Ben Muse

Do drug companies face the correct incentives?

A day or so ago I quoted William Baumol on entrepreneurs ("More education isn't always a good thing").  Baumol argued that entrepreneurs will invest their energies where they think there will be a payoff, and that the payoffs are not always in productive activities.  If the big payoffs are in redistributive efforts or rent seeking  then they will invest in redistribution.

Marcia Angell argues that drug companies face incentives that lead them in largely unproductive directions ("The Truth About the Drug Companies").

Tweak an existing formula just enough to get patent coverage

"...The great majority of "new" drugs are not new at all but merely variations of older drugs already on the market. These are called "me-too" drugs. The idea is to grab a share of an established, lucrative market by producing something very similar to a top-selling drug. For instance, we now have six statins (Mevacor, Lipitor, Zocor, Pravachol, Lescol, and the newest, Crestor) on the market to lower cholesterol, all variants of the first. As Dr. Sharon Levine, associate executive director of the Kaiser Permanente Medical Group, put it,

"If I'm a manufacturer and I can change one molecule and get another twenty years of patent rights, and convince physicians to prescribe and consumers to demand the next form of Prilosec, or weekly Prozac instead of daily Prozac, just as my patent expires, then why would I be spending money on a lot less certain endeavor, which is looking for brand-new drugs?..."

Invest in lobbying and marketing

"Over the past two decades the pharmaceutical industry has moved very far from its original high purpose of discovering and producing useful new drugs. Now primarily a marketing machine to sell drugs of dubious benefit, this industry uses its wealth and power to co-opt every institution that might stand in its way, including the US Congress, the FDA, academic medical centers, and the medical profession itself. (Most of its marketing efforts are focused on influencing doctors, since they must write the prescriptions.)..."

Economize on internal research funds by licensing taxpayer funded research

"Beginning in 1980, Congress enacted a series of laws designed to speed the translation of tax-supported basic research into useful new products�a process sometimes referred to as "technology transfer." The goal was also to improve the position of American-owned high-tech businesses in world markets.

The most important of these laws is known as the Bayh-Dole Act, after its chief sponsors, Senator Birch Bayh (D-Ind.) and Senator Robert Dole (R-Kans.). Bayh-Dole enabled universities and small businesses to patent discoveries emanating from research sponsored by the National Institutes of Health, the major distributor of tax dollars for medical research, and then to grant exclusive licenses to drug companies. Until then, taxpayer-financed discoveries were in the public domain, available to any company that wanted to use them. But now universities, where most NIH-sponsored work is carried out, can patent and license their discoveries, and charge royalties. Similar legislation permitted the NIH itself to enter into deals with drug companies that would directly transfer NIH discoveries to industry...

These laws mean that drug companies no longer have to rely on their own research for new drugs, and few of the large ones do. Increasingly, they rely on academia, small biotech startup companies, and the NIH for that. At least a third of drugs marketed by the major drug companies are now licensed from universities or small biotech companies, and these tend to be the most innovative ones..."

Invest in legal resources to extend patents

"In the 1990s, Congress enacted other laws that further increased the patent life of brand-name drugs. Drug companies now employ small armies of lawyers to milk these laws for all they're worth�and they're worth a lot. The result is that the effective patent life of brand-name drugs increased from about eight years in 1980 to about fourteen years in 2000. For a blockbuster�usually defined as a drug with sales of over a billion dollars a year (like Lipitor or Celebrex or Zoloft)�those six years of additional exclusivity are golden. They can add billions of dollars to sales�enough to buy a lot of lawyers and have plenty of change left over. No wonder big pharma will do almost anything to protect exclusive marketing rights..."

I don't know enough about the drug industry to evaluate some of her charges (for example, no difference between statins), and her rhetorical approach is not mine.  The idea that the firms will invest resources where the incentives are greatest, and that the incentives might not always direct them to productive investments, sounds plausible.

What went wrong in Cancun

What went wrong in Cancun

Last September the "Doha Round" world trade talks went seriously astray during negotiations in Cancun, Mexico. This Doha Round is also referred to as the "Development Round" since it was advertised as a round of negotiations aimed to a great extent at helping developing countries. (I posted last June on some background to the Doha development round: "A Tale of Three Cities) Jeffrey Schott of the Institute for International Economics explains what went wrong in the Institute paper "Reviving the Doha Round.".

Schott's paper is worthwhile for more than the "old news" of what went wrong in Cancun. He also offers four differences between GATT and WTO negotiations, and a proposals for getting the Doha Round back on track.

His Cancun analysis highlights the practical, rather than philosophical, obstacles to agreement. The European Union (EU) internal agricultural negotiations were out of synch with the Doha process; the US and EU had to cobble together a common position in a very short period of time - the time constraint forced the US away from its own position - the inadequacies in the resulting joint paper generated skepticism about US motives among other parties; a developing country coalition (G-20) which evolved in response to the EU/US paper didn't have time (time constraints again) to pull a complete negotiating posture together (they knew what they wanted, they didn't know what they'd give); the EU didn't make clear what it would need as compensation for farm reforms; developing countries were unwilling to commit to potential concessions in the far future in exchange for real advantages in the present; the promotion of the Doha Round as a "development round" led some developing countries to push for developed country concessions that could not be provided within the WTO negotiations.

"First and foremost was inadequate progress on agriculture...The United States put forward radical proposals in the summer of 2002 that would require it to rewrite its farm bill; the European Union was unable to do anything until it agreed to new farm policies in the summer of 2003. By that point, Geneva negotiators had failed to meet their assigned deadline to agree on "modalities" for farm trade talks; indeed, by the Montreal mini-ministerial in late July 2003 the talks were at an impasse. Countries recognized that the draft ministerial declaration developed by the WTO Council chairman was untenable and would cause the Cancun meeting to be still-born.

As a result, ministers in Montreal turned to the big powers for a new initiative to save Cancun. From the US perspective, it was a no-win situation: working with the European Union probably would produce a bad deal. The two sides had only about 10 days to craft a proposal, and the EU negotiators had little flexibility to deviate from their freshly minted negotiating mandate. Thus any compromise would reflect in large measure the EU position. But not working with the European Union would doom Cancún. So the US strategy, as I see it, was to deal with the Europeans and then hope that other WTO members would push the United States back toward its original proposals on agricultural reform.

Unfortunately, US officials, among others, underestimated the backlash to the US-EU compromise proposal tabled in late August 2003, which created mistrust and provoked the formation of the G-20. This hastily formed alliance of developing countries (led by Brazil, China, India, and South Africa) were united on their demands but couldn't agree to a common position for their own contributions, thus provoking the ire of US officials and others. Interestingly, this did not inhibit Brazil from pushing for substantive discussions in Cancun, but the curtain closed on the show shortly after intermission and the negotiations were not engaged.

The G-20 was founded - and still exists in large measure - to push the United States, Europe, and Japan to liberalize their barriers to agricultural trade. That position is not antithetical to US interests and objectives in the Doha RoundÂ...provided that the large and middle-income developing countries in the group also reduce barriers to trade in their markets.

Second, negotiators were uncertain about what the European Union needed to get from other countries to enable it to follow through on hoped-for farm reforms that would go beyond their limited new mandate. Initially, the Singapore issues seemed to be EU priorities, though it was hard to identify political constituencies that actively promoted these objectives. Japan also strongly supported negotiations on the Singapore issues (particularly investment) for both substantive and tactical reasons. At Cancun, however, Japanese negotiators seemed to be following defensive strategies to avoid decision points on agriculture more than substantive interests in an investment accord.

While the European Union (plus Japan and Korea) wanted comprehensive negotiations on the Singapore issues, almost no one else did. The expected deal would probably have involved negotiations on a narrowly circumscribed set of transparency obligations - but developing countries were worried about opening the door to new obligations on investment policies in subsequent WTO rounds - that is, in talks that might take place 10-15-or even 20 years from now! In essence, developing countries opted to either delay or forego benefits from market access reforms this decade in order to reduce their anxiety about talks that might take place in a decade or two.

Third, many developing countries misconstrued what could be done in a "Development Round" in the WTO. Some officials recognized that political resistance in the major industrial countries to needed reform commitments in agriculture meant that the WTO talks would necessarily be extended well past the stated deadline of January 2005, and thus adopted positions that deepened divisions instead of narrowing gaps on key market access and rulemaking initiatives. Others were less well informed - which is another problem in the WTO - and demanded advance payments on trade reforms and monetary compensation for the Doha Round to proceed - demands that stretched well beyond the jurisdiction of the WTO and exceeded the competence of the ministers involved in the WTO. The fact that this latter group of developing countries are hurt the most by setbacks to the multilateral trading system seemed beyond their comprehension."

Nations wax and nations wane

Nations wax and nations wane

Foreign Affairs editor James Hoge argues that Indian and Chinese economic growth will increase their relative power in the world, while that of the west will decline: "A Global Power Shift in the Making"

Fundamental changes in the relative power of states "occur infrequently, and are rarely peaceful." Hoge sees the rise of China, base on its economic fundamentals, as the key fact, and discusses potential political responses. The U.S. has engaged in a traditional competitive balance of power response:

"Militarily, the United States is hedging its bets with the most extensive realignment of U.S. power in half a century. Part of this realignment is the opening of a second front in Asia. No longer is the United States poised with several large, toehold bases on the Pacific rim of the Asian continent; today, it has made significant moves into the heart of Asia itself, building a network of smaller, jumping-off bases in Central Asia. The ostensible rationale for these bases is the war on terrorism. But Chinese analysts suspect that the unannounced intention behind these new U.S. positions, particularly when coupled with Washington's newly intensified military cooperation with India, is the soft containment of China...

Suspicious Americans have interpreted larger Chinese military budgets as signs of Beijing's intention to roll back America's presence in East Asia. Washington is thus eager to use India, which appears set to grow in economic and military strength, as a counterbalance to China as well as a strong proponent of democracy in its own right..."

Hoge acknowledges the need to be prepared for a competitive relationship, but recommends cooperative engagement as well.

"...The Bush administration's embrace of engagement with China is an improvement over its initial posture, and the change has been reflected in Washington's efforts to work with Beijing in the battle against terrorism and negotiations with North Korea. The change has also been reflected in the reluctance to settle trade and currency differences by imposing duties...

...The United States must also avoid creating a self-fulfilling prophecy of strategic rivalry with China. Such a rivalry may in fact come to pass, and the United States should be prepared for such a turn of events. But it is not inevitable; cooperation could still produce historic advancements.

At the international level, Asia's rising powers must be given more representation in key institutions, starting with the UN Security Council...The same can be said of other key international bodies...

...Canadian Prime Minister Paul Martin has embraced the idea of elevating to heads-of-state level the meetings of the G-20 group, which is composed of 10 industrialized countries and 10 emerging market economies. This could incorporate into global economic governance those countries with large populations and growing economies.

The credibility and effectiveness of international bodies depends on such changes; only then will they be able to contribute significantly to peace among nations. Although hardly foolproof, restructuring institutions to reflect the distribution of power holds out more hope than letting them fade into irrelevance and returning to unrestrained and unpredictable balance-of-power politics and free-for-all economic competition."

Paul Kelly sees economic and population growth driving similar power shifts between Australia and its Asian neighbors, and focuses on potential economic responses in
"Punching Above Our Weight" from Policy magazine.

Kelly's starting point is the argument that "disparity in growth rates between Australia and industrialising East Asia meant that the gap in economic size, technological and industrial sophistication will narrow, and, as a result 'Australia will be able to rely less on its strategic and economic weight in the region to achieve its policy objectives' " [in the last phrase, Kelly quotes from a 1997 Australian gov't white paper- Ben]...

"Hard power" is best defined by population and GDP, and other Asian countries are likely to outcompete Australia on both criteria in coming years.

"The situation is compounded by a series of strategic realities." Australia lives in an increasingly rough neighborhood. "...Australia is in a region where dislocation and conflict are on the rise...Australia will have to assume a greater role within its own neighborhood not just as a security partner but to uphold civil society and check the drift towards failed states...The threat of Islamic terrorism will drive Australia into deeper collaboration with Indonesia, the Philippines and other regional partners..." Nevertheless, Australia has few opportunities to seek increased security through "political or regional economic union" with other states (aside from New Zealand). Finally, "Australia is highly exposed to the impact of globalization."

Kelly focuses on the economic dimensions of Australia's strategic response. Australia has to enhance three strategic assets: GDP, population, and technological change. The response includes: (a) "becoming one of the most open and competitive economies in the world exposed to global markets and the disciplines they demand." (b) investment in education, (c) microeconomic reform to maintain a flexible economy, (d) encourage immigration, and (c) public policy to stabilize the fertility rate.

I learned about Kelly's article from the Arts & Letters Daily.

Revised 6-29-04

More effective PowerPoint presentations Ten

More effective PowerPoint presentations

Ten tips for more effective presentations from Bill Howard: "Some Additional Tips for Effective Presentations"

Some good ideas, although I'm not sure about #10: "Male presenters, learn to use a little makeup (called pressed powder) to take the sheen off your face. It's especially important if you have oily skin and you're at a conference where your image is projected on a screen."

I learned about these from Newmark's Door.

The price of a college

The price of a college education

USA Today reports that tuition costs paid by students at public universities has dropped dramatically over the last five years, while the costs paid by students at private universities has risen by less than half the published tuition prices. Published prices have risen, but federal tax breaks and state and federal grants have grown enormously: "Tuition burden falls by a third"

• Average tuition costs at public universities have fallen 32% over the last five years, although posted prices have risen 18%.


• Students at public schools only paid an average of 27% of the posted prices.


• Average tuition costs at private universities have risen 7%, considerably less than the 20% increase in posted prices.


• Students at private schools only paid an average of 57% of the posted prices.


• All of this is courtesy of a "a $22 billion annual increase in grants and tax breaks since 1998."

Posted tuition isn't independent of the surge in grants and tax breaks. According to Cauchon, (in the related story "Grants more than offset soaring university tuition",

"King Alexander, president of Murray State University in Kentucky, wants the world to know how many universities set tuition prices. It works like this:

1. The university raises its official tuition price.

2. The higher tuition qualifies many students for bigger federal and state grants, which are passed on to the school.

3. The university writes a "scholarship" to cover the rest of the tuition hike, so many students don't actually pay more.

"It is a shell game, pure and simple," Alexander says. "A lot of schools set tuition prices to maximize grant money and then use institutional (financial) aid — which isn't real money — to set the real tuition.".."

More education isn't always a good thing

A lot depends on what its going to be used for.  Over at Catallaxy, Jason Soon asks, "Can an economy have too many lawyers?"

William Baumol writes about his 1993 book, Entrepreneurship, Management and the Structure of Payoffs:

"I was concerned primarily with the entrepreneur, and the apparently mysterious propensity of the supply of that factor of production suddenly to dry up, braking the economy's growth, or to expand unexpectedly, by some unspecified process of spontaneous generation, leading the economy to take off.  I concluded that much of the explanation for such swings is to be found in the way in which the market mechanism - together with institutional arrangements - influences, not the creation, but the allocation of entrepreneurship between productive and unproductive (rent-seeking) pursuits.  It was my contention that entrepreneurs as a group do not just appear or disappear in some primordial ooze.  Rather, they can be and are reallocated by economic conditions and circumstances into (or out of) activities that appear not to be entrepreneurial because of the preconception that enterprising activity is necessarily productive.  But entrepreneurs, like many others, are motivated primarily by prospects of wealth, power, and prestige, and, like people in any other occupation, entrepreneurs range widely in the degree to which morality and concern over the public welfare constrain their activities.  Consequently, when institutional arrangements happen to offer greater rewards to enterprising rent-seeking or to destructive activities such as warfare or organized crime, than they offer to productive entrepreneurial activity, we can expect an economy's entrepreneurial effort to be allocated away from the more productive undertakings..."

(The Free-Market Innovation Machine, Princeton, 2002, pages vii-viii).

Eight ways to abuse science

Eight ways to abuse science in policy-making

Chris Mooney lists eight ways to abuse science in the policy-making process: "Towards a Taxonomy of Science Abuses"

Policy evaluation - paying attention

Policy evaluation - paying attention to statistics

Alan Krueger points out how important it is to pay attention to statistical issues in designing and interpreting policy evaluations. See the June 24 New York Times "Economic Scene" column: "Economic Scene: Private vs. Public at Airports"

Can private firms provide airport security more cheaply and more effectively than government? We can't tell. We have several studies, but the small sample sizes are small, and they are subject to selection bias.

I learned about this column from Atlanticblog

Cowen on Shaviro on Medicare

Cowen on Shaviro on Medicare

NYU Law professor and public finance expert Daniel Shaviro has a new book out on medicare: Who Should Pay for Medicare?. Tyler Cowen at Marginal Revolution recommends it, and has run a series of posts on it.

"Is Medicare Progressive in its Impact?" Maybe not.

Medicare poses an enormous fiscal challenge. "What Should we do with Medicare?" may not be "What will happen with Medicare?"

More sugar

The Financial Times reports on a proposal to revamp European Union (EU) sugar subsidy and protection programs:

"...According to documents seen by the Financial Times, Mr Fischler [EU Farm Commissioner - Ben] will propose cutting the guaranteed sugar price by one-third between 2005 and 2007. He will also reduce sugar quotas from 17.4m tonnes to 14.6m tonnes a year. Crucially, the amount of subsidised sugar exports will drop from 2.4m tonnes a year to 400,000 tonnes, a move that will boost the prospects of sugar farmers in the developing world."

Peter Gallagher provides an analysis of the impacts on EU sugar producers, and on certain foreign countries which actually benefit from EU subsidies and protection, here: "Proposed EU Sugar Reforms" 

Some foreign countries (76 African, Caribbean and Pacific countries - called the "ACP" countries) benefit from the EU program because the EU gives them preferential access to its domestic market (and the artificially high prices therein) as a sort of foreign aid program.  Gallagher points to a nifty paper by Theodore Levantis, Frank Iotzo and Vivek Tulpule of the Australian Bureau of Agricultural and Resource Economics (ABARE) on the impacts of the preferential access program on one small ACP country - Fiji:  "Ending of EU Sugar Trade Preferences.  Potential Consequences for Fiji". 

The authors use an computable general equilibrium model of Fiji's economy to look at the impacts of three scenarios: (a) eliminating the subsidy with no new foreign aid, (b) eliminating the subsidy and substituting equivalent foreign aid which is then used to reduce Fijian taxes and tariffs, (c) eliminating the subsidy and substituting equivalent foreign aid which is then used for investments in infrastructure. 

All three alternatives move Fiji onto a faster growth path, and (b) and (c) lead to increased GDP (under (a) the increase in growth is small compared to the immediate impact of the loss of the preference, and GDP is below baseline levels for at least 10 years).

"The two principal reasons for the higher growth path [even under Alternative A - Ben] are: factor resources are diverted to sectors of the economy with stronger growth prospects; and factor resources are diverted to sectors providing higher productivity growth. The marginal cost of producing sugar in Fiji is relatively high and exceeds the world market price... Growth in Fiji?s sugar industry is therefore constrained by the fixed volume quota for access to the European market. For this reason, growth in other sectors of the Fijian economy consistently outpace growth in sugar production. And productivity growth in sugar production is constrained by a lack of investment caused by the lack of growth prospects in European sugar markets and the uncertainty about land tenure in Fiji."

It's not all skittles and beer, even under Alternatives (b) and (c).  Unskilled rural labor takes a hit under all three scenarios:

"...Employment in the sugar industry is dominated by rural based unskilled labor, particularly of family based self employment on small scale farms. Consequently, it is this labor that loses out in the event of a loss in sugar trade preferences. Under scenario A, unskilled rural employment drops by 5.2 per cent in the first year and continues to decline marginally thereafter so that, after ten years, the decline reaches 5.5 per cent... Scenario C is the best case but, even then, unskilled rural employment declines sharply. After ten years, the loss in unskilled rural employment will be 3.3 per cent and, initially, the fall will be 6.1 per cent...  For scenario B, the pattern of unskilled rural employment is similar to scenario A ...."

Revised 6-25-04

Running interference for sugar producers

Chris Mooney argues (in Mother Jones) that the U.S. Department of Health and Human Services is trying to get the World Health Organization (WHO) to modify a report tying sugar consumption to obesity and obesity related diseases such as Type II diabetes.  The motive: to be responsive to sugar interests with administration ties.  "Eating Away at Science"

"...The final WHO guidelines are scheduled to be approved this summer, and before drafting them the WHO produced a summary of the scientific research, which finds a connection between obesity and unhealthy diets, including too much consumption of sugar and fatty foods. In April 2003, after this report was released, the Sugar Association and the Corn Refiners Association (which makes high-fructose corn syrup, the leading soft-drink sweetener) mobilized to have the findings revised. Not only did they call on HHS to take action, but the Sugar Association also wrote to the WHO threatening to have its allies in Congress eliminate the organization's U.S. funding if the WHO didn't rethink its anti-obesity work.   

The industry's leaders and representatives are certainly well positioned to make their views known in Washington, particularly to the president and his top advisers. The Bush campaign acknowledges, for instance, that its "Rangers"?fundraisers who bundle at least $200,000 in donations?include the sugar magnate Jose "Pepe" Fanjul Jr.; Richard F. Hohlt, a 2003 lobbyist for Altria, which owns Kraft Foods; and Robert Leebern Jr., a lobbyist who last year represented Coca-Cola. And in the campaign's class of "Pioneers"--bundlers of a minimum of $100,000; there's Robert A. Coker, a United States Sugar Corp. senior vice president; Barclay Resler, Coca-Cola's vice president of Government Relations; and Joe Weller, the chairman and CEO of Nestl� USA..."

The government is providing this service to the industry in addition to jacking its profits up at the expense of U.S. consumers by protecting it from international competition. (Given the health problems associated with sugar consumption, higher prices and reduced consumption may have a positive health benefit.)

Recent posts on "big sugar"

"Trade Protection Can Cost Jobs"

"Cooperation, makes it happen..."

"Big Sugar"

"Candy makers fleeing the country"

"Doha round maneuvers; European sugar"

(I'm taking advantage of Blogger's new search function.)

Harding Administration accomplishments

David Bernstein at The Volokh Conspiracy posts on Harding Administration accomplishments ("Poor Warren Harding"), and finds that Harding compares favorably to the "execrable and incompetent Woodrow Wilson."

Hal Varian on writing about

Hal Varian on writing about economics

Hal Varian explains how to write economics textbooks, business textbooks, and economics columns, here.

"...The most important single thing is to know your audience. At the very outset you should form a clear idea of who you are writing for. Once you understand who your audience is, the next question is ask is why they should be interested in what you have to say. Do they want to be educated, informed, enlightened, or entertained? And why are you the person who can do it? If, after sober contemplation of these questions, you still want to proceed, you will be in a far better position to resolve the countless choices that arise when you write. When you have to make a decision, you simply ask ``What does my audience want?'' If you have a good idea of who your audience is, your should be able to answer this question."

Varian describes how he evolved from an author, to a pundit, to a New York Times columnist, here. Where do good ideas for columns come from?

"...if you can't think of something to write about yourself, you can just write about someone else's ideas.

...there is no end of interesting economic material being written. Since essentially no one reads those papers-except for other economists-there is a vast reservoir of untapped material.

What I try to do is to take some current event-Social Security, or drug prices, or technology-and find some relevant work in economics. Sometimes it is recent work, sometimes several years old. And then I try to explain how this economic thinking casts light on the issues being debated.

...Sometimes I come across an interesting working paper or recent publication and I use that as the basis for the column.

Sometimes someone (usually a non-economist) will ask me about something and this will inspire me to write a column explaining the economists viewpoint..."

Markets for pollination services Skip

Markets for pollination services

Skip Sauer (Sports Economist) posts with a link to a paper on markets for pollination services:"The fable of the bees".

Beekeeping has been used as an example of an activity that would be underprovided because it would be associated with positive externalities (pollination services). Steven N. S. Cheung actually looked at what happened, and documented contracting between farmers and beekeepers to provide pollination services. Sauer links to a paper on honeybee pollination markets.

Douglas Whynott wrote a book on the lives and operations of migratory beekeepers:
Following the Bloom: Across America With the Migratory Beekeepers Andrew David Chamberlain at the Idea Shop has a complementary post on this topic, with a link to an additional article. He doesn't have Sauer's story on the migratory beekeeper, the truck crash, and the loose bees, however.

Clinton Economic Policy Failures Max

Clinton Economic Policy Failures

Max Zawicky posts a list of six Clinton Administration economic policy failures (from the perspective of someone on the left): "BUBBA BUBBA, TOIL AND TRUBBA"

Zawicky spends time getting his failure criteria right. Politicians have to make all sorts of compromises to stay in office, so its not realistic to ding them for every deviation from an ideal policy stance. A policy failure could be the result of compromise; a political failure could be the result of taking risks to do the right thing. But, when something is counterproductive from a partisan point of view, and counterproductive from a policy point of view, you have an unambiguous failure.

The Economist on the underground

The Economist on the underground economy

This week's (June 19) Economist's "Economic Focus" column highlights two studies on the underground or gray economy:"Economics focus: In the shadows"

Friedrich Schneider reports on "Size and Measurement of the Informal Economy in 110 Countries Around the World" According to Schneider's abstract,

"Estimates of the size of the informal economy in 110 developing, transition and OECD countries are presented. The average size of the informal economy, as a percent of official GNI in the year 2000, in developing countries is 41%, in transition countries 38% and in OECD countries 18%. A large burden of taxation and social security contributions combined with government regulations are the main determinants of the size of the informal economy."

Firms enter the underground economy to avoid the costs associated with these.

Diana Farrell of the McKinsey Group points out that high tax rates and regulatory burdens can slow growth by encouraging firms to structure themselves for success in the underground economy in productivity-sapping ways ("The hidden dangers of the informal economy" free registration required for access to the article). As the Economist puts it:

"In Russia, for example, large supermarkets, which have no choice but to obey the tax inspectors, have a 5% cost advantage over small shops. But informal outlets can save 13% by staying in the shadows. In other words, the productivity benefits of greater scale are swamped by higher tax rates. As a result some industries, especially labour-intensive ones such as retailing, stay fragmented and inefficient."

Mead on Chernow on Hamilton

Mead on Chernow on Hamilton

Political scientist Walter Russell Mead likes Ron Chernow's new biography of Alexander Hamilton very much and says so in this review in the new Foreign Affairs.

The Library of America series also has a volume on Hamilton. The volume includes:

"...more than 170 letters, speeches, essays, reports, and memoranda written between 1769 and 1804. Included are all 51 of Hamilton's contributions to The Federalist, as well as subsequent writing calling for a broad construction of federal power under the Constitution; his famous speech to the Constitutional Convention, which gave rise to accusations that he favored monarchy; early writings supporting the Revolutionary cause and a stronger central government; his visionary reports as Treasury secretary on the public credit, a national bank, and the encouragement of American manufactures; the Reynolds Pamphlet, in which Hamilton made a detailed confession of adultery in order to defend himself against charges of official misconduct; and his self-destructive attack on John Adams during the 1800 campaign. An extensive selection of private letters illuminate Hamilton's complex relationship with George Washington, his deep affection for his wife and children, his mounting fears during the 1790s regarding the Jeffersonian opposition and the French Revolution, and his profound distrust of Aaron Burr. Appendix includes conflicting eyewitness accounts of the Hamilton-Burr duel."

The Library of America series covers the revolutionary period and the early republic well, with volumes on Jefferson, Franklin, Washington, Madison, Paine, a volume of collected writings on the Revolution, and two volumes on the debates on the constitution. I'd love to see a volume on John Adams.

Alaska Senator Stevens' successful investments

Liz Ruskin reports on Alaska senior senator Ted Stevens' business venture with Anchorage developer Bob Penney in today's Anchorage Daily News: "Stevens-Penney venture pays well, at least on paper".

"Stevens joined Penney and other partners to develop a subdivision in Grantsville, Utah, starting with an investment of $15,000 or less in 1998, according to the financial disclosure form Stevens filed for that year. His share of the subdivision project is now worth at least $100,000 and possibly as much as $250,000, according to the senator's latest report...

Penney said he and his business partners invited Stevens to join them in "appreciation for all he's done for Alaska and the country. We respect him very, very much...

...The Utah development "is one where we asked Ted to come in and join us because we'd like to have him for a partner out of due respect and our way of giving him a thank-you and consideration for what he's done for all of us and all our kids," Penney said.

When you look for business partners, it makes sense to choose from people you like and admire rather than strangers, Penney said."

In December 2003 I posted on two genres of Stevens' stories: (a) stories about how much money he brings to Alaska as chair of the Senate Appropriations committee, and (b) stories about his connections with Alaska business figures and their profitable investments together:  "It helps to have a Senator on the Appropriations Committee"

Two earlier posts referenced in December - Last summer Liz Ruskin reported on Stevens' connections with Anchorage developer John Rubini:  "Business and politics"  Also last summer the Associated Press reported that "Alaska gets $1.91 back for every $1.00 in Federal taxes"

Asian dollar purchases Why are

Asian dollar purchases

Why are the Chinese and Japanese central banks loading up on "U.S. dollar denominated securities?" Seven ideas from Tyler Cowen: "Why do Asian central banks buy so many dollars?"

What is variety worth? Freeing

What is variety worth?

Freeing international trade lowers consumer prices. It also gives consumers more products to choose from. Economist's have measured the first benefit, but not the second.

Virginia Postrel highlights an National Bureau of Economic Research (NBER) study addressing the second benefit in her column in today's New York Times:"The Economic Value of Variety".

>>Being able to get exactly the coffee you're in the mood for makes you, in a sense, better off. But this improvement in consumer welfare has tended to go unmeasured. In most economic statistics, coffee is coffee, beer is beer and shoes are shoes.

In a recent working paper for the National Bureau of Economic Research, Professor Weinstein and Christian Broda, an economist with the Federal Reserve Bank of New York, estimate how much international trade has benefited consumers simply by increasing variety. (The paper is available at www.ny.frb.org/research/staff_reports/sr180.html.)

The results are striking. Consumers, they estimate, would be willing to pay $280 billion a year, or about 3 percent of gross domestic product, to have access to the variety of goods that were available in 2001, rather than what they could have bought in 1972...

African contribution to Allied victory

African contribution to Allied victory in WWII

Abiola Lapite notes that about a quarter million Africans died fighting the Axis powers in WWII: "World War II - The Forgotten African Contribution"

Bainbridge on interstate shipment of

Bainbridge on interstate shipment of wine

Professor Bainbridge comments on the interstate wine shipment case before the U.S. Supreme Court:"TCS Column on Wine"

John Christian Barber

On April 20 I posted excerpts from the diary of John Christian (Jack) Barber , a young Englishman ("When Good Vacations Go Bad").

In March and April 1914, Barber was traveling in Mexico. He spent March visiting his uncle, William Gleadell, and Gleadell's family, in Merida in the Yucatan. In April he traveled with them to their home in Jalapa, Vera Cruz.

Interstate wine shipments 2 Last

Interstate wine shipments 2

Last Wednesday's USA Today carried a story by Donna Leinwand on the upcoming Supreme Court case on state ability to control imports of alcohol:"Ordering liquor online sets off legal challenges" Leinwand surveys the pros and cons - the laws restrain trade but may make it easier for a state to collect tax revenues or control sales to minors. Leinwand also provides a survey of state controls on interstate shipments.

Industry support for the current arrangements is coming from liquor wholesalers, whose central position in the distribution system gets legislative support under current arrangements. The main opposition is coming from small wineries, looking for new ways to move their products.

"...Last month, the Supreme Court agreed to resolve conflicting rulings by courts in New York and Michigan over whether states can ban out-of-state companies from shipping wine, beer and liquor directly to customers. Fifteen states have such bans; most of the rest have some limits on shipments.

The restrictions are part of a distribution system that requires wineries, breweries and distilleries to sell their products to state-licensed wholesalers, which then sell them to liquor stores. The laws make it easy for states to tax alcohol. And as an obstacle to underage drinking, the laws also require customers to purchase alcohol in face-to-face transactions in which IDs can be checked.

Critics say the laws have been made obsolete by the Internet and by the boom in U.S. vineyards, which have changed the landscape for alcohol sales...

Earlier posts: (a) Interstate wine shipments, and (b) Interstate wine sales

The Institute for Justice, the law firm representing the wineries, has a web site on the issue, here: Media Center. The "See Related Press Information" link at the bottom of the page connects to background material on a New York case (Swedenburg v. Kelly), one of the two cases behind the Supreme Court case.

Jim Tozzi and the Data

Jim Tozzi and the Data Quality Act

Liberal science and policy journalist and blogger Chris Mooney writes about Jim Tozzi of the conservative regulatory think-tank, the Center for Regulatory Effectiveness, and about Tozzi's brainchild, the Data Quality Act, in the May Washington Monthly:"Paralysis by Analysis"

Mooney's title summarizes his argument, which is that Tozzi has promoted the Data Quality Act as a way of "gumming up" the regulatory works, and providing a tool for use in slowing down regulatory activity.

"..On its face, the Data Quality Act merely requires government agencies to field complaints over the data, studies, and reports they disseminate, in order to ensure the "quality, objectivity, utility, and integrity" of the information. Though seemingly unobjectionable, this provides a new workload for agencies that could impinge upon their other duties. But it's just the beginning. The Bush administration has used the DQA as a springboard to implement an unprecedented "peer review" system for government science, a cumbersome set of protocols that was strenuously opposed by the nation's science community, which saw little in the original plan resembling standard academic peer review. (As we went to press, the White House released a revised "peer review" bulletin that appeared to respond to some of these criticisms.)..."

Outsourcing and state and local

Outsourcing and state and local budgets

State and local governments can save taxpayers a bundle with foreign outsourcing. But they are also vulnerable to political pressure to "do the work at home." Daniel Drezner posts on the conflict: "More cost savings from protectionism".

Light pollution

Light pollution

Urban lighting makes it harder to see the stars.  This makes it a concern to star gazers and amateur and professional astronomers.  The International Dark-Sky Association tries to publicize the problem and promote solutions.  The Italian Light Pollution Science and Technology Institute has another useful set of resource pages.  Click here for the Institute's "World Atlas of the Artificial Night Sky Brightness."

But ecologists are also becoming concerned.  Ben Harder points to some of the research in the story "Degraded Darkness" in the most recent issue of Conservation in Practice (a publication of the Society for Conservation Biology).  Lots of species behave different in the light and the dark, or change their behavior when lights are on after dark.

"...Many of the effects of artificial light may resonate up and down food chains, dragging whole ecosystems into imbalance. And by modifying the playing field on which nocturnal organisms develop, interact, and reproduce, artificial light may sculpt not only their individual lives but also the biological evolution of their species...

It's tempting to assume that artificial light distresses only a few exquisitely sensitive species. But mounting evidence suggests that the disappearance of darkness can affect plants and animals in a variety of ecosystems.  Snake populations are declining in the vicinity of developing parts of California, for example. And intriguingly, it seems that not all the blame lies with familiar culprits like new roads and neighborhoods. Nocturnal snake species are thinning out more rapidly than diurnal snake species, even in areas where development isn?t cutting directly into snake habitat. "There are certain areas in southern California," says biologist Robert Fisher of the U.S. Geological Survey, "that have what seems like suitable habitat for these nocturnal snakes. But they?re not there, even though their diurnal counterparts are." ...

Moore [a Wellesley College scientist - Ben] suspects that artificial illumination alters aquatic ecosystems from the smallest organisms on up. The implications are far reaching and could ultimately link light pollution to water quality. Minute zooplankton lurk well below the surface during the day to avoid predators, then rise to graze on algae at night. But artificial light discourages them from venturing toward the surface. "If their grazing is inhibited . . . effects will cascade up the food chain," Moore says. Algae populations could explode in response to reduced predation, and those blooms would deplete dissolved oxygen critical to fish, crowd out other photosyn-thesizers, and cast unwanted daytime shade on submerged aquatic vegetation that provides habitat for juvenile fish..."

An interesting article available on the web.  (materials from a conference on the ecological impacts of artificial lighting can be found at the web page of the Urban Wildlands Group).

Ecology's systemic impacts and associated unanticipated consequences bring to mind the interactions between markets we study in economics.  The Scientific American recently had a neat article on the impacts of reintroducing wolves into the Yellowstone National Park: "Lessons from the Wolf"  Evidently, the reintroduction of wolves reduced elk populations, fewer elk browsed on willow trees, willow populations in stream bottoms rebounded, stream banks were stabilized, beaver populations grew by exploiting the willow for food and construction material, and trout habitat improved.  Wolves outcompeted coyote populations, reducing coyote numbers and increasing the population sizes of coyote prey (voles, mice, etc.).

How to write bad Daniel

How to write bad

Daniel Drezner explains: "A new challenger for Judith Butler's mantle"

Interstate wine shipments The American

Interstate wine shipments

The American Thinker posts on the importance of the upcoming U.S. Supreme Court case on direct interstate alcohol shipping for small wineries: "A necessary intrusion by the Supreme Court"

I learned about this from Professor Bainbridge: "Lifson on Interstate Wine Shipments"

How are exchange rates determined?

How are exchange rates determined?

And why do they matter? Hal Varian explains in his New York Times column:The New York Times > Business > Economic Scene: Exchange Rates the Economy

Who benefits from elimination of

Who benefits from elimination of tariffs and subsidies?

Peter Gallagher points out that, "...it's been demonstrated many times that the biggest winners from the elimination of absurd levels of protection for products such as sugar, oilseeds, cheese, meat, rice and grains are the world's richest and most protectionist countries."

But, "Even poor countries that do not export agricultural products will benefit from the opening of access to markets such as the EU, Japan, Norway, Canada and the USA. Why? Because the effect of astronomically high tariffs in these countries is to depress world market prices and, evenutally, the prices received by farmers in every less protected market.":"Market access matters "

New IMF Head Rodrigo Rato

New IMF Head Rodrigo Rato

The Economist evaluates the likelihood that new IMF head Rodrigo Rato will enjoy a quiet life in "A new boss for the IMF"

"...Can Mr Rato, then, look forward to a quiet life? Probably not. These rare months of tranquility in emerging markets owe a lot to two stars falling into temporary alignment: strong growth and easy money. America’s vigorous recovery and China’s unbridled expansion have made it easy for Latin America and South-East Asia to export their goods. Meanwhile, interest rates at emergency lows in the United States have made it disconcertingly easy for emerging markets to import capital. In the year to March, the spread between emerging-market bonds and United States Treasuries fell by almost three percentage points.

Mr Rato’s honeymoon may not even last the month, however. The market expects Alan Greenspan, the chairman of America’s Federal Reserve, to raise interest rates at its June 30th meeting and to double them by the end of the year. Latin America’s stock, bond, and currency markets are looking towards this event with a mixture of fear and loathing. As J.P. Morgan, an investment bank, recollects in a recent report, the last time Mr Greenspan tightened monetary policy, in 1999-2000, Brazil’s real took a dive. The time before that, in 1994-5, Mexico was hit by its “tequila crisis”. And in 1986-1989, when Mr Greenspan made his debut, a rash of debt defaults followed..."

Job creation as a social

Job creation as a social goal

Eric Rasmusen reflects: "Jobs as a Stupid Goal of Government Policy"

Health insurance Arnold Kling argues

Health insurance

Arnold Kling argues that people should be required to obtain mandatory catastropic health insurance in this Tech Central Station column: "Health Insurance Do-Nots"

Brad DeLong argues for a Kerry campaign proposal for the government to "reinsure private insurers and HMOs: construct a 'premium rebate' pool to pay annual health-care bills over $50,000...": "More Thoughts About Kerry Health Care Proposals"

International comparisons of tort costs

International comparisons of tort costs as a percent of GDP

Peter Gordon reports:Tort Costs

Chewing gum in Singapore The

Chewing gum in Singapore

The Guardian reports on how they deal with externalities in Singapore:"Singaporeans enter the gum-chewing 21st century - but only if they register"

"...gum is going on sale legally for the first time in 12 years. The bad news: if you want some you will have to register as a gum user and show an identity card every time you buy a packet.

The arch-symbol of the American way of life was outlawed by Singapore's senior minister Lee Kuan Yew in 1992.

He took the unique measure... in outrage at the splats of used gum dotting the country's otherwise pristine streets..."

Also, Santa Anna's role in introducing chewing gum to the U.S. I learned about this from Peter Gordon's Blog