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The $84,000 Drug Costs $84,000 Because of Government Patent Protection Print
Friday, 30 May 2014 05:17

The Washington Post had an interesting piece discussing the issues associated with the cost of Sovaldi, a new drug designed to treat Hepatitis C. As the headline tells readers, Gilead Science, the manufacturer of the drug, is selling a year's dosage for $84,000. The piece notes that many new drugs are now being developed which will likely carry similar price tags.

At one point the piece raises the possibility of price controls, which it implies would be a government intervention into the market. Actually, the $84,000 price is the result of a government intervention into the market. It is due to the fact that the government grants companies a complete patent monopoly, threatening to arrest those who try to compete in selling the same drug.

While patent monopolies are one way to provide an incentive for research and development, they are an extremely inefficient mechanism. Not only do they lead to a situation in which drugs that would otherwise be cheap (absent patent protection, Sovaldi would almost certainly cost less than $1,000) become very expensive, they provide enormous incentives for drug companies to misrepresent the safety and effectiveness of their product. And they do this all the time, just as economic theory would predict.

In addition, patent monopolies provide incentives for duplicative research as other companies attempt to innovate around a patent in order to get a share of patent rents. The article reports that this seems to be happening in the case of Hepatitis C where other companies are bringing similar drugs to the market.

In short, the problem of high-priced drugs is the direct result of government policy. That point should be front and center in any piece that discusses the topic.

 
Doctor Shortages at the Veterans Affairs Hospitals: Why Aren't People Talking About Immigration? Print
Friday, 30 May 2014 05:06

The Silicon Valley folks and their allies in think tanks and academia are constantly touting the need to have more immigrants to work as engineers in their companies. This is in spite off the fact that the wages of the workers in the sector do not demonstrate evidence of a serious shortage (i.e. they are not rising rapidly).

Given the frequency with which more immigration comes up in the context of the tech sector, is striking that the issue is not mentioned once in a major NYT article on doctor shortages in the Veterans Affairs hospitals. Doctors in the United States make on average more than twice what their counterparts in other wealthy countries earn, which means that many would likely be willing to work in the United States for a period of time, given the opportunity. (The piece puts the median pay of primary care physicians in the private sector at $221,000 in 2012.) It is also easy to design a mechanism to compensate developing countries for any doctors who come to United States so that they can train 2 or 3 doctors for each one that comes to the United States.

Anyhow, given the evidence of a shortage of doctors in the United States, and the huge gap in pay between the U.S. and other countries, this would seem an obvious case for benefits from increased immigration. It is remarkable that this is not front and center on the national agenda.

 
Why Is It So Acceptable to Lie to Promote Trade Deals? Print
Friday, 30 May 2014 04:36

It's not polite to use the "L" word here in Washington, but it's hard not to be more than a bit disgusted with the frequency with which trade pacts are sold as great engines of job creation and economic growth, when they clearly are not. The latest offender in this area is Bruce Ackerman, a Yale Law professor.

In a Washington Post column Ackerman called on President Obama to push for the Transatlantic Trade and Investment Pact (TTIP), which he described as, "opening the path for job-creating opportunities for workers on both continents."  Really, what evidence does Professor Ackerman have for this assertion?

The most widely cited projections for the growth impact of the TTIP are from the Centre for Economic Policy Research in London (no connection to my CEPR) which shows the pact leading to an increase in GDP of 0.4 percent in the U.S. when its effects are fully felt in 2027, and 0.5 percent in the European Union. The analysis explicitly says that it will not lead to more jobs since the models are full employment models. It may lead to somewhat higher wages, but it is not a way to employ the unemployed. Furthermore, the discussion notes that in the transition, some workers may end up unemployed as the economies adjust to the new rules.

Implying that a deal that raises GDP by 0.4 or 0.5 percent 13 years out means "job-creating opportunities for workers on both continents" is just dishonest. The increment to annual growth is on the order of 0.03 percentage points. Good luck finding that in the data.

In addition, there are reasons to believe the growth effect could go in the opposite direction. The model used by the London CEPR does not assume any negative growth impact from higher prices for drugs or other goods that might be more costly due to stronger patent and copyright protections coming out of the deal.

These will likely be a drag on growth. Economists tend to like patents and copyrights (probably because their friends and family members benefit from them), but that doesn't change the fact that they lead to market distortions and have major economic costs. If the price of a drug rises by 1000 percent because we imposed stronger or longer patent protection it has the same effect in the market as if we imposed a 1000 percent tariff on the drug.

Markets are stupid, they don't realize that the price increase was caused by a policy that economists support in contrast to a trade policy they oppose. They respond the same way in both cases. While we don't know how much increased patent and related protections will raise prices as a result of these deals, but there is no doubt that the direction is up. And that will slow growth in a way that is not accounted for in the CEPR analysis. (Yes, higher prices give more incentive for innovation. If you find evidence that this ends up as a net positive for the economy, you get a Nobel Prize and huge bucks from the pharmaceutical industry.)

Reducing trade barriers can lead to increased economic growth and gains for consumers and workers, however the barriers between the U.S. and Europe are already very low in almost all cases. This means that the potential for further gains are limited. This deal is primarily about imposing a set of regulations on both continents, some of which may be improvements, but many of which will be designed to serve the business interests who are in on the negotiations. They hope to accomplish through a "trade" deal what may not be possible through the normal democratic process. And they won't hesitate to sell this backdoor sleaze as a "job creator."

 
Andrew Sentance Wants Us to Stop Worrying About Deflation Print
Thursday, 29 May 2014 13:54

Andrew Sentance, a former member of Bank of England's Monetary Policy Committee, wrote in the Financial Times that we should stop worrying about deflation. He actually is at least partly right.

Sentance distinguishes between what he calls "chronic" deflation, "benign" deflation, and "price adjustment." He says that we need only worry about the former, a process whereby price declines become self-perpetuating, much as an inflationary spiral can become self-perpetuating. He writes that in this situation people may put off purchases and the real value of debt increases, both of which reduce demand and therefore put further downward pressure on prices. 

Sentance argues that we have little basis for fearing this sort of deflation. He is right. We have not seen this sort of deflationary cycle in any wealthy country since the Great Depression. Even in Japan the periods of deflation were relatively brief, with the rate of price decline almost always less in absolute terms than -1.0 percent.

However it does not follow from this fact that a low rate of inflation is not a problem. The low rates of inflation across Europe mean that real interest rates are much higher than would be desired in a weak economy. Given the high unemployment rate across the euro-zone, a standard Taylor rule would imply a negative real interest rate on the overnight rate of at least -3.0 percent. However with an inflation rate of just 0.7 percent, the European Central Bank can only get the rate down to -0.7 percent with standard monetary policy.

The debt burdens on homeowners and governments are also much greater than would be the case if inflation was eroding the real value of debt at the rate of 2.0 percent a year, or even better at a 3.0 percent or 4.0 percent annual rate. Since most of the outstanding debt was contracted when the inflation rate was higher and expected to remain higher, the lower than expected rates of inflation that countries are now experiencing amounts to a windfall transfer from debtors to creditors. 

More rapid inflation would also facilitate the price adjustment process that is necessary to restore balance within the euro zone precisely because we are unlikely to see the sort of deflationary spiral that Sentance dismisses. The new zero inflation rate in Germany and other core countries means that the peripheral countries can only adjust very slowly with modest rates of deflation. If the core countries had inflation rates of 4.0-5.0 percent, the adjustment could be much quicker.

And Europe is paying an enormous price for this slow adjustment. According to the I.M.F. every country in the euro zone is operating well below its potential GDP with the exception of Malta. In Greece the output gap is almost 10 percent, but the I.M.F. calculates that even core countries like Austria and the Netherlands have output gaps. In these cases, the estimated gaps are 0.9 and 4.7 percent, respectively.

Furthermore, these gaps are measured against sharply lowered estimates of potential GDP. If the I.M.F.'s pre-crisis projections are used as the basis for calculating potential GDP then almost every country in the euro zone would be looking at an output gap of more than 10 percent of GDP. (By comparison, we are supposed to believe that the Transatlantic Trade and Investment Pact, which is projected to raise GDP by 0.5 percent by 2027, is a big deal.)

This suggests that all is seriously not well in the euro zone and that a higher rate of inflation could be an important part of the cure.

 

 
Amazon's Tax Breaks Are Essential to Its Survival Print
Thursday, 29 May 2014 07:03

An NYT article on the battle between Amazon and Hachette, a major publisher, told readers that:

"Thanks to Wall Street’s unwavering support, Amazon could afford to sell books for what it paid for them — something no physical bookseller could do."

While the willingness of investors to pay large amounts of money for the stock of a company that makes little or no profit has been important to Amazon's success, it is also worth noting that through most of its existence it has been exempt from the requirement that it collect sales tax, unlike its traditional competitors. This has allowed it to undercut them in the market giving the company an enormous competitive advantage courtesy of the taxpayers. The savings from not having to collect sales taxes dwarf Amazon's cumulative profits since it came into existence.

 

Addendum:

Having read through the comments here, I will make a couple of quick points.

1) Don't waste anyone's time or kill any electrons talking about customers being obligated to pay the tax. This is a blog about the real world. No one sends their sales tax to the government for the things they bought on Amazon. What matters is the law as it's enforced, and that means that Amazon's brick and mortar competitors (which includes many Internet sellers) had to collect state sales tax all along. Amazon has just recently started collecting taxes in some states.

2) Not having to collect sales tax is a huge subsidy to Amazon. (Yes, it is a subsidy. States and cities collect revenue -- if Bezos gets out of paying it, then everyone else pays more. It is the same thing as if the governments sent Jeff Bezos a big fat welfare check every year.) And it mattered a huge amount to Amazon's growth and survival. If it thought it could have raised prices by 4-8 percent (the amount of state sales tax) without hitting its market share, it would have done so. The fact that the company has generally operated with near zero profits indicates that collecting sales tax would have been a very big hit.

 

Note: Typos corrected.

 
Six Things George Will Would Not Have Said If He Had Access to Economic Data Print
Thursday, 29 May 2014 05:08

George Will devoted his column today to complaining about Obamanomics, or more specifically the state of the economy during the Obama administration. The article includes a serious of inaccurate or misleading statements which Will presumably made because he doesn't have access to data from his home or office in Washington.

1) Will told readers:

"June begins the sixth year of the anemic recovery from the 18-month recession. Even if what Obama’s administration calls “historically severe” weather — a.k.a., winter — reduced GDP growth by up to 1.4 percentage points, growth of 1.5 percent would still be grotesque."

Actually quarterly data are always erratic and an individual quarter tells people almost nothing about the state of the economy. (The first quarter number was revised downward this morning to show negative growth.) If Will thinks that a 1.5 percent growth rate would be "grotesque" then he would presumably also be appalled by the 1.9 percent growth rate the economy saw in the second quarter of 1986, the sixth year of the Reagan presidency. The best quarterly growth figure we have seen in the last four decades was the 16.5 percent annual growth rate in the second quarter of 1978 in the midst of "Carter-era stagflation."

 

2) Will complained:

"The recovery’s two best growth years (2.5 percent in 2010 and 2.8 percent in 2012) are satisfactory only when compared with 2011 and 2013 (1.8 percent and 1.9 percent, respectively)."

The recovery has indeed been anemic, but this is due to the fact that this recession was qualitatively different from prior recessions, with the exception of the 2001 downturn. It was caused by the collapse of a housing bubble. If Will had access to data he would know that house prices rose by more than 70 percent above their trend level at the peak of the bubble in 2006. This led to record levels of construction. The wealth effect from $8 trillion in bubble generated equity led to a consumption boom with the savings rate falling to record lows.

When the bubble burst there was no easy way to replace the lost demand from the collapse in residential construction and consumption. Folks who have managed to take an intro econ class know that there are only five components of aggregate demand. In addition to residential construction and consumption, we have non-residential investment, government spending, and net exports. An economic collapse will not generally provide the basis for a boom in non-residential investment. Will's Republican allies in Congress (along with many Democrats) have acted to make sure there was no big increase in government spending.

This only leaves net exports. A major rise in net exports would require a sharp decline in the dollar, which would make U.S. goods and services more competitive in the world economy. However powerful interests like Walmart, which have low-cost supply chains in the developing world, have no interest in seeing the dollar fall in value relative to other currencies, which would undermine their competitive advantage.

Anyhow, given the nature of the downturn, the weakness of the recovery was predictable and predicted. The economy was also slow to recover from 2001 recession, which was caused by the collapse of the stock bubble. It did not start generating jobs again until the fall of 2003 being pulled forward by the growth of the housing bubble.

Read more...

 

 
The Economic Recovery in Spain Should Push Unemployment Below 10 Percent by 2030 Print
Thursday, 29 May 2014 04:17

A New York Times article on the success of Podemos, a new anti-austerity political party in Spain, referred to the "hints of recovery" in Spain. In the last year, the unemployment rate in Spain has fallen by 1.0 percentage point to its current level of 25.3 percent. At this pace of recovery, the unemployment rate in Spain should fall below 10.0 percent just before 2030.

 
Why Would the Addition of Young Healthy People Raise the Cost of Insurance? Print
Wednesday, 28 May 2014 04:59

That's what Washington Post readers are asking after reading an article warning of large price increases in 2017. The piece reported the output from a simulation model developed by Stephen Parente, a University of Minnesota health economist who advised Sen. John McCain's 2008 presidential campaign.

According to the article, Parente's model predicts a large increase in the price of bronze and catastrophic plans in the exchanges in 2017. It gives the reason for this increase:

"Parente estimates between 4 million and 6 million people will see their existing individual coverage end in the next few years when either their plans lose grandfathered status or the White House's extension of non-compliant health plans runs out near the end of 2016. These holdovers from the individual market predating the ACA are expected to be younger, healthier and more sensitive to price.

"Parente's model finds these factors will have the most significant affect on 2017 premiums for less-robust plans in Obamacare's "metal tiers." These include catastrophic and bronze-level health plans, which have the cheapest premiums but the highest out-of-pocket costs. The effects will differ by state, but the national picture shows a big price jump for bronze and catastrophic plans between 2016 and 2017 — premiums for the average individual bronze plan, before subsidies, are projected to climb between $2,132 and $4,174 between those two years."

Let's see, healthy people raise the cost of insurance? Maybe we can get some older, sick people into the pool.

 
The NYT Makes Silly Mistakes Because It is Determined to Use Numbers Without Any Context Print
Wednesday, 28 May 2014 04:29

Newspapers should be in the business of informing their readers, but not the New York Times. Last fall I had raised the issue of putting large numbers in some context so that readers would be able to understand their significance. I was primarily thinking of budget numbers. Almost no readers have any idea what the billions or trillion mean, but they would immediately be able to understand a number expressed as a percent of the budget. The latter takes no additional research, it takes one second of a reporter's time to use a spreadsheet or calculator.

Margaret Sullivan, the paper's public editor agreed with me. So did David Leonhardt who was the Washington Bureau chief at the time and is now the editor of Upshot section. Leonhardt said that to most readers reporting a number in the hundreds of billion was the same thing as just writing "really big number." It seemed that this agreement would lead to a change in the paper's practices. However that was not to be the case.

The paper still routinely presents budget and other numbers without any context, even though everyone involved in the process knows these numbers are meaningless to the overwhelming majority of people who see them. Of course the numbers are also meaningless to the editors and copy editors at the NYT who review copy.

We got more evidence of this fact in a correction to an article on the cost of demolishing abandoned buildings in the city of Detroit. The correction told readers:

"Because of an editing error, an earlier version of the headline on the home page gave an incorrect figure for the estimated cost of ending blight in Detroit. It is $850 million, not $850 billion."

Yes, million, billion, who can tell the difference? If this number had been expressed relative to the size of the city's economy the error might have been clearer to the NYT's editors and likely would have not found its way into print.

The city of Detroit has a gross city product of roughly $35 billion, assuming that the share of the city's economy in the metro area economy is proportional to its population. This means the cost of addressing blight, as indicated in this article, would be roughly 2.3 percent of the city's annual output. By contrast, if the article had used the billion number it would have reported that the cost of blight was 2300 percent of the city's economy. Presumably an editor would have been able to realize that the latter was an implausible figure and caught the mistake before it found its way into print.

It is difficult to see any legitimate reason for not expressing numbers in a context where they are understandable to NYT readers. The failure to do so also means the numbers are less understandable to NYT editors, which means that the paper will allow more embarrassing typos into print.

 
L.A. Times Reports Low-Paid Workers Don't Have Much Money Even After Increase in the Minimum Wage Print
Tuesday, 27 May 2014 14:11

The Los Angeles Times had a news article telling readers that workers in Connecticut are still having a tough time making ends meet even after the minimum wage in the state was increased by 45 cents to $9.15 an hour at the start of 2014. The headline of the piece, which reflected the content of the article, read:

"In Connecticut, some minimum-wage workers say raise has not helped much."

The piece included comments from economists who have criticized the minimum wage, saying both that it would cost jobs and that it is an ineffective way to reduce poverty. The piece did not present the views of any of the large group of economists who have studied the minimum wage and found that it had little or impact on employment.

Nor did it discuss the views of any economists whose research indicated the minimum wage could have a substantial effect in reducing poverty. The Congressional Budget Office agreed with this assessment in the analysis of the minimum wage it released earlier this year. The article instead touted increases in the Earned Income Tax Credit (EITC) as a preferred way to address poverty. The article ignored evidence that the EITC lowers wages for low-paid workers who do not qualify for the credit.

The article tries to present a case that the minimum wage is already costing Connecticut workers jobs:

"Employment growth in Connecticut has lagged behind the nation since December, data show. Nationally, employment grew 0.62% from December through April, while employment in Connecticut fell 0.19% over the same time period.

"Much of that drop-off was related to the elimination of 10,900 jobs in January, the month employers had to start paying 45 cents more. In the previous three years, Connecticut had added an average of 4,000 jobs over the same time period."

Actually Connecticut has been lagging the country in employment growth throughout the recovery. The country as a whole had created jobs at a 1.1 percent annual rate from the end of the recession in June 2009 to December of 2013. Connecticut had created jobs at just a 0.7 percent annual rate.

Job losses are also not unusual in erratic state data. According to the Bureau of Labor Statistics Connecticut lost 9,000 jobs from June of 2013 to September of 2013.

The piece also implies that most minimum wage workers are teenagers who are working for spending money:

"Another argument from business owners against increasing the minimum wage: It doesn't help the presumed beneficiaries — working-poor families — because many minimum-wage workers are young people learning their first jobs or working part time while going to school.

"Case in point: Bridgeport, Connecticut's largest city and one of its poorest, decided to raise the minimum wage for all city employees to $10.10 on July 1.

"But that will mainly benefit people who work at the city's golf course, like Meaghan Derry and Yogabeth Arias. Derry's husband supports the family with a higher-paying job, and Arias is a high school student who will go to college in the fall.

"The extra money Arias has earned this year from the 45-cent raise has mostly gone to pay for her prom."

In fact, the majority of workers earning near the minimum wage are over age 25 and the vast majority are over the age of 20. Almost 10 percent have a college degree and another 33.3 percent have some college.

 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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