Alex Tabarrok

Marketing Pork

by on September 2, 2015 at 1:10 pm in Economics | Permalink

Here is a great little story by Danny Vinik from Politico’s The Agenda on how so-called marketing boards are surreptitiously turned into lobbying boards.

Industries with a large number of producers find it difficult to organize collectively because of the free rider problem. Mostly, that’s a good thing because it prevents cartels. Collective action, however, could also be used to perform research or marketing that’s good for the industry as a whole but too expensive for any small subset of producers. In theory, therefore, some type of collective action could be beneficial and in agriculture governments have created checkoff programs which force producers to pay a tax to fund collective goods.

pigsCheckoffs exist for dairy farmers, mushroom producers, and even popcorn processors. Critics say they violate economic freedom and distort the market; big corporate farmers, they allege, easily find ways to influence the boards and siphon the money off to push their own causes.

“In one sense, it’s a classic case of the larger producers are the more powerful political forces within these organizations,” said Dan Glickman, the Agriculture Secretary at the end of the Clinton administration who largely supports checkoff programs.

For the unhappy hog farmers, the current problem started with the 1985 Pork Law, when Congress set up the National Pork Board and required all farmers to contribute. Today, hog farmers must hand over 40 cents out of every $100 in revenue from pork sales. The board uses the money, totaling nearly $100 million a year, to conduct research and promote the pork industry, but is not allowed to lobby.

But as Adam Smith said “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Quite so. And in this case by creating a National Pork Board the government is providing the meeting hall and paying for the conversation. According to the law, the money from the checkoff program isn’t supposed to go for lobbying but here is where the story gets interesting.

You may recall the slogan, “Pork: The Other White Meat.” The slogan hasn’t been used for years but the National Pork Board still pays $3 million a year every year for the rights. Why would the Pork Board pay millions for an unused slogan? The key is who they are paying. The slogan is owned by National Pork Producers Council. The NPPC is a lobby group and you won’t be surprised to know that it is closely connected with the NPB (having once even shared offices).

…critics say the two groups have never been as separate as the law calls for, and now are essentially colluding through a deal that lets the Pork Board funnel money to the NPCC by assigning an absurdly inflated value to the “other white meat” slogan; the money then goes to promote the NPPC’s lobbying agenda.

A neat trick. The story is also a good object lesson in Mancur Olson’s thesis about how special interest groups grow in power over time, slowly choking off innovation as they cartelize the economy.

Romer on Urban Growth

by on August 31, 2015 at 7:25 am in Economics | Permalink

Here’s one bit from an excellent interview of Paul Romer on urban development:

Q. How are economics and planning and development of cities related each other?

Urban Expansion is an exception to the usual rule that an economy does not need a plan. Creating new built urban area requires a plan for the public space that will be used for mobility (sidewalks, bus lanes, bike lanes, auto lanes …) and for parks. At a minimum, this plan should provide for a network of arteries big enough to allow bus travel and dense enough that no location is more than 0.5 km from such an artery. This is the only thing that needs to be planned up front for land that is not yet developed. Everything else can wait. But if informal development comes first, it is too late. The area will never have enough public space to allow successful urban development.

I think Romer is correct. What surprised me most when studying Gurgaon in India was that despite strong demand, there wasn’t a lot of common infrastructure being built. The transaction costs of ex-post planning were simply too high.

In addition to transport arteries, I would also mention the importance of setting aside space and access points for sewage, electricity, and information arteries. It’s not even necessary that government provide these services or even the plan itself (private planning of large urban areas is also possible) but a plan has to be made. By reserving space for services in advance of development, developers and residents can greatly improve coordination and maximize the value of a city.

A simple, minimal urban plan is analogous to the rules of the game.

I have long argued that the FDA has an incentive to delay the introduction of new drugs because approving a bad drug (Type I error) has more severe consequences for the FDA than does failing to approve a good drug (Type II error). In the former case at least some victims are identifiable and the New York Times writes stories about them and how they died because the FDA failed. In the latter case, when the FDA fails to approve a good drug, people die but the bodies are buried in an invisible graveyard.

In an excellent new paper (SSRN also here) Vahid Montazerhodjat and Andrew Lo use a Bayesian analysis to model the optimal tradeoff in clinical trials between sample size, Type I and Type II error. Failing to approve a good drug is more costly, for example, the more severe the disease. Thus, for a very serious disease, we might be willing to accept a greater Type I error in return for a lower Type II error. The number of people with the disease also matters. Holding severity constant, for example, the more people with the disease the more you want to increase sample size to reduce Type I error. All of these variables interact.

In an innovation the authors use the U.S. Burden of Disease Study to find the number of deaths and the disability severity caused by each major disease. Using this data they estimate the costs of failing to approve a good drug. Similarly, using data on the costs of adverse medical treatment they estimate the cost of approving a bad drug.

Putting all this together the authors find that the FDA is often dramatically too conservative:

…we show that the current standards of drug-approval are weighted more on avoiding a Type I error (approving ineffective therapies) rather than a Type II error (rejecting effective therapies). For example, the standard Type I error of 2.5% is too conservative for clinical trials of therapies for pancreatic cancer—a disease with a 5-year survival rate of 1% for stage IV patients (American Cancer Society estimate, last updated 3 February 2013). The BDA-optimal size for these clinical trials is 27.9%, reflecting the fact that, for these desperate patients, the cost of trying an ineffective drug is considerably less than the cost of not trying an effective one.

(The authors also find that the FDA is occasionally a little too aggressive but these errors are much smaller, for example, the authors find that for prostate cancer therapies the optimal significance level is 1.2% compared to a standard rule of 2.5%.)

The result is important especially because in a number of respects, Montazerhodjat and Lo underestimate the costs of FDA conservatism. Most importantly, the authors are optimizing at the clinical trial stage assuming that the supply of drugs available to be tested is fixed. Larger trials, however, are more expensive and the greater the expense of FDA trials the fewer new drugs will be developed. Thus, a conservative FDA reduces the flow of new drugs to be tested. In a sense, failing to approve a good drug has two costs, the opportunity cost of lives that could have been saved and the cost of reducing the incentive to invest in R&D. In contrast, approving a bad drug while still an error at least has the advantage of helping to incentivize R&D (similarly, a subsidy to R&D incentivizes R&D in a sense mostly by covering the costs of failed ventures).

The Montazerhodjat and Lo framework is also static, there is one test and then the story ends. In reality, drug approval has an interesting asymmetric dynamic. When a drug is approved for sale, testing doesn’t stop but moves into another stage, a combination of observational testing and sometimes more RCTs–this, after all, is how adverse events are discovered. Thus, Type I errors are corrected. On the other hand, for a drug that isn’t approved the story does end. With rare exceptions, Type II errors are never corrected. The Montazerhodjat and Lo framework could be interpreted as the reduced form of this dynamic process but it’s better to think about the dynamism explicitly because it suggests that approval can come in a range–for example, approval with a black label warning, approval with evidence grading and so forth. As these procedures tend to reduce the costs of Type I error they tend to increase the costs of FDA conservatism.

Montazerhodjat and Lo also don’t examine the implications of heterogeneity of preferences or of disease morbidity and mortality. Some people, for example, are severely disabled by diseases that on average aren’t very severe–the optimal tradeoff for these patients will be different than for the average patient. One size doesn’t fit all. In the standard framework it’s tough luck for these patients. But if the non-FDA reviewing apparatus (patients/physicians/hospitals/HMOs/USP/Consumer Reports and so forth) works relatively well, and this is debatable but my work on off-label prescribing suggests that it does, this weighs heavily in favor of relatively large samples but low thresholds for approval. What the FDA is really providing is information and we don’t need product bans to convey information. Thus, heterogeneity plus a reasonable effective post-testing choice process, mediates in favor of a Consumer Reports model for the FDA.

The bottom line, however, is that even without taking into account these further points, Montazerhodjat and Lo find that the FDA is far too conservative especially for severe diseases. FDA regulations may appear to be creating safe and effective drugs but they are also creating a deadly caution.

Hat tip: David Balan.

The Maple Syrup Cartel

by on August 23, 2015 at 7:29 am in Economics, Food and Drink | Permalink

Quebec produces more than 70 percent of the world’s maple syrup and the Federation of Quebec Maple Syrup Producers is a cartel every bit as rapacious as OPEC or De Beers. The Federation is government backed and all producers must sell to them. From an excellent piece in the NYTimes:

maple-syrupAfter the spring harvest, farmers from around the province send their syrup to the federation.

…To keep prices high, the federation enforces strict quotas for the province’s 7,400 producers. Instead of flooding the market during years with bumper crops, all syrup produced beyond that amount is stored in the federation’s warehouse, which helps prop up prices by limiting supply. When seasons are lean, it releases the syrup, to maintain stable supply and pricing.

…When the federation suspects farmers are producing and selling outside the system, it posts guards on their properties. It seeks fines from producers and buyers who do not follow the rule. In the most extreme situations, it seizes production.

Addendum: The NYTimes video about rebel maple syrup producers is excellent.

What is China’s Unemployment Rate? 4.1% For what month, what year? Doesn’t matter the answer is still 4.1%. That’s a slight exaggeration but for the last 3 years the unemployment rate has been 4.1% almost every month. Indeed, since 2002 the official unemployment rate has varied between 3.9% and 4.3%, an absurdly smooth series.

In contrast to the unemployment rate, China’s GDP growth rate has had massive swings. As a piece in Quartz puts it the unemployment rate exhibits an eerie stillness.


A new NBER working paper uses a newly available household survey and finds a very different series–the China-UHS series shown in black below. According to these estimates China’s unemployment rate shot up to around 11% in 2002 and has been nearly that high at least until 2009 when unfortunately the new series ends.

UE Rate China

So how high is Chinese unemployment today? No one knows but it could well be closer to 10% than to 4.1%.

Keep an eye on China and don’t be surprised by the unexpected. In China it’s not just the unemployment rate that is more volatile than it appears.

Tim Urban at Wait but Why has a fascinating longform series on How and Why SpaceX Will Colonize Mars which itself is part of a longer series on Elon Musk and his companies. Here’s just one bit:

The Scary Thing About the Universe

Species extinctions are kind of like human deaths—they’re happening constantly, at a mild and steady rate. But a mass extinction event is, for species, like a war or a sweeping epidemic is for humans—an unusual event that kills off a large chunk of the population in one blow. Humans have never experienced a mass extinction event, and if one happened, there’s a reasonable chance it would end the human race—either because the event itself would kill us (like a collision with a large enough asteroid), or the effects of an event would (like something that decimates the food supply or dramatically changes the temperature or atmospheric composition). The extinction graph below shows animal extinction over time (using marine extinction as an indicator). I’ve labeled the five major extinction events and the percentage of total species lost during each one (not included on this graph is what many believe is becoming a new mass extinction, happening right now, caused by the impact of humans):1


…Let’s imagine the Earth is a hard drive, and each species on Earth, including our own, is a Microsoft Excel document on the hard drive filled with trillions of rows of data. Using our shortened timescale, where 50 million years = one month, here’s what we know:

  • Right now, it’s August of 2015
  • The hard drive (i.e. the Earth) came into existence 7.5 years ago, in early 2008
  • A year ago, in August of 2014, the hard drive was loaded up with Excel documents (i.e. the origin of animals). Since then, new Excel docs have been continually created and others have developed an error message and stopped opening (i.e gone extinct).
  • Since August 2014, the hard drive has crashed five times—i.e. extinction events—in November 2014, in December 2014, in March 2015, April 2015, and July 2015. Each time the hard drive crashed, it rebooted a few hours later, but after rebooting, about 70% of the Excel docs were no longer there. Except the March 2015 crash, which erased 95% of the documents.
  • Now it’s mid-August 2015, and the homo sapiens Excel doc was created about two hours ago.

Now—if you owned a hard drive with an extraordinarily important Excel doc on it, and you knew that the hard drive pretty reliably tended to crash every month or two, with the last crash happening five weeks ago—what’s the very obvious thing you’d do?

You’d copy the document onto a second hard drive.

That’s why Elon Musk wants to put a million people on Mars.

On a related note the latest Planet Money podcast is How to Stop an Asteroid. It’s funny and informative and yours truly makes an appearance. Worth a listen.

Let’s raise their status! Details here.

One Billion Club

Hat tip: Zac Gochenour.

The (Soon-to-be) Prisoners Dilemma

by on August 11, 2015 at 11:13 am in Economics, Law | Permalink

An enterprising sheriff in Franklin county, KY posted the following flyer on Facebook.

drug dealers

The flyer resulted in successful prosecutions and is now being used by other police departments. More at the NYTimes.

Hat tip: Andrea Castillo.

WSJ: A federal court in New York delivered a setback to the Food and Drug Administration, ruling the agency can’t bar a drug company from marketing a pill for off-label use as long as the claims are truthful.

The decision by the federal district court in the Southern District of New York, is the latest of a line of such cases. It concerns the Irish company Amarin Pharma Inc. and its fish-oil-derived drug Vascepa, and it has been closely watched by the pharmaceutical industry. The company asked the court to stop the FDA from enforcing its off-label marketing ban, and the court agreed.

The ruling is important because in the last few years the FDA has extracted billions of dollars in settlements from pharmaceutical firms for engaging in what appears to be constitutionally protected speech. In fact, the courts have repeatedly ruled that FDA and Congressional restrictions on truthful and non-misleading off-label marketing are unconstitutional.

In Washington Legal Foundation v. Friedman, for example, the DC court issued an injunction preventing the FDA from prohibiting, restricting, sanctioning or otherwise seeking to limit pharmaceutical and device manufactures from disseminating information about off-label uses from peer-reviewed professional journals or textbooks. In U.S. v. Caronia the court (2nd circuit) reversed a criminal conviction and said that the FDA cannot criminalize truthful promotion of off-label uses of approved drugs. Indeed, the court in that case defended the utility of such promotion:

…prohibiting off-label promotion by a pharmaceutical manufacturer while simultaneously allowing off-label use “paternalistically” interferes with the ability of physicians and patients to receive potentially relevant treatment information; such barriers to information about off-label use could inhibit, to the public’s detriment, informed and intelligent treatment decisions. See Va. Bd. of Pharmacy v. Va. Citizens Consumer Council, Inc., 425 U.S. 748, 770 (1976)

…See also Sorrell, 131 S. Ct. at 2670- 72 (“[The] fear that [physicians, sophisticated and experienced customers,] would make bad decisions if given truthful information” cannot justify content-based burdens on speech.”) (citing sources);

…Liquormart, 517 U.S. at 503 (“[B]ans against truthful, nonmisleading commercial speech . . . usually rest solely on the offensive assumption that the public will respond ‘irrationally’ to the truth. . . . The First Amendment directs us to be especially skeptical of regulations that seek to keep people in the dark for what the government perceives to be their own good.”).

In Washington Legal Foundation v. Henney the court summed up concisely:

The First Amendment is premised upon the idea that people do not need the government’s permission to engage in truthful, nonmisleading speech about lawful activity.

(By the way, it’s this line of cases that makes me think that 23andMe has a strong first amendment case for presenting to customers information about their own DNA.)

The courts were exactly correct. Off-label uses of approved drugs are a vital part of the discovery process of modern medicine. New uses for old drugs are often discovered through serendipity and close observation in the field. Indeed, modern medicine moves faster than the FDA and it often happens that the first-line therapy is an off-label treatment. Prohibiting firms from truthfully discussing such treatments with physicians is not just unconstitutional it’s also paternalistic and harmful to patient welfare.

This case, Amarin v FDA, is especially egregious because the company wants to discuss with physicians the results of its own FDA-approved trial. Amarin has a fish-oil derived drug designed to reduce triglyceride levels and it already has approval to sell and market this drug in patients with very high levels of triglycerides. It also wanted approval to sell the drugs in patients with high (but not very high levels) and it conducted an FDA-approved trial that showed that the drug is safe and effective at reducing triglyceride levels in this set of patients.

Although the trial was successful the FDA, for reasons discussed below, refused to grant approval. Amarin isn’t disputing the refusal but they wanted to tell physicians the results of the trial and then let the physicians and their patients decide whether reducing triglyceride levels is something that they want to do given currently existing evidence about triglyceride levels and heart attacks. The FDA threatened to pursue civil and possibly criminal charges but the court has now precluded the FDA from those pursuits.

Aside from the first amendment issues, the case is also interesting as another example of how a capricious FDA can kill innovation through regulation uncertainty. (The story is similar in many respects to that told by Joseph Gulfo in Innovation Breakdown, see my review).

To wit: Amarin wanted approval to sell its drug to patients with high levels of triglycerides and they obtained a special protocol agreement (SPA) from the FDA to run a study in this population. Quoting the court:

An SPA agreement is a written agreement that a manufacturer may enter into with the FDA, which sets out the design and size parameters for clinical trials of a new drug, and the conditions under which the FDA would approve the drug. For the manufacturer, such an agreement minimizes development risk by providing regulatory predictability: Provided that the manufacturer follows the procedure set in the SPA agreement and the drug proves meets the benchmarks for effectiveness set in the agreement, the FDA must approve the drug.

The results of the study were good:

The ANCHOR study achieved each numeric objective that the SPA Agreement had set: The results showed that Vascepa produced a statistically significant decrease in triglyceride levels in persons with persistently high triglycerides, as well as in other lipid, lipoprotein, and inflammatory biomarkers.

…Because Amarin had met all requirements for approval set out in the ANCHOR SPA Agreement, Amarin anticipated that the FDA would approve Vascepa for the additional use that Amarin sought, i.e., by patients with persistently high triglycerides.

Instead of approving the drug, however, the FDA rescinded their agreement. The FDA argued that although the drug did reduce triglyceride levels it was no longer certain that reducing triglyceride levels would reduce cardiovascular events.

Can you imagine the tailspin this sent researchers at Amarin into when they learned that the drug would not be approved despite passing all the agreed upon tests? (Read Gulfo for a vivid account of his case).

Who will invest in bio-medical advances with this kind of risk? Sergei Brin said that he didn’t want to invest in health care because “It’s just a painful business to be in . . . the regulatory burden in the U.S. is so high that I think it would dissuade a lot of entrepreneurs.” It’s precisely this kind of regulatory uncertainty that an SPA was meant to avoid. By rescinding their agreement, the FDA is sending the message to investors that no one is safe.

In India, for example, the number of taxpayers in relation to voters in the economy has been about 4-4.5% for a long time.

That is from an in-depth discussion about the Indian economy between Karthik Muralidharan and Arvind Subramanian (Chief Economic Adviser, Government of India). The reference is to income tax, of course. It’s a great discussion and the best place to begin if you want to understand the Indian economy today.

The ghost in the machine

by on August 7, 2015 at 7:30 am in Film, Science, Travel | Permalink

I visited two wonderful churches in Barcelona. The first, of course, was La Sagrada Familia. Ramez Naam put it best, this is “the kind of church that Elves from the 22nd Century would build.” I can’t add to that, however, so let me turn to the second church.

The Chapel Torre Girona at the Polytechnic University of Catalonia in Barcelona is home to the MareNostrum, not the world’s fastest but certainly the world’s most beautiful supercomputer.


Although off the usual tourist path, it’s possible to get a tour if you arrange in advance. As you walk around the nave, the hum of the supercomputer mixes with Gregorian chants. What is this computer thinking you wonder? Appropriately enough the MareNostrum is thinking about the secrets of life and the universe.

In this picture, I managed to capture within the cooling apparatus a saintly apparition from a stained glass window.

The ghost in the machine.


Hat tip: Atlas Obscura.

China Star is situated next to the Ibn al-Khattab Mosque, and not long before the first call sounded for sunset prayer a sheikh arrived at the shop. He was tall and fat, with strong, dark features, and he wore a brilliant blue galabiya, a carefully wrapped turban, and a pair of heavy silk scarves. He was followed by two large women in niqabs. The sheikh planted himself at the entrance of the shop while the women searched purposefully through the racks and the rows of mannequins. Periodically, one of them would hold up an item, and the sheikh would register his opinion with a wave of his hand.

…The two women in niqabs quickly found two items that the sheikh approved of: matching sets of thongs and skimpy, transparent nightgowns, one in red and the other in blue.

An excellent piece from Peter Hessler in the New Yorker that begins with a teaser on how the Chinese pioneered the market for lingerie in Egypt and just expands from there. Lots of lessons on development economics, foreign policy and more.

Hat tip: David Zetland.

It’s a TED-style talk, and Alex Tabarrok is just getting going, dressed in D.C.-friendly attire (dark gray suit) in front of the usual casual-hip crowd at the Voice & Exit conference in Austin, Texas. Pacing behind the podium, he flashes images of workers, of wastrel, skeleton-thin immigrants seeking labor. Your heart bleeds as he sings his songs of morality and justice and the need for immigrants in any good society and etc., etc., etc.

His pitch to solve this messy hot topic of the day? Two words: open borders.

That’s from an amusing profile of me in OZY, Can Philosopher Alex Tabarrok Bridge the Wonks and Burning Man?

Addendum 1: Tyler’s office is even messier than mine.

Addendum 2: Tyler, of course, blogged this 3 minutes earlier from somewhere in Serbia. How does he bend the laws of space and time?

Private schools for the poor are growing rapidly throughout the developing world. The Economist has a review:

PrivateSchoolingPrivate schools enroll a much bigger share of primary-school pupils in poor countries than in rich ones: a fifth, according to data compiled from official sources, up from a tenth two decades ago (see chart 1). Since they are often unregistered, this is sure to be an underestimate. A school census in Lagos in 2010-11, for example, found four times as many private schools as in government records. UNESCO, the UN agency responsible for education, estimates that half of all spending on education in poor countries comes out of parents’ pockets (see chart 2). In rich countries the share is much lower.

Overall, there is good evidence that private school systems tend to create small but meaningful increases in achievement (e.g. herehere, here, here) and especially good evidence that they do so with large costs savings. The large costs savings suggest that with the right institutional structure, which might involve vouchers and nationally comparable testing, an entrepreneurial private sector could create very large gains. Karthik Muralidharan who has done key work on private schools and performance pay in India puts it this way:

Since private schools achieved equal or better outcomes at one-third the cost, the fundamental question that needs to be asked is “How much better could private management do if they had three times their current level of per-child spending?”

The Economist notes that another promising development is national chains which can scale and more quickly adopt best practices:

…Bridge International Academies, which runs around 400 primary schools in Kenya and Uganda, and plans to open more in Nigeria and India, is the biggest, with backers including Facebook’s chief executive, Mark Zuckerberg, and Bill Gates. Omega Schools has 38 institutions in Ghana. (Pearson, which owns 50% of The Economist, has stakes in both Bridge and Omega.) Low-cost chains with a dozen schools or fewer have recently been established in India, Nigeria, the Philippines and South Africa.

Bridge’s cost-cutting strategies include using standardised buildings made of unfinished wooden beams, corrugated steel and iron mesh, and scripted lessons that teachers recite from hand-held computers linked to a central system. That saves on teacher training and monitoring.

The Economist is somewhat skeptical of scripted lessons, known as Direct Instruction in the education world, but in fact no other teaching method has as strong a record of proven success in randomized experiments (see also here and here).

Need I also point out that online education can bring some of the best teachers in the world to everyone, everywhere at low cost? An article in Technology Review titled India loves MOOCs points out that students from India are a large fraction of online students (fyi, we are also finding many Indian students at Marginal Revolution University)

Throughout India, online education is gaining favor as a career accelerator, particularly in technical fields. Indian enrollments account for about 8 percent of worldwide activity in Coursera and 12 percent in edX, the two leading providers of massive open online courses, or MOOCs. Only the United States’ share is clearly higher; China’s is roughly comparable.

Education is changing very rapidly and its the developing world which is leading the way.

Prior to 1800 or so there were no large differences in per-capita GDP between nations, differences were perhaps on the order of 2-3 at most. As modern economic growth took hold in some nations and not in others, between-country inequality increased dramatically with differences in per-capita GDP between nations of up to a factor of 100. As more and more nations enter a modern economic growth phase–which now includes a very rapid catch-up phase–between-country inequality has started to decline. In the future we may return to much smaller differences in per-capita GDP between countries.

As MacAskill points out in Doing Good Better (review here see also here) this means that we live today in an unusual time when charity is very cheap. Today, for example, it’s possible to save a life for as little as $4000. As other nations become rich that will no longer be true. More generally, the average person in a developed country can do a lot of good today by giving up relatively little. As MacAskill writes:

Imagine a happy hour where you could either buy yourself a beer for five dollars or buy someone else a beer for five cents. If that were the case, we’d probably be pretty generous–next round’s on me! But that’s effectively the situation we’re in all the time. It’s like a 99-percent-off sale, or getting 10,000 percent extra free. It might be the most amazing deal you’ll see in you life.