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Failed Medical Innovation: The Secret to the Lower Than Expected Cost of the Medicare Drug Plan Print
Friday, 20 May 2011 05:46

Michael Leavitt, the Secretary for Health and Human Services under President Bush, touted the Medicare Part D model in an oped in the Washington Post. Leavitt argued that this model, which provided a prescription drug benefit through private insurers, has been effective in providing a wide range of choices to beneficiaries and holding down costs. He notes that the cost of the program has been far lower than the Congressional Budget Office had projected.

While Leavitt is correct in pointing out that the drug benefit has cost much less than had been projected, it is important to note that drug prices in general have risen much less rapidly than was projected when the benefit was introduced in 2006. The obvious explanation for the lower than expected increase in drug prices is a much slower rate of innovation.

In the years since 2005, the Food and Drug Administration has been granting approvals for new drugs that it assigns priority reviews, meaning that they provide a qualitative improvement over existing drugs, at roughly half of the rate that it did in the 1990s. The number of priority approvals averaged just 10 between 2005-2009 compared to 19.9 in the 1990s.

 

new_drug_approvals_20533_image001

 

Source: FDA and Knowledge Ecology International.

 

These new drugs, which supposedly provide much greater medical benefits than existing drugs, are the major factor driving cost increases. Therefore, it is not surprising that a slowdown innovation would be associated with a slower rate of increase in the cost of drugs, including the cost of drugs provided through Medicare Part D.

According to the Center for Medicare and Medicaid Services, we are spending almost 4 times as much on prescription drugs today (adjusted for inflation) as we did in 1990. Given this increase in spending, it would be reasonable to expect the rate of drug development to increase.

 
Is Robert Rubin Really Still an Authority on the Economy? Print
Friday, 20 May 2011 05:12

Ezra Klein apparently thinks so. He turned to Mr. Rubin to get his assessment of the risks of letting the country default on its debt.

As Treasury Secretary, Rubin pushed the high dollar policy that created the enormous trade imbalance that still afflicts the U.S. economy. He also stood by as the stock bubble rose to ever more dangerous levels. He insisted on removing restrictions on financial industry risk-taking, over-riding efforts by other regulators.

After leaving the Clinton administration he became a top official at Citigroup. Citigroup packaged hundreds of billions of dollars of bad mortgages into mortgage backed securities, helping to inflate the housing bubble. The bank was only saved from collapse with a massive government bailout. Mr. Rubin pocketed over $100 million for his work with the bank.

 
Is Paying a Bus Driver $38,000 a Year Generous? Print
Friday, 20 May 2011 04:55

Apparently it is, according to a front page news story in the Washington Post on a budget provision approved by the Montgomery County Council that would require county employees to pay much more for their health care. The article notes that range of salaries for county employees, beginning with bus drivers who earn $38,000 a year.

It then tells readers:

"But the way they [the increased employee payments for health care] were passed shows what happens when a wealthy, liberal county is forced to confront years of political accommodation and generous spending."

 
The Nanny Economy in Brazil Print
Friday, 20 May 2011 04:33
The NYT tells us that working conditions and wages are improving for nannies in Brazil. In fact, even some of the nannies now have nannies. It would be useful if this piece included some information on the number of people who work as nannies.
 
Senator Coburn Still Doesn't Know About the Housing Bubble Print
Thursday, 19 May 2011 05:35
The Washington Post has a practice of granting oped space to almost anyone who is prepared to advance its agenda of deficit reduction. Today it opens its pages to Senator Tom Coburn who begins his piece by telling readers that:

"Any honest view of our debt, deficits, size of government and demographic challenges shows we must make major changes if we are going to pass on the American way of life to our children. Each week seems to bring new warning signs: slower-than-expected growth (already as much as 25 to 33 percent every year, some estimate), higher-than-expected unemployment numbers."

Actually the current period of high unemployment and slow growth has nothing to do with the budget deficit. It is the result of the collapse of the $8 trillion housing bubble. Unfortunately, Federal Reserve Board chairs Alan Greenspan, Ben Bernanke and other policymakers overlooked this enormous bubble as it was growing. Apparently, Mr. Coburn has not noticed the bubble even now that its collapse has wrecked the economy.

At one point, Coburn cites Morgan Stanley Director Erskine Bowles calling the deficit situation, "... the most predictable economic crisis in history." Actually, the housing bubble was probably the most predictable economic crisis in history. Unfortunately, almost no one in a policy position was able to predict it.

Contrary to Mr. Coburn's assertion at the beginning of his, any honest view of the debt, deficits, size of government and demographic challenges shows that we have to fix our health care system. If per person health care expenditures were comparable to what they are in Germany, Canada, or any other wealthy country with a longer life expectancy than the United States we would be looking at budget surpluses, not deficits.

 
And It All Has Nothing to Do With the Price of Gas! Print
Thursday, 19 May 2011 05:25

The Democrats want to take away tax breaks from the big oil companies, the Republicans want to let them drill more places. These may be good or bad policies, but neither will have any noticeable effect on the price of gas.

Let's say that 20,000 times. Neither of these policies will have a noticeable impact on the price of gas. This is not a disputable point.

Getting more tax revenue from the oil industry may be a good idea, especially in a context where Congress is obsessed with reducing the deficit, but it will not reduce the price of gas.

Similarly, the opening of new areas off the coast to drilling cannot possible generate enough additional oil to have any noticeable effect on the world price of oil. When politicians say that they want to increase drilling to bring down gas prices they either do not know what they are talking about or they are not being truthful. 

Either way, this assertion should be treated as a gaffe. (You know, like then Senator Obama's comment about guns and religion during the presidential primaries.) Politicians who make such inaccurate assertions should be pressed on them. The media should try to determine whether they are really completely ignorant of the dynamics of the world oil market or they are just trying to deceive the public.

It should not just imply that opening new areas to drilling is a plausible way to reduce gas prices, as is done in this article

 
Chris Farrell Is Mistaken, Pension Funds Will Get 8 Percent Returns Print
Thursday, 19 May 2011 05:00

On Marketplace radio this morning Chris Farrell told listeners that state pension funds will only get 4-5 percent nominal returns in the years ahead, not the 8 percent that many have assumed. This is wrong. Given the mix of assets held by these funds, current stock market valuations, and projected economic growth, 8 percent is the expected rate of return on these funds. It is virtually impossible to describe a scenario in which returns will only be the 4-5 percent rate suggested by Mr. Farrell.

Many people who want to see the benefits of public employees reduced are complaining now that current assumptions on returns are excessive. In fact, they should have complained in the late 90s, during the stock bubble years, when the assumptions of returns were demonstrably excessive. It is striking that many of the same economists, who completely missed the stock bubble and then the housing bubble, are now the experts that the media turn to when assessing the market's prospects going forward. 

 
The U.S. Has "Free Trade" Agreements, not Free Trade Agreements Print
Thursday, 19 May 2011 04:53

When the United States negotiates trade agreements with countries in Latin America, it likes to call them "free trade agreements." Apparently this makes them more salable than simply calling them "trade agreements."

These deals do not actually lead to free trade. They generally do almost nothing to remove the barriers that protect highly paid professionals, like doctors and lawyers, from foreign competition. More importantly they increase many protectionist barriers, like patent and copyright protection, which raises prices by several thousand percent above the free market price.

For this reason, in this article on relationships with Latin America, the NYT should either have simply called the agreements negotiated with Panama and Colombia "trade agreement" or used quotation marks in describing them as "free trade" agreements.

 
Kristof's Misplaced Praise for Economists Print
Thursday, 19 May 2011 04:15

NYT columnist Nicholas Kristof does not have a very good track record in identifying effective ways to help poor people in the developing world. (He was a big promoter of Greg Mortenson, the best-selling author of Three Cups of Tea, whose aid project now appears to be largely a fraud.) His column today indicates that his track record is not about to improve.

He urges people who want to help the world's poor to study economics and points to useful results that economists have uncovered. While the results he mentions are intriguing, Kristof somehow manages to ignore all the harm that economists have done in the developing world.

For example, the economists at the International Monetary Fund had routinely imposed structural adjustment programs that required that parents pay fees for their children to attend primary school. These agreement also often required fees for the provision of basic health services. This practice kept millions of children out of school and denied them basic preventive health care, since even small fees were unaffordable to many poor parents.   

The practice was not changed voluntarily by the economists at the IMF. Rather it was a change that was forced on the institution by activists who were able to use their influence in Congress to require that the IMF stop making these fees a condition of getting loans. 

At present, virtually all economists are making a point of not noticing the efforts of the United States and other wealthy countries to raise the price of medicine to people in the developing world by imposing patent protection. All the "free-trade" agreements that the United States has negotiated with developing countries have imposed stronger patent protection or other monopolistic restrictions (e.g. data exclusivity for tests used to get drugs approved) that typically raise the price of drugs by several thousand percent above their free market price. The TRIPS provisions of the WTO (which were drafted by the U.S. pharmaceutical industry) also were intended to have this effect.

While any economist (and most non-economists) should possess the ability to recognize the potential harm that these provisions can imply for the world's poor, very few have tried to call attention to these protectionist measures. It is worth noting that very powerful forces, most notably the pharmaceutical industry and the Gates Foundation, stand behind these sorts of measures. That could explain the reluctance of economists to apply economics to these issues.

Contrary to what Mr. Kristof suggests, the biggest obstacle to improving the lot of the poor in the developing world is probably not a lack of knowledge of economics, but rather the efforts of the powerful from preventing the teachings from economics from being applied in situations where it would hurt their interests.

 
What Do You Know, the Recession Is Actually Serious Bad News Print
Thursday, 19 May 2011 04:05

In an article on the poor employment prospects for recent college grads, the NYT told readers:

"Now evidence is emerging that the damage wrought by the sour economy is more widespread than just a few careers led astray or postponed."

This is actually a good article that includes some new evidence on the extent to which recent college grads are either working at jobs that do not require a college degree or out of work altogether. (The graph accompanying the article shows that 22.4 percent are out of work altogether and 22.0 percent are working at jobs that don't require a degree.)

It's just striking that a sentence like this appeared near the top of the article. We're just now discovering that there is serious damage from this downturn? Some editor was asleep at the wheel on this one.

 
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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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