Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press.

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Austin Frakt had an interesting Upshot piece in the NYT saying that drug spending in the US began to sharply diverge from other countries in the 1990s. This actually is not very clear, since the comparison group dating back to the 1980s is small. I am actually more struck by the explosion in spending in the 1980s, with it nearly doubling as a share of GDP over the course of the decade. Note that drug spending had not been increasing at all as a share of GDP over the prior two decades.

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Source: Bureau of Economic Analysis.

The obvious villain here is the passage of the Bayh-Dole Act in 1980, which allowed private corporations to get patent rights to government-funded research. This undoubtedly led to more investment in research and development, but it also led to a huge increase in spending the difference between the current 2.2 percent of GDP that we spend on drugs and the 0.4 percent we spent in 1980 is equal to $360 billion a year, roughly five times annual spending on food stamps.

 

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The New York Times ran a very confusing piece on the difficulties that many people in China are facing in getting access to drugs. The piece does not clearly distinguish between the problem of drugs not being legally available because they have not been licensed by China's drug safety agency and drugs being expensive in China due to patent monopolies.

These are very different issues. The first can be readily solved by making the licensing agency more efficient and possibly also relying on approvals by other agencies. (The piece indicates this has recently become the practice.)

The issue of drugs being expensive due to patent monopolies is more complicated. China has to make a decision as to whether it wants to rely on patent monopolies as a mechanism to finance research or whether it instead depends more on a pre-funding mechanism that would allow new drugs to be sold in a free market at generic prices.

This is a huge issue and China's policy in this area will have enormous implications for the rest of the world. If it decides to make new drugs widely available at their free market price, it will be difficult for the US and European companies to charge prices that are often more than 100 times as much, both in their own markets and in the developing world.

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This is a fact that would have been worth mentioning in an NYT piece on how health care may be affected by last Tuesday's elections. Near the end, the article referred to the Trump administration's promotion of short-term insurance policies but only said that they, "do not have to cover pre-existing conditions or provide all the benefits required by the health law."

The important feature of these short-term plans from the standpoint of the Affordable Care Act (ACA) is that they are designed to be appealing to relatively healthy people. By excluding people who are likely to suffer from costly health conditions, they can offer insurance at a lower price. This has the effect of pulling healthier people out of the ACA insurance pools.

This means that the people remaining in the ACA pools will be less healthy on average and therefore have higher costs. That will drive up the price of insurance in the ACA pools, likely pushing more relatively healthy people to buy short-term insurance plans. The end result in this story is that the ACA pools end up being extremely expensive, which makes the prohibition on discrimination over pre-existing conditions pointless.

This is the importance of short-term insurance policies. It should have been mentioned in the piece.

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This post was originally published on my Patreon page.

Several people on my Twitter feed touted the drop in the stock market last month as evidence of the failure of Donald Trump’s economic policy. I responded by pointing out that he was reducing wealth inequality. I was being only half facetious.

I have always been less concerned about wealth than income both because I think wealth is less well-defined and because income is the more important determinant of living standards. In the case of the stock market plunge, the vast majority of the losses go to the richest 10 percent of the population and close to half go to the richest 1 percent, for the simple reason that this is the distribution of stock ownership.

When people decry the rise in inequality in wealth over the last decade, they are basically complaining about the run-up in the stock market. The real value of the stock market has roughly tripled from its recession lows. With the richest one percent holding close to 40 percent of stock wealth and the richest 10 percent holding more than 80 percent, a tripling in the value of the stock market pretty much guarantees a big increase in wealth inequality. If we think this increase is bad, then why would we not think a drop in the stock market is good?

There is a correlation between the stock market and economic growth. The market generally rises when the economy is strong and falls in recessions, but this link is weak. Remember the recession of 1988?

I hope not, because the economy continued to grow at a healthy pace until the summer of 1990. This is in spite of the stock market’s largest one-day drop ever in October of 1987. (It did recovery half of its value by the end of the year.)

In short, the recent plunge in the market tells us little about the future direction of the economy. If we are troubled by wealth inequality then we should be happy, rich people now have substantially less wealth.

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That seems like an obvious question that went unanswered in this NYT piece. It did talk about how this would increase Amazon's bargaining power if it could play off two cities (and Seattle) against each other, but it did not raise the question of the initial commitments. In many of these bidding wars, the winner ends up losing by giving away more in concessions than it could ever hope to get back from the investment generated. It will be surprising if this is not the case here.

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The Washington Post used its lead editorial to demand that the Trump administration do more to protect US intellectual property from China. The highlight of the piece is the accusation that a Chinese state-owned company hired a number of employees from Micron, who brought over files containing Micron's latest DRAM technology.

Assuming this is true, this sort of theft is indeed a problem. The company has now been indicted and it will be interesting to see the response of the Chinese government. However, it is important to note that this sort of taking of technology is not restricted to Chinese companies.

Some people may have heard of a company called "Uber." It hired one of the top people from Waymo, the self-driving car unit of Alphabet. The new hire brought along stolen files containing much of Waymo's latest technology.

While the Post's response to this problem is a call for greater protectionism to put tighter locks on technology, the free market solution would be to work to have more technology in the public domain. This can be done through greater public support for research and shorter patents (see chapter 5 of Rigged [it's free]). If there is less money to be made by stealing other companies' technology, then it is less likely to be done.

While the protectionists at the Post may not understand this point, we all benefit if technology is freely available and can be transferred around the globe at the lowest possible costs. If Chinese producers are then able to produce goods and services at lower costs, then US consumers will benefit, even if the Post's friends may see lower profits.

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In an otherwise useful and important piece on how the Trump administration has backtracked from the Obama administration in enforcing laws and regulations on corporate conduct, the NYT asserted:

"...political appointees under Mr. Trump have led a philosophical shift in governing that favors big business and prioritizes the interests of individual investors."

How does the NYT know that this shift is explained by "philosophy?" This sentence could have with equal plausibility have been written:

"...political appointees under Mr. Trump, with close ties to the industries they regulate, have adopted policies that favor big business and prioritizes the interests of individual investors."

There is no more reason to believe that pro-business regulatory enforcement is explained by philosophical beliefs than good old-fashioned corruption. The NYT should not be asserting the former.

The piece also mischaracterizes the views of Jay Clayton, Trump's pick to head the Securities and Exchange Commission (SEC):

"But Mr. Clayton’s remarks that day about job creation — something not directly under the purview of the commission — signaled a new emphasis on bolstering the economy rather than policing Wall Street."

If Wall Street engages in abusive business practices it hurts rather than helps job creation. The financial industry does not directly create wealth. It is an intermediate industry, like trucking, as opposed to an industry like health care or food that directly produces goods and services of value to people.

As an intermediate industry, it best promotes jobs and growth if it does its work at the lowest possible cost. In the same way that we would not be benefited by a trucking industry that is four times as large but delivers the milk no quicker, we are not benefited by a large financial sector that no more effectively allocates capital.

For this reason, cracking down on abusive practices, that may enrich the industry but do nothing to promote the economy, is a job creation strategy. Hopefully, the head of the SEC knows this, even if the NYT doesn't.

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When it comes to the budget deficit and programs like Social Security and Medicare, the Washington Post has had difficulty keeping its editorial views out of the news section. We see this again today in an article on the October jobs numbers that told readers:

"A growing number of Wall Street analysts and economists say that the tax cuts and additional spending caused a temporary boost that will fade and leave future generations with a substantially larger debt burden."

The piece actually doesn't cite a single economist who complains about the debt burden on future generations. The extent the debt imposes a burden is questionable since the interest is overwhelmingly paid to people in the United States. This means there could be a distributional issue within generations (from the group who pays taxes to the group getting interest), but not a generational issue.

There can be an issue that the deficits now being run will crowd out investment by raising interest rates. Less investment will mean the economy is less productive in the future. But this story is offset by the fact that more rapid growth tends to lead to more investment. In fact, the failure to run larger deficits earlier in the recovery slowed growth and investment, thereby imposing a huge burden on future generations in the form of a weaker economy. The Washington Post has literally never run a news story calling attention to the cost of austerity policies (which it supported) on future generations.

If the Post were to seriously discuss burdens on future generations it would also have to talk about government-granted patent and copyright monopolies. These monopolies are ways in which the government pays for research and creative work. In effect, the monopolies allow companies to impose large taxes on consumers. If a patent monopoly allows Pfizer or Merck to sell a drug for $30,000 that would sell for $300 in a free market, it imposes the same burden on future generations as a tax of 10,000 percent on the drug.

Again, the Post literally never mentions the burdens imposed by patent and copyright monopolies, even though these come to close to $1 trillion a year, swamping the size of the interest burden on the debt. It is probably worth noting in this context that pharmaceutical companies are major advertisers for the paper.

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The NYT published an oped last week by Jochen Bittner, a political editor for a major German newspaper, asking what is wrong with German's Social Democrats. The focus of the piece is the collapse of popular support for the party as shown by its poor performance in several recent elections.

Bittner attributes this drop in support to its unwillingness to push an agenda that combats Germany's rising inequality. As one example, he comments:

"Nor did the SPD [the German Social Democratic Party] seem to mind that the chief executive of Deutsche Post earns 239 times the salary of his average employee."

Deutsche Post is the privatized German postal and delivery company. A state-owned bank still has a 20 percent share of the company.

While Bittner's piece raises good questions (there is nothing in the rules of a market economy that says a CEO should be allowed to rip off the company they work for), he alludes at one point to the German unemployment rate. He notes that it has fallen by more than 50 percent to "around 5 percent."

In fact, Germany's unemployment rate according to the OECD's harmonized measure, which essentially uses the US methodology, is just 3.4 percent. Bittner's 5 percent figure refers to the official German measure of unemployment, which includes workers who are employed part-time as being unemployed.

The NYT should have adjusted the unemployment number in Bittner's piece to the OECD measure to avoid giving readers a misleading picture of Germany's economy. Unfortunately, this is a common problem in the NYT and elsewhere. If the point is to convey information to readers, then the terms should be adjusted to measures readers would understand. 

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CEPR was selected as one of the organizations to get a share of CREDO’s November givings. The size of our share will depend on how many people vote for CEPR here.

I am really proud of all the issues where CEPR has been ahead of everyone else. We were saying that Social Security did not have to be cut at a time when even many Democrats said the program faced a crisis. We were warning that the I.M.F.’s structural adjustment programs were stifling growth and increasing inequality at the high point of the Washington Consensus. We were yelling about the housing bubble and the dangers it posed to the economy when politicians in both parties were celebrating the rise in homeownership rates.

And, we were warning of the dangers of private equity before people saw the wreckage of Toys "R" Us and other retail icons brought down by financial engineering. I should also mention our contribution to getting Fed Up off the ground, a fantastic coalition of community and labor organizations that has had a huge impact on the Federal Reserve Board.

I’ll spare people the full boast list, but as the saying goes in Washington, the only thing worse than being wrong is being right. And, with CEPR’s track record, funding is naturally very difficult.

We welcome the direct contributions from many of our readers, which make a big difference to our finances. The funding from CREDO can also be a big help, and in this case, it is just a question of taking a few seconds to vote here.  

Thanks for your support.

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