Adverse Economic Consequences of Ideology Driven, Ill Informed or Not Voting

Vijay K. Mathur

“A man without a vote is a man without protection.” 

 Lyndon B. Johnson

Ill-informed voters and low voter turnout, aside from threatening democratic values, often end up electing politicians who decide on policies that result in adverse economic consequences for most Americans. Pew Research reports that in the 2016 presidential election 61.4% of the voting age population in the U.S. voted, the same as in 2012.

In Utah, the 2016 voter turnout was an impressive 82%. Republicans in the Utah Legislature have had a supermajority since 1992. This supermajority of Republicans in both state Houses is surprising, since only 45% of the voters are declared Republicans. Unaffiliated declared voters are 37% and only 13% are Democrats, according to www.elections.utah.gov. Hence it is more likely that voters in Utah are driven by their conservative ideology and political spin on policy stands, rather than by party affiliation.

Alexander Field states in the December, 2017 Journal of Economic Literature, “ An ideology is an integrated system of belief about how the world should be, how the world is, and how new evidence about the state should be interpreted and used.” Note, ideology clouds independent judgment since it is subject to an ideological interpretation of facts and logic.

Hence, elected by ideology, Utah legislators know that their status is secured. Therefore they were emboldened to change the voters’ recently passed propositions on Medicaid and medical marijuana. The changes will reduce the expansion of Medicaid, thus depriving health care benefits to thousands of Utahns. The state monopoly in medical marijuana will create barriers to entry in production resulting in higher prices. This is the cost voters will pay for electing people on ideological grounds and making ill-informed decisions on politicians.

Nationally, the most alarming fact is that voters who suffer the most from unfavorable economic policies have the lowest voting record. Voting percentages increase with education and income. Blacks and Hispanics have lower percentages than non-Hispanic whites. Young voters (18-29 years of age) vote less than voters of age 45 years and older, according to the Census Bureau. US.. government economic policies reflect this tilt in voting patterns, favoring older, wealthy and white voters.

Most voters old and young, low income and middle class, complain about wealth and income inequality. However, despite promises, the 2017 tax cut primarily benefited corporations and the rich. The research by Professors Emmanuel Saez and Gabriel Zucman, reported by David Leonhardt of The New York Times, shows that the richest 400 households paid less average tax rate (23%) in 2017 as compared to 1950 (70%) and 1980 (47%). The middle class and poor barely benefited from the tax cut.

Trade policies of the current administration are also economically detrimental to small farmers and workers in the industrial belt, most of whom voted for President Donald Trump. The Republican majority in the Senate and President Trump have also tried to dismantle the Affordable Care Act (Obamacare), that primarily provides health care benefits to lower income Americans. Voting also affects the choice of politicians who, for example, care about preservation of national parks, cleaner environment and policies to deal with climate change, skills training for unemployed workers, housing affordability and assistance in paying college debt.

Only 63.3% of women voters voted in the 2016 election (the same as in 2012). It did not help their causes dealing with child-bearing rights, childcare, early childhood education, parental leave and real income security. Randall Akee and other coauthors in the March 2018 American Economic Review find that an increase in household income has significant effect on children’s personality traits, emotional well-being, behavioral health, educational attainment and other beneficial adult outcomes.

Voters’ apathy by not voting or by ill-informed voting causes perils for democracy also, because policy decisions are made to please donors and partisans driven by their agenda and/or ideology. Democracy promotes economic stability, as Dan Rodrik finds in his study published in the American Economic Review in May 2000. Economic stability is vital for economic growth, employment, and the vitality of financial and labor markets. We are witnessing this instability in the Trump administration and its adverse consequences.

American voters must get over their excuses for not voting or for ill-informed voting. Voting by the missing one-third of voters and better informed voters could change things like registration barriers, gerrymandering, placement of voting facilities and voting days; complaints will not resolve such issues. As Louis L’Amour states, “ To make democracy work, we must be a nation of participants, not simply observers. One who does not vote has no right to complain.”

Mathur is former chairman and professor of Economics, Department of Economics, Cleveland State University, Cleveland, OH.  This article was published as opinion piece in the Standard Examiner, October, 31, 2019, Ogden, UT.

Escalating Drug Prices and Patent System Abuse

Vijay K. Mathur

High drug prices in the U.S. significantly contribute to the high cost of health care and health insurance. Rand Corporation found that in 2016 Americans spent $10,300 per person on health care, and 17% of that was on drugs. The U.S. has 5% of the world’s population but spends half of the total world expenditure on drugs. Such expenditure increase will lead to serious disruption in the health care system and in Americans’ lives.

The latest state data for 2014 shows that Utahns spent $784 per capita on prescription drugs and medical nondurables (PD&MN), one of the lowest amounts among states (Kaiser Family Foundation). That is 33% of the total per capita spending on health care, much larger than in some Scandinavian countries. However, using average growth rate of 1.8% per year for the decade 2004-2014, the 2014 per capita expenditure on PD&MN in Utah would increase to $857 in 2019.

The claim, by Budget Director Mick Mulvaney, that drug prices have fallen for the first time in 50 years is erroneous. The use of pharmaceutical drugs data from the Consumer Price Index is very unreliable, according to the National Bureau of Economic Research. In fact, the list prices of more than 3,000 drugs increased, and they decreased for only 117 drugs as cited by KFF on April 7, 2019.

Drug companies argue that the development of drugs is risky; 90% of drugs in clinical trials fail according to the Rand study. However, even though development of many new products is risky, industry R&D costs are exaggerated. In addition, risk is the hallmark of any innovation, development and market acceptance of resulting products. Moreover, Bloomberg in January 2015 ranked the U.S. sixth in innovation from the top after South Korea, Japan, Germany, Finland and Israel, countries with lower drug prices. Partly it reflects lower spending on R&D as a percent of the gross domestic product.

Patents provide incentives for innovations and risks involved in the development of drugs. Professors Adam Jaffe and Josh Lerner report in their book, "Innovation and its Discontents," that the modern patent system has existed since 1836, when it extended the 14-year term of the 1790 Act by seven more years. However, since 1995 patent law provides 20 years of protection from the time of filing the application. But it has many loopholes.

DrugPatentWatch reports that pharmaceutical companies earn 80% of their revenues from patented drugs’ monopoly. Monopoly increases prices by restricting quantity, hence earning enormous profits. Companies maintain their monopoly by manipulating the law, by new formulations, and by new administration of drugs. For example, simplifying doses, extended release versions and new methods of administering (oral dose or nasal spray) are some of the tactics to extend patents’ duration.

Deep-pocketed companies engage in lawsuits to block generic drugs competition or buy generic drug makers to suppress the promotion of generics and maintain their patented drugs monopoly. Robert Posen, Harvard Business School lecturer, suggested that innovations and granting of patents should be sped up by hiring more experts and adopting the “first to file” rule for the applications, rather than wasting time discovering who first came up with the idea. Also, “first to file” rule will reduce frivolous and costly lawsuits since the patent office will decide the first filing date. Granting extensions should be rare.

“Cross licensing”, where companies agree to license their patents to each other as a device to expedite innovation, has outlived its usefulness. It depresses competition by blocking entry, especially of new startups. Small companies face threats of expensive infringement lawsuits or unwillingness of large companies to enter “cross-licensing” agreements or face substantial royalties in any agreement, thus thwarting competition and increasing prices.

On June 10, Bloomberg Business Week reported that American drug companies Merck & Co and Bristol-Myers Squibb are facing stiff competition in prices in China from some Chinese companies that have patented their drugs to treat the same health conditions. For example, the drug Tuoyi by Shanghai Junshi Biosciences Co. to treat melanoma (skin cancer), sells for 1/3 less than the price for Merck’s drug Keytruda in China. Allowing importation of drugs and Medicare to negotiate lower drug prices to counter monopoly power will also deescalate prices in general.

Professors Jaffe and Lerner cogently state, “Thus, the patent system — intended to foster and protect innovation — is generating waste and uncertainty that hinders and threatens the innovative process.” I might add that it also destroys competition.

Mathur is former chairman and Professor of Economics, Department of Economics, Cleveland State University, Cleveland, Ohio.  This opinion piece was published in Standard Examiner, August 23, 2019, Ogden, UT.

The American Dream and happiness in America

Vijay K. Mathur

Recent research on Americans’ well-being and happiness is finding that the American dream is fading. These findings are at odds with some in the media parroting the current administration’s and its sympathizers’ announcements that the economy is very healthy with plentiful jobs, better than in past decades.

This apparent conflict between the macro data and the personal lives and perceptions of Americans about their well-being can only be understood if one looks beyond the macro data on unemployment and growth rates. For example, if businesses in Utah advertise for 100 job openings for part-time work and single moms fill those jobs at minimum wages and no benefits, the unemployment rate will drop. However, those single moms will not be very happy with their lives, especially when they have small children to support.

The 2019 World Happiness Report (WHR) uses Gallop World Poll from 2016-2018 to rank countries on a happiness measure. This survey uses a measure, “life evaluations”, where people in a country’s population are asked to put the status of their lives on a ladder with zero to 10 steps, where zero is the worst and 10 is the best. Each country is ranked based upon the average score from the survey for the measure “life evaluations”. Six variables, per capita GDP, social support, healthy life expectancy, freedom, generosity and absence of corruption, are used to explain the overall average score. The U.S. ranks 19 from the top out of 154 countries for the period 2016-2018.

The U.S. ranking has been declining over a period of time since the first WHR in 2012. The survey also collected data on positive affects and negative affects. Positive affects represent an average of previous day for happiness, laughter and enjoyment over the survey waves from three to seven years, and negative affects represent an average of previous day of worry, sadness and anger over the period of time. The U.S. ranks 35 on positive and 70 on negative affects from the top out of 156 countries.

A review essay by Davis Blanchflower and Andrew Oswald (BO) in “Journal of Economic Literature,” from June 2019, fills up some gaps on the overall happiness status of Americans. The authors present research findings of Carol Graham of Brookings Institution and draw certain other conclusions based on their data. Graham finds that mental well-being has become more unequal; Americans are suffering from lack of hope and are less optimistic; the poor have more stress, pain and lower life satisfaction as compared to the rich; Americans have lost confidence and hope for upward social mobility.

In addition BO find that Americans are facing psychological difficulties in mid-life. White Americans are less happy than black Americans despite wide financial gap between whites and blacks during 1972-2016. There is lower financial satisfaction and happiness among less educated. Depression, anxiety and suicide are more prevalent among whites than blacks. High-income inequality contributes to low life satisfactions.

Utah is one of the happiest states in the U.S. with a ranking of No. 2 from the top, even though it has a drug overdose death rate higher than the U.S. rate (www.druguse.gov) and one of the highest suicide rates (www.cgc.gov) among states in 2017. Some of the factors contributing to high overall happiness ranking are fewest working hours, high-income growth, low divorce rate and high level of safety.

The economic uncertainty among Americans plays a very dominant role in hope, life satisfactions, confidence and optimism. A June 2019 survey of a sample of 1116 adults, by AP NORC center and University of Chicago, finds that fewer adults have confidence in their ability to retire or pay an unexpected expense of $1,000. A quarter of adults do not have enough income to meet expenses. Economic opportunities are not widely shared. The American dream is becoming more distant for an increasing proportion of Americans.

Professor Angus Deaton, Nobel Prize winner in economics, appropriately states in his book, “The Great Escape,” “There is much to be said for equality of opportunity, and for not penalizing people for the success that comes from their own hard work. Yet, with other rich countries, and in spite of the popular belief in the American dream that anyone can succeed, the United States is in fact not particularly good at actually delivering equal opportunities.”

Mathur is former chairman and professor of Economics, Department of Economics, Cleveland State University, Cleveland, OH.  It was published as opinion article in Standard Examiner, July 23, 2019, Ogden, UT.

Health capital is as valuable asset as human capital

Vijay K. Mathur

“Physical fitness is not only one of the most important keys to a healthy body, it is the basis of dynamic and creative intellectual activity.”

Robert F. Kennedy

Let me first clarify the word capital in the current context. Capital goods such as machines, tools and buildings are durable goods that last for some time in production. Specifically, physical capital is a produced means of production that increases productivity and profits to the employer for a period of time. It does require maintenance due to wear and tear, and it depreciates in value over a period of time. Financial capital is not a direct input in production, but it is used to produce physical capital.

Human capital is accumulated by investment just like physical capital, and once it is embodied in raw labor it increases labor’s productivity, thus producing rewards to the employer and employee over his/her lifetime. In addition, human capital in knowledge workers has spillover effects. In other words, an employee’s human capital not only benefits him or her in terms of high productivity and wage earnings but also benefits other employees who come into contact with the educated and knowledge employee. That is why “Silicon Valley” in California and “Silicon Slopes” in Utah attract knowledge workers. In the presence of spillovers of ideas and knowledge, workers self-interest would dictate under-investment in the acquisition of their education. Therefore, public financing of education is required to fill the gap.

Just like human and physical capital, heath capital is a durable good. Professor Michael Grossman, in the Journal of Political Economy, argues that health capital stock can be increased by investment, but increase in its price will reduce its quantity. This implies that disinvestment in health will decumulate health capital. Health is a multidimensional input embodied in raw labor and/or human capital. It not only increases productivity but also contributes to the person’s wellbeing and longevity.

A healthy labor force would be more productive than a labor force in poor health. Centers of Disease Control and Prevention (CDC), in 2016, found that stress is the leading cause of workplace health problems and the primary cause of occupational risk. Productivity loss from missed work costs employers $225.8 billion and $1,685 per employee per year. There is increasing evidence of job stressors contributing to depression. According to ibis.health.utah.gov, Utah had a greater age-adjusted depression in percentages of adults than the U.S. in all the years from 2011 to 2017.

Poor health not only reduces well-being and longevity of individuals, but it also costs the rest of society due to the loss in productivity and growth. It is well established that free choice of some in not preventing communicable diseases such as measles, mumps and rubela adversely affects others’ free choice of being free from these diseases.

Hence, in the presence of deleterious spillovers there is a need for public funding and regulation to prevent such diseases. A similar argument can be made for non-communicable poor health conditions. Poor health of workers affects productivity of individual workers and human capital, and it also adversely affects productivity of others in the workplace teams. Hence, investment in health capital by both private sector and government financing is needed to fill the gap in underinvestment in health capital by the private sector.

Ironically the state of Utah, concerned about growth, has been very reluctant to spend public funds to promote health capital, as evidenced by reduced funding for Medicaid. Health capital and human capital are complementary means of production. One cannot expect more productivity from human capital and its robust spillover effects without effective health capital.

Another line of research, reported by D. Almond, J. Currie and V. Duque in the Journal of Economic Literature in December 2018, further strengthens the case of partnership between public and private sector financing to promote health capital. This research on fetal origins hypothesis (FOH) basically establishes, for example, that parental nutritional deprivation, lack of medical care and lower income results in lower birth weight, chronic health conditions in adulthood and non-health outcomes such as low test scores, adults’ schooling attainment and wages.

Hopefully, decision makers in the private sector and governments recognize that more health capital not only benefits individuals but also society as a whole. Hence, health capital also deserves the same attention as human capital. We cannot succeed in reaping the fruits of increasing human capital without increasing health capital.

Mathur is former chairman and professor of economics, Department of Economics, Cleveland State University, Cleveland, Ohio.

“Fear Mongering” Socialism Is as Offensive as “Crony Capitalism” to Many Americans

The political equality that is required by democracy is always under threat from economic inequality, and the more extreme the economic inequality, the greater the threat to democracy.

Angus Deaton, 2015 Nobel Prize winner in Economics

 Vijay K. Mathur

The ideas of democratic socialism, popularized by Senator Bernie Sanders in 2016, have entered the current political thought of Democratic candidates for president in 2020 and in the media. President Trump and GOP political leaders have even started scare mongering the ideas of democratic socialism, without much understanding of the difference between socialism, democratic socialism and communism.  

Many GOP leaders, including President Trump and Utah’s Rep. Chris Stewart (founder of Anti-Socialism Caucus in the House) tend to paint socialism, communism and democratic socialism with the same brush. Perhaps their intent is to further aggravate the ideological divide between Americans and dissuade them from their major economic concerns about the crony capitalism that, with government assistance, is gradually subverting the private enterprise system. 

Socialism involves collective ownership of government, abolition of private property rights, private enterprise and competition in markets, and a centrally planned economy.  The central planning body decides what would be produced and consumed at regulated prices, and the distribution of income.  Communism is an extreme form of socialism, a tyrannical system where a small group/or groups control government and businesses. China under Mao Zedong and the former Soviet Union under Joseph Stalin had extreme forms of communism, close to totalitarianism. Now China and Russia are still communist states with limited individual freedom. 

Most Americans are not hankering for either socialism or communism.  However, they are concerned about the recent drift of capitalism and the free market system toward crony capitalism.  Crony capitalism, labeled as rent seeking behavior by economists, has some elements of communism.  A small group of wealthy people and corporations influence government policies and subvert the free market system with government assistance that benefits them more, at the cost of the rest of the Americans.

Nobel Laureate economist Joseph Stiglitz explains in Price of Inequality, “Rent seeking takes many forms: hidden and open transfers and subsidies from the government, laws that make the marketplace less competitive, lax enforcement of existing competition laws, and statutes that allow corporations to take advantage of others or pass costs on to the rest of the society.” Pharmaceutical industry spent  $280 million on lobbying in 2017 (statista.com). Purdue Pharmaceutical (owned by Sackler family) earned enormous profits by lobbying FDA in 2001 that allowed labeling OxyContin for long-term use without scientific evidence (“60 minutes”, CBS, February, 24, 2019). 

In the Utah legislature, bill HB267 failed to pass due to lobbying and legal threats by the pharmaceutical industry. Its goal was to control escalating drug prices by allowing competition from imports from Canada.  Also.  An Institute of Taxation and Economic Policy study (May 10, 2017) found that 240 Fortune 500 companies in Utah used state corporate tax loopholes to avoid paying $126 billion in taxes from 2008-15. Rent seeking behavior is as offensive as socialism to most Americans. Political influence peddling by wealthy people and/or corporations to enrich themselves is partly responsible for increasing political as well as income and wealth inequality. 

Democratic Socialists believe in democracy and the First Amendment. They want ordinary people, rather the wealthy people and corporations, to have power in the formulation of government policies. A Democratic Socialist Michael Harrington, who died in 1989, inspired President Lyndon Johnson’s poverty program.  Scandinavian countries such as Norway, Belgium, Sweden and Denmark are democratic socialist countries. After 1991 Sweden is less socialist than others. 

Polls indicate that most Americans like some elements of democratic socialism, such as universal health care, increase in minimum wage, reduced burden of education debt, affordability of higher education and more economic opportunities.  However they are not sure about the means to achieve those ends. Senator Bernie Sander’s answer, the Scandinavian countries can do it so we can do it as well, is not satisfactory in the American context.   It lacks substance.  Senator Elizabeth Warren’s proposal of a wealth tax to finance her agenda is also very tenuous.  

Nobel Laureate economist F.A. Hayek, an ardent critic of socialism, argued in The Road to Serfdomthat “The dispute about socialism has thus become largely a dispute about means and not about ends…” and about the impracticality of simultaneous attainment of all ends of socialism. Convincing most Americans of the ideals of democratic socialism requires rooting out crony capitalism, empowerment of all Americans in the enactment of government policies beneficial to all and promoting a vibrant and thriving competitive private enterprise system. 

Mathur is former chairman and professor of economics, Department of Economics, Cleveland State University, Cleveland, Ohio.  He blogs at mathursblogonomics.blogspot.cpm.

How well off are Americans and Utahns in this booming economy?

Vijay K. Mathur

The Great Recession of 2007-2008 was the most severe recession in the recorded history of recessions. The unemployment rate increased from 5 percent in 2007 to 9.5 percent at the end of the recession. According to the study by Hillary Homes, Douglas Miller and Jessamyn Schaller, in the Journal of Economic Perspectives, Summer 2012, this recession was the longest lasting recession on record.

Since the Great Recession, differing from other recessions, minority groups, youths and lower educated low wage groups have not fully regained the wages they enjoyed prior to 2007. Middle class wages are shrinking. Hence, the scenario of the economic boom is murky at best, since the boom is not filtering down to low and middle-income groups.

In the post Great Recession era we are facing the lowest official national unemployment and growth rates, and Utah has an even lower unemployment rate than the US rate of 3.7 percent. However, the Bureau of Labor Statistics (BLS) measures six categories of unemployment rates from U1to U6, labeled as underutilization rates. The official low rate U3 is not indicative of the general well-being when there are more discouraged, part time and contract workers (included in U6). From the fourth quarter of 2017 to the third quarter of 2018 this rate was 7.8 percent in the US and 6.1 percent in Utah. These rates represent very high underutilization rates of workers and loss of potential output capacity.

Employment statistics could also be misleading. A person is employed if he or she did any work for pay or profit during the survey week, or who did 15 hours of unpaid work for business or farm operated by a family with whom he or she lives or is temporarily absent from work. According to the Economic Policy Institute (EPI), March 1, 2018, even with the employment boom, attributed to the tax cuts of 2018, there is no investment boom and wage growth since the Great Recession. The wage gap between the top, middle and bottom of the income distribution has been increasing since 2000.

Utah prides itself on one of the highest job growth rates and lowest unemployment rates in the US. However, 2018 Economic Report to the Governor (ERG) shows that Utah had the third highest ratio of non-working age population to working age population (18 to 64 years) in the nation. Median hourly wage in 2017 was $17.14 (BLS), much lower than the $24 living wage, and the annual slowdown in wage growth since 2015 is being eroded by inflation. The increase in homelessness, the same poverty rate in 2017 as in 2007, 52 percent of working families in the SNAP (food stamps) program (Center for Budget and Policies and Priorities, December, 2018), health insurance uncertainty and the demand for Medicaid expansion portray a non-participatory economy for many low to moderate-income Utahns.

The decline of the middle class and increase in income inequality are worrisome signs. According to Pew Research Center, September 2018, in the US the middle of the middle-income group had approximately the same median income in 2016 as in 2000, however the upper tier of middle income lost more that the lower tier in 2016. Additionally, upward income mobility has declined, and even college graduates are uncertain about their future well-being, as they are burdened with $1.5 trillion college debt (see The Wall Street Journal, Dec. 11, 2018). It prevents them from starting families, home ownership, wealth mobility and secured retirement. In addition, the trade war, stagnant wage and income growth, projected lower economic growth, and high cost of health insurance are not optimistic signals.

Ken Gardner Policy Institute (KGPI), October 2018, finds that since 1960 the middle class in Utah declined 2.8 percent by 2016. But lower bound middle class households had 55 percent higher income and upper bound middle class households had 48 percent lower income than in the US in 2016 (2017 dollar). Thus Utah has less income inequality among middle class groups than the U.S., a hopeful sign.

The Economist, November 17, 2018, reports that there is a sense that capitalism is rigged to benefit owners of capital at the cost of workers, hence a 2016 survey shows that, “…more than half of young Americans no longer support capitalism.” This distrust is the result of accelerating income and wealth inequality since 1980s and the inaction of private and public power brokers.

Mathur is former chairman and professor of economics, Department of Economics, Cleveland State University, Cleveland, OH. He blogs at mathursblogonomics.blogspot.com

Published in Standard Examiner, Ogden, Utah, January 8, 2019