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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That would have been a reasonable headline for a NYT article on India's resistance to U.S.-type patent rights on expensive drugs. The focus of the piece is Herceptin, a cancer drug that costs $18,000 for a single round of treatment, which makes it unaffordable to almost anyone suffering from cancer in India. A generic version of this drug would likely cost two or three percent of this price.

As a result of the enormous price difference between patent protected drugs and free market drugs the Indian government is taking a very critical view of many patents. In this case, the manufacturer, Roche Holdings, has decided not to challenge the production of generics in Indian court since it believes it would lose the case.

The piece presents this issue as a problem because the widespread availability of low cost generics in India and elsewhere will reduce the returns to innovation and will mean that drug companies will have less incentive to invest in developing new drugs. While this is true if we rely exclusively on government granted monopolies to finance research, this is far from the only mechanism that could be or is used to finance research.

There are other more modern mechanisms for financing research than this relic from the feudal guild system. For example, Nobel laureate Joe Stiglitz has advocated a prize system whereby innovators are compensated for breakthroughs from a public prize fund and then the patent is placed in the public domain so that the drug can be freely produced as a generic. It is also possible to simply fund the research up front, as is already done to a substantial extent with the $30 billion a year provided to the National Institutes of Health.

If we eliminated monopolies it would both reduce the cost of drugs and also likely lead to better medicine. The enormous mark-ups provided by these government monopolies gives drug companies an incentive to mislead the public about the safety and effectiveness of their drugs. It is a standard practice to conceal or even misrepresent research findings (e.g. Vioxx). This leads to bad health outcomes, the cost of which likely exceeds the money invested in research and development by the drug companies by an order of magnitude.

For these reasons, a piece like this in the NYT should be highlighting the increasing difficulty that the United States and Europe are facing in imposing patent monopolies on prescription drugs in the developing world. It is wrong to imply that there is some inherent tension between affordable drugs and innovation. This tension only arises with the archaic patent system.

 

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That's the calculation for those of you who didn't know offhand whether $24 billion is a big deal to the federal government. It takes about two seconds to do this sort of calculation on CEPR's nifty keep Responsible Budget Reporting Calculator.

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Yes, the investigative team at the Washington Post is back on the trail. Today's front page expose highlights a government program that uses 0.00008 percent of the federal budget to promote the health benefits of walnuts. The piece tells readers that this program is a "hard not to crack." It explained that even though Representative Tom McClintock pushed to kill the program; Congress voted 322-98 to keep it, claiming that it provided benefits to farmers.

Of course this is not the only example of a wasteful program uncovered by the Post's investigative team. They also highlight the "Christopher Columbus Fellowship Foundation," a program that runs an essay contest for middle schoolers interested in science. This one takes up 0.00001 percent of the federal budget. Then we have the Lake Murray State Park Airport in Oklahoma on which the government wastes 0.000004 percent of its budget each year.

And, the Post reminds us of its earlier investigative work, like when it exposed the fact that 0.006 percent of Social Security benefits are sent to dead people in an earlier front page story. The Post adds to this that each month Social Security mistakenly identifies 0.00003 percent of its covered population as being dead even though they are still alive.

After going through a number of very small programs that the Post has decided are wasteful, the article implies that somehow spending has not actually been cut.

"Three years after deficit-driven Republicans took the House, Washington’s experiment with budget-cutting has produced mixed results. Politicians have, indeed, had historic success cutting numbers — the abstract, friend-less figures at the bottom of the federal balance sheet.

"In the next fiscal year, for instance, the government’s “discretionary” spending will be limited to $1.012 trillion. That figure was set by the budget deal agreed to last week. That’s down about 13 percent from 2010, adjusting for inflation.

"There has been very little change in 'mandatory' spending programs, which account for the vast majority of federal spending."

Of course spending has actually been cut. The result has been that growth has been stunted. Hundreds of thousands more people are unemployed. This means that the spending cuts demanded by the Post in both its editorial and news sections has thrown the parents of our children out of work. These cuts have also made it much more difficult for young people just leaving school to find jobs.

The Post's complaint about the fact that mandatory spending has not been cut reflects the fact that people across the political spectrum overwhelming support Social Security, Medicare and Medicaid, as well as the other programs that account for the overwhelming majority of mandatory spending. The Post and its chosen sources, in this case the Concord Coalition, a Peter Peterson creation, are relatively lonely in pushing for cuts to these programs.

It is also worth noting that mandatory spending actually is now projected to be considerably lower as a result of a sharp slowdown in the rate of growth of health care costs. Spending for Medicare and Medicaid in 2020 is now projected to be about 10 percent less than was projected in 2010. The projected savings in later years are even larger.

 

Addendum:

I see from comments that some folks think it is appropriate to make a big deal about items that might be less than 0.0001 percent of the budget. That's great if you want to spend your time on these relatively small amounts of spending, but it means that your efforts will have no noticeable impact on overall spending and deficits. If you want to have an impact on overall spending then you have spend your time on items that actually involve a big share of the budget. That's just arithmetic.

My guess is that the vast majority of readers of the WaPo have no idea how insignificant the items it chose to highlight were to the overall budget because it never provided this information. Since most people have relatively little time to concern themselves with such issues, my guess is that they would rather focus on items that actually do have a noticeable impact on spending and deficits rather ones that the paper chose to highlight in an effort to make the government seem wasteful.

 

Correction made on projections for Medicare, thanks ltr.

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The NYT had a good piece explaining how some of the financial industry's biggest defenders in academia are paid by the industry for their work.

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Paul Sullivan gave NYT readers some pretty bizarre investment advice in his "Wealth Matters" column. He noted the Fed's announcement that it would begin to cut back on its quantitative easing (QE) program, telling readers:

"Bonds are one area of concern. Since interest rates on fixed income, particularly benchmarks like 10-year United States Treasury notes, fell so much over the last few years, the view is they will begin to rise as the Fed ends its bond-buying program and the economy improves. As that happens, the value of bonds that people already own decreases."

The problem with this story is that bond prices have already fallen, a lot. The yield on 10-year Treasury bonds fell as low as 1.5 percent last year. It is now at 3.0 percent. While it is possible, if not likely, that yields will rise further in the year ahead, the risk of big losses in value is much smaller now than it was in 2012.

The basic story here is a simple one. The markets anticipated the ending of QE and have largely incorporated it into bond prices. Other events could push bond yields higher and prices lower, but the ending of QE is not going to be one of them. 

 

Note: Original said bond prices have risen -- this was corrected.

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Morning Edition had a segment on the Trans-Pacific Partnership and EU-U.S. trade agreement today. The piece began with a speech by President Obama in which he asserted that exports have been one of the fastest growing sectors of the economy. This is not true in any meaningful sense.

What matters for the economy is net exports, not exports alone. If GM shuts down an auto assembly plant in Ohio and replaces it with one in Mexico, which then ships the cars back to the United States, this would show up as an increase in exports. However, it would be associated with a loss of jobs and output in the United States since it means that imports will have grown by even more.

Much of our trade has this character. If we look at net exports, trade has actually been a drag on growth in 2013. Presumably President Obama understands this fact and was simply trying to deceive his audience to promote his trade agenda. NPR should have exposed this deception rather than assisting President Obama in accomplishing this goal.

The piece also repeatedly refers to these deals as "free trade" agreements. This is inaccurate. Many of the provisions in the proposed agreements have little to do with trade, as was explained in the segment, and some will actually increase barriers, as is the case with rules that will lead to strengthened copyright and patent protection.

 

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The Washington Post had a good investigative piece on how for profit hospice-care providers are increasing their profits by admitting people for hospice care who are not actually dying. These people are far more profitable for the companies since they are likely to be receiving hospice care for a longer period of time and require less care than someone who is actually dying. Medicare and Medicaid pick up most of the cost of this care.

In the accounts of spending on the elderly that the Washington Post and others routinely cite to make arguments about generational inequity, the money ripped-off from the government by these hospice providers count as payments to the elderly. 

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The Washington Post just loves anything that is labeled as a free trade agreement. (I'm going to call my old car a "free trade agreement" and sell it to the Post for a fortune.) Today it ran a piece on the Trans-Pacific Partnership that had the sub-head:

"goal of talks with Pacific region is a freer flow of world commerce."

While this is also asserted in the article itself, it is not true as the article makes clear. One of the main purposes of the deal is strengthening patent and copyright protection and other claims to intellectual property.

Note the word "protection." This aspect of the deal is about obstructing the free flow of international commerce. These forms of protectionism will raise the price of many items by several thousand percent above their free market price. They will cause large amounts of resource to be wasted to legal suits, lobbying, marketing, and other forms of rent-seeking activity. 

It is possible to argue for the merits of increased protection for intellectual property claims, but it is just flat wrong to describe this as creating a freer flow of international commerce. These forms of protection are 180 degrees at odds with free trade.

 

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It's hard to get news over at Fox on 15th Street, buried away in downtown Washington, five blocks from the White House. That presumably is why the Washington Post had a front page article discussing the extent to which young people are signing for the health care exchanges set up under Obamacare. The piece reports on the outreach effort to sign up:

"the healthy Americans in their 20s and 30s who are key to making the economics of the new health-care law work."

In fact there is not a special need to sign up young healthy people as opposed to healthy people of all ages. Kaiser Family Foundation did an analysis last week showing that it would have relatively little impact on the cost of the program even if the number of young people enrolling fell far below their share of the population. While young people do have lower costs on average, they also pay lower premiums. While these are not completely offsetting the difference will have little impact on the costs of the program.

The conclusion of the Kaiser study is that the exchanges need healthy people of all ages. It doesn't especially matter if they are young. (A healthy 55-year-old pays three times as much as a healthy 30-year-old.) The real concern is a skewing based on health status, not age.

 

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Lydia DePillis warns us in the Post of 8 ways that robots will take our jobs. It is amazing how the media have managed to hype the fear of robots taking our jobs at the same time that they have built up fears over huge budget deficits bankrupting the country. You don't see the connection? Maybe you should be an economics reporter for a leading national news outlet.

Okay, let's get to basics. The robots taking our jobs story is a story of labor surplus, too many workers, too few jobs. Everything that needs to be done is being done by the robots. There is nothing for the rest of us to do but watch.

There can of course be issues of distribution. If the one percent are able to write laws that allow them to claim everything the robots produce then they can make most of us very poor. But this is still a story of society of plenty. We can have all the food, shelter, health care, clean energy, etc. that we need; the robots can do it for us.

Okay, now let's flip over to the budget crisis that has the folks at the Washington Post losing sleep. This is a story of scarcity. We are spending so much money on our parents' and grandparents' Social Security and Medicare that there is no money left to educate our kids.

Some confused souls may say that the problem may not be an economic one, but rather a fiscal problem. The government can't raise the tax revenue to pay for both the Social Security and Medicare for the elderly and the education of our kids. This is confused because if we are living in the world where the robots are doing all the work then the government really doesn't need to raise tax revenue, it can just print the money it needs to back its payments.

Okay, now everyone is completely appalled. The government is just going to print trillions of dollars? That will send inflation through the roof, right? Not in the world where robots are doing all the work it won't. If we print money it will create more demands for goods and services, which the robots will be happy to supply. As every intro econ graduate knows, inflation is a story of too much money chasing too few goods and services. But in the robots do everything story, the goods and services are quickly generated to meet the demand. Where's the inflation, robots demanding higher wages?

In short, you can craft a story where we have huge advances in robot technology so that the need for human labor is drastically reduced. You can also craft a story where an aging population leads to too few workers being left to support too many retirees. However, you can't believe both at the same time unless you write on economic issues for the Washington Post.

Just in case anyone cares about what the data says on these issues, the robots don't seem to be winning out too quickly. Productivity growth has slowed sharply over the last three years and it is well below the pace of 1947-73 golden age. (Robots are just another form of good old-fashioned productivity growth.)

labor productivity

On the other hand, the scarcity mongers don't have much of a case either. Even if productivity growth stays at just a 1.5 percent annual rate its impact on raising wages and living standards will swamp any conceivable tax increases associated with caring for a larger population of retirees.

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