Month: October 2004

Vaccines: The Long Run

Yesterday I discussed some of the reasons for the current shortage. Today, I will discuss an important paper by Michael Kremer and Christopher Snyder. Kremer and Snyder argue that for the same cost and effectiveness drugs are more profitable to produce than vaccines. As a result, private incentives bias the market against vaccines.

A well known reason is that some people free rider on vaccine provision. When you are vaccinated, I benefit from one less possible transmitter. As a result, some who benefit do not pay. Drugs, in contrast, offer more excludable benefits thereby increasing demand and profits.

Drugs also provide a very natural method for firms to, in effect, price discriminate.

A simple example suffices to illustrate this point. Suppose there are 100 total consumers, ninety of whom have a ten percent chance of contracting the disease and ten of whom have a 100 percent chance. Suppose consumers are risk neutral and are willing to pay 100,000 to be cured of the disease if they contract it. A monopolist selling a vaccine could either charge 100,000 and sell to the ten high-risk consumers or charge 10,000 and sell to all 100 of them. Either way, the monopolist’s revenue is 1,000,000. A monopolist selling a treatment would, in expectation, sell to the nineteen consumers contracting the disease (all ten of the high risk consumers as well as an average of nine consumers from the low-risk group) at a price of 100,000 for a total revenue of 1,900,000, almost twice the revenue from a vaccine.

Damn, that’s clever. I wish I had thought of that.

Having praised Kremer and Snyder I now must say that I am not convinced that the forces they discuss matter very much. First, if the pharmaceutical market is competitive and vaccines pay then they will be produced even when drugs would be more profitable to a monopolist. K&S underestimate the competitiveness of the pharmaceutical market.

Second, my suspicion is that nature and science combine to make it the case that some diseases at some times are better treated by vaccines and other diseases by drugs. K and S’s model works best if there are many cases where drugs and vaccines are close cost-substitutes. Firms then choose drugs even when vaccines would have been more desirable. I think, in contrast, that cost differences will usually exceed the profit differences. On the margin, K and S are correct but suppose vaccines had been subsidized would we today have an AIDS vaccine? I doubt it.

I’m not necessarily against their conclusion, however, that vaccines should be subsidized relative to drugs. It’s sad to say, therefore, that as discussed yesterday we currently do precisely the opposite.

Is tit-for-tat the best strategy in games?

Remember tit for tat? I will cooperate if you do, but otherwise I defect. Many consider this to beeconsidered the best way to play in repeated prisoner dilemma situations. But the old wisdom is being revised:

…the Southampton team submitted 60 programs. These, Jennings explained, were all slight variations on a theme and were designed to execute a known series of five to 10 moves by which they could recognize each other. Once two Southampton players recognized each other, they were designed to immediately assume “master and slave” roles — one would sacrifice itself so the other could win repeatedly.

If the program recognized that another player was not a Southampton entry, it would immediately defect to act as a spoiler for the non-Southampton player. The result is that Southampton had the top three performers — but also a load of utter failures at the bottom of the table who sacrificed themselves for the good of the team…

Our initial results tell us that ours is an evolutionarily stable strategy — if we start off with a reasonable number of our colluders in the system, in the end everyone will be a colluder like ours,” he said.

This, by the way, is how the Soviets used to win chess tournaments. Throw games to the leading Soviet player, and fight especially hard against the leading non-Soviet rivals.

I have not seen the primary information on the games or the program, but I suspect that some caveats are in order. First, simulated game results usually are sensitive to the choice of parameter values. Second, this strategy may be appropriate for genetically-related teams, but otherwise it will not be implemented in the real world without side payments or coercion (both are typically prohibited in the game in question).

Here is the full story, which also provides useful background information for those new to this debate. And thanks to for the pointer.

What is the nature of American poverty?

Robert Samuelson is one of my favorite economics columnists:

Many middle-class families achieved large income gains in the 1990s and — despite the recession and halting recovery — have kept those gains. They’re worse because the increase in poverty in recent decades stems mainly from immigration. Until our leaders acknowledge the connection between immigration and poverty, we’ll be hamstrung in dealing with either.

Let’s examine the Census numbers. They certainly don’t indicate that, over any reasonable period, middle-class living standards have stagnated. Mostly, the middle class is getting richer. Consider: In 2003, 44 percent of U.S. households had before-tax incomes exceeding $50,000; about 15 percent had incomes of more than $100,000 (they’re included in the 44 percent). In 1990, the comparable figures were 40 percent and 10 percent. In 1980, they were 35 percent and 6 percent. All comparisons are adjusted for inflation.

True, the median household income has dropped since 1999 and is up only slightly since 1990. That’s usually taken as an indicator of what’s happened to a typical family. It isn’t. The median income is the midpoint of incomes; half of households are above, half below. The median household was once imagined as a family of Mom, Dad and two kids. But “typical” no longer exists. There are more singles, childless couples and retirees. Smaller households tend to have lower incomes. They drag down the overall median. So do more poor immigrant households.

A slightly better approach is to examine the incomes of households of similar sizes: all with, say, two people. In 2003 those households had a median income of $46,964, off about $900 from the peak year (1999) but up almost 10 percent from 1990. For four-person households, the median income in 2003 was $64,374, off about $2,200 from its peak but still up about 14 percent from 1990. Though unemployment and a decline in overtime have temporarily dented incomes, the basic trend is up.

Now look at poverty. For 2003, the Census Bureau estimated that 35.9 million Americans had incomes below the poverty line; that was about $12,000 for a two-person household and $19,000 for a four-person household. Since 2000 poverty has risen among most racial and ethnic groups. Again, that’s the recession and its aftermath.

But over longer periods, Hispanics account for most of the increase in poverty. Compared with 1990, there were actually 700,000 fewer non-Hispanic whites in poverty last year. Among blacks, the drop since 1990 is between 700,000 and 1 million, and the poverty rate — though still appallingly high — has declined from 32 percent to 24 percent. (The poverty rate measures the percentage of a group that is in poverty.) Meanwhile, the number of poor Hispanics is up by 3 million since 1990. The health insurance story is similar. Last year 13 million Hispanics lacked insurance. They’re 60 percent of the rise since 1990.

To state the obvious: Not all Hispanics are immigrants, and not all immigrants are Hispanic. Still, there’s no mystery here. If more poor and unskilled people enter the country — and have children — there will be more poverty. (The Census figures cover both legal and illegal immigrants; estimates of illegal immigrants range upward from 7 million.) About 33 percent of all immigrants (not just Hispanics) lack a high school education. The rate among native-born Americans is about 13 percent.

The bottom line: The American middle class is doing better than many commentators would have you believe. And while I don’t think we should neglect the welfare of Hispanics, in many cases the correct comparison is with their native countries, not with other U.S. statistical aggregates.

Addendum: Here is a good piece on how the federal government defines poverty.

Vaccines: The Short Run

President Bush was correct when he said that liability risk is one factor in the recurrent shortage of vaccines. Based on a post by Mark Kleiman, suggesting that flu vaccines are immune from liability due to the Vaccine Injury Compensation Program, Brad De Long called Bush’s claim an “eternal lie.” To his credit, Kleiman (but not DeLong) quickly retracted his post when others pointed out that the VICP applies only to pediatric vaccines.

Liability is not the only issue, however. Costly FDA regulations and requirements, for example to remove thimerosal from vaccines despite no evidence of safety problems, have pushed firms out of the industry. See this paper in the The Independent Review (I am an assistant editor) for more on these regulations and their consequences.

A further problem is that the federal government is the major purchaser of vaccines, although not the flu vaccine, and it uses its monopsony powers and the law to require companies to sell at low prices. Firms have left the industry because they are squeezed on one end by regulation and on the other by low prices and, for vaccines like the flu vaccine not covered by VICP, potential liability. Note that even if the prices are high enough to earn the company a modest profit the point is that they are not high enough to make it worthwhile to make a surplus of vaccine that can be sold in the event of a contamination problem, as has happened this year. If the firms can’t price high during a shortage then there is no incentive to plan for a shortage.

Even without legal price caps there are significant disincentives to high prices. Here is a CDC spokesperson (link to audio file) on recent price increases:

Shame on the people who are price gouging. This is a reprehensible thing to be doing. I think an immoral thing.

Is it any wonder that firms don’t want in on this market?

Henry Miller, a former head of the FDA’s biotechnology division, summarizes well:

The fundamental problem is that government regulatory policies and what amounts to price controls discourage companies from investing aggressively to develop new vaccines. Producers have abandoned the field in droves….Although their social value is high, their economic value to pharmaceutical companies is low because of vaccines’ low return on investment and the exposure to legal liability they bring manufacturers….

Moreover, the FDA has a history of removing safe and effective vaccines from the market based merely on perceptions of excessive side effects — a prospect that terrifies manufacturers.

We need a fundamental change in mind-set: The rewards for creating, testing and producing vaccines must become commensurate with their benefits to society, as is the case for therapeutic pharmaceuticals.

Read Henry’s article for more on dealing with the problem today, (he notes, for example, that it may be possible to dilute current stocks and still maintain good effectiveness). Also, as Tyler reported last year, simply targeting vaccines to at-risk people is not necessarily the best approach. A better approach is to target super-spreaders, people who may not be at great risk themselves but who can and will spread it to many others.

Tomorrow: Vaccines: The Long Run.

Fastest Flip-Flop Ever?

Here from last night’s debate, is President Bush making a good case against government-run health care:

I think government- run health will lead to poor-quality health, will lead to rationing, will lead to less choice.

Once a health-care program ends up in a line item in the federal government budget, it leads to more controls.

And just look at other countries that have tried to have federally controlled health care. They have poor-quality health care.

Our health-care system is the envy of the world because we believe in making sure that the decisions are made by doctors and patients, not by officials in the nation’s capital.

And what does he say less than two minutes later?

We’ve increased VA funding by $22 billion in the four years since I’ve been president. That’s twice the amount that my predecessor increased VA funding.

Of course we’re meeting our obligation to our veterans, and the veterans know that.

We’re expanding veterans’ health care throughout the country. We’re aligning facilities where the veterans live now. Veterans are getting very good health care under my administration…

True, you can’t blame him much for the flip-flop – it’s what the public wants to hear. How many people even noticed the glaring contradiction? I suppose that on this issue I’d rather have flip-flop than all flop.

Should we buy weapons from Iraqis?

Payments for weapons handed over in Sadr City on Monday reportedly ranged from $5 for a hand grenade to $150 for an AK-47 to $2,000 for a highly specialized mortar. It appeared that both noncombatants and Mahdi Army insurgents were taking part in the buyback.

Abdulla Abu Ghassan, a bakery owner, received $1,200 after turning in a grenade launcher, an assault rifle and ammunition, all of which he said he had kept after serving in the now-disbanded Iraqi army.

The idea, presumably, is to take weapons out of the hands of terrorists. But will this work?

Under an optimistic scenario, the weapons are gone and the Iraqis are richer. Under a pessimistic scenario, the terrorists use weapons sales to finance future operations. If the terrorists have accumulated large weapons inventories, this should not be hard to do.

The dynamic problems are formidable. By bidding up the price of weapons, we raise the return to accumulating large weapons inventories in the future. We also make the weapons market more liquid. So weapons buy-back plans become less effective over time, unless we create the expectation that price will be falling. This means we had better get it right now, if indeed we can.

In some models government does best by accumulating its own inventory. The government then precommits to selling its stock, and driving down prices, if private traders accumulate too many of the forbidden assets. Knowing this danger in advance, private traders might be reluctant to invest in large stocks. Now I am not suggesting this as a viable policy option (hey, why don’t we sell off some nukes from Colorado, and lower the world price? That would show those nasty North Koreans…). Nonetheless the scenario shows just how far buying weapons can be from an ideal, incentives-driven economic policy.

Addendum: David Nishimura offers more information.

Dog the Bounty Hunter

Check out Dog the Bounty Hunter, the latest reality-tv show on, believe it or not, A&E (Thursdays at 10/9C is the regular time-slot but it repeats often). As you know, I have a special interest in bounty hunters but the show is good entertainment. Surprisingly, it’s not just the chase that’s interesting but also the life-story of the arrestees and Dog and his family.

The man who killed the draft

The influence of Milton Friedman in ending conscription is well-known. But an economist named William Meckling arguably played a larger role, read the story. Many of you will know that Meckling, working with Michael Jensen, made seminal contributions to the theory of the debt-equity ratio. Here’s hoping that Congress meant its recent vote.

And consider these words from David Henderson:

Many of you who have made or are now making your fortunes would not have done so if the draft had been in the way. Consider Bill Gates, who in 1975 dropped out of Harvard to start Microsoft: during the draft years, young men like him who left college risked being certified as prime military meat. Computer programmers and other IT workers, who often do their best work relatively early in life, regularly drop out of college now because high-paying, interesting jobs beckon. If we still had the draft — even a peacetime draft — many wouldn’t have that chance.

People often wonder why today’s 20-somethings have such entrepreneurial spirit. One reason, I believe, is that a whole generation has grown up without the draft looming over its head.

Thanks to Bryan Caplan for the pointer.

Prescott on Bush’s fiscal policy

Edward Prescott, who picked up the Nobel Prize for Economics, said President George W. Bush tax rate cuts were “pretty small” and should have been bigger.

“What Bush has done has been not very big, it’s pretty small,” Prescott told CNBC financial news television.

“Tax rates were not cut enough,” he said.

Lower tax rates provided an incentive to work, Prescott said.

As spoken, I agree with the words. But I must wonder if negative numbers count as “pretty small”? We all know that Bush has shifted taxes into the future, not cut them. Government spending is a better (albeit still imperfect) measure of what government takes from the economy. And domestic spending is way, way up; read Alex here.

We try to vary our content on MarginalRevolution; still if there were one point that we would make every day, it would be this one. “It’s the spending, stupid,” you might say.

Prescott should not be blamed for any possible misquotation or removal from context of his words by the news media; if there is any economist who understands the difference between real and nominal variables, or the importance of intertemporal budget constraints, it is he. Here is the link.

Markets in everything

Ms. Frenkel was not on a date with Mr. Blumberg, in pursuit of a kinky threesome; she was on the clock. A 29-year-old graduate student, she is one of a dozen women who work for a New York-based Web site called, earning up to $30 an hour to accompany single men to bars and help them chat up other women. The Web site’s founder, Shane Forbes, a computer programmer, started it in December after realizing he had more success with women when he went to clubs with female friends. “Every time I was with them, I would meet women,” he said.

I find that women often judge a husband by the quality of his wife. We call this a “sufficient statistic.”

But do Wingwomen work for everyone?

When asked about the women he had met, he shrugged. “They are all nice and cute, but two were in insurance, and the other one is from New Jersey.”

Here is the full story. Thanks to Andy for the pointer.

Addendum: Randall Parker discusses other possible dating strategies…don’t be shocked…

The virtues of a nasty central banker

The most important application of the time-consistency ideas in Kydland and Prescott’s work (with due credit going also to Barro and Gordon and Kenneth Rogoff) is to monetary policy. Consider a central bank that wants low inflation and low unemployment. To keep inflation low the central bank promises to hold down the growth rate of money. Let us suppose that the public believes the central bank’s promise and as a result they plan on low inflation in their writing of contracts. At some point, however, unemployment will increase and the central bank will be tempted to juice the economy with a spurt of inflation. Since the public has planned on low inflation a higher than expected inflation rate will be very effective at reducing unemployment and thus very tempting.

But the situation that I have just described cannot be a rational equilibrium. When the central bank promises to keep inflation low the public will say, ‘this promise isn’t credible – if we take the central bank at their word they will surely try to deceive us later with high inflation rates’. As a result, the public does not plan on low inflation and when the central bank does want to reduce unemployment it must increase inflation even more than when low inflation was expected. The only equilibrium of this game is one with high inflation and no systematic reduction in unemployment.

How can we improve the situation? Surprisingly, a nasty central banker can make everyone better off. A nasty central banker cares only about reducing inflation and not at all about reducing unemployment (think fat-cat Republican living off fixed income bonds). Precisely because a nasty central banker won’t juice the economy to reduce unemployment, the nasty central banker can credibly commit to keep inflation low. The public believes the promise and safely plans for low inflation. Unemployment is the same in both scenarios – because the central bank can never systematically surprise the public with higher than expected inflation – but inflation itself is lower with the nasty central banker and thus the public is better off.

Thomas Schelling once described a similar idea this way: If you are kidnapped who do you want in charge of the negotiations, your loving wife or your nasty ex-wife? Easy, right? But suppose that the kidnappers know in advance who will be in charge of the negotiations – now who do you want? See? Sometimes, nasty people do good things.