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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- Written by Dean Baker
The NYT had a good column on the government's efforts to prevent people from buying lower cost drugs from foreign countries. The column makes the point that the Food and Drug Administration has misleadingly tried to claim that the issue with foreign drugs is one of safety when it really is just pharmaceutical industry profits. If people know that they can buy drugs for prices that are often less than one fifth the price in the United States, they will be unlikely to buy the drugs in the United States.
The government has therefore tried to prevent lower cost drugs from entering the country. It also uses trade agreements like the Transatlantic Trade and Investment Partnership to raise drug prices in other countries. This both increases industry profits overseas and removes a potential source of low cost drugs.
Low cost drugs do undermine the usefulness of patent protection as a way to finance research and development, just as black markets in blue jeans undermined central planning in the Soviet Union. Ordinarily economists look to mechanisms that are consistent with markets rather than ones that depend on stifling markets. For some reason economists have shown little interest in any of the alternatives to patents, such as public funding through entities like the NIH, as ways to finance prescription drug research. Since these alternatives could bring patent protected drug prices down by 80-90 percent, they would offer enormous economic gains, in addition to the obvious benefits to public health.Add a comment
- Written by Dean Baker
The Washington Post had a major piece that discussed the ethics of efforts to use public pressure to force drug companies to make expensive drugs available to patients at affordable prices. Remarkably it never discussed the role of patent monopolies.
In the case that was the immediate focus of the article, a young boy who was suffering from cancer and seemed likely to benefit from a drug that was still in the experimental stage, it does not appear that patent protection was a major factor. However in many cases patients will face exorbitant prices for a life-saving drug that they may not be able to afford because the drug is subject to patent protection.
In such cases it is the patent that creates the moral dilemma raised in this article. If the drug were sold at its free market price it would likely be affordable to most patients. This is one of the perversities of patent financed drug research. While drugs can be expensive to develop, they are generally cheap to manufacture. It would be desirable for drugs to be sold at their free market price if some alternative mechanism (e.g. NIH funding) could be used to finance their development.
It would have been useful if this piece had discussed the way in which the mechanism we use to finance drug research can lead to the sort of ethical dilemmas it discusses. In this context it is probably worth mentioning that the Washington Post gets considerable revenue from drug company advertising.
Note: Typos corrected, thanks Robert Salzberg.Add a comment
- Written by Dean Baker
In his column "when the scientist is also a philosopher," Greg Mankiw tells us about his preference for not having the government interfere in consensual exchanges between individuals. He warns readers that economists who advocate such interventions also have a political philosophy about achieving certain outcomes (i.e. less inequality).
The wisdom of not interfering with consensual exchanges implies that is possible to have exchanges in which the government has not already played a huge role in setting the terms of the exchange. This is clearly not true.
For example, the number of jobs is very directly determined by government policy. We would have millions more jobs in the economy today if the government had not decided to run a high unemployment policy by reducing the size of the budget deficit. One can argue for the merits of deficit reduction, but this was a political choice where a lower deficit number was judged to be more important than letting millions of people have jobs.
In the same vein, we could have pursued policies to get the trade deficit closer to balance. If we had emphasized reducing the value of the dollar in our negotiations with trading partners, instead of things like patent protection for prescription drugs, copyright protection for Microsoft and Hollywood, and access to financial markets for Goldman Sachs, we would also have millions more people employed.
Furthermore, we could have structured trade agreements to put our doctors and lawyers in direct competition with their counterparts in the developing world (who would train to our standards) then globalization would not have been a factor increasing inequality. Instead it would have brought down the wages of the most highly skilled workers, while producing huge economic gains by lowering the cost of health care and other services. This would also have improved the bargaining situation of most of the workforce at the expense of business.
Mankiw is misleading readers by implying that we have the option to have consensual exchanges that are not shaped in very large ways by the government. (This is the topic of my free book, The End of Loser Liberalism: Making Markets Progressive.) In the last three decades, most of that shaping has been done to redistribute income upward.Add a comment
- Written by Dean Baker
The Post gives us its latest concern about the housing market, telling us that higher interest rates will cause people to stay in their current homes where they have locked in low mortgage rates for long periods of time.
"The higher rates, soaring home prices and a tight inventory have kept potential buyers on the sidelines, hurting the sales of previously owned homes and undermining the recovery of the housing market, a huge contributor to economic growth."
The problem with this line is that the housing market has recovered pretty much all we should expect. In the mid-1990s, before the bubble began to dominate the market, existing home sales averaged about 3.5 million annually. If we adjust upward by 20 percent for population growth, we should expect existing home sales of around 4.2 million.
In fact, they have been running at around 4.8 million, considerably above trend levels. This is partially offset by lower than trend sales of new homes (this is due to the fact that unusually high vacancy rates are still discouraging new construction). However this piece is focused on explaining a weakness in the housing market that does not exist.
The piece also misrepresents the scenario we would face if interest rates rise further, implying that this will directly make housing less affordable. It ignores the fact that higher interest rates will likely lead to lower house prices. This will not completely offset the impact of higher interest rates on monthly housing costs, but the almost inevitable drop in house prices will alleviate the impact on higher interest rates. It is bizarre that the piece never mentioned this fact.Add a comment
- Written by Dean Baker
There are many ideologues who have their own set of truths, who refuse to listen to any evidence that points in a different direction. However George Will is in a class all by himself. He refuses to pay attention to the evidence that he himself puts forward.
Exhibit A is a classic Will rant at the left for being unwilling to consider the cultural factors that affect poverty. The hero of this piece is Daniel Patrick Moynihan:
"In March 1965, Moynihan, then 37 and assistant secretary of labor, wrote that 'the center of the tangle of pathology' in inner cities — this was five months before the Watts riots — was the fact that 23.6 percent of black children were born to single women, compared with just 3.07 percent of white children."
Will then goes on to tell readers:
"Forty-nine years later, 41 percent of all American children are born out of wedlock; almost half of all first births are to unmarried women, as are 54 percent and 72 percent of all Hispanic and black births, respectively."
If we follow Will's link we find that 29 percent of non-Hispanic white children are born out of wedlock today.That's considerably higher than the 23.6 percent of black children born out of wedlock in 1965 that Moynihan thought was the explanation for their poverty. Yet the poverty rate for white children today is less than 10 percent. It was over 40 percent for African American children in the mid-1960s.
If black children in 1965 had a poverty rate that is more than four times the poverty rate for white children in 2012, despite their lower rate of births to unmarried mothers, this would seem pretty solid evidence that being born to an unmarried mother is not the main factor in determining child poverty.
The far more important factor is the earnings potential for the children's parent(s). This is determined by the factors that Will discourages us from considering, such as macroeconomic policy, trade policy, policies toward labor organizing, and other policy choices that will determine the health of the labor market facing parents of young children. Of course their access to health care and quality child care will also be important factors determining the children's well-being which are picked up in the Census Bureau's supplemental poverty measure.
And it is easy to show that government policy has made poverty worse on this score. The fall in employment rates following the 2001 recession was associated with a rise in poverty. The much sharper fall in employment rates following the 2008 recession was associated with an even larger rise in poverty. The decision of Congress to run high unemployment budgets (i.e. lower deficits) also will predictably result in a higher poverty rate for children.
There is a different and trivially true point that perhaps Will is trying to make in his column. Children with two loving committed parents will fare better in life on average than children who only have one parent.
Many liberals don't find this very useful from a policy perspective because they don't think the government is very good at creating and preserving good marriages. However we do know how to run economic policies that will reduce the unemployment rate.Add a comment
- Written by Dean Baker
The campaign to install Larry Summers instead of Janet Yellen as Fed chair was chock full of sexist innuendo as pundits speculated as to whether Yellen had the gravitas to hold down the job. The Washington Post's editorial on Yellen's first press conference showed that such attitudes continue in elite Washington circles.
The headline complained:
"In Fed media event, Yellen isn't able to control the message."
The piece itself told readers:
"Mr. Bernanke’s successor, Janet Yellen, met with reporters Wednesday and, bluntly, it didn’t go all that smoothly. Responding to a question, Ms. Yellen hinted that the Fed might start raising interest rates above zero “around six months” after phasing out the current bond-buying stimulus program; bond markets quickly sold off, which was almost certainly not what Ms. Yellen intended. Ms. Yellen also assured investors that there was no great significance to the Fed’s decision, announced Wednesday, to back off its previous plan to raise rates after unemployment hit 6.5 percent. But markets looked past her words to other Fed officials’ own interest-rate forecasts and drew contrary conclusions."
If you missed the earthquake in bond markets that was the basis for the Post's editorial you can be forgiven. The economy will probably miss it too. The linked article reports that yield on two-year Treasury notes climbed 7 basis points to 0.42 percent. This is a lot in percentage terms, but its economic impact is close to zero. The yield on ten-year Treasury bonds, which has far more impact on the economy, was little changed. It is still under 2.8 percent and has remained in pretty much the same range for the last month and a half, down from just over 3.0 percent in December.
In other words, if Yellen misspoke there was little obvious consequence. By contrast, her predecessor Ben Bernanke did spark a sharp rise in long-term interest rates with his famous taper talk last June. Partly as a result of this talk, the yield on ten-year bonds rose by more than one percentage point over a two-month period. While this rise in long-term rates did not appear to be his intention, it appears to have taken the air out of an incipient bubble in the housing market. In that sense, it may have been a remarkably good move, even if it was an unintended outcome.
Anyhow, it is striking that the WaPo didn't see the need to rebuke Bernanke for what appeared to major unintended consequences from a press conference, while Yellen does draw its wrath for a possibly mistake that will have virtually no economic impact.Add a comment
- Written by Dean Baker
How can we stop the country's leading newspaper from repeating nonsense? To paraphrase a former president, "there they go again." A front page article on the Obama administration's efforts to sign up young people before the deadline told readers:
"And there is concern that the administration still needs a larger proportion of 18- to 34-year-olds, the young and presumably healthy people whom insurance companies need as customers in order to keep premiums reasonable for everyone."
The simple fact, as shown in this analysis by the Kaiser family Foundation, is that the potential age skewing of enrollment matters little for the cost of the program. Younger people are on average healthier than older people, but they also pay much less in premiums. The difference in premiums doesn't fully capture the difference in costs, but the gap between premiums and average cost has relatively little impact on the finances of the program. It matters much more if there is a skewing by health condition.
Most older people are also healthy. A substantial portion of people in the oldest age bracket (55-64) will have few or no claims on their insurer. Since these healthy older people pay three times as much on average for insurance as young people it matters much more whether they sign up for the exchanges than healthy young people.Add a comment
- Written by Dean Baker
Bloomberg View columnist Megan McArdle gives us yet another rendition of the story of young invincibles killing Obamacare, (literally, it is the headline of the piece). Remarkably, the column actually notes the Kaiser Family Foundation analysis showing that young invincibles really don't matter much for the program. This analysis points out that because young people pay much less in premiums than older people, it really doesn't matter much whether they don't sign up in proportion to their population.
The column then cites a column by Seth Chandler, which argues that a skewing by subsidy size could indeed cause problems for the program. Chandler's analysis is undoubtedly correct and acknowledged explicitly in the Kaiser analysis. If only people receiving large subsidies of all ages sign up for the program then it will face problems, just as would be the case if only people with bad health signed up for the program. However neither Chandler nor McArdle present any reason to believe that such skewing would be correlated with the sign-up patterns of the young invincibles.
The Chandler piece also takes issue with the conclusion of the Kaiser analysis that the 2.0 percent increase in insurer costs that would result from an extreme skewing by age would be unlikely to lead to a death spiral for the system, pointing out that any increase in costs makes a death spiral more likely. While this is true, it is worth noting for comparison purposes that per capita health care costs in 2014 are about 10 percent lower than was projected in 2008. In other words, this 2.0 percent increase is only a little bit larger than average error in annual health care cost projections.
Thanks to Aaron Beeman for calling my attention to this one.Add a comment
- Written by Dean Baker
In a piece discussing patterns in world growth over the last three decades Eduardo Porter told NYT readers:
"What’s happened is that while income growth stalled for middle-class workers in developed countries and surged for people in the 1 percent, it also grew sharply for hundreds of millions of workers in China, India and other Asian countries. In the late 1980s, for instance, workers in the middle of China’s urban income distribution made 56 percent of the median American income, according to Mr. Milanovic’s calculations. By 2008, that figure rose to 71 percent."
It is unlikely that people in the middle of the income distribution in urban areas of China had an income that was 71 percent of median in the United States in 2008. According to the Penn World Tables, per capita income on a purchasing power parity basis (the appropriate measure for comparisons of living standards), per capita income in the United States in 2011 was over $42,000. It was just under $8,000 in China. Overall, income is somewhat more unequally distributed in China than in the U.S., but urban areas have far higher living standards than rural areas. However even if we say this doubles the income of middle income urban Chinese, this would still only get them to 40 percent of the average in the United States.
While China's workers have enjoyed enormous gains in living standards over the last three decades, their standard of living is still well below the median in the United States. These gains have continued since 2008, with per capita income in China rising by nearly 60 percent in the last six years according to the I.M.F.
It is also worth noting that these gains need not come at the expense of workers in the United States and other wealthy countries. In principle, if U.S. workers had seen larger gains in income they could have been an even bigger source of demand for China's exports. In this context, the budget reducing policies of Washington politicians are lowering incomes in both China and the United States.
Also, policies that would promote equality in the United States could also yield large benefits for China. For example, weaker patent and copyright rules would make drugs and other products cheaper for people in China, giving their workers more purchasing power, while also reducing the patent rents received by the wealthy in the United States.Add a comment
- Written by Dean Baker
In his new and improved FiveThirtyEight Nate Silver examines the sources of increases in government spending over recent decades and identifies Social Security, Medicare, and Medicaid as the culprits. He then notes that these are effectively insurance programs. He then concludes that this explains the decline in trust for government:
"Nevertheless, the declining level of trust in government since the 1970s is a fairly close mirror for the growth in spending on social insurance as a share of the gross domestic product and of overall government expenditures. We may have gone from conceiving of government as an entity that builds roads, dams and airports, provides shared services like schooling, policing and national parks, and wages wars, into the world’s largest insurance broker.
"Most of us don’t much care for our insurance broker."
There is a big problem with this story. Social Security, Medicare, and Medicaid are all hugely popular programs across the political spectrum. If the public thought this was all the government did with their money, the government would likely be very popular. In fact, many people often discount these programs from the government as in the famous line from older Tea Party supporters that the government should keep its hands off their Medicare.
In fact, the public hugely misperceives where government tax dollars are spent, as polls consistently show. For example a 2010 poll found, the public on average believes that 27 percent of the budget goes to foreign aid. The actual number is less than 1.0 percent. A CNN poll from the same year found that the median respondent thought that food stamps accounted for 10 percent of the budget, while subsidies to the Corporation for Public Broadcasting accounted for 5 percent of the budget. (The actual number is less than 0.01 percent.)
Since the public huge exaggerates the portion of the budget that goes to many non-insurance programs, it is likely that its view of the government is more a result of its attitude toward these programs. The latter is in turn probably more negative than would otherwise be the case because of the exaggerated view of the amount of money these programs receive.
Anyhow, the piece does a good job explaining what is and what is not growing in the budget, but since most people are clueless on these facts (largely to due to the pathetic quality of budget reporting), the piece strikes out badly in its explanation of public opinion.Add a comment