*Divergent Paths*

by on August 26, 2015 at 3:16 pm in Books, Economics, Education, Law, Philosophy | Permalink

That is the new forthcoming Richard Posner book and the subtitle is The Academy and the Judiciary.  Virtually everything by Posner is worth reading, and this comparison of the worlds of the professor and the judge is no exception.

Wednesday assorted links

by on August 26, 2015 at 1:02 pm in Uncategorized | Permalink

1. Are political values of corporations correlated with their kinds of lawbreaking? (speculative)

2. How should Bitcoin be governed?  Here is New Yorker coverage of Bitcoin governance.  And Joshua Gans on Nate Rosenberg.

3. Did silver wreck China?  And more on whether China has enough foreign exchange reserves.

4. Obamacare and accounting.

5. Burger collusion for a day.  You can imagine further variants on this idea…

6. The new infrastructure spending.

7. My Product Hunt live chat will be at 1:30 EST tomorrow.

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.

World trade recorded its largest contraction since the financial crisis in the first half of this year, according to figures that will feed concerns over the global economy and add fuel to a debate over whether globalisation has peaked.

The volume of global trade fell 0.5 per cent in the three months to June compared to the first quarter, the Netherlands Bureau for Economic Policy Analysis, keepers of the World Trade Monitor, said on Tuesday. Economists there also revised down their result for the first quarter to a 1.5 per cent contraction, making the first half of 2015 the worst recorded since the 2009 collapse in global trade that followed the crisis.

That is from Shawn Donnan at the FT.  Here is a previous post on the world trade slowdown, now a contraction apparently.

“I would never have been able to arrive at my destination without my smartphone,” he added. “I get stressed out when the battery even starts to get low.”

That is from Osama Aljasem, a 32-year-old music teacher from Deir al-Zour in Syria, who took a boat to Greece, walked to Belgrade, and hopes to continue to parts further north and west:

In this modern migration, smartphone maps, global positioning apps, social media and WhatsApp have become essential tools.

Recommended.  And yes, disintermediation is kicking in:

“Right now the traffickers are losing business because people are going alone, thanks to Facebook,” said Mohamed Haj Ali, 38, who works with the Adventist Development and Relief Agency in Belgrade, Serbia’s capital — a major stopover for migrants.

Facebook groups are used to pass along GPS coordinates and the prices charged by the traffickers have fallen in half.

Another sign on the door says that a new restaurant will be replacing Charlie Chiang’s and will be “opening soon.”

The new restaurant will be called Amannisahan and will serve Uyghur cuisine, according to the sign. In an indication that a quick reopening may indeed be in the works, Amannisahan says it’s currently hiring restaurant managers and waiters.

Take that Bryan Caplan!  And that’s for Crystal City, VA, by the way here is the Jorma Kaukonen song.

For the pointer I thank Michael Makowsky.

Tuesday assorted links

by on August 25, 2015 at 11:59 am in Uncategorized | Permalink

1. Dan Drezner is worried about North Korea, even more than usual.  And here is Ian Bremmer on same.  Do all New Zealand libertarians go hide in caves?

2. Should the police be able to take control of self-driving cars?

3. How might East Asian birth rates recover?

4. The new Moneyball focuses on player health.

5. The gender gap in self-citation.

6. Nathan Rosenberg has passed away.

7. Straussian vanity license plates.

Despite regular assurances to the contrary, all indications are that Chinese banks are experiencing serious liquidity problems.  The PBOC has been pumping in large sums of money almost daily via reverse repos and MLF lending so that the RRR cut seems almost expected.  The problem again relates to the RMB/$ peg.  While RRR cut is designed to give banks more liquidity, there has been a significant correlation between RRR cuts and capital outflows.  I am absolutely not saying it is causative, but given the lack of good investment choices within China, declining interest rates, enormous over capacity, economic worries and a collapsing stock market, it is very likely much of this additional liquidity will make its way out of China.  That again places downward pressure on the RMB.

That is from Christopher Balding, most of the post is an excellent discussion of where the contagion effects actually lie.  And here is your China fact of the day:

With RMB offshore rates in Hong Kong jumping to 16% due to traders looking to short the RMB, it is possible we could see a rapid and large jump in RMB deposit rates for a variety of reasons.  Though shorting the RMB is not allowed in China, I’m sure 16% deposit rates in Hong Kong will provide a small amount of competition.

Christopher’s advice: “Watch the deposit rates.”

Here is further context from FTAlphaville.

1. The forces within the government who want to let stock prices adjust are winning.  Intervention is expensive, and so far it hasn’t achieved valuable ends.

2. The Chinese central bank is cutting interest rates for the fifth time since November.  Additional liquidity is flowing, but where to?  The Prime Minister by the way must sign off on every rate cut.

3. China is cracking down on underground banks and capital flight.  See #2.

4. The allowable rates on term deposits one year and longer have been raised.  This will help limit capital flight but squeeze the profits of the banks.  See #3 and #2.

5. The New Republic is still running articles on whether Stalin might have made it work with advanced computers.

6. A Chinese PLA trooper breaks a world record after not blinking for almost an hour.  The previous world record, 41 minutes by Australia’s Fergal ‘Eyesore’ Fleming, now lies shattered in the dust.

7. Singapore goes to the polls September 11.  What does a Singaporean version of Donald Trump look like?  Bernie Sanders?

8. You can think that China is in for a very bad recession, as I do.  But do not forget that countries hold most of their wealth in the form of human capital, China too.  That said, the conversation will now switch to the Chinese currency, and soon.  Some Chinese agencies are talking about the yuan at seven or eight to the dollar (video at the link, sorry)

File this one under “unglamorous yet underrated philosophical paragraphs”:

There are really two problems that fall under the label of ‘the problem of intertheoretic choice-worthiness comparisons’.  The first problem is: “When, if ever, are intertheoretic choice-worthiness comparisons possible, and in virtue of what are intertheoretic comparisons true?”…The second problem is: “Given that choice-worthiness sometimes is incomparable across first-order normative theories, what is it appropriate to do in conditions of normative uncertainty?”

That is from the doctoral dissertation of William MacAskill, who is also a driving force behind the Effective Altruism movement.

Here is an oversimplified way of putting his point.  Let’s say you think utilitarianism is true with some probability, and Kantian deontology is also true with some probability.  Can you aggregate the recommendations of these two theories “across the probabilities”?  Not easily.  The Kantian theory offers an absolute recommendation, but should that carry the day if deontology is true with only 7%?  More generally, even less absolute theories do not offer comparable frameworks for cross-theoretical aggregation.  How does 6% truth for maximin, 13% truth for prioritarianism, and 27% truth for cosmopolitan utilitarianism all add up?  It’s not like calculating true shooting percentage in the NBA, because there is no common and commensurable understanding of “points” across the different frameworks.  This aggregation problem is actually tougher than Arrow’s, at least once we recognize there is justifiably uncertainty about the true moral theory.

There is actually some related blog commentary on this issue.  Overall MacAskill is on to one of the most important developments in consequentialist ethics over the last few decades.

The Nature article is here.  The FT put it differently: “Scientists make breakthrough in search for universal flu vaccine”  Here are many other articles on the same.

And how long did it take us, starting more or less from scratch, to make that Ebola vaccine?

Is it possible that our vaccine development capacity is seriously better than say ten years ago?

Are the biggest potential winners China, India, Indonesia, and Nigeria?

For a relevant pointer I thank J.

Monday assorted links

by on August 24, 2015 at 2:26 pm in Uncategorized | Permalink

1. Living on German trains.

2. China’s ant tribe, living in basements or further below.

3. Japan centurion fact of the day.

4. sometimes i’m wrong

5. New results on social media echo chambers.

6. A new NBER paper on peer to peer and sharing economy issues.

One estimate is that China has been spending about $400 billion to prop up stock and currency prices, but with no success.  Might market-determined, flexible prices have some value today?

Cheng-chung Lai and Joshua Jr-Shiang Gau reiterate a well-known point about the 1930s:

It is often argued that the silver standard insulated the Chinese economy from the Great Depression that prevailed in the gold standard countries during the period 1929–1935. Using econometric testing and counterfactual simulations, this article shows that if China had been on the gold standard (or on the gold-exchange standard), the balance of trade of this semiclosed economy would have been ameliorated, but the general price level would have declined significantly. Due to limited statistics, two important variables (GDP and industrial production) are not included in the analysis, but the general argument that the silver standard was a lifeboat to the Chinese economy remains defensible.

China during the Great Depression remains very much an underexplored research topic.  Here is Loren Brandt and Thomas Sargent on China later going off the silver standard.  Here is Milton Friedman on the same (jstor).  The Chinese were not able to sustain that peg either.  So what should the smart money bet on today?

Here is Lars Christensen on the falling apart of the dollar bloc.

When things are good I look at The Washington Post and The New York Times first every morning.  All those reports and ideas!  And what if there is a new movie coming out, not to mention new road construction?  When things are less good I look at The Financial Times first every morning; the headline is sure to cover the carnage.  When things are worse yet I go to Bloomberg to start the day, because the ugly numbers will be fully current.  But today…we all need another media rung into the bowels of asset price hell.

Currently I see the Dow futures down 1000 points, FTSE down six percent, and various measures of USD off two to four percent.  And tweets are popping up faster than I can follow them.

Wolfgang Munchnau made a relevant observation:

The EZ recovery strategy is critically dependent on the idea that what’s happening in China cannot be happening

Don’t even ask about Canada, the largest single national market for American goods.

Economists are familiar with the use of monetary and fiscal policy to stimulate or restore nominal gdp, or other measures of aggregate demand if you prefer.  But China faces a bigger dilemma.  Part of its earlier pro-growth program overstimulated particular sectors of the economy, for instance construction and a variety of heavy duty state-owned enterprises.  Not coincidentally, those are the same parts of the economy which have experienced excess capacity and decreasing returns.

The more specific dilemma is this: China’s main paths for boosting its nominal gdp path also tend to stimulate or re-stimulate these overextended sectors.  Think for instance of pushing more credit through state-owned banks to favored state-owned firms.  Or consider fiscal policy.  At the margin that could mean municipal governments spending more on what they know best how to do, namely building more physical infrastructure.

Chinese stimulus, in the broad sense of that word, thus worsens previous Chinese malinvestments.  China would like to stay on a smooth ngdp growth path, but they don’t know how to do this without overextending themselves in particular sectors all the more.

It is fine to call for “reform,” but there are two extra problems.  First, most of the best reforms will lower ngdp in the short run and maybe even the medium run.  Second, the ngdp crunch may be coming more quickly than reforms can be instantiated.

Over the next months, you will read many blog posts, from other economists, about China in an aggregate demand framework.  Be wary of them if they do not appreciate this point.

Here are my earlier remarks from 2012.