This week’s Forbes (the Nov. 1 issue) has a feature story on Alex’s work to make drug regulation more sensible.

Alex notes that off-label drug uses are largely unregulated. No proof of efficacy is required, and off-label drug prescriptions bring a net health gain; see this paper. Yet to get a new drug approved it must go through, in addition to Phase I trials,

…Phase II and Phase III trials, which typically take years and focus on efficacy as well as safety. The long wait can cost lives and runs up new-drug costs–to an estimated $900 million per successful drug.

Tabarrok says this system makes little sense; the FDA demands costly, time-consuming efficacy tests for some uses and no tests for others. And while the FDA allows off-label prescribing by docs, it strictly limits the drugmakers’ promotion of such uses to doctors and permits none at all to patients.

Alex argues that FDA regulation ought to be reduced, making the regulation of new and old drugs more consistent. But that is not all:

Tabarrok and [Dan] Klein also offer some alternative proposals at FDAReview.org. One is to make all FDA testing optional. Drugs that didn’t go through the process would be labeled “Not FDA Approved.” Under this approach, they say, “the FDA would become a genuinely voluntary institution, much like Underwriters Laboratories.” Another idea is for the FDA to award letter grades, A to D, to claims made by drugmakers, much as it is considering doing for health claims for foods and dietary supplements. The FDA could still have its say, but wouldn’t be able to impose long delays, since a new drug could be marketed at first as “unrated.”

At the least, Tabarrok argues, the FDA should permit drug companies to sell any drug that has been approved by other sophisticated drug regulators, such as those in Canada, Australia or the European Union. Under such a system U.S. patients would get speedier access to new medicines without losing out on safety protection.

Kudos to Alex, the only sorrow is that the on-line version does not reproduce the excellent photo of him in the magazine. But you can see that at your local Borders.

Brad DeLong writes:

There is a bigger, unmentioned reason to be against private accounts. Ten years down the road or so, there will be pressure on Congress to allow people to borrow against their private accounts, or to withdraw them to buy a house, or to use them to meet unexpected medical expenses. Congress will bow to that pressure–it’s their money, after all. And in the end a lot of people will hit 70 having drained their Social Security private account dry. The rest of us will then have to decide whether to let them starve on the street, or tax ourselves a second time to give them Social Security benefits. As Dick Schmalensee says, “You have to ask yourself not just, ‘Is this good policy?’ but ‘Will this still be good policy after Congress does its worst to it?'” The Medicare drug benefit and the corporate tax boondoggle are powerful evidence that the Bush administration holds no leashes to use to control what this Congress does to policy proposals, while lobbyists can make this Congress roll over and beg.

Brad also takes on whether the government could finance the transition to a more private system by borrowing (also read Bruce Webb’s comment, number two in the list). After all, government debt would be higher but government long-term implicit obligations are lower. Would this simply be a wash? (Arnold Kling believes “yes”). I am skeptical. When it comes to government, measured nominal flows tend to be sticky. So say our government increases its borrowing today but lowers its SSA obligations for tomorrow. Even if the transaction can balance without a current increase in interest rates, the increased rate of borrowing (or taxation) will tend to stick in the long run. Plus there is a time consistency problem. If the new debt is placed smoothly, government has an incentive, ex post, to accept some new unfunded liabilities for the future. Knowing this in advance, the bond market will be suspicious about the new debt offering.

What should we do? Here is my previous post on social security privatization.

Dueling articles on the flu vaccine shortage today in the Washington Post and NYTimes. The Times article is much better. As Russ Roberts, points out you have to wade far into the Post article before you get to a decent explanation of the shortage. The Times article correctly pinpoints low prices, liability and regulation early on (the same factors I wrote about here).

In recent decades, many drug companies in the United States abandoned the manufacture of vaccines, saying that they were expensive to make, underpriced and not profitable enough. Flu vaccine can be a particular gamble, because the demand for it varies from year to year and companies throw away what they do not sell because a new vaccine must be made each year to deal with changing strains of the virus. Some companies dropped out because of lawsuits, and others because they determined that it would not pay to retool aging vaccine plants to meet regulatory standards.

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.

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 www.geekpress.com for the pointer.