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.

Please also consider supporting the blog on Patreon.

Follow on Twitter Like on Facebook Subscribe by E-mail RSS Feed

The New York Times ran a piece on a warning from the Internal Revenue Service that it would not allow plans to circumvent the new limits on the State and Local Tax (SALT) deduction by providing a credit for contributions to state-established charitable funds. At one point the piece told readers:

"The Treasury Department and the I.R.S. are worried that the workarounds could further balloon the cost of the tax cuts, which are projected to add more than $1 trillion to the national debt over a decade."

NYT reporters must have some extraordinary mind-reading abilities if they can know what is really worrying the Treasury Department and IRS. The worries attributed to them here seem especially out of line with the known facts since the Trump administration and Republicans in Congress have shown zero concern in their behavior about the size of the deficit.

Add a comment

A Washington Post article reporting the decision by the Trump administration to not press employers to use E-Verify to prevent undocumented workers from getting jobs repeatedly tells readers there is a labor shortage, especially in farming, restaurants, and construction. The data indicate otherwise.

If there were a shortage of workers in these industries, we should see rapidly rising wages. We don't.

The Bureau of Labor Statistics establishment survey does not include farms, but we don't see especially rapid wage growth in either construction or restaurants. Here is the picture for the average hourly wage of production and non-supervisory workers in construction.

Construction: Average Hourly Wage, Production and Non-Supervisory Workers

construct wages

Source: Bureau of Labor Statistics.

Wage growth has been somewhat higher in the last two years than earlier in the recovery, but they still are rising less than 4.0 percent a year. And, the rate of increase is considerably less than at the peak of the last cycle.

There is even less of a case of a labor shortage in restaurants.

Restaurants: Average Hourly Wage, Production and Non-Supervisory Workers

restaurant wages

Source: Bureau of Labor Statistics.

The pace of wage growth has slackened some in recent months. It is more than a percentage point lower than peaks hit in 2017 and well below the pre-recession pace.

It undoubtedly is true that some employers cannot afford to pay higher wages. In this case, they will go out of business. This is what happens in capitalism. It is the reason we don't still have half of our workforce employed in agriculture. Workers had better-paying opportunities in cities that small farmers could not match.

Apparently, the Post thinks we should interfere with markets to protect low-wage employers and keep wages down. Those of us who like markets don't share the political views expressed in this article.

Add a comment

MarketWatch had a short piece reporting that Michael Woodford, one of the country's most prominent macroeconomists, is now arguing that the Fed should actively look to stem the growth of asset bubbles like the housing bubble in the last decade. It points out that house prices have been rising rapidly in recent years. It also notes that Woodford argues the Fed should not distinguish between run-ups in house prices based on fundamentals and run-ups based on speculation.

As someone who advocated the Fed should counteract bubbles long before the crash of the housing bubble sank the economy, I am glad to see Woodford make this case. However, I think he is badly mistaken in arguing for using interest rate policy, rather than regulatory policy and public statements and information to try to sink a bubble. Also, it is very important to distinguish between a bubble-driven run-up in house prices and one driven by the fundamentals of the market.

Interest rates are a very inefficient tool for targeting an asset bubble. High enough interest rates will eventually burst the bubble, but they will also sink the economy. Bubbles are not likely to respond to modest increases in interest rates absent other measures from the Fed.

The effort to target rising housing prices, if they are driven by fundamentals (as is now the case), is likely to be self-defeating. Insofar as house prices are driven by fundamentals, it means that the best way to bring them down is by increasing supply. While this can be done through changing zoning policy at the local level, the Fed is not in a position to directly affect zoning. However, higher interest rates will reduce construction, making shortages of housing worse.

While higher rates will also eventually reduce demand by making house buying less affordable, this is a very indirect way of addressing the problem. It also means that it addresses a real shortage of housing by making it difficult for people to buy homes rather than increasing the supply. That doesn't seem like good policy.

Add a comment

The United States has really awful policies on child care and parental leave. This makes it very hard for parents, and especially mothers, since they invariably get stuck with most of the responsibilities, to raise kids.

This is an outrage as Amy Westervelt points out in her Guardian column. But a declining birth rate, as the supposed downside for those of us not raising kids or thinking about it, doesn't pass the laugh test.

The prospect of less traffic congestion, less crowded parks and beaches, and lower house prices doesn't have me quaking in my boots. It's not clear what the point is here. In a good society, people should be able to have kids if they want to and not have to worry about a life of stress and poverty, but if we have fewer kids because people's priorities are elsewhere, so what?

Add a comment

It's rare that you get a more explicitly classist piece in a major newspaper than Catherine Rampell's column on Donald Trump's trade war with China. While its assessment of the Trump administration's blustery rhetoric and confused actions seems very much on the money, its assertions about the country's actual interests is not.

It tells readers:

"So rather than taking the time to learn about our actual complaints regarding China’s trade policy (primarily, intellectual property theft), or how we could deal with them (through multilateral pressure, such as the Trans-Pacific Partnership that Trump killed), Trump fixated on deficits. The part of the story that sold with the public."

Okay, so Rampell tells us that we should not be concerned about a trade deficit that costs in the neighborhood of 2 million manufacturing jobs. Instead, we should be concerned that China is not as protectionist as she wants it to be when it comes to intellectual property claims of our software and pharmaceutical companies.

And why exactly should those of us who don't own lots of stock in Microsoft and Pfizer care if China doesn't pay them licensing fees and royalties? If we think through the economics here, this means that other things equal, lower payments to these companies mean a lower valued dollar, which would improve our trade balance on manufactured goods. What's the problem here?

Actually, the story gets even better. Suppose that China doesn't honor the patents of Pfizer and other drug companies so that it produces generic version of new drugs that sell for hundreds of dollars for a course of treatment instead of the hundreds of thousands of dollars that these companies demand for the patent-protected product (equivalent to tariffs of tens of thousands of percent). Suppose it sells these generic versions to people in the United States or just lets them come to China for their treatment.

This would save patients in the United States enormous amounts of money, and possibly save lives. This is what free trade is all about.

Sure, it means that Microsoft and Pfizer will not be as profitable and their shareholders will be less rich. It probably also means that some of the highly skilled workers whose pay depends largely on these forms of protectionism will get smaller paychecks. But as I recall, we are all supposed to be concerned about income inequality, so why should the country be pursuing a trade policy intended to give us more of it?

Yes, we do need a mechanism for financing innovation and research. But we can do better than extending a relics of the feudal guild system, even if most of the folks in policy debates are too lazy to bother thinking about the issue. (See Rigged, chapter 5. It's free.)

Add a comment

Neil Irwin had an interesting Upshot piece in the NYT that takes advantage of new data on the median worker's pay at major corporations. The piece calculates the "Marx ratio" which is the ratio of profits per worker to the median worker's pay. It shows this number for each of the companies who have released data on their ratio of CEO pay to median worker's pay, as required by a provision of the Dodd-Frank financial reform act.

It's not clear exactly what this ratio is giving us. Suppose that a major manufacturer has subsidiaries in China and other low-wage countries that do most of its work. In this case, the median worker could be someone in one of these countries, giving it a low, median wage. However, it also has lots of workers (it's likely they employ more workers per unit of output in low wage Bangladesh than in the United States) so it may have low profits per worker.

Now suppose the company contracts out its manufacturing work in low-wage countries so that the people who work in these countries are no longer on the companies payroll. This will raise the median wage by getting rid of many of the company's lowest-paid workers. It will also raise per worker profits since it has fewer workers, but its profits will be pretty much unchanged.

There is a similar problem domestically. A company that contracts out its custodial staff, cafeteria workers, and other lower-paid workers will have higher median pay than an otherwise identical company that has many of these workers on the company's payroll. A better measure of the profits the company makes on its workers would not be sensitive to this sort of maneuver.

Of course, the main point of the new requirement was to call attention to how high CEO pay is relative to the pay of ordinary workers. This is arguably justified if the CEO is extremely innovative and able to produce large returns to shareholders. However, there is good evidence that CEO pay bears little relationship to their value to shareholders.

In that case, the tens of millions earned by CEOs is not reflecting their contribution to the company or the economy, but rather their insider contacts that allow them to secure and hold positions. This has a corrupting impact on incomes throughout the economy since it raises the pay for both the second- and third-tier executives, as well as setting a higher benchmark for pay in the non-profit sector and government.

And, as economists and fans of arithmetic everywhere know, more money for those at the top means less money for everyone else.

Add a comment

Paul Krugman had an interesting blog post this morning in which he attributed the continuing weakness of wage growth to an increase in monopsony power. I'm a skeptic on this one since the collapse in wage growth happens to coincide with the Great Recession. The big issue is whether the labor market is again back to its prerecession level of tightness when wages were rising considerably more rapidly.

To argue the case that it is, Krugman follows Jason Furman in dismissing the drop in prime-age labor force participation as just being part of a longer-term trend. This leaves me uncomfortable for a couple of reasons.

First, it would be nice to have an explanation for the trend, instead of just pointing to it and saying "trend." We have clear explanations for trends like rising incomes through time or increases in life expectancy. What is the explanation for fewer men interested in working through time? Will this decline persist forever?

That brings me to the second reason I am uncomfortable with this story. Insofar as there had been an explanation, it was usually that the skills of less-educated men were less valued in the modern economy. We no longer need strong people to move things around, machines do that for us.

There undoubtedly is some truth to this story, except the drop in employment rates (EPOPs) since 2007, and especially since 2000, has been pretty much across the board. EPOPs have fallen for both men and women and at pretty much all education levels. These drops are departures from past trends. (Women's EPOPs had been rising until the 2001 recession.) A shortage of demand is the most simple explanation for why there would be a sudden drop in EPOPs hitting pretty much every demographic group.

Add a comment

With Donald Trump declaring a truce in his "trade war" with China, it might be a good time to check the charts. According to data from the Commerce Department, the US trade deficit with China was $91.9 billion in the first three months of 2018. That's up from $78.8 billion in 2017 and $77.9 billion in 2016.

There are problems with this figure, as many people have noted. First, it is overstated due to the fact that we count the full value of a product exported from China, even though it may have just been assembled there, with most of the value originating elsewhere. The classic example is an iPhone, where the phone is assembled in China, but the bulk of the value is from items and intellectual property that are imported to China.

This is a real problem with the Commerce Department data, but there is also an analogous issue on the other side. Many of the goods we import from the European Union, Japan, and other countries have components that were made in China. My guess is that the net would still imply a reduction in our trade deficit with China, but probably not a huge one.

The other big issue is that many intellectual products never appear in our exports at all. When Apple contracts with Foxconn to produce its phones with China, the value of its software is not counted as an export. Some of this is due to inherent difficulties in measurement. (If Apple licensed Foxconn to produce the phones, the license would show up as export.) Some of the problem is due to tax avoidance, where companies attribute the value of the intellectual work to tax havens like Ireland, even if it was actually performed in the United States.

In any case, these problems in measurement are longstanding and almost certainly do not affect the direction of change. So as it stands now, Trump has taken us $13.1 billion deeper in the hole in terms of our trade deficit with China ($52.4 billion on an annual basis) compared to where things sat when he took office. We'll see how things change following the truce.

Add a comment

That's what a story in the Financial Times tells readers. I don't think they have much of a case.

The argument is attributed to Hal Varian, Google's chief economist and a former professor of mine when I was in grad school at Michigan. According to Varian, if we accurately counted the value of software in smartphones it would add $200 billion to US exports, cutting our trade deficit in half.

The first item to point out is that our trade deficit is currently running at an annual rate of $640 billion, not the $400 billion claimed by Varian. A $200 billion reduction is still large, but it would imply cutting the deficit by a bit more than 30 percent, not half.

But the more important issue is the logic of the argument. Varian points out that, while Apple has proprietary software, for which it charges for its use, Google makes its software available for free, but demands ad placement in exchange for its use. This means that Apple's software should be accounted for in our exports, but Google's would not. This is indeed a problem, but perhaps not as much of one as Varian implies. (It is worth noting that the value of the software is in principle already counted in our National Accounts, so the Varian critique would imply no change in GDP, but that exports are understated and domestic investment is overstated.)

In effect, he is saying that Google is being compensated for its software by the ads that are subsequently sold on the phone. By contrast, Apple has been fully compensated at the point of sale. If we had proper accounting, then we would also count the value of Google's software at the point of sale. But look at what happens in subsequent years.

Suppose the Android phone is sold in some third country. Google will be collecting ad revenue from these phones for their full working lives. This ad revenue would then, in principle, (there is an important accounting issue I will address in a moment) be attributed to Google and count as an exported service. By contrast, the Apple phone does not directly generate any further revenue for Apple. This means that we should effectively be picking up the value of Google's software in Android phones through the ad revenue the phone generates in subsequent years. There is still an issue of timing, and also a definitional one (perhaps the original transfer of software should have been booked as an investment), but we are capturing the value of the software exported in the subsequent income flows from the advertising.

This would not be the case if the Android phone is imported back into the United States since the ad revenue is all domestic income. But there is no problem here because the imported phone costs less than it would have had the software been proprietary like Apple's. In short, there is not really a major issue here.

Now, there is a very important secondary point. Let's hypothesize that all of Google's innovation for its Android phone comes out of its Mountain View campus in California. Suppose to minimize their taxes, Google attributes most of the value and subsequent profits to its subsidiary in low-tax Ireland.

In this case, we would be understating the value of US exports, since the subsequent flows of income would be showing up at Google's Irish subsidiary, not its Mountain View campus. Clearly, there is much of this sort of gaming taking place, as most of the big tech companies seem to do a surprising share of their innovative work in low-tax countries, although it probably does not get you to $200 billion a year. (And here is my easy fix for this problem, if anyone is interested in a fix.)

Add a comment

The NYT had a column by Christina Gibson-Davis and Christine Percheski telling readers that wealth inequality had grown much more among families with children than among the elderly. While there is little doubt that inequality has increased hugely over the last three decades (they look at the period from 1989 to 2013), with the implications they describe for inter-generational mobility, there are serious problems with their use of wealth.

First, it is important to note that while the authors' research shows a much larger increase in inequality among families with children than the elderly, they still find that the top one percent of elderly households has more than twice the wealth of the top one percent of households with children. The next 9 percent of the elderly households actually saw a considerably more rapid percentage increase in wealth over this period than was the case for the next 9 percent of the distribution for families with children.

While the bottom 50 percent of the elderly distribution look to be in much better shape in terms of their wealth than the bottom 50 percent of the distribution for families with children (median wealth of $46,020 for the elderly, an inflation-adjusted gain of 70 percent, compared with debt of $233 for families with children) on closer analysis this is much less clear. An elderly household was far more likely to have some income from a defined benefit pension in 1989 than in 2013. They were also more likely to have retiree health benefits. Furthermore, the amount of health care spending not covered by Medicare would be much higher in 2013 than in 1989. In addition, Social Security benefits are lower relative to workers' wages in 2013 than was the case in 1989. When these factors are taken into account (we would take the discounted value of these benefit reductions), it is not obvious that the median elderly household would have more wealth in 2013 than in 1989.

Wealth is also a problematic measure for families with children. The families at the bottom by this measure are likely to be recent graduates of elite programs like Harvard business school. These families would have borrowed heavily to earn their degrees, but would not have much work experience to pay off their debt and accumulate assets. Many recent college grads would also have negative wealth. While some of these people will face serious problems paying back their debt, most will have much higher paying jobs than non-college educated members of their cohorts and have much better life prospects.

Also, since there is a huge age aspect to wealth (on average, people have much more wealth in their 40s than in the 20s or 30s) the fact that many people are having children at an older age is likely to be a huge contributor to wealth inequality among families with children. This would especially be the case if more educated families tend to be the ones having children at older ages.

None of this should be taken to minimize the problem of inequality or the difficulties that children from low- and moderate-income families face in obtaining a decent education and in their subsequent careers. However, trends in wealth inequality are probably not a very good way to access these difficulties.

Add a comment

It's really great that Tthe New York Times' reporters are able to read people's minds, especially when it comes to Donald Trump. After all, the guy constantly contradicts himself and makes assertions that clearly are not true, so it might be difficult for most of us to know what he really believes.

But NYT reporters can cut through the confusion with their mind reading powers. An article on the failure of a House Republican bill for renewing food stamps and farm subsidies told readers:

"[...]he [Rep. K. Michael Conaway, chair of the House Agriculture Committee] also sought to accommodate the White House and outside conservative groups, which demanded new election-year initiatives to reduce the rolls of the Supplemental Nutrition Assistance Program, or SNAP, which Mr. Trump regards, along with Medicaid and housing aid, as 'welfare.'"

It's good to know that Trump actually believes that the $126 a month that people collect in food stamps are welfare, as opposed to just being something he says to denigrate low- and moderate-income people for his base.

Add a comment

Economists usually are inclined to trust the data coming out of the Federal Reserve Board and the government statistical agencies, but the NYT told us they are wrong in an article on trade negotiations with China. The article refers to a disputed promise by the Chinese government to reduce its annual trade deficit with the United States by $200 billion.

The piece explicitly dismisses the significance of this promise. It tells readers:

"Economists say that the purchase by China of $200 billion more in American goods per year — an amount equivalent to more than half of the annual American trade deficit with China — simply is not practical. 'The short answer is these are unrealistic numbers,” said Chad Brown, a senior fellow at the Peterson Institute for International Economics.'

"Even if the Chinese stopped buying other foreign products, like Airbus airplanes from the European Union or soybeans from Brazil, and purchased solely American products, it would add up to only a small fraction of the $200 billion total they are promising to purchase.

"'It would even be a stretch to get it to $50 billion,' Mr. Bown said.

"That is because the United States economy is already running near its full productive capacity, meaning it would not be able to produce enough new goods to meet Chinese demands, especially in the short term.

"In that scenario, the United States would probably stop selling airplanes, soybeans and other exports to other countries and sell them to China instead — shrinking the United States trade deficit with China but leaving the United States trade deficit with the entire world unchanged."

The claim advanced by Mr. Brown, which the piece implies is shared by all economists, implicitly assumes both that the US economy is at full employment and that the manufacturing sector cannot expand its output. Government data would indicate that neither claim is true.

Add a comment

Jared Bernstein and I had a piece earlier this week discussing the problems that a government job guarantee would address along with some of the problems which make us reluctant to endorse one. I thought it would be useful to summarize the four areas in which we have serious concerns about the economic response:

1) The number of people currently employed who would opt for a guaranteed job.

Proponents of a guarantee argue that most private sector employers would improve their wage and benefit package to match the terms offered by a guaranteed job. Given the large portion of the workforce who stand to gain from a job with the terms being proposed ($15 an hour wage, plus genenefits), it isrous health care and other be possible that tens of millions of workers may see a guaranteed job as better than those on offer in the private sector.

2) The ability of the government to effectively manage a jump in the size of its workforce by at least 10 million and quite possibly two or three times this size. 

The issue here is whether the people doing jobs provided through the guarantee are actually doing useful work. This is not just a moral concern that people work for their pay. It will be pretty much impossible to maintain political support for a job guarantee if people employed under the program routinely come to work late, leave early, or don't show up at all, or alternatively sit around and do nothing when they are ostensibly employed. Since by definition many of these people will have little work experience, the task will be even harder.

Add a comment

The NYT ran a column highlighting new research by Tim Bartik and Brad Hershbein showing that the earnings premium from graduating college is not the same for everyone. Specifically, the research finds that the premium is lower for people from lower-income families than for people from middle-income families.

It is good to see this divergence in experiences getting attention in the paper. While this has been known to researchers for many years (see this 2010 piece by John Schmitt and Heather Boushey), the NYT in general, and columnist David Leonhardt in particular, have often presented increased college attendance as a panacea for income inequality.

As that paper showed, there was a growing divergence in income outcomes for college graduates among men. (This was less the case among women.) Many, many college grads earned less than high school grads, suggesting that they had gained little income by going to college. Since many incurred substantial debt, college was likely, on net, a losing proposition for them economically.

Also, many people who enter college do not graduate. When the risk of not graduating is taken into account, it is understandable that many young men have chosen not to attend college. Hopefully, this more recent research will make the basic facts about college and earnings more widely known to people in policy circles.

Add a comment

Kevin Roose had a piece in the NYT about the large number of tech companies that are going public without ever having made a profit. As the piece points out, the strategy is to use low prices to build up a large market niche and then jack up prices once people become dependent on the company.

Roose touts Amazon as a successful model for this strategy:

"Those years of investments paid off, and Amazon is now the second most valuable company in the world, with $1.6 billion in profit last quarter alone."

While it's fine for a company to make $1.6 billion in profit for a quarter, Amazon now has a market capitalization of more than $780 billion. Assuming its other quarters are equally profitable, the company has a price to earnings ratio of more than 120 to 1. In order for Amazon's stock price to make sense, its profits will have to increase by almost a factor of ten from its current level. While this could happen, Roose may want to find another company as an example where its profit growth has already managed to justify the price shareholders paid for the company.

Add a comment

Austin Frakt had an interesting NYT Upshot piece noting that the US leads the world in health care spending per capita, but badly trails most other wealthy countries in life expectancy. He notes this divergence began in 1980.

While that is true in terms of life expectancy, the divergence in spending actually began in the 1970s. According to the OECD, the United States was near, but not at the top, in terms of health care spending as a share of GDP. Both Canada and Denmark devoted a larger share of their GDP to health care. While the difference with Canada was small, the difference with Denmark was more than 1.2 percentage points of GDP for 1971, the first year that data are available.

By 1980, the gap with Denmark had fallen to less than 0.2 percentage points of GDP, while US spending as a share of GDP exceeded Canada's by 0.6 percentage points. Insofar as there is a mystery about US health care spending, as the headline asserts, it seems to have begun in the 1970s rather than the 1980s.

One other point is worth noting in reference to this piece. At the end, as one potential solution to high costs in the US, the piece suggests more competition. That would be great (starting with an end to government-granted patent monopolies in prescription drugs and medical equipment), but another even more simple route is increased medical travel.

If people facing expensive medical procedures could travel to other countries and share in the savings it would directly lower costs. Furthermore, by reducing demand in the United States it should put downward pressure on prices. However, the most important effect is that it would make more people aware of the fact that people in other countries get high-quality care for prices that are often less than half of what we pay in the United States.

Add a comment

Since I and others have raised questions about Jeff Bezos–owned paper's boosterism of Amazon when it comes to the location of the company's second headquarters, it is worth calling attention to this very fair piece that points out some of the downsides of having Amazon in the DC area. There are two issues that might have been worth more attention.

The piece notes that the specifics of the incentives being offered by the District of Columbia and Northern Virginia have not been made public. This certainly raises the possibility that the hit to budgets in these areas could be very large if Amazon were to choose either as a destination. While the secrecy is noted, it would have been worth making the point about this risk more explicit.

The other is that the company is openly using the threat of moving jobs to get Seattle to reduce or eliminate a payroll tax it is considering for large companies. This certainly raises the possibility that Amazon may engage in similar behavior if it locates in the DC area and one or more of the governments attempts to raise taxes to meet public needs.

Add a comment

I was glad to see Paul’s short post explaining some of the economics of the US government negotiating drug prices with the drug companies: the route Donald Trump rejected. I thought I would add a few more points.

First, the monopoly profits earned by the drug companies provide a powerful incentive for rent-seeking. This is the standard story that economists always complain about with trade protection, except instead of talking about a tariff that raises the price of the protected item by 10 or 25 percent above the free market price, we’re talking about a government-granted monopoly that typically raises the price of a factor of ten or even a hundred compared with the free market price. These markups are equivalent to tariffs of 1000 percent or 10,000 percent.

This not only encourages behavior like the payoff from Novartis to Trump lawyer Michael Cohen, it also gives drug companies an enormous incentive to misrepresent the safety and effectiveness of their drugs. We frequently hear stories of drug companies withholding evidence that their drugs are less effective than claimed or even harmful for some patients. Perhaps the most famous was the case where Merck allegedly withheld evidence that its arthritis drug, Vioxx, increases the risk of heart attack and strokes for people with heart disease. Needless to say, the costs from this sort behavior are enormous.  

A second point is that we are not talking about a typical consumer buying decision, like buying a car or a cell phone. People buy drugs because they are in bad health and possibly facing death. As Krugman notes, there is typically a third-party payer, either an insurer or the government. Apart from the possibility that this can lead to excessive payments that Krugman discusses, there is also the perverse dynamics this creates.

The price that companies end up getting for their drugs, and if they get it all, depends on the ability of patients to lobby their insurer or the government. Naturally, the drug companies are happy to help in this effort. There is a whole set of industry-funded disease groups that are largely aimed at forcing insurers and the government to buy expensive drugs, often of questionable value, from the drug companies.

This also raises the point that it is pretty crazy that we expect people when they are sick or dying to pay for research that has already been done. In almost all cases, the cost of manufacturing and delivering drugs is cheap, we make it expensive with government-granted patent monopolies. If we asked questions about paying for possibly life-saving drugs at their actual production costs, it would almost always be a no-brainer. But when we have a cancer drug, which may not even work, that a drug company sells for several hundred thousand dollars, it becomes a tough question as to whether the government should pick up the tab or force insurers to do so.

Finally, there is an absurd view in this debate that somehow patent monopolies are the only way to finance innovation. There is no argument that we have to pay for research; no one expects highly skilled researchers to work for free. But we can and do have other mechanisms for paying for this work.

The government already spends more than $30 billion a year on biomedical research, primarily through the National Institutes of Health. This research is incredibly productive by all accounts. There is no reason, in principle, that we can’t double or triple the amount we spend on directly supported research. This would allow all new drugs to be sold at generic prices, without patent monopolies or related protections. By my calculations, this would save close to $380 billion a year (around 2.0 percent of GDP or more than five times the annual budget for the food stamp program). We would also benefit from having all the research findings in the public domain so that doctors and other researchers would have access to it when making decisions for their patients or planning future research.

Add a comment

Donald Trump is relying on a silly myth in his latest pharmaceutical industry America First crusade. He is claiming that because other countries don't give our drug industry unchecked patent monopolies, we are subsidizing research for them. The numbers disagree.

According to the National Science Foundation, our pharmaceutical industry spent $62.5 billion on research worldwide in 2013, the most recent year for which data are available. If we increase this by 25 percent to account for growth between 2013 and 2017, we get $78.3 billion. Worldwide sales last year were just under $1 trillion.

If just half of these sales were by U.S. companies, it would translate into just under $500 billion in sales. This would mean that the industry's research expenditures were equal to less than 16 percent of its sales. Prices in other wealthy countries are generally in the range of 40 to 60 percent of the U.S. price. Since the cost of manufacturing and delivering the drugs is generally less than 10 percent of the U.S. sales price, and often less than 1 percent, the industry should easily be able to recover its research expenditures if the whole world paid the regulated prices in other countries rather than the U.S. government imposed monopoly prices.

In other words, there is not really a plausible story on how Trump's efforts to force other countries to pay higher prices will lead to lower drug prices in the United States. On the other hand, insofar as Trump suceeds, it will lead to higher industry profits.

Add a comment

The NYT did some serious editorializing in a headline that told readers:

"[...]to lower drug costs at home, Trump wants higher prices abroad."

Sorry folks, the NYT does not know what Trump wants. In fact, a reasonable first guess might be that Trump wants to increase the profits of the pharmaceutical industry, with whom he is very close. The NYT would be on sounder footing with a headline saying "To increase pharmaceutical industry profits, Trump wants foreigners to pay more for drugs." This headline more closely corresponds to the known facts, but we know the paper doesn't like attributing motives, except of course when it does.

It is worth noting that the headline writer is following the article which told readers in the first paragraph that Trump:

"[...]has an idea that may not be so popular abroad: Bring down costs at home by forcing higher prices in foreign countries that use their national health systems to make drugs more affordable."

Why is it so hard for reporters to just report what politicians say and do and not try to tell us what they are thinking?

Add a comment

The second paragraph of an article on a new requirement in California — that all new homes have solar power — told readers:

"It will add thousands of dollars to the cost of home when a shortage of affordable housing is one of California’s most pressing issues."

It then added:

"That made the relative ease of its approval — in a unanimous vote by the five-member California Energy Commission before a standing-room crowd, with little debate — all the more remarkable."

The piece then goes on to explain that the energy savings are likely to far exceed the additional costs of the solar installations over the life of a standard mortgage. Given this evidence, it might have been reasonable for the second paragraph to say something like:

"In spite of increasing construction costs, the savings on energy likely mean that the requirement will reduce the cost of home ownership, which is an important issue given the shortage of affordable housing in California."

That might have left readers with a different view of the new regulation.

Add a comment