Spending Cuts
A big hat tip on this post to Russ Roberts who used the 10 year time frame to compare in this excellent post.
FDA: Moving to a Safety-Only System
It now costs about a billion dollars to develop a new drug which means that many potentially beneficial drugs are lost. Economist Michele Boldrin and physician S. Joushua Swamidass explain the problem and suggest a new approach:
Every drug approval requires a massive bet—so massive that only very large companies can afford it. Too many drugs become profitable only when the expected payoff is in the billions….in this high-stakes environment it is difficult to justify developing drugs for rare diseases. They simply do not make enough money to pay for their development….How many potentially good drugs are dropped in silence every year?
Finding treatments for rare disease should concern us all. And as we look closely at genetic signatures of important diseases, we find that each common disease is composed of several rare diseases that only appear the same on the outside.
Nowhere is this truer than with cancer. Every patient’s tumor is genetically unique. That means most cancer patients have in effect a rare disease that may benefit from a drug that works for only a small number of other patients.
…We can reduce the cost of the drug companies’ bet by returning the FDA to its earlier mission of ensuring safety and leaving proof of efficacy for post-approval studies and surveillance.
Harvard Neurologist Peter Lansbury made a similar argument several years ago:
There are also scientific reasons to replace Phase 3. The reasoning behind the Phase 3 requirement — that the average efficacy of a drug is relevant to an individual patient — flies in the face of what we now know about drug responsiveness. Very few drugs are effective in all individuals. In fact, most are not effective in large portions of the population, for reasons that we are just beginning to understand.
It’s much easier to get approval for drugs that are marginally effective in, say, half the population than drugs that are very effective in a small fraction of patients. This statistical barrier discourages the pharmaceutical industry from even beginning to attack diseases, such as Parkinson’s, that are likely to have several subtypes, each of which may respond to a different drug. These drugs are the underappreciated casualties of the Phase 3 requirement; they will never be developed because the risk of failure at Phase 3 is simply too great.
Boldrin and Swamidass offer another suggestion:
In exchange for this simplification, companies would sell medications at a regulated price equal to total economic cost until proven effective, after which the FDA would allow the medications to be sold at market prices. In this way, companies would face strong incentives to conduct or fund appropriate efficacy studies. A “progressive” approval system like this would give cures for rare diseases a fighting chance and substantially reduce the risks and cost of developing safe new drugs.
Instead of price regulations I have argued for more publicly paid for efficacy studies, to be produced by the NIH and other similar institutions. Third party efficacy studies would have the added benefit of being less subject to bias.
Importantly, we already have good information on what a safety-only system would look like: the off-label market. Drugs prescribed off-label have been through FDA required safety trials but not through FDA-approved efficacy trials for the prescribed use. The off-label market has its problems but it is vital to modern medicine because the cutting edge of treatment advances at a far faster rate than does the FDA (hence, a majority of cancer and AIDS prescriptions are often off-label, see my original study and this summary with Dan Klein). In the off-label market, firms are not allowed to advertise the off-label use which also gives them an incentive, above and beyond the sales and reputation incentives, to conduct further efficacy studies. A similar approach might be adopted in a safety-only system.
Addendum: Kevin Outterson at The Incidental Economist and Bill Gardner at Something Not Unlike Research offer useful comments.
Hard Determinism and Punishment
Determinists argue that fault and blame have no place in criminal “justice”. Neuroscientist David Eagleman, for example, made this argument recently in The Atlantic:
The crux of the problem is that it no longer makes sense to ask, “To what extent was it his biology, and to what extent was it him?,” because we now understand that there is no meaningful distinction between a person’s biology and his decision-making. They are inseparable.
While our current style of punishment rests on a bedrock of personal volition and blame, our modern understanding of the brain suggests a different approach. Blameworthiness should be removed from the legal argot. It is a backward-looking concept that demands the impossible task of untangling the hopelessly complex web of genetics and environment that constructs the trajectory of a human life.
Eagleman and other determinists are against punishment but they recognize that incarceration still has a role to play because the public has a right to be safe. Philosopher Saul Smilansky now pounces with a timely paper on determinism and punishment.
It is surely wrong to punish people for something that is not their fault or under their control. (Hard determinists agree with this premise.) But incarceration is a type of punishment so under the hard determinist view, justice
requires that when we incarcerate criminals we must also compensate them to make up for the unjust punishment. Smilansky has a bit of a silly name for punishment with compensation, funishment.
Funishment, however, is very likely to cause a big increase in crime and that is also unjust. Smilansky concludes, therefore, that hard determinists have a problem:
[B]y its nature funishment is a practical reductio of hard determinism: it makes implementing hard determinism impossible to contemplate.
Smilansky has put hard determinists into a corner but I fear that they have a type of escape at least in practice if not in theory–it is the one used by many humanitarians in the past–punish people under the guise or belief that you are really doing them good. The inquisitors surely recognized that it was unjust to torture someone who was controlled by the devil. Nevertheless, if torture is what it takes to get the devil out, then torture is not punishment but treatment…and vice-versa. The record of the psychiatric profession and non-punishing treatment of criminals (and others) is not without blemish.
Eagleman goes to some lengths to distance himself from such conclusions. He says, for example, that
To help a citizen reintegrate into society, the ethical goal is to change him as little as possible while bringing his behavior into line with society’s needs.
The tension, as I see it, is that if free will is a myth then it’s not clear why we should have an ethical goal of changing people as little as possible.
The Winner’s Curse
Tim DeChristopher has been sentenced to two years in a Federal prison. DeChristopher was an economics major at the University of Utah when he fraudulently bid on a number of oil and gas leases pushing up the prices on some leases and winning others.
The sentence appears to be out of proportion to the crime, even if you don’t accept DeChristopher’s environmental justifications as a mitigating factor. The other bidders did walk away with lower profits than they otherwise would have but their claims should have been made in civil court. The Federal government may even have made money on net because DeChristopher pushed prices up. It is certain that they would have made money had they chosen to resell the rights that DeChristopher “bought.” But a judge later ruled that the Department of the Interior’s environmental impact statement was inadequate and most of the auctions were annulled.
DeChristopher’s big mistake appears to have been winning some auctions as it would have been difficult to prosecute him for simply pushing up bids.
An Unbalanced Budget Amendment
The main argument against a balanced budget amendment is that it makes it more difficult to engage in Keynesian counter-cyclical fiscal policy. The main argument in favor is that without some legal or moral constraint, the ordinary rules of politics will push costs onto unrepresented and unorganized future taxpayers, as Jim Buchanan argued. In order to transcend these arguments I propose an unbalanced budget amendment.
The unbalanced budget amendment is a requirement that in good times the government must run a budget surplus. The virtues of such a rule are that it allows for counter-cylical fiscal policy during a recession. Indeed, it reduces the cost of counter-cyclical fiscal policy because it guarantees a reserve fund for just such emergencies. The unBBA is thus a type of automatic stabilizer of the kind I have argued for before (e.g. here).
A simple version of the unBBA requires surpluses but more generally the rule would be a surplus or a similarly sized reduction from the previous year’s deficit. The size of the required surplus/deficit reduction would be tied to a function of current and recent GDP growth rates.
Notice that while making counter-cyclical fiscal policy easier the unBBA would tend to create budget balance as surpluses in good times were spent in bad times. Thus over a period of time the unBBA has similar results to a BBA. By requiring surpluses (and thus taxes) to be high(er) in good times,however, rather in bad times the unBBA has a lower cost and a better chance of being passed than the BBA.
Overall, an unbalanced budget amendment seems much preferable to a balanced budget amendment.
Give Directly
Here is Tyler summarizing the principles of charitable giving:
1. Cash is often the best form of aid.
2. Give to those who are not expecting it, and,
3. Don’t require the recipients to do anything costly to get the money.
Loyal readers will recall that Tyler followed through on his advice by sending money to random people in India, as suggested by MR readers (see also here).
A new charity is formalizing Tyler’s system and reducing the transaction cost of efficient donation. GiveDirectly takes donations over the web, locates poor households in Kenya using people on the ground, and then transfers money directly to the recipient’s cell phone (even very poor households typically have cell phones but GiveDirectly provides SIM cards for those who do not.) Transactions costs are low, just 10%.
You will not be surprised to learn that the CEO and founders and are all economists (one MBA/MPA). All the founders also have extensive experience in development. A randomized control trial is under way to evaluate the program.
Transfers, following point #3, are unconditional. The founders write:
GiveDirectly intentionally provides unconditional, rather than conditional, cash transfers. We do this for three reasons. First, empowering the poor to make their own decisions advances our core value of respect. Second, it lets recipients purchase the things they need most, enhancing impact. Third, imposing conditions on the use of funds requires that costly monitoring and enforcement structures be put in place. One detailed estimate put the administrative costs of a conditional cash transfer scheme at 63% of the transfers made over the first three years of the program (Caldes & Maluccio 2005).
Points one and three are excellent. The second point is a bit disengenous, yes it lets recipients purchase they things they need but it also lets recipients purchase alcohol, cigarettes and prostitutes. Even in poor countries, a substantial amount of poverty is caused by poor choices. Still, there is no special reason to think that cash grants will increase the proportion of money spent on “bad goods.” Cash grants could even reduce bad-goods spending. Some people drink to escape depressing circumstances, for example, so if you make things less depressing, drinking can fall. Moreover, even if you give people housing, health care, or food (stamps!) it’s not so easy to get around bad-goods spending because money is fungible. Thus, I have no problem with donating cash.
Indeed, Tyler and I wish to encourage experimentation in charity and we have therefore made a donation to GiveDirectly.
Addendum: Givewell, our favorite charity evaluator, says GiveDirectly is too new to evaluate but they like the idea and they note that GiveDirectly has been unusually forthright in providing them with advance plans on evaluation.
The Toilet Challenge
In our textbook, Modern Principles, Tyler and I write:
In the United States, diarrhea is a pain, an annoyance, and of course an embarrassment. In much of the developing world, diarrhea is a killer, especially of children. Every year 1.8 million children die from diarrhea. To prevent the deaths of these children we do not need any scientific breakthroughs, nor do we need new drugs or fancy medical devices. What these children need most is one thing: economic growth.
Economic growth brings piped water and flush toilets, which together cut infant mortality from diarrhea by 70 percent or more.
Bill Gates and the Gates Foundation think that some scientific breakthroughs are needed and they are putting millions into the Toilet Challenge a new project to build a better toilet.
“No innovation in the past 200 years has done more to save lives and improve health than the sanitation revolution triggered by invention of the toilet,” Sylvia Mathews Burwell, president of the foundation’s global development program, said in a statement. “But it did not go far enough. It only reached one-third of the world. What we need are new approaches. New ideas. In short, we need to reinvent the toilet.”
So what is wrong with the current commode?
It’s too expensive for people in the developing world; it requires water and a sewer-system hook-up, which aren’t always available; and it does nothing to actually treat human waste, said Frank Rijsberman, the foundation’s director of water sanitation and hygiene.
Gates is to be credited with taking on an important and unsung task. Some of the ideas he has spent money on, however, seem to be highly unrealistic. Consider:
Professor Georgios Stefanidis and his team at Delft University of Technology propose to develop a toilet system that will apply microwave technology to transform human waste into electricity. The waste will be gasified using plasma, which is created by microwaves in tailor-made equipment. This process will yield syngas, a mixture of carbon monoxide (CO) and hydrogen (H2). The syngas will then be fed to a solid oxide fuel cell stack for electricity generation. This toilet system will be able to serve single households or groups of households.
My rule is that any society capable of managing and maintaining such a system will already have flush toilets (either that or they live on the space station).
The Benefits of Fiscal Illusion
David Wessel does a good job explaining how the Gang of Six plan is both a tax cut and a tax increase:
The Gang of Six, a bipartisan group of senators, threw its deficit-reduction package into the arena Tuesday and it is variously described as increasing tax revenues by $1 trillion over 10 years and also decreasing them by $1.5 trillion over 10 years. Huh?
Measured against current law, the Gang of Six plan is a tax cut. The law currently says that the Bush tax cuts expire at the end of 2012 for everyone and that the pesky Alternative Minimum Tax will reach deeper into the middle class (because it doesn’t automatically adjust its thresholds for inflation).
The Gang of Six, among other things, would eliminate the Alternative Minimum Tax—that alone would cost the Treasury about $1.7 trillion versus current law. Altogether, the various tax changes in the Gang of Six plan would reduce tax revenues by $1.5 trillion.
But no one expects current law to prevail. Congress every year, for instance, puts a patch on the Alternative Minimum Tax so it won’t hit more families. And both the White House and many Republicans want to extend the Bush tax cuts for taxpayers with incomes under $250,000 a year. (The argument is over expending them for taxpayers with higher incomes.)
So budget wonks have developed “alternative” or “realistic” baselines. The Bowles-Simpson fiscal commission used such a baseline, borrowing one developed by the Obama White House. Among other things, that yardstick assumes the AMT is patched year after year, and assumes the tax cuts for the under $250,000 crowd are extended. Against that baseline, the Gang of Six raises about $1 trillion revenue over 10 years, roughly the same sum that the Bowles-Simpson plan did. That’s how it’s also a tax increase.
Thus, if the Republican base reads it as a tax cut and the Democrat base reads it as a tax increase, we just might get a deal.
Ella and Louis offer relevant advice.
The 11th Commandment?
At the conference I attended in Israel, Shimon Peres said that if he could, he would add an 11th commandment, “Respect your sons and daughters.”
I would go for “Thou shalt not spread my word with the sword,” which sounds appropriately biblical and might have done some good.
If you could write an 11th commandment what would it be?
Marginal Revolution and the Martial Arts
It surely ranks high in the annals of the improbable that the August 2011 issue of Black Belt: The World’s Leading Magazine of Martial Arts contains an article (not online) in which your loyal authors are featured. Mark Hatmaker, writes:
“I’ll borrow the phrase “marginal revolution,” a term coined by economists Tyler Cowen and Alexander Tabarrok. This esteemed duo defines marginal revolution as the tiny changes that can be made to a system that result in large changes at the end point–gold vs. silver, for example. These tweaks, these marginal improvements, are what steadily accrue into large rewards.
…Once you gain a fundamental level of skill and conditioning, you must make tweaks to nudge your progress upward. As a marginal revolutionary, you must recognize that small is fine, that shaving off one-tenth of a second can be an eternity and that one-eighth of an inch can be a great distance. Every gain is important, no matter how small.
The picture is from the Shaolin Temple. Here are previous MR posts on Kung Fu.
Hat tip to Carl Close.
The Singularity is Near: From Dust to Device
It’s now possible to scan and replicate an object with moving parts in a 3D printer. Check out what happens when the physicist reaches into the dust and pulls out a wrench. Truly, any sufficiently advanced technology is indistinguishable from magic.
http://youtu.be/ZboxMsSz5Aw
(FYI, I think some post-scanning information must have been added to the computer representation to fully describe the moving parts.)
Hat tip: Kottke.
The fruits of immigration
A tough new law cracking down on illegal immigrants and those who hire or “harbor” them has created a severe shortage of agricultural labor in Georgia right at harvest time.
The head of a farmer’s group estimates that the state’s $1.1 billion fruit-and-vegetable industry could suffer a loss of $300 million.
Gary Paulk, a blackberry farmer interviewed by PRI’s the World, says he has lost $200,00-250,00 this season, as unpicked berries rot. “Having a fake ID, a first-time offense can be up to 10 years, and a $100,000 fine,” Paulk said. “I mean that’s, that’s like a felony. A felony to use a fake ID to get a job to support your family.”
To combat the shortage, Governor Nathan Deal has authorized using criminal offenders out on probation to replace the mostly Latino migrant workers. It’s not working out so well:
The first batch of probationers started work last week at a farm owned by Dick Minor…So far, the experiment at Minor’s farm is yielding mixed results. On the first two days, all the probationers quit by mid-afternoon, said Mendez, one of two crew leaders at Minor’s farm.
“Those guys out here weren’t out there 30 minutes and they got the bucket and just threw them in the air and say, ‘Bonk this, I ain’t with this, I can’t do this,'” said Jermond Powell, a 33-year-old probationer. “They just left, took off across the field walking.”…
By law, each worker must earn minimum wage, or $7.25 an hour. But there’s an incentive system. Harvesters get a green ticket worth 50 cents every time they dump a bucket of cucumbers. If they collect more than 15 tickets an hour, they can beat minimum wage.
The Latino workers moved furiously Thursday for the extra pay.
Jose Ranye, 37, bragged he’s the best picker in Americus, the largest community near the farm. His whirling hands filled one bucket in 25 seconds. He said he dumped about 200 buckets of cucumbers before lunch, meaning he earned roughly $20 an hour. He expected to double his tickets before the end of the day.
None of the probationers could keep pace. Pay records showed the best filled only 134 buckets a day, and some as little as 20. They lingered at the water cooler behind the truck, sat on overturned red buckets for smoke breaks and stopped working to take cell phone calls.
In short, we have turned good workers into criminals and turned criminals into bad workers, losing on both ends of the deal. Incredible.
The Great Fiction
Catherine Rampell, Bruce Bartlett, and Matt Yglesias are all pushing the chart below from a paper by Suzanne Mettler. According to this gang, people who use, for example, the mortgage interest deduction or who have a 529 college savings program are willfully ignorant about how they benefit from government (Rampell’s terminology).
As Bastiat said, “Government is the great fiction through which everybody endeavors to live at the expense of everybody else.” What Rampell et al. want to do is to make people believe in this great fiction. But there are always taxpayers and taxeaters, even though government has so wormed its way into every organ of the body politic that it is sometimes difficult to tell which are which. (Indeed, part of Mettler’s point is that the government shell game of ‘hide the subsidy, hide the tax’ is often designed to obscure taxpayers and taxeaters.)
Nevertheless, there are dividing lines. In a laissez-faire world we don’t get rid of 529 programs, instead all savings, not just savings for college, become tax-free. A 529 program is not a government program like food stamps, it is the absence of a government tax. (N.B. I am not taking a position here on the best tax structure.)
People who use 529 programs and who think that they have not used a government social program are not willfully ignorant, they are demonstrating a healthy if fading appreciation of the distinction between civil society and government. What Rampell et al. implicitly imagine is that the natural state is slavery and any departure from that state a government benefit. Thus, if the government taxes your saving for a college education less than your other savings, you should be grateful for how government has benefited you and your children.
And if the government doesn’t jail you today, you should be grateful for how government has granted you the benefit of liberty.
This is the attitude of a serf not an American.
Wolfers on Happiness
Excellent talk on happiness by Justin Wolfers. Robert Frank and discussion which follow are also good but Wolfers is outstanding.
A couple of things I learned. The flat happiness line in the United States over time is often contrasted with rising GDP per capita to assert a paradox. The paradox goes away once you take into account that median earnings haven’t risen (ala TGS).
Wolfers also shows that income matters not just for happiness but for a large number of correlates, inputs and outputs of happiness. Compared to people in poorer countries, people in richer countries, for example, more often say their food tastes good, they report less pain and they smile more.
The Art of Bribery
Interesting piece on bribery in China. The following four scenarios all have counterparts elsewhere but, as relayed by the author, in China the elegance of the art and the elegance of the bribe are all brought together with true appreciation.
The First Scenario:
The corrupted official can sell a fake painting at any rigged gallery. After coordinating with the official, the briber will go to the designated gallery and buy it at the agreed price plus the commission of the gallery owner. All of the three parties know that the painting is fake, but eventually they are all benefited. This fake painting can be reused and it can go through another bribery circulation of other “elegant” buyers and sellers.
The Second Scenario:
The briber puts a real and expensive painting at the gallery. The gallery marks down the price as if it were a fake painting. The official buys it as if he has the greatest bargain on earth. Sooner or later, the official can resell it at the right place, at the right time, and at the right price.
The Third Scenario:
The briber visits the official and gives him/her a real or fake painting as a present. Three days later, a seemingly unrelated person knocks the door of the official and buys that particular painting at an unreasonably high price. This buyer is actually a trusted subordinate of the briber, and, by doing so, the whole process does not involve the gallery whose owner will certainly ask for a commission.
The Fourth Scenario:
There are rigged auction houses all over China and they become the most suitable places for elegant corruption. The briber, first of all, gets a fake painting either from a gallery or a fake painting factory. Then, s/he provides relevant document proof of scholars and experts to take care of the problem of authenticity. These scholars and experts are paid to confirm the authenticity of this fake painting. They falsify every historical detail, evidence of painting style and scientific verification of the materials used. The forged painting is then given to the official as a gift and is auctioned at a very high price. Eventually, there is always someone coming from nowhere who wins the bid. Again, the bidder is a trusted person of the briber. These auction houses get hush money before the whole corruption process is completed.
Hat tip: Daniel Lippman.