Tuesday assorted links
1. The economics team at Instacart.
2. Josh Hart invents a new basketball play?
4. Digitization has increased the demand for the printed books.
5. Pet psychics are entering the mainstream (WSJ). “People book sessions with animal communicators to unravel behavioral issues, to learn about preferences for end-of-life care, and when the time comes, to make sure their pets are enjoying the afterlife.”
Pharmaceutical Price Controls and the Marshmallow Test
The pharmaceutical market is in turmoil. On the one hand we have what looks like a golden age of medicine with millions of lives saved by COVID vaccines, a leap in mRNA technology, excellent new obesity and blood sugar drugs, breakthroughs in cancer treatments and more. On the other hand, the Inflation Reduction Act includes the most extensive price controls on pharmaceuticals we have ever seen in the United States.
In Washington-speak the “Inflation Reduction Act” requires HHS to “negotiate” drug prices for Medicare Part D and Part B to establish a maximum “fair” price. In reality there is no negotiation–firms who refuse to negotiate are hit with huge taxes. The “negotiation,” if you want to call it that, is “your money or your life” and fairness has little to do with it. The IRA also requires very costly inflation rebates, i.e. a price control/tax. In essence, the IRA is a taking; for drugs with a large Medicare market it is similar to abrogating patents to 9 years for small molecule drugs and 13 years for biologics. For the included drugs there will be a significant reduction in revenues. Moreover, we don’t yet know whether the plan will be extended to more and more drugs. There is significant uncertainty affecting the entire market. What will be situation in 10 years? Will the US be like Europe?
Reduced revenues mean less R&D. The value of extending life is very high and so in my view medical R&D is underprovided. Thus, price controls are taking us in the wrong direction.
The positive effects of price controls are immediate and easy to see: Prices are reduced.
The negative effects of price controls take time and are harder to see. Namely:
- Fewer drugs for Medicare market.
- Less research on post-approval indications and confirmatory trials.
- Reduced incentive for generics to enter quickly.
- Most importantly: Less R&D spending leading to fewer new drugs, a reduced pharmaceutical armory, lower life expectancy and higher morbidity. By one calculation, ~135 fewer new drugs through to 2039 (see also here and here and here and here).
- Fewer new drugs means more spending on physicians and hospitals so in the long run price controls may not even save money! (Most prescriptions are for generics. Drugs fall greatly in price when they go generic but physicians and hospitals never go generic!)
Price controls are a classic example of political myopia. Price controls, like rent controls and deficit financing, have modest benefits now and big future costs and thus they are supported by politicians who want to be elected now. Unfortunately, current citizens don’t forecast the future well and future citizens don’t have a vote so it’s easy to create big future costs without engaging an opposition.
The emergence of groundbreaking pharmaceuticals and the increasing implementation of price controls are probably related trends. Everyone wants the great new pharmaceuticals without paying for them. We need to think more long-term–we have much more to gain from a continuing flow of new pharmaceuticals than from lower prices on the last generation. Don’t forget that children who fail the marshmallow test do less well later in life. Well, our government is failing the marshmallow test, big time.
Pharmaceutical price controls driven by myopia and the failure to delay gratification are greatly harming future patients.
Japan fact of the day
People make a lot of the fact that Americans don’t travel a lot (43% have passports) but I’m not sure people realise how massive that is compared to Japan, where only 21.7m people now have passports, not even a fifth of the country.
Here is the link.
The hypocrisy at the core of America’s elite universities
That is the title of my latest Bloomberg column, the piece is best read as a whole. Nonetheless here is one excerpt:
As someone who stands to the political right of most of my fellow university faculty and administrators, I have no qualms accepting the argument that colleges and universities need to grow wealthier. That can mean tolerating various inequalities in the short run, because in the longer run academia will produce more innovation that benefits virtually everyone, including the poor.
This is not the kind of argument many on the political left find appealing. In tax policy, for example, such reasoning — the idea that short-run inequality can bring longer-run benefits — is often derided as “trickle-down economics.” And yet virtually any fan of the Ivies has to embrace this idea. The best defense of the admissions policies of America’s most prestigious universities is a right-leaning argument that they are deeply uncomfortable with.
So instead they tie themselves into knots to give the impression that they are open and egalitarian. To boost their image, minimize lawsuits and perhaps assuage their own feelings of institutional guilt, America’s top schools adopt what are known as DEI policies, to promote diversity, equity and inclusion.
The “inclusion” part of that equation is hardest for them to defend. Top-tier universities accept only a small percentage of applicants — below 4% at Stanford last year, for example. How inclusive can such institutions be? Everyone knows that these schools are elitist at heart, and that they (either directly or indirectly) encourage their students and faculty to take pride at belonging to such a selective institution. Most of all, the paying parents are encouraged to be proud as well. Who exactly is being fooled here?
And to close:
I thus have the luxury of opposing the new anti-legacy-admissions bill for two mutually reinforcing reasons. First, it reflects an unjustified expansion of federal powers over higher education. Even if you are anti-legacy, or want to rein in the Ivy League, you may not be happy about how those federal powers will be used the next time around.
Second, I do not mind a world where America’s top schools practice and implicitly endorse trickle-down economics. Someone has to carry the banner forward, and perhaps someday this Trojan horse will prove decisive in intellectual battle. In the meantime, I have my cudgel — hypocrisy among the educational elite — and I, too, can feel better about myself.
Recommended.
A GPT for GOAT?
I took a few minutes to create a GPT configured as similarly as possible to the original EconGOAT GPT-4 assistant. Try it out, contrast and compare, and see if you can build a better one! https://t.co/gt8kvmoG1T
— Jeff Holmes (@Jeff_Holmes) November 13, 2023
Also linked here.
Words to live by
I propose a model of a social media platform which manages a two-sided market composed of content producers and consumers. The key trade-off is that consumers dislike low-quality content, but including low-quality content provides attention to producers, which boosts the supply of high-quality content in equilibrium. If the attention labor supply curve is sufficiently concave, then the platform includes some low-quality content, though a social planner would include even more.
That is from the job market paper of Karthik Srinivasan of University of Chicago Booth School of Business. Via Gavin Leech.
Monday assorted links
3. Again, Sweden has done immigration the worst.
4. On the Biden-Xi AI agreement?
5. Why don’t more intellectuals convert to Protestantism?
6. Vultures are underrated (NYT). I liked this line: ““It makes sense that an animal that depends on scarce resources can really benefit from being intelligent,” said Thijs van Overveld, a vulture researcher at the Donana Biological Station in Seville, Spain.” One of the best pieces I’ve read in a while.
7. National Gallery of Art receives major Haitian donation.
8. A claim that Hsieh and Moretti does not replicate. I am happy to link to a response from the authors.
Zoning Deregulation Increases Affordable Housing
Geetika Nagpal and Sahil Gandhi study zoning deregulation in Mumbai, India. As I pointed out in my video, Skyscrapers and Slums: What’s Driving Mumbai’s Housing Crisis?, Mumbai has very restrictive floor area ratio regulations (also called Floor Space Index, FSI, regulations, see the video for an explanation) which means taller buildings require more unused land. In 2018, however, FAR was liberalized for some streets:
Mumbai’s stringent FAR limits, which are much lower than those of comparable megacities, are often criticized for causing housing unaffordability (Bertaud, 2004). Despite the criticism, establishing a causal effect has been challenging because of a lack of changes in FAR regulations. The relaxation in 2018 linked a parcel’s FAR to the width of its bordering road, providing incremental FAR relaxation for parcels on roads wider than 12 meters. Parcels on narrower roads remained ineligible for the relaxation. Our reduced-form specification uses a DID design to compare developments built between 2014 and 2022 on wider roads with FAR relaxation with those on narrower roads that remained ineligible.
…The FAR relaxation results in a significant supply response, driven by less expensive, smaller housing units. Developers fully utilize the FAR relaxation, increasing the average
number of apartments in each treated multifamily development by 28% relative to the control.…We develop a structural model of housing supply and demand that incorporates the provision of amenity floorspace and shows that average home buyer incomes are 3.18% lower post-relaxation.
GO YIMBY!
Geetika Nagpal is on the market from Brown.
Which are the most underperforming parts of the world? (from my email)
You’ve written about undervalued economies in the past, but after visiting the Bay Area, I wonder what you think are the most underperforming places in the world? Define “place” as you wish, but I mean underperforming relative to easily achievable/median policy mixes. So less “what if Albanians acted like Singaporeans” and more “what if LA improved land use.”
I ask because the Bay Area, despite its achievements, seems like a candidate (Paul Graham seems to think so), as does Southern California which cedes the world’s most livable climate to cars. Various parts of Mexico come to mind. Eritrea sits on a key trade route with little to show for it. My Bosnia is a disappointment relative to neighbors. West Virginia?
Always eager to hear your thoughts.
That is from Haris Hadzimuratovic. I have a few nominations:
1. Albania I think will end up much richer, more or less on a par with parts of the former Yugoslavia. The country has enjoyed a growth spurt lately. So Albania is a good pick, but it is converging and soon won’t be a pick anymore.
2. Egypt and Lebanon should be much richer. You cannot cite their neighbors in support of that claim, but they are both extremely cultured places. Lebanese migrants in particular have done very well elsewhere.
3. Armenia should be much richer. Armen Alchian would agree.
4. Belarus should be richer than Russia, not poorer than Russia.
5. Nicaragua should be modestly richer than it is.
6. Venezuela was once the richest country in Latin America, now it is among the poorest. Cuba too.
(You will notice that communism is implicated in 3-6, and arguably #1 too.
7. Yemen should be richer, though I would not expect it to be rich.
What else?
Freer Indian reservations prosper more
Several disciplines in social sciences have shown that institutions that promote cooperation facilitate mutually beneficial exchanges and generate prosperity. Drawing on these insights, this paper develops a Reservation Economic Freedom Index that classifies institutions on a sample of Indian reservations concerning whether these intuitions will enhance the prosperity of Indians residing on these reservations. The development of this index is guided by the research of political scientists, economists, other social science disciplines, and research in law. When correlating this index with Indian incomes, the evidence shows a statistically significant positive correlation between reservations with prosperity-enhancing institutions and their economic prosperity.
That is from a recent article by my colleague Thomas Stratmann, recently published in Public Choice. Here is the SSRN version. Here is the index itself. Here is a related Op-Ed.
Sunday assorted links
1. Will Sweden move away from school vouchers?
2. Lagos harbor and various water and real estate projects.
3. How Manuel Blum became such a successful academic advisor.
4. Chinese confrontations with Filipino ships.
5. U.S. approves chikungunya vaccine. As I’ve been telling you, it is all going to work.
6. Claims about fake license plates.
Should I keep an eye on Spain? (from my email)
Keep an eye on Spain. What is happening politically is very serious and the tension is increasing.
Fernando Savater: Spain is formally a democracy, sure, but it is ceasing at a forced march from being a rule of law state.
https://theobjective.com/elsubjetivo/opinion/2023-11-05/resignados-sumisos-luchar-sanchez/
Felix de Azúa: The reactionary left will face the coup right with a predictable result: economic ruin and institutional chaos.
https://theobjective.com/elsubjetivo/opinion/2023-11-11/irse-preparando-sanchez/
…Felipe González is very worried, as well.
That is all from Mario Abbagliati.
Classical liberals are increasingly religious
Not too long ago, I was telling Ezra Klein that I had noticed a relatively new development in classical liberalism. If a meet an intellectual non-Leftist, increasingly they are Nietzschean, compared to days of yore. But if they are classical liberal instead, typically they are religious as well. That could be Catholic or Jewish or LDS or Eastern Orthodox, with some Protestant thrown into the mix, but Protestants coming in last.
The person being religious is now a predictor of that same person having non-crazy political views. Classical liberalism thus, whether you like it or not, has become an essentially religious movement.
Many strands of libertarianism are being left behind, and again this is a positive rather than a normative claim. It is simply how things are.
Aayan Hirsi Ali announces she is now a Christian.
The neo trad movement gets ayaan 🙁 But seriously this seems to be a real trend – lots of otherwise smart, successful, secular people I know have been going religious, but it’s not in the same way people used to go religious. It’s much more *cultural* now, and less about belief
Seconded. You may recall my earlier prophecy that the important thinkers of the future are going to be religious thinkers. I believe that will prove true outside of classical liberalism as well.
Saturday assorted links
1. What drives Russian men to volunteer to fight in Ukraine?
2. More on the economics of OnlyFans.
3. Abstract art comes from figurative art. The Mondrian sequence is my favorite, and it has intrigued me for a long time.
4. The EU seems to be slowing down with its anti-AI regulations. More information here. Good for them.
5. The average age of a Ukrainian soldier is 43.
6. Can a GPT-4 Vision model do your Christmas shopping for you?
Low Income Drivers Gain from Congestion Pricing
….there is disagreement about the distributional effects of highway toll lanes. On one side, policymakers refer to dynamic tolling as “value pricing” and emphasize that it provides choice to drivers (Samdahl et al., 2013). On the other side, opponents are concerned that “Lexus lanes” enrich the wealthy at everyone else’s expense (Astor, 2017; Rosendorf, 2018). Evaluation of these perspectives depends on two empirical objects: the distribution of driver preferences and what we call the “road technology”—the relationship between traffic quantities and travel times. When one lane becomes tolled, drivers substitute from the newly priced lane into the remaining unpriced ones, increasing travel times in the unpriced lanes. High peak-hour prices may also induce drivers to substitute toward driving off-peak (or not at all), which can increase average speeds when the road technology is convex. Finally, since tolling changes the predictability of travel times, having the option to take the priced lanes can serve as insurance against worse-than-expected traffic conditions.
In this paper, we study the aggregate and distributional impacts of dynamic tolling. To do this, we bring together data on toll transactions, historical traffic conditions, and driver characteristics from the I-405 Express Toll Lanes in Washington State. We begin by presenting two sets of descriptive facts: first, aggregate speed and throughput increased after the introduction of tolling on this highway, and second, low-income drivers face advantageous trade-offs between price and travel time savings in the toll lanes. Next, to quantify the equilibrium effects of tolling, we build and estimate a model of driver demand, the road technology, and the pricing algorithm. In particular, the demand model incorporates the features of dynamic tolling highlighted above: choices of where and when to drive, as well as uncertainty about prices and travel times. Using the estimated model, we find that low-income drivers in fact gain the most from status-quo tolling, and we explore how equilibrium outcomes would change under counterfactual pricing policies.
Pearl Li from Stanford is on the job market.