6 Economic Experts Reveal the Truth About the Inflation Reduction Act

Is it good for your wallet? A climate bill in disguise? Landmark action or nothingburger? The Institute for New Economic Thinking assesses the Democrats’ legislative victory.

Now that Democrats have finally passed their much-touted legislation, key experts go beyond the hype to weigh in on how the Inflation Reduction Act (IRA) will likely impact your wallet in the short and long term, what it means to climate change, and what more is required to improve the lives of Americans and save the planet.

On Climate, a Meaningful Small Step: Servaas Storm, Senior Lecturer of Economics, Delft University of Technology

Getting beyond the hyperbole and political drama, I would start by noting that the IRA does nothing to bring down inflation (in the foreseeable future). This is confirmed by analysts using the Penn Wharton Budget Model, who conclude that the impact is statistically indistinguishable from zero, as well as by CBO Director Philip L. Swagel, who finds that the bill will have a negligible impact in 2022 and 2023. Importantly, the IRA does help (lower-income) U.S. households to better manage price increases, especially on healthcare, medicines, and energy. However, the IRA is best considered as a climate bill, meant to lower U.S. CO₂ emissions, promote clean energy, improve resilience to global warming, and reduce the risk of ‘fossilflation’ (Storm 2022).

As such, the IRA constitutes an important—albeit limited—step in the right direction. Using ‘pecuniary rewards’ (such as tax credits and rebates on renewable energy), funded by additional taxation of socially unproductive monopoly profits of corporations, the IRA aims to provide a boost to the renewable energy transition—and thus help to cut U.S. carbon emissions over time. Within the polarized stalemate of U.S. (climate and energy) politics, the IRA definitely constitutes a major break with the past—but, alas, one which falls rather short of ‘saving civilization’, as Paul Krugman is suggesting. The IRA falls short of what is needed for two reasons: the fiscal stimulus to the renewable energy transition is far too small compared to what is needed in view of the steadily building climate crisis; and the positive price incentives, loved by establishment economists, will not work, failing to bring about the required structural transformation of the U.S. economy, which is addicted to fossil fuels, to a net-zero-carbon system.

Much more will be needed—both in terms of public investment in clean energy and sustainable technology and in terms of direct interventions to scale back fossil fuels. There is no getting around it: direct measures including phasing out coal (power plants), taking climate liability litigation seriously, public investment in renewable energy generation and RD&D, and banning drilling, fracking, and (oil and gas) pipeline provisions, will be needed.

No Reform Without Banning Buybacks: William Lazonick, Professor emeritus of economics at the University of Massachusetts and co-founder and president of the Academic-Industry Research Network

The IRA provides U.S. business corporations with hundreds of billions in government subsidies to confront climate change and enables Medicaid to negotiate certain high-cost prescription drugs in 2026. Any chance of success depends on the SEC or Congress rescinding Rule 10b-18, first adopted in November 1982.

Rule 10b-18 gives publicly listed companies a safe harbor against stock-price manipulation charges when they do stock buybacks -- which have resulted in extreme income inequality and setbacks in U.S. leadership in a range of critical technologies because key U.S.-based corporations have not invested in cutting-edge innovation.

Rule 10b-18 is a license to loot the corporate treasury. Based on stock prices and trading volume on August 15, 2022, the Rule’s safe-harbor “limit” permits Intel to do $459 million in buybacks per day, Cisco $181 million, GE $117 million, and Boeing $322 million—repeatedly, at the discretion of the company’s top executives, trading day after trading day. For the decade 2011-2020, total buybacks (and proportion of net income) for these corporations were Intel $80 billion (57%), Cisco $76 billion (90%), GE $49 billion (155%), and Boeing $43 billion (126%). While each company lavished and wasted corporate cash on buybacks, it lost global competitive advantage in, respectively, semiconductor fabrication, 5G and IoT, wind energy, and commercial aircraft.

Big Pharma companies are among the largest stock repurchasers. In 2011-2020, Pfizer did $76 billion (59% of net income), J&J $63 billion (49%), and Merck $46 billion (73%). When Medicare starts negotiating drug prices, the government should insist that pharmaceutical companies refrain from doing buybacks so that they can use profits for drug innovation. The SEC or Congress can ensure this condition by rescinding Rule 10b-18.

If Apple had not done buybacks, it could have made a huge difference to U.S. investment in critical technologies. Currently, Apple can do an astounding $2.5 billion in buybacks per trading day while availing itself of Rule 10b-18. From October 2012 through June 2022, Apple did $529 billion in buybacks (96% of net income) along with $122 billion in dividends (22%). Apple does these distributions to shareholders under its “Capital Return Program”, but the only funds that Apple has ever raised on the public stock market was $97 million in its 1980 IPO.

With a small fraction of this $529 billion, Apple could have invested in U.S.-based advanced semiconductor fabrication instead of outsourcing the manufacture of its iPhone chips to Taiwan’s TSMC. Rather than acquiescing in the use of over half a trillion dollars in buybacks, Apple’s second-longest serving board member (since 2003), Albert Gore Jr., could have advised the company on investing in clean technology. Likewise, Arthur Levinson, the longest serving board (since 2000) and a prominent biopharma CEO (formerly Genentech and now Calico) could have directed some of the big buyback bucks to medical innovation.

The IRA does not ignore buybacks, imposing a puny 1% tax on them to raise an estimated $74 billion over 10 years. This revenue measure serves to legitimize buybacks, a practice that Senate Majority Leader Chuck Schumer thinks should be abolished. Meanwhile, in addition to $489 billion in dividends, the eight high-tech companies flagged spent a combined $811 billion on buybacks in 2011-2020. If the companies had spent the money on technologies, the U.S. economy would be far stronger now—and, driven by innovation rather than manipulation, the companies might have higher stock value, too.

May Help Fight Future Inflation: Claudia Sahm, Founder of Sahm Consulting and former Federal Reserve economist

By enacting the IRA, Congress is taking an important step toward claiming a role in fighting inflation, as opposed to leaving it to the Federal Reserve alone. The Fed reduces demand with higher interest rates, so it is not well equipped to slow the increases in prices of necessities like gasoline, food, and housing, for which supply is crucial. Moreover, the Fed is reactive to inflation and its tools are blunt, whereas Congress can act proactively and target specific cost-of-living pressures.

The current episode of high inflation shows that the United States is insufficiently prepared for the supply-side disruptions—from broken supply chains to labor shortages to global food and energy cutbacks—that the pandemic and the war in Ukraine caused. In fact, about half of the inflation is supply-driven, according to research at the San Francisco Fed. Higher interest rates are not the solution in this instance.

The Inflation Reduction Act is unlikely to make a noticeable dent in current inflation, but it is an investment against future inflation. The clearest examples are the programs to increase energy efficiency and the use of renewable energy. Oil prices are set on the global market and prone to large, unpredictable swings, which have repeatedly created hardship for families and businesses. Rising temperatures and extreme weather are inflationary, too, a point too often omitted from the debate.

The future inflation that sensible energy policy could avert is hard to measure, but given recent experience, is real. It is missed in the macroeconomic analysis of the Act, which focuses almost entirely on its potential effects on aggregate demand regardless of what the spending is, as opposed to the ways it could increase supply and make the economy more resilient to inflationary shocks.

Tough Job for Fiscal Policy: Steven Fazzari, Professor of economics and sociology at Washington University in St. Louis

Yes, the bill contains some pieces that reduce prices, including authorization for Medicare to negotiate prices of some widely used prescription drugs and initiatives to increase the supply of renewable energy over time. But in terms of the inflation data driving today’s news, the impact of the IRA on inflation will be minimal.

While one might criticize its politically motivated name, it is important to recognize it is likely almost impossible to design an effective fiscal policy to address the recent inflation spike. The inability of supply chains to adjust to huge changes in the allocation of demand caused historic pressure on relative prices. A change in relative prices does not have to cause overall inflation, in principle. But the only way it would not cause higher inflation is if the prices of items less in demand fall to offset the increases in prices of items for which demand exceeds restricted supply.

Over the next few decades, perhaps the IRA really is an “inflation reduction act” because over shorter horizons it really is a climate bill.

How Significant are the Compromises? Pia Malaney, Co-Founder and Director of The Center for Innovation, Growth and Society and Senior Economist at the Institute for New Economic Thinking

While the White House and congressional Democrats point to this bill as being historic, another word we frequently hear associated with the bill is “compromise”. So how significant are the compromises? The bill is indeed historic in the amount of money committed to climate change, but in a world where every day brings more news of climate-related disasters, we can no longer afford to treat climate change as anything other than an existential risk. While the IRA will reduce greenhouse gas emissions significantly, it will not be sufficient to meet the goal of a 50% reduction from 2005 emissions by 2030. The “compromise” which makes the development of renewables on government territory conditional on the Interior Department making 2 million acres of public land and 60 million acres of federal waters available for oil and gas leases each year simply goes in the wrong direction.

The bill is careful to use markets to achieve climate change goals, strategically using financial incentives to encourage the development of renewable energy sources, and this should have a significant impact over the long term, but the fear is that some of the concessions will simply translate to business as usual for the fossil fuel industry, something we can scarcely afford.

Some of the other economic provisions in the bill are steps in the right direction, though not necessarily in terms of inflation, which it will barely affect in the short term, creating the unshakeable feeling that the rebranding was simply a convenient political move. That being said, giving the government the ability to negotiate drug prices and cap out-of-pocket expenses for seniors seems long overdue and should reduce health care costs in the longer term. The 15% corporate minimum tax is a start. The 1% tax on stock buybacks is an acknowledgment of a critical issue that INET-funded research by Lazonick et al has been highlighting for years.

Fast Action Needed to Curb Inflation Beyond the IRA: Thomas Ferguson, Director of Research, Institute for New Economic Thinking

Back in the fall of 2021, Paul Jorgensen, Jie Chen, and I predicted that the Biden administration's failure to deal seriously with Covid would create endless headaches, not least in the economy. Then came Omicron and its worldwide impact. Because the virus hit China and many other countries, too, this latest version of the plague added to the woes of crews and mechanics working on ships, planes, and trucks; and workers in health care, education, and many other fields. Not surprisingly, supply problems snarled intractably.

Now the Biden administration is winding down health care support for Americans while the CDC is not even trying to test seriously, as new strains of the virus take off and long Covid balloons. Yes, death rates are lower, though they are rising a bit. But people are still getting sick – and in the widespread cases of long Covid, staying sick. When they are ill, people can't work or care for their families without spreading the virus, even to folks who've had earlier strains.

Fed rate rises will do nothing to arrest any of this, any more than they will stop the war in Ukraine, cool down climate hotspots, put out wildfires, or pour water into rivers running dry all over the world. Nor, of course, will the rate increases do much to check businesses in concentrated markets from raising prices, as so many have been doing with abandon.

To effectively stem inflation, the U.S. needs to act on many fronts, fast. The government needs to pursue sweeping antitrust actions, set firm position limits for non-end users in commodities markets, and have OSHA and other federal agencies enforce mandates for ventilation in offices and schools. It also needs to set up some formal mechanism to sort out the climate mess that is developing out of the scramble to build new liquid natural gas terminals to offset the giant gas price rises facing the Europeans and the developing world as global warming intensifies.

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Goats and Graduate Students: Working with and Learning from Lance Taylor

In memory of Lance Taylor

My significant experience of Lance Taylor as a colleague, co-author, and friend began with my arrival at the New School in January 1999. From our first conversations, we discovered compelling shared areas of interest in macroeconomics and environmental problems, which provided abundant food for conversation and thought. I got into the habit of sitting with Lance in his or my office or over lunch or dinner (which revealed a taste on Lance’s part for good wine and somewhat exotic and rich foods such as Merguez sausages) to pick his brain on current macroeconomic developments and theoretical puzzles. I recall, for example, his periodic noting of milestones in the U.S. current account deficit during the years preceding the financial crisis of 2007-8, often accompanied by a mention of Wynne Godley’s latest bulletins on the unsustainability of U.S. macroeconomic policy emanating from the Levy Institute. This episode was one of the few cases where Lance (along with many other astute economic observers) missed the mark, in that the crisis that followed was not the crash of the dollar Lance and Wynne anticipated, but the collapse of short-term liquidity in world money markets triggered by the sub-prime mortgage fiasco, during which the dollar gained strength.

The sources of Lance’s uncannily prescient insights into practical macroeconomics gradually became clear to me in these conversations. Lance thought about economics in a systems perspective more common among engineers and applied mathematicians than among economists. He instinctively approached practical issues through the lens of dynamical systems models of typically two or three dimensions, a realm where Lance was completely at home and “spoke the language”. (Not everyone was so gifted in this respect, and Lance had a tendency to assume a degree of familiarity with the properties and analysis of low-dimensional dynamical systems models that challenged the backgrounds of his readers and students. I was in the fortunate position of having just enough familiarity with the general math behind his references to “sinks,” “sources” “nodes” and the other arcana of differential equations to keep up with him.) Lance’s intellectual universe balanced the precision of thought implicit in dynamical systems theory with a voracious appetite for empirical data. He shared with Wynne Godley a fascination with social accounting frameworks. Another instinctive move for Lance in approaching a concrete problem of macroeconomics or environmental economics was to construct the relevant Social Accounting Matrix to provide the context for his analysis. It became clear to me that this had been going on a long time and that as a result of years and decades of work on practical problems, Lance had accumulated a treasure-house of relevant statistical data and stylized facts. It became second nature for me in collaborations with Lance to begin by asking him what the signs and magnitudes of key parameters of a model were likely to be. Who knew what a reasonable elasticity of investment with respect to the profit rate might be for a middle-income developing country, or what the half-life of carbon dioxide in the atmosphere is? Lance knew.

Economics is a field that puts an enormous premium on the ability of researchers to connect the abstract and the concrete convincingly, and Lance had a remarkable ability to pull off this difficult feat. His pioneering work on model closures in macroeconomics (a perspective he shared with Steve Marglin and Amit Bhaduri) rested on his instinctive evaluation of what factors in a given situation were of prime importance and worth investigating in detail. There was almost no point in trying to get Lance to explain just why the exchange rate played such a different role in Brazilian and U.S. macroeconomics since the difference seemed obvious to him from the start. Lance also instinctively sought out the aspects of economic problems that affected ordinary people and their lives, and implicitly and explicitly advocated for basic human values such as equality and security. This gave his work a flavor that may have limited its acceptance by the economics establishment but gained him great respect among politically inclined economists in the world at large. These leanings, however, did not get in the way of Lance’s clear-sighted realism. When the Kirchner government in Argentina tried to cover up its mismanagement of macroeconomic policy by cooking cost-of-living statistics Lance was outraged, despite his general approval of the Kirchners’ politics.

The technical elegance and importance of Lance’s thinking did make a considerable impact on some figures of the mainstream economics establishment, such as Paul Krugman, with whom Lance co-authored a classic paper on the impact of currency devaluation.

Lance had a strong aversion to some of the shibboleths of mainstream economics, particularly the concept of the production function, and he was also an elasticity pessimist who doubted the importance of firm and household responses to relative price movements. He was willing to suspend these feelings and co-author our paper with Armon Rezai (published in Economic Theory), working out the economics of greenhouse gas mitigation in the context of a neoclassical general equilibrium framework with a production function, primarily, I think, because he thought the environmental point the paper made was so important. He hastened to atone for this moment of wavering by leading the same team of co-authors to write two more papers (published in The Cambridge Journal of Economics and Ecological Economics) showing that purely demand factors can determine short- and long-run growth paths and that these models reproduce the key policy results of the general equilibrium model concerning climate damage. This work, including other important pioneering papers on the historic role of energy inputs in sustaining labor productivity increases that culminated in a paper with Gregor Semieniuk (published in Nature Climate Change), led to Lance and me sharing the 2015 Leontief Prize of Tufts University. Whether these efforts will succeed in convincing the world that correcting the greenhouse-gas externality confers a net benefit to humanity rather than imposing a cost, or that macroeconomics is better off without the production function and the concept of a steady state growth path to which market economies converge, remains to be seen. This work was an intellectual journey that was immensely satisfying for me personally and which I am grateful to Lance for sharing.

I was aware that there was a whole other side to Lance’s work as an international political and development economist, a world with which I had at best a nodding acquaintance. I leave the story of Lance’s work in this domain to those who collaborated with him on it, such as José Antonio Ocampo, Edmar Bacha, and Frank Lysy among many others.

Lance had what one might call a casual approach to everyday dress, though he appeared for public talks well turned out even with rather jaunty accessories. It was not unusual, however, for him to appear in his office in the working clothes of a Maine farmer. On some of these occasions, particularly when travel delays or cancellations disrupted work plans, I would try to persuade Lance that graduate students were at least as interesting as goats in the hopes of getting him to spend more time in New York, but I made no headway on this issue. A visit to Yvonne and his farm in Washington, Maine, on the occasion of their 50th wedding anniversary attended by their whole family gave me some insight into the powerful hold his life in Maine exerted on Lance. There were indeed goats, somewhat cuter and more lovable in person than in my imagination, and a remarkably comfortable and architecturally striking custom-designed house. Considering the intellectual flourishing of graduate students Lance mentored, including Nelson Barbosa, Laura Carvalho, Michalis Nikiforos, Armon Rezai, Codrina Rada, Rudy von Arnim, and Ozlem Ömer (to name a few recent mentees among many others) I think my concern over Lance’s graduate students was probably misplaced and the goats deserved their share of his attention.

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China’s Development Path: Indigenous Innovation and Global Competition

China’s successful technological development path stands in contrast to the corporate financialization model in the United States

In our INET working paper, "China’s Development Path,” we employ the “social conditions of innovative enterprise” framework to analyze the key determinants of China’s development path from the economic reforms of 1978 to the present. First, we focus on how government investments in human capabilities and physical infrastructure provided foundational support for the emergence of Chinese enterprises capable of technological learning. Second, we delve into the main modes by which Chinese firms engaged in technological learning from abroad—joint ventures with foreign multinationals, global value chains, and experienced high-tech returnees—that have contributed to industrial development in China. Third, we provide evidence on achievements in indigenous innovation[1]—by which we mean improvements in national productive capabilities that build on learning from abroad and enable the innovating firms to engage in global competition—in the computer, automobile, communication-technology, and semiconductor-fabrication industries. Finally, we sketch out the implications of our approach for the role of innovation in China’s development path as it continues to unfold.

Like any national economy that has achieved sustained economic growth, the Chinese state has invested in human capabilities and physical infrastructure that provide goods and services to the business sector. The Chinese developmental state has not, however, been a passive investor in these productive resources. It has implemented proactive policies to support the expansion of advanced manufacturing capacity by attracting, negotiating, and coordinating foreign investment, and by fostering the inflows of talent and knowledge to China. Such investments have formed the foundation of the nation’s technological learning. Furthermore, to foster innovative business enterprises, the Chinese government often has provided sustained funding, described as “patient capital”, which otherwise would not have been available through nonstate financial channels.

The case of China also demonstrates that the success of the developmental state in fostering a dynamic of growth eventually depends on the emergence of innovative enterprises. From the perspective of the theory of innovative enterprise, the importance of indigenous innovation derives from the concept of the locus of strategic control. Companies that seek to become global competitors in technology industries must go beyond technology learning from abroad to develop superior productive capabilities at home. Key to indigenous innovation are, first, the devolution of strategic control to autonomous business enterprises that can engage in domestic and global competition by investing in learning processes, and second, the exercise of strategic control within these business enterprises by senior executives who have both the abilities and incentives to allocate corporate resources to investment in innovation.

As indicated in our essay, a distinctive feature of China’s development path has been the wide range of governance structures, from minying to employee ownership to joint ventures to state-owned enterprises to venture-backed startups, under which innovative firms have emerged since the 1980s. The key issue is not the form of enterprise ownership but rather the abilities and incentives of those who exercise strategic control, given an ownership structure. Not all Chinese firms possess these strategic capabilities, but, from our study of China’s development path, it is our contention that the most successful Chinese companies have been those in which, given the supportive national ecosystem, senior executives have had the autonomy, ability, and incentive to invest in innovation.

Strategic control over corporate resource allocation gives top executives the power to invest in the productive capabilities of the workforce and, through organizational integration, transform those productive capabilities into the organizational-learning processes that are the essence of innovation, enabling the generation of higher-quality, lower-cost products. Building these organizational capabilities inevitably entails the high fixed cost of attracting, training, motivating, and retaining the labor force engaged in organizational learning. For innovation to be successful, this fixed-cost investment in productive capabilities must result in a higher-quality product than would otherwise have been available for the firm’s market segment. Then, by virtue of possessing a higher-quality product, the innovating firm can transform the high fixed cost of developing that higher-quality product into low unit cost by accessing a large extent of that market segment, thus achieving economies of scale. Over the last four decades, those Chinese companies which have been able to generate higher-quality products have had the advantage of access to both a rapidly growing domestic market, resulting from national economic growth, and a massive export market enabled by China’s participation in the global economy.

In addition to strategic control and organizational integration, innovative enterprise requires financial commitment. To accumulate technological capability, Chinese companies have reinvested profits in productive capabilities, often complemented by loans from the state-run banking system. This financial commitment has combined with strategic control and organizational integration as social conditions of innovative enterprise for Chinese firms. Underpinning the success of enterprise growth in China has been the dynamic interaction of innovative business strategy and developmental government policy.

As principles of economic transformation, the social conditions of innovative enterprise that have enabled China’s development path are not unique to China. Following the publication of Chalmers Johnson, MITI and the Japanese Miracle in 1982, it became common to credit the “developmental state” for Japan’s rise to global leadership in a range of mass-production industries. Yet, from the late nineteenth century, it was the United States that possessed the most formidable developmental state in history. From the perspective of the accumulation of knowledge that provided a foundation for Japan’s indigenous innovation, the United States, first and foremost among the advanced economies, functioned as Japan’s developmental state. Central to Japan’s success was the growth of innovative enterprises, supported by national institutions—specifically, stable shareholding, permanent employment, and main-bank lending—that provided Japanese corporations with the social conditions that enabled indigenous innovation and, in many cases, the subsequent transition to global technology leadership.

By transferring this knowledge from abroad and then improving upon it, by the last decades of the century Japanese corporations were outcompeting their US rivals in industries such as automobiles, consumer electronics, machine tools, and steel, in which US companies had been world leaders. The organizational foundation of US leadership in mass-production industries had been the combination of secure employment under the norm of career with one company for both blue-collar operatives, typically organized in unions with first-hired, last-fired seniority provisions, and white-collar engineers, whose attachment to the company was cemented by promotion up the corporate hierarchy and the availability of company-funded nonportable defined-benefit pensions, based on years of service with the company. These employment relations characterized what Lazonick has called the “Old Economy business model” (OEBM).

Under Japan’s system of permanent (aka “lifetime”) employment, which evolved in the post-World War II decades, blue-collar operatives and white-collar engineers also had, as in the United States, employment security over the course of their careers. In the United States, however, there was an organizational segmentation of the routine work of “semi-skilled” operatives from the organizational learning among engineers who were deemed to be part of the management structure. In sharp contrast, the key source of Japanese competitive advantage in the mass-production industries was organizational integration of the skills and efforts of shop-floor operatives with those of professional engineers to enable the collective and cumulative learning required to generate higher-quality, lower-cost products. In effect, the Japanese surpassed the United States in mass-production manufacturing by perfecting the OEBM.

In the 1970s and 1980s, as an outcome of indigenous innovation commenced in Japan in the 1950s, Japanese electronics corporations also used their integrated skill bases to become global leaders in memory chips, a segment of the semiconductor industry in which value is added by reducing defects and increasing yields. This development forced major US semiconductor companies to retreat from this segment of the market, with Intel facing the possibility of bankruptcy in the process. Led by Intel with its microprocessor for the IBM PC and its clones, US companies became world leaders in logic chips, in which value is added through design and functionality. Indeed, the IBM PC, with its open-systems “Wintel” architecture, formed the basis for the rise to dominance of a “New Economy business model” (NEBM), characterized by offshoring and outsourcing of manufacturing, mainly to Asia; insecure employment, marked by interfirm labor mobility; stock-based pay and defined-contribution pensions; and the emergence of a global technology labor force, with India and China playing leading roles in the supply of highly educated people, particularly to the tech industry of the United States.

With ten times the population of Japan and the world’s second-largest economy, China has become a formidable global competitor, engaging in indigenous innovation through its global participation in the US-led NEBM. Despite their accumulated technological capabilities in information and communication technology, Japanese firms failed to prevail as major global competitors in the mobility revolution because they remained ensconced in the OEBM. In contrast, China’s emergence as a global competitor in ICT, with companies such as Lenovo, Huawei, and Alibaba, has been based on taking a development path that has become integral to NEBM on a global scale, with a pervasive presence in global value chains.

While through the process of indigenous innovation, Chinese companies have become major global competitors, many US technology companies have fallen victim to corporate financialization. The starkest contrast is between the success of Huawei Technologies in communication infrastructure, in which the company is the world leader (followed by Sweden’s Ericsson and Finland’s Nokia), and the failure of US-based Cisco Systems to become a significant competitor in this segment. In a forthcoming paper, “The Pursuit of Shareholder Value: Cisco’s Transformation from Innovation to Financialization,” Marie Carpenter and William Lazonick document how, at the turn of this century, Cisco was positioned technologically to build on its global leadership in enterprise networking equipment to become a major competitor in the more sophisticated service-provider infrastructure segment. To do so, Cisco would have had to make large-scale investments in manufacturing and marketing as well as R&D. Instead, from 2002-2021, Cisco distributed USD144 billion (98 percent of net income) to shareholders in the form of stock buybacks as well as USD48 billion (another 33 percent of net income) as dividends. More generally, corporate financialization has robbed the United States of the possibility of attaining a leadership position in 5G and IoT.

In smartphone competition with Huawei, Apple has benefited immensely from US trade policy that, from the fourth quarter of 2020, eviscerated the Chinese company’s high-end smartphone output by coercing TSMC to stop shipping advanced nanometer chips to HiSilicon, Huawei’s chip-design subsidiary. Yet TSMC’s rise to global dominance of advanced chip fabrication was enabled by the fact that Apple itself chose to outsource semiconductor fabrication while, between October 2012 and June 2022, wasting USD529 billion on stock buybacks (92 percent of net income) to give manipulative boosts to its stock price. Apple could have deployed just a fraction of this cash to fund on a sustained basis its own state-of-the-art fab—as indeed an industrial journalist suggested to Apple CEO Steve Jobs in 2010. To put the extent of this corporate financialization in perspective, the combined USD27 billion that TSMC and Samsung Electronics committed to spending over several years from 2021 to launch state-of-the-art fabs in the United States was less than one-third of the USD86 billion that Apple spent on buybacks in 2021 alone.

Meanwhile, as has explicitly been recognized by Pat Gelsinger, Intel’s CEO, who took office in February 2021, corporate financialization has been a prime cause of that company’s loss of world leadership in chip fabrication to TSMC and Samsung. China’s SMIC may be struggling to catch up with the Taiwanese and Korean companies in advanced nanometer platforms, but Intel’s financialization has helped create an opening for SMIC’s development path. The same argument can be made about how Boeing’s corporate financialization, manifested by USD43 billion in buybacks from January 2013 to the first week of March 2019, just before the second of the two Boeing 737 MAX crashes, crippled a US-based technology leader, enhancing the possibility that China’s Comac, with its C919, might break into the Boeing-Airbus duopoly in the global manufacture of large aircraft.

More generally, a book could be written about how US-based companies have supported China’s development path to the mutual benefit of both nations, but how the US-based companies have squandered these gains in the name of “maximizing shareholder value”. Indeed, such a book could focus solely on the story of China’s rise to global leadership in green technology, with corporate financialization causing the United States to fall further and further behind. For the past decade or so, as the success of China’s development path has become clear in global competition, US interests have complained about China’s currency manipulation, intellectual property theft, unfair government subsidies, violation of WTO rules, and attacks on US national security. While, depending on the facts of the matter, there may be cause for US concern on any or all of these issues of US-China relations, a policy agenda that limits itself to litigating these questions will fail to comprehend the technological learning that since the 1980s has been driving China’s development path. At the same time, this US penchant for blaming China will ignore, or at best underestimate, the damage to the development path of the United States that corporate financialization has wrought.

Note

[1] The pioneering academic work on indigenous innovation in China was done by Qiwen Lu, on a project led by William Lazonick at the UMass Center for Industrial Competitiveness from 1993 to 1998 and the Euro-Asia Centre, INSEAD, from 1998 until Professor Lu’s untimely death in August 1999, just after his submission of the final book manuscript China’s Leap into the Information Age: Innovation and Organization in the Computer Industry to Oxford University Press (published in 2000). During the late 1990s, Qiwen Lu was in contact with Feng Lu, who was completing his Columbia University PhD dissertation on the reform of Chinese state-owned enterprises. Feng Lu subsequently became a faculty member at Tsinghua University, where, with his student Kaidong Feng, he ran a project on the limits imposed on indigenous innovation of the Chinese policy of “trading market for technology” in the automobile industry. In the spring of 2004, Feng Lu, by that time professor of political economy at Peking University, met with officials at the Chinese Ministry of Science and Technology (MOST) to discuss his report carried out with Kaidong Feng, The Policy Choice to Develop Our State’s Automobile industry with Indigenous Intellectual Property Rights. This report was influential in making “indigenous innovation” central to MOST’s Medium and Long Term Plan. For the last decade, William Lazonick and Yin Li have been collaborating with Kaidong Feng on a project on indigenous innovation and economic development in China.

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China’s Development Path: Government, Business, and Globalization in an Innovating Economy

China’s successful technological development path stands in contrast to the corporate financialization model in the United States
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Does Nature Have Rights?

Ruskin scholar Jeffrey Spear, author of “Dreams of an English Eden: Ruskin and his Tradition in Social Criticism,” discusses how the insights of a key 19th-century thinker can help us build a new paradigm for protecting the planet – and save us from ourselves.

Since I first wrote about the Victorian art and social critic John Ruskin, economics, and the environment over 40 years ago, the foreboding cloud of ecological disaster then on the horizon has become experiential climate change. Human activity has initiated the 6^th great extinction in the planet’s history threatening at least 25% of Earth’s species and, if not humans as a species, certainly the ethos of perpetual economic and population growth dependent on fossil-derived fuels and chemistry.

Ruskin challenged the premises of the Liberal economic order in terms that are, if anything, more relevant today than in 1860 when he declared the first principle of his economics: “There is no wealth but life.” Consequently, “that country is the richest which nourishes the greatest number of noble and happy human beings; that man is richest who, having perfected the functions of his own life to the utmost, has also the widest helpful influence, both personal and by means of his possessions, over the life of others.”[1] Given when he wrote, it is no surprise that Ruskin privileges human life, but the expansion to all life does not alter the underlying principle. The opposite of this wealth is not poverty, but what Ruskin called “illth,” not simply what is literally to death devote, like weapons, but also the things that must be consumed to maintain human life ranging from the byproducts of agriculture and husbandry, to the resources we take from the earth, to industrial waste and wear and tear on the body itself. The goal is to produce the most wealth, that is the greatest abundance of healthy life, with the least possible illth. Progressive economists like Herman Daley in The New York Times make the same point, but with no polemical punch. Does growth, he asks, really increase wealth? Is it making us richer in any aggregate sense, or might it be increasing costs [he includes environmental costs] faster than benefits making us poorer?” Ilth says it all in one word.

Ruskin formed his ideas before Marxism provided a potential alternative to the capitalist order, so his radical critique of economic liberalism called into question the underlying assumptions of industrialism itself, not just its capitalist expression; likewise, his rejection of competition does not imply a socialist alternative. The combination of influences that led Ruskin to criticize the liberal economic order at the moment of its triumph in Victorian Britain were unique, but several have a place in contemporary analyses, so I will begin with a brief account of assertions Ruskin made that have gained urgency since his time; then recount how the post-Romantic aspect of his critique has, in effect, been reborn as the literature of re-enchantment and conclude with reasons why the Rights of Nature legal movement, if it can be established -- and that is a big if -- has the potential to be both transnational and more effective than environmental legislation.

Ruskin was born in 1819 into a strict evangelical household. He was drilled by his mother on the Bible, the Scottish paraphrases, and Adam Smith’s Theory of Moral Sentiments from the time he was a toddler. As an adult, he transitioned to The Wealth of Nations, and, along with much else, regular re-reading of Plato. His first work of social criticism came directly from Smith. It was not the well-known passage on productivity to be gained by the division of labor, but rather the less familiar passage in which the moral philosopher predicts that the division of labor will have so damaging an effect on the physical and mental wellbeing of workers and thus society at large that only intervention by the state on their behalf could prevent it. “It is not, truly speaking,” Ruskin wrote, the labour that is divided; but the men: -- Divided into mere segments of men – broken into small fragments and crumbs of life; so that all the little piece of intelligence that is left in a man is not enough to make a pin or a nail, but exhausts itself in making the point of a pin, or the head of a nail” (10:192).

It was an article of Ruskin’s faith that Adam’s God-given assignment to tend the Garden did not end with the Fall, but was transformed into the labor of restoring Eden. As the sectarian faith of his childhood faded, he followed the Romantics, particularly Wordsworth, in finding spiritual and moral value, even solace, in Nature rather than its presumptive creator, and a duty to preserve not destroy. Ruskin had nothing against private property, but believed that it was, in effect, held in trust, and that responsible use of natural resources had to take the effect on others into account. The fact that you own riverfront property, can build a factory there, and use the river water, does not give you the right to pollute that water, or dirty the air without any attempt at mitigation. Correspondingly, righteous consumers should consider how the products they purchase came into being, not simply price.

The traditions Ruskin drew upon when examining political economy each imply a test question: the Gospels ask is it moral, moral philosophy asks is it ethical, Plato asks is it just. Looking at the Victorian market economy with its emphasis upon competition, the notion that private greed can be a public good, the positing of an abstract, rational, economic man as a consumer as opposed to the whole human being, assuming profit and return on investment as the purpose of businesses rather than the reward for producing useful goods or services, Ruskin’s answer was no, no and no. What economists like John Stuart Mill tried to add back into the system, the kinds of things now called externalities and such sub-fields as behavioral economics, were to Ruskin essential.

Moreover, the assumption of rational choice in a competitive marketplace neglected an important incentive in that system, the incentive to cheat, whether directly, by say adulterating a product rather than improving it, or indirectly by the advantage of wealth that enables the systemic robbery of the poor by the rich -- the reverse, “robbing the rich because they are rich being,” he noted, “rarely practiced by persons of discretion” (17: 58). Using contemporary examples, if it is the purpose of an energy company to provide fuel, it can legitimately raise prices to cover increased costs, but not to take advantage of a tight market to increase profit margins. As for cheating, one need go no farther than the oil companies’ campaign to discredit climate science after their own research confirmed that carbon emissions were a key driver of global warming. Robbing the poor by “taking advantage of a man’s necessities in order to obtain his labour or property at a reduced price” needs no elaboration. It is often affected by “occult theft,” that “hides itself even from itself, and is legal, respectable, and cowardly, [and] corrupts the body and soul” (27: 127). If this language seems unfashionably moralistic, consider the Great Recession and the gap between the common understanding of justice – the perpetrators and profiteers of misery should be jailed – and the fact that what they did was legal under The Commodities Futures Modernization Act of 2000. If the body politic has a soul, surely it is corrupted when what is legal diverges radically from the common understanding of right and wrong.

Free market capitalism violates what Ruskin called “The Law of Help.” Drawing on 19^th-century chemistry, Ruskin noted that both animate and inanimate substances consist of atoms that cohere, but while inanimate structures cannot help or repair themselves when injured, living things can. Help is life, helplessness is corruption or death. “The highest and first law of the universe – and the other name of life is, therefore, ‘help.’ The other name of death is separation. Government and co-operation are in all things and eternally the laws of life. Anarchy and competition … the laws of death” (7:207). Although Ruskin comes at it from a religious and Platonic standpoint, the Law of Help approximates what the contemporary materialist Jane Bennett calls Vibrant Matter, which I will get to shortly.

Translated into modern terms, Ruskin thought of both Nature and the economy as interfacing whole systems anticipating the science of ecology and, regarding the economy, something like General Systems Theory. It is now commonplace to see that the segmentation of natural systems into parcels that can be owned and exploited without regard to the whole can alter those systems so radically as to cause the extinction of whole species. I stress that Ruskin thought of the natural order and economic system the same way because we are not used to thinking of individually owned and operated entities doing business with others as parts of a complex interdependent system that is more like a web than a linear progression from production to sales to consumption. This reality has been brought painfully home by the so-called supply chain crisis precipitated by Covid-19. The complex systems of political economy in the broadest sense of that term need to be recognized, and in some way managed or controlled, if we are to avert catastrophe.

In the United States publicly held energy companies advertise going into renewables, but when their dirty assets are neither cleaned nor closed, but keep on producing behind the veil of private equity, the only thing going green is the corporate image. Likewise, the energy savings produced so far by the rising sales of electric vehicles in the US has been offset by the growth of energy-hungry cryptocurrency mining that is keeping coal-fired plants in operation that were supposed to be taken offline and held in reserve. Water rights in the US are a mare’s nest of legal and regulatory complications because surface water and the aquifer have traditionally been treated as distinct entities with differing rules of use and ownership rather than features of the water cycle.

In 1972 Barry Commoner noted that the wealth of modern societies “has been gained by rapid, short-term exploitation of the environmental system, but it has blindly accumulated a debt to nature.” We have not paid our debt, so Nature has begun to foreclose.

The Neo-Animism of Re-enchantment

Since the Jungian Thomas Moore called ecology a “Sacred science” in The Re-Enchantment of Everyday Life back in 1996 there have been at least 20 books in English dealing with the relationship between humans and nature with enchantment or re-enchantment in the title or centrally referenced. It is a new version of the Romantic and in some cases Christian tradition that Ruskin drew upon, the belief that there is something essentially spiritual in our relationship with the natural world that has been denied to our present and future sorrow by the zeitgeist of industrial and now post-industrial modernity with its abstraction, mechanization, exploitation and the fetishization of perpetual growth. To put it another way, humans have instrumentalized non-human nature at the immediate expense of the non-human, and the long term-expense of humanity itself creating a void once filled by belief that humans were part of Nature, a state of enchantment. “Re-enchantment” is the attempt by writers, largely philosophers, theologians, and social scientists to fill that void. The popular association of “enchantment” with magic practiced by humans, creates a space where believers in religions of the book with their transcendent but omnipresent deity can, as Ruskin did, find a duty of care for nature as we see in books with titles like Alister McGrath’s The Denial of Religion and the Ecological Crisis, or Mark Wallace’s When God was a Bird: Christianity, Animism, and the Re-enchantment of the World. This last title rejects the “otherworldly theologies” of traditional Christianity by treating Christian symbolic metaphors as reversible, making the holy dove akin to Thoth, the Ibis-headed god of learning in ancient Egypt, which may be a hard sell. Ruskin did something similar when he wrote about Athena as the Queen of the Air rather than the Goddess of Wisdom.

In the conventional history of religion animism is the oldest form of belief, but from a secular point of view, it is the newest. The idea that we are mammals and consequently part and parcel of the natural order, not beings apart, goes hand in hand with the discovery that sentience and communication are not the purview of humans alone, nor even mammals, but permeates the natural world. In the words of marine biologist Dominic Vitelli who studies octopuses, “it is not a question of how intelligent they are, but how they are intelligent.” Thanks largely to the work of the Canadian forest ecologist Suzanne Simard, who had to overcome both gender bias and the fact that timber companies fund most forest research, we now know that trees have an elaborate means of communication by way of symbiotic fungi and can share information and nutrition even across species, demonstrating that clear-cutting and monoculture of trees are both self-defeating and a capital crime against nature. As Simard says: trees and plants have agency. They perceive, relate, and communicate… cooperate, made decisions, learn and remember. By noting how trees, animals, even fungi – any and all nonhuman species – have this agency, we can acknowledge that they deserve as much regard as we accord ourselves.” Mistreatment of one species is a mistreatment of all” (Finding the Mother Tree: 294).

For materialists, neo-animism is where science and faith link up with no need for a transcendent spirit. In the light of the new science a leading secular voice, the political theorist Jane Bennet, author of The Enchantment of Modern Life (2001), has dropped enchantment and titled her 2010 materialist manifesto Vibrant Matter: A Political Ecology of Things. “I believe,” she concludes, in one matter-energy, the maker of all things seen and unseen… this pluriverse is transversed by heterogeneities that are continually doing things … it is wrong to deny vitality to nonhuman bodies, forces, and forms… there is a common materiality of all that lives” (122). The literature of re-enchantment expresses a necessary change in attitude but does not advance a direct mechanism for change.

The Rights of Nature

Federal protection of the environment in the United States relies largely on legislation passed in the 1970s and early 80s that established The Environmental Protection Agency, created superfunds to clean up the illth that padded the profits of abstract corporate persons at the expense of flesh and blood, established clean air and water standards, and protected endangered species. In the early 1970s, when smog had turned Los Angeles into a blurry smear below Observatory Hill, the need for regulation clearly justified its attendant expense and bureaucratic hassle, but just as a new generation arose in biblical Egypt that knew not Joseph, so once the air and water cleared, the need for enforcement to maintain or advance clean air and water became obscure to many, and the expense and bureaucratic hassle more problematic. The steady pressure of industry for deregulation and attendant court decisions have hobbled enforcement. This regulation cycle makes essential regulation the victim of its own partial success -- not to mention that new computer-based industries have largely evaded both regulation and taxation. Uber and its ilk, for example, have crippled traditional taxed and regulated livery services while increasing the number of cars cruising urban areas increasing congestion and pollution. In Pennsylvania, gas from wells scheduled to be capped is now fueling unlicensed generators powering crypto mining. The seven major crypto enterprises in the US now use as much power as Houston, a city of around 2.5 million people. We need a more comprehensive and international approach in the face of impending disaster and the international Rights of Nature movement is one possible way forward.

Dissenting in the 1972 case Sierra Club versus Morton, William O Douglas, the last of the New Deal Supreme Court Justices, contended that “if a ship is a person for maritime purposes, and a corporation is a person for purposes of the adjudicatory processes … so it should be as respects valleys, alpine meadows, rivers, lakes, estuaries, ridges, groves of trees, swampland, or even air that feels the destructive pressures of modern technology and modern life.” Douglas was paraphrasing a draft of the now classic article and subsequent book by Christopher Stone, Should Trees Have Standing” (1975, 3^rd revised edition 2010). Arguably an ecosystem has a better claim to limited recognition as a legal entity than a corporation, which has no body and no claim to sentience in and of itself.

In July, the Washburn fire threatened to destroy the Mariposa Sequoia Grove in California even though fire is part of the Sequoia life cycle – but this fire was just too hot. The mother tree of the Grove, the Grizzly Giant, was a sapling when the Roman Reality Show was who killed Germanicus and what will Tiberius do about it, but even a celebrity tree has no direct standing in court to challenge the human activity that threatens its existence. Apart from guardianship arrangements and popular support, efforts to give conditional legal standing to ecosystems in the US have failed whether in appeals court as with Lake Erie or by panicked passage of an actual ordinance against such recognition as happened in Florida. The major successes and current promise for the Rights of Nature have come from another direction, late-stage decolonization. Responding in 2008 to demands from its indigenous population, Ecuador became the first nation to recognize the Rights of Nature in its constitution. In 2010 Bolivia passed a law on the Rights of Mother Earth followed in 2012 with a framework law dealing with implementation. The most famous case is the long struggle of the New Zealand Māoiri to have the sacred status of the Whanganui River recognized by the state. As of 2017, the river became a legal entity called Te Awa Tupua that can sue and be sued. On that model, Colombia granted the Atrato River, its tributaries, and its basin, the right to be protected, preserved, and restored. The High Court of India followed suit in regard to the Ganges and Yamuna rivers, though they were reversed by the Supreme Court not on principle, but in regard to practicality.

The UN’s International Covenant on Civil and Political Rights of 1966, endorsed by the United States, asserts the rights of “ethnic and religious or linguistic minorities have the rights to their own culture” within nation-states. Within that frame, The International Labour Organization Convention no. 169 in 1996 established a framework for empowering indigenous and tribal peoples and their right to define priorities for their own development. A group of nations is now calling for a Universal Declaration for the Rights of Mother Earth. The special promise of the Rights of Nature movement is that it functions both within and between nation-states.

This brings me to my final point. In the homelands of Liberalism, its three pillars --- the rights to life, liberty, and property -- are deeply engrained in law and culture along with the legacy of religious traditions that gave man sovereignty over nature. But cultural and religious traditions elsewhere, the Daoism and Hinduism of East and South Asia example, are much closer to those of the indigenous peoples who are leading the way. A recent Law review article by Sequoia Butler argues that “Unlike a treaty rights approach or international human rights approach, environmental personhood allows tribal communities to insert ancestral knowledge and spiritual beliefs into plans aimed at preserving the land.” Following the New Zealand example, the Yurok tribe in Northern California has declared the Klamath River to be a person under tribal law. The same logic could apply to Federal lands in general. As the old animism joins hand with the new there is at least some hope that the Law of Help may be realized with the help of the law.

Note

[1] Unto This Last, E.T. Cook and Alexander Wedderburn, eds. The Complete Works of John Ruskin, vol. 17:104, hereafter cited in the text.

Image: By John Ruskin (1819–1900), Fragment of the Alps (1854-56), watercolor and gouache over pencil on paper, 33.5 × 49.3 cm, Harvard Art Museum, Cambridge, MA. Wikimedia Commons.

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In Tribute to Lance Taylor (5/25/1940 - 8/15/2022)

Everyone at INET is saddened by the news that our colleague Lance Taylor passed away on Monday, August 15th, 2022. His loss leaves a giant hole in our hearts as well as in the field of economics. His talents and achievements were prodigious and we will miss his cheerful and inspiring presence. Words help little on such occasions, but we would like to extend our condolences to his wife Yvonne, and his children Signe and Ian.

To commemorate his contributions, here are a few noteworthy articles, events, videos, and interviews by, with, or about Lance Taylor.

• Webinar: Research Webinar & Book Launch: Macroeconomic Inequality From Reagan to Trump
• Book: Macroeconomic Inequality from Reagan to Trump
• Video: Lance Taylor on Growth, Distribution, and the Future of Capitalism
• Video: Do Economists Understand the Economy?
• Article: Mainstream Economists Have Been Using a Misleading Inflation Model for 60 Years
• Interview: Are Economists in Denial About What's Driving the Inequality Trainwreck?
• Interview: What Thomas Piketty and Larry Summers Don’t Tell You About Income Inequality
• INET bio & all Lance Taylor content

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How to Unf★ck America

Over the last four decades, the US economy has done quite well for the top 1%, but it has been largely stagnant for the great majority of Americans. This was not an accident, nor the natural workings of the market and certainly not an inevitability. US policies have been deliberately structured since 1980 to redistribute income upwards. In other words, the system has been rigged.

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America, Land of the Dying? Alarming Study Shows U.S. Killing Its Own Population

Researchers find that the nation had become an outlier among other rich countries in mortality rates long before the pandemic – and that Americans are dying younger than their peers abroad.

With its economic and military might, America is hard to beat on technological wonders, space exploration, and top-notch universities. But when it comes to health, a fundamental prerequisite to a fulfilling life, the US isn’t delivering and hasn’t been for a long time. Researchers now find that the big picture of health failings is even graver than we already knew.

Piles of studies have called attention to the fact that in the country ranking number one in healthcare spending per capita, people are living shorter lives, feeling more depressed, and are more likely to skip treatment due to cost than in many developed nations. In a performance ranking of 11 high-income countries compiled by the Commonwealth Fund in 2021, the American healthcare system came in dead last, with the worst outcomes of any of the nations studied.

“The only wealth is life,” wrote the nineteenth-century critic John Ruskin. Recent research indicates that America may be rich in dollars, but getting poorer in ways that matter most.

In a stunning new report, “Missing Americans: Early Death in the United States, 1933-2021,” Boston University professor of global health and epidemiology Jacob Bor and colleagues pored over data from the CDC and a global mortality database. During the period investigated, they compared U.S. mortality rates with those of Canada, Japan, and 16 Western European countries. How many American lives would have been saved each year, asked the researchers, if U.S. mortality rates had matched those of other wealthy nations?

A staggering number, is the answer.

Millions Gone Missing

According to the researchers, the U.S. started out of the gate in 1933 as a global health frontrunner, showing a significant advantage in mortality rates over the peer countries studied. But starting in the 1970s, something went awry. Overall, Americans began to die at higher rates than their peers, a trend that grew steadily and picked up steam in the 2000s.

By the year 2019, the number of annual “excess deaths” had reached a stunning 656,353. Bor and his colleagues refer to these people who died as “missing Americans” -- the friends, family members, and colleagues who would still be with us if only modern U.S. healthcare and social policy lived up to their early promise.

Consider, the figure of 656,353 missing Americans is the number of excess deaths just in the year 2019 alone. In a single year, we lost – needlessly – more than the population of Detroit, Las Vegas, or Baltimore. More than Atlanta and Miami combined. And this was before the pandemic. In 2021, the number of missing Americans swelled to 1,092,293 – a whole lot more than you could put on milk cartons. Even worse: half of them were under age 65.

Bor and his fellow researchers found that on average, not only were there more Americans dying relative to their peers abroad, the deaths were becoming younger.

These are human beings who didn’t have to leave us. People who had children, elders, and neighbors to look after. Contributions to make. Love and laughter to share. The researchers found a haunting way to help us envision the profound depth of the tragedy. Based on the age at which Americans succumbed and the number of years they could have been expected to live had they been born in Finland, Spain, Japan, or the other countries studied, Bor and colleagues tabulate that in a single year, 2021, America sustained 25 million years of life lost.

Again, the figure of 25 million years of life lost is only for the year 2021. In 2022, as even more people die at 60 instead of 80, millions more future years of life will never be lived. The coronavirus is supposed to prey most viciously on the elderly, but in America, people still in their working years have been dropping away at higher rates during the pandemic than in peer nations – as they have been for years. Unsurprisingly, Black and Native Americans make up a disproportionate share of those vanished years and lives.

What changed?

Why, in a country with so much to spend – and so much spent on medical care – are so many lives being cut short? How did we start out so well and end up so badly?

Bor notes that the American mortality advantage in the late 1930s and 1940s was impacted by the high death rates in peer countries due to WWII and that the disadvantage of much of Europe and Japan likely continued for about a decade after the war because of the widespread devastation. But he also points to several other factors that probably helped Americans live longer up into the 1950s, such as the relative strength of organized labor and consequent rising wages, plus the large public investments that helped boost the middle class, like the GI bill and the promotion of high home ownership (with the caveat that these advantages were primarily available to White Americans).

Bor observes that the later period of American mortality advantage was likely bolstered by President Johnson’s War on Poverty and the marked expansion of the safety net by Medicare and Medicaid, as well as the racial integration of hospitals in 1963 and environmental regulation which made water and air healthier. “All of these programs and policies took some of the gains that occurred in the 1950s and expanded them so that it wasn’t just people with middle-class incomes and White people who had access to the determinants of a healthy, long life,” he explains.

Yet even during the period of relative mortality advantages, America’s inequality and structural racism likely held back the country’s longevity record from being as good as it could have been. Older populations in the U.S. have tended to have better mortality outcomes relative to peer countries than younger groups. Bor cites the fact that Americans have to reach the age of 65 before benefits like universal health care kick in as negatively impacting younger peoples’ life expectancy. This age-related trend shifted somewhat from 1980 to 2000, but the researchers found that in the 2000s, the age-related mortality picture is clear: the story of the U.S. disadvantage is primarily about people under 65 dying at higher rates than in peer countries.

The year when America’s overall mortality numbers diverged from other wealthy nations is 1980, according to the researchers’ findings. If the name Ronald Reagan comes to mind, you’re not alone: Bor notes that a Twitter discussion of the team’s work has homed in on this association. However, he emphasizes that the story is more complicated than one man’s presidency and its attendant policy changes, citing multiple factors such as the rise in opioid-related deaths in the 2000s, as well as increasing deaths due to obesity, diabetes, and metabolic syndrome. Gun violence has also increased America’s relative death toll.

In considering the widening gap between the US and peer countries in the 2000s, Bor points to the work of Princeton economists Anne Case and Angus Deaton on “deaths of despair” – the term for lives lost to preventable causes like suicide, drug overdose, and alcoholism. Researchers like sociologist Shannon Monnat, who has studied the opioid crisis, have built upon this work, trying to understand why these deaths occur so frequently in the US.

Bor mentions the combined stressors of economic dislocation due to globalization and the loss of jobs and economic opportunity in some parts of the country, especially among those lacking college degrees, and the social implications of these trends, such as increasing numbers of men without jobs who are no longer considered husband material and thus lose the social support that comes with marriage. Compounding the problem, in Bor’s view, is “the failure of our politics to address it, or to even see it coming – and this was happening under both George W. Bush and Obama.”

As Bor and his researchers note, inequality is surely a big part of the picture. In 2017, economist Peter Temin described how America began to diverge into what are essentially two separate nations in the 1970s. One nation – around 20% of the total population -- boasts college educations, good jobs, and access to quality healthcare. The other nation, where the 80% majority resides, is stuck with low wages, insecure jobs, fewer education opportunities, and unaffordable and inadequate healthcare. These are the people getting sicker and dying younger than they used to. Temin observes that the US economic structure now looks a lot more like that of a developing nation than a wealthy superpower, which may help explain why the country’s mortality rates as a whole can’t compete with peer countries where such bifurcation is less pronounced. Thomas Ferguson, Director of Research at the Institute for New Economic Thinking (INET), has studied America’s increasing turn to money-driven politics, which has resulted in public-minded policies giving way to free market-driven policies that do not consider the needs of the majority.

These two worlds, the high-income and low-wage sectors, interact less and less, which might explain why many affluent Americans, including the doctors who attend them, are unaware of how dire the country’s overall health record has become or how many are dying young compared to peer nations.

But the low-wage world knows something about it first-hand. The Covid crisis has illustrated how many Americans are not simply ignored, but placed directly in harm’s way -- expected to sacrifice their very lives for the benefit of the affluent. This attitude was succinctly expressed by Dan Patrick, lieutenant governor of Texas, as the pandemic raged: “There are more important things than living,” he stated. Like an economy that mostly benefits the few?

Bor acknowledges the need to discuss policies that would help the U.S. turn around its dismal mortality record, but he believes that the first step is to make the public aware of the urgency of the situation. Even he, an epidemiologist, has been taken aback by what he and his colleagues found. “What surprised me in this research is how huge the number of missing Americans is, and how little a part of our public conversation… I am sure if you did a survey, people would have no idea of the scale of excess mortality in the U.S. We’re just way behind.”

A turn for the worse?

Unfortunately, if America was a patient, the doctor would likely be predicting a turn for the worse.

For starters, the nation’s pandemic response has been widely criticized, with data showing clearly that the U.S. record in saving people from the ravages of the virus is below average in the world and among the worst among developed and high-income nations. That’s certainly not helping the mortality crisis.

In the broader view, the fracturing of the country into a dual economy is not improving. To add further stress, Peter Temin has illuminated in his most recent book that racial disparities in the U.S. economy appear to be getting worse, not better.

Unbridled capitalism is not good for life expectancy. For example, the increasing move of private equity into healthcare since the 1980s in the US has alarmed many experts, as INET has highlighted in research by Eileen Appelbaum and Rosemary Batt, and also in work by Thomas Ferguson, Paul Jorgensen, and Jie Chen on private equity’s political contributions. A series of articles on the pressure put on emergency rooms by private equity to cut costs has further illuminated the danger to American lives from this rapacious part of the financial sector, which squeezes ever-steeper profits from human bodies.

Meanwhile, as the health of Americans is deteriorating, the Supreme Court attacks environmental regulation, gun protections, and delivers a shocking blow to women’s health. If U.S. programs and policies of the 1960s expanded upon the gains that occurred in the 1950s, then many of those in the 2020s are doing the opposite – they are intensifying the failures of past decades.

“It’s one of the tragic ironies of our era,” says Bor. “Populations that have seen some of the worst trends in health outcomes over the last 40 years are electing leaders who will further exacerbate those trends through policies that are inimical to public health – whether that’s a failure to expand Medicaid, failure to regulate guns, or abortion restrictions that will lead to negative short-term and long-term health consequences for women.”

All of this points to the uncomfortable reality that US democracy is not functioning as it should. When elected officials do not reflect the will of the people, which surely, at a most basic level, is to live, then something has gone badly wrong. “The thing that I find most frustrating is that you’d expect in a democracy that the political system would respond when there’s a mass health crisis, when peoples’ material realities have been in decline,” says Bor. “What you see is exactly the opposite. It seems very bleak but then you think, gosh, there has to be an opportunity for a new politics here.”

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Copyrights and Patents and IP, Oh My!

Why are we incentivizing wealth at the expense of health?

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How Public Real Estate Investment Trusts Extract Wealth from Nursing Homes and Hospitals

Real Estate Investment Trusts (REITs) are considered “passive” investors and are exempt from corporate tax. But in reality, they play a very active role in reshaping whole industries, like healthcare.

Real Estate Investment Trusts (REITs) are important financial actors that control over $3.5 trillion in gross assets and over 500,000 properties in the U.S. Yet they have been largely ignored because tax rules define them as ‘passive investors.’ They exist as tax “pass through” entities and pay no corporate taxes if they invest at least 75 percent of their assets in real estate, derive 75 percent of their gross income from real property, and pay out at least 90 percent of taxable income (excluding capital gains) as shareholder dividends each year.

In our new report, “The Role of Public REITs in Financialization and Industry Restructuring” (Institute for New Economic Thinking Working Paper #189), we question this conventional view of REITs as passive investors. Our evidence shows that they are financial actors that aggressively buy up property assets and manage them to extract wealth at taxpayers’ expense. They do not simply wait patiently to buy real estate through market transactions, sit back passively, and collect the rent. The case studies in this report suggest that their tax-exempt status should be revisited.

We identify three important ways in which REITs have had a powerful impact on the US economy in general and on productive enterprises more specifically – whether intended or not. We draw on cases from markets where REITs have a major presence – nursing homes, hospitals, and hotels.

First, because REITs were designed to facilitate retail investing in the real estate market, they have become an important mechanism for expanding the financialization of the US economy. That is, they increase the power of finance capital by expanding its reach into larger swaths of the productive economy. They have expanded the pool of capital available for transactions that monetize real property and turn it into tradable assets – financial widgets with little or no connection to the real purpose of the productive enterprises that occupy the properties they own.

Second, REITs have played a major role in industry restructuring and consolidation. They have done so by promoting REITs as a separate asset class – one that should be legally separate from the commercial enterprises that produce goods and services on real estate property. By separating ownership of real property (property company or PropCo) from the enterprises operating on that property (operating company or OpCo), investors may more precisely calculate the returns to capital based on the risk-reward features of the asset class – in this OpCo/PropCo model, real estate assets versus the goods or services produced on the property. And the stock market values these assets differently.

Thus, REITs have grown and expanded their reach by separating real estate assets from productive assets. They have dominated M&A activity in real estate markets due to their tax-exempt status, which allows them to pay higher premiums for properties than non-REIT property owners. As REITs buy up local property and consolidate it into national or global property corporations, they also facilitate the consolidation of the operating companies that become their tenants. That is, they facilitate industry consolidation both at the property level and at the commercial enterprise level.

This is evident in the three sectors analyzed in this study. In healthcare, healthcare REITs have partnered with private equity firms to separate assets into property and operating entities -- with REITs financing the expansion and consolidation of PE-owned nursing homes and hospitals into mega-chains with enhanced local, regional, or national market power. The anti-competitive implications of these developments in healthcare have become a major focus of scholarly research and a major concern for political leaders and anti-trust regulators. A similar pattern of concentrated ownership is evident in the hotel sector, where REITs have dominated M&A activity and fostered industry consolidation – both at the level of the hotel real estate and also at the level of the brands and operating companies that manage the property assets.

A third effect of REITs occurs at the level of operating companies and the outcomes for the companies, employees, and consumers. By law, REITs must act as passive investors to retain their tax-exempt status, which means that they cannot interfere with the management or operating decisions of their tenants. This has led to the OpCo/PropCo model described above, which separates property and operations ownership into separate legal entities – entities that by law must maintain arms-length relations. But this separation poses major problems from the standpoint of effective business management and service delivery. That is because productive operations depend importantly on the quality and maintenance of the underlying property. The quality of patient care depends on how well facilities are maintained; hotel revenues depend on customer satisfaction with both services and facilities.

In other words, the separation of property ownership from operations is driven entirely by the financial logic of maximizing returns for investors – NOT the business logic of providing high quality integrated services. The legal requirement for an arms-length relationship between property and operating companies is in conflict with the needs of the business, and ironically, also the ability of real estate owners to make sure that operations on their properties are managed effectively.

To overcome this dilemma, REITs have developed work arounds to allow them to influence or partner with the companies that manage their properties – strategies that are at odds with the original conditions for their tax-exempt status. They have successfully lobbied for legal changes that have freed up REITs to behave more and more like publicly traded corporations, but without paying the corporate taxes that their counterparts pay. These work arounds vary based on different risk-reward assumptions across industries.

Moreover, the cases in this report show how REITs achieve their financial goals through work arounds that directly or indirectly shape the decisions or business strategies of their tenants -- and in turn, outcomes for consumers, patients, and employees. However, they bear no legal liability for what happens to the operating company or any of these stakeholders. While these REIT strategies may be technically legal, they undercut the original intent of the laws.

In healthcare, REITs use sale-lease back agreements with healthcare operating companies in which the companies are tenants and the REITs are landlords. These agreements assume that government reimbursement systems provide long term predictable funding mechanisms. The tenants bear all of the profit-loss risks, as well as the costs and risks of property maintenance. Thus, healthcare REITs are viewed as safe investments that yield reliable dividends, almost as safe as bonds. They bear little risk if an operating company fails; and in that event, their properties may be repurposed for a new tenant. Healthcare operating companies in nursing homes and hospitals, however, bear substantial risk of financial failure due to ongoing cost increases and uncertain and unpredictable funding.

Healthcare REITs have teamed up with private equity firms to strip property assets from healthcare providers. Our case studies show how private equity firms have bought out nursing homes and hospitals using extensive debt, and then have sold the underlying property to a REIT, in what is known as a ‘sale-leaseback.’ The PE firms have taken the proceeds from these sales to pay dividends to themselves and their investors, rather than using them to improve healthcare services for patients. The REITs have received inflated rents from healthcare providers, while the healthcare providers have become tenants of the property they formerly owned. Now they are burdened with ‘triple net’ leases in which they pay rent subject to annual escalator clauses (and continue to pay the costs of property maintenance and improvements, taxes, and insurance).

While REITs appear to be passive investors in these cases, a deeper analysis shows how they have made it possible for private equity firms to extract wealth through excessive debt financing; and how they have undermined healthcare providers’ financial stability through charging excessive rents with unsustainable escalator clauses in long-term renewable leases. Our case analyses illustrate how this happens. They include examples in skilled nursing: Healthcare Properties (HCP) (a healthcare REIT) and HCR ManorCare (owned by PE firm Carlyle Partners); and Health Care REIT and Genesis (owned by Formation Capital). In hospitals, they include Medical Properties Trust (a healthcare REIT) and its involvement with Cerberus-owned Steward Health, Leonard Green-owned Prospect Medical Holdings, and LifePoint Healthcare, owned by PE firm Apollo.

In hotels, by contrast, REITs bear most of the risk of profit and loss, as they lease their properties to taxable REIT subsidiaries, which in turn contract with hotel operators -- paying them a fee for managing the REIT’s properties and reimbursing them for labor and other expenses. Hotel REITs hide behind the complexity of contracting relationships to argue that they maintain arms-length relations with operators. But their financial concerns over risk management lead them to promote strategies to ‘actively manage’ their assets and drive down hotel operating costs, which became particularly evident during the COVID pandemic.

Notably, if operating companies or their stakeholders suffer negative consequences due to REIT ownership strategies, the REITs bear no liability or responsibility for these outcomes.

In sum, this working paper suggests that scholars and policy makers need to take a much closer look at REIT activities. Their profits and executive compensation have been extraordinary in recent years, with little discomfort caused by the COVID pandemic. Their financial transactions offer little or no transparency, and taxpayers deserve a clear assessment of how much they are subsidizing yet another asset class that may be contributing to greater inequality in the US economy.

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The Role of Public REITs in Financialization and Industry Restructuring

Real Estate Investment Trusts (REITs) are considered “passive” investors and are exempt from corporate tax. But in reality, they play a very active role in reshaping whole industries, like healthcare.
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