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Article Artículo

Krugman on Drugs

I was glad to see Paul’s short post explaining some of the economics of the US government negotiating drug prices with the drug companies: the route Donald Trump rejected. I thought I would add a few more points.

First, the monopoly profits earned by the drug companies provide a powerful incentive for rent-seeking. This is the standard story that economists always complain about with trade protection, except instead of talking about a tariff that raises the price of the protected item by 10 or 25 percent above the free market price, we’re talking about a government-granted monopoly that typically raises the price of a factor of ten or even a hundred compared with the free market price. These markups are equivalent to tariffs of 1000 percent or 10,000 percent.

This not only encourages behavior like the payoff from Novartis to Trump lawyer Michael Cohen, it also gives drug companies an enormous incentive to misrepresent the safety and effectiveness of their drugs. We frequently hear stories of drug companies withholding evidence that their drugs are less effective than claimed or even harmful for some patients. Perhaps the most famous was the case where Merck allegedly withheld evidence that its arthritis drug, Vioxx, increases the risk of heart attack and strokes for people with heart disease. Needless to say, the costs from this sort behavior are enormous.  

A second point is that we are not talking about a typical consumer buying decision, like buying a car or a cell phone. People buy drugs because they are in bad health and possibly facing death. As Krugman notes, there is typically a third-party payer, either an insurer or the government. Apart from the possibility that this can lead to excessive payments that Krugman discusses, there is also the perverse dynamics this creates.

The price that companies end up getting for their drugs, and if they get it all, depends on the ability of patients to lobby their insurer or the government. Naturally, the drug companies are happy to help in this effort. There is a whole set of industry-funded disease groups that are largely aimed at forcing insurers and the government to buy expensive drugs, often of questionable value, from the drug companies.

This also raises the point that it is pretty crazy that we expect people when they are sick or dying to pay for research that has already been done. In almost all cases, the cost of manufacturing and delivering drugs is cheap, we make it expensive with government-granted patent monopolies. If we asked questions about paying for possibly life-saving drugs at their actual production costs, it would almost always be a no-brainer. But when we have a cancer drug, which may not even work, that a drug company sells for several hundred thousand dollars, it becomes a tough question as to whether the government should pick up the tab or force insurers to do so.

Finally, there is an absurd view in this debate that somehow patent monopolies are the only way to finance innovation. There is no argument that we have to pay for research; no one expects highly skilled researchers to work for free. But we can and do have other mechanisms for paying for this work.

The government already spends more than $30 billion a year on biomedical research, primarily through the National Institutes of Health. This research is incredibly productive by all accounts. There is no reason, in principle, that we can’t double or triple the amount we spend on directly supported research. This would allow all new drugs to be sold at generic prices, without patent monopolies or related protections. By my calculations, this would save close to $380 billion a year (around 2.0 percent of GDP or more than five times the annual budget for the food stamp program). We would also benefit from having all the research findings in the public domain so that doctors and other researchers would have access to it when making decisions for their patients or planning future research.

CEPR / May 13, 2018

Article Artículo

The State of the Labor Market, What the JOLTS Data Tell Us

The Bureau of Labor Statistics released data from its March Job Openings and Labor Turnover Survey (JOLTS) yesterday. It got some attention because the job openings figure rose substantially, bringing the job opening rate to 4.3 percent, the highest since the survey was first fielded in December of 2000. This is somewhat higher than the 3.7 percent hire rate. Since the hiring rate had previously exceeded the job opening rate, as seen below, this was taken as fresh ammunition by the "hard to get good help" gang. 

fredgraph1

The argument they are making is that businesses have jobs open and want to hire, but they just can't find the people with the right skills. The problem with this story is that we see a sharp rise in the ratio of openings to hires everywhere, including industries like retail trade and restaurants, where we generally don't think of as requiring high skills.

In 2007, before the Great Recession, the job opening rate in retail was 2.6 percent. The hiring rate was 4.9 percent, a gap of 2.3 percentage points. In March, the job opening rate was 4.3 percent with a hiring rate of 4.4 percent, a gap of just 0.1 percentage point.

CEPR / May 09, 2018

Article Artículo

Yes Kids, You Can Have a Promising Career Scaring People About the Debt: Just Ask George Will

Yes, we have yet another column warning about the government debt from George Will, with a brief interlude warning about household debt as well. Yes, the national debt is a really big number, but quickly, here is why we need not be as concerned as George Will wants us to be.

First, on the debt service point, Will wants us to be scared that interest rates will rise, making debt service a very large share of the budget. Well, the Fed controls interest rates and unless inflation starts to rise rapidly (in which case the real value of the debt falls), there is no obvious reason that it should allow interest rates to rise to high levels.

It is also important to note that the Fed itself owns much of the debt. (It has more than $4 trillion in assets.) The interest on the debt owned by the Fed is refunded to the Treasury, meaning there is no net burden from this debt for taxpayers. The amount of this refund was more than $100 billion last year, or 0.5 percent of GDP. The interest burden net of money refunded now stands at about 1.0 percent of GDP, compared to more than 3.0 percent of GDP in the first half of the 1990s.

Suppose we get Will's bad story and the economy goes into recession. Of course, the deficit will rise due to the recession, as tax collections fall and we pay out more money on programs like unemployment insurance and food stamps. Also, we would likely want a fiscal stimulus to boost the economy.

The deficit hawks would like people to believe that no one will lend to us because of our high debt burden. That seems unlikely (Japan's debt-to-GDP ratio is more than twice that of the United States and its long-term interest rates are near zero), but let's assume it is true. What would stop the Fed from directly buying up debt issued by the US government that private investors didn't want?

The folks yelling "inflation" have to go back to the start of this story. The economy is in a recession, how would we get inflation? There is a story that the Fed's actions could cause the dollar to fall against the currencies of our trading partners. Let's imagine the dollar falls by 20 to 30 percent against the currencies of our trading partners as it did in the years from 1986 to 1990.

This would be equivalent to imposing tariffs of 20 to 30 percent on imports and granting a subsidy of 20 to 30 percent on all US exports. That would mean a sharp reduction in the size of the trade deficit, providing a huge stimulus to the U.S. economy. Are you scared yet?

CEPR / May 06, 2018