Beat the Press

Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

Since I came to Washington in 1992, I have been working alongside friends in the policy community, labor movement, and community organizations in fighting against a series of trade pacts. NAFTA was the immediate issue in 1992, but a couple of years later we had the Uruguay Round of the GATT that created the WTO. At the end of the Clinton administration, we had China’s admission to the WTO and then various other smaller pacts.

Those of us who opposed these deals (which were not really about free trade), argued that they would put downward pressure on the wages of manufacturing workers, by putting these workers in direct competition with low-paid workers in the developing world. This mattered in a big way because manufacturing had historically been a source of comparatively good-paying jobs for workers without college degrees. Therefore, using trade to depress the wages of manufacturing workers would lead to downward pressure on the pay of non-college educated workers more generally, thereby increasing inequality.

We also raised other objections, most notably that the stronger and longer patent and copyright monopolies (the opposite of free trade) in these pacts would raise the price of prescription drugs and other items subject to these protections. The most recent deals, like the Trans-Pacific Partnership, also included rules that locked in the current regulatory structure of the Internet which, for example, obstruct efforts to regulate Facebook and Google.

Of course, these deals did in fact lower the pay of manufacturing workers, as millions of manufacturing jobs were lost due to trade following the opening to China. In the last decade we have gotten an acknowledgement from many in the economics profession that trade did have a large impact on the manufacturing economy and the regions that depended on these jobs. This was due in large part to the work of M.I.T. labor economist, David Autor and his colleagues.    

While it was great to see Autor’s work and the impact it has had on the policy debate, there was nothing really surprising about his findings. It shouldn’t really be surprising that when workers are subject to competition from workers in other countries who get much lower pay, their pay drops. (Just ask doctors how they feel about opening the door to more foreign-trained doctors.) This was even a well-established result in economic theory, with a key article co-authored by no less than Paul Samuelson, the first American winner of the Nobel Prize in economics.

Anyhow, the point is that we had a trade policy that was really bad news for large segments of the country’s population, yet it managed to get overwhelming support in the policy community. Leading news outlets overwhelming featured both opinion and news pieces that favored these trade pacts. Opponents of these pacts were treated as ignorant know-nothings and/or tools of special interest groups that might lose from these deals.

The news outlets were reflecting the consensus within intellectual circles. My friends arguing against these trade deals were largely treated with contempt. New York Times columnist Thomas Friedman reflected the elite attitude perfectly when he said on a talk show:

“I was speaking out in Minnesota — my hometown, in fact — and a guy stood up in the audience, said, ‘Mr. Friedman, is there any free trade agreement you’d oppose?’ I said, ‘No, absolutely not.’ I said, ‘You know what, sir? I wrote a column supporting the CAFTA, the Caribbean Free Trade initiative. I didn’t even know what was in it. I just knew two words: free trade.’”

Friedman may have been more explicit in his views than most, but there can be little doubt that his comments reflect elite opinion. He has been a columnist at the New York Times for more than two decades, is a regular commentator on CNN, and his books consistently make the best seller list. Whatever one thinks of the quality of his work, Friedman is very much at the center of establishment thinking on the issues where he voices an opinion.

The point was probably best stated by Meg Greenfield, who was the Washington Post’s editorial page editor during the NAFTA debate. Responding to complaints that the paper’s opinion pages had been entirely one-sided in supporting NAFTA, she said:

“On this rare occasion when columnists of the left, right and middle are all in agreement . . . I don’t believe it is right to create an artificial balance where none exists.”

In short, intellectual types were overwhelmingly on board with the trade policy of the last three decades. This mattered because it created a political atmosphere in which it was possible to override the groups that would lose from these trade deals, in this case, the majority of the country’s workers as well as some domestic manufacturers who were devastated by foreign competition.

It is interesting that it was possible to get this sort of elite consensus around U.S. trade agreements, both since the policy was obviously disadvantageous to a large group of people and the basic argument was wrong. The idea that increasing trade along the lines prescribed by these deals would lead to large economic gains without substantial costs to some groups was absurd on its face, but our elites were totally prepared to embrace this line.

 

Free Taxes

When progressives propose various policies ranging from Medicare for All (M4A) or financial transactions taxes (FTT), a standard response from policy types is that these proposals might be good in principle, but the power of various interest groups (e.g., the insurance industry or the financial industry) will make them impossible to get through Congress. To date, this assessment has largely proved correct.

Any progress in extending health care coverage has come largely with the cooperation of the insurance industry. They are making money selling policies in the health care exchanges created by the Affordable Care Act. Efforts to have a publicly run alternative, or simply opening up Medicare, were beaten back. Similarly, a FTT faces an enormous uphill battle because the revenue from the tax would come almost entirely out of the pockets of the financial industry. The fact that a powerful lobby stands opposed to these policies is generally taken as a basis for throwing up hands and acknowledging the impossibility of change, not a doubling down to rally the troops, as was the case with trade policy.

While both M4A and a FTT are policies that, to my view, would provide large benefits to the vast majority of people in the country, there are arguments against them (more with M4A than with FTTs) that can at least be a reasonable basis for caution. Let me throw out another policy where there is no other side: government preparation of tax returns.

The idea here is a simple one. Instead of having taxpayers struggle with their returns every year, the I.R.S. would fill out a return for them, based on the data it already has on file about the person’s income and family size. The form would be sent out each year for review. People could accept the information as correct and get whatever refund was indicated, or pay the additional taxes for which they were billed. Alternatively, they could contest the I.R.S. calculation by providing documentation that showing that it was incorrect.

Currently people pay over $27 billion a year to have their tax returns prepared, most of which could be saved if the I.R.S. prepared tax returns for people.[1] This comes to about $200 per household, or around 0.13 percent of GDP. If the latter figure sounds trivial, it is very much in the ballpark for the projected gains from trade deals like NAFTA, CAFTA, and the TPP. (A 10-year figure would put the savings over $300 billion.) Also, the direct savings might be the smaller part of the benefit. People spend hours working over their returns and many have anxiety about filling them out incorrectly and the potential consequences. Almost all of this would instantly vanish if the I.R.S. did the forms for people.

The notion of the I.R.S. filling out returns should not sound far-fetched. Several European countries have been doing this for decades, and they are not that much smarter than we are. In short, we have an entirely doable reform that would save tens of billions of dollars a year and save people a huge amount of time and anxiety. So why doesn’t it happen?

The obvious reason is the political power of the tax preparation industry. NPR’s Planet Money had a fascinating piece a few years ago about an effort to have California’s revenue service prepare people’s state income tax for them under a program called “ReadyReturn.” The tax preparation industry fought the proposal with all guns blazing. They were undoubtedly concerned about not only losing the market for preparing California’s state taxes but also the precedent this could set for the country as a whole. As it turned out, in spite of widespread bipartisan support, the legislature ended up passing a very watered-down version which would only benefit people too poor to use tax services anyhow.

This story is not surprising for those of who have followed U.S. politics over the last four decades, but it does raise the free trade question. Why were our elites silent on this issue? Measures like ReadyReturn could help a huge swath of the population while only hurting a relatively small industry that provides no inherent benefit to society. Where were the denunciations of politicians who would sacrifice the greater good for this special interest?

It seems that sort of denunciation is only there for opponents of recent trade pacts. If we look for the differences between what is involved, the class aspect is front and center. The winners from our trade deals were overwhelmingly those in the top 10 percent of the income distribution. It’s good for doctors, lawyers, professors, and other workers who have college and advanced degrees to pay less for cars and clothes. The losers were directly the people who make these things and indirectly all the workers in the service sector who have to compete with workers displaced from manufacturing.

In short, from the standpoint of the top ten percent, the trade deals of the last three decades really were no-brainers.  That is why Thomas Friedman can proudly boast that when he sees the words “free trade,” he doesn’t have to read any further. He knows that he is looking at a pact that will benefit him and his friends. The opponents are to be treated with contempt or simply ignored.

That’s not a pretty story about the state of policy and academic debate in the United States, but it is important that we recognize reality. The class bias in these debates are immense. If we ever hope to counteract them, acknowledging them is the first step.  

[1] This can be found in the National Income and Product Accounts, Table 2.4.5U, Line 297. (I used the 2019 number since 2020 is likely atypical due to the pandemic.)

Since I came to Washington in 1992, I have been working alongside friends in the policy community, labor movement, and community organizations in fighting against a series of trade pacts. NAFTA was the immediate issue in 1992, but a couple of years later we had the Uruguay Round of the GATT that created the WTO. At the end of the Clinton administration, we had China’s admission to the WTO and then various other smaller pacts.

Those of us who opposed these deals (which were not really about free trade), argued that they would put downward pressure on the wages of manufacturing workers, by putting these workers in direct competition with low-paid workers in the developing world. This mattered in a big way because manufacturing had historically been a source of comparatively good-paying jobs for workers without college degrees. Therefore, using trade to depress the wages of manufacturing workers would lead to downward pressure on the pay of non-college educated workers more generally, thereby increasing inequality.

We also raised other objections, most notably that the stronger and longer patent and copyright monopolies (the opposite of free trade) in these pacts would raise the price of prescription drugs and other items subject to these protections. The most recent deals, like the Trans-Pacific Partnership, also included rules that locked in the current regulatory structure of the Internet which, for example, obstruct efforts to regulate Facebook and Google.

Of course, these deals did in fact lower the pay of manufacturing workers, as millions of manufacturing jobs were lost due to trade following the opening to China. In the last decade we have gotten an acknowledgement from many in the economics profession that trade did have a large impact on the manufacturing economy and the regions that depended on these jobs. This was due in large part to the work of M.I.T. labor economist, David Autor and his colleagues.    

While it was great to see Autor’s work and the impact it has had on the policy debate, there was nothing really surprising about his findings. It shouldn’t really be surprising that when workers are subject to competition from workers in other countries who get much lower pay, their pay drops. (Just ask doctors how they feel about opening the door to more foreign-trained doctors.) This was even a well-established result in economic theory, with a key article co-authored by no less than Paul Samuelson, the first American winner of the Nobel Prize in economics.

Anyhow, the point is that we had a trade policy that was really bad news for large segments of the country’s population, yet it managed to get overwhelming support in the policy community. Leading news outlets overwhelming featured both opinion and news pieces that favored these trade pacts. Opponents of these pacts were treated as ignorant know-nothings and/or tools of special interest groups that might lose from these deals.

The news outlets were reflecting the consensus within intellectual circles. My friends arguing against these trade deals were largely treated with contempt. New York Times columnist Thomas Friedman reflected the elite attitude perfectly when he said on a talk show:

“I was speaking out in Minnesota — my hometown, in fact — and a guy stood up in the audience, said, ‘Mr. Friedman, is there any free trade agreement you’d oppose?’ I said, ‘No, absolutely not.’ I said, ‘You know what, sir? I wrote a column supporting the CAFTA, the Caribbean Free Trade initiative. I didn’t even know what was in it. I just knew two words: free trade.’”

Friedman may have been more explicit in his views than most, but there can be little doubt that his comments reflect elite opinion. He has been a columnist at the New York Times for more than two decades, is a regular commentator on CNN, and his books consistently make the best seller list. Whatever one thinks of the quality of his work, Friedman is very much at the center of establishment thinking on the issues where he voices an opinion.

The point was probably best stated by Meg Greenfield, who was the Washington Post’s editorial page editor during the NAFTA debate. Responding to complaints that the paper’s opinion pages had been entirely one-sided in supporting NAFTA, she said:

“On this rare occasion when columnists of the left, right and middle are all in agreement . . . I don’t believe it is right to create an artificial balance where none exists.”

In short, intellectual types were overwhelmingly on board with the trade policy of the last three decades. This mattered because it created a political atmosphere in which it was possible to override the groups that would lose from these trade deals, in this case, the majority of the country’s workers as well as some domestic manufacturers who were devastated by foreign competition.

It is interesting that it was possible to get this sort of elite consensus around U.S. trade agreements, both since the policy was obviously disadvantageous to a large group of people and the basic argument was wrong. The idea that increasing trade along the lines prescribed by these deals would lead to large economic gains without substantial costs to some groups was absurd on its face, but our elites were totally prepared to embrace this line.

 

Free Taxes

When progressives propose various policies ranging from Medicare for All (M4A) or financial transactions taxes (FTT), a standard response from policy types is that these proposals might be good in principle, but the power of various interest groups (e.g., the insurance industry or the financial industry) will make them impossible to get through Congress. To date, this assessment has largely proved correct.

Any progress in extending health care coverage has come largely with the cooperation of the insurance industry. They are making money selling policies in the health care exchanges created by the Affordable Care Act. Efforts to have a publicly run alternative, or simply opening up Medicare, were beaten back. Similarly, a FTT faces an enormous uphill battle because the revenue from the tax would come almost entirely out of the pockets of the financial industry. The fact that a powerful lobby stands opposed to these policies is generally taken as a basis for throwing up hands and acknowledging the impossibility of change, not a doubling down to rally the troops, as was the case with trade policy.

While both M4A and a FTT are policies that, to my view, would provide large benefits to the vast majority of people in the country, there are arguments against them (more with M4A than with FTTs) that can at least be a reasonable basis for caution. Let me throw out another policy where there is no other side: government preparation of tax returns.

The idea here is a simple one. Instead of having taxpayers struggle with their returns every year, the I.R.S. would fill out a return for them, based on the data it already has on file about the person’s income and family size. The form would be sent out each year for review. People could accept the information as correct and get whatever refund was indicated, or pay the additional taxes for which they were billed. Alternatively, they could contest the I.R.S. calculation by providing documentation that showing that it was incorrect.

Currently people pay over $27 billion a year to have their tax returns prepared, most of which could be saved if the I.R.S. prepared tax returns for people.[1] This comes to about $200 per household, or around 0.13 percent of GDP. If the latter figure sounds trivial, it is very much in the ballpark for the projected gains from trade deals like NAFTA, CAFTA, and the TPP. (A 10-year figure would put the savings over $300 billion.) Also, the direct savings might be the smaller part of the benefit. People spend hours working over their returns and many have anxiety about filling them out incorrectly and the potential consequences. Almost all of this would instantly vanish if the I.R.S. did the forms for people.

The notion of the I.R.S. filling out returns should not sound far-fetched. Several European countries have been doing this for decades, and they are not that much smarter than we are. In short, we have an entirely doable reform that would save tens of billions of dollars a year and save people a huge amount of time and anxiety. So why doesn’t it happen?

The obvious reason is the political power of the tax preparation industry. NPR’s Planet Money had a fascinating piece a few years ago about an effort to have California’s revenue service prepare people’s state income tax for them under a program called “ReadyReturn.” The tax preparation industry fought the proposal with all guns blazing. They were undoubtedly concerned about not only losing the market for preparing California’s state taxes but also the precedent this could set for the country as a whole. As it turned out, in spite of widespread bipartisan support, the legislature ended up passing a very watered-down version which would only benefit people too poor to use tax services anyhow.

This story is not surprising for those of who have followed U.S. politics over the last four decades, but it does raise the free trade question. Why were our elites silent on this issue? Measures like ReadyReturn could help a huge swath of the population while only hurting a relatively small industry that provides no inherent benefit to society. Where were the denunciations of politicians who would sacrifice the greater good for this special interest?

It seems that sort of denunciation is only there for opponents of recent trade pacts. If we look for the differences between what is involved, the class aspect is front and center. The winners from our trade deals were overwhelmingly those in the top 10 percent of the income distribution. It’s good for doctors, lawyers, professors, and other workers who have college and advanced degrees to pay less for cars and clothes. The losers were directly the people who make these things and indirectly all the workers in the service sector who have to compete with workers displaced from manufacturing.

In short, from the standpoint of the top ten percent, the trade deals of the last three decades really were no-brainers.  That is why Thomas Friedman can proudly boast that when he sees the words “free trade,” he doesn’t have to read any further. He knows that he is looking at a pact that will benefit him and his friends. The opponents are to be treated with contempt or simply ignored.

That’s not a pretty story about the state of policy and academic debate in the United States, but it is important that we recognize reality. The class bias in these debates are immense. If we ever hope to counteract them, acknowledging them is the first step.  

[1] This can be found in the National Income and Product Accounts, Table 2.4.5U, Line 297. (I used the 2019 number since 2020 is likely atypical due to the pandemic.)

It is often said that intellectuals have a hard time dealing with new ideas. Unfortunately, for purposes of public debate, open-source government funding of drug development is a new idea, and people in policy positions seem to be having a very hard time understanding it. So, I will try to write this post in a way that even a policy wonk can figure it out.

The basic idea of government-funded research should not be hard to grasp since the government already funds a large share of biomedical research. The National Institutes of Health gets over $40 billion a year in federal funding, with the Biomedical Advanced Research and Development Agency (BARDA) and other government agencies getting several billion more. This puts the government’s total spending in the $45 to $50 billion range, compared to a bit over $90 billion from the industry.[1] So the idea that the government would fund research really should not be that strange.

Most of the public funding does go to more basic research, but there are plenty of instances where the government has actually funded the development of new drugs and also done clinical testing. But under the current system, most of the later stage funding does come from the industry and is funded through patent monopoly pricing. Relying on open-source government-funded research for later-stage development and testing would be a major change.

 

The Outlines of a System of Government-Funded Research

To my view, the best way for the government to support the development of new drugs is through long-term contracts (10-12 years), which would be awarded through competitive bids for research in specific areas, like cancer or heart disease. The plan would be that the contracts would be relatively large, with the idea that the winners would be comparable to prime contractors for the military. (I describe this system in somewhat more detail in chapter 5 of Rigged [it’s free].)

Major military contractors, like Lockheed or Boeing, typically contract out to many smaller companies in specific areas. This is a good model. Most of the major innovations in the development of new drugs have come from start-ups, who are often bought out by major pharmaceutical companies like Pfizer or Merck. The winners of prime contracts under this system would be foolish not to look to award contracts to innovative start-ups, to ensure that they have something to show for their work.

One condition that would apply to both prime contractors and any subcontractors is that all research findings would have to be fully open, meaning that they are posted on the Internet as soon as practical. This would apply both to pre-clinical research and the results of clinical trials. The posting of trial results would mean that researchers around the world would be able to independently analyze the data and assess the effectiveness and risks of drugs and vaccines for different populations.

I have had many people ask me what would be the incentive for the companies that win contracts to actually innovate as opposed to just spinning their wheels. Since they presumably would want to renew their contracts when they expire, that should provide substantial incentive for them to have something to show.

Also, the researchers would presumably want to actually do something with their time rather than just looking to collect a paycheck. I have also suggested having a large pot of money (e.g. $200 million a year) to pay out as prizes, similar to a Nobel Prize. If a researcher, or group of researchers, have a major breakthrough that will radically improve the treatment of heart attack victims, why not give them $10 million? But this prize would be on top of their ordinary pay, not a replacement.

People have often raised the problem of political influence determining the awarding of contracts. There is always a risk of political interference, which of course arises under the current system as well. One advantage of this system is that the full public posting of results should at the least make blatantly political decisions difficult, if not impossible. If a company had received $30 billion to research lung cancer over a ten-year period and had nothing to show in terms of new drugs or major innovations, it would be hard to justify another long-term contract to the same company.    

All of the drugs developed through this system (the funding would include carrying new drugs through the FDA approval process) would be available as generics from the day they are approved. This would mean that new drugs that may sell for thousands of dollars, or even tens of thousands of dollars, under the patent monopoly system, are likely to sell for ten or twenty dollars. Drugs are rarely expensive to manufacture and distribute, under a system of government-financed open-source research they would also be cheap to buy.

 

Government Funding in the Pandemic

The pandemic provided a great opportunity to experiment with open-source government funding. While we did the government funding part, with the U.S. government alone putting up $10 billion through Operation Warp Speed, we did not get the open-source part.  The government effectively paid for much or all of the research, but still gave private companies patent monopolies.

Ideally, we would have negotiated an international pact, where all countries would contribute to research, based on their size and relative wealth, and all findings would be fully open to researchers around the world. I’ve heard people object that it’s difficult to negotiate these sorts of deals, and we needed to act in a hurry. Some people have also insisted that China and Russia never would have agreed to such a deal.

On the first point, it really should not have taken very long to negotiate a pact. We are throwing money around all over the place. No one thinks that we are getting things exactly right. Some industries and individuals are getting compensated in ways that they probably don’t need/deserve and undoubtedly some people are being left behind. If the United States or some other country chips in 20 percent too much or too little, it would be chump change relative to the costs of the pandemics and various rescue packages being put forward.

As far as including China and Russia in a deal, I have no idea whether they would be anxious to join if given the opportunity. They have joined in many other international agreements, so there would be no prima facie reason to assume that they would not want to be parties to this sort of arrangement. We also can’t know for certain that they could be counted on to contribute their agreed-upon share and to make results fully open, but as a practical matter, both countries have been reasonably good about adhering to other agreements to which they are a party.

It would have been enormously advantageous if China and Russia would have been included in a pact with open-source research. Ideally, if all the successful vaccines were fully open, including their production processes, manufacturers anywhere in the world that had the ability to produce these vaccines could have done so.

And, they could have begun to ramp up production even before the vaccines had been determined to be safe and effective. The cost of manufacturing 1 billion vaccines that turned out not to be approved is trivial, in both lives and money, compared to the cost of waiting to have 1 billion vaccines become available so that they can be administered.

While we can never know how much quicker we could have learned about the effectiveness of vaccines, and arranged their distribution, in an open-source world, we can have some idea just from what we have learned over the last several months.

For example, Pfizer discovered that it is possible to get six shots out of a standard shipping vial, not the five they originally believed. This means getting 20 percent more vaccines. If this knowledge was available sooner, it might have meant hundreds of thousands or even millions of additional vaccines.

There is also evidence, based on data from Israel, that the Pfizer vaccine is highly effective after just one shot. It is possible that if all the clinical trial data was fully public that this result could have been discovered sooner. This would have allowed countries to adopt a one-shot strategy with the second shot coming after most people had received their initial shot.

Pfizer also discovered that its vaccine can be kept in a normal freezer for up to two weeks, instead of requiring super-cold storage. If this was known sooner, it would have greatly facilitated the storage and distribution of the vaccine.

And, Pfizer reported last month that it had discovered a way to alter its production process to nearly double its output of vaccines. It’s hard to believe that if engineers all over the world were familiar with Pfizer’s production process, not one would have been able to realize this potential improvement more quickly.

We also got an interesting lesson about incentives with reports that Astra Zeneca cherry-picked the data it presented to the Food and Drug Administration (FDA) to gain approval of its vaccines. While Astra Zeneca denies the charge, this problem would not exist in an open-source world.

First, the company that developed a vaccine or drug would have no special incentive to see it approved if it was not safe and effective. While it would like to have something to show when a contract came up, the risk of having a drug approved that later turned out not to be safe or effective would likely far exceed any potential benefit.

More importantly, the clinical trials would not be under its control. The data from these trials would be fully public so that any researcher anywhere in the world could analyze it independently. If the FDA or some other regulatory agency misread the data and made the wrong call, it is virtually certain that independent researchers would be able to recognize the mistake and call public attention to it.

We would not have stories like Purdue Pharma misleading physicians about the addictiveness of its opioids. Under a system of open-source research, they would have neither the incentive nor the opportunity.

If People Act the Way Economic Theory Predicts, We Should Want Open-Source Research

Economists always want to look at the incentive structures that we create with our policies. While patent monopolies do create incentives to develop drugs and vaccines, they also create incentives to keep as much research as possible secret, so as not to benefit competitors. The huge markups allowed by patent monopolies also create an enormous incentive for drug companies to lie about the safety and effectiveness of their products.

Open-source, publicly funded, research radically alters the structure of incentives. The incentive is to try to have research results spread as widely and quickly as possible in the hope that others can build on them. And, there is no incentive or opportunity to push drugs that are unsafe or ineffective. This is a big deal.

[1] The figure on private R&D spending comes from the National Income and Product Account, Table 5.6.5, Line 9.

It is often said that intellectuals have a hard time dealing with new ideas. Unfortunately, for purposes of public debate, open-source government funding of drug development is a new idea, and people in policy positions seem to be having a very hard time understanding it. So, I will try to write this post in a way that even a policy wonk can figure it out.

The basic idea of government-funded research should not be hard to grasp since the government already funds a large share of biomedical research. The National Institutes of Health gets over $40 billion a year in federal funding, with the Biomedical Advanced Research and Development Agency (BARDA) and other government agencies getting several billion more. This puts the government’s total spending in the $45 to $50 billion range, compared to a bit over $90 billion from the industry.[1] So the idea that the government would fund research really should not be that strange.

Most of the public funding does go to more basic research, but there are plenty of instances where the government has actually funded the development of new drugs and also done clinical testing. But under the current system, most of the later stage funding does come from the industry and is funded through patent monopoly pricing. Relying on open-source government-funded research for later-stage development and testing would be a major change.

 

The Outlines of a System of Government-Funded Research

To my view, the best way for the government to support the development of new drugs is through long-term contracts (10-12 years), which would be awarded through competitive bids for research in specific areas, like cancer or heart disease. The plan would be that the contracts would be relatively large, with the idea that the winners would be comparable to prime contractors for the military. (I describe this system in somewhat more detail in chapter 5 of Rigged [it’s free].)

Major military contractors, like Lockheed or Boeing, typically contract out to many smaller companies in specific areas. This is a good model. Most of the major innovations in the development of new drugs have come from start-ups, who are often bought out by major pharmaceutical companies like Pfizer or Merck. The winners of prime contracts under this system would be foolish not to look to award contracts to innovative start-ups, to ensure that they have something to show for their work.

One condition that would apply to both prime contractors and any subcontractors is that all research findings would have to be fully open, meaning that they are posted on the Internet as soon as practical. This would apply both to pre-clinical research and the results of clinical trials. The posting of trial results would mean that researchers around the world would be able to independently analyze the data and assess the effectiveness and risks of drugs and vaccines for different populations.

I have had many people ask me what would be the incentive for the companies that win contracts to actually innovate as opposed to just spinning their wheels. Since they presumably would want to renew their contracts when they expire, that should provide substantial incentive for them to have something to show.

Also, the researchers would presumably want to actually do something with their time rather than just looking to collect a paycheck. I have also suggested having a large pot of money (e.g. $200 million a year) to pay out as prizes, similar to a Nobel Prize. If a researcher, or group of researchers, have a major breakthrough that will radically improve the treatment of heart attack victims, why not give them $10 million? But this prize would be on top of their ordinary pay, not a replacement.

People have often raised the problem of political influence determining the awarding of contracts. There is always a risk of political interference, which of course arises under the current system as well. One advantage of this system is that the full public posting of results should at the least make blatantly political decisions difficult, if not impossible. If a company had received $30 billion to research lung cancer over a ten-year period and had nothing to show in terms of new drugs or major innovations, it would be hard to justify another long-term contract to the same company.    

All of the drugs developed through this system (the funding would include carrying new drugs through the FDA approval process) would be available as generics from the day they are approved. This would mean that new drugs that may sell for thousands of dollars, or even tens of thousands of dollars, under the patent monopoly system, are likely to sell for ten or twenty dollars. Drugs are rarely expensive to manufacture and distribute, under a system of government-financed open-source research they would also be cheap to buy.

 

Government Funding in the Pandemic

The pandemic provided a great opportunity to experiment with open-source government funding. While we did the government funding part, with the U.S. government alone putting up $10 billion through Operation Warp Speed, we did not get the open-source part.  The government effectively paid for much or all of the research, but still gave private companies patent monopolies.

Ideally, we would have negotiated an international pact, where all countries would contribute to research, based on their size and relative wealth, and all findings would be fully open to researchers around the world. I’ve heard people object that it’s difficult to negotiate these sorts of deals, and we needed to act in a hurry. Some people have also insisted that China and Russia never would have agreed to such a deal.

On the first point, it really should not have taken very long to negotiate a pact. We are throwing money around all over the place. No one thinks that we are getting things exactly right. Some industries and individuals are getting compensated in ways that they probably don’t need/deserve and undoubtedly some people are being left behind. If the United States or some other country chips in 20 percent too much or too little, it would be chump change relative to the costs of the pandemics and various rescue packages being put forward.

As far as including China and Russia in a deal, I have no idea whether they would be anxious to join if given the opportunity. They have joined in many other international agreements, so there would be no prima facie reason to assume that they would not want to be parties to this sort of arrangement. We also can’t know for certain that they could be counted on to contribute their agreed-upon share and to make results fully open, but as a practical matter, both countries have been reasonably good about adhering to other agreements to which they are a party.

It would have been enormously advantageous if China and Russia would have been included in a pact with open-source research. Ideally, if all the successful vaccines were fully open, including their production processes, manufacturers anywhere in the world that had the ability to produce these vaccines could have done so.

And, they could have begun to ramp up production even before the vaccines had been determined to be safe and effective. The cost of manufacturing 1 billion vaccines that turned out not to be approved is trivial, in both lives and money, compared to the cost of waiting to have 1 billion vaccines become available so that they can be administered.

While we can never know how much quicker we could have learned about the effectiveness of vaccines, and arranged their distribution, in an open-source world, we can have some idea just from what we have learned over the last several months.

For example, Pfizer discovered that it is possible to get six shots out of a standard shipping vial, not the five they originally believed. This means getting 20 percent more vaccines. If this knowledge was available sooner, it might have meant hundreds of thousands or even millions of additional vaccines.

There is also evidence, based on data from Israel, that the Pfizer vaccine is highly effective after just one shot. It is possible that if all the clinical trial data was fully public that this result could have been discovered sooner. This would have allowed countries to adopt a one-shot strategy with the second shot coming after most people had received their initial shot.

Pfizer also discovered that its vaccine can be kept in a normal freezer for up to two weeks, instead of requiring super-cold storage. If this was known sooner, it would have greatly facilitated the storage and distribution of the vaccine.

And, Pfizer reported last month that it had discovered a way to alter its production process to nearly double its output of vaccines. It’s hard to believe that if engineers all over the world were familiar with Pfizer’s production process, not one would have been able to realize this potential improvement more quickly.

We also got an interesting lesson about incentives with reports that Astra Zeneca cherry-picked the data it presented to the Food and Drug Administration (FDA) to gain approval of its vaccines. While Astra Zeneca denies the charge, this problem would not exist in an open-source world.

First, the company that developed a vaccine or drug would have no special incentive to see it approved if it was not safe and effective. While it would like to have something to show when a contract came up, the risk of having a drug approved that later turned out not to be safe or effective would likely far exceed any potential benefit.

More importantly, the clinical trials would not be under its control. The data from these trials would be fully public so that any researcher anywhere in the world could analyze it independently. If the FDA or some other regulatory agency misread the data and made the wrong call, it is virtually certain that independent researchers would be able to recognize the mistake and call public attention to it.

We would not have stories like Purdue Pharma misleading physicians about the addictiveness of its opioids. Under a system of open-source research, they would have neither the incentive nor the opportunity.

If People Act the Way Economic Theory Predicts, We Should Want Open-Source Research

Economists always want to look at the incentive structures that we create with our policies. While patent monopolies do create incentives to develop drugs and vaccines, they also create incentives to keep as much research as possible secret, so as not to benefit competitors. The huge markups allowed by patent monopolies also create an enormous incentive for drug companies to lie about the safety and effectiveness of their products.

Open-source, publicly funded, research radically alters the structure of incentives. The incentive is to try to have research results spread as widely and quickly as possible in the hope that others can build on them. And, there is no incentive or opportunity to push drugs that are unsafe or ineffective. This is a big deal.

[1] The figure on private R&D spending comes from the National Income and Product Account, Table 5.6.5, Line 9.

More About Me, for Anyone Who Feels the Need

You can get the story here.

You can get the story here.

I keep asking this question because whining over the government debt looks to be a huge growth sector in the next year or two, or perhaps until Republicans retake the White House. I regularly ridicule debt whining, because, unlike its cousin, deficit whining, it has no basis in economic reality.

Before again showing why the debt is a meaningless number, let me contrast it with the budget deficit, which can be a real cause for concern. The way in which deficits can pose a problem is that a large deficit can push the economy beyond its ability to produce goods and services.

This is a textbook story that happens to be accurate. The point at which the economy is being pushed too far by a budget deficit is not easy to determine and it varies hugely over the course of the business cycle.

When the economy is in a severe slump, there is plenty of excess capacity and unemployed workers, and therefore little basis for concern that a deficit is creating more demand than the economy can supply. However, near the peak of a business cycle, when the unemployment rate is already low, a large budget deficit can create demand that the economy is unable to meet.

The consequences of excessive demand are hard to know at this point. One possible consequence is that the Federal Reserve Board decides to raise interest rates. This will reduce demand by reducing housing construction and to a lesser extent lowering public and private investment. It also is likely to raise the value of the dollar, which leads to a larger trade deficit, which will also lower demand.

But suppose the Fed doesn’t raise the rate. Fed Chair Jay Powell indicated that he plans to keep short-term rates near zero for the immediate future. In the old days, we would have thought that would create serious problems with inflation, but that is less clear now.

First, the economy is far more internationalized, which means that is easier for excess demand in the United States to simply spill over to increased demand for imports, rather than driving up domestic prices. This is pretty much the story that we see if a single state has very strong demand.

If Ohio were to have a booming economy, it would mostly translate into higher demand for a wide range of goods and services from neighboring states, not an inflationary spiral in Ohio. This is likely to be the case with any excess demand that results from large budget deficits here.

The other major difference between the economy of today and the economy of the 1970s, the last time we saw an inflationary spiral, is that unions are much weaker today. This means workers have far less bargaining power.

While this is a big part of the story of the growth of wage inequality over the last four decades, it does mean that we are less likely to see the sort of wage-price spiral we saw in the 1970s. If we do see a rise in prices due to excess demand, it is unlikely that workers today will be able to respond by demanding higher wages.  

For these reasons, whether or not the large budget deficits that we are now seeing will lead to problems with inflation is an open question. I have argued that it is worth pressing the economy to try to get back to full employment quickly, as well as do many of the positive things included in the American Recovery Act, such as increasing the child tax credit and enhancing the subsidies in the health care exchanges. But there is a real basis for concern about inflation.

 

The Debt Is Not a Measure of Anything

While deficits are potentially a problem, the debt is not, first and foremost because it doesn’t really measure anything. The debt whiners are fond of telling stories about how the debt is a burden on our children, or how the debt can lead to financial crisis and other bad things, but these claims are inventions, not economic realities.[1]

Interest that we pay on the debt can be a burden, but it is dwarfed by other factors like productivity growth. (The impact of ten years of even modest productivity growth swamps an increment to debt service that we pass onto to our kids from higher deficits today.) Furthermore, debt service burdens at present and the near-term future will almost certainly be much smaller than what we saw in the 1990s.

But there is another aspect to this story that our debt whiners desperately do not want anyone to talk about. Direct spending is only one way in which the government pays for things. We also pay for things, like coronavirus vaccines, by giving out patents or copyright monopolies.

These monopolies can be very costly. In the case of the coronavirus vaccines, they mean that we are paying roughly ten times as much for each vaccine as we would in a free market. Vaccines that would likely cost around $2 a shot instead cost us $20. And, they may cost us even more in future years if we need boosters after the pandemic is over.

These government-granted monopolies are effectively a form of government debt. Incredibly, I have literally never seen any of the debt whiners ever mention the hundreds of billions of dollars in rents paid out each year to drug companies, medical equipment suppliers, software companies, or other beneficiaries of these monopolies as part of the burden of the debt. This in spite of the fact that the rents from these monopolies are several times larger than the debt service that we pay out on the official debt.

But let’s flip the story over in the hope of teaching something to the debt whiners. Suppose that we looked to replace much or all of the debt that troubles them with new patent monopolies. Imagine that we sold off trillions of dollars worth of patent monopolies to pay off a large chunk of the debt.

If this sounds strange it is important to step back for a second and think of the logic of a patent or a copyright monopoly. While we ostensibly link the award of these monopolies to innovation or creative work, there is no necessary link.

At the point where the rents are being collected, a patent or copyright monopoly is simply a monopoly on a particular item. It doesn’t matter one iota whether the monopoly was awarded due to some brilliant innovation or whether it was awarded due to a payoff to a Trump friend or family member. The monopoly means that the holder gets to charge a price far above the free market price.

With this in mind, suppose the government decided to auction off monopoly selling rights to a number of goods and services. (We can even call them “patents” to make people feel better.) We surely could raise enough to pay off the national debt.

Just to take my favorite example, patent rents on prescription drugs will be over $400 billion this year. (I explain how I get this figure here.)  Patents have a limited lifespan, but let’s imagine the ones we auction off to continue in perpetuity. The current interest rate on thirty-year Treasury bonds is roughly 3 percent. This means that to generate the $400 billion in rents earned on prescription drugs, we would need $12 trillion in Treasury bonds.

Therefore, the claim to patent right on prescription drugs lasting in perpetuity should be worth roughly $12 trillion. If we had this auction and got $12 trillion, we could reduce our national debt by an amount equal to 60 percent of GDP. That should make the debt whiners very happy.

In fact, we can go further. I calculated that total patent rents in the economy come to over $1 trillion a year. If we auctioned off these rights (again being carried on in perpetuity) it should raise more than $30 trillion, more than enough to eliminate the national debt altogether.

And, we aren’t limited to just auctioning off patent rents on the items where companies currently get them. We can auction off monopoly rights on anything, on selling cars, computers, bread, haircuts, anything. We can raise vast amounts of money through this route and make the debt whiners very happy.

Of course, these rents do have real economic costs. They create large economic distortions (think of tariffs of many thousand percent) and they create perverse incentives. We see this with the patent rents we currently have. For example, pharmaceutical companies misled physicians about the addictiveness of the new generation of opioids to maximize their sales. As economic theory predicts, patent monopolies give drug companies incentives to push their products as widely as possible, even if it means misleading doctors and the public about their safety and effectiveness.

But the debt whiners only care about the debt issued by the national government, they don’t care at all about the burden of patent and copyright monopolies. So, we can answer their concerns simply by issuing enough of these monopolies to bring the debt down to a level that makes them happy.

 

The National Debt is a Meaningless Number

Perhaps some folks will read the prior section and decide that we need to auction off a large number of monopolies to reduce the national debt. The sane ones will instead recognize that the debt is a largely meaningless number. It can imply larger debt service burdens, and that can be a problem, but this is a very small part of the economic picture, especially compared to items like patent rents that get almost no attention at all from economists. What really matters is the underlying strength of the economy and society that we pass on to future generations.

I have no idea if the debt whiners understand this point and try to obfuscate reality, or are just confused. As the old saying goes, “economists are not very good at economics.”  But anyhow, the rest of the country need not take their debt whining seriously.  

[1] One famous instance of debt mongering turned out to be literally an invention. The claim promoted by Carmen Reinhart and Ken Rogoff, that growth slowed when the debt-to-GDP ratio crossed 90 percent, turned out to based on an Excel spreadsheet error.

I keep asking this question because whining over the government debt looks to be a huge growth sector in the next year or two, or perhaps until Republicans retake the White House. I regularly ridicule debt whining, because, unlike its cousin, deficit whining, it has no basis in economic reality.

Before again showing why the debt is a meaningless number, let me contrast it with the budget deficit, which can be a real cause for concern. The way in which deficits can pose a problem is that a large deficit can push the economy beyond its ability to produce goods and services.

This is a textbook story that happens to be accurate. The point at which the economy is being pushed too far by a budget deficit is not easy to determine and it varies hugely over the course of the business cycle.

When the economy is in a severe slump, there is plenty of excess capacity and unemployed workers, and therefore little basis for concern that a deficit is creating more demand than the economy can supply. However, near the peak of a business cycle, when the unemployment rate is already low, a large budget deficit can create demand that the economy is unable to meet.

The consequences of excessive demand are hard to know at this point. One possible consequence is that the Federal Reserve Board decides to raise interest rates. This will reduce demand by reducing housing construction and to a lesser extent lowering public and private investment. It also is likely to raise the value of the dollar, which leads to a larger trade deficit, which will also lower demand.

But suppose the Fed doesn’t raise the rate. Fed Chair Jay Powell indicated that he plans to keep short-term rates near zero for the immediate future. In the old days, we would have thought that would create serious problems with inflation, but that is less clear now.

First, the economy is far more internationalized, which means that is easier for excess demand in the United States to simply spill over to increased demand for imports, rather than driving up domestic prices. This is pretty much the story that we see if a single state has very strong demand.

If Ohio were to have a booming economy, it would mostly translate into higher demand for a wide range of goods and services from neighboring states, not an inflationary spiral in Ohio. This is likely to be the case with any excess demand that results from large budget deficits here.

The other major difference between the economy of today and the economy of the 1970s, the last time we saw an inflationary spiral, is that unions are much weaker today. This means workers have far less bargaining power.

While this is a big part of the story of the growth of wage inequality over the last four decades, it does mean that we are less likely to see the sort of wage-price spiral we saw in the 1970s. If we do see a rise in prices due to excess demand, it is unlikely that workers today will be able to respond by demanding higher wages.  

For these reasons, whether or not the large budget deficits that we are now seeing will lead to problems with inflation is an open question. I have argued that it is worth pressing the economy to try to get back to full employment quickly, as well as do many of the positive things included in the American Recovery Act, such as increasing the child tax credit and enhancing the subsidies in the health care exchanges. But there is a real basis for concern about inflation.

 

The Debt Is Not a Measure of Anything

While deficits are potentially a problem, the debt is not, first and foremost because it doesn’t really measure anything. The debt whiners are fond of telling stories about how the debt is a burden on our children, or how the debt can lead to financial crisis and other bad things, but these claims are inventions, not economic realities.[1]

Interest that we pay on the debt can be a burden, but it is dwarfed by other factors like productivity growth. (The impact of ten years of even modest productivity growth swamps an increment to debt service that we pass onto to our kids from higher deficits today.) Furthermore, debt service burdens at present and the near-term future will almost certainly be much smaller than what we saw in the 1990s.

But there is another aspect to this story that our debt whiners desperately do not want anyone to talk about. Direct spending is only one way in which the government pays for things. We also pay for things, like coronavirus vaccines, by giving out patents or copyright monopolies.

These monopolies can be very costly. In the case of the coronavirus vaccines, they mean that we are paying roughly ten times as much for each vaccine as we would in a free market. Vaccines that would likely cost around $2 a shot instead cost us $20. And, they may cost us even more in future years if we need boosters after the pandemic is over.

These government-granted monopolies are effectively a form of government debt. Incredibly, I have literally never seen any of the debt whiners ever mention the hundreds of billions of dollars in rents paid out each year to drug companies, medical equipment suppliers, software companies, or other beneficiaries of these monopolies as part of the burden of the debt. This in spite of the fact that the rents from these monopolies are several times larger than the debt service that we pay out on the official debt.

But let’s flip the story over in the hope of teaching something to the debt whiners. Suppose that we looked to replace much or all of the debt that troubles them with new patent monopolies. Imagine that we sold off trillions of dollars worth of patent monopolies to pay off a large chunk of the debt.

If this sounds strange it is important to step back for a second and think of the logic of a patent or a copyright monopoly. While we ostensibly link the award of these monopolies to innovation or creative work, there is no necessary link.

At the point where the rents are being collected, a patent or copyright monopoly is simply a monopoly on a particular item. It doesn’t matter one iota whether the monopoly was awarded due to some brilliant innovation or whether it was awarded due to a payoff to a Trump friend or family member. The monopoly means that the holder gets to charge a price far above the free market price.

With this in mind, suppose the government decided to auction off monopoly selling rights to a number of goods and services. (We can even call them “patents” to make people feel better.) We surely could raise enough to pay off the national debt.

Just to take my favorite example, patent rents on prescription drugs will be over $400 billion this year. (I explain how I get this figure here.)  Patents have a limited lifespan, but let’s imagine the ones we auction off to continue in perpetuity. The current interest rate on thirty-year Treasury bonds is roughly 3 percent. This means that to generate the $400 billion in rents earned on prescription drugs, we would need $12 trillion in Treasury bonds.

Therefore, the claim to patent right on prescription drugs lasting in perpetuity should be worth roughly $12 trillion. If we had this auction and got $12 trillion, we could reduce our national debt by an amount equal to 60 percent of GDP. That should make the debt whiners very happy.

In fact, we can go further. I calculated that total patent rents in the economy come to over $1 trillion a year. If we auctioned off these rights (again being carried on in perpetuity) it should raise more than $30 trillion, more than enough to eliminate the national debt altogether.

And, we aren’t limited to just auctioning off patent rents on the items where companies currently get them. We can auction off monopoly rights on anything, on selling cars, computers, bread, haircuts, anything. We can raise vast amounts of money through this route and make the debt whiners very happy.

Of course, these rents do have real economic costs. They create large economic distortions (think of tariffs of many thousand percent) and they create perverse incentives. We see this with the patent rents we currently have. For example, pharmaceutical companies misled physicians about the addictiveness of the new generation of opioids to maximize their sales. As economic theory predicts, patent monopolies give drug companies incentives to push their products as widely as possible, even if it means misleading doctors and the public about their safety and effectiveness.

But the debt whiners only care about the debt issued by the national government, they don’t care at all about the burden of patent and copyright monopolies. So, we can answer their concerns simply by issuing enough of these monopolies to bring the debt down to a level that makes them happy.

 

The National Debt is a Meaningless Number

Perhaps some folks will read the prior section and decide that we need to auction off a large number of monopolies to reduce the national debt. The sane ones will instead recognize that the debt is a largely meaningless number. It can imply larger debt service burdens, and that can be a problem, but this is a very small part of the economic picture, especially compared to items like patent rents that get almost no attention at all from economists. What really matters is the underlying strength of the economy and society that we pass on to future generations.

I have no idea if the debt whiners understand this point and try to obfuscate reality, or are just confused. As the old saying goes, “economists are not very good at economics.”  But anyhow, the rest of the country need not take their debt whining seriously.  

[1] One famous instance of debt mongering turned out to be literally an invention. The claim promoted by Carmen Reinhart and Ken Rogoff, that growth slowed when the debt-to-GDP ratio crossed 90 percent, turned out to based on an Excel spreadsheet error.

The industry needs some good PR right now. After all, its refusal to share its vaccine technology could end up costing millions of lives in the developing world. In addition, it could mean trillions of dollars of lost output as countries need to shut down large segments of their economy.

But the NYT is there to help. It ran a lengthy article about the issue, which contains much useful information, but it maintains a framing favorable to the pharmaceutical industry. At the end of the piece, after giving the argument for broader sharing of technology and over-riding the industry’s government-granted patent monopolies, the piece tells readers:

“But governments cannot afford to sabotage companies that need profit to survive.”

If the reporters/editors had read their piece, they would know that the companies in question had already made large profits, through being paid directly for their research and building manufacturing facilities, as was the case with Moderna and BioNtech (Pfizer’s German partner), or with advance purchase agreements. No one is suggesting that these companies should not make a profit, so it is not clear on what planet this assertion originated.

It is possible to make profits directly on government contracts, as major military contractors like Lockheed and Boeing could explain to the New York Times. The advantage of having direct contracts for biomedical research is that a requirement of the contract could be that all findings are fully open-source so that researchers all over the world can benefit from them. (I discuss a mechanism for direct funding in chapter 5 of Rigged [it’s free].)

If the U.S. had gone this route with Operation Warp Speed, any manufacturer anywhere in the world with the necessary expertise (all production technology would also be freely available), would be able to freely produce vaccines, as well as tests and treatments for the coronavirus. This would almost certainly allow the world to be vaccinated more quickly.

The piece also included another important assertion unsupported by any evidence. It told readers:

“But in Brussels and Washington, leaders are still worried about undermining innovation.”

It does not indicate how it knows what leaders in Brussels and Washington are actually “worried” about. It is certainly possible that politicians are concerned about keeping their pharmaceutical companies happy since they are powerful political actors. As the piece notes, these companies are concerned about profits, not innovation as an end in itself.  

It is probably worth mentioning inequality in this piece. The NYT, like most intellectual types, has done considerable hand-wringing over inequality in recent years, both overall and racial inequality. It is a safe bet that giving more money to pharmaceutical companies will mean more inequality and certainly benefit whites far more than Blacks. It might be useful if the paper paid a little attention to the policies that create inequality instead of just bemoaning it as an unfortunate feature of the economy.

 

Addendum

I should have also mentioned some of the ways in which we can see the potential value of open-sourcing technology as a way to foster innovation in the pandemic. Last month Pfizer announced that it had discovered a way to cut the production time of its vaccines in half.  It also discovered that its vaccines don’t require super-cold storage, but can instead be kept at normal freezer temperatures for up to two weeks.

These are great discoveries that will allow more vaccines to be produced and make them easier to store and transport. However, unless we think that Pfizer’s engineers are the only people in the world who can innovate around the production and distribution of its vaccine, it is likely these discoveries would have come sooner if the technology had been open-sourced. Also, there are undoubtedly other ways to speed the manufacture and distribution of the vaccine that have not yet occurred to Pfizer’s engineers.

The industry needs some good PR right now. After all, its refusal to share its vaccine technology could end up costing millions of lives in the developing world. In addition, it could mean trillions of dollars of lost output as countries need to shut down large segments of their economy.

But the NYT is there to help. It ran a lengthy article about the issue, which contains much useful information, but it maintains a framing favorable to the pharmaceutical industry. At the end of the piece, after giving the argument for broader sharing of technology and over-riding the industry’s government-granted patent monopolies, the piece tells readers:

“But governments cannot afford to sabotage companies that need profit to survive.”

If the reporters/editors had read their piece, they would know that the companies in question had already made large profits, through being paid directly for their research and building manufacturing facilities, as was the case with Moderna and BioNtech (Pfizer’s German partner), or with advance purchase agreements. No one is suggesting that these companies should not make a profit, so it is not clear on what planet this assertion originated.

It is possible to make profits directly on government contracts, as major military contractors like Lockheed and Boeing could explain to the New York Times. The advantage of having direct contracts for biomedical research is that a requirement of the contract could be that all findings are fully open-source so that researchers all over the world can benefit from them. (I discuss a mechanism for direct funding in chapter 5 of Rigged [it’s free].)

If the U.S. had gone this route with Operation Warp Speed, any manufacturer anywhere in the world with the necessary expertise (all production technology would also be freely available), would be able to freely produce vaccines, as well as tests and treatments for the coronavirus. This would almost certainly allow the world to be vaccinated more quickly.

The piece also included another important assertion unsupported by any evidence. It told readers:

“But in Brussels and Washington, leaders are still worried about undermining innovation.”

It does not indicate how it knows what leaders in Brussels and Washington are actually “worried” about. It is certainly possible that politicians are concerned about keeping their pharmaceutical companies happy since they are powerful political actors. As the piece notes, these companies are concerned about profits, not innovation as an end in itself.  

It is probably worth mentioning inequality in this piece. The NYT, like most intellectual types, has done considerable hand-wringing over inequality in recent years, both overall and racial inequality. It is a safe bet that giving more money to pharmaceutical companies will mean more inequality and certainly benefit whites far more than Blacks. It might be useful if the paper paid a little attention to the policies that create inequality instead of just bemoaning it as an unfortunate feature of the economy.

 

Addendum

I should have also mentioned some of the ways in which we can see the potential value of open-sourcing technology as a way to foster innovation in the pandemic. Last month Pfizer announced that it had discovered a way to cut the production time of its vaccines in half.  It also discovered that its vaccines don’t require super-cold storage, but can instead be kept at normal freezer temperatures for up to two weeks.

These are great discoveries that will allow more vaccines to be produced and make them easier to store and transport. However, unless we think that Pfizer’s engineers are the only people in the world who can innovate around the production and distribution of its vaccine, it is likely these discoveries would have come sooner if the technology had been open-sourced. Also, there are undoubtedly other ways to speed the manufacture and distribution of the vaccine that have not yet occurred to Pfizer’s engineers.

That seems to be the implication of a David Sanger piece commenting on the state of U.S. relations with Russia and China. At one point Sanger notes that China is a rising economic power:

“Economists debate when the Chinese will have the world’s largest gross domestic product — perhaps toward the end of this decade”

Actually, China already has the world’s largest economy using purchasing power parity measures of GDP, which is what most economists view as the best basis of comparison.

Here is what that well-known source of Chinese propaganda, the CIA World Factbook, has to say on the topic.

 “From 2013 to 2017, China had one of the fastest growing economies in the world, averaging slightly more than 7% real growth per year. Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in 2017 stood as the largest economy in the world, surpassing the US in 2014 for the first time in modern history. China became the world’s largest exporter in 2010, and the largest trading nation in 2013. Still, China’s per capita income is below the world average.”

Since China has four times as many people as the United States, it is still much poorer on a per person basis, but its economy is already considerably larger than the U.S. economy and is likely to be close to twice as large as the U.S. economy by the end of the decade.

That seems to be the implication of a David Sanger piece commenting on the state of U.S. relations with Russia and China. At one point Sanger notes that China is a rising economic power:

“Economists debate when the Chinese will have the world’s largest gross domestic product — perhaps toward the end of this decade”

Actually, China already has the world’s largest economy using purchasing power parity measures of GDP, which is what most economists view as the best basis of comparison.

Here is what that well-known source of Chinese propaganda, the CIA World Factbook, has to say on the topic.

 “From 2013 to 2017, China had one of the fastest growing economies in the world, averaging slightly more than 7% real growth per year. Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in 2017 stood as the largest economy in the world, surpassing the US in 2014 for the first time in modern history. China became the world’s largest exporter in 2010, and the largest trading nation in 2013. Still, China’s per capita income is below the world average.”

Since China has four times as many people as the United States, it is still much poorer on a per person basis, but its economy is already considerably larger than the U.S. economy and is likely to be close to twice as large as the U.S. economy by the end of the decade.

Okay, I’ll admit that this is stupid, but you know damn well if the situation were reversed the Republicans would have this comparison all over the place. We don’t even have to speculate. When President Obama assumed office with an economy in free fall from the collapse of the housing bubble, the Republicans were quick to blame him for the job loss from the crash he had inherited.

So, in the spirit of reciprocity, here’s the picture.

 


As can be seen, after four years in the White House, Donald Trump had a net loss of 2,943,000 jobs. After one month, Joe Biden has a net gain of 379,000. Looks pretty damn MAGA to me.

Okay, I’ll admit that this is stupid, but you know damn well if the situation were reversed the Republicans would have this comparison all over the place. We don’t even have to speculate. When President Obama assumed office with an economy in free fall from the collapse of the housing bubble, the Republicans were quick to blame him for the job loss from the crash he had inherited.

So, in the spirit of reciprocity, here’s the picture.

 


As can be seen, after four years in the White House, Donald Trump had a net loss of 2,943,000 jobs. After one month, Joe Biden has a net gain of 379,000. Looks pretty damn MAGA to me.

Okay, those were not exactly Mr. Cueni’s words, and they weren’t specifically directed at Bill Gates, but that is the gist of an assertion that Cueni made about the international effort to vaccinate the world against the Coronavirus.

In a debate last week, Cueni asserted that at a conference held this month, everyone agreed that the major obstacle to vaccinations in the developing world was not the availability of vaccines, but rather the availability of vials, syringes, and other items needed for transporting and administering the vaccines. (Listen to his comments starting at about 21:10 minutes.)

Note that this is March of 2021 that he was talking about, not March of 2020. If we accept Mr. Cueni’s assertion at face value, we must believe that Bill Gates, and the highly credentialed public health experts at his foundation, COVAX, the WHO and elsewhere, didn’t realize that we would need billions of syringes and huge volumes of other ancillary items to administer the billions of vaccines that would be needed. Alternatively, we would have to believe that even with a year of preparation, and billions of dollars at their disposal, they were not able to arrange the manufacture of these mundane items.

If either of these happens to be true, then “moron” would certainly be the right description. Of course, there is another possibility. Mr. Cueni may be trying to deflect attention from the fact that his organization is trying to block efforts to override the government-granted patent monopolies held by the members of his organization.

Okay, those were not exactly Mr. Cueni’s words, and they weren’t specifically directed at Bill Gates, but that is the gist of an assertion that Cueni made about the international effort to vaccinate the world against the Coronavirus.

In a debate last week, Cueni asserted that at a conference held this month, everyone agreed that the major obstacle to vaccinations in the developing world was not the availability of vaccines, but rather the availability of vials, syringes, and other items needed for transporting and administering the vaccines. (Listen to his comments starting at about 21:10 minutes.)

Note that this is March of 2021 that he was talking about, not March of 2020. If we accept Mr. Cueni’s assertion at face value, we must believe that Bill Gates, and the highly credentialed public health experts at his foundation, COVAX, the WHO and elsewhere, didn’t realize that we would need billions of syringes and huge volumes of other ancillary items to administer the billions of vaccines that would be needed. Alternatively, we would have to believe that even with a year of preparation, and billions of dollars at their disposal, they were not able to arrange the manufacture of these mundane items.

If either of these happens to be true, then “moron” would certainly be the right description. Of course, there is another possibility. Mr. Cueni may be trying to deflect attention from the fact that his organization is trying to block efforts to override the government-granted patent monopolies held by the members of his organization.

(This post first appeared on my Patreon page.)

One item in President Biden’s recovery package that deserves more attention is the increased subsidies for people buying health insurance through the exchanges created by the Affordable Care Act (ACA). These subsides will make insurance purchased on the exchanges far more affordable, by capping the cost at 8 percent of income. It also removes the current income cap on subsidies, so that even upper middle-income people can benefit under this proposal.

The increased subsidies will lower the cost of insurance purchased in the exchanges for most people but will likely have the largest impact for older middle-income people. Before the American Recovery Act (ARA) was passed, there were no subsides available for anyone earning more than four times the poverty level. For a single individual, this cutoff was just under $50,000 last year.

This meant that a person earning $50,000 a year had to pay the full price for whatever insurance plan they purchased in the exchanges. For a person in the oldest age group (55 to 64), the average cost of a silver plan without the ARA subsidies would be $12,900 a year. However, the ARA caps the payment at 8.5 percent of income, which means this person would pay just $4,250 for a silver plan, a savings of $8,650 a year.

Even a person earning $100,000 would only pay $8,500 a year for a silver plan under the ARA, a savings of $4,400 a year. In short, for the vast majority of people, the ARA makes health care far more affordable than the subsidy schedule in the ACA.

Under the ARA, these expanded subsidies only apply to the remainder of 2021 and 2022, but many hope that they can be made permanent. This would be great if it could be done, but the cost will likely be far higher than is immediately apparent.

The Congressional Budget Office (CBO) put the cost of the expanded subsidies in the ARA at $35.5 billion, with most of that cost being in 2022, since the larger subsidies will be in place for the full year. This cost comes to less than 0.8 percent of the federal budget, an amount that should be easily doable, whether it means a larger deficit or finding some tax increases and spending cuts as offsets.

However, the cost of sustaining subsidies of this size over a longer period of time will almost certainly be considerably higher than this $35.5 billion figure. The reason is that, for a single year of a subsidy, most people are not likely to change their health insurance arrangements.

The vast majority of the pre-Medicare age population gets health insurance through their employer. Workers are not likely to leave an employer who offers a plan they like, in order to take advantage of the lower cost of insurance on the exchanges, if the subsidies will only be there for a year. But, if they expect the enhanced subsidies to be in place indefinitely, then getting insurance through the exchanges becomes a far more attractive option.

Employers are likely also in many cases to stop offering insurance in order to effectively share the savings with their workers. The pattern of subsidies in the ACA, which cut off altogether for workers earning more than four times the poverty level, meant that employers would effectively be giving upper middle-income workers a substantial pay cut if they handed them the money previously paid towards their premiums, and then told them to buy insurance on the exchange. (The real world generally does not work this way, but the point is that we can envision employers doing this sort of calculation.)

However, the expansion of subsidies in the ARA puts out a large pot of money that employers can effectively look to share with their workers. In most cases, employers could probably increase pay by an amount equal to half of their current health care premiums, and still leave workers purchasing insurance through the exchanges far better off, since the subsidies would make plans relatively cheap for most workers.

This sort of move away from employer-provided insurance would be a great thing. There is no reason to want an employer to be an intermediary in workers’ insurance. Also, the link between employment and insurance creates the difficult situation we saw during the pandemic, where people who lose their job also lose their insurance. So, if enhanced subsidies in the exchanges substantially lessen the reliance on employer-provided insurance, that should be seen as a positive development.

The flip side of increased reliance on the exchanges is that the cost of the subsidies will increase substantially. If we are subsidizing policies by $7,000 or $8,000 a piece and then see tens of millions more people getting their insurance through the exchanges, then we could be seeing the annual cost of the subsidies rise by hundreds of billions of dollars. This is not an expense that can be easily swept under the rug. If we end up paying another 2 percent or so of GDP ($420 billion in today’s economy) in subsidies, then we almost certainly need to raise some serious taxes to offset the increased expenses.

 

Getting Costs Down: The Alternative to Large Tax Increases

Needless to say, large tax increases are not likely to be popular, even if they are structured to be relatively progressive. As an alternative we can try to get our costs more in line with the costs in other wealthy countries. The OECD put per capita health care spending in the United States at $11,100 in 2019. That compares to $6,600 in Germany, $5,400 in France, and $4,700 in the United Kingdom. The latter two are less than the $6,100 in public per capita public health care expenditures that the Center for Medicare and Medicaid Services reported for the United States for 2019, and Germany’s spending is only modestly higher. In other words, if health care cost the same here as in other wealthy countries, the government would already be spending enough to provide universal health care.

As I’ve written elsewhere, the reasons for the higher costs in the United States are not a big secret: we pay twice as much for our drugs, our doctors, and our medical equipment. In addition, we face $400 billion to $500 billion annually in excessive administrative costs due to our system of private insurance, that can be avoided with a simpler Medicare type system.

I go through prospects for potential savings in each of these areas here and here. The basic story is that with drugs and medical equipment we have to move away from the current system where research and development is supported by government-granted patent monopolies. The point that needs to be endlessly emphasized is that drugs are cheap; it is patent monopolies that make them expensive. The same is true for medical equipment.

But it is also important for Biden to start making progress in reducing the waste in excessive administrative costs due to our system of private health insurance. The problem here is a fairly basic one: insurers can best increase their profits by not insuring people who are likely to have major medical bills and to avoid paying those bills when they do get sick. This is not consistent with ensuring that people have adequate access to health care.

Of course, we do regulate insurers. This limits the extent to which they can avoid insuring people with health conditions or paying the bills for which they are supposed to be responsible, but people who believe in the ingenuity of the private sector know that government efforts to prevent insurers from screwing patients will never be completely successful.  

If those last two paragraphs sound like vague ideological accusations, then you have never heard of surprise medical billing. This is the story where out-of-network providers, like anesthesiologists or testing services, hit patients with huge bills for medical procedures that should have been covered by their insurers. The insurers get off the hook with these by saying that they are not responsible because the patient chose (not really the right word for someone getting an emergency medical procedures) a provider that is not in their network. Anyhow, insurers have a thousand and one ways to screw patients, and they use them all the time.

 

Improving and Expanding Medicare

The best way for Biden to start to squeeze out the waste from the insurance sector is to carry through on one of his campaign promises. He should offer a Medicare buy-in option to everyone. This would save a huge amount of money on administrative fees for the people who took advantage of this option.

Since this option would be available through the exchanges, it could reduce the cost of providing insurance for those already in the exchanges, in addition to making it possible to add people at lower cost. The potential savings are substantial, since the overhead costs (administration and profit) of private insurers are between 20 and 25 percent of the medical expenses they pay, while the administrative costs for Medicare are close to 2.0 percent.

However, there is a further issue that has to be addressed to make a Medicare option attractive; the traditional Medicare program has to be modernized. I have written about this elsewhere, but the key points are to have a cap on out-of-pocket spending (e.g. $6,000) and to combine at least Part A and Part D to make the program simpler. Ideally, Part B could be folded in as well, but since this division dates back to the creation of the program, it would be more complicated to end it. Also, Medicare must be expanded to include essential items like hearing aids in its coverage.

As it stands, nearly 40 percent of new beneficiaries opt for private Medicare Advantage plans rather than the traditional Medicare program. If we offer the option to buy into an unreformed Medicare program, most people would likely still go with private insurance. That would rule out the possibility of large savings on administrative costs.

If Biden did offer a buy-in option to a reformed Medicare program, there would likely be a large number of people switching from private insurers. There could well be a snowballing effect, where instead of doctors and other providers refusing to take Medicare because of the lower rates, they refuse to take private insurance to avoid the additional paper work. There are real advantages for providers from only having to deal with one insurance system rather than the dozens now operating, each with its own forms and coverage rules.

As a political matter, improving the existing Medicare program should be quite popular. Currently, most people in the traditional program have to pay for supplemental private plans. If the program was improved so that these private plans were no longer necessary, it will be a very real and visible gain for millions of beneficiaries.

As important as it is to reduce the waste on administrative costs associated with private insurers, the Biden administration should be aggressive in taking steps to reduce prices for drugs and medical equipment and increase competition to bring the pay of our doctors more in line with pay in other wealthy countries.

It is also worth noting that lower prices for medical inputs also makes insurance issues easier. We would want our insurers, whether public or private, to be careful in authorizing drugs that cost several hundred thousand dollars a year. We would want to be very sure that these drugs were medically necessary. However, if these drugs were selling for a few hundred dollars, as cheap generics, there would be less reason to scrutinize the decision made by a doctor in prescribing them. Bringing the cost of drugs and other items under control makes everything else in health care much easier.  

 

Making the Exchanges Affordable Is Only the First Part of the Problem

While progressives have almost universally applauded the expanded subsidies that are part of Biden’s rescue package and have called for making them permanent, we must recognize that this is only the beginning of what is likely to be a major transformation of the U.S. health care system. If health insurance is much cheaper in the exchanges than in the private health care system for most people, it will be only a matter of time before people migrate to the exchanges.

This will be a positive development, since it will move us away from a system where people’s insurance depended on their employment. But it also means that the cost of the subsidies will grow much larger through time. It is essential to have measures in place that will contain costs so that health care does not become an unaffordable burden for the country. The routes for containing costs are well-known, but the affected industry groups are very powerful. This will be a difficult battle.

(This post first appeared on my Patreon page.)

One item in President Biden’s recovery package that deserves more attention is the increased subsidies for people buying health insurance through the exchanges created by the Affordable Care Act (ACA). These subsides will make insurance purchased on the exchanges far more affordable, by capping the cost at 8 percent of income. It also removes the current income cap on subsidies, so that even upper middle-income people can benefit under this proposal.

The increased subsidies will lower the cost of insurance purchased in the exchanges for most people but will likely have the largest impact for older middle-income people. Before the American Recovery Act (ARA) was passed, there were no subsides available for anyone earning more than four times the poverty level. For a single individual, this cutoff was just under $50,000 last year.

This meant that a person earning $50,000 a year had to pay the full price for whatever insurance plan they purchased in the exchanges. For a person in the oldest age group (55 to 64), the average cost of a silver plan without the ARA subsidies would be $12,900 a year. However, the ARA caps the payment at 8.5 percent of income, which means this person would pay just $4,250 for a silver plan, a savings of $8,650 a year.

Even a person earning $100,000 would only pay $8,500 a year for a silver plan under the ARA, a savings of $4,400 a year. In short, for the vast majority of people, the ARA makes health care far more affordable than the subsidy schedule in the ACA.

Under the ARA, these expanded subsidies only apply to the remainder of 2021 and 2022, but many hope that they can be made permanent. This would be great if it could be done, but the cost will likely be far higher than is immediately apparent.

The Congressional Budget Office (CBO) put the cost of the expanded subsidies in the ARA at $35.5 billion, with most of that cost being in 2022, since the larger subsidies will be in place for the full year. This cost comes to less than 0.8 percent of the federal budget, an amount that should be easily doable, whether it means a larger deficit or finding some tax increases and spending cuts as offsets.

However, the cost of sustaining subsidies of this size over a longer period of time will almost certainly be considerably higher than this $35.5 billion figure. The reason is that, for a single year of a subsidy, most people are not likely to change their health insurance arrangements.

The vast majority of the pre-Medicare age population gets health insurance through their employer. Workers are not likely to leave an employer who offers a plan they like, in order to take advantage of the lower cost of insurance on the exchanges, if the subsidies will only be there for a year. But, if they expect the enhanced subsidies to be in place indefinitely, then getting insurance through the exchanges becomes a far more attractive option.

Employers are likely also in many cases to stop offering insurance in order to effectively share the savings with their workers. The pattern of subsidies in the ACA, which cut off altogether for workers earning more than four times the poverty level, meant that employers would effectively be giving upper middle-income workers a substantial pay cut if they handed them the money previously paid towards their premiums, and then told them to buy insurance on the exchange. (The real world generally does not work this way, but the point is that we can envision employers doing this sort of calculation.)

However, the expansion of subsidies in the ARA puts out a large pot of money that employers can effectively look to share with their workers. In most cases, employers could probably increase pay by an amount equal to half of their current health care premiums, and still leave workers purchasing insurance through the exchanges far better off, since the subsidies would make plans relatively cheap for most workers.

This sort of move away from employer-provided insurance would be a great thing. There is no reason to want an employer to be an intermediary in workers’ insurance. Also, the link between employment and insurance creates the difficult situation we saw during the pandemic, where people who lose their job also lose their insurance. So, if enhanced subsidies in the exchanges substantially lessen the reliance on employer-provided insurance, that should be seen as a positive development.

The flip side of increased reliance on the exchanges is that the cost of the subsidies will increase substantially. If we are subsidizing policies by $7,000 or $8,000 a piece and then see tens of millions more people getting their insurance through the exchanges, then we could be seeing the annual cost of the subsidies rise by hundreds of billions of dollars. This is not an expense that can be easily swept under the rug. If we end up paying another 2 percent or so of GDP ($420 billion in today’s economy) in subsidies, then we almost certainly need to raise some serious taxes to offset the increased expenses.

 

Getting Costs Down: The Alternative to Large Tax Increases

Needless to say, large tax increases are not likely to be popular, even if they are structured to be relatively progressive. As an alternative we can try to get our costs more in line with the costs in other wealthy countries. The OECD put per capita health care spending in the United States at $11,100 in 2019. That compares to $6,600 in Germany, $5,400 in France, and $4,700 in the United Kingdom. The latter two are less than the $6,100 in public per capita public health care expenditures that the Center for Medicare and Medicaid Services reported for the United States for 2019, and Germany’s spending is only modestly higher. In other words, if health care cost the same here as in other wealthy countries, the government would already be spending enough to provide universal health care.

As I’ve written elsewhere, the reasons for the higher costs in the United States are not a big secret: we pay twice as much for our drugs, our doctors, and our medical equipment. In addition, we face $400 billion to $500 billion annually in excessive administrative costs due to our system of private insurance, that can be avoided with a simpler Medicare type system.

I go through prospects for potential savings in each of these areas here and here. The basic story is that with drugs and medical equipment we have to move away from the current system where research and development is supported by government-granted patent monopolies. The point that needs to be endlessly emphasized is that drugs are cheap; it is patent monopolies that make them expensive. The same is true for medical equipment.

But it is also important for Biden to start making progress in reducing the waste in excessive administrative costs due to our system of private health insurance. The problem here is a fairly basic one: insurers can best increase their profits by not insuring people who are likely to have major medical bills and to avoid paying those bills when they do get sick. This is not consistent with ensuring that people have adequate access to health care.

Of course, we do regulate insurers. This limits the extent to which they can avoid insuring people with health conditions or paying the bills for which they are supposed to be responsible, but people who believe in the ingenuity of the private sector know that government efforts to prevent insurers from screwing patients will never be completely successful.  

If those last two paragraphs sound like vague ideological accusations, then you have never heard of surprise medical billing. This is the story where out-of-network providers, like anesthesiologists or testing services, hit patients with huge bills for medical procedures that should have been covered by their insurers. The insurers get off the hook with these by saying that they are not responsible because the patient chose (not really the right word for someone getting an emergency medical procedures) a provider that is not in their network. Anyhow, insurers have a thousand and one ways to screw patients, and they use them all the time.

 

Improving and Expanding Medicare

The best way for Biden to start to squeeze out the waste from the insurance sector is to carry through on one of his campaign promises. He should offer a Medicare buy-in option to everyone. This would save a huge amount of money on administrative fees for the people who took advantage of this option.

Since this option would be available through the exchanges, it could reduce the cost of providing insurance for those already in the exchanges, in addition to making it possible to add people at lower cost. The potential savings are substantial, since the overhead costs (administration and profit) of private insurers are between 20 and 25 percent of the medical expenses they pay, while the administrative costs for Medicare are close to 2.0 percent.

However, there is a further issue that has to be addressed to make a Medicare option attractive; the traditional Medicare program has to be modernized. I have written about this elsewhere, but the key points are to have a cap on out-of-pocket spending (e.g. $6,000) and to combine at least Part A and Part D to make the program simpler. Ideally, Part B could be folded in as well, but since this division dates back to the creation of the program, it would be more complicated to end it. Also, Medicare must be expanded to include essential items like hearing aids in its coverage.

As it stands, nearly 40 percent of new beneficiaries opt for private Medicare Advantage plans rather than the traditional Medicare program. If we offer the option to buy into an unreformed Medicare program, most people would likely still go with private insurance. That would rule out the possibility of large savings on administrative costs.

If Biden did offer a buy-in option to a reformed Medicare program, there would likely be a large number of people switching from private insurers. There could well be a snowballing effect, where instead of doctors and other providers refusing to take Medicare because of the lower rates, they refuse to take private insurance to avoid the additional paper work. There are real advantages for providers from only having to deal with one insurance system rather than the dozens now operating, each with its own forms and coverage rules.

As a political matter, improving the existing Medicare program should be quite popular. Currently, most people in the traditional program have to pay for supplemental private plans. If the program was improved so that these private plans were no longer necessary, it will be a very real and visible gain for millions of beneficiaries.

As important as it is to reduce the waste on administrative costs associated with private insurers, the Biden administration should be aggressive in taking steps to reduce prices for drugs and medical equipment and increase competition to bring the pay of our doctors more in line with pay in other wealthy countries.

It is also worth noting that lower prices for medical inputs also makes insurance issues easier. We would want our insurers, whether public or private, to be careful in authorizing drugs that cost several hundred thousand dollars a year. We would want to be very sure that these drugs were medically necessary. However, if these drugs were selling for a few hundred dollars, as cheap generics, there would be less reason to scrutinize the decision made by a doctor in prescribing them. Bringing the cost of drugs and other items under control makes everything else in health care much easier.  

 

Making the Exchanges Affordable Is Only the First Part of the Problem

While progressives have almost universally applauded the expanded subsidies that are part of Biden’s rescue package and have called for making them permanent, we must recognize that this is only the beginning of what is likely to be a major transformation of the U.S. health care system. If health insurance is much cheaper in the exchanges than in the private health care system for most people, it will be only a matter of time before people migrate to the exchanges.

This will be a positive development, since it will move us away from a system where people’s insurance depended on their employment. But it also means that the cost of the subsidies will grow much larger through time. It is essential to have measures in place that will contain costs so that health care does not become an unaffordable burden for the country. The routes for containing costs are well-known, but the affected industry groups are very powerful. This will be a difficult battle.

I mention this because the implication seems to have been missed by news outlets reporting on the 3.0 percent decline reported for February. The Post told us that the 3.0 percent decline was considerably larger than the 0.5 percent drop expected by economists.

But unless these economists were expecting an upward revision to the January data, their expectation for the February number would have been 0.5 percent lower than the number previously reported for January. As it turned out, the February figure was 0.7 percent lower than the number previously reported for February, which is pretty close to right on the mark.

I mention this because the implication seems to have been missed by news outlets reporting on the 3.0 percent decline reported for February. The Post told us that the 3.0 percent decline was considerably larger than the 0.5 percent drop expected by economists.

But unless these economists were expecting an upward revision to the January data, their expectation for the February number would have been 0.5 percent lower than the number previously reported for January. As it turned out, the February figure was 0.7 percent lower than the number previously reported for February, which is pretty close to right on the mark.

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