World financial markets appear to be in a panic, partly over events in China, and partly over the plunge in oil prices. I will claim no expertise on the former, although people I respect who do write on China seem to think the country is not facing an economic meltdown.
This leaves lower oil prices as the main source of worry. There are some bad stories with lower oil prices. Developing countries that are heavily dependent on oil exports will be badly hit. Also, much of the debt issued by energy companies is likely to go bad. This may have some ripple effects in the financial markets, but is unlikely to set off any general collapses. Also, the energy sectors in the U.S., Canada, and a few other wealthy countries will be badly hurt.
But it is important to remember that lower oil prices also have an upside. Many countries are big net importers of oil. For them, the plunge in prices will free up large amounts of money for other goods and services.
Just to take a few prominent ones, France imports 470 million barrels of oil a year. If we envision average savings of $50 a barrel from the prices of two years ago, that comes to $23.5 billion in freed up money, and amount equal to 0.8 percent of GDP. (That would come to around $150 billion a year in the United States.) Turkey imports 124 million barrels a year, which would imply savings of $6.2 billion a year, or a bit less than 0.8 percent of GDP. Greece imports just under 150 million barrels a year, which would mean savings of $7.5 billion annually or more than 3.0 percent of GDP (equal to $540 billion a year in the U.S.).
These countries, and other big oil importers, should be seeing a spur to growth from the drop in oil prices as more money is ending up in consumers’ pockets. Any discussion of the impact of plunging oil prices on the world economy has to include these positive effects. (Of course the spur to fossil fuel consumption is horrible for the environment.)
World financial markets appear to be in a panic, partly over events in China, and partly over the plunge in oil prices. I will claim no expertise on the former, although people I respect who do write on China seem to think the country is not facing an economic meltdown.
This leaves lower oil prices as the main source of worry. There are some bad stories with lower oil prices. Developing countries that are heavily dependent on oil exports will be badly hit. Also, much of the debt issued by energy companies is likely to go bad. This may have some ripple effects in the financial markets, but is unlikely to set off any general collapses. Also, the energy sectors in the U.S., Canada, and a few other wealthy countries will be badly hurt.
But it is important to remember that lower oil prices also have an upside. Many countries are big net importers of oil. For them, the plunge in prices will free up large amounts of money for other goods and services.
Just to take a few prominent ones, France imports 470 million barrels of oil a year. If we envision average savings of $50 a barrel from the prices of two years ago, that comes to $23.5 billion in freed up money, and amount equal to 0.8 percent of GDP. (That would come to around $150 billion a year in the United States.) Turkey imports 124 million barrels a year, which would imply savings of $6.2 billion a year, or a bit less than 0.8 percent of GDP. Greece imports just under 150 million barrels a year, which would mean savings of $7.5 billion annually or more than 3.0 percent of GDP (equal to $540 billion a year in the U.S.).
These countries, and other big oil importers, should be seeing a spur to growth from the drop in oil prices as more money is ending up in consumers’ pockets. Any discussion of the impact of plunging oil prices on the world economy has to include these positive effects. (Of course the spur to fossil fuel consumption is horrible for the environment.)
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While economic debates can often get into complex questions of theory or statistical methods, many hang on more simple issues, like the right adjective. We got a great example of one such debate in a Wall Street journal column by Andrew Biggs, an economist at the American Enterprise Institute and former Deputy Commissioner of the Social Security Administration under President George W. Bush.
Biggs looks at some recent evidence, most notably a new study from the Congressional Budget Office (CBO), and dismisses the idea that there is a retirement crisis. At the center of this assertion is the CBO projection that a typical household in the middle quintile, born in 1960, can expect to get $19,000 a year from Social Security. Biggs sees this $19,000 as replacing 56 percent of pre-retirement income and says this is not far from the 70-80 percent usually viewed as adequate. He then touts data on total retirement savings and pronounces everything as okay.
If we step back from replacement rates, we can ask a rhetorical question, is $19,000 a year a middle class income? Odds are that most people would not consider $19,000 a reasonable income for a middle class household, hence the basis for the claim about a retirement crisis. Biggs does point to the record amount of retirement savings. This is indeed good news for those who have these savings, but unfortunately most middle class households don’t fall into this category.
According to the Federal Reserve Board’s 2013 Survey of Consumer Finance, the average net worth outside of housing equity for the middle quintile of households between the ages of 55 and 64 was less than $55,000. This includes all IRAs, 401(k)s and other retirement accounts. This will translate into roughly $3,000 a year in additional retirement income, bringing this middle income household’s income up to $22,000 a year.
Biggs looks at this and says everything is just fine and we should be looking to cut Social Security. Those raising concerns about a retirement crisis do not see $22,000 a year as a middle class income. We are just arguing about adjectives here, there is not much disagreement on the situation.
While economic debates can often get into complex questions of theory or statistical methods, many hang on more simple issues, like the right adjective. We got a great example of one such debate in a Wall Street journal column by Andrew Biggs, an economist at the American Enterprise Institute and former Deputy Commissioner of the Social Security Administration under President George W. Bush.
Biggs looks at some recent evidence, most notably a new study from the Congressional Budget Office (CBO), and dismisses the idea that there is a retirement crisis. At the center of this assertion is the CBO projection that a typical household in the middle quintile, born in 1960, can expect to get $19,000 a year from Social Security. Biggs sees this $19,000 as replacing 56 percent of pre-retirement income and says this is not far from the 70-80 percent usually viewed as adequate. He then touts data on total retirement savings and pronounces everything as okay.
If we step back from replacement rates, we can ask a rhetorical question, is $19,000 a year a middle class income? Odds are that most people would not consider $19,000 a reasonable income for a middle class household, hence the basis for the claim about a retirement crisis. Biggs does point to the record amount of retirement savings. This is indeed good news for those who have these savings, but unfortunately most middle class households don’t fall into this category.
According to the Federal Reserve Board’s 2013 Survey of Consumer Finance, the average net worth outside of housing equity for the middle quintile of households between the ages of 55 and 64 was less than $55,000. This includes all IRAs, 401(k)s and other retirement accounts. This will translate into roughly $3,000 a year in additional retirement income, bringing this middle income household’s income up to $22,000 a year.
Biggs looks at this and says everything is just fine and we should be looking to cut Social Security. Those raising concerns about a retirement crisis do not see $22,000 a year as a middle class income. We are just arguing about adjectives here, there is not much disagreement on the situation.
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The Wall Street Journal devoted an article to the presidential candidates economic plans and their potential to affect growth and to help the middle class. Remarkably, the piece never once mentions the Federal Reserve Board and its current plans to raise interest rates in order to slow growth.
The Fed’s plans should be front and center in any discussion of efforts to boost growth either through tax cuts or additional spending, since if the Fed believes that such plans will simply lead to more inflation, then it will accelerate its rate hikes in order to prevent the economy from growing more rapidly. This means that in order to boost the growth rate, a plan would not just have to be well-designed for the economy, but it also would be necessary to get the approval of the Fed to allow additional growth. This point should have been mentioned.
In this respect, it is worth noting that Senator Bernie Sanders plan for a financial transactions tax would directly open up a considerable amount of economic space by eliminating close to $100 billion annually in wasteful financial transactions. Most research indicates that trading is relatively elastic, meaning that trading volume will decline in rough proportion to the extent that a tax raises cost. This means that the amount of revenue raised by a tax will correspond to resources freed up in the financial sector by reduced trading volume. These resources (worker and capital) could then be diverted to more productive sectors.
In principle, since this involves a reallocation from finance to other sectors, rather than a net increase in output, the Fed should be content to allow it to take place. Since so many of the top incomes are in finance, Sanders’ proposal would be hugely redistributive from the rich to the middle class.
The piece also includes the bizarre comment:
“Some economists believe that 4% [the growth rate targeted by Governors Bush and Christie] would be a stretch, at least for any significant period of time, given an aging U.S. population and lethargic productivity, big factors in determining growth.”
Actually, nearly all economists believe that 4 percent would be completely impossible on a sustained basis. Even sustaining a 3 percent growth rate over the next decade would be an extraordinary accomplishment. In other words Bush and Christie are just using nutty numbers. They presumably are aware of this fact, WSJ readers should be as well.
The Wall Street Journal devoted an article to the presidential candidates economic plans and their potential to affect growth and to help the middle class. Remarkably, the piece never once mentions the Federal Reserve Board and its current plans to raise interest rates in order to slow growth.
The Fed’s plans should be front and center in any discussion of efforts to boost growth either through tax cuts or additional spending, since if the Fed believes that such plans will simply lead to more inflation, then it will accelerate its rate hikes in order to prevent the economy from growing more rapidly. This means that in order to boost the growth rate, a plan would not just have to be well-designed for the economy, but it also would be necessary to get the approval of the Fed to allow additional growth. This point should have been mentioned.
In this respect, it is worth noting that Senator Bernie Sanders plan for a financial transactions tax would directly open up a considerable amount of economic space by eliminating close to $100 billion annually in wasteful financial transactions. Most research indicates that trading is relatively elastic, meaning that trading volume will decline in rough proportion to the extent that a tax raises cost. This means that the amount of revenue raised by a tax will correspond to resources freed up in the financial sector by reduced trading volume. These resources (worker and capital) could then be diverted to more productive sectors.
In principle, since this involves a reallocation from finance to other sectors, rather than a net increase in output, the Fed should be content to allow it to take place. Since so many of the top incomes are in finance, Sanders’ proposal would be hugely redistributive from the rich to the middle class.
The piece also includes the bizarre comment:
“Some economists believe that 4% [the growth rate targeted by Governors Bush and Christie] would be a stretch, at least for any significant period of time, given an aging U.S. population and lethargic productivity, big factors in determining growth.”
Actually, nearly all economists believe that 4 percent would be completely impossible on a sustained basis. Even sustaining a 3 percent growth rate over the next decade would be an extraordinary accomplishment. In other words Bush and Christie are just using nutty numbers. They presumably are aware of this fact, WSJ readers should be as well.
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Robert Samuelson used his column today to tout a Pew study that recycled well-known Census data showing stagnating family incomes over the last four decades. Unfortunately, Samuelson thought the results showed the opposite, telling readers:
“But the study convincingly rebuts the notion that the living standards of most Americans had stagnated for many decades. Pew calculated household incomes, adjusted for inflation, all along the economic spectrum and found that, until the early 2000s, most households reaped slow but steady increases. Growing inequality did not siphon off all gains for those who are not rich . Here’s how Pew describes this period:
“‘Households typically experienced double-digit gains in each of the three decades from 1970 to 2000. Middle-income household income increased by 13% in the 1970s, 11% in the 1980s, and 12% in the 1990s. Lower-income households had gains of 13% in the 1970s, 8% in the 1980s and 15% in the 1990s.'”
Rather than representing impressive gains in living standards, these are very modest gains compared with both prior decades and the economy’s rate of productivity growth. In the late forties, fifties, and sixties, family incomes were rising at an annual rate of more than 2 percent, which would translate into gains of more than 20 percent over the course of a decade. For example, the cutoff for the top third quintile of income rose by almost 16 percent in just the six years from 1967 to 1973. (The cutoffs for the second and first quintiles rose by 11.1 percent and 12.6 percent, respectively.)
Furthermore, most of the rise in incomes enjoyed by households in the late 1970s, 1980s, and 1990s was due to women entering the labor force. While it is a good thing that women enjoyed increased opportunities in these decades, we would not ordinarily think of it as a rise in the standard of living because two earners have more income than a single earner. Since we know that the wages of most workers were nearly stagnant over this period, the only way that most households were able to acheive gains in income was by putting in more hours.
Robert Samuelson used his column today to tout a Pew study that recycled well-known Census data showing stagnating family incomes over the last four decades. Unfortunately, Samuelson thought the results showed the opposite, telling readers:
“But the study convincingly rebuts the notion that the living standards of most Americans had stagnated for many decades. Pew calculated household incomes, adjusted for inflation, all along the economic spectrum and found that, until the early 2000s, most households reaped slow but steady increases. Growing inequality did not siphon off all gains for those who are not rich . Here’s how Pew describes this period:
“‘Households typically experienced double-digit gains in each of the three decades from 1970 to 2000. Middle-income household income increased by 13% in the 1970s, 11% in the 1980s, and 12% in the 1990s. Lower-income households had gains of 13% in the 1970s, 8% in the 1980s and 15% in the 1990s.'”
Rather than representing impressive gains in living standards, these are very modest gains compared with both prior decades and the economy’s rate of productivity growth. In the late forties, fifties, and sixties, family incomes were rising at an annual rate of more than 2 percent, which would translate into gains of more than 20 percent over the course of a decade. For example, the cutoff for the top third quintile of income rose by almost 16 percent in just the six years from 1967 to 1973. (The cutoffs for the second and first quintiles rose by 11.1 percent and 12.6 percent, respectively.)
Furthermore, most of the rise in incomes enjoyed by households in the late 1970s, 1980s, and 1990s was due to women entering the labor force. While it is a good thing that women enjoyed increased opportunities in these decades, we would not ordinarily think of it as a rise in the standard of living because two earners have more income than a single earner. Since we know that the wages of most workers were nearly stagnant over this period, the only way that most households were able to acheive gains in income was by putting in more hours.
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Rewrites of history can pop up in the strangest places. This one appears in an obituary for Edward Hugh, an economist who became somewhat famous for his pessimistic blogposts about the prospects for the euro zone. Towards the end, the piece tells readers:
“On occasion his prognostications were overly pessimistic, and Spain’s surprisingly quick economic recovery was an event that he, along with many others, did not foresee.”
This one should have left readers scratching their heads. Spain did not have a surprisingly quick recovery. In fact it’s recovery was much weaker and slower than almost anyone expected. In 2010, the I.M.F. projected that by 2015 Spain’s GDP would be 4.7 percent above its 2008 pre-recession level. It’s most recent projections show 2015 GDP coming in 3.1 percent below the 2008 level. If Hugh was wrong about the pace of Spain’s recovery, he was most likely overly optimistic, since very few people expected an economic performance that would be this weak.
Rewrites of history can pop up in the strangest places. This one appears in an obituary for Edward Hugh, an economist who became somewhat famous for his pessimistic blogposts about the prospects for the euro zone. Towards the end, the piece tells readers:
“On occasion his prognostications were overly pessimistic, and Spain’s surprisingly quick economic recovery was an event that he, along with many others, did not foresee.”
This one should have left readers scratching their heads. Spain did not have a surprisingly quick recovery. In fact it’s recovery was much weaker and slower than almost anyone expected. In 2010, the I.M.F. projected that by 2015 Spain’s GDP would be 4.7 percent above its 2008 pre-recession level. It’s most recent projections show 2015 GDP coming in 3.1 percent below the 2008 level. If Hugh was wrong about the pace of Spain’s recovery, he was most likely overly optimistic, since very few people expected an economic performance that would be this weak.
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Noam Scheiber had a good discussion yesterday in the NYT on recent changes in tax shares. The piece commits one major sin when it discusses the desire to lower the tax rate on capital income as stemming from a desire to reduce “double taxation.” The logic of this argument is that profits are taxed at the corporate level, so when they are taxed again at the individual level when they are paid out as dividends or lead to capital gains, this amounts to “double taxation.”
The problem with this logic is that the government gives individuals something of enormous value when it allows them to create a corporation as a legal entity. A corporation enjoys a wide range of privileges that these people would not have as individuals, most importantly that it allows them limited liability. This means that the individuals who own shares in the corporation are not liable for any harm the corporation may do beyond the value of their shares.
We know that limited liability and other benefits of corporate status have great value because people choose to incorporate. They would not do so, and save themselves from having to pay the corporate income tax, if they didn’t think the value of corporate status exceeded the burden of the tax. In this sense, the corporate income tax is a 100 percent voluntary tax, people opt to pay it in order to get the benefits of limited liability.
There is one other point that would have been useful to include in this discussion. Taxes affect the before-tax distribution of income insofar as they allow for a lucrative tax avoidance industry. To a large extent the private equity industry, which has created rich people like Mitt Romney and Peter Peterson, is about devising ways to raise corporate profits through tax avoidance. This is an important cost associated with having an excessively complex tax code. That is an important point that is always necessary to keep in mind in any discussion of the tax code.
Noam Scheiber had a good discussion yesterday in the NYT on recent changes in tax shares. The piece commits one major sin when it discusses the desire to lower the tax rate on capital income as stemming from a desire to reduce “double taxation.” The logic of this argument is that profits are taxed at the corporate level, so when they are taxed again at the individual level when they are paid out as dividends or lead to capital gains, this amounts to “double taxation.”
The problem with this logic is that the government gives individuals something of enormous value when it allows them to create a corporation as a legal entity. A corporation enjoys a wide range of privileges that these people would not have as individuals, most importantly that it allows them limited liability. This means that the individuals who own shares in the corporation are not liable for any harm the corporation may do beyond the value of their shares.
We know that limited liability and other benefits of corporate status have great value because people choose to incorporate. They would not do so, and save themselves from having to pay the corporate income tax, if they didn’t think the value of corporate status exceeded the burden of the tax. In this sense, the corporate income tax is a 100 percent voluntary tax, people opt to pay it in order to get the benefits of limited liability.
There is one other point that would have been useful to include in this discussion. Taxes affect the before-tax distribution of income insofar as they allow for a lucrative tax avoidance industry. To a large extent the private equity industry, which has created rich people like Mitt Romney and Peter Peterson, is about devising ways to raise corporate profits through tax avoidance. This is an important cost associated with having an excessively complex tax code. That is an important point that is always necessary to keep in mind in any discussion of the tax code.
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The Washington Post opinion pages is not a place most people go for original thought, even if they do provide much material for Beat the Press. One major exception to the uniformity and unoriginality that have marked the section for decades was Harold Meyerson’s column. Meyerson has been writing a weekly column for the Post for the last thirteen years. He was told by opinion page editor Fred Hiatt that his contract would not be renewed for 2016.
According to Meyerson, Hiatt gave as his reasons that his columns had bad social media metrics and that he focused too much on issues like worker power. The first part of this story is difficult to believe. Do other WaPo columnists, like BTP regulars Robert Samuelson and Charles Lane, really have such great social media metrics?
As far as part II, yes Meyerson was a different voice. His columns showed a concern for the ordinary workers who make up the overwhelming majority of the country’s population. Apparently, this is a liability at the Post.
The Washington Post opinion pages is not a place most people go for original thought, even if they do provide much material for Beat the Press. One major exception to the uniformity and unoriginality that have marked the section for decades was Harold Meyerson’s column. Meyerson has been writing a weekly column for the Post for the last thirteen years. He was told by opinion page editor Fred Hiatt that his contract would not be renewed for 2016.
According to Meyerson, Hiatt gave as his reasons that his columns had bad social media metrics and that he focused too much on issues like worker power. The first part of this story is difficult to believe. Do other WaPo columnists, like BTP regulars Robert Samuelson and Charles Lane, really have such great social media metrics?
As far as part II, yes Meyerson was a different voice. His columns showed a concern for the ordinary workers who make up the overwhelming majority of the country’s population. Apparently, this is a liability at the Post.
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The Washington Post gained notoriety in the last decade by relying on David Lereah as its main source the housing market. Lereah was the chief economist for the National Association of Realtors and author of Why the Real Estate Boom Will Not Bust and How You Can Profit from It. It continues to follow the pattern of relying on a narrow group of economists, most of whom seem to specialize in repeating what the others are saying.
It devoted a major news article to explaining why “$2 gasoline isn’t having the economic impact everyone thought it would.” According to the piece, the main problem is that people have increased their savings:
“Kathy A. Jones, Schwab’s chief strategist on credit markets, said that consumers have increased their savings as oil prices have dropped. And as the savings rate has gradually edged higher, Jones said, the use of credit cards has declined. According to the Bureau of Economic Analysis, the personal savings rate climbed to 5.6 and 5.5 percent respectively in October and November, the highest rates in three years.”
Actually, the saving rate is poorly measured since it depends on a measure of income that is subject to large revisions. If we take spending as a share of GDP, we find that it was 68.33 percent in the first three quarters of 2015, down trivially from its 68.4 percent measure in 2014 and almost identical to the 68.37 percent share in 2013. In other words, the data (as opposed to the economists) say people are spending pretty much what we should expect them to spend. If we want to find the sources of weak growth, we should look elsewhere.
While the piece correctly identifies equipment investment as one of the other sources of weakness, remarkably it ignores the trade deficit. Measured in 2009 dollars, the trade deficit rose from $442.5 billion in 2014 to $546.1 billion in the first three quarters of 2015. Assuming a multiplier on net exports of 1.5 this rise in the trade deficit would be sufficient to knock roughly a percentage point off GDP growth in 2015.
It is remarkable that the Post would not include this sharp rise in the trade deficit in a discussion of the economy’s weak growth in 2015. In this context, it is probably worth noting that the Post is a strong proponent of the Trans-Pacific Partnership (TPP). Supporters of the TPP tend to ignore the trade deficit and its impact on growth and jobs.
The Washington Post gained notoriety in the last decade by relying on David Lereah as its main source the housing market. Lereah was the chief economist for the National Association of Realtors and author of Why the Real Estate Boom Will Not Bust and How You Can Profit from It. It continues to follow the pattern of relying on a narrow group of economists, most of whom seem to specialize in repeating what the others are saying.
It devoted a major news article to explaining why “$2 gasoline isn’t having the economic impact everyone thought it would.” According to the piece, the main problem is that people have increased their savings:
“Kathy A. Jones, Schwab’s chief strategist on credit markets, said that consumers have increased their savings as oil prices have dropped. And as the savings rate has gradually edged higher, Jones said, the use of credit cards has declined. According to the Bureau of Economic Analysis, the personal savings rate climbed to 5.6 and 5.5 percent respectively in October and November, the highest rates in three years.”
Actually, the saving rate is poorly measured since it depends on a measure of income that is subject to large revisions. If we take spending as a share of GDP, we find that it was 68.33 percent in the first three quarters of 2015, down trivially from its 68.4 percent measure in 2014 and almost identical to the 68.37 percent share in 2013. In other words, the data (as opposed to the economists) say people are spending pretty much what we should expect them to spend. If we want to find the sources of weak growth, we should look elsewhere.
While the piece correctly identifies equipment investment as one of the other sources of weakness, remarkably it ignores the trade deficit. Measured in 2009 dollars, the trade deficit rose from $442.5 billion in 2014 to $546.1 billion in the first three quarters of 2015. Assuming a multiplier on net exports of 1.5 this rise in the trade deficit would be sufficient to knock roughly a percentage point off GDP growth in 2015.
It is remarkable that the Post would not include this sharp rise in the trade deficit in a discussion of the economy’s weak growth in 2015. In this context, it is probably worth noting that the Post is a strong proponent of the Trans-Pacific Partnership (TPP). Supporters of the TPP tend to ignore the trade deficit and its impact on growth and jobs.
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Austin Frakt has an interesting discussion in the NYT of patterns in clinical testing of cancer drugs suggesting a bias towards testing drugs treating late-stage patients with little chance of survival as opposed to more promising drugs treating people at early stages or even prevention. However the remedies involve a less demanding testing process by the Food and Drug Administration and increased use of marketing exclusivity to provide more incentive to testing.
Incredibly, there is no discussion of publicly funded clinical trials. In addition to overcoming the bias reported in the piece, publicly funded trials would also have the advantage that the drugs would be available at generic prices as soon as they are approved. In addition, all of the data from the trials would be fully available to other researchers and physicians to help in their prescribing choices.
For those worried about the inefficiency of government testing, the process could be contracted out to private companies, just as the Defense Department contracts out the development of weapon systems. (A big advantage of drug testing over weapon development is that there is no excuse for secrecy in drug testing. Complete openness should be a condition of any contracts.)
The reluctance to consider public funding for clinical trials seems to stem from some strange belief that if the government touches the money, then the resulting process is hopelessly inefficient. It is difficult to understand the basis for such a view.
Austin Frakt has an interesting discussion in the NYT of patterns in clinical testing of cancer drugs suggesting a bias towards testing drugs treating late-stage patients with little chance of survival as opposed to more promising drugs treating people at early stages or even prevention. However the remedies involve a less demanding testing process by the Food and Drug Administration and increased use of marketing exclusivity to provide more incentive to testing.
Incredibly, there is no discussion of publicly funded clinical trials. In addition to overcoming the bias reported in the piece, publicly funded trials would also have the advantage that the drugs would be available at generic prices as soon as they are approved. In addition, all of the data from the trials would be fully available to other researchers and physicians to help in their prescribing choices.
For those worried about the inefficiency of government testing, the process could be contracted out to private companies, just as the Defense Department contracts out the development of weapon systems. (A big advantage of drug testing over weapon development is that there is no excuse for secrecy in drug testing. Complete openness should be a condition of any contracts.)
The reluctance to consider public funding for clinical trials seems to stem from some strange belief that if the government touches the money, then the resulting process is hopelessly inefficient. It is difficult to understand the basis for such a view.
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