[Ip-health] Debt, Toll Roads and Patents -Dean Baker

Riaz K Tayob riaz.tayob at gmail.com
Mon Feb 6 23:56:13 PST 2012


Snip:


The more items that are subject to such protection, the greater the 
burden will be on future generations. We pay roughly $300 billion a year 
for prescription drugs that would sell for $30 billion a year in a free 
market without patent protection. This is equivalent to a tax of $270 
billion on prescription drugs (@1.8 percent of GDP) that is paid to the 
drug companies because of a government imposed patent monopoly.


Dean Baker

Co-Director of CEPR; Author, 'The End of Loser Liberalism: Making 
Markets Progressive'

Debt, Toll Roads and Patents
Posted: 02/ 6/2012 3:14 pm


It's budget time, again. This means that the deficit hawks will be out 
in force warning us about the devastating debt burden that we are 
passing on to our children. So that this Halloween fright gang doesn't 
needlessly cause any kids to lose sleep, here's what parents can tell 
their children.

First, it is important to tell your kids that the national debt is not 
in any way a measure of intergenerational transfers from the young to 
the old. Debt is also an asset to the people who own the bonds. At some 
point, everyone who is alive today will be dead, which means that the 
bonds they own will be passed on to their or someone else's children and 
grandchildren.

Our children and grandchildren might owe the debt, but they will also be 
receiving the interest paid on the debt. There can be an issue of 
distribution within future generations (e.g. Bill Gates' descendants own 
all the debt) but that is a question of inequality within generations, 
not between generations. So when you hear the deficit hawks ranting 
about the $15 trillion debt that we are passing on to our kids, you can 
tell your children that we are passing on $15 trillion in government 
bonds to our children.

Of course some of the debt is held by foreigners. Many of the deficit 
hawks have been harping on the China menace, running scary ads about how 
the Chinese are going to own the United States in 20 or 30 years. While 
the debt service paid on the bonds held by foreigners will be a drain in 
future years, there are two important points to keep in mind. First, the 
outflow on interest payments on bonds held by foreigners is still quite 
small by any measure.

The second and more important point is that foreign ownership of 
government bonds and U.S. assets more generally is determined by the 
trade deficit, not the budget deficit. It is our $600 billion annual 
trade deficit that gives China and other countries the means to buy up 
government bonds and other U.S. assets.

The trade deficit is in turn primarily the result of an over-valued 
dollar. This means that if the deficit hawks were really worried about 
foreigners owning too much of the U.S. economy then they should be 
railing about the over-valued dollar, not the budget deficit. When the 
deficit hawks rant about China owning the U.S., they are either confused 
or being dishonest.

There are certainly times when deficits can make our children poorer 
than they otherwise would be. If the economy were operating near its 
potential, and the deficits had the effect of raising interest rates and 
pulling money away from private investment, then the economy would be 
less productive in the future as a result of the deficit.

However, the relevant measure here is not the deficit or debt, but 
productivity growth: the rate at which the economy is getting more 
efficient. Productivity has continued to grow at close to a 2.5 percent 
annual rate, meaning that the economy is getting more efficient at a 
relatively rapid pace.

This is not surprising, since it is absurd to imagine that current 
deficits are pulling money away from private investment. Interest rates 
are at near-rock-bottom levels. Given the huge amounts of excess 
capacity in most sectors, it is likely that the deficits are actually 
increasing investment by increasing demand. In this sense, deficits are 
making our children richer. This would be even more true insofar as the 
deficits are being run to build infrastructure or to finance education 
and training, all of which will make the economy more productive in the 
future.

There is an issue with the debt that is worth discussing: The country 
will have to raise tax revenues to finance its annual interest payment. 
This does impose an economic cost, since taxes are at least somewhat 
distortionary. However, this problem is enormously overplayed.

Suppose that we eliminated $1 trillion of our debt burden by selling off 
public roads and allowing private companies to charge tolls. Are future 
generations better off by this huge reduction in the debt burden? They 
aren't in any obvious way. In fact, depending on the terms of the deal, 
selling off public assets to reduce the debt could in fact lead to much 
higher economic costs for future generations. These costs just would not 
show up as public debt.

This point should sound familiar to people. There have been several 
prominent cases of asset sales of exactly this sort. For example, 
Indiana's governor Mitch Daniels sold off the Indiana toll road to 
reduce that state's debt. In my home town, former Mayor Richard Daley 
sold off a 75-year lease of Chicago's parking meters to a consortium led 
by Morgan Stanley. This reduced the city's debt, but did not necessarily 
benefit either current or future generations of Chicagoans.

There are other ways in which the government imposes future burdens that 
are not at all captured in budget numbers. Patent and copyright 
monopolies are, in effect, a way that the government allows individuals 
and corporations to get a claim to future income flows to promote 
innovation and creative work.

The more items that are subject to such protection, the greater the 
burden will be on future generations. We pay roughly $300 billion a year 
for prescription drugs that would sell for $30 billion a year in a free 
market without patent protection. This is equivalent to a tax of $270 
billion on prescription drugs (@1.8 percent of GDP) that is paid to the 
drug companies because of a government imposed patent monopoly.

There is an endless list of issues like patent protection and the sale 
of public assets that will have a large impact on the well being of 
future generations. If the deficit hawks really cared about our 
children's well being, they would be talking not just about deficits, 
but all the issues that affect the health of the economy and society 
that we will pass on to future generations.

However, concern for our children's well being is not their real agenda. 
The deficit hawks want to scare them in order to advance a very 
different agenda. Watch what they do.

http://www.huffingtonpost.com/dean-baker/debt-toll-roads-and-paten_b_1258040.html




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