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Quick, Some Meaningless Budget Numbers from the NYT Print
Wednesday, 19 November 2014 08:12

Okay folks, how big a deal is $608 billion over the next ten years to the federal government? Yeah, that comes to 1.3 percent of the $48.5 trillion that we were projected to spend over this period. You all knew that, right?

Yes, the NYT is again doing the meaningless budget numbers routine, telling us that plans by House Republicans to extend a set of tax breaks over the next decade would cost $608 billion in lost revenue. A Senate plan to cover 2015 and 2014 would cost $84.1 billion (roughly 2.4 percent of spending). Of course none of its readers has any idea of the significance of these numbers, and they know it. But hey, who ever said news reporting has anything to do with informing the public?

As Jonathan Gruber says, the public is stupid.

Tufts Economist Documents Inefficiency of Patent System for Financing Drug Research Print
Wednesday, 19 November 2014 05:54

Joe DiMasi, a professor at Tufts University, presented the findings of a study updating his prior work on the cost of developing new drugs. He reported that the study estimated the average cost at $2.6 billion. It is worth noting that this figure only applies to a small fraction of drugs. DiMasi looked at drugs based on new chemical entities, which are less then 20 percent of all new drug approvals. He also is looking at drugs for which the drug companies paid for all the research (as opposed to the National Institutes of Health [NIH] or other funders), which further reduces the size of the group of drugs in question.

The $2.6 billion figure is a dramatic increase from DiMasi's last estimate of $802 million in 2001. (Both numbers are in current dollars -- the 2001 number would be roughly $1,040 million in 2014 dollars.) While many people raised questions about DiMasi's methodology, it's worth stepping back for a moment and asking about the implications of Dimasi's number. (The study itself is not yet available, he only released slides yesterday. It is worth noting that this study, like earlier versions, relies on funding and proprietary data provided by the pharmaceutical industry.)

While this study is almost certainly going to be used to justify charging high drug prices, rapid increases in costs is exactly what we would expect to see in a protected industry. When an industry is shielded from normal market competition, as the drug industry is with patent monopolies, it doesn't have the same incentive to minimize costs as other industries. As an analogy, consider the cost of military contractors working on cost-plus contracts. These contractors have no incentive to limit salaries and reduce waste, since higher costs mean higher profit.

It is likely that we are seeing a similar story in the pharmaceutical industry. While DiMasi's numbers may well be gross exaggerations of the true cost to the industry, it would not be surprising if drug companies that can charge $84,000 for a drug like Sovaldi, when the generic version would sell for less than $1,000, waste vast amounts of resources (for example, on financing studies showing that it is expensive to develop drugs). Of course they are able to charge $84,000 because the government will arrest anyone who produces the drug without the patent holder's permission.

So DiMasi's big numbers can really be seen as an indictment of the drug industry rather than an argument for higher drug prices. The bigger the number he comes up with, the better the argument for considering alternatives to patent supported research. If the money for research was paid up upfront, through mechanisms like NIH funding, then we would have the advantage that all research findings would be fully open so that other researchers, physicians, and the general public would have access. We also would be able to have all drugs available at generic prices, so we wouldn't have absurd moral dilemmas about whether we should pay $84,000 to treat every person suffering from Hepatitis C. And we wouldn't be giving drug companies enormous incentives to mislead the public about the safety and effectiveness of their drugs.

But of course this would require that we can consider alternatives to the patent system for developing drugs and that would require some new thinking from our policy wonks and the media. And that may be a serious long shot given the group of people we are talking about.

Is Saudi Arabia Raising Production to "Gain Market Share" or Punish U.S. Enemies? Print
Tuesday, 18 November 2014 14:46

That is a serious question. I ask in reaction to the assertion that increased U.S. domestic oil production sparked "a battle among OPEC members and other big producers for market share, leading to a crash in world prices." This was a prediction from Michael Levi, a fellow at the Council on Foreign Relations. It was cited in a Slate piece by Jordan Weissman which argues that folks like me were wrong to be dismissive about the impact of U.S. production on world oil prices.

I am not saying that Weissman is wrong in his assessment of Saudi Arabia's motives in increasing production, just that he is not obviously right. If the argument is that lower prices today will permanently displace domestic production, that doesn't seem to make any sense. If increased demand pushes prices back above $100 a barrel in a year or two, what would keep domestic producers in the U.S. from coming back on line? if the answer is nothing (that seems the case to me), then how is Saudi Arabia gaining anything by increasing production and pushing down prices today.

As an alternative hypothesis, if the United States wanted to punish Russia and Venezuela, two countries with whom the Obama administration has issues, it would be difficult to think of a better mechanism than driving down the price of oil. Could the United States persuade Saudi Arabia to increase production to advance its foreign policy agenda? My guess is yes, but I will leave it to others to decide between these competing hypothesis.

One point that is not arguable is that the drop in world demand has actually had more impact in creating the current oil glut than increases in domestic supply. Current demand is 5.8 million barrels a day less than what was projected in 2007. This is twice the increase in domestic production over this period. That means the recession combined with conservation efforts deserve more credit for the oil glut than increased domestic production.

The Soft Bigotry of Incredibly Low Expectations Print
Tuesday, 18 November 2014 08:02

A front page Washington Post article touted the health of the U.S. economy, noting its 3.0 percent annual growth rate. While there are reasons for questioning whether even this growth rate will be sustained (October retail sales were weak, as was manufacturing output in both September and October), 3.0 percent growth is not especially strong given how far the economy is below its potential.

According to the Congressional Budget Office, the economy is still nearly 4.0 percent below potential GDP. With potential GDP growing at roughly a 2.2 percent annual rate, it would take us until 2019 to return to potential GDP if the growth rate remains at 3.0 percent. This would make it nearly 12 years since the beginning of the downturn, a longer period of under-utilization than even during the Great Depression. 

It is also worth noting that Japan has not been quite the economic basket case implied in this piece. Its employment to population (EPOP) ratio increased by 2.2 percentage points since 2012. By comparison, the EPOP in the United States increased by just 1.1 percentage point over the same period.


NPR Discusses Doctor Shortage and Never Once Mentions Wages Print
Tuesday, 18 November 2014 05:55

I have to thank NPR for proving my point about physicians being a protected profession. You see, doctors are poor little boys and girls -- must be shielded from the free market, unlike auto workers, dishwashers, and domestic care workers. How else can we explain a Morning Edition segment on the possibility of a doctor shortage that never once discussed their wages?

For the record, the average pay of doctors in the United States is roughly twice as high as the average for other wealthy countries. (Yes, they have high student loan debt. Their average debt load would be equivalent to roughly $20,000 for a typical worker.) This might be taken as prima facie evidence of doctor shortage. If there were more doctors it would presumably drive down their wages, making health care more affordable for the rest of us. (Why does everyone know that higher pay for workers in fast food restaurants means higher hamburger prices, but somehow the idea that higher pay for doctors raises health care costs seems bizarre?)

The piece in effect implies that the market relations don't apply to physicians. In discussing the idea of training more doctors as a precaution, it tells listeners:


"But letting more people train to be doctors 'just in case' strikes Wilensky [Gail Wilensky, a health economist]  and many other health economists as wasteful.

'Are you really serious?' Wilensky asks. 'You're talking about somebody who is potentially 12 to 15 years post high school — to invest in a skill set that we're not sure we're going to need?'"


Of course if we had more doctors their training would be used, they would just get paid less to use it. So what, no one forced them to become doctors? (If the market doesn't apply to doctors, then why don't we just cut their pay in half tomorrow and save everyone $90 billion a year? That is equal to more than half of a percentage point of GDP or 45 times the amount of improper disability payments over the last seven years that AP chose to highlight in a piece last weekend.)

Incredibly, the issue of immigration never once got mentioned in this piece. Given that immigration is front and center in the news right now and it is obviously cheaper to train doctors in other countries than in the United States, it would have been reasonable to expect that the issue would be raised. But apparently doctors are not yet ready to be exposed to the harsh winds of globalization.

Can we get another piece from David Leonhardt and the Washington Post on the mystery of stagnating middle class wages? (Yes doctors are at the high end, many are in the one percent and virtually all are in the top two percent of the income distribution.)

David Brooks and the Economics of Keystone Pipeline Print
Tuesday, 18 November 2014 05:36

David Brooks is unhappy that President Obama won't support the Keystone Pipeline. Maybe he would happier if he got the economics right. Brooks tells readers:

"Keystone XL has been studied to the point of exhaustion, and the evidence overwhelmingly suggests that it’s a modest-but-good idea. The latest State Department study found that it would not significantly worsen the environment. The oil’s going to come out anyway, and it’s greener to transport it by pipeline than by train. The economic impact isn’t huge, but at least there’d be a $5.3 billion infrastructure project."

I think there may be a problem of reading comprehension here. The studies all show that the pipeline would make it cheaper to get a very dirty type of oil (Canadian tar sands) to the market. There are issues associated with the risk of a spill, but more importantly, the pipeline will increase the amount of the oil that is burned thereby spewing more carbon dioxide into the atmosphere and worsening global warming.

The assertion that "the oil's going to come out anywhere," is what economists refer to as "wrong." The pipeline would make the tar sands oil cheaper to bring to market, which would mean that more of it would be used. Not building the pipeline is equivalent to imposing a tax on tar sands oil. This is exactly what most economists, including Republican ones like Greg Mankiw (this is a piece touting bipartisan approaches), would advocate.

The Global Warming Tax on Chocolate Print
Monday, 17 November 2014 07:57

Nope, the tree huggers are not proposing to tax chocolate as a way to slow global warming, the global warming deniers are raising the price of chocolate because of their insistence that we do nothing to combat global warming. According to an article in the Washington Post, cocoa production in the Ivory Coast and Ghana, which account for 70 percent of world production, has declined in recent years as a result of dry weather and the spread of a fungus. 

Is this due to global warming? Well, we can only have probabilities, but we have to act on probabilities all the time. For example, we invaded Iraq ostensibly because there was a high probability that Saddam Hussein was developing weapons of mass destruction. (Some of us did know the probability was near zero, but no reason to go there.)

Anyhow, when we get people crying tears over the harm that will be done to people if carbon taxes or other restrictions on greenhouse gas emissions raise their energy prices we have to ask where are their tears when people pay higher prices for chocolate or other foods due to the effects of global warming? Or when they have to pay more taxes to pay for the damage from storms like Sandy?

When costs rise the economy doesn't care whether it was due to a government imposed tax or the impact of human caused global warming. The effects are the same. If the former is "job-killing" so is the latter. 

Rattner on Income Inequality Print
Monday, 17 November 2014 06:08

Steve Rattner gets many things right in his NYT column on income inequality. (Okay, I'm going soft because he used a chart from CEPR on mandated vacation.) But there is one point worth correcting.

His charts showing income inequality before taxes and transfers across countries is misleading. The OECD counts government run pension programs like Social Security as a transfer. Most other countries have much more generous public pension programs than the United States. As a result, many retired workers in these countries have no income except their government pension. They also pay more in "taxes" for their benefits.

This makes before-tax income seem much more unequal than would be the case if we treated the pensions as being privately run. That implied redistribution is then very large, even if the pension program is only modestly redistributive (i.e. workers' benefits reflect what they paid into the program).

Btw, inequality really is not hard. If we free trade for the services of doctors and other highly paid professionals, a more efficient mechanism than patent monopolies for developing prescription drugs, and taxed the financial sector like other sectors, we could undo most of the increase in inequality over the last three decades. 

Robert Samuelson Wants to Take Away Social Security from the Affluent Elderly Print
Monday, 17 November 2014 05:38

Robert Samuelson does the old "pox on both your houses" routine, complaining about Republicans who want tax cuts for rich people and Democrats who defend Social Security and Medicare. Naturally, there are many problems wrong with Samuelson's formulation. (The "pox on both your houses" story will always sell in elite DC circles, it doesn't matter what the facts of the situation are.)

First Samuelson asserts:

"Democrats’ rigid support of retirement spending is squeezing many valuable domestic programs that, like defense, are now underfunded."

Really? Is there any evidence whatsoever that we would be spending more money on education, infrastructure, clean energy, etc. if we spent less on Social Security and Medicare? Samuelson certainly doesn't present any. The reality is that we are under no real world budget constraints at the moment or in the near-term future. We face political constraints and there is no reason to believe that the Republicans would view an agreement to cut Medicare and Social Security as anything other than an opportunity to give more money to the rich.

The more fundamental problem is that Samuelson's prescription of reducing benefits for the "affluent elderly" doesn't make any sense. This is for two reasons. First, unless "affluent" means something different for Samuelson than the rest of us, there ain't no money there. When we raised income taxes, the line for affluent was an income of $400,000 a year. Even if we cut that in half because we think seniors needs less money, we would find that there ain't nothing there.

While people earning over $400,000 have very large incomes, which can provide substantial tax revenue, they don't have very large Social Security checks. It would just be a rounding error in the budget if we took away all of their Social Security and Medicare. To really have a noticeable impact on the budget we would have to go after people who have non-Social Security income of around $40,000 a year. This is not most people's definition of "affluent." (It's funny this double-talk appears in a piece lecturing the public on the need for honest discussion.)

The other problem with cutting benefits for the affluent elderly is that they paid for these benefits. We could with as much justification go after the interest payments on the government bonds held by the affluent elderly, but most people probably would not consider this very fair.

According to an analysis from the Urban Institute most seniors pay more in Social Security taxes than they will receive back in benefits. The value of Medicare benefits exceed the taxes paid in, but this is due to the fact that we pay twice as much per person for our health care as people in other wealthy countries with nothing to show for it in terms of outcomes. The problem here is not how much seniors are getting, but rather how much we are paying to doctors, drug companies, and other health care providers.

Unfortunately, health care providers are a protected class in elite Washington circles. (Drug companies are big advertisers in the WaPo.) So instead we get pox on both your houses pieces that don't make any sense.

WaPo Wonders Why Man Run Over By Car Can't Walk and Wages Aren't Growing Print
Sunday, 16 November 2014 15:18

When a Washington Post editorial frets over weak wage growth is is a bit like ISIS wondering why foreign reporters don't seek their leaders out for interviews. Come on folks, are you serious?

We've had three and half decades in which we have maintained much higher unemployment rates than in the Golden Age (1947-1973) when workers shared in the gains of productivity growth. As Jared Bernstein and I show in our book, wage growth at the middle and the bottom of the wage ladder is directly related to the level of unemployment. Of course the Washington Post has endorsed most of the high unemployment policies in the form of the Fed's anti-inflation policy, a high dollar policy that gave us large trade deficits, and reducing budget deficits and thereby depriving the economy of much needed demand.

But the Post's attack on wages goes well beyond these macroeconomic policies. It has supported trade deals that are designed to put downward pressure on the wages of large segments of the labor force by placing them in direct competition with low-paid workers in the developing world. Yet, it will not even consider policies that would allow consumers to gain by subjecting doctors, lawyers, and other highly paid professionals to the same sort of competition.

The paper also has been an enthusiastic supporter of increased protectionism in the form of stronger patent and copyright protection. As a result of patent protection, we now spend close to $400 billion a year (@2.2 percent of GDP) on prescription drugs alone. We would probably spend about one-tenth this amount if drugs were sold in a free market.

And, the Post has been a consistent opponent of policies that would restore the balance of power between unions and management. The plunge in unionization rates has also been a big factor in reducing wages for most workers.

And,the Post has been a protector of the vast rents earned by rich people in the financial sector. It has opposed the I.M.F. and others who want to subject the financial sector to the same level of taxation of other sectors.

So, the WaPo is troubled by the fact wages aren't growing. Hmmm, maybe if they followed the news more closely they would be better informed on the topic.

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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.