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Just as the media in the Soviet Union were not allowed to talk about alternatives to one-party rule, the Washington Post apparently can't raise the issue of alternatives to patent supported drug research in the United States. This should be apparent to readers of an article on Sovaldi, a new drug to treat Hepatitis C.

The drug is currently subject to a government granted patent monopoly which allows its manufacturer, Gilead Science, to sell a year's dosage for $100,000. By contrast, a generic version sells in India for about 1 percent of this price. As the piece tells readers:

"If all 3 million people estimated to be infected with the virus in the United States were treated with the drugs, at an average cost of $100,000 per person, the amount spent for all prescription drugs in the country would double, from about $300 billion in a year to more than $600 billion."

To put this number in context, the additional cost of Sovaldi due to the government granted patent protection would in this case be equal to more than 1.7 percent of GDP, or a bit less than 25 percent of after-tax corporate profits. In short, it is real money.

One might think that an article that raises ethical questions, as this one does, about how much we should be willing to pay for saving a person's life, might also ask the question about why this drug is so expensive in the first place. Not in the Washington Post.

The granting of patent monopolies is a government policy to provide incentive for innovation. There are other ways to provide incentives, like paying people directly. (Has anyone heard of the National Institutes of Health? They get $30 billion a year to do basic biomedical research.) The government also finances a large amount of research directly through the Defense Department, with military contractors paid to develop new weapons systems. So there is a great deal of precedent for the government paying directly for research.

Some economists, like Joe Stiglitz, a winner of a Nobel prize, have suggested a prize fund where the government would buy up patents and then place them in the public domain. Under either system, all new drugs could be sold as generics at generic prices.

This would meet the condition that the price would then equal the marginal cost, which is usually a high priority for economists. Economists and people who have been through intro econ classes usually get upset when government policies like tariffs raise the price of a product by 15-20 percent above marginal cost. In this case, the patent monopoly is raising the price by close to 10,000 percent above marginal cost.

All the economic distortions and incentives for corruption that we would see from a 15-20 percent tariff also appear when a patent monopoly raises the price by 10,000 percent, except they are several orders of magnitude greater. The company has enormous incentive to mislead patients and doctors about the effectiveness and safety of their drug and also to market for uses for which it may be inappropriate. Drug companies also have incentives to pay off politicians to get their drugs covered by public programs. And drug companies act all the time in exactly the way predicted by economic theory. (Think of Vioxx.)

It is incredible that alternatives to patent supported research were never mentioned in an article that poses ostensibly difficult ethical questions about how much a life is worth.Without the government granted patent monopoly such questions would not arise, unless the Post puts the value of human life at less than $1,000.

It is also amazing that, at a time where much of the intellectual class has been obsessed with Thomas Piketty's book, Capital for the 21st Century, which warns of a growing concentration of wealth and income, a policy that both creates enormous economic distortions and leads to upward redistribution of income, is not even a topic for debate.

It is probably worth mentioning that the Post gets substantial advertising revenue from the drug industry.


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This is one of those strange but true stories. Here's the description of Paul Krugrman's column from NYT opinion page for Friday:


Why Economics Failed

Though it’s true that few economists saw the fiscal crisis coming, policy makers and politicians ignored both the textbooks and lessons of history. comment icon Comment


You have 30 seconds to see the problem in this story.

That's right, Krugman doesn't believe there was a fiscal crisis, in fact he has vigorously argued the opposite. We clearly had a financial crisis, but as Krugman argues, it had nothing to do with excessive budget deficits.

So how does this find its way into the NYT? Clearly some folks were asleep at the wheel, but this is pretty incredible. It attributes a view that is at 180 degrees at odds with the frequently and strongly expressed view of the paper's most prominent columnist.

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Very good piece in the Washington Post on how the trucking industry contracted out to push down wages in trucking. Now many independent truckers don't earn much more than workers in fast-food restaurants.

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Following the NYT, the Washington Post had an article on Bill Clinton's economic legacy today. And like the NYT piece yesterday, the Post did not mention the soaring trade deficit. (See my complaint about the NYT piece here.)

This is not a small matter. The trade deficit was less 1.0 percent of GDP when Clinton took office, it was almost 4.0 percent when he left, and headed upward.This increase would be equivalent to more than $500 billion in today's economy.

And this increase was largely a result of Clinton's policy. His team pushed a high dollar policy and put muscle behind it with the bailout they designed for the East Asian financial crisis. A high dollar leads to a trade deficit in the same way that high meat prices lead to fewer hamburgers being sold. A high dollar makes our goods and services relatively more expensive in the world economy, therefore we sell less of them.

The resulting trade deficit creates a huge hole in demand. For arithmetic fans, demand is equal to consumption, investment, government spending, and net exports:

Y = C+I+G+(X-M)

If we have a big trade deficit then we have to make it up with one of the other components of demand, otherwise we have a shortfall in demand and unemployment. This is not whacko lefty thought, this is the simple economics that is taught in every intro class.

In the 1990s we made up for the trade deficit with the demand generated by the stock bubble. Consumption soared based on the stock wealth effect (people increase their consumption as they see the value of their stockholding increase) and there was also an uptick in investment as the crew could raise billions for nonsense plans by issuing stock.

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Okay, I really did not want to spend more time arguing about methodology but there seems to be some simple points getting lost in cyberspace. Paul Krugman picks up on the debate between Simon Wren-Lewis and Tom Palley, coming down clearly on the side of the former.

I won't go through the blow by blow, but I do want to deal with the point Paul raises at the end of his post.

"And what’s going on here, I think, is a fairly desperate attempt to claim that the Great Recession and its aftermath somehow prove that Joan Robinson and Nicholas Kaldor were right in the Cambridge controversies of the 1960s. It’s a huge non sequitur, even if you think they were indeed right (which you shouldn’t.)"

Hmm, I don't quite see it that way. To me there is a very specific issue that Piketty raised that relates directly to the Cambridge controversies. He argued that the elasticity of substitution between capital and labor was greater than one. Therefore even as the amount of capital increased relative to labor, there was no reason that the rate of profit had to fall proportionately. This raises the prospect of an increasing capital share as economies get richer.

This relates to the Cambridge controversies since the Cambridge U.K. people argued that the idea of an aggregate production function did not make sense. They pointed out that there was no way to aggregate different types of capital independent of the rate of return. The equilibirum price of any capital good depended on the rate of return. Therefore we can't tell a simple story about how the rate of return will change as we get more capital, since we can't even say what is more capital independent of the rate of return.

The takeaway from this, or at least my takeaway, is that we don't have a theoretical construct that we can hope more or less approximates how the economy actually works. The theoretical construct doesn't make sense. This means if we want to determine the rate of return to capital we should not be looking to elasticities of substitution, but rather the institutional and political factors that determine the rate of profit. 

The debate touched off by Piketty's claim about the elasticity of substitution will inevitably be a fruitless one. We are not going to find a technical relationship in past data that will tell us how profit shares will change as the ratio of capital to labor increases.

Does any of this mean that the Great Recession proved Joan Robinson and Nicholas Kaldor right? Not as far as I can see. Although it is pretty damning of the state of the economic profession that almost no one recognized the growth of housing bubbles in the United States and much of the rest of world, and that their collapse would create a hole in demand that would be extremely hard to fill.

I will say that I am a bit at loss to understand the meaning of Simon Wren-Lewis's comment that:

"As I said in my original post, I would like to make students aware of heterodox critiques, but I want to point out where in my mainstream account that critique would enter. (I think what I teach is pretty close to how many central bankers think, if not the rest of 'my tribe'!)"

It certainly is worthwhile to know what central bankers think, but is this supposed to be a source of legitimation? After all, even by the I.M.F.'s measures the wealthy countries are losing well over $2 trillion a year due to economies operating below potential GDP. The cumulative losses to the rich countries from the Great Recession are virtually certain to exceed $20 trillion and could well top $30 trillion. Is it supposed to be some sort of validation that the folks who got us here share your view of the world?

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Incredibly, the NYT article on Bill Clinton's economic legacy left out the most important facts. The value of the dollar began to rise after Robert Rubin became Treasury Secretary and openly espoused a high dollar policy. He put muscle behind this policy with his handling of the bailout from the East Asian financial crisis which caused the dollar to soar against the currencies of our trading partners. (Lloyd Bentsen, Clinton's first Treasury Secretary, allowed the dollar to fall. This was supposed to allow an increase in net exports to fill the gap in demand created by Clinton's deficit reduction package.)

The high dollar led to a fall in exports, as our goods became more expensive to people in other countries. It also led to a surge in imports, which became very cheap. As a result, the trade deficit rose to almost 4 percent of GDP ($680 billion a year in today's economy) and eventually peaked at almost 6 percent of GDP ($1,020 billion in today's economy) in 2005. Currently the deficit is around $500 billion or 3.0 percent of GDP.

This trade deficit corresponds to income that is generated in the United States but is creating demand elsewhere rather than in the United States. It is very difficult to find ways to replace this demand, especially in a political environment where people like Bill Clinton tout the virtues of deficit reduction.

The trade deficit is by far the main cause of the "secular stagnation" that many economists, most notably former Clinton Treasury Secretary Larry Summers, have been worrying about in recent years. It certainly should have been discussed in any article on the Clinton legacy.

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That sounds pretty scary since the last time we had one it cost us almost 9 million jobs, wiped out the wealth of a large portion of the middle class, and led to a recession from which we still have not recovered almost seven years later. Thankfully Samuelson doesn't have much of a case. 

First off, the last bust was so severe because we had a serious housing bubble that was driving the economy. House prices were more than 70 percent above their trend level creating more than $8 trillion in bubble generated housing equity. The record high prices led to a construction boom, with residential construction reaching a record high share of GDP. In addition, the wealth effect from the bubble equity led to a record high share of consumption in GDP as the saving rate fell to near zero.

When the bubble burst construction fell from record highs to record lows. The boom led to enormous overbuilding and the vacancy rate reached new records. At the same time, consumption fell sharply as the housing wealth that had been driving it disappeared. This was the basis for the recession and seven years later we still do not have any source of demand that can replace the demand generated by the housing bubble.

Now Samuelson warns us of another housing bust. Really?

Samuelson doesn't even argue that housing construction will fall from its level of 2013, which at 920,000 was less than half of the bubble peak. He doesn't say prices will fall at all. (They're currently around 10 percent above trend levels.) Where's the bust?

The story, insofar as there is one, is that housing will not be driving the economy in 2014. It's not clear why anyone would have expected it to be driving the economy. Existing home sales in 2013 were at or somewhat above trend levels. In the mid-1990s, before the bubble started driving the market, existing home sales averaged around 3.5 million a year. If this is adjusted upward by 20 percent for population growth in the last two decades we get 4.2 million, a rate that is substantially below the recent pace.

This simple arithmetic makes far more sense than Samuelson's explanation that prices are too low for sellers but too high for buyers. In other words, we are seeing roughly the amount of home sales that we should expect to see in a normal economy.

Housing construction is still somewhat below normal levels but this is easily explained by the fact that vacancy rates are still extraordinarily high, although down from the recession peaks. Furthermore, the new normal is likely lower than the old normal for simple demographic reasons. With the baby boomers in their 50s and 60s, they are likely to be moving down the ladder in terms of house size rather than up.

The share of health care spending in GDP is about 6 percentage points higher than it was two decades ago. That has to come from somewhere. In other words, housing is likely to be a somewhat smaller share of the economy going forward than it was even before the bubble.

So the only surprise here is that anyone could have expected housing to play a large role in the recovery in 2014. Any serious analysis of the data would not lead to this conclusion.


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That's a cheap shot, but an editor at the NYT was clearly asleep at the wheel when they allowed a graph into the paper showing that the relative price of televisions had fallen by somewhere around 110 percent since 2005. (Actually the base year doesn't look right either, since these look like much longer trends in prices.) The graph appears alongside a mostly good article about how the living standards of the low-income families have not kept pace with the rest of the population.

The article is at least imprecise when it tells readers:

"The same global economic trends that have helped drive down the price of most goods also have limited the well-paying industrial jobs once available to a huge swath of working Americans. And the cost of many services crucial to escaping poverty — including education, health care and child care — has soared."

The factors that have destroyed well-paying industrial jobs were conscious policy, not abstract global trends. The United States has trade policies that were explicitly designed to put our manufacturing workers in direct competition with low-paid workers in places like Mexico, China, and Vietnam. This had the predictable effect of driving down their wages.

We could have put in place a trade policy that made it as easy as possible for smart kids in the developing world to train to U.S. standards and work as doctors, lawyers, dentists and other highly paid professionals in the United States.This would have driven down the pay of these professionals and made items like health care much cheaper in the United States. This was a policy decision, not a global economic trend.

This decision was aggravated by the high dollar policy pursued by the Clinton administration. That led to the soaring trade deficit at the end of the 1990s and into the last decade. This deficit has cost the country millions of relatively high-paying manufacturing jobs.

There is also a policy to run a high unemployment budget. Congress has decided to run budgets that leave millions of people out of work rather than spending enough money to bring the economy close to full employment. As Jared Bernstein and I show in our book, lower rates of unemployment would hugely benefit lower paid workers, not only by increasing their likelihood of finding a job, but also increasing their hours and wages.

In short, the low income of the poor is largely a result of deliberate policy decisions that have made them poorer, not global economic trends.



I may have missed this the first time, but the chart indicates it is showing percentage point changes relative to a 23 percent overall increase in prices over the period from 2005-2013. This means that an item showing a 10 percentage point drop on this chart would have seen its price increase by 20.7 percent, 2.3 percentage points less than the 23 percent overall price rise. If this is correct, then a 110 percentage point decline in television prices would mean that their prices had fallen by 2.3 percent since 2005.

This may not be the most useful way to convey information. Imagine if the rate of inflation over this period had been near zero, as was the case in Japan. It would have been more standard just to show the percentage change in real prices for each item.


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It seems the folks at the NYT are having a hard time accepting that the United States has been surpassed by China as the world's largest economy. That is the implication of the latest measures of purchasing power parity  (ppp) GDP from the World Bank. (If one adds in the GDP of Hong Kong and Macao, which are both under China's control, its GDP is already larger than that of the United States.)

Rather than accept the standard measure economic output among economists, the NYT found one to deride the ppp measures. At great length it presented the views of Louis Kuijs, the chief China economist for the Royal Bank of Scotland. Mr. Kuijs noted the large revisions in the 2005 PPP measures that lowered China's GDP by around 20 percent and then the most recent numbers that increased the measure by roughly the same amount.

The article quotes Mr. Kuijs:

"Having observed these huge changes in estimates, I’ve become a bit wary of these estimates. ..  The market can be wrong but at least it’s a pretty objective measurement, and nobody can quibble about whether it was that number or whether it was 10 percent higher."

Actually the market measure can be 10 percent higher both because GDP is not measured perfectly (even the U.S. often has large revisions to its measure) and more importantly because currency prices fluctuate by large amounts. If China stopped deliberately propping up the dollar against its currency and then its currency rose by 20 percent, then Mr. Kuijs' measure would show that China's economy has just grown by 20 percent relative to the size of the U.S. economy.

Since most economists do not consider this a plausible story, they do not rely on exchange rate GDP for making international comparisons. Relying on exchange rate GDPs would also yield absurdities like China was exporting more than 9 percent of its GDP to the United States in 2007 (exports were $321.4 billion, China's exchange rate GDP was $3,494.2 billion). Mr. Kuijs might think that makes sense, but it's not likely the NYT could find many other economists who do.

To drive home its absurd case that we should rely on exchange rate GDP rather PPP GDP the article concludes by telling us about ordinary Chinese:

"Do ordinary Chinese appreciate that they pay so much less for the same product? Does it make them feel as if they’ve finally reclaimed the title as top economy after two centuries of British and American dominance?

"'If China’s economy has surpassed the U.S.A., why do I have to get up every morning at 4 a.m.?' Ms. Lu asked. 'In a few years, I will be 50 years old. If China’s economy has surpassed the U.S.A., it certainly hasn’t had anything to do with me.'"

China has four times the population of the United States. This means that if the average Chinese person has a living standard that is just one fourth as high as the average person in the United States then its GDP is as high as ours. The PPP data show that China's workers are much poorer than people in the United States. It is amazing that the NYT apparently did not recognize this fact. 

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That's sort of the story that Neil Irwin relayed in the NYT's Upshot section based on a new study from McKinsey Global Institute. The point is that the United States is increasingly dependent on exports of "knowledge-intensive goods and services."

This can be very problematic, since the knowledge is often easily separable from the actual goods and services. For example, the knowledge on how to produce the latest cancer drug is separable from the drug itself. The same applies to the knowledge needed to produce the latest iPhone or other nifty device.

In order for the United States to get paid for its knowledge-intensive goods and services it needs to impose rules, like patents and copyrights, that make it illegal to separate the knowledge from the goods and services. This is very problematic for fans of the market, since these government restrictions lead to prices that are far higher than would exist in a free market.

In the context of international trade, we are asking developing countries to charge their citizens these high prices so that they can send the money back to the United States. This may not be a viable long-run strategy. It both transfers money from the poor to the rich and leads to enormous economic inefficiency. And, in the case of prescription drugs, the higher prices will cost lives.


Note: Correction made, should have been "inefficient." 

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