• Economic Crisis and RecoveryCrisis económica y recuperaciónPricesUnited StatesEE. UU.
On a lazy Friday afternoon, a person’s thoughts naturally turn to car price indexes. There is actually a reason that I became interested in this topic. I noticed that in the January Consumer Price Index, the new vehicle index rose 0.2 percent. The December measure was revised up due to new seasonal adjustment factors so that what had been reported as a 0.1 percent decline last month is now reported as a 0.6 percent increase.
I was inclined to think this was an aberration and that we would see the downward trend that had previously been apparent in the data reappear in another month or two. However, I noticed that the Manheim index for used vehicle prices showed a sharp uptick for January and the first half of February. This was after a full year in which declining prices were reversing much of the pandemic run-up. Perhaps my expectation that vehicle prices, both new and used, would soon look like they were back on their pre-pandemic path was wrong.
Vehicle prices are a big deal in the CPI. Together the new and used vehicle components comprise just under 7.0 percent of the overall index and 8.8 percent of the core index. As a result, it will have a big impact on our inflation measures if vehicle prices are on a downward path, as it seemed when we got the December CPI.
I thought I would look at a bit of history and pull in the index for imported vehicles. (This is not entirely apples to apples since the import index includes car parts.) Here’s the picture.
Source: Bureau of Labor Statistics.
As can be seen, the price index for imported vehicles somewhat outpaced the new vehicle index for the U.S. in the two decades prior to the pandemic. Currency values explain at least part of this movement. The dollar fell in value against the currencies of our trading partners from 2000 to 2012. It then began to rise modestly, which is the period when saw the gap close slightly. Still, by 2019 there was still a gap of roughly 7.0 percentage points, with the import price index rising by 9.8 percentage points since 2000, compared to an increase of just 2.8 percent in the new vehicle price index.
There was a larger gap between the new vehicle price index and the used vehicle price index. The used vehicle price index was actually 10.3 percent below its 2000 value in 2019, implying a gap of 13.1 percentage points between the new and used vehicle indexes over this 19-year period.
This story gets completely reversed in the years since the pandemic. Used vehicle prices are up by 37.2 percent, new vehicle prices are up by 20.1 percent, while the index for imported vehicles has increased by just 6.9 percent. This raises the question of whether there is some fundamental factor that has led to a lasting change in the pattern of new, used, and imported vehicles or whether this is a temporary story that will revert back to the pre-pandemic path in time.
Offhand, I can’t see any fundamental factor that has changed in a way that would affect these price trends. The dollar did rise in 2021 and earlier in 2022, which would lower imported car prices in the United States, but it is now pretty much back to its pre-pandemic level against most currencies, so currency valuations can’t explain much of the picture.
And, currency values won’t tell us anything about the far more rapid rise in used vehicle prices than new vehicle prices. This is easily explained in the context of pandemic shortages of cars, driving up used car prices, but if we envision a post-pandemic future where automakers can produce enough vehicles to meet demand, presumably, we will see the former pattern restored.
There may well be something that I am missing (suggestions welcome), but it still looks to me like we should expect the new vehicle index to converge towards the imported vehicle index and the used vehicle index to again drop below the new vehicle index. This path may take longer than I had expected, but it still seems likely.
That means that we should expect vehicle prices to be constraining inflation going forward. That may not be the case in the next couple of months, but it is likely to be true later in 2023 and into 2024.
On a lazy Friday afternoon, a person’s thoughts naturally turn to car price indexes. There is actually a reason that I became interested in this topic. I noticed that in the January Consumer Price Index, the new vehicle index rose 0.2 percent. The December measure was revised up due to new seasonal adjustment factors so that what had been reported as a 0.1 percent decline last month is now reported as a 0.6 percent increase.
I was inclined to think this was an aberration and that we would see the downward trend that had previously been apparent in the data reappear in another month or two. However, I noticed that the Manheim index for used vehicle prices showed a sharp uptick for January and the first half of February. This was after a full year in which declining prices were reversing much of the pandemic run-up. Perhaps my expectation that vehicle prices, both new and used, would soon look like they were back on their pre-pandemic path was wrong.
Vehicle prices are a big deal in the CPI. Together the new and used vehicle components comprise just under 7.0 percent of the overall index and 8.8 percent of the core index. As a result, it will have a big impact on our inflation measures if vehicle prices are on a downward path, as it seemed when we got the December CPI.
I thought I would look at a bit of history and pull in the index for imported vehicles. (This is not entirely apples to apples since the import index includes car parts.) Here’s the picture.
Source: Bureau of Labor Statistics.
As can be seen, the price index for imported vehicles somewhat outpaced the new vehicle index for the U.S. in the two decades prior to the pandemic. Currency values explain at least part of this movement. The dollar fell in value against the currencies of our trading partners from 2000 to 2012. It then began to rise modestly, which is the period when saw the gap close slightly. Still, by 2019 there was still a gap of roughly 7.0 percentage points, with the import price index rising by 9.8 percentage points since 2000, compared to an increase of just 2.8 percent in the new vehicle price index.
There was a larger gap between the new vehicle price index and the used vehicle price index. The used vehicle price index was actually 10.3 percent below its 2000 value in 2019, implying a gap of 13.1 percentage points between the new and used vehicle indexes over this 19-year period.
This story gets completely reversed in the years since the pandemic. Used vehicle prices are up by 37.2 percent, new vehicle prices are up by 20.1 percent, while the index for imported vehicles has increased by just 6.9 percent. This raises the question of whether there is some fundamental factor that has led to a lasting change in the pattern of new, used, and imported vehicles or whether this is a temporary story that will revert back to the pre-pandemic path in time.
Offhand, I can’t see any fundamental factor that has changed in a way that would affect these price trends. The dollar did rise in 2021 and earlier in 2022, which would lower imported car prices in the United States, but it is now pretty much back to its pre-pandemic level against most currencies, so currency valuations can’t explain much of the picture.
And, currency values won’t tell us anything about the far more rapid rise in used vehicle prices than new vehicle prices. This is easily explained in the context of pandemic shortages of cars, driving up used car prices, but if we envision a post-pandemic future where automakers can produce enough vehicles to meet demand, presumably, we will see the former pattern restored.
There may well be something that I am missing (suggestions welcome), but it still looks to me like we should expect the new vehicle index to converge towards the imported vehicle index and the used vehicle index to again drop below the new vehicle index. This path may take longer than I had expected, but it still seems likely.
That means that we should expect vehicle prices to be constraining inflation going forward. That may not be the case in the next couple of months, but it is likely to be true later in 2023 and into 2024.
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• Health and Social ProgramsLos Programas Sociales y de SaludSocial SecurityUnited StatesEE. UU.
A New York Times article on the economics and politics around Social Security and Medicare begins by telling readers:
President Biden scored an early political point this month in his fight with congressional Republicans over taxes, spending and raising the federal debt limit: He forced Republican leaders to profess, repeatedly, that they will not seek cuts to Social Security and Medicare.
In the process, Mr. Biden has effectively steered a debate about fiscal responsibility away from two cherished safety-net programs for seniors, just as those plans are poised for a decade of rapid spending growth.
It is not clear that “fiscal responsibility” has anything to do with this debate. First, it is not clear what that expression means. Would it have been fiscally responsible to have more deficit reduction in the years following the Great Recession, with the economy recovering slowly and unemployment remaining high?
In those circumstances, more deficit reduction would have meant slower growth and higher unemployment. Perhaps the New York Times would define deficit reduction that hurts the economy as being “fiscally responsible,” but it is not clear that most people would accept that definition.
The other part of the story is that Republicans have repeatedly demonstrated by their actions that they don’t care about budget deficits. Every time the Republicans have regained the White House in the last four decades, they have pushed through large tax cuts that resulted in large increases in the budget deficit.
Seeing this behavior, it is absurd to imagine that the leaders of the Republican Party are concerned about budget deficits (if this is how we are defining fiscal responsibility). They may claim to be concerned about budget deficits, but it would be irresponsible to imply that they actually are concerned about budget deficits.
In short, this is alleged to be a debate over “fiscal responsibility” or budget deficits. There is little reason to believe, at least on the Republican side, that this is actually a debate over budget deficits.
Spending on Social Security and Medicare Has Been Far Less Than Projected
It is also worth noting that the dynamics of the shortfalls facing Social Security and Medicare are somewhat different than implied by this piece. Social Security spending has already been rising rapidly, since most of the baby boom cohorts have already reached retirement age. Social Security spending rose from 4.19 percent of GDP in 2000 to 5.09 percent of GDP in 2023, an increase of 0.9 percentage points. It is projected to increase to 5.95 percent of GDP by 2040, a further rise of 0.84 percentage points.
This means that, in terms of its economic impact, we will not be seeing anything qualitatively different from what we had been seeing from Social Security. There is a different story going forward in that the dedicated trust fund built from the Social Security tax is projected to face a shortfall, but that is an issue of allocating governmental resources, not a question of requiring a more rapid diversion of resources to Social Security than we have been seeing for decades.
It is also worth noting that the cost increases for both Social Security and Medicare have been far less than had earlier been projected. The 2000 Social Security Trustees Report projected that Social Security spending would increase by 2.07 percentage points by 2025, to 6.26 percent of GDP. The 2022 Trustees report shows costs increasing by just 1.17 percentage points to 5.26 percent of GDP in 2025.
While there have not been explicit cuts to Social Security, changes in both practices and society have led to slower-than-projected cost growth. In the former category, a far higher rate of denial for disability claims has substantially reduced the cost of the disability program. In the latter category, the slower growth in life expectancy, especially for non-college-educated workers, has reduced the cost of the Social Security program. These are not necessarily positive developments, but they mean that Social Security is now costing far less than had been projected in the not-so-distant past.
There is a similar story with Medicare cost growth. Its spending was projected to rise by 0.61 percentage points to 2.0 percent of GDP in 2025. Its costs are now projected to rise to 1.68 percent of GDP in 2025, an increase of just 0.29 percentage points. This smaller increase is the result of a sharp slowing in healthcare cost growth after the passage of the Affordable Care Act in 2010. Here also, we have seen substantial savings against projected spending, even if there were no explicit cuts in the program.
Upward Redistribution Has Been a Major Factor in the Projected Social Security Shortfall
It is also worth noting that much of the projected shortfall in the Social Security program is due to the upward redistribution of income over the last four decades. In 1982, when the last major changes to Social Security were put into place, 90 percent of wage income fell below the cap on taxable wages (currently $160,200).
In the last two decades, just over 82 percent of wage income was subject to the Social Security tax (see page 148). There was also a redistribution from wage income to profit income, which further reduced Social Security tax revenue. Together, this upward redistribution accounts for more than 40 percent of the program’s projected shortfall over its 75-year planning horizon. If we had not shifted so much income to high-end earners and to profits, closing the projected shortfall in Social Security would be a far more manageable task.
A New York Times article on the economics and politics around Social Security and Medicare begins by telling readers:
President Biden scored an early political point this month in his fight with congressional Republicans over taxes, spending and raising the federal debt limit: He forced Republican leaders to profess, repeatedly, that they will not seek cuts to Social Security and Medicare.
In the process, Mr. Biden has effectively steered a debate about fiscal responsibility away from two cherished safety-net programs for seniors, just as those plans are poised for a decade of rapid spending growth.
It is not clear that “fiscal responsibility” has anything to do with this debate. First, it is not clear what that expression means. Would it have been fiscally responsible to have more deficit reduction in the years following the Great Recession, with the economy recovering slowly and unemployment remaining high?
In those circumstances, more deficit reduction would have meant slower growth and higher unemployment. Perhaps the New York Times would define deficit reduction that hurts the economy as being “fiscally responsible,” but it is not clear that most people would accept that definition.
The other part of the story is that Republicans have repeatedly demonstrated by their actions that they don’t care about budget deficits. Every time the Republicans have regained the White House in the last four decades, they have pushed through large tax cuts that resulted in large increases in the budget deficit.
Seeing this behavior, it is absurd to imagine that the leaders of the Republican Party are concerned about budget deficits (if this is how we are defining fiscal responsibility). They may claim to be concerned about budget deficits, but it would be irresponsible to imply that they actually are concerned about budget deficits.
In short, this is alleged to be a debate over “fiscal responsibility” or budget deficits. There is little reason to believe, at least on the Republican side, that this is actually a debate over budget deficits.
Spending on Social Security and Medicare Has Been Far Less Than Projected
It is also worth noting that the dynamics of the shortfalls facing Social Security and Medicare are somewhat different than implied by this piece. Social Security spending has already been rising rapidly, since most of the baby boom cohorts have already reached retirement age. Social Security spending rose from 4.19 percent of GDP in 2000 to 5.09 percent of GDP in 2023, an increase of 0.9 percentage points. It is projected to increase to 5.95 percent of GDP by 2040, a further rise of 0.84 percentage points.
This means that, in terms of its economic impact, we will not be seeing anything qualitatively different from what we had been seeing from Social Security. There is a different story going forward in that the dedicated trust fund built from the Social Security tax is projected to face a shortfall, but that is an issue of allocating governmental resources, not a question of requiring a more rapid diversion of resources to Social Security than we have been seeing for decades.
It is also worth noting that the cost increases for both Social Security and Medicare have been far less than had earlier been projected. The 2000 Social Security Trustees Report projected that Social Security spending would increase by 2.07 percentage points by 2025, to 6.26 percent of GDP. The 2022 Trustees report shows costs increasing by just 1.17 percentage points to 5.26 percent of GDP in 2025.
While there have not been explicit cuts to Social Security, changes in both practices and society have led to slower-than-projected cost growth. In the former category, a far higher rate of denial for disability claims has substantially reduced the cost of the disability program. In the latter category, the slower growth in life expectancy, especially for non-college-educated workers, has reduced the cost of the Social Security program. These are not necessarily positive developments, but they mean that Social Security is now costing far less than had been projected in the not-so-distant past.
There is a similar story with Medicare cost growth. Its spending was projected to rise by 0.61 percentage points to 2.0 percent of GDP in 2025. Its costs are now projected to rise to 1.68 percent of GDP in 2025, an increase of just 0.29 percentage points. This smaller increase is the result of a sharp slowing in healthcare cost growth after the passage of the Affordable Care Act in 2010. Here also, we have seen substantial savings against projected spending, even if there were no explicit cuts in the program.
Upward Redistribution Has Been a Major Factor in the Projected Social Security Shortfall
It is also worth noting that much of the projected shortfall in the Social Security program is due to the upward redistribution of income over the last four decades. In 1982, when the last major changes to Social Security were put into place, 90 percent of wage income fell below the cap on taxable wages (currently $160,200).
In the last two decades, just over 82 percent of wage income was subject to the Social Security tax (see page 148). There was also a redistribution from wage income to profit income, which further reduced Social Security tax revenue. Together, this upward redistribution accounts for more than 40 percent of the program’s projected shortfall over its 75-year planning horizon. If we had not shifted so much income to high-end earners and to profits, closing the projected shortfall in Social Security would be a far more manageable task.
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There were several news stories on the 3.0 percent jump in retail sales the Commerce Department reported for January that took this as evidence that the economy was still very strong. In fact, since the January rise followed two months where reported sales fell sharply, the picture is far more ambiguous.
Reported sales fell by more than 1.0 percent in both November and December. As a result, reported sales in January were just 0.7 percent higher than those reported in October. Since these are nominal sales, it means that real retail sales have been close to flat over the last three months.
Likely, nominal sales did not really fall by more than 1.0 percent in November and December and then jumped by 3.0 percent in January. This is more likely an issue of seasonal adjustments for holiday shopping. Seasonal adjustments are always difficult, but post-pandemic shopping patterns make it harder for the Commerce Department to distinguish between sales changes reflected growth or weakness, as opposed to normal seasonal patterns.
In any case, when we get large changes like the 3.0 percent jump in sales reported in January, it is important to look back over the recent past to put them in context. No one looking at retail sales over the past three months can be concerned that they are growing too rapidly, even if the January jump, taken in isolation, might imply that.
There were several news stories on the 3.0 percent jump in retail sales the Commerce Department reported for January that took this as evidence that the economy was still very strong. In fact, since the January rise followed two months where reported sales fell sharply, the picture is far more ambiguous.
Reported sales fell by more than 1.0 percent in both November and December. As a result, reported sales in January were just 0.7 percent higher than those reported in October. Since these are nominal sales, it means that real retail sales have been close to flat over the last three months.
Likely, nominal sales did not really fall by more than 1.0 percent in November and December and then jumped by 3.0 percent in January. This is more likely an issue of seasonal adjustments for holiday shopping. Seasonal adjustments are always difficult, but post-pandemic shopping patterns make it harder for the Commerce Department to distinguish between sales changes reflected growth or weakness, as opposed to normal seasonal patterns.
In any case, when we get large changes like the 3.0 percent jump in sales reported in January, it is important to look back over the recent past to put them in context. No one looking at retail sales over the past three months can be concerned that they are growing too rapidly, even if the January jump, taken in isolation, might imply that.
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According to news reports, Moderna is considering a price in the range of $110 to $130 for shots of its Covid booster. People may recall that we paid Moderna close to $450 million to develop its Covid vaccine. We then paid another $450 million for the clinical trials that were needed to determine its effectiveness.
Moderna has already made a good return on our tax dollars, selling the initial set of shots at around $20 a piece. According to Forbes, the company’s soaring stock price had already produced five billionaires by the summer of 2021.
Who knows how many Moderna billionaires we will have if the company gets away with charging $110-$130 for its new booster. Of course, this money will come out of the pockets of the rest of us, or at least those of us who are not prevented from getting boosters by these high prices.
Fortunately, there is an alternative if the Biden administration is prepared to challenge Moderna and drug companies more generally on their monopoly pricing. Peter Hotez and Elena Bottazzi, two highly respected researchers at Baylor University and Texas Children’s Hospital, developed a simple to produce, 100 percent open-source Covid vaccine. It uses well-established technologies that are not complicated (unlike mRNA). Their vaccine has been widely used in India and Indonesia, with over 100 million people getting the vaccine to date.
If we want to see the vaccine used here it would need to be approved by the Food and Drug Administration (FDA). In principle, the FDA could rely on the clinical trials used to gain approval in India, but it indicated that they want U.S. trials. (In fairness, India’s trials are probably lower quality.)[1]
However, the government could fund a trial of Hotez-Bottazzi vaccine (Corbevax) with pots of money left over from Operation Warp Speed, or alternatively from the budgets of National Institutes of Health or other agencies like Biomedical Advanced Research and Development Authority (BARDA). With tens of billions of dollars of government money going to support biomedical research each year, the ten million or so needed for a clinical trial of Corbevax would be a drop in the bucket.
The arithmetic on this is incredible. Shots of Corbevax cost less than $2 a piece in India. If it costs two and a half times as much in the U.S., that still puts it a $5 a shot. That implies savings of more than $100 a shot. That means that if we get 100,000 people to take the Corbevax booster, rather than the Modern-Pfizer ones (Pfizer is planning to also charge over $100 for its booster), we’ve covered the cost of the trials. If we get 1 million to take Corbevax, we’ve covered the cost ten times over, and if 10 million people get the Corbevax booster, we will have saved one hundred times the cost of the clinical trial.
There is also the advantage that, since at least some of the reason for vacine hesitancy is fears of mRNA vaccines. We may get some vaccine hesitant people to take Corbevax, who wouldn’t take the mRNA vaccines.
It is understandable that the pharmaceutical industry would be very unhappy if the Biden administration were to put up the money for a clinical trial of Corbevax. Not only would FDA approval seriously cut into the gold mine they were anticipating from selling boosters at more than $100 a shot, it would also be a dangerous example for the industry.
It would show that it is possible to develop effective vaccines without relying on government-granted patent monopolies. (Hotez and Bottazzi supported their research on small grants from the government and private foundations.) And, it would be a great reminder that vaccines (and drugs) are cheap. It is rare that it is actually expensive to manufacture and distribute a drug or vaccine. Drugs are expensive because we give companies patent monopolies, or other forms of protection.
If we pay for the research up front, we don’t have to gouge patients to recover development costs. And, we don’t give drug companies an enormous incentive to lie, cheat, and steal to maximize the value of their patent monopolies.
The Biden administration has a great opportunity to hugely advance public health, and set an incredibly important example, by putting up the money for a clinical trial of Corbevax. Bernie Sanders, as chair of the Senate Health Committee, can also get on the case. He has been critical of Moderna for charging outrageous prices for a vaccine developed with taxpayer money.
Sanders’ anger is quite justified. But rather than just haranguing the company into lowering its price, we can take away its ability to get away with charging $130 a shot by giving them some competition. Competition is great for capitalism, even if it may not be good for individual capitalists.
[1] It seems as though the pharmaceutical industry may also be working to slow the use of Corbevax outside of the United States. Hotez and Bottazzi have been unable to get the World Health Organization (WHO) to move on their request for pre-qualification, which they submitted back in June. They have been given no reason for the delay. This matters hugely for developing countries, because their health agencies are reluctant to approve a vaccine that the WHO has not pre-qualified.
According to news reports, Moderna is considering a price in the range of $110 to $130 for shots of its Covid booster. People may recall that we paid Moderna close to $450 million to develop its Covid vaccine. We then paid another $450 million for the clinical trials that were needed to determine its effectiveness.
Moderna has already made a good return on our tax dollars, selling the initial set of shots at around $20 a piece. According to Forbes, the company’s soaring stock price had already produced five billionaires by the summer of 2021.
Who knows how many Moderna billionaires we will have if the company gets away with charging $110-$130 for its new booster. Of course, this money will come out of the pockets of the rest of us, or at least those of us who are not prevented from getting boosters by these high prices.
Fortunately, there is an alternative if the Biden administration is prepared to challenge Moderna and drug companies more generally on their monopoly pricing. Peter Hotez and Elena Bottazzi, two highly respected researchers at Baylor University and Texas Children’s Hospital, developed a simple to produce, 100 percent open-source Covid vaccine. It uses well-established technologies that are not complicated (unlike mRNA). Their vaccine has been widely used in India and Indonesia, with over 100 million people getting the vaccine to date.
If we want to see the vaccine used here it would need to be approved by the Food and Drug Administration (FDA). In principle, the FDA could rely on the clinical trials used to gain approval in India, but it indicated that they want U.S. trials. (In fairness, India’s trials are probably lower quality.)[1]
However, the government could fund a trial of Hotez-Bottazzi vaccine (Corbevax) with pots of money left over from Operation Warp Speed, or alternatively from the budgets of National Institutes of Health or other agencies like Biomedical Advanced Research and Development Authority (BARDA). With tens of billions of dollars of government money going to support biomedical research each year, the ten million or so needed for a clinical trial of Corbevax would be a drop in the bucket.
The arithmetic on this is incredible. Shots of Corbevax cost less than $2 a piece in India. If it costs two and a half times as much in the U.S., that still puts it a $5 a shot. That implies savings of more than $100 a shot. That means that if we get 100,000 people to take the Corbevax booster, rather than the Modern-Pfizer ones (Pfizer is planning to also charge over $100 for its booster), we’ve covered the cost of the trials. If we get 1 million to take Corbevax, we’ve covered the cost ten times over, and if 10 million people get the Corbevax booster, we will have saved one hundred times the cost of the clinical trial.
There is also the advantage that, since at least some of the reason for vacine hesitancy is fears of mRNA vaccines. We may get some vaccine hesitant people to take Corbevax, who wouldn’t take the mRNA vaccines.
It is understandable that the pharmaceutical industry would be very unhappy if the Biden administration were to put up the money for a clinical trial of Corbevax. Not only would FDA approval seriously cut into the gold mine they were anticipating from selling boosters at more than $100 a shot, it would also be a dangerous example for the industry.
It would show that it is possible to develop effective vaccines without relying on government-granted patent monopolies. (Hotez and Bottazzi supported their research on small grants from the government and private foundations.) And, it would be a great reminder that vaccines (and drugs) are cheap. It is rare that it is actually expensive to manufacture and distribute a drug or vaccine. Drugs are expensive because we give companies patent monopolies, or other forms of protection.
If we pay for the research up front, we don’t have to gouge patients to recover development costs. And, we don’t give drug companies an enormous incentive to lie, cheat, and steal to maximize the value of their patent monopolies.
The Biden administration has a great opportunity to hugely advance public health, and set an incredibly important example, by putting up the money for a clinical trial of Corbevax. Bernie Sanders, as chair of the Senate Health Committee, can also get on the case. He has been critical of Moderna for charging outrageous prices for a vaccine developed with taxpayer money.
Sanders’ anger is quite justified. But rather than just haranguing the company into lowering its price, we can take away its ability to get away with charging $130 a shot by giving them some competition. Competition is great for capitalism, even if it may not be good for individual capitalists.
[1] It seems as though the pharmaceutical industry may also be working to slow the use of Corbevax outside of the United States. Hotez and Bottazzi have been unable to get the World Health Organization (WHO) to move on their request for pre-qualification, which they submitted back in June. They have been given no reason for the delay. This matters hugely for developing countries, because their health agencies are reluctant to approve a vaccine that the WHO has not pre-qualified.
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• Economic Crisis and RecoveryCrisis económica y recuperaciónEconomic GrowthEl DesarolloInequalityLa DesigualdadUnited StatesEE. UU.
We recently got new data showing that China’s population shrunk last year. It is now projected to see its population continue to decline through the rest of this century.
This is being portrayed as a disaster for China. A similar disaster has already hit Japan, South Korea, Italy, and many other wealthy countries. People in these countries are having fewer kids than they did in prior decades. Unless they make up for their low birth rates with high rates of immigration, they will see declining populations, which we are supposed to believe is a terrible disaster. In fact, although declining populations may be a problem for political leaders who want to be more important in international politics, they are not bad news for the people of a country.
Before directly addressing the looming disaster story, let me just say that many of the policies that countries have adopted to promote population growth are good in their own right, whether or not they lead to more rapid population growth. Parents of young children should be able to get time off from work to be with their kids. They should also have access to affordable child care. And we should have something equivalent to the expanded child tax credit to ensure that even low-income families can provide basic necessities for their kids.
These policies are important because having kids should be a manageable task for parents rather than an impossible burden. If people choose to have kids, they should be able to do so without it wrecking their lives.
We should also want every kid to have a decent chance in life. This means, at the minimum, ensuring that they have decent nutrition and housing, and access to medical care. This can be done at a relatively low cost to society and should not really be an arguable point.
But getting beyond these issues, the question is whether societies will really suffer if they see a secular decline in population over many decades. While it is fashionable among intellectual types to assert that falling populations are a disaster, the logic for this argument is lacking.
The essence of the disaster story is that we will have fewer workers to support a growing population of retirees. The implication is that either retirees will have to get by with less money or workers will face an impossible tax burden.
There are two basic flaws in this argument:
Taking these in turn, it should be clear to anyone familiar with economic data that even modest rates of productivity growth have far more impact on living standards than changing demographics. The years 2010 to 2025 are the peak years of the retirement of the baby boom cohort in the United States. The Social Security Trustees project that the aged dependency ratio (the number of people over age 65 divided by the number of people between the ages of 20 and 64) will increase from 0.218 in 2010 to 0.325 in 2025.
This is a story of a rapidly aging society since we had a long period of very high birth rates following the end of World War II, followed by decades of much lower birth rates. As a result, the United States is seeing a more rapid aging of its population than most countries with declining birth rates are likely to experience. Yet, this still should be a relatively manageable problem.
Suppose that productivity growth averages 1.0 percent annually over this fifteen-year period, which is a slower pace than we have ever seen over any fifteen-year period in the United States. If wage growth moves in step with productivity (that’s a big if, but has nothing directly to do with demographics), before-tax real wages would be 16 percent higher at end of this period.
Suppose that people over age 65 consume 70 percent as much per person as the working-age population, and that we tax workers to ensure the older population gets their 70 percent. In this case, both workers and retirees can see an 8.9 percent increase in income over this 15-year period. And this doesn’t even account for the fact that we are seeing a decline in the youth dependency ratio and also that an increasing share of the over-65 population is likely to be working as older people have better health and a larger share of jobs are not physically demanding. It’s hard to see a crisis here.
And this is the story for the period of the peak rate of retirement of the baby boom cohort. In a story where we continue to see low birth rates and a declining population, the ratio of retirees to workers will continue to grow, but not as rapidly as in the peak years of the baby boomers’ retirement.
Furthermore, we can plausibly see more rapid rates of productivity growth. If productivity growth were to average 2.0 percent over a 15-year period, roughly the post-World War II average, the before-tax real wage would rise by almost 35 percent. This would allow for a gain in after-tax income for both workers and retirees of more than 20 percent, even with the rapid increase in the ratio of retirees to workers associated with the retirement of the baby boomers.
And many countries, notably China, have seen far more rapid increases in productivity. China has been averaging productivity growth of more than 4.0 percent annually in recent decades as people have moved from very low-productivity work in agriculture to much higher-productivity jobs in manufacturing. It is approaching the end of this shift, as more than 62 percent of the population is now urban, but it still may see productivity growth that far exceeds the 2.0 percent that the U.S. has averaged over the last 75 years.
Also, there are benefits from a smaller population that GDP does not pick up. Parks, beaches, museums, and other recreational areas will be less crowded. There will be less congestion and pollution. There will also be less strain on infrastructure. None of these factors are picked up in the GDP accounts or measures of productivity.
In short, there is no reason to believe that a country will see stagnant or declining living standards simply because it has a rising ratio of retirees to workers. If for some reason, it stops seeing gains in productivity, then living standards could stagnate or decline, but the issue here is the weak productivity growth, not the aging of the population.
It would be very dishonest to imply that a country in such circumstances is suffering due to the aging of the population, a problem that cannot be easily remedied. By contrast, factors that impede productivity growth may be difficult to address politically but are likely much more easily solved than finding a way to substantially increase birth rates. (Increasing immigration is easier.)
It is also important to recognize that increasing birth rates actually makes the situation worse in the near term, as it increases the number of children that each worker must support. In the United States, the combined young and old dependency ratio hit a peak, due to the baby boom, in the early 1960s that is likely to never be surpassed. It will take more than twenty-five years before an increase in the birth rate can begin to lower the overall dependency ratio.
Is Too Few Workers Even a Problem?
While increases in productivity should ensure that a rise in the ratio of retirees to workers doesn’t lead to a drop in living standards, there is an even more basic question about the impact of an aging population. After decades in which policy debates focused on being able to meet the demand created by a growing cohort of retirees, it turns out that the major economic problem in this context may be too little demand or secular stagnation.
What we have seen first and foremost in Japan, but also in other wealthy countries with a growing share of retirees in their populations, is that insufficient demand is a major problem. This is the direct opposite of the story, where the economy is unable to meet the demand created by retirees, resulting in high interest rates and high inflation.
In fact, prior to the pandemic, most wealthy countries had near-zero interest rates in their overnight money markets, and even longer-term government bonds carried unusually low interest rates. The interest rate on Japan’s 10-year Treasury bonds was generally negative in the years since the Great Recession.
Rather than being troubled by inflation rates that were too high, central banks were actually struggling to raise inflation rates to their targets. And, even as many governments ran large deficits to help support their economy, the debt service was not imposing a major burden.
Japan again is the poster child. In spite of having a debt of 260 percent of its GDP, until recently, investors were paying the government to hold its debt, as its bonds carried a negative nominal interest rate. The country’s current interest burden is roughly 0.3 percent of GDP. That compares to 1.7 percent in the United States at present and more than 3.0 percent in the 1990s.
In short, the evidence from the decade prior to the pandemic is that the concern that a rising ratio of retirees to workers would place an impossible burden on the economy, was entirely misplaced. The biggest problem posed by an aging population is that investment falls, as businesses no longer need to expand their capital stock to accommodate a growing workforce.
The quickest way to offset weak demand is to have the government spend more money. Ideally, this spending should be in areas that provide both current and lasting benefits, like child care and education, but any spending can generate demand in the economy. But in any case, lack of demand appears to be the major problem associated with an aging society and falling population. This does not look like a major crisis.
Declining Populations as a Problem for Politicians, Policy Types, and Pundits
If the prospect of an aging society and declining population does not pose a major problem for most of the people living in a country, the story is different for politicians looking for power. The typical person in Denmark or the Netherlands does not have a worse standard of living than the typical person in the United States, and by many measures, they are doing better.
However, there is a reason that most people in the world know about President Biden, whereas few people outside of Denmark or the Netherlands would know the names of their prime ministers. The difference is that the United States has 330 million people, compared to 6 million in Denmark and 18 million in the Netherlands. The policies pursued by a rich country with 330 million people in the world make a big difference. The policies pursued by rich countries with 6 million or 18 million matter far less.
If politicians are seeking power, it is much better to be running a big country than a small one. For this reason, the prospect of a shrinking population looks like bad news to many of them. And this sort of concern goes far beyond just the small number of people who might actually be running a country or a top policy adviser.
There is a much larger group of academics, commentators, or generic pundits whose views matter much less when they are directed to the government of Denmark or the Netherlands than when they are presenting their wisdom to guide the policies of the United States. If that seems hard to fathom, imagine Thomas Friedman directing his bold pronouncements to the Prime Minister of Denmark rather than the president of the United States. It just wouldn’t pack the same punch.
While these commentators may be a tiny share of the population, they are a very large share of the people whose views about things like a shrinking population get attention in major media outlets. In short, the people whose status depends on addressing their remarks to a major power are the ones telling us that we should be very worried about our country becoming a lesser power, no surprises here.
There is one last point to be made about how the quest for great power status may diverge from the interests of most of the population. The traditional way to secure great power status is through military power.
This can be expensive. At the peak of the Reagan era military buildup, we were spending 6.0 percent of GDP on the military. We are currently spending a bit more than 3.0 percent. The difference of 3.0 percentage points of GDP is more than twice the projected increase in spending on Social Security as a share of GDP between 2000 and 2030, the years of the retirement of the baby boom generation.
There is a further issue that the Soviet Union’s economy, at its peak, was around 60 percent of the size of the U.S. economy. By contrast, China’s economy is already about 20 percent larger than the U.S. economy and is projected to continue to grow more rapidly for the foreseeable future. This means that a full-fledged arms race with China is likely to be far more expensive than the Cold War with the Soviet Union. That would likely impose a serious burden on the U.S. economy.
Conclusion: Shrinking Populations Are Not a Problem
As a practical matter, there is little reason for the overwhelming majority of the country to be concerned about a declining population. The impact of aging on the living standards is limited and much smaller than other burdens the country has borne in the past, such as paying for the care and education of the baby boom generation when they were children. Furthermore, the gains from higher productivity should swamp the impact of a rising ratio of retirees to workers.
By contrast, the prospect of a declining population and diminished national power in world politics is bad news for the people who write in major news outlets about things like a declining population. This is the most obvious explanation for why we hear so much about this non-problem.
We recently got new data showing that China’s population shrunk last year. It is now projected to see its population continue to decline through the rest of this century.
This is being portrayed as a disaster for China. A similar disaster has already hit Japan, South Korea, Italy, and many other wealthy countries. People in these countries are having fewer kids than they did in prior decades. Unless they make up for their low birth rates with high rates of immigration, they will see declining populations, which we are supposed to believe is a terrible disaster. In fact, although declining populations may be a problem for political leaders who want to be more important in international politics, they are not bad news for the people of a country.
Before directly addressing the looming disaster story, let me just say that many of the policies that countries have adopted to promote population growth are good in their own right, whether or not they lead to more rapid population growth. Parents of young children should be able to get time off from work to be with their kids. They should also have access to affordable child care. And we should have something equivalent to the expanded child tax credit to ensure that even low-income families can provide basic necessities for their kids.
These policies are important because having kids should be a manageable task for parents rather than an impossible burden. If people choose to have kids, they should be able to do so without it wrecking their lives.
We should also want every kid to have a decent chance in life. This means, at the minimum, ensuring that they have decent nutrition and housing, and access to medical care. This can be done at a relatively low cost to society and should not really be an arguable point.
But getting beyond these issues, the question is whether societies will really suffer if they see a secular decline in population over many decades. While it is fashionable among intellectual types to assert that falling populations are a disaster, the logic for this argument is lacking.
The essence of the disaster story is that we will have fewer workers to support a growing population of retirees. The implication is that either retirees will have to get by with less money or workers will face an impossible tax burden.
There are two basic flaws in this argument:
Taking these in turn, it should be clear to anyone familiar with economic data that even modest rates of productivity growth have far more impact on living standards than changing demographics. The years 2010 to 2025 are the peak years of the retirement of the baby boom cohort in the United States. The Social Security Trustees project that the aged dependency ratio (the number of people over age 65 divided by the number of people between the ages of 20 and 64) will increase from 0.218 in 2010 to 0.325 in 2025.
This is a story of a rapidly aging society since we had a long period of very high birth rates following the end of World War II, followed by decades of much lower birth rates. As a result, the United States is seeing a more rapid aging of its population than most countries with declining birth rates are likely to experience. Yet, this still should be a relatively manageable problem.
Suppose that productivity growth averages 1.0 percent annually over this fifteen-year period, which is a slower pace than we have ever seen over any fifteen-year period in the United States. If wage growth moves in step with productivity (that’s a big if, but has nothing directly to do with demographics), before-tax real wages would be 16 percent higher at end of this period.
Suppose that people over age 65 consume 70 percent as much per person as the working-age population, and that we tax workers to ensure the older population gets their 70 percent. In this case, both workers and retirees can see an 8.9 percent increase in income over this 15-year period. And this doesn’t even account for the fact that we are seeing a decline in the youth dependency ratio and also that an increasing share of the over-65 population is likely to be working as older people have better health and a larger share of jobs are not physically demanding. It’s hard to see a crisis here.
And this is the story for the period of the peak rate of retirement of the baby boom cohort. In a story where we continue to see low birth rates and a declining population, the ratio of retirees to workers will continue to grow, but not as rapidly as in the peak years of the baby boomers’ retirement.
Furthermore, we can plausibly see more rapid rates of productivity growth. If productivity growth were to average 2.0 percent over a 15-year period, roughly the post-World War II average, the before-tax real wage would rise by almost 35 percent. This would allow for a gain in after-tax income for both workers and retirees of more than 20 percent, even with the rapid increase in the ratio of retirees to workers associated with the retirement of the baby boomers.
And many countries, notably China, have seen far more rapid increases in productivity. China has been averaging productivity growth of more than 4.0 percent annually in recent decades as people have moved from very low-productivity work in agriculture to much higher-productivity jobs in manufacturing. It is approaching the end of this shift, as more than 62 percent of the population is now urban, but it still may see productivity growth that far exceeds the 2.0 percent that the U.S. has averaged over the last 75 years.
Also, there are benefits from a smaller population that GDP does not pick up. Parks, beaches, museums, and other recreational areas will be less crowded. There will be less congestion and pollution. There will also be less strain on infrastructure. None of these factors are picked up in the GDP accounts or measures of productivity.
In short, there is no reason to believe that a country will see stagnant or declining living standards simply because it has a rising ratio of retirees to workers. If for some reason, it stops seeing gains in productivity, then living standards could stagnate or decline, but the issue here is the weak productivity growth, not the aging of the population.
It would be very dishonest to imply that a country in such circumstances is suffering due to the aging of the population, a problem that cannot be easily remedied. By contrast, factors that impede productivity growth may be difficult to address politically but are likely much more easily solved than finding a way to substantially increase birth rates. (Increasing immigration is easier.)
It is also important to recognize that increasing birth rates actually makes the situation worse in the near term, as it increases the number of children that each worker must support. In the United States, the combined young and old dependency ratio hit a peak, due to the baby boom, in the early 1960s that is likely to never be surpassed. It will take more than twenty-five years before an increase in the birth rate can begin to lower the overall dependency ratio.
Is Too Few Workers Even a Problem?
While increases in productivity should ensure that a rise in the ratio of retirees to workers doesn’t lead to a drop in living standards, there is an even more basic question about the impact of an aging population. After decades in which policy debates focused on being able to meet the demand created by a growing cohort of retirees, it turns out that the major economic problem in this context may be too little demand or secular stagnation.
What we have seen first and foremost in Japan, but also in other wealthy countries with a growing share of retirees in their populations, is that insufficient demand is a major problem. This is the direct opposite of the story, where the economy is unable to meet the demand created by retirees, resulting in high interest rates and high inflation.
In fact, prior to the pandemic, most wealthy countries had near-zero interest rates in their overnight money markets, and even longer-term government bonds carried unusually low interest rates. The interest rate on Japan’s 10-year Treasury bonds was generally negative in the years since the Great Recession.
Rather than being troubled by inflation rates that were too high, central banks were actually struggling to raise inflation rates to their targets. And, even as many governments ran large deficits to help support their economy, the debt service was not imposing a major burden.
Japan again is the poster child. In spite of having a debt of 260 percent of its GDP, until recently, investors were paying the government to hold its debt, as its bonds carried a negative nominal interest rate. The country’s current interest burden is roughly 0.3 percent of GDP. That compares to 1.7 percent in the United States at present and more than 3.0 percent in the 1990s.
In short, the evidence from the decade prior to the pandemic is that the concern that a rising ratio of retirees to workers would place an impossible burden on the economy, was entirely misplaced. The biggest problem posed by an aging population is that investment falls, as businesses no longer need to expand their capital stock to accommodate a growing workforce.
The quickest way to offset weak demand is to have the government spend more money. Ideally, this spending should be in areas that provide both current and lasting benefits, like child care and education, but any spending can generate demand in the economy. But in any case, lack of demand appears to be the major problem associated with an aging society and falling population. This does not look like a major crisis.
Declining Populations as a Problem for Politicians, Policy Types, and Pundits
If the prospect of an aging society and declining population does not pose a major problem for most of the people living in a country, the story is different for politicians looking for power. The typical person in Denmark or the Netherlands does not have a worse standard of living than the typical person in the United States, and by many measures, they are doing better.
However, there is a reason that most people in the world know about President Biden, whereas few people outside of Denmark or the Netherlands would know the names of their prime ministers. The difference is that the United States has 330 million people, compared to 6 million in Denmark and 18 million in the Netherlands. The policies pursued by a rich country with 330 million people in the world make a big difference. The policies pursued by rich countries with 6 million or 18 million matter far less.
If politicians are seeking power, it is much better to be running a big country than a small one. For this reason, the prospect of a shrinking population looks like bad news to many of them. And this sort of concern goes far beyond just the small number of people who might actually be running a country or a top policy adviser.
There is a much larger group of academics, commentators, or generic pundits whose views matter much less when they are directed to the government of Denmark or the Netherlands than when they are presenting their wisdom to guide the policies of the United States. If that seems hard to fathom, imagine Thomas Friedman directing his bold pronouncements to the Prime Minister of Denmark rather than the president of the United States. It just wouldn’t pack the same punch.
While these commentators may be a tiny share of the population, they are a very large share of the people whose views about things like a shrinking population get attention in major media outlets. In short, the people whose status depends on addressing their remarks to a major power are the ones telling us that we should be very worried about our country becoming a lesser power, no surprises here.
There is one last point to be made about how the quest for great power status may diverge from the interests of most of the population. The traditional way to secure great power status is through military power.
This can be expensive. At the peak of the Reagan era military buildup, we were spending 6.0 percent of GDP on the military. We are currently spending a bit more than 3.0 percent. The difference of 3.0 percentage points of GDP is more than twice the projected increase in spending on Social Security as a share of GDP between 2000 and 2030, the years of the retirement of the baby boom generation.
There is a further issue that the Soviet Union’s economy, at its peak, was around 60 percent of the size of the U.S. economy. By contrast, China’s economy is already about 20 percent larger than the U.S. economy and is projected to continue to grow more rapidly for the foreseeable future. This means that a full-fledged arms race with China is likely to be far more expensive than the Cold War with the Soviet Union. That would likely impose a serious burden on the U.S. economy.
Conclusion: Shrinking Populations Are Not a Problem
As a practical matter, there is little reason for the overwhelming majority of the country to be concerned about a declining population. The impact of aging on the living standards is limited and much smaller than other burdens the country has borne in the past, such as paying for the care and education of the baby boom generation when they were children. Furthermore, the gains from higher productivity should swamp the impact of a rising ratio of retirees to workers.
By contrast, the prospect of a declining population and diminished national power in world politics is bad news for the people who write in major news outlets about things like a declining population. This is the most obvious explanation for why we hear so much about this non-problem.
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Okay, that’s not exactly what the NYT told us. A piece, headlined “The Medicine is a Miracle, but only if You Can Afford It,” told readers how patients struggle to pay for drugs that sell for tens, or even hundreds, of thousands a dollars a year. The piece describes people taking out GoFundMe pages or seeking out foundations that would pay for treatments that can improve their health and/or save their lives.
While the piece tells us that drug companies invest lots of money in developing these drugs or treatments, it neglects to mention that the we could eliminate this problem if we simply paid for the research up front. This would mean having the government pick up the tab for the research, as it already does with over $50 billion a year of funding to the National Institutes of Health, and then having all new drugs and treatments available as cheap generics. In that situation, we would not be forcing people with serious illnesses to run around begging for money to get effective treatments.
Okay, that’s not exactly what the NYT told us. A piece, headlined “The Medicine is a Miracle, but only if You Can Afford It,” told readers how patients struggle to pay for drugs that sell for tens, or even hundreds, of thousands a dollars a year. The piece describes people taking out GoFundMe pages or seeking out foundations that would pay for treatments that can improve their health and/or save their lives.
While the piece tells us that drug companies invest lots of money in developing these drugs or treatments, it neglects to mention that the we could eliminate this problem if we simply paid for the research up front. This would mean having the government pick up the tab for the research, as it already does with over $50 billion a year of funding to the National Institutes of Health, and then having all new drugs and treatments available as cheap generics. In that situation, we would not be forcing people with serious illnesses to run around begging for money to get effective treatments.
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• HealthcareIntellectual PropertyPropiedad IntelectualUnited StatesEE. UU.
Outlawing items such as marijuana or alcohol invariably leads to black markets and corruption. Since there is much money to be made by selling these products in violation of the law, many people will follow the money and break the law. They will also corrupt the legal system in the process, making payments to people in law enforcement and elsewhere in the legal system.
The old line from economists on this problem is to take the money out, by making marijuana and alcohol legal. If people can buy these items in a free market, then no one is going to have any big incentive to make payoffs to police officers or judges, there would be no reason.
We should think the same way about the pharmaceutical industry and patent monopolies. Patent monopolies and related protections allow pharmaceutical companies to sell drugs at prices that are typically several thousand percent above their free market price. In this context, economic theory predicts they will bend or break the law to extend and expand their protection as widely as possible.
The latest example of this story of corruption was a front-page New York Times piece on the arthritis drug Humira. Humira is an extraordinarily effective arthritis drug taken by tens of thousands of people in the United States. Its main patent was due to expire in 2016, which would have in principle opened the door to generic competition.
At the time, Humira was being sold at $50,000, for a year’s treatment. In principle, generic competition would have lowered the price considerably. However, as the piece points out, AbbVie, the drug’s manufacturer took out dozens of other patents on Humira. According to the piece, Abbvie applied for a total of 311 patents on the drug, 165 of which were granted.
Many of these patents are of dubious legal status. The U.S. patent office is notorious for being lax in its standards, having once granted a patent on a peanut butter and jelly sandwich. However, the threat of patent suit was enough to discourage potential competitors from entering the market. According to the piece, all the would-be entrants signed agreements with AbbVie delaying entry, with the first competitor just entering the market this year. In the meantime, AbbVie raised the price of Humira to $80,000 for a year’s treatment.
As the piece points out, this practice of taking out dozens, or even hundreds of patents, has become a standard practice for the pharmaceutical industry. There is a fundamental asymmetry in a patent infringement suit that will always favor the patent holder.
The patent holder is suing for the right to sell its drug at a monopoly price. The would-be competitor is trying to get the right to sell its drug at the free market price. The potential profits from keeping the monopoly dwarf the profits that a generic competitor might hope to earn. For this reason, the patent holder will typically be prepared to spend far more money to protect a patent claim than a generic producer would be willing to spend to challenge it. As a result, the effective patent duration for many big-selling drugs is often long beyond the 20 years specified in the law.
Sometimes pharmaceutical companies don’t even go the bogus patent route to discourage generic competition. Outright payoffs also can do the trick. While a direct payment would likely be an antitrust violation, awarding a lucrative manufacturing contract to a generic producer for a different drug can accomplish the same goal and be all but impossible to detect, unless someone is foolish enough to put the quid pro quo in writing.
Lying About Safety and Effectiveness
Unfortunately, extending patent life is not the only abuse caused by the lure of patent monopoly profits. When drug patents allow drugs to sell for many thousand percent above the free market price, drug companies have an enormous incentive to promote their drugs as widely as possible. This means exaggerating their effectiveness and downplaying safety risks. This could mean people get improper care or take drugs that harm them.
There are endless examples where companies have misrepresented the safety or effectiveness of drugs. The Alzheimer’s drug, Aduhelm, is a prominent recent case. The Food and Drug Administration was persuaded to approve the drug in spite of weak evidence for its effectiveness and also evidence of seriously harmful side effects in some patients.
Biogen, the drug’s manufacturer, had plans to sell it for $56,000 for a year’s treatment. It turned out Biogen’s representatives had met frequently with officials at the FDA, a fact that was not properly documented by the agency. Fortunately, protests from experts in the field, including the resignation of several members of an FDA advisory commission, managed to ensure that the approval was far more limited than the open-ended approval sought by Biogen.
The arthritis drug Vioxx, which Merck sold, is another prominent case where a drug company sought to mislead the medical community and the public about the safety of its drug. It was alleged that the drug increased the risk of strokes and heart attacks for people with heart conditions. Since there is considerable overlap between people with heart conditions and those suffering from arthritis, this is a serious problem for an arthritis drug.
According to allegations, Merck had evidence from its clinical trials of this risk but concealed it from regulators. Merck paid $4.85 billion to settle a lawsuit and withdrew the drug from the market.
Perhaps the most egregious example of concealing evidence of a drug’s potential harm is with Oxycontin and the new generation of opioid drugs that were developed in the 1990s and 2000s. Purdue Pharma and other opioid manufacturers pushed their drugs widely, concealing evidence that they were highly addictive. The lure of monopoly profits was likely a substantial factor in creating the opioid crisis of the last two decades.
In addition to instances where drugs may be altogether ineffective or harmful, there is the more general problem of drug companies promoting their drugs for uses not approved by the FDA. While doctors can prescribe a drug for non-authorized use, it is illegal for drug companies to promote their drugs for unauthorized use. Nonetheless, they routinely find ways around this prohibition, for example by paying doctors to write about or lecture on their drugs. Medical journals and regulators have sought to restrict such practices, but it is difficult to effectively police this behavior when there is so much money at stake.
Patents Can Interfere with the Research Progress
In addition to making drugs expensive, and providing incentives to misrepresent the safety and effectiveness of drugs, patent monopolies can also slow the development process itself. When researchers, or their employers, are concerned about maintaining patent rights, they may refuse to take part in potentially useful collaborations.
In a feature article on Katalin Kariko, one of the leading mRNA pioneers, the New York Times wrote that at one point she was unable to arrange a collaboration with another researcher because they were concerned that her university affiliation might complicate patent claims. Similar issues could arise in many other contexts, for example, if drugs might best be used in tandem, as with the AIDS cocktails, it would be necessary to make arrangements on intellectual property claims before going through with clinical trials.
Similarly, if research points to the potential effectiveness of an old drug or a non-pharmaceutical treatment for a condition, such as diet or environmental changes, the patent system provides no incentive to pursue it. If the treatment is not patentable, the system provides no incentive to do the research.
Patent Protected Drug Prices Complicate the Lives of People with Medical Issues
The fact that we look to recover the cost of research, plus healthy profits and overhead costs, from the patients, rather than paying it upfront, creates needless problems for people with health issues. Paying tens of thousands of dollars for a life-saving drug is a huge burden for almost anyone. While most people may be able to get an insurer or the government to pick up most of the tab, this is hardly the end of the problem.
Insurers do not want to pay out $50,000 a year for a patient’s drugs. If they can find a way to avoid having to make the payment, they will. This often means extensive documentation requirements, and possibly even requiring a second opinion. An insurer may even opt to refuse to make a payment even if they know it should be covered.
After all, this is pretty much a no-lose proposition from their standpoint. If the patient believes that the insurer should cover the drug, and presses their case, the insurer ends up having to make a payment that they would have made anyhow. However, if the patient believes the insurer is correct in turning down the claim and doesn’t pursue it further, the insurer could save tens of thousands of dollars by turning it down. The only risk the insurer would face in this story is if turning down valid claims becomes so common that their patients are able file a successful class action lawsuit.
In addition to creating needless hassles for people with medical problems, patent protected drug prices add to the cost of health care by increasing the administrative costs of insurers. We will spend around $560 billion this year on prescription drugs, roughly $4,300 per household. These drugs would likely sell for less than $100 billion in a world without patent monopolies or related protections.
This additional cost creates the incentive for insurers to carefully police expenditures. If a year’s treatment with a drug costs $500, an insurer likely would trust a doctor’s assessment that a patient needs it. When the drug costs $50,000, the insurer has a strong incentive to find an excuse to turn down a claim or insist that the patient use a cheaper alternative.
Insurers’ net administrative costs (profits and wages) will be close to $270 billion this year. Roughly 20 percent of the spending that goes through insurers will be for prescription drugs. If we assume that the administrative costs are proportionate to spending, this means patent protected drug prices add another $54 billion to our healthcare bill due to the increased expenses and profits accrued by insurers.
While some drug payments may still go through insurers even if drugs were sold in a free market without patent monopolies, they would result in much less scrutiny. Medicare did not cover prescription drugs when it was established in 1965 because drugs were not a major expense at the time. In a patent-free world, that would still be the case.
Patent Monopolies are Not Necessary to Finance Research
It is possible to read this indictment of patent monopoly financing for prescription drugs and still insist that the system is a net positive because it is needed to finance the life-saving innovations in technology we have seen in recent decades. This would be a reasonable argument if patent monopolies were the only way to finance successful research. But why would we think that the only way to motivate people to innovate is to give them a patent monopoly?
Through government funding, we have had many great research breakthroughs, including most of the work developing mRNA technology. The National Institutes of Health spends more than $50 billion a year on biomedical research. Nearly everyone, especially the pharmaceutical industry, says this money is very well spent. While most of this funding goes for more basic research, some has gone to develop drugs like the AIDS drug AZT (originally developed as a cancer drug) and Taxol. Nonetheless, it would take some considerable leaps of logic to argue that the government can effectively finance basic research, but if they funded downstream research it would be the same thing as throwing money in the toilet.
To my view, we would want to alter the funding system if we looked to replace the patent monopoly-supported research. I recommended that we look to parcel out funding to long-term prime contractors. For example, a pharmaceutical company may win a contract to research liver cancer drugs for 12 years. The condition of getting the contract would be that all research findings would be posted on the web as soon as practical and all patents are placed in the public domain so anyone can use them.[1]
We would have lots of room to play around and still come out ahead. If all drugs were sold at free market prices, we would likely save close to $400 billion a year on prescription drugs (a bit less than half of the Defense Department budget). The industry currently spends bit more than $100 billion a year on research, so even if it took $150 billion to replace research that is patent-financed, we would still see massive savings.
Can We Debate the Patent Monopoly Financing System?
Of course, the extent to which direct funding could be an effective alternative to patent monopoly financing is a debatable point. There are also other possible mechanisms. For example, we could have a patent buyout system, where the government pays some sum for the rights to useful drugs, and then places the patents in the public domain so they can be produced as generics.
But the key point is that there are enormous problems with the system of patent monopoly financing. It is absurd that we use the power of the government to make life-saving drugs that would sell for hundreds of dollars in a free market, instead sell for tens or even hundreds of thousands of dollars. That is a cruel and inefficient system that invites corruption. We can do better.
[1] I describe this system in somewhat more detail in Rigged, chapter 5 (it’s free).
Outlawing items such as marijuana or alcohol invariably leads to black markets and corruption. Since there is much money to be made by selling these products in violation of the law, many people will follow the money and break the law. They will also corrupt the legal system in the process, making payments to people in law enforcement and elsewhere in the legal system.
The old line from economists on this problem is to take the money out, by making marijuana and alcohol legal. If people can buy these items in a free market, then no one is going to have any big incentive to make payoffs to police officers or judges, there would be no reason.
We should think the same way about the pharmaceutical industry and patent monopolies. Patent monopolies and related protections allow pharmaceutical companies to sell drugs at prices that are typically several thousand percent above their free market price. In this context, economic theory predicts they will bend or break the law to extend and expand their protection as widely as possible.
The latest example of this story of corruption was a front-page New York Times piece on the arthritis drug Humira. Humira is an extraordinarily effective arthritis drug taken by tens of thousands of people in the United States. Its main patent was due to expire in 2016, which would have in principle opened the door to generic competition.
At the time, Humira was being sold at $50,000, for a year’s treatment. In principle, generic competition would have lowered the price considerably. However, as the piece points out, AbbVie, the drug’s manufacturer took out dozens of other patents on Humira. According to the piece, Abbvie applied for a total of 311 patents on the drug, 165 of which were granted.
Many of these patents are of dubious legal status. The U.S. patent office is notorious for being lax in its standards, having once granted a patent on a peanut butter and jelly sandwich. However, the threat of patent suit was enough to discourage potential competitors from entering the market. According to the piece, all the would-be entrants signed agreements with AbbVie delaying entry, with the first competitor just entering the market this year. In the meantime, AbbVie raised the price of Humira to $80,000 for a year’s treatment.
As the piece points out, this practice of taking out dozens, or even hundreds of patents, has become a standard practice for the pharmaceutical industry. There is a fundamental asymmetry in a patent infringement suit that will always favor the patent holder.
The patent holder is suing for the right to sell its drug at a monopoly price. The would-be competitor is trying to get the right to sell its drug at the free market price. The potential profits from keeping the monopoly dwarf the profits that a generic competitor might hope to earn. For this reason, the patent holder will typically be prepared to spend far more money to protect a patent claim than a generic producer would be willing to spend to challenge it. As a result, the effective patent duration for many big-selling drugs is often long beyond the 20 years specified in the law.
Sometimes pharmaceutical companies don’t even go the bogus patent route to discourage generic competition. Outright payoffs also can do the trick. While a direct payment would likely be an antitrust violation, awarding a lucrative manufacturing contract to a generic producer for a different drug can accomplish the same goal and be all but impossible to detect, unless someone is foolish enough to put the quid pro quo in writing.
Lying About Safety and Effectiveness
Unfortunately, extending patent life is not the only abuse caused by the lure of patent monopoly profits. When drug patents allow drugs to sell for many thousand percent above the free market price, drug companies have an enormous incentive to promote their drugs as widely as possible. This means exaggerating their effectiveness and downplaying safety risks. This could mean people get improper care or take drugs that harm them.
There are endless examples where companies have misrepresented the safety or effectiveness of drugs. The Alzheimer’s drug, Aduhelm, is a prominent recent case. The Food and Drug Administration was persuaded to approve the drug in spite of weak evidence for its effectiveness and also evidence of seriously harmful side effects in some patients.
Biogen, the drug’s manufacturer, had plans to sell it for $56,000 for a year’s treatment. It turned out Biogen’s representatives had met frequently with officials at the FDA, a fact that was not properly documented by the agency. Fortunately, protests from experts in the field, including the resignation of several members of an FDA advisory commission, managed to ensure that the approval was far more limited than the open-ended approval sought by Biogen.
The arthritis drug Vioxx, which Merck sold, is another prominent case where a drug company sought to mislead the medical community and the public about the safety of its drug. It was alleged that the drug increased the risk of strokes and heart attacks for people with heart conditions. Since there is considerable overlap between people with heart conditions and those suffering from arthritis, this is a serious problem for an arthritis drug.
According to allegations, Merck had evidence from its clinical trials of this risk but concealed it from regulators. Merck paid $4.85 billion to settle a lawsuit and withdrew the drug from the market.
Perhaps the most egregious example of concealing evidence of a drug’s potential harm is with Oxycontin and the new generation of opioid drugs that were developed in the 1990s and 2000s. Purdue Pharma and other opioid manufacturers pushed their drugs widely, concealing evidence that they were highly addictive. The lure of monopoly profits was likely a substantial factor in creating the opioid crisis of the last two decades.
In addition to instances where drugs may be altogether ineffective or harmful, there is the more general problem of drug companies promoting their drugs for uses not approved by the FDA. While doctors can prescribe a drug for non-authorized use, it is illegal for drug companies to promote their drugs for unauthorized use. Nonetheless, they routinely find ways around this prohibition, for example by paying doctors to write about or lecture on their drugs. Medical journals and regulators have sought to restrict such practices, but it is difficult to effectively police this behavior when there is so much money at stake.
Patents Can Interfere with the Research Progress
In addition to making drugs expensive, and providing incentives to misrepresent the safety and effectiveness of drugs, patent monopolies can also slow the development process itself. When researchers, or their employers, are concerned about maintaining patent rights, they may refuse to take part in potentially useful collaborations.
In a feature article on Katalin Kariko, one of the leading mRNA pioneers, the New York Times wrote that at one point she was unable to arrange a collaboration with another researcher because they were concerned that her university affiliation might complicate patent claims. Similar issues could arise in many other contexts, for example, if drugs might best be used in tandem, as with the AIDS cocktails, it would be necessary to make arrangements on intellectual property claims before going through with clinical trials.
Similarly, if research points to the potential effectiveness of an old drug or a non-pharmaceutical treatment for a condition, such as diet or environmental changes, the patent system provides no incentive to pursue it. If the treatment is not patentable, the system provides no incentive to do the research.
Patent Protected Drug Prices Complicate the Lives of People with Medical Issues
The fact that we look to recover the cost of research, plus healthy profits and overhead costs, from the patients, rather than paying it upfront, creates needless problems for people with health issues. Paying tens of thousands of dollars for a life-saving drug is a huge burden for almost anyone. While most people may be able to get an insurer or the government to pick up most of the tab, this is hardly the end of the problem.
Insurers do not want to pay out $50,000 a year for a patient’s drugs. If they can find a way to avoid having to make the payment, they will. This often means extensive documentation requirements, and possibly even requiring a second opinion. An insurer may even opt to refuse to make a payment even if they know it should be covered.
After all, this is pretty much a no-lose proposition from their standpoint. If the patient believes that the insurer should cover the drug, and presses their case, the insurer ends up having to make a payment that they would have made anyhow. However, if the patient believes the insurer is correct in turning down the claim and doesn’t pursue it further, the insurer could save tens of thousands of dollars by turning it down. The only risk the insurer would face in this story is if turning down valid claims becomes so common that their patients are able file a successful class action lawsuit.
In addition to creating needless hassles for people with medical problems, patent protected drug prices add to the cost of health care by increasing the administrative costs of insurers. We will spend around $560 billion this year on prescription drugs, roughly $4,300 per household. These drugs would likely sell for less than $100 billion in a world without patent monopolies or related protections.
This additional cost creates the incentive for insurers to carefully police expenditures. If a year’s treatment with a drug costs $500, an insurer likely would trust a doctor’s assessment that a patient needs it. When the drug costs $50,000, the insurer has a strong incentive to find an excuse to turn down a claim or insist that the patient use a cheaper alternative.
Insurers’ net administrative costs (profits and wages) will be close to $270 billion this year. Roughly 20 percent of the spending that goes through insurers will be for prescription drugs. If we assume that the administrative costs are proportionate to spending, this means patent protected drug prices add another $54 billion to our healthcare bill due to the increased expenses and profits accrued by insurers.
While some drug payments may still go through insurers even if drugs were sold in a free market without patent monopolies, they would result in much less scrutiny. Medicare did not cover prescription drugs when it was established in 1965 because drugs were not a major expense at the time. In a patent-free world, that would still be the case.
Patent Monopolies are Not Necessary to Finance Research
It is possible to read this indictment of patent monopoly financing for prescription drugs and still insist that the system is a net positive because it is needed to finance the life-saving innovations in technology we have seen in recent decades. This would be a reasonable argument if patent monopolies were the only way to finance successful research. But why would we think that the only way to motivate people to innovate is to give them a patent monopoly?
Through government funding, we have had many great research breakthroughs, including most of the work developing mRNA technology. The National Institutes of Health spends more than $50 billion a year on biomedical research. Nearly everyone, especially the pharmaceutical industry, says this money is very well spent. While most of this funding goes for more basic research, some has gone to develop drugs like the AIDS drug AZT (originally developed as a cancer drug) and Taxol. Nonetheless, it would take some considerable leaps of logic to argue that the government can effectively finance basic research, but if they funded downstream research it would be the same thing as throwing money in the toilet.
To my view, we would want to alter the funding system if we looked to replace the patent monopoly-supported research. I recommended that we look to parcel out funding to long-term prime contractors. For example, a pharmaceutical company may win a contract to research liver cancer drugs for 12 years. The condition of getting the contract would be that all research findings would be posted on the web as soon as practical and all patents are placed in the public domain so anyone can use them.[1]
We would have lots of room to play around and still come out ahead. If all drugs were sold at free market prices, we would likely save close to $400 billion a year on prescription drugs (a bit less than half of the Defense Department budget). The industry currently spends bit more than $100 billion a year on research, so even if it took $150 billion to replace research that is patent-financed, we would still see massive savings.
Can We Debate the Patent Monopoly Financing System?
Of course, the extent to which direct funding could be an effective alternative to patent monopoly financing is a debatable point. There are also other possible mechanisms. For example, we could have a patent buyout system, where the government pays some sum for the rights to useful drugs, and then places the patents in the public domain so they can be produced as generics.
But the key point is that there are enormous problems with the system of patent monopoly financing. It is absurd that we use the power of the government to make life-saving drugs that would sell for hundreds of dollars in a free market, instead sell for tens or even hundreds of thousands of dollars. That is a cruel and inefficient system that invites corruption. We can do better.
[1] I describe this system in somewhat more detail in Rigged, chapter 5 (it’s free).
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Everyone recognizes that inflation has slowed sharply from its peak in the spring of 2022. The question often asked is whether the inflation rate has dropped to the Fed’s 2.0 percent target. This requires a bit more careful thinking than it has received.
Before directly addressing this issue, let me briefly deal with a slightly different point. Many people have called for raising the Fed’s inflation target to 3.0 percent or even 4.0 percent. I think these higher targets would be fine. For my part, I have never been a big fan of the 2.0 percent target.
In fact, I would be fine if the Fed just went back to saying that it was committed to price stability as an undefined concept. But I do have to say, if it sets a target, and then changes it any time it seems difficult to achieve, then the target doesn’t have much meaning. For this reason, in my view, if the Fed is going to change its target, it should be done after it has brought inflation down to the 2.0 percent target.
But I raise this issue, just to be clear that I am not talking about changing the target. Instead, I am asking about what a 2.0 percent inflation target means.
Chair Powell, and his predecessor Janet Yellen, were both explicit in saying that 2.0 percent is meant as an average inflation rate, not a ceiling. This meant that we would have periods below and above the 2.0 percent target.
In the years leading up to the pandemic, the inflation rate was consistently below the 2.0 percent target. In the decade from the 4th quarter of 2009 to the 4th quarter of 2019, the inflation rate in the core personal consumption expenditure deflator averaged 1.6 percent. While the Fed presumably would have liked to have seen somewhat more rapid inflation over this decade, the gap between the 2.0 percent target and the actual inflation rate was not viewed as some sort of crisis or major failing of Fed policy.
This matters in the current context, because it is entirely possible we will see the inflation rate drop to a pace close to 2.0 percent, but remain somewhat above this level. The question then is how the Fed should view an inflation rate of say, 2.5 percent?
Obviously, 2.5 percent is above 2.0 percent, but if we envision 2.0 percent as an average, and there is no reason to believe that the inflation rate will rise from 2.5 percent, then it is hard to see why the Fed should be any more concerned about an inflation rate is 0.5 percentage points above its target than it was in the last decade about an inflation rate that was at times 0.5 percentage points below its target.
Inflation can move unpredictably, as we have seen, and a 2.5 percent inflation rate means there is little room for a rise without the Fed having to be worried, but there seems little harm in waiting. After all, what is the logic in saying that the Fed should deliberately slow the economy early, to lessen the risk that it may have to slow the economy at some point in the future?
At this point, this discussion is hypothetical. Maybe the inflation rate won’t slow to the point where this issue arises. Alternatively, if we get enough good news on rent, and goods’ prices keep falling, maybe inflation will be below 2.0 percent. In any case, it is worth a little thinking now about what a 2.0 percent target means. Based on the statements of the last two Fed chairs, it should not mean that inflation actually has to fall below 2.0 percent.
Everyone recognizes that inflation has slowed sharply from its peak in the spring of 2022. The question often asked is whether the inflation rate has dropped to the Fed’s 2.0 percent target. This requires a bit more careful thinking than it has received.
Before directly addressing this issue, let me briefly deal with a slightly different point. Many people have called for raising the Fed’s inflation target to 3.0 percent or even 4.0 percent. I think these higher targets would be fine. For my part, I have never been a big fan of the 2.0 percent target.
In fact, I would be fine if the Fed just went back to saying that it was committed to price stability as an undefined concept. But I do have to say, if it sets a target, and then changes it any time it seems difficult to achieve, then the target doesn’t have much meaning. For this reason, in my view, if the Fed is going to change its target, it should be done after it has brought inflation down to the 2.0 percent target.
But I raise this issue, just to be clear that I am not talking about changing the target. Instead, I am asking about what a 2.0 percent inflation target means.
Chair Powell, and his predecessor Janet Yellen, were both explicit in saying that 2.0 percent is meant as an average inflation rate, not a ceiling. This meant that we would have periods below and above the 2.0 percent target.
In the years leading up to the pandemic, the inflation rate was consistently below the 2.0 percent target. In the decade from the 4th quarter of 2009 to the 4th quarter of 2019, the inflation rate in the core personal consumption expenditure deflator averaged 1.6 percent. While the Fed presumably would have liked to have seen somewhat more rapid inflation over this decade, the gap between the 2.0 percent target and the actual inflation rate was not viewed as some sort of crisis or major failing of Fed policy.
This matters in the current context, because it is entirely possible we will see the inflation rate drop to a pace close to 2.0 percent, but remain somewhat above this level. The question then is how the Fed should view an inflation rate of say, 2.5 percent?
Obviously, 2.5 percent is above 2.0 percent, but if we envision 2.0 percent as an average, and there is no reason to believe that the inflation rate will rise from 2.5 percent, then it is hard to see why the Fed should be any more concerned about an inflation rate is 0.5 percentage points above its target than it was in the last decade about an inflation rate that was at times 0.5 percentage points below its target.
Inflation can move unpredictably, as we have seen, and a 2.5 percent inflation rate means there is little room for a rise without the Fed having to be worried, but there seems little harm in waiting. After all, what is the logic in saying that the Fed should deliberately slow the economy early, to lessen the risk that it may have to slow the economy at some point in the future?
At this point, this discussion is hypothetical. Maybe the inflation rate won’t slow to the point where this issue arises. Alternatively, if we get enough good news on rent, and goods’ prices keep falling, maybe inflation will be below 2.0 percent. In any case, it is worth a little thinking now about what a 2.0 percent target means. Based on the statements of the last two Fed chairs, it should not mean that inflation actually has to fall below 2.0 percent.
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• Health and Social ProgramsLos Programas Sociales y de SaludHealthcareSocial SecurityUnited StatesEE. UU.
For the 43,578th time, the Washington Post called for cuts to Social Security and Medicare. While the paper rejects Republican efforts to use the debt-ceiling hostage-taking route, it tells readers:
Yet the discussion [about the programs’ finances] needs to happen sometime, and sooner rather than later. These entitlements — which already account for about a third of federal spending — remain on unsustainable trajectories, and protecting them for future generations is too important to keep reform off the table indefinitely.
I’ll make a few quick points here. First, as Social Security is now financed, through a payroll tax, there is a problem. The Social Security trust fund is projected to be unable to pay full benefits in a bit more than a decade.
But it is important to note that this is primarily an accounting issue. We have already seen most of the rise in benefits associated with the retirement of the baby boom generation. There will be further increases in costs, but we’ve seen roughly two-thirds of the projected rise already, which has not devastated the economy.
The second point is that the Washington Post editorial board is apparently unable to get access to current economic debates, being isolated in downtown Washington, DC. Contrary to what had been the conventional wisdom two or three decades ago, the problem with an aging population is not too much demand, but rather too little.
With a stagnant or declining labor force, companies invest less. This puts a drag on demand. The result is a story like what we have seen in Japan, with an economy with low-interest rates and low inflation coupled with weak growth. (Some guy named Larry Summers talked about this a few years ago in a piece on “secular stagnation.”)
While some deficit hawks make a big deal about Japan’s debt as a horror story that could face the U.S. in the future, the interest burden on this debt comes to roughly 0.3 percent of Japan’s GDP. That compares to a burden of 1.7 percent in the United States at present. Our burden was around 3.5 percent in the 1990s, which by the way was a decade of strong growth and rising living standards.
The other bizarre aspect of the Post’s editorial is that it indicates zero knowledge of the Medicare program. It calls for raising the age for Medicare eligibility to 67 from 65.
As people who follow policy have long known, this would have little effect on the budget, since it would raise the amount spent on providing insurance in the ACA exchanges. It could also end up increasing health care costs in the country overall. Medicare is far more efficient than private sector insurers, so forcing people to get insurance through the private sector would likely mean higher healthcare expenses for the country as a whole.
The other part of the story is that the Washington Post’s editorial writers apparently can’t be bothered to look at the Medicare Trustees’ reports. The program’s projected costs have actually plummeted in the last 15 years.
If we go back to the 2009 report, the program was projected to face a shortfall of 1.2 percent of GDP in 2030 and 2.33 percent of GDP in 2050. (That would be $300 billion and $600 billion in today’s economy.) In the most recent Trustees report the projected shortfall for 2030 is 0.21 percent of GDP and for 2050 it’s 0.41 percent of GDP.
This is a huge improvement. It is likely in part due to reforms made with the Affordable Care Act, as well as other changes in the healthcare system. It seems likely that the projections will improve further with the 2023 report, as healthcare spending has actually been falling as a share of GDP since the pandemic.
In any case, much has been done to improve the program’s finances in contrast to what is implied in the Post’s editorial. The key is reducing the costs of our healthcare system as a whole. This means less money going to drug companies, medical equipment suppliers, insurance companies, doctors, and others in the industry. Apparently, the Post does not want to have that conversation, it is more interested in cutting benefits for retirees.
For the 43,578th time, the Washington Post called for cuts to Social Security and Medicare. While the paper rejects Republican efforts to use the debt-ceiling hostage-taking route, it tells readers:
Yet the discussion [about the programs’ finances] needs to happen sometime, and sooner rather than later. These entitlements — which already account for about a third of federal spending — remain on unsustainable trajectories, and protecting them for future generations is too important to keep reform off the table indefinitely.
I’ll make a few quick points here. First, as Social Security is now financed, through a payroll tax, there is a problem. The Social Security trust fund is projected to be unable to pay full benefits in a bit more than a decade.
But it is important to note that this is primarily an accounting issue. We have already seen most of the rise in benefits associated with the retirement of the baby boom generation. There will be further increases in costs, but we’ve seen roughly two-thirds of the projected rise already, which has not devastated the economy.
The second point is that the Washington Post editorial board is apparently unable to get access to current economic debates, being isolated in downtown Washington, DC. Contrary to what had been the conventional wisdom two or three decades ago, the problem with an aging population is not too much demand, but rather too little.
With a stagnant or declining labor force, companies invest less. This puts a drag on demand. The result is a story like what we have seen in Japan, with an economy with low-interest rates and low inflation coupled with weak growth. (Some guy named Larry Summers talked about this a few years ago in a piece on “secular stagnation.”)
While some deficit hawks make a big deal about Japan’s debt as a horror story that could face the U.S. in the future, the interest burden on this debt comes to roughly 0.3 percent of Japan’s GDP. That compares to a burden of 1.7 percent in the United States at present. Our burden was around 3.5 percent in the 1990s, which by the way was a decade of strong growth and rising living standards.
The other bizarre aspect of the Post’s editorial is that it indicates zero knowledge of the Medicare program. It calls for raising the age for Medicare eligibility to 67 from 65.
As people who follow policy have long known, this would have little effect on the budget, since it would raise the amount spent on providing insurance in the ACA exchanges. It could also end up increasing health care costs in the country overall. Medicare is far more efficient than private sector insurers, so forcing people to get insurance through the private sector would likely mean higher healthcare expenses for the country as a whole.
The other part of the story is that the Washington Post’s editorial writers apparently can’t be bothered to look at the Medicare Trustees’ reports. The program’s projected costs have actually plummeted in the last 15 years.
If we go back to the 2009 report, the program was projected to face a shortfall of 1.2 percent of GDP in 2030 and 2.33 percent of GDP in 2050. (That would be $300 billion and $600 billion in today’s economy.) In the most recent Trustees report the projected shortfall for 2030 is 0.21 percent of GDP and for 2050 it’s 0.41 percent of GDP.
This is a huge improvement. It is likely in part due to reforms made with the Affordable Care Act, as well as other changes in the healthcare system. It seems likely that the projections will improve further with the 2023 report, as healthcare spending has actually been falling as a share of GDP since the pandemic.
In any case, much has been done to improve the program’s finances in contrast to what is implied in the Post’s editorial. The key is reducing the costs of our healthcare system as a whole. This means less money going to drug companies, medical equipment suppliers, insurance companies, doctors, and others in the industry. Apparently, the Post does not want to have that conversation, it is more interested in cutting benefits for retirees.
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In the last year or so there have been many people who complained about China’s “vaccine nationalism.” This generally meant the country refused to approve the U.S. mRNA vaccines. The claim was that our mRNA vaccines were far superior to China’s old-fashioned dead virus vaccines. The argument went that the country needed to maintain its zero Covid policy, otherwise, the pandemic would devastate its unprotected population.
Well, we have now gotten the opportunity to test that claim. There is little doubt that the abrupt ending of pandemic restrictions led to much death and suffering in China. The government is not being open about the pandemic toll, but even the high-end estimates put the number of deaths at around 1 million.
That is a terrible number of lives lost, but the official count in the U.S. is over 1.1 million deaths. The number of Covid-related excess deaths that were not recorded would push this figure at least 200,000 higher. With four times the population, if China were to be similarly hard-hit it would be seeing well over 5 million deaths.
The current omicron strain is less fatal than the original alpha and delta strains, but plenty of people, including vaccinated people, have died from the omicron strain. Clearly the Chinese vaccines have done a reasonably job protecting China’s population.
We didn’t need this gigantic test to know that China’s vaccines were effective. We actually had some good data from studies that compared the effectiveness of China’s vaccines with the mRNA vaccines. While one study found that the Chinese vaccines were somewhat less effective, they still would prevent the overwhelming majority of the population from getting seriously ill from the disease. The other study found that with a booster shot, one of the Chinese vaccines was actually trivially more effective in preventing death in older people.
The major issue with China was not that it lacked an effective vaccine, its biggest problem in coping with the opening of the country was its failure to get much of its elderly population fully vaccinated and boosted. It’s not clear that President Xi gave a damn about the advice he was getting from our elite policy types, but their complaint that vaccine nationalism was keeping him from buying our mRNA vaccines was nonsense.
If they wanted to give useful advice to Xi, they would have harped on his failure to get China’s elderly population fully vaccinated. This is something that could have in principle been remedied fairly quickly. The idea of quickly shipping over billions of doses of Pfizer or Moderna’s vaccines was the sort of thing that would be laughed at anywhere other than the pages of the Washington Post.
Furthermore, the obsession with mRNA vaccines is incredibly silly. There are a number of non-mRNA vaccines that have been widely administered to billions of people around the world, providing protection that is comparable to the mRNA vaccines. Most notable in this category is the Oxford-AstraZeneca vaccine, which was widely used in Europe. Our elite policy types have not felt the need to denounce European countries for vaccine nationalism for their failure to ensure that their populations received a mRNA vaccine.
The fact is that we have done a horrible job dealing with the pandemic. Our policy was always more focused on making Moderna billionaires than protecting people here and around the world from the pandemic. If saving lives had been the focus of policy we would have worked together with researchers around the world (including China), pooling technology and allowing anyone anywhere in the world to produce any vaccines that were determined to be effective. Not only would more rapid dispersion of vaccines, along with tests and treatments, have saved lives in developing countries, by slowing the spread it may have prevented the development of new strains of the pandemic that led to massive waves of infections here.
And, just to be clear, this is not a question of relying on the market rather than government. In spite of what we hear from the policy types who dominate public debate, government-granted patent monopolies, and related forms of intellectual property, are not the free market. These are policies that we have chosen for promoting innovation, they do not amount to leaving things to the market, even if their beneficiaries would like us to believe otherwise.
In the last year or so there have been many people who complained about China’s “vaccine nationalism.” This generally meant the country refused to approve the U.S. mRNA vaccines. The claim was that our mRNA vaccines were far superior to China’s old-fashioned dead virus vaccines. The argument went that the country needed to maintain its zero Covid policy, otherwise, the pandemic would devastate its unprotected population.
Well, we have now gotten the opportunity to test that claim. There is little doubt that the abrupt ending of pandemic restrictions led to much death and suffering in China. The government is not being open about the pandemic toll, but even the high-end estimates put the number of deaths at around 1 million.
That is a terrible number of lives lost, but the official count in the U.S. is over 1.1 million deaths. The number of Covid-related excess deaths that were not recorded would push this figure at least 200,000 higher. With four times the population, if China were to be similarly hard-hit it would be seeing well over 5 million deaths.
The current omicron strain is less fatal than the original alpha and delta strains, but plenty of people, including vaccinated people, have died from the omicron strain. Clearly the Chinese vaccines have done a reasonably job protecting China’s population.
We didn’t need this gigantic test to know that China’s vaccines were effective. We actually had some good data from studies that compared the effectiveness of China’s vaccines with the mRNA vaccines. While one study found that the Chinese vaccines were somewhat less effective, they still would prevent the overwhelming majority of the population from getting seriously ill from the disease. The other study found that with a booster shot, one of the Chinese vaccines was actually trivially more effective in preventing death in older people.
The major issue with China was not that it lacked an effective vaccine, its biggest problem in coping with the opening of the country was its failure to get much of its elderly population fully vaccinated and boosted. It’s not clear that President Xi gave a damn about the advice he was getting from our elite policy types, but their complaint that vaccine nationalism was keeping him from buying our mRNA vaccines was nonsense.
If they wanted to give useful advice to Xi, they would have harped on his failure to get China’s elderly population fully vaccinated. This is something that could have in principle been remedied fairly quickly. The idea of quickly shipping over billions of doses of Pfizer or Moderna’s vaccines was the sort of thing that would be laughed at anywhere other than the pages of the Washington Post.
Furthermore, the obsession with mRNA vaccines is incredibly silly. There are a number of non-mRNA vaccines that have been widely administered to billions of people around the world, providing protection that is comparable to the mRNA vaccines. Most notable in this category is the Oxford-AstraZeneca vaccine, which was widely used in Europe. Our elite policy types have not felt the need to denounce European countries for vaccine nationalism for their failure to ensure that their populations received a mRNA vaccine.
The fact is that we have done a horrible job dealing with the pandemic. Our policy was always more focused on making Moderna billionaires than protecting people here and around the world from the pandemic. If saving lives had been the focus of policy we would have worked together with researchers around the world (including China), pooling technology and allowing anyone anywhere in the world to produce any vaccines that were determined to be effective. Not only would more rapid dispersion of vaccines, along with tests and treatments, have saved lives in developing countries, by slowing the spread it may have prevented the development of new strains of the pandemic that led to massive waves of infections here.
And, just to be clear, this is not a question of relying on the market rather than government. In spite of what we hear from the policy types who dominate public debate, government-granted patent monopolies, and related forms of intellectual property, are not the free market. These are policies that we have chosen for promoting innovation, they do not amount to leaving things to the market, even if their beneficiaries would like us to believe otherwise.
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