Showing the sort of creativity that we have come to expect from economists, Tyler Cowen used his NYT column today to call for giving more money to the pharmaceutical industry as a way to deal with the risks of pandemics. Cowen moves from the true statement that research and development into prescription drugs and public health more generally has a substantial public good character, to the idea that we need to give pharmaceutical companies more money in order to get them to do the research.

In discussing the issue of protecting the public against pandemics Cowen tells readers:

"If anything, the American government — or, better yet, a consortium of governments — should pay more for pandemic remedies than what market-based auctions [of patent rights] would yield. That’s because, if a major pandemic does arise, other countries may not respect intellectual property rights as they scramble to copy a drug or vaccine for domestic distribution. To encourage innovations, policy makers need to bolster the expectation of rewards."

For reasons that Cowen never bothers to mention, he excludes the possibility that patents may not be the best way to finance research. The patent system does provide an incentive to innovate but it also provides an enormous incentive to misrepresent research results and deceive the public and regulators about the quality and safety of drugs. We see this happening all the time, exactly as economic theory predicts. (Think of Vioxx.) The result is considerable damage to public health and an enormous economic waste as money is paid to pharmaceutical industry for drugs that are ineffective or possibly even harmful.

Patents also give an incentive for duplicative research. If a company has a major breakthrough drug that produces high profits then its competitors have a substantial incentive to try to duplicate this drug in a way that circumvents the patent. In a regime where patents provide a monopoly, the availability of potential substitutes will have the benefit of bringing the price down, however if the drug were already selling at its free market price, without a patent monopoly, no one would look to waste resources developing a second drug that essentially does the same thing as the first drug.

Patent financed research also slows progress by encouraging secrecy. Science advances best when results are shared as widely as possible. Companies that are relying on patent financing will only make the bare minimum of their research available to the larger scientific community, providing the information needed to secure patents. They have enormous incentive to withhold any additional information that could provide benefits to competitors.

Patent financing also distorts research toward finding patentable treatments for diseases. If a disease can be best controlled through diet, exercise, or controlling pollutants, patents will provide zero incentive to carry out research in the proper direction. Instead resources will be wasted on trying to develop a patentable drug.

The April Jobs report was better than most economists (including me) had expected. Better news is always better than worse news, but it was one report amidst a lot of other less than stellar news. Furthermore, it just was not that good.

Nonetheless the front page Post story hyped the good news in the report and told readers [in print edition only]:

"The jobs report could also have significant implications for the Federal Reserve's $85-billion-a-month stimulus program. .. The program is tied to the outlook for the labor market, and some officials have begun suggesting that job growth could accelerate enough for the Fed to begin winding down the purchases this year."

The Post, like most major media outlets have been shooting from excessive optimism to excessive pessimism about the economy consistently failing to keep their eyes on an underlying trend
of weak growth. (Neil Irwin's blogpost yesterday gets the story almost exactly right.) Just last fall the Post and other news outlets were filled with pieces about how uncertainty over the "fiscal cliff" was already slowing growth and deterring investment. Somehow the people doing the investment did not get the message, as investment rose at a 13.2 percent annual rate in the quarter.

In terms of current data, the Fed probably noticed that new orders for non-defense capital goods (excluding aircraft) were still almost 4.0 percent below their January level in March, even after a 0.9 percent increase from their February level. The March number is less than 0.2 percent above the year ago level. The Fed probably also noticed the construction data released by the Commerce Department last week which showed that total construction spending fell 1.7 percent in March driven by a 4.1 percent falloff in spending by the public sector.

On March 19, 2013 Guatemala became the first nation to try a former head of state, Efraín Ríos Montt, for genocide and crimes against humanity in its own courts, an extraordinary achievement that led award-winning investigative journalist Allan Nairn to state that, “Guatemala has reached a higher level of civilization than the United States,” where such a trial would be unthinkable.   Ríos Montt’s took power in a March 1982 coup and his brutal military campaign that human rights defenders have characterized as genocidal received support from President Ronald Regan, though his administration denied it at the time.

Nairn had flown to Guatemala City as a proposed witness but once in Guatemala, he was asked not to testify after another witness, a former soldier, unexpectedly named current President Otto Pérez Molina as responsible for crimes against humanity.  In September 1982, Nairn had interviewed then Major Pérez Molina, a commander in the area where the crimes Ríos Montt is being tried for had occurred.  It appears that his testimony would have implicated the current president in crimes, and the victims’ lawyers were afraid that pushing the political establishment any further would endanger the case.

On April 18, the case was unexpectedly annulled by a judge not overseeing the trial, pre-trial judge Carol Patricia Flores.  She made the illegal ruling two days after former Guatemalan Vice President Eduardo Stein signed a communique published in Guatemalan newspapers, along with 11 other former members of the administration of Álvaro Arzú, calling the charges of genocide against Ríos Montt a “threat to the nation” and suggesting that if a sentence for genocide were handed down it could mean a return to political violence.

In a post for the Roosevelt Institute's Econobytes, Dean Baker, co-director of the Center for Economic and Policy Research, on the state of public pensions:

Last month, Moody’s, one of the big three bond-rating agencies announced that it was changing the way that it will treat public pension liabilities. While there are several notable features to announced changes, two are especially important.

• First, instead of accepting projections of pension fund returns based on the assets they hold, Moody’s will evaluate their liabilities using a risk-free discount rate.
• The second major change is that it will evaluate pension assets at their current market value rather than using a formula to smooth volatile asset prices over a period of 3-5 years as is the current practice.
• Together Moody’s changes in accounting will have the effect of making pension funds seem in considerably worse financial condition.
• They could also lead pension fund managers to follow investment strategies that will provide far lower rates of return on assets. This would mean higher costs for taxpayers with little obvious benefit in reduced risk. 

 The practice of using a risk-free discount rate to assess liabilities is a departure from the current practice of effectively discounting liabilities using projected rates of returns on assets.

• Most pension funds project rates of return on assets of between 7.0-8.0 percent. By contrast, the rate that Moody’s would apply at present would be around 4.5 percent.
• This makes a huge difference in assessing liabilities. If a pension fund was obligated to make $1 billion in payments each year for the next thirty years its liabilities would be calculated at $16.5 billion using a 4.5 percent discount rate.
• By comparison, they would be just $11.9 billion using a 7.5 percent discount rate. This is a difference of almost 40 percent.
• Put another way, a pension that is fully funded using the 7.5 percent return assumption would be almost 30 percent underfunded using Moody’s new approach.

While the implication for an assessment of funding levels is clear, there are grounds for debating which method is appropriate.

• Supporters of the Moody’s approach argue that it is appropriate to discount for the risk associated with pension returns, and especially stock returns.
• However this argument is problematic since it is not clear that there is much risk for pension funds on projected returns when they are properly calculated.
• The reason is that a pension fund, unlike individuals, does not need to be concerned about the stock market’s short-term fluctuations.
• State and local governments do not have retirement dates where they have to start drawing on stock holdings. They need only concern themselves with long period averages, without worrying about short-term fluctuations.

May 3, 2013

May 3, 2013 (Jobs Byte)

In an article this week in the Malaysian Star, South Centre Director Martin Khor describes a move by Latin American and Caribbean countries – most of which belong to the Bolivarian Alliance for the Americas group, or ALBA –  to form an alternative to the World Bank’s International Center for Settlement of Investment Disputes (ICSID) to settle investor-state disputes, noting the predilection of ICSID to rule in favor of corporations:

LEADERS of several Latin American countries have set up a new coalition to coordinate actions to face the growing number of international legal suits being taken against governments by transnational companies.

A ministerial meeting of 12 countries held in Guayaquil, Ecuador, decided on several joint actions to counter the threat posed by these lawsuits, which have claimed millions or even billions of dollars from governments.

…

Seven of the countries, mostly represented by their ministers of foreign affairs, trade or finance, adopted a declaration with an agreement to form a conference of states affected by transnational interests.

They are Ecuador, Bolivia, Cuba, Nicaragua, Dominican Republic, St Vincent and the Grenadines as well as Venezuela.

But while these are all ALBA members (except the Dominican Republic), Khor notes that several other countries were also present at the meeting are not: “Representatives of another five countries (Argentina, Guatemala, El Salvador, Honduras and Mexico) also attended the meeting and will convey the results to their respective governments.”

This post originally appeared in Dissent Magazine. Colin Gordon is a professor and director of Undergraduate Studies, 20th Century U.S. History, at the University of Iowa.

What happened to the good jobs? This is the question posed by the walkouts of fast food workers in New York and Chicago in recent weeks. It is the question posed by activists in those corners of the economy—including restaurants and domestic work and guestwork—where the light of state and federal labor standards barely penetrates. And it is the question posed (albeit from a different set of expectations), by recent college graduates for whom low wages and dim prospects are the dreary norm.

There are no shortage of suspects for this sorry state of affairs. The stark decline of labor, now reaching less than 7 percent of the private sector, has dramatically undermined the bargaining power and real wages of workers. The erosion of the minimum wage, for which meager increases have been overmatched by inflationary losses, has left the labor market without a stable floor. And an increasingly expansive financial sector has displaced real wages and salaries with speculatory rent-seeking.

New work by John Schmitt and Janelle Jones at the Center for Economic and Policy Research recasts this question, posing it not as a causal riddle but as a political challenge: What would it take to get good jobs back?

Schmitt and Jones start with a basic distinction between good jobs (those that pay $19.00/hr or better and offer both job-based health coverage and some retirement coverage) and bad jobs (those that meet none of these criteria). Each of these categories accounts for about a quarter of the workforce (the rest fall somewhere in between), with the share of good jobs slipping since 1979 and the share of bad jobs creeping up. The goal, by simulating the impact of different policy interventions, is to increase the share of good jobs and to eliminate—as much as possible—the bad jobs entirely.

Senate Foreign Relations Committee Chairman Robert Menendez (D-NJ) met with Honduran president Porfirio “Pepe” Lobo on Wednesday as part of a tour through Central America. According to press reports, Menendez characterized the trip, during which the Senator also visited El Salvador and Guatemala, as an opportunity to evaluate regional counter-narcotics and security initiatives that the U.S. is funding at increasing levels through the Central American Regional Security Initiative (CARSI). A Spanish-language press report on the trip quotes Menendez as having said that he intends to “explore the specific points of this funding proposal,” and that he wants to “see what works and what does not.”

The State Department’s 2014 budget proposal, submitted on April 10, requests $161.5 million in funding for CARSI, a $26 million increase from the previous year. The proposal requests $4.5 million in foreign military financing specifically for Honduras, an increase of 450% over the FY2012 total. And Just the Facts, a joint project of nonpartisan groups focused on U.S.-Latin American relations, notes that current budget proposals have total U.S. military and police funding for Honduras in FY2014 at $8.7 million, a 63% increase over 2013 projections. Furthermore, according to a Congressional Research Service report, as of last July the State Department and USAID had planned to allocate a combined $72 million to Honduras in FY2012.

These rising levels of funding for the police and military run counter to the concerns of many lawmakers in Washington around the lack of accountability for U.S. involvement in Honduran security and anti-narcotics operations. It also highlights the seriousness of recent reports that the State Department has been supporting units under the command of National Police Chief Juan Carlos “El Tigre” Bonilla, who allegedly ran death-squads a decade ago, and, more broadly, that the police have been accused of continuing to commit death-squad murders today. In December the National Autonomous University, citing the police’s own reports, announced that police had killed 149 civilians in the previous two years.

On April 25^th, Representative Barbara Lee of California introduced H.R. 1749, the Assessing Progress in Haiti Act, which would require the Government Accountability Office (GAO) to produce a detailed and comprehensive report on U.S. aid programs to Haiti since the January 2010 earthquake.  The bill, which has 24 original co-sponsors, reflects the growing concern in Congress about the lack of tangible progress in U.S. post-quake relief and reconstruction efforts, and the lack of transparency around how U.S. aid money is being used.

An earlier version of this bill was passed in the House of Representatives in May of 2011 and later was approved by the Senate Foreign Relations Committee, but never made it to a vote on the Senate floor.  The legislation has been significantly revised and, whereas the old bill (which can be viewed here) had general reporting requirements, the new bill (which can be viewed here) has very specific and probing reporting language that should help shed light on how USAID funds are being used on the ground in Haiti.  Among other things, the legislation calls for:

·         An assessment of the “amounts obligated and expended on United States Government programs and activities since January 2010 (…) including award data [read: financial data] on the use of implementing partners at both prime and subprime levels, and disbursement data from prime and subprime implementing partners.”

·         A description of “goals and quantitative and qualitative indicators to evaluate the progress, or lack of achievement of such goals…”

·         An “assessment of the manner in which the Department of State and USAID are working with Haitian ministries and local authorities, including the extent to which the Government of Haiti has been consulted on the establishment of goals and timeframes and on the design and implementation of new programs…”

·         An “assessment of how consideration for vulnerable populations, including IDPs (Internally Displaced Populations), women, children, orphans, and persons with disabilities, have been incorporated in the design and implementation of new programs and infrastructure”

·         An “assessment of how agriculture and infrastructure programs are impacting food security and the livelihoods of smallholder farmers in Haiti”

Last month CEPR published a report titled “Breaking Open the Black Box” describing the lack of transparency of U.S. aid programs in Haiti, particularly at the contracting level, and recommended USAID reporting requirements similar to those found in H.R.1749.  The report noted that the effectiveness of U.S. aid to Haiti has been questioned by the GAO, the USAID Inspector General and other government watchdogs. 

At a speech celebrating May Day in Bolivia today, President Evo Morales announced the expulsion of the United States Agency for International Development (USAID) from the country. According to the AP, Morales stated:

"The United States does not lack institutions that continue to conspire, and that's why I am using this gathering to announce that we have decided to expel USAID from Bolivia.”

The role of USAID in Bolivia has been a primary point of contention between the U.S. and Bolivia dating back to at least 2006. State Department spokesperson Patrick Ventrell characterized Morales’ statement as “baseless allegations.” While State Department spokespeople and many commentators will characterize USAID's work with oppositional groups as appropriate, a look at the agency's work over the past decade paints a very different picture.

Documents obtained by investigative journalist Jeremy Bigwood show that as early as 2002, USAID funded a “Political Party Reform Project,” which sought to “serve as a counterweight to the radical MAS [Morales’ political party] or its successors.” Later USAID began a program “to provide support to fledgling regional governments,” some of which were pushing for regional autonomy and were involved in the September 2008 destabilization campaign that left some 20 indigenous Bolivians dead. Meanwhile, the U.S. has continually refused to disclose the recipients of aid funds. As a recent CEPR report on USAID activities in Haiti concluded, U.S. aid often goes into a “black box” where it becomes impossible to determine who the ultimate recipients actually are.

Thomas Friedman is probably best ignored, but there are people who take him seriously. Today his NYT column touts the "401(k) world" where Friedman says:

"But this huge expansion in an individual’s ability to do all these things comes with one big difference: more now rests on you."

The gist of the argument is that people are more exposed to risk so that means that they can fall farther or, in principle, rise higher than before all the wonderful new technologies that leave Friedman breathless.

Naturally, just about everything Friedman has to say is wrong or misleading. First and foremost, wonderful new technologies are not new. We have been seeing breakthroughs in technology for the last two hundred years. Have the last decade's been more wonderful and awesome than the breakthroughs of prior decades?

How does the Internet compare to development of the telegraph, the telephone, radio, television?  I have a job, so I'll let the Thomas Friedmans of the world worry about that one.