Month: October 2007

Big news on pharmaceutical prizes

Senator Bernie Sanders, the first self-described socialist ever to be elected to the Senate, has introduced a bill that I might actually sign on to, The Medical Innovation Prize Fund Act of 2007In essence, the prize fund would pay pharmaceutical companies to release their patent rights to the public domain. 

The level of funding for medical innovation prizes would start at
$80 billion per year, and increase with the growth in GDP….

Under the Sanders
proposal, the patent system would still be used, but the patent owners
would no longer be given monopoly rights to control the manufacturing
and sale of products.  Instead, patents would be used to establish who
"owns" the right to the cash rewards given for new inventions.  Drugs
developed without patents would also be eligible for the prizes.

I like that the funding amounts are serious and would be available to non-patented products (innovations without property rights are underfunded).  I worry about corruption and funding directed according to political pressure.  I would be reassured if the system were clearly voluntary – that is, pharmaceutical manufacturers should have the option of the patent or the prize.  Clearly an option will increase profits for the pharmaceutical firms but medical innovation has many beneficial returns not captured by the pharmaceutical companies  so I am not worried about bigger transfers.

Most importantly, a prize fund would make clear the tradeoff between pharmaceutical revenues and R&D and it would reduce the pressure for price controls which I think are a serious threat to future medical innovation.

Thanks to Ben Krohmal for the pointer.

Satanists Unite!

Here’s a mini-review of my brother’s movie Weirdsville. 

Weirdsville – a
dark and devilishly funny comedy about a pair of junkie crooks who
can’t seem to catch a break to save their lives. Throw in a couple
Satan worshipers, a band of vigilante little people and a pair of
curling stone wielding drug dealers and things get, well – considerably
weirder. The film is littered with fantastic offbeat and unexpected
moments that keep the laughs rolling. Moyle meanwhile, adds his
signature rock n’ roll flare and gives the film a cold, gritty feel
that keeps you on just enough of an edge. Definitely a trip worth

So who is complaining?  The Satanists!  Here is one email:

I would just like to voice my opinion and state that I do NOT appreciate the way you portray Satanism in the least. Using the same-old watered down mass-media version or not, it still tends to give us a bad name. I am not asking you to remove this movie or change anything on it, just think about it.

By the way, long-time readers of Marginal Revolution may be wondering whether the Satan worshipers in Weirdsville are a commentary on my brother’s previous blockbuster.


…there’s no doubt that Marginal Revolution and Freakonomics are, by far, the most popular economics blogs. If you look at their Google Reader subscriber numbers, Marginal Revolution has 72,378 subscribers, while Freakonomics has a few different feeds with 78,462 subscribers in total.

That’s from Felix Salmon, it’s actually a lot more than I had thought.

This is so, so wrong

When she said yes, he asked the more important question, would she attend a performance of the Black Watch, an international bagpipe and drum group, the next weekend at UT Tyler’s Cowen Center.

Here is the full but totally non-interesting story

On a less incorrect but still odd note, someone just built a column around this point:

There are some restaurant dishes that I order because they sound better than everything else on the menu, and there are some I order because they sound worse.  My reasoning goes like this: If a chef dares to offer something as unappealing as, say, a raw kale salad, chances are it’s fantastic.

RAND Hits Back

Joseph Newhouse and the other RAND researchers have responded to Nyman’s paper arguing that attrition bias biased their results.  The RAND researchers were aware of these issues and in fact designed the experiment to avoid incentives for non-random attrition.   Most importantly, the basic RAND findings have now been replicated in many other studies (smaller and not always experiments but the results are solid).  I call it a knockout for RAND.

It’s a credit to the many insightful commentators on Marginal Revolution that many of these points were made already in the comments on my original post.

Thanks to Jason Furman for the pointer.

Uh oh

George Mason is updating to a new network system.  We are told, "MESA was designed specifically for George Mason University." 

In other words, MESA has not been thoroughly tested, no other universities have found it worthwhile to adopt the same system and we will be utterly dependent on the designers.   Ahhhrghhh!  Run for the hills!   

Is Hillary electable?

At this point it is ridiculous to claim that Hillary cannot win, but her chances are overestimated.  I apply what I call The Angry Ape Test to the candidates.  Imagine each mimicking an angry ape, and ask how pretty or appealing the resulting picture is.  Most swing voters perceive America as being at war and so they demand toughness.  They demand An Angry Ape, if not at every moment in time, at least in principle.  Most Americans don’t find an angry Hillary to be a pleasant Hillary, whereas an angry, raging Giuliana fits his basic image.  Americans claim not to be biased, but at their core they don’t much like angry women; being female remains Hillary’s biggest barrier, even when explicit prejudice is absent.  Related prejudicial forces will keep Barack Obama from the presidency.  Being black, he is supposed to sound reasonable and intelligent all the time.  He is not allowed to mimic An Angry Ape.  Americans want their first women President to be like Margaret Thatcher — firm, no-nonsense schoolmarmish strength without much radiation of anger — and they want their first black President to be like Colin Powell.  We will allow "Magisterial" — I’m too strong to need to throw a tantrum — to trump Angry Ape, but Hillary can’t play that card.  Barack is too young, too inexperienced, and doesn’t have the military record.

Mitt Romney also can’t do The Angry Ape.  This same hypothesis suggests McCain still has some chance, though obviously his path to the top is no longer clear, given his limited resources.  He can at least do The Ape.  This is the main reason why I still think Giuliani will win.

Under this theory foreign policy disasters, no matter who caused them, will help the Republican candidate.  We will demand An Angrier Ape.

Have median wages stagnated?

This is a very common charge.  It is true that median wage growth has been slower than usual over the last thirty years.  But it’s not quite the grim picture it is often made out to be. 

For instance: "Including estimated benefits adds 6 percentage points to the growth rate of
average hourly earnings and 8 percentage points to the growth rate of the median hourly wage."  For the last thirty years, twenty-eight percent growth in median wages is the best available estimate.  Don’t let anyone tell you it is zero or negative.

Here is the one good summary article on this topic.  Thanks to a loyal MR reader for the pointer.

Why do college costs outpace inflation?

Tuition and other costs, not including room and board, rose on average
to $6,185 at public four-year colleges this year, up 6.6 percent from
last year, while tuition at private colleges hit $23,712, an increase
of 6.3 percent…In recent years, consumer prices have risen less than 3 percent a year,
while net tuition at public colleges has risen by 8.8 percent and at
private ones, 6.7 percent.

Etc., and please note that explanations for high costs (i.e., lazy professors who won’t blog) do not automatically translate into explanations for rising costs.

Rrecall that 78 percent of the buyers in this market choose the public sector.  Tuition is going up because it can, to paraphrase the old saw about the dog (or is it the monkey?).  But too big a sticker shock across one year would irritate voters, who might then insist on tighter regulations on public sector higher education.  Think about the equilibrium.  Many state schools could earn more money by forgoing state aid and raising tuition to profit-maximizing levels, or some approximation thereof.  Step-by-step, we are moving toward some version of this outcome.

Why do low-tuition goodies for middle class parents no longer figure so prominently in the political calculus?  Could it be the aging of the population?  Or simply that some schools tried raising tuition and found that it did not backfire?. 

If the market discounters — who capture 78 percent of the customers — can raise their price, so can the other suppliers.

If more people want to get into Harvard, Harvard doesn’t have much incentive to increase the size of a yearly class.  The academic departments don’t want to lower standards by hiring more professors or adjuncts, and the development office seems OK with just raising the size of the required bribe for admission, rather than hoping that a bigger class means more donations thirty years from now.

At the same time the returns to skilled labor are rising, so many people even feel they’re getting their monies worth.  Toss in a dash of Robin Hanson’s "showing that you care" ("I’m sorry Johnny, but we won’t be spending a penny more on you") and the market seems to hang together.

Nor do universities have the best governance structures for controlling costs.  Here are some good comments on the problem.


The boys were tossed out of the ball pit for rough-housing.  The wife began to sternly lecture them "Why are you so wild?  Don’t you know you could get hurt?!"  The 5-year old retorted, "Mom!  No risk, no fun."

Naturally I burst out laughing.  Need I explain why this was not wise?  I should have kept quiet, but I learned another tradeoff; no fun, no risk.

How much is America taxing its rich?

Lots, at least for some:

It might be fair to have the rich pay half their income . . . but when you factor in other taxes, many of them do. My old colleagues moving to New York City from London were frequently heard to say "What is this rubbish we’ve been talking about America having low taxes? My taxes are higher here!" That’s because New York State and New York City together levy an additional income tax of 10% once your income is over $100K, which pushed two-income families above Britain’s 40% top tax bracket. A 50% tax rate on top incomes would result, for New Yorkers, in a 60% effective total income tax rate total, with their incomes further eroded by the city’s 10% sales tax. Since pretty much the entire increase in inequality in the last few decades seems to have come from a few zip codes in the high tax zones around New York and San Francisco, this matters.

There are broader lessons.  First, tax incidence is tricky.  If location is such an enormous source of economic value, will local income tax rates, and also sales tax, in fact fall on landowners in those cities?

Second, not all of these people can convert their labor income into capital gains income, which is taxed at a much lower rate.  In other words, high-earning Manhattan journalists face exorbitant rates of taxation, as do doctors without their own practices.  That’s one reason why it is becoming a city of equity holders.

Third, those who can opt for capital gains, for tax reasons, end up with more exposure to income risk than they ideally want.  Boo-hoo for the billionaires you might say, but the added risk raises income inequality for the winners who constitute the top one percent, relative to other income classes.  That doesn’t bother me much, but the policy is helping create a result it was designed to counteract.

Fourth, if you’re planning on raising marginal tax rates on the wealthy, there may be less "give" in the system than you might have thought.  This of course depends on tax incidence, but if behavioral considerations matter, many people resent nominal marginal rates of 60 percent, even if they are earning some of it back in the form of higher wages.

Perceptions of Corruption

Transparency International produces a much cited index of corruption, the Corruption Perceptions Index (CPI).  But here is something, shall we say… interesting.

"Transparency International commissions the CPI from Johann Graf Lambsdorff." Lambsdorff, who likes to be called the "father" of the CPI, has another kid on the side, a firm called Anti-Corruption Training and Consulting.  And what does this firm do?  Well I will let them speak for themselves:

Following an invitation of the Chinese Ministry of Supervsion Prof.
Graf Lambsdorff and Mathias Nell went to China from July 22 to July 29
2007. The trip encompassed anti-corruption consultations in Beijing,
Nanjing and Chengdu as well as the release ceremony at Tsinghua
University of the Chinese version of Prof. Graf Lambsdorff’s new book
“The Institutional Economics of Corruption and Reform: Theory, Evidence
and Policy”.

China, let us recall, scores a 3.5 out of 10 on TI’s Corruption Index where the most corrupt country in the world, Somalia, has a score of 1.4.  Pretty corrupt, eh?  Here is a picture, from the ACTC website illustrating some of ACTC’s consulting:


Hat tip to CPI-Watch.

What went wrong with subprime loans in 2006?

Yuliya Demyanyk and Otto Van Hemert report:

We analyze the subprime mortgage crisis:
an unusually large fraction of subprime mortgages originated in 2006
being delinquent or in foreclosure only months later.  We utilize a
loan-level database, covering about half of all US subprime mortgages,
and identify two major causes.  First, over the past five years, high
loan-to-value borrowers increasingly became high-risk borrowers, in
terms of elevated delinquency and foreclosure rates.  Lenders were aware
of this and adjusted mortgage rates accordingly over time.  Second, the
below-average house price appreciation in 2006-2007 further contributed
to the crisis.

Neither point is shocking news, but the mystery deepens upon inspection.  After 2006, 2001 was the next worst performing year for mortgage repayment, a puzzling fact.  I had expected a rising crescendo of failures; why did things suddenly get so much worse when they did?  Furthermore variable rate loans and low documentation loans do not seem to worsen disproportionately in 2006, contrary to common suppositions.  The ratio of loan value to house value is a critical variable, but again there is the puzzle of why 2006 was so much worse for these loans than preceding years.  Unless you think everyone is "flipping," (not the case), falling home prices don’t stop you from repaying your loan.  Note also that lenders could see the risk of these loans worsening, and it was reflected in the rates they charged, although apparently not enough.

Addendum: Here is James Hamilton on same.

Dan Klein critiques Bryan Caplan

Slugfest of the classical liberals.  Dan stresses he wrote these comments off the top of his head, which is how most criticism of colleagues should be done.

Perhaps the most interesting discussion is whether Bryan has identified the key biases in voter behavior.  Bryan identifies anti-foreigner, make-work, pessimistic, and anti-market biases.  Like Dan, I see pro-conformity biases as essential, and as shaping the form that other biases will take, including the biases of high-status academics.   I also don’t think that voters are pessimistic per se; on many issues (Iraq, global warming) they have seemed quite cavalier and willing to ignore pending problems.  It is fairer to say that voters either ignore or overestimate low probability events, depending on framing, rather than getting it right.

My list of the essential biases in voter (and human) behavior are: feel good about oneself bias, conformity bias, and anti-foreigner bias.  Robin Hanson might cite signaling bias.  The remaining biases are numerous and important, but they will flow from how these initial deeply rooted biases interact with the social environment.  Among other things, this means that people can be too biased toward Bryan’s point of view and that we can’t always trust academics over the common person.

I often joke with Bryan that the time has come for him to accept the consensus of what the experts in moral philosophy (or atonal music) tell us (him) to do.