Tuesday assorted links
1. The advent of artisanal cash.
2. The early Mediterranean monolith.
3. Discounting government projects.
4. “China’s firms have borrowed a trillion dollars of USD denominated debt. That makes it risky to devalue the RMB more” And David Beckworth on China’s peg and the impossible trinity. Here is Izabella Kaminska.
5. What will greater transparency bring to the innovativeness of Alphabet [Google]?
The (Soon-to-be) Prisoners Dilemma
An enterprising sheriff in Franklin county, KY posted the following flyer on Facebook.
The flyer resulted in successful prosecutions and is now being used by other police departments. More at the NYTimes.
Hat tip: Andrea Castillo.
Six thoughts about the Yuan devaluation
1. The Australian and Singaporean dollars are weakening, as are many emerging market currencies. Take this to be a signal of Chinese weakness. Overall this is a sign of surrender to the market.
2. Offshore-RMB is down more than the size of the devaluation, a clear sign the market believes the currency will continue to decline in value. Take this to be a signal of Chinese weakness.
3. “Gold related stocks” are being called “the biggest winner.” Take this to be a signal of global weakness. Commodity prices are falling and there is a general flight to safety.
4. A panicky flight of capital still is not the most likely scenario for China. Still, the chance of that scenario just went up, and the leadership knows this, thus the negative signal about underlying economic conditions. That exchange rate “currency wars” stimulus really must be needed.
5. There has never been a better time to visit China. As for Chinese leaving the country to finance Paris and Bangkok, the index of Chinese airline stocks just fell 9.6 percent.
6. U.S. monetary policy just got harder, that is the dollar is up once again.
A summary of the currency move is here, I believe it is the single biggest drop in the modern history of the Chinese currency.
Addendum: Here are thoughts from Christopher Balding.
Is WeChat the future?
This Connie Chan article about mobile in China is difficult to summarize or excerpt, but it is one of the most important pieces of the year so far. Here are the opening bits:
This post is all about WeChat, but it’s also about more than just WeChat. While seemingly just a messaging app, WeChat is actually more of a portal, a platform, and even a mobile operating system depending on how you look at it.
Much has been written about WeChat in the context of messaging app trends, but few outside of China really understand how it works — and how it can pull off what for many companies (and countries) is still a far-off vision of a world managed entirely through our smartphones. Many of WeChat’s most interesting features — such as access to city services — are not even visible to users outside of China.
So why should people outside of China even care about WeChat? The first and most obvious reason is that it points to where Facebook and other messaging apps could head. Second, WeChat indicates where the future of mobile commerce may lie. Third, WeChat shows what it’s like to be both a platform and a mobile portal (what Yahoo could have been).
Ultimately, however, WeChat should matter to all of us because it shows what’s possible when an entire country — which currently has a smartphone penetration of 62% (that’s almost 1/3 of its population) — “leapfrogs” over the PC era directly to mobile. WeChat was not a product that started as a website and then was adapted for mobile, it was (to paraphrase a certain movie) born into it, molded by it.
Do read the whole thing, this is also one of China’s first major innovations in the classic sense of that term.
Alphabet and Google
Peter Klein has an interesting Rand Journal piece (pdf) on conglomerates:
This paper challenges the conventional wisdom that the 1960s conglomerates were inefficient. I offer valuation results consistent with recent event-study evidence that markets typically rewarded diversifying acquisitions. Using new data, I compute industry-adjusted valuation, profitability, leverage, and investment ratios for thirty-six large, acquisitive conglomerates from 1966 to 1974. During the early 1970s, the conglomerates were less valuable and less profitable than standalone firms, favoring an agency explanation for unrelated diversification. In the 1960s, however, conglomerates were not valued at a discount. Evidence from acquisition histories suggests that conglomerate diversification may have added value by creating internal capital markets.
In other words, today’s Google announcement isn’t as crazy as it may sound. Here is further positive evidence on conglomerates, and Glenn Hubbard also thinks the 1960s conglomerates were largely efficient. Here is some evidence, however, that conglomerates tend to be less innovative. Scharfstein and Stein are less positive more generally. Here is some evidence that the non-Google divisions will receive favoritism in the allocation of capital within the conglomerate. That all said, conglomerates are understudied in microeconomics, in part because they are hard to study.
What do you all think of the news?
Women like free trade less
Or so it seems. Mansfield, Mutz, and Silver write:
In this paper, we provide one of the first systematic analyses of gender’s effect on trade attitudes. We draw on a unique representative national survey of American workers that allows us to evaluate a variety of potential explanations for gender differences in attitudes toward free trade and open markets more generally. We find that existing explanations for the gender gap, most notably differences between men and women in economic knowledge and differing material self-interests, do not explain the gap. Rather, the gender difference in trade preferences and attitudes about open markets is due to less favorable attitudes toward competition among women, less willingness to relocate for jobs among women, and more isolationist non-economic foreign policy attitudes among women.
The pointer is from Ben Southwood, I do not see an ungated copy.
Singapore fact of the day
According to Morgan Stanley, Singapore’s public spending on education amounts to about 3 per cent of GDP — far behind the Nordic countries, which spend 7 per cent or more, and even Malaysia at its 6 per cent. For wider comparison, the US spends about 5.5 per cent and Hong Kong 3.5 per cent.
The FT story on Singapore’s 50th birthday is here.
Monday assorted links
FDA Loses Another Free Speech Case
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.
Can economists justify pre-market exclusion for pharmaceuticals?
One recurring problem in economics, and the other social sciences all the more, is that researchers will accept a lot of conventional wisdom on a topic if it suits their preexisting biases, especially if it is not an area which they have researched themselves. Yet this entire question is — surprise, surprise — largely unstudied. Social scientists love to talk about themselves, but critical self-scrutiny backed by data is less popular.
Jason Briggeman just wrote a GMU dissertation to investigate these and similar questions, here is his abstract:
In the United States and most other wealthy nations, all drugs are banned unless individually permitted. This policy, called pre-market approval, is controversial among economists; the preponderance of the economics literature that offers a judgment on pre-market approval is critical of the policy, but surveys of U.S. economists show that many, perhaps a majority, support pre-market approval. Here I analyze the results of a recent survey that asked economists who support pre-market approval to justify, with reference to the economic concept of market failure, their support of the policy. I find that, while almost all the economists surveyed could point to a market failure or failures that may plausibly exist and affect the market for pharmaceuticals, none were able to make a well reasoned connection between those market failures and the particular remedy of pre-market approval. None of the economists surveyed cited in support of their position any literature specific to pre-market approval. I supplement the survey findings with a review of relevant reading material assigned in health economics courses at top universities, searching that material for discussions of what may justify pre-market approval. I find a strong argument that the prospect of overt disasters being caused by avoidable mistakes can justify some intervention in pharmaceuticals; however, I find little to justify the other interventions that are part of pre-market approval. I suggest that future inquiry into possibilities for liberalizing reform concentrate on understanding matters such as the informational effects of product bans, the distinction between safety and efficacy, the nature of demand for drugs about which little is known, and the political economy of drug substitutes.
The upshot is that economists hold a lot of views whose justifications they cannot articulate very well. I think you would find the same when it comes to the Ex-Im Bank (are you sure it fits the model of strategic trade theory?), the mortgage agencies (what was that externalities argument for home ownership again?) or all sorts of random regulations. The relatively interventionist economists will pull some justification out of a hat, and the relatively pro-market economists will be pretty skeptical.
For the pointer I thank Daniel Klein.
The new Fable of the Bees
This Leah Sottile WaPo piece is excellent in many ways. Here are a few bits:
Bees are still dying at unacceptable rates…Ohio State University’s Honey Bee Update noted that losses among the state’s beekeepers over the past winter were as high as 80 percent.
…Researchers say innovative beekeepers will be critical to helping bees bounce back.
“People ask me, ‘The bees are going to be extinct soon?’ ” said Ramesh Sagili, principal investigator at the Oregon State University Honey Bee Lab. “I’m not worried about bees being extinct here. I’m worried about beekeepers being extinct.”
Commercial beekeepers are leaving the sector and innovative bee hobbyists are taking on a much larger role:
“I feel a social responsibility to provide good bees,” Prescott said. “It makes me happy to look at the part that I’m playing.”
…Obsessing over bee health was unheard of 50 years ago, said Marla Spivak, a University of Minnesota professor of entomology. “In the past, it was very easy to keep bees. Throw them in a box, and they make honey and survive. Now, it takes lots of management.”
The story has some excellent examples:
Henry Storch, 32, does it because he felt a calling to beekeeping. A farrier by trade, Storch said he could make more money shoeing horses. But five years ago, he became obsessed with the notion that he could build a better bee…He barely flinched as a bee stung him on the upper lip.
…Storch’s mountain-bred “survivor” bees are like open-range cows: tough, hardened and less in need of close management than the bees he trucks to the California almond fields. Storch compares the effort to growing organic, non-GMO food.
The good news is this:
Amid the die-off, beekeepers have been going to extraordinary lengths to save both their bees and their livelihoods.
That effort may finally be paying off. New data from the Agriculture Department show the number of managed honeybee colonies is on the rise, climbing to 2.7 million nationally in 2014, the highest in 20 years.
Recommended. To trace the longer story, here are previous MR posts on bees.
India Fact of the Day
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.
Economics still is not a science (could Mao improve today’s Chinese economy?)
Assuming a continuation of current policies, the paper predicts the Chinese economy will expand by 7-8 per cent for the next 10 years or so, with growth slowing to 5.2 per cent on average between 2024 and 2036 and then a rate of just 3.6 per cent between 2036 and 2050.
That is actually slower than the growth rate of 3.9 per cent it predicts between 2036 and 2050 if China were to return to Maoist policies introduced in the aftermath of the disastrous Great Leap Forward, in which between 30m and 40m died in a famine that was largely the result of economic mismanagement.
The authors of the paper were focused only on economic factors and did not consider the impact of individual policies or the enormous social costs of Mao’s “brutal” political movements and purges, which left many millions dead, ostracised or imprisoned in gulags.
Putting Mao aside, the 7-8% prediction already is clearly wrong and this is a July 2015 working paper. By the way, the four economists who wrote the paper (NBER) are working at “…the Federal Reserve Bank of Dallas, Princeton, Yale and Sciences Po in Paris.” And get this:
They concluded that the abolition of the private sector in China and the return to a command economy would yield an annual average GDP growth rate of 4 to 5 per cent between now and 2050.
The journalist who wrote the FT piece is the very good Jamal Anderlini, who understands the Chinese economy, and perhaps the limits of growth models, better than these researchers do. That’s the actual fact here which we don’t take seriously enough.
*Just Married*
That is the new and highly intelligent book by Stephen Macedo, and the subtitle is Same-Sex Couples, Monogamy & the Future of Marriage. I balk at only one of his conclusions: he is pro-gay marriage, where I agree, but he does not believe in legal polygamy. For instance he argues there is no polygamous orientation comparable to a same-sex orientation, rather polygamy is a preference. He views polygamy as unstable, and also as leading to distributive injustice, with high status males reaping excess gains. Furthermore the historical record of polygamy is often negative. Here are relevant comments from Will Wilkinson, who (like me) is convinced by Macedo on gay marriage but not polygamy. Is polygamy going to be such a significant practical problem that we ultimately have to in some way wield the coercive apparatus of the state if people insist on trying to practice it? Would polygamous-equivalent contracts be not just left unenforced but also banned? I don’t quite see how a liberal doctrine gets you there. Furthermore, might polygamy make more sense in some eras than in others? (“Not your grandfather’s polygamy!”) I still wish to defend the presumption for some notion of freedom of contract.
Belgrade notes
Upon arrival, the taxi driver was a lumbering hulk with a huge back, but his cab radio spewed out Engelbert Humperdinck songs.
Communism as an economic system is gone, and the government is democratic, but still the place seems to have the character types and status markers of a communist society.
Neither Americanization nor Europeanization seems to have progressed very far here; with respect to the latter category, I think of Belgrade as the anti-Barcelona. Nothing here is very attractive, yet in a quite charming way. The place conjures up, still, some of the better sides of 1920s Europe and also 1980s communism. That said, infrastructure and services are quite acceptable. Prices are reasonable.
The food is good but not so varied or original and it seems like a waste of time to look for true peaks. There are no noteworthy or signature sights. Museums still refer to “the former Republic of Yugoslavia” and the Serbs seem to be searching for a new identity. There is lots of talk about the past. The country is stuck in the middle income trap.
I recommend this place for all those who feel they are sick of Europe, but actually are not, but who would be, unless they came here. That includes me.