.
Dean Baker:
And you mentioned some of the problems. When you have lengthy patents, they could often get in the way of innovation. There’s a lot of research. There’s a concept in the literature known as the patent thicket, where you have a whole variety of patents that if you’re an innovative company, you have to worry that you’re going to step on the patent of Gilead and Pfizer and Merck, and they’re all going to sue you. And some of the research shows that these companies, that startup companies tend to do their research in areas where there aren’t a lot of patents for the simple reason that they can’t defend themselves. They don’t want to be in a situation where they’re trying to be innovative, but it turns out someone has a patent that arguably they conflict with. Because a lot of these things aren’t that clear cut. And maybe they do, maybe they don’t. But they don’t want to be tied up with a big lawsuit.
Dean Baker:
So by virtue of having the patents, you’re creating potentially very large obstacles to innovation. And you also misdirect innovation. And again, this is just totally straightforward, that if you have Company A and they have a patent on a new drug, and let’s say it’s for treating heart disease or cancer, whatever it might be, they’re going to make a lot of money on it. Well, Company B is going to say, “Oh, they’re making lots of money on that. Maybe we could find a way to innovate around their patent so we’ll come up with a me-too drug, a copycat drug. It’s not necessarily any better. Maybe it is, but oftentimes it may not be. But we’re going to rely on our great marketing network to be able to cut into a lot of their patent rights.” And that just directly follows from virtue of the fact that you have patents there and you could sell these drugs for very high prices because of that.
Dean Baker:
And as a result of that, we do have a lot of wasted innovation. A lot of times where we get the third, fourth, fifth, sixth version of the drug when we already have one that’s effective. And just to be clear, I don’t want to say that those are necessarily worthless. But if you’re just standing out there looking down and go, “Okay, where could our innovation be best directed?” Odds are, you would say it should be directed towards treating a condition where we don’t already have an effective drug rather than finding the fourth, fifth, sixth version where, again, there could be some benefit, but odds are, not a lot.
Dean Baker:
The other really big problem with patents that … just patent monopolies with drugs, it has a fraction of the attention it deserves, is they give drug companies incentives to lie, to put it bluntly. They want to sell as much of their drug as possible. And it’s against the law, of course, to be misleading about the safety and effectiveness of a drug. But the reality is the drug companies have more information about what their drugs do and how safe they are than the Food and Drug Administration or doctors who might be prescribing it or other researchers. Because they’re the ones who have the data. They’re sitting there with the test results. They have the data.
Dean Baker:
And if that sounds farfetched to people that drug companies would lie, I just refer you to the opioid crisis. Because that’s exactly what happened there. The leading opioid manufacturers were charged with deceiving the public about the addictiveness of their drugs. And they’ve paid billions of dollars in settlements on that. And if these drugs are being sold as generics, they wouldn’t have had incentive to do that. I mean, it’s not that they’re suddenly going to become really honest people or anything, but you have a lot more incentive to be misleading about the safety of a drug when you can sell it for four or five or $600 a prescription than if you’re selling it as a generic for say 10 or 15 bucks. You probably just wouldn’t go into big effort to be misleading about it. So there are lots of big questions that have to be raised about the patent system patent and copyrights generally, but particularly with regard to prescription drugs, it’s, to my view, just a very bad way to finance the research.
Dean Baker:
I’ll also add one more point here. Few people realize how much is at stake here in terms of the money. So we’re going to spend over 500 billion this year in 2020 on prescription drugs. If we snapped our fingers and removed patents and related monopolies, because there’s other forms of protection now with getting into here, but they’re related to patents. If we removed all those, we’d almost certainly be spending less than a hundred billion. And that difference, 400 billion, that’s about 2% GDP. It’s more than five times what we’ll spend on food stamps. It’s more than twice the size of the Trump tax cuts. It’s a huge, huge amount of money. And the idea that we would not even be questioning whether this was a good expenditure, kind of mind boggling.
Rob Johnson:
I remember … I’m often very fond of what I’ll call the prescience of artists. And I remember sometime around 2000 and 2001, the novelist John le Carré wrote a book called The Constant Gardener. And in that, he listed the harmfulness of various types of patent protections, particularly for the citizens of developing nations, the leading nations like the United States, things that related to tuberculosis or HIV or whatever. They made these drugs so expensive that for the monopoly, it was profitable. But the dissemination, which you might say allowed the propagation of the disease or the consequences of the disease to blossom. And I remember reading the book and he was talking about a trial brought by the pharmaceuticals against a generic drug company in South Africa. In our conversations, you’ve talked to me about the role of India, and during the Obama administration, how there was some wrestling matches related to patents and drug pricing. I’m curious if you could share, how would I say, that episode?
Dean Baker:
Yeah. So the point about the developing world, of course, is a hugely important one because, I was just mentioning, we spend 500 billion on drugs. It’s a huge expenditure here, and of course, a lot of people have a very hard time paying for the drugs they need. But we are a rich country so that, for the most part, people can get the drugs. Their insurer pays for it. The government pays for it. So for the most part, people here in the United States, and I understand well there are exceptions, they can get the drugs they need. In the developing world, patent protection prices are just out of reach in almost all cases. And it’s a longer story. In many cases, they are able to get lower prices. But if they had to pay the prices we paid, very, very few people in these countries could do it.
Dean Baker:
Now, India is an incredibly important country in this story. Obviously, it’s a huge country, 1.4 billion people, so neck-and-neck with China for being the most populous in world. But it also has a huge generic drug industry. And what’s happened with India is that their patent laws are different than the United States. They’re much stricter. I’m going to use that term here, because one could argue whether it’s stricter or more lax. But I’m going to use that term stricter, which means it’s harder to get a patent on a drug in India than the United States. So there’s a number of important drugs that are patented in the United States that aren’t patented in India.
Dean Baker:
And this means that their industry is producing it and selling the drugs in many cases for literally less than 1% of the price. So you have drugs that might sell for tens of thousands, even hundreds of thousands of dollars for a year’s treatment here that could be produced and sold profitably. I mean, these are not charitable institutions. They’re making profit on it. They’re generic drug makers. They might sell for 100, 200, $300. Anyhow, the United States has long worked to get India to adopt patent laws that are closer to the US, more along the US line. And this has been bipartisan, so I’m not trying to just pick on Obama. But the point is that what we might think of as a democratic and more liberal administration, they were also pressuring India.
Dean Baker:
So there was this big push to get them to change their patent law to be more modeled along the US lines. And a friend of mine, Arjun Jayadev, who’s Indian ancestry. I’m not if he born there. But any case, he has ties to India. He alerted me and Joe Stiglitz. We’d written some things together. And he alerted us to this issue in India. And we together wrote a piece, which we managed to get placed in the Hindustan Times, the largest paper in India. I’m relying on Arjun here, because my knowledge of India’s media isn’t that good. But he assured both of us it was the largest paper in India. So anyhow, after that, they contacted Stiglitz and they arranged for him to meet with the finance minister. And Stiglitz met with him and he gave him the arguments as to why there was no reason for them to be adopting the US style patent laws here. And the finance minister listened to him. They had some discussion. He agreed.
Dean Baker:
And that killed that law. At least for the time being. I don’t rule out that it’s going to come back at some point. But in that case, we at least had a … Well, I shouldn’t say a small victory. It was a big victory, because it would matter both for India and really much of the developing world. Because the point with India is not just are they supplying prescription drugs for their own population, but they’re huge exporters to the rest of south Asia to Sub-Saharan Africa. They’re the far and away the biggest actors in prescription drugs.
Rob Johnson:
Well, I’ll tip my hat to Arjun, because he’s a affiliate of INET who works with the Premji University of Bangalore. And I believe he was born in India, near Bangalore, but …
Dean Baker:
Okay. I wasn’t absolutely certain of that. So I didn’t want to say that without knowing.
Rob Johnson:
But Arjun has been a very important element of the INET staff, albeit while a tenured professor and involved in India, but he’s played a big role in many, many facets of the development of this organization. So it’s nice to hear you pay tribute.
Dean Baker:
Yeah, no, it’s great. He’s great.
Rob Johnson:
But Dean, I guess I’m struck by two things. The first of which, and you said this at the outset, these patent systems are not facts of nature. They are human social constructions and the distributional consequences and the ramifications for the quality of life appear to be enormous. In an America, which is a place where what I always call the commodification of social design competes with representation, where democracy is in tension with the incentives of capitalism, when people can influence policy as though it were a commodity, how do you govern this creative process in a way that has the proper balance?
Dean Baker:
Well, it’s been really striking because there’s been very little attention to this. So basically the industry’s been out there kind of calling the shots. So patent and copyrights have both been made longer and stronger, hugely so, over the last four decades. And basically, the only ones paying attention are the industry, so where you have a situation where … Let’s say that Exxon was writing our laws on the environment. Well, they’re probably pretty bad, by most lights, even where they are now. But imagine we didn’t have environmental groups, environmental lobbyists, we just had Exxon. Well, what would our oil laws look like? They’d be worse than they are today. I think it’s a safe bet. And that’s kind of what’s been the case with patents and copyrights, because this is gets to be a technical area. Most people don’t realize they really do matter a huge amount.
Dean Baker:
So we get these absurd situations. We all want lower drug prices and most progressives have been pushing for this. And you could look to people in Congress. People like Bernie Sanders have been leading the way. Elizabeth Warren. I mean, any number of people that can mention who have been pushing or this. You go, okay, those things are good to lower drug prices. But the reason they’re expensive is because we gave them patent monopolies. And it’s, people do not understand, A, that these could be changed, and have been changed, and B, again, how much money is at stake. So, of course, I was in Washington a long time.
Dean Baker:
And I remember we’d have big debates. The Republicans a few years ago wanted to cut the food stamp budget by I think it was about two or three billion annually, which, I don’t want to trivialize that. I mean, that would hurt a lot of people. But you go, okay, but here we’re talking about drug patents that raise the price of prescription drugs by 400 billion annually. So how about paying a little attention to that? And again, you get to this idea, oh, well what can we do? And of course, as I said, they could be longer. They could be shorter. They could be weaker. We’ve allowed for patenting things we didn’t used to let people patent. So we let people patent life forms. We didn’t used to let them do that. We let them patent software. We didn’t used to let them do that. We let them patent business methods.
Dean Baker:
I mean, one of the great stories that are absurdities, Microsoft got sued by Apple when they came out with Windows, because Apple said that Windows had the touch and feel of the Macintosh system. So based on that, they were saying it was a violation. Perhaps even better story, Amazon had a patent on one-click shopping. So if you’re a retailer and you wanted to have … you remembered people’s credit card information and mailing address and this and that, you couldn’t do one-click shopping, at least if Amazon had their way, because they said, “That’s a business method that we’ve patented.” So the point here is just that these could be longer. They could be shorter. They could be weaker. They’re enormously flexible. And even if we decide these are good ways to finance research, to finance innovation, to finance creativity, they still could be structured differently.
Dean Baker:
And again, the point here is the winners from having longer and stronger, are overwhelmingly those at the top. Not just the very top, but when we talk about scientists, people with STEM skills getting very well paid, that’s because we structured it this way. And sometimes I say, suppose we didn’t have patents and copyrights and people go, “Oh, well then, there’d be no incentive to …” Go, “Okay. So you just acknowledged to me that the fact that people with STEM skills get lots of money is due to policy.” Then they get really angry. But the point is we could manipulate these any which way. And of course, they have been manipulated, but they’ve been overwhelmingly manipulated to benefit the people that … the industry, the people in a position to make lots of money from them with basically the public interest being ignored.
Rob Johnson:
I’m reminded as I’m listening to you of a book that INET helped sponsor by Peter Temin, the professor emeritus at MIT, called the Vanishing Middle Class. And Peter talked about how our world now was turning into a world that was largely in the service sector, and that high … what I’ll call knowledge-intensive high value added services were making extraordinary amount of money. And he drew the analogy to W. Arthur Lewis, who talked about how people would walk from the farm to the factory, and you had a transformation from agriculture to industry. And now instead of walking geographically, you need to walk through the education system up to the, as you talked about, STEM skills or whatever, so that you can produce these knowledge intensive products and be part of the higher-paid group.
Rob Johnson:
Well, Peter’s book goes into all kinds of things that relate to policy dysfunction, the way in which schools are financed, the role of racial animosity in affecting what I’ll call that ladder. And one of the upshots, one of the implications of his study, was that at some level a dysfunctional school system protects the rents of the high value added service sector because there isn’t competition among people driving those wages down relative to other functions within society.
Dean Baker:
Yeah. Well, I very much agree with that. I mean, I haven’t read that particular book by Peter, but I’ve read much of the work leading up to that, and it’s of course, very useful research. And I’m inclined to agree with that, but I guess I’d make a couple points here. One is I agree completely about the inequality in the school system, and anyone who’s looked at the opportunities available to … not even low income. I mean, low income people, of course, they have very few opportunities, but even make this more working class, someone whose parents have steady jobs, but they’re not especially high paying, say $15 an hour or something. Compare that to someone who grew up in a wealthy suburb. I mean, they’re not in the same ballpark.
Dean Baker:
And I guess I’m not going to set and argue for a second. We should try to reduce those barriers. But just having seen the efforts for … since I was a kid watching the Civil Rights Movement, we haven’t made a lot of progress. So I could look back 50 years, my lifetime, and say, okay, we haven’t done really good and we’ve had a lot of people have ostensibly been trying. So do I think we’ll do much better in the next 50 years? I sure hope so. But those differences are so, so large, I don’t see us getting rid of them. So I guess what I do say is, okay, let’s flip this over and let’s say for a moment, yeah, we should do everything we can to try and reduce, eliminate the barriers that prevent obviously racial, but also economic barriers, that prevent those at the bottom or even middle from having the same opportunities as those to the top. But how about reducing the gaps between the top and the bottom?
Dean Baker:
And one of the … This is just a simple thing. I did this, I forget, not too long ago, just for fun, is going, what if the minimum wage had kept pace with productivity growth since it’s peak in ‘68? People think, well, that’s kind of a farfetched thing. Well, the minimum wage did keep pace with productivity growth from 1938, when we first put it in place, the first national minimum wage. Until 1968, they rose pretty much together. So you go, okay. So suppose the minimum wage, people often talk about keeping pace with inflation. That’s good. That’d be better than where we are today. If it kept pace with productivity growth, it’d be $24 an hour today. And you just go, think of how different the country would look if the people in the lowest paying op occupations, a dishwasher or custodian, they started their job at $24 an hour. So they’re earning $48,000 a year. A two-earner minimum wage couple would be earning $96,000 a year. That’d be a very, very different world.
Dean Baker:
Now, I’m not advocating just jumping to a $24 an hour minimum wage because given the structure of the economy, we couldn’t do that. I mean, I’d love to do it, but we have to change the structure. And the changing of the structure is the factors that allow the people at the top to get such out of line wages. And again, copyrights, patents, big part of that story. Not the whole thing, but a very, very big part of that story. I’d go on, say we have a corrupt corporate governance structure, the CEOs that are getting 20 million a year. I’m just saying not whether I like them or not. I think that they aren’t worth 20 million to their firm. I’ll just say that.
Dean Baker:
So you have a lot of CEOs … I know John Stumpf. He’s my poster child here. He was the CEO of Wells Fargo when they had their big phony accounts scandal. He almost put them into bankruptcy because he … It was a crazy scheme. Well, he did get away with it for a period of time. But in any case, at the end of the day, he got busted. He walked away with over a hundred million dollars. That wasn’t in the interest of the shareholders. If you had a guy that almost wrecked the company, he should walk away with nothing. He should probably go to jail. But we have a corrupt corporate governance structure. And it’s not just the CEOs that I’m focused on. I mean, yeah, how many CEOs are there in the Fortune 500? Okay, there’s 500 of them. But the person underneath the CEO, the chief financial officer, well, if the CEO’s getting 20 million, they’re getting 12, 15 million, the next layer of executives, they’re getting two, three million. If you had CEOs that had pay comparable to what they were 40 50 years ago, they’d be getting two million, three million. Person underneath them, get one and a half million. The third layer, they’d be getting five hundreds of thousands. We’d have a very, very different world.
Dean Baker:
So I think, again, I’d love to see us do what we can to try and reduce the inequalities and opportunity and education and other aspects of opportunity. That mean the wealthy have so much better shot in life than, as I say, not just the poor. Of course, that’s true of the poor, but even people who are working class or even middle class, we should absolutely try to do that. But again, I don’t have great hope that we’ll be hugely successful in that area. I think the most important thing, at least where are we in principle have a better opportunity success, in reducing the huge gaps between the top and the bottom so it won’t matter as much. So that’s the way I would look.
Rob Johnson:
I often tell the story of growing up in Detroit in the early 1960s, when there was a group at Ford Motor Company led by Robert McNamara called the Wiz Kids. And a couple of the Wiz Kids lived on my block. And when the dads would get out and we’d be playing … like, learning how to play baseball, four, five, six years old. I remember hearing about the reverence for McNamara. And one night I was watching television and somebody said to McNamara, “You get paid 14 times what your average worker gets paid. What do you think of that?” And he said, “Anything more would be criminal.” And now what are we? 350? 400 times?
Dean Baker:
In that neighborhood.
Rob Johnson:
And it’s a profound change that you are describing in the compensation of what you might call the C-suite.
Dean Baker:
In the same vein, there’s a great story. Mitt Romney’s father, of course, was George Romney, who was also [crosstalk 00:36:13]-
Rob Johnson:
Right. My governor as a kid. Yeah.
Dean Baker:
Yeah, no, I did my graduate work with Michigan and that was … It was after Romney was governor, but I knew people who knew him. In fact, they remembered him quite fondly. They were almost all Democrats, but they said, “This is a guy we could work with. We could live with.” Anyhow, there was a famous story. Before he went to politics, he’d been president of American Voters, which at that time was the number four automaker, certainly a very big company. And they proposed giving him a raise. And he said, “No, I don’t need it.” And again, I don’t know exactly what he was paid, but probably something like the 15 times the average worker. And you compare that to his son, who obviously is one of the leaders, well, at least of the pre-Trump Republican Party, who easily made hundreds of millions. I don’t know if he’s a billionaire, but he certainly made hundreds of millions. Clearly a very, very different ethic there.
Rob Johnson:
My mother worked in the development of the Detroit Symphony. And my parents were moderate Republicans, what I’ll call in the parlance Rockefeller or Gerald Ford-type Republicans. And I remember listening to my mother rant about how so many of the Democrats were doing things like using hug money to build luxury apartments along the Detroit River and how much she liked, and she knew him, George Romney. And George Romney was someone that she had interacted with while he was a governor. And she was working on the Interlochen Music Program and the Detroit Symphony Orchestra’s development. And it was, how would I say, in the scheme of things, the pressures to be of servitude to concentrated financial and economic interests certainly evolved. When my mother passed away in 2005, she had a very different impression, well, actually of both parties. She thought that structurally things had deteriorated quite markedly. But I’ll never forget her acting as though the rent seekers were the Democrats in real estate development and the governor was an honest man.
Dean Baker:
That’s interesting. Well again, I never met George Romney, but I did hear good things about him from people who did work with him. And again, these were in almost all cases, maybe all cases, but almost all cases, Democrats. So it wasn’t like they were going out of their way to find a … they had a need to say good things about him. But you know, again, just getting to the issue of CEOs, I mean, part of the story here, and I’ve done some research, and of course, there’s much other research in this area, they don’t earn it for the shareholders, which I just think is hugely important. So it’s not just that I don’t think John Stumpf is worth a hundred million. He wasn’t worth a hundred million dollars to the shareholders. And the basic story of CEO pay is that the people who decided are corporate boards who overwhelmingly owe their allegiance to top management.
Dean Baker:
And I don’t have that much occasion to talk to corporate board people, but I have occasionally. And one of the things that I’ve asked more than once is, do you ever talk about, can we get someone as good for half the pay or for much lower pay? I don’t know if I said half. And invariably, they look at me like I’m nuts. And you go, “Well, isn’t that your job? I mean, the corporate board ostensibly is supposed to represent the shareholders to make sure that top management is not taking advantage of them. They aren’t paying themselves too much.” But they don’t see their job that way. Being on a corporate board’s a very lucrative position in of itself. Typically, someone on board of a major corporation, a General Electric or Wells Fargo, whatever it might be, they’re getting $3-400,000 a year, sometimes more, for maybe a couple hundred hours of work. So it’s pretty good work if you could get it.
Dean Baker:
And the one way to make sure that you stay on the corporate board is to not piss off your colleagues on the corporate board. Because the percentage … Members of corporate board come up for election periodically. I think it’s typically four years, but it’s up to the company. They give different periods. But I think four years is typical for a typical term. The board members that are nominated for approval win shareholder elections over 99% of the time? I mean, this is … Basically, if you stay on the good side of your fellow board members, they nominate you for another term, you got it. You don’t have to worry.
Dean Baker:
So from the standpoint of a board member who wants to keep their position, there’s just no money in saying, “Hey, this guy or woman who’s or CEO, they’re nothing special. We could find someone who’s just as good and pay them much, much lower pay.” They have no incentive ever to do that. And they don’t. So you get these inflated salary structures where basically there’s no downward pressure. It’s not like the company sees their assembly line workers and they go, “Oh, we’re paying them 20 an hour. Maybe we can get away with paying them 18. Or maybe we could take away their healthcare. Or maybe we can contract out the custodial service and get paid …” they have clear incentives to do that. But the board members have no incentive to look at top management and say, “Hey, these people are overpaid. We can get away with paying people much less who will do every bit as good a job.” They don’t have that incentive and they don’t do that.
Rob Johnson:
Well, I have a very good friend in Northern California you may know, Steve Silverstein, and he’s worked on the question of pension fund management, the state funds in California in particular, where he’s looked at how various groups, whether in the private sector, like State Street, BlackRock, Vanguard, or Fidelity or CalPERS, CalSTRS, people like that. And he finds that they don’t tend to resist. If you take what you might call the ratio between CEO salary and performance of the S&P 500, that they don’t exercise their authority. And various hypotheses underpin this when I’ve gone to pension related conferences, one of which is the young officers working at these companies are looking to climb the ladder and be, how we say, in that high pay zone in some other place and they don’t want to make noise. They don’t want to be disruptive. Others suggest that some of the companies, particularly the private sector companies, would like to manage the pension fund for the company. So they have to endorse the CEO pay, et cetera, in order to be a candidate to manage the pension fund for the company in question.
Dean Baker:
Yeah. So you don’t have anyone really who has incentive to crack down on CEO pay. And in that context, it’s understandable. It just keeps going up and up because there’s no one who has incentive to try to push it down. And again, they would at least have an argument. If you had a CEO, I mean, I might not like it, but if the CEO of Exxon can go, “Yeah, I get 20 million because I add 20 million of value,” they would at least have an argument. But they don’t have that because there’s a lot of research showing that CEO pay bears little or no resemblance to stock returns. So it’s not as though they could say, “Yeah, I produced that for the shareholders.” That’s just not true. They got 20 million because they’re fortunate to be the CEO in that company and the board is not going to put any downward pressure on the pay.
Rob Johnson:
Let me circle back to China for a minute. Because when I read your article, there was something very striking in my mind. Various people, like Pat Malloy, who’d been my colleague on the Senate Banking Committee years ago, and was on the US China Security Commission and others, remembered and emphasized that there was a period of time when Wall Street firms desired to get the license in China to, we might call, become a financial advisor or a fund manager. Many companies engaged in foreign direct investment and then exported back to the United States. So Nike and Walmart are two of the leaders. And the lobby against declaring China as a currency manipulator was largely the American companies that were beneficiaries of foreign investment undervalued renminbi, and sending money back to the United States.
Rob Johnson:
As you cite rightly in your article, the widening of inequality, the devastation of wages in many of the manufacturing sector, I think you cited a number of something like three and a half million jobs were lost. And that was a very painful and wounding experience for many people, my friends in Detroit to be included. But what I’m seeing and the reason I circled back in this direction, is that both President Trump, some Democrats, and others are seeming to fight these new fights related to intellectual property and so forth, with copyrights and patents and internet platforms and cyber security all being emphasized, but they’re fighting with the energy and with the hoping to inspire those who were wounded in that previous battle, when in some respects what’s happening now will intensify that inequality rather than mitigate it. And I thought, this is why your article was extraordinary because you are taking historic wounds and you’re propelling them into a different domain. And this is a very different fight than what we saw.
Dean Baker:
Yeah. Yeah, no, that’s exactly right. And yeah, just to go back over that period. So China gets admitted to the WTO in 2000. Of course, Bill Clinton’s in the White House, but has the support of most Republicans. So, point here, just being totally bipartisan. There were many Democrats to oppose that, just to be clear, but obviously Bill Clinton was the leader of the Democratic Party at that time and most of the leaders in the House and Senate did support that. And the impact of that was huge. And it was predicted, too. So you often have people kind wringing their hands going, “Oh, we just had no idea.”
Dean Baker:
I was working in that. I just left the Economic Policy Institute at the time, but I was working in that. And of course they were doing a huge amount of work trying to oppose that, saying, “That’s going to be devastating to the US manufacturing.” And we were literally poo-pooed. I mean, I’ve gone back and looked at some of the things said by other people, more mainstream policy people, and they just ridiculed the idea that we could lose any substantial number of jobs as a result of that. They said, “Oh, a trivial impact. Won’t be a big deal.” And the impact was huge. We had millions of people lose their jobs. And these were disproportionately people in the Midwest, places like Ohio, Pennsylvania, Wisconsin, Michigan, I’m not naming those states accidentally, who had relatively well-paying manufacturing jobs, very often union jobs. They often came with healthcare pensions. They lost those. And that was devastating to those people in those communities.
Dean Baker:
And the downside of this story, and I’m reluctant to say it, but I have to say, I think it’s true. We aren’t getting those back. So a lot of people have talked about, well, we want to get China to raise the value of its currency, which would be a good thing to do, and get something closer to balance trade with China, which would be a good thing to do. But we aren’t going to get back those good-paying union jobs. And the data on here to my view is just very clear, that if you look since 2010, when our manufacturer employment bottomed out to just before the pandemic hit, we had somewhere around … I’d have to check the exact number, but we increased manufacturing employment over a million over that period. Not all under Trump, by the way. But in any case, we increased manufacturing employment. And the number of union jobs in manufacturing fell by about five or 600,000.
Dean Baker:
So the point just being that when the jobs came back, they generally weren’t the same places. And where they were occurring, they weren’t unionized and they weren’t particularly well-paying. So we aren’t going to get back the good jobs we lost. And that’s just the reality. And then you say, “Okay, but we’re really angry at China.” And as you said, it wasn’t particularly China. It was US companies that were moving jobs and it was Walmart that was taking advantage of low cost supply chains to undercut their competitors. So it wasn’t that China was doing something evil to us. I mean, obviously, businesses in China were benefiting as well, but US companies were totally behind this. So it wasn’t something that was being done against us. It was US companies that were benefiting.
Dean Baker:
But if we then turn around and go, “Okay, now we are really going to get tough on China. We’re going to have stronger and longer patent copyright monopolies, and we’re going to make them respect that,” well, that’s furthering the upward redistribution of income. Because the auto workers, the steel workers that lost their jobs, they’re not going to benefit from longer and stronger patent and copyright monopolies. They’re going to be paying more for drugs, more for software, more for all the other things they buy. And sure, maybe they’ll get a job in a manufacturing plant, but it’s going to be paying 15, 20 an hour. It’s not going to be paying 30 an hour with a pension and healthcare benefits. So they have no stake in this one.
Rob Johnson:
Well, I’m reminded of the … This is sometimes what I would say characterized as Trump. Trump created this hoopla, created this change from a multilateral system to a bilateral fight. But I do recall documents from the Council on Foreign Relations written by people like Kirk Campbell and a gentleman named Blackwell that started playing the music of a confrontation with China, that China was not adapting. And when the China 2025 proposal came out, I remembered just an uproar when the RNB was not made globally convertible, when American financial firms were not allowed in, the Goldman Sachs, JP Morgans, et cetera, to manage money within China. It was like the elite coalition was frustrated and became nationalistic.
Rob Johnson:
And those traditional firms, like I mentioned, Nike, and you mentioned Walmart, started to suffer from the fact that the Chinese started to improve their environmental considerations or policies. They started to work for rising wages, all of which meant profit compression for the traditional foreign direct investment group. So what I saw was a change in temperament of the American elite, that, how would I say, saw at the margin diminishing prosperity in China. And you add to that the intellectual property rights or the people who’d said, “I had visions of selling to 1.4 billion people in China, or 1.3 billion people. And all of a sudden, I found out that through technology, sharing parts of our agreement, they were creating another firm and replicating what we were doing. And what they were doing then is using government policy to promote the domestic-owned firm at our expense.” And you just, you saw a whole lot of disappointment emanating from American power. And that predated Donald Trump. That’s 2014 and 2015 in the documents that I read.
Rob Johnson:
And now, obviously, we see both Republicans and Democrats reflecting on that. I have been going to China quite readily since about 1990, first as a private investor and then more recently through INET. And I meet very high-level Chinese officials. And one thing that they often say to me is, “I understand some of the concerns, but one of the major concerns is something we have no control over, which is, in the West, you talk about how free trade can make everyone better off and no one worse off. And China’s a very large country that started this process with much lower compensation for people than the wage earner in America. But in the transition that would’ve made everyone better off and no one worse off, part of the responsibility was in the United States, of the United States government, to ameliorate those who had to go through the adjustment, to create transformational energy, retraining to help the United States evolve.
Rob Johnson:
“And what happened was the political economy of the winners used their money, politics, influence to exacerbate the inequality, gut the infrastructure, the health system, the public school system, to allow more money to be held offshore. And that’s something that we, the Chinese,” as these people said to me across the table, “have no control over. And yet we are being blamed.”
Dean Baker:
Yeah, well, that strikes me as very much on the mark. So, you could have envisioned the US engaging in China and even say, okay, so we lose these jobs. And I’m sure for the most part, people weren’t dying to keep a job in the steel factory. Those tend to … Well, they’re probably better places than they were 40 years ago, but they’re still not very healthy places. So what they needed was their healthcare. What they needed was their pension. What they needed was the decent paycheck. And what we could have done was made sure that these people were resituated, that we gave them the skills they need to work in new industries, that they had healthcare, that their pensions were maintained. We didn’t do any of that. And as a result of that, of course, millions of workers and the communities they lived in suffered horribly.
Dean Baker:
So again, China can’t be blamed for that. And again, since US companies were doing this, I mean, I get a kick out of it. Sometimes people talk about China forcing US companies to transfer technology. You go, how did they force them? Did they put a gun to their head? Every time Boeing or some other company goes to China and they transfer technology, they signed a contract. So this was not China doing this. This was the way we chose to interact with China and allowing basically the people running the companies, the people at the top, to get all the benefits and for the losers basically doing nothing. And yeah, so they see a big out big penalty for this. I mean, I’m saying they in the sense that if we actually do get into a Cold War, God knows how long, that will be bad for China too. I mean, I’d hate to see us have kind of a arms race. I mean, I’ve heard people talk about it. I have no idea how people are serious about it.
Dean Baker:
I mean, one of the important points that I think people fail to realize, China’s economy is 30% larger than ours. So we could have an arms race with the Soviet Union, an economy that at its peak was probably half, if that, the size of the US economy and say, “Oh, it’s be a huge burden on them.” Of course, it was. But if we have an arms race with an economy that’s 30% larger than the US economy and probably twice the size of the US economy by the end of the decade, that’s going to be really hard on us. And again, it’s not just a waste of resources. You have an arms race, people tend to want to use them. And that’s really the worst possible story.
Dean Baker:
So there’s a really bad scenario there that I hope we don’t go. And again, if we’re just Donald Trump and go, “Okay, well let’s hope Biden beats him,” I certainly do, and then we don’t have to worry about it, but the issue here is, well, unfortunately it goes much, much deeper than Donald Trump. And we might not have … Biden certainly wouldn’t be as belligerent and loose with this tongue as Donald Trump, but the point is there are a lot of powerful interests that do want to pursue this sort of hostile competition with China. And that’s bad for us, bad for them, bad for the world.
Rob Johnson:
Well, I want to say in underscore, and part of my attraction to the article that inspired me to call you, is two things. The first of which is you didn’t ever assert that Donald Trump wasn’t capable of creating unnecessary losses, which might exceed those that his opponent would bring about. But secondly, you were very clear at the outset that there are some features in China. You’re not apologizing for China. There are some features of China in the way they manage their society and their relationship to their population that are very unattractive. So it’s not kowtowing to China here. And I really wanted to talk with you through these issues because I think for the American people to understand how our elites have behaved and how we have been using China as a diversion, as a mask in addressing the problems that you’ve been through today: intellectual property rights, patents, the distributional questions. And, how would I say, China may not be right, but neither is America in some respects. And we can’t allow the scapegoating to blind us to the improvements we can make that we do have control over within our country.
Dean Baker:
Yeah. Yeah, no, that’s very much how I see it. So again, I’m never doing an advertisement for China. I mean, there’s a lot of things you could say are good. I mean, people there are living much better than they did 40, 50 years ago and that’s great thing for them, great thing for the world. But the repression there, I mean, there’s no reason … I mean, it’s not an issue of glossing over and saying we should say it’s good or we shouldn’t condemn it. But the point is, we’re not going to change that. I mean, you go, okay, we don’t like the way they’re treating the Uyghurs. We don’t like the way they’re treating Tibet. We don’t like the fact that they don’t have a free press. They’re going back on their commitments to Hong Kong.
Dean Baker:
I mean, it’s a long, long list we can go through. But you go, okay, but what are we going to do about that? I mean, again, we should condemn that. But is that why we’re going to have a big fight with them over intellectual property? And that I just don’t believe. That’s not true. I’ll just say that. I’m going to say that. It’s just not true. That’s not why we’re having a fight with them over intellectual property. It’s because the people who stand to gain from us having a fight with them over intellectual property want us to have that fight. And just to make one other point in this, all those issues about China’s human rights, those were true in 2000. And those of us who said, “Hey, this is a country that doesn’t respect labor rights. It doesn’t respect human rights. Maybe we should make some conditions here before we let them in the WTO,” we were laughed at. So I don’t think all those people have suddenly gotten a great concern for human rights in China. I think it’s that they have a different agenda.
Rob Johnson:
And as you say in your paper, there are other places, in particular parts of the Middle East and others, that we consider allies that demonstrate similar abuses of human beings. And …
Dean Baker:
Yeah. We had a couple over at the White House today, the United Arab Emirates and Bahrain. No one’s going to claim that they respect human rights. Saudi Arabia, of course, big ally, engaging in a genocidal war in Yemen. I don’t know how many people they have killed there with US support. So you’re a little hard pressed to believe that human rights is the major motivating factor of our policy here.
Rob Johnson:
Well, Dean, I want to thank you for coming quickly to the microphone and spending this hour with me. I think, as always, you have a very fresh, high-integrity, and very insightful perspective. And I want to thank you for today and look forward to the next time we can talk about issues that are near and dear to your heart on this podcast.
Dean Baker:
Thanks a lot. Really enjoyed it.
Rob Johnson:
My pleasure. Bye bye.
Dean Baker:
Great. Thanks a lot for having me on, Rob. Good talking to me again.
Rob Johnson:
And check out more from the Institute for New Economic Thinking at ineteconomics.org.
