Year: 2014

Basically, the story is that the number of mergers and acquisitions has rebounded from the lows of the Great Recession, but the total for 2013 was pretty average. Some press sources, like the Economist magazine, are chirping about the possibility of a new wave of mergers and acquisitions right around the corner. They have been making that prediction for a couple of years now, and sooner or later it will be correct.

The report also shows the size distribution of mergers. Remember that the very small number of mergers under $50 million is not because such mergers don\’t occur, but because the smaller mergers need not be reported to the antitrust authorities.

Out of all the proposed mergers, typically about 3-4% lead to a request from the antitrust authorities for more information, and ultimately a few dozen of the mergers are challenged. This percentage may seem low. But remember that firms who know that the antitrust authorities are looking are less likely to propose an anticompetitive merger in the first place. And remember further that the job of the antitrust authorities is not to make judgments about whether the merger makes sense from a business point of view, or whether the price is a fair one, but only to judge whether it might lead to anticompetitive outcomes.

The report also offers quick overviews of the more prominent antitrust enforcement actions over the last year. For teachers of economics looking for a quick example, here are two good examples, with links to the underlying case documents. In both cases, the antitrust authorities allowed a merger to proceed only after the firm agreed to divest various assets in a way that was intended to preserve competition.

One case is the merger between US Airways and American Airlines (or AMR Corporation). The report notes:

In United States, et al. v. US Airways Group, Inc. and AMR Corporation, the Division
and the states of Texas, Arizona, Pennsylvania, Florida, Tennessee, Virginia, and the District of Columbia challenged the proposed $11 billion merger between US Airways Group, Inc. and American Airlines’ parent company, AMR Corporation. The complaint alleged that the transaction, as originally proposed, would substantially lessen competition for commercial air travel and result in passengers paying higher airfares and receiving reduced service. In addition, the transaction would reduce competition in the market for slots at National Airport where the merged carrier would control almost 70% of the slots. A proposed consent decree settling the suit was filed November 12, 2013, requiring US Airways and American to divest slots and gates in key constrained airports across the country to low cost carriers in order to enhance system-wide competition in the airline industry and address the competitive harm that would result from the proposed transaction. Specifically, the companies are required to divest or transfer: (i) 104 air carrier slots and related gates and facilities at Washington Reagan National Airport; (ii) 34 slots at New York LaGuardia Airport and related gates and facilities; and (iii) two gates and
related facilities at each of five airports: Boston Logan, Chicago O’Hare, Dallas Love Field, Los Angeles International, and Miami International. These divestitures are the largest ever in an airline merger and will allow low cost carriers to fly more direct and connecting flights throughout the country in competition with the legacy carriers. This will result in more choices and more competitive airfares for consumers. The court entered the consent decree on April 25, 2014.

Another case that might make a useful example, given the general preoccupation of many college students with the beer industry, is the proposal from Anheuser-Busch (ABI) to purchase Modelo. The \”competitive impact statement\” filed by the antitrust authorities notes:

The beer industry in the United States is highly concentrated and would become more so
if ABI were allowed to acquire all of the remaining Modelo assets required to compete in the United States, as the transaction was originally proposed. ABI and MillerCoors, the two largest  beer brewers in the United States, account for more than 65% of beer sold in the United States.  Modelo is the third largest beer brewer, constituting approximately 7% of national sales, and in  certain MSAs its market share approaches 20%. Heineken and hundreds of smaller fringe competitors comprise the remainder of the beer market. In the 26 MSAs alleged in the  Complaint, ABI and Modelo control an even larger share of the market, creating a presumption  under the Clayton Act that the merger of the two firms would result in harm to competition in  those markets.

The Hart-Scott-Rodino report sums up the consent decree:

In United States v. Anheuser-Busch InBev SA/NV and Grupo Modelo S.A.B de C.V., the
Division challenged Anheuser-Busch InBev’s (ABI) proposed acquisition of the remaining
interest in Grupo Modelo that ABI did not already own. According to the complaint filed on January 31, 2013, as originally proposed, the $20.1 billion transaction would have substantially lessened competition in the market for beer in the United States as a whole and in 26 metropolitan areas across the United States, resulting in consumers paying more for beer and diminished innovation. ABI’s Bud Light is the best selling beer in the United States, and Modelo’s Corona Extra is the best selling import. On April 19, 2013, a consent decree was filed settling the suit and requiring Modelo and ABI to make divestitures that would fully replace Modelo as a competitor in the United States. The decree called for the divestiture of Modelo’s entire U.S. business including perpetual and exclusive licenses of Modelo brand beers for distribution and sale in the United States, its most advanced brewery, Piedras Negras, and its interest in Crown Imports, LLC (Crown) to Constellation Brands, Inc. (Constellation) or an alternative purchaser. Crown was the joint venture established by Modelo and Constellation to import, market, and sell certain Modelo beers into the United States. The decree was entered by the court on October 24, 2013.

One of the standard arguments as to why the U.S. and other high-income countries should support trade with low-income countries and foreign aid to those countries is that it would reduce the pressures for emigrants to leave those countries. For example, during the arguments over the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico, it was common to hear supporters argue that if the U.S. wasn\’t willing to import goods from Mexico, it would end up importing immigrants instead. Similar arguments have been made that western European countries should support trade and aid to Africa and Asia, so that pressure for immigration flows to Europe would be reduced.

But do the facts support this arguement? In the Center for Global Development Working Paper 359 (March 2014), Michael Clemens asks \”Does Development Reduce  Migration?\” He argues that the evidence supports a \”migration transition,\” in which economic growth actually stimulates emigration from a low-income country until it reaches upper-middle income levels–and only leads to less immigration at that point. Clemens writes:

\”In short, the best-available data show an unmistakable inverted-U pattern across countries in the relationship between overall economic development and emigration. The data offer no sign that among low-income or lower-middle-income countries, rising incomes are associated with smaller emigrant stocks or lower net emigration rates. To the contrary, typical countries in this group show a positive, significant association between average incomes and emigration. The relationship changes markedly somewhere around PPP$6,000–8,000. Among countries above this level of income—upper-middle-income countries or richer—higher incomes are associated with reduced emigration. But even the very richest countries do not systematically exhibit lower emigration rates than the poorest countries.\”

Here\’s one of the pieces of evidence behind that claim. The graph is based on plotting data by country. The horizontal axis shows per capita GDP for each country; the vertical axis shows the percentage of the population of that country which has emigrated. The graph shows curves fitted through this data for 1990, 2000, and 2010. The common pattern is that emigration is lower for the lowest-income and highest-income countries, and higher for middle-income countries.

Why might this pattern hold true? Clemens considers a range of possibilities. For example, people in the poorest countries may be less likely to have the resources to emigrate. Perhaps people in middle-income countries are more likely to have some level of connectedness to high-income countries that makes migration seem more thinkable and less risky.

But as researchers seek to disentangle the underlying rationale behind the migration transition, the assumption that economic development in low-income countries will reduce migration doesn\’t seem likely to hold up well. After all, economic development in China and India in recent decades doesn\’t seem to have reduced emigration from those countries–even if a number of those emigrants eventually head back to their home countries. At least for the next few decades, the future of the globalizing economy may also be a future of ever-evolving pressures for rising migration levels.

Prices for gasoline and diesel fuel vary a great deal around the world, because some countries tax these goods heavily, while others subsidize them. Lucas W. Davis considers the effects in \”The Economic Cost of Global Fuel Subsidies,\” published in the May 2014 issue of the American Economic Review: Papers & Proceedings (104:5,  pp. 581–585). (The AER is not freely available on-line, but many readers will have access through library subscriptions.)

Here\’s a graph showing gasoline prices in countries around the world, on the horizontal axis, and gasoline consumption per year, per person, on the vertical axis. The size of the circle for each country is proportional to total consumption of gasoline in that country. Thus, for example, the U.S., Canada, and Kuwait are roughly similar in their per capital consumption of gasoline, but because of the much larger population of the United States, the circle denoting U.S. consumption is larger. Similarly, although per capital consumption of gasoline is much lower in India and China than in the United States, the much larger populations of those countries mean that total consumption of gasoline is larger–as shown by the size of the circles for those countries.

Of course, many factors will affect fuel consumption in an economy besides the after-tax price: fro example, countries with higher per capita GDP tend to consume more fuel, and countries that are large and sprawling will tend to consume more fuel for transportation than smaller countries where more people live in urban areas. Still, a couple of themes from this graph catch my eye.

1) The price of gasoline in the U.S. is well below that many other high-income countries. That isn\’t the only reason the U.S. consumes so much more fuel on a per capita basis–as a high-income and geographically sprawling country, one would expect U.S. fuel consumption to be higher–but it\’s one of the reasons. The higher taxes on gasoline are part of a general pattern where the governments of most high-income countries rely more heavily on consumption taxes, including value-added taxes as well as taxes on specific goods like gasoline, than does the U.S. government.

2) Venezuela has the lowest fuel prices of any country: indeed, their prices are well below the actual world market price. Presumably, the political leadership in Venezuela believes that its political base supports this policy–and this belief may well be correct. But subsidizing fuel has a cost, which in Venezuela\’s case is about $14 billion out of a GDP of $380 billion–that is, almost 4% of GDP in Venezuela goes to fuel subsidies. For comparison, the U.S. defense budget is projected to be 3.6% of GDP this year. When Venezuela spends, in proportional terms, the amount of the U.S. defense budget on fuel subsidies, it give up the possibility of spending those funds on health care, education, income support, and so on. Indeed, the bulk of fuel subsidies don\’t go to the poor–who don\’t have enough income to buy a lot of fuel at any price–but instead go to those with middle- and upper-level incomes.

3) Worldwide, governments spend about $110 billion annually on fuel subsidies. Of that amount, 90% is for the ten countries listed in the table below. By the measure used here, the U.S. does not subsidize oil and gas production on an overall basis, given the mixture of gasoline taxes on one side and various ways of favoring oil-producers in the tax code on the other. Davis writes: \”Fuel subsidies also have a large impact on government budgets, requiring taxes to be higher than they would otherwise, and inhibiting the ability of government to address other fiscal objectives. Expenditures on energy subsidies in many of these countries exceed public expenditures
on health, education, and other key components of government spending.\”

4) Not all major oil exporters subsidize fuel. As Davis writes: \”Prices are at or above market in Iraq ($2.95 per gallon for gasoline), Mexico ($3.26), Russia ($3.74), and Canada ($5.00).\”

The potential problems that could arise as microbes become resistant to antibiotics were recognized quite early. For example, Sir Alexander Fleming shared the Nobel prize in physiology or medicine in 1945 \”for the discovery of penicillin and its curative effect in various infectious diseases.\” Near the end of his Nobel lecture, Fleming said:

\”I would like to sound one note of warning. Penicillin is to all intents and purposes non-poisonous so there is no need to worry about giving an overdose and poisoning the patient. There may be a danger, though, in underdosage. It is not difficult to make microbes resistant to penicillin in the laboratory by exposing them to concentrations not sufficient to kill them, and the same thing has occasionally happened in the body. The time may come when penicillin can be bought by anyone in the shops. Then there is the danger that the ignorant man may easily underdose himself and by exposing his microbes to non-lethal quantities of the drug make them resistant. Here is a hypothetical illustration. Mr. X. has a sore throat. He buys some penicillin and gives himself, not enough to kill the streptococci but enough to educate them to resist penicillin. He then infects his wife. Mrs. X gets pneumonia and is treated with penicillin. As the streptococci are now resistant to penicillin the treatment fails. Mrs. X dies.\”

As it turns out, the issue is not that that antibiotics \”can be bought by anyone in the shops,\” but instead that health care providers have been quick to prescribe antibiotics, repeatedly and for a wide range of conditions. Inevitably, not everyone takes the full dose, and in some cases the full dose doesn\’t quite end the infection. Some microbes become increasingly resistant to antibiotics. As economists have pointed out, this pattern is logically parallel to the issue of what can happen with the overuse of a shared public resource, the so-called \”tragedy of the commons.\”

Imagine a shared public resource like a common field where people can graze cattle. If there are too many cattle on the field, it will degrade the environment and everyone will suffer. However, each individual has an incentive to graze just a few more cattle on the field, because the individual will receive 100% of the benefits from adding a few cattle, while the costs of environmental degradation will be shared with everyone else who uses the field. Unless some social norms or rules prevent the outcome, overgrazing will result. Of course, the same logic can be applied to overfishing, overlogging, and indeed more broadly to issues like air and water pollution. In the case of antibiotic resistance, health care providers who prescribing antibiotics frequently and easily are seeking to benefit each individual patient, while the costs of accumulating resistance to antibiotics are shared across the population. In this way, the pursuit of health for individual way, resistance to antibiotics builds in a way that can impose heavy costs.

\”A post-antibiotic era—in which common infections and minor injuries can kill—far from being
an apocalyptic fantasy, is instead a very real possibility for the 21st century.\” So says the World Health Organization in its recent report: \”Antimicrobial Resistance: Global Report on surveillance.\”

The WHO report draws on evidence from around the world to note a growing rise in resistance to antibiotics for some major diseases: tuberculosis, pneumonia, malaria, HIV, influenza, and others. The report notes:

\”For several decades antimicrobial resistance (AMR) has been a growing threat to the effective treatment of an ever-increasing range of infections caused by bacteria, parasites, viruses and fungi. AMR results in reduced efficacy of antibacterial, antiparasitic, antiviral and antifungal drugs, making the treatment of patients difficult, costly, or even impossible. . . . Antibacterial resistance (ABR) involves bacteria that cause many common and life-threatening infections acquired in hospitals and in the community, for which treatment is becoming difficult, or in some cases impossible. . . .

Some estimates of the economic effects of AMR have been attempted, and the findings are disturbing. For example, the yearly cost to the US health system alone has been estimated at US $21 to $34 billion dollars, accompanied by more than 8 million additional days in hospital. Because AMR has effects far beyond the health sector, it was projected, nearly 10 years ago, to cause a fall in real gross domestic product (GDP) of 0.4% to 1.6%, which translates into many billions of today’s dollars globally.

What are the possible solutions? One possibility is to invent our way out of the problem with new groups of antibiotics. The WHO report documents a \”discovery void\” in new groups of antibiotic drugs in the last quarter-century. Perhaps some of this \”discovery void\” can be linked to a lack of economic incentives to discover new groups of antibiotics. But my understanding from a few researchers in this area is that it has been proving genuinely hard to find new classes of antibiotics. And even if a scientific discovery that could lead to new classes of antibiotics is made tomorrow, there would be years of health and safety testing ahead before it reached the health care market.

The other options all come down to ways to avoid overprescribing antibiotics–so that when they are really needed, they will still work. In too many places, antibiotics are prescribed for all sorts of conditions where they aren\’t going to be effective (like in response to viruses). In too many places, many steps could be taken to cut down on the risk of infections through basic steps like more hand-washing and sterilization, which would reduce the need to prescribe antibiotics. Steps like these need to be undertaking with some urgency, so that current antibiotics can keep working while we hunt for new ones. 

The U.S. seems to have a consensus, about which many people have strong feelings, that blood donors should be volunteers. However, the U.S. is also the country which relies most heavily for a paid supply of blood plasma, and in fact exports plasma to the rest of the world. Robert Slonim, Carmen Wang, and Ellen Garbarino explore this and many other aspects of \”The Market for Blood\” in the Spring 2014 issue of the Journal of Economic Perspectives. (Full disclosure: I\’ve been managing editor of the JEP since the first issue in 1987. All articles in JEP back to that first issue are freely available on-line compliments of the American Economic Association.)

For me, the most intriguing questions concern the issue of whether the blood supply should be paid or volunteer. Of course, the issue only affects donors of blood–everyone else in the health care system is expecting to be paid when they store and use this valuable health product. Slonim, Wang, and Garbarino write (citations and footnotes omitted): \”Even with a largely voluntary supply of blood, the blood industry can be regarded as a multibillion–dollar market because hospitals pay for blood products and charge patients for their use. For example, the cost of the components of each unit of blood sold to hospitals in the United States is approximately $570, with the cost for red blood cells at $229, platelets at $300, and plasma at $40. Hospitals transfuse this blood at estimated costs of between $522 and $1,183 per unit in the United States and Europe.\”

The question of whether a country relies on volunteer or paid blood supply is in part an historical accident, often relating to how blood systems evolved in the decades after World War II. Volunteer blood donation is more common in high-income countries, but many countries in Latin America rely on paid blood donors. In the past, it may have been true that blood from paid donors was less likely to be safe, but given modern techniques for screening blood (and plasma), this pattern no longer seems to be true. Looking at the evidence across countries, Slonim, Wang, and Garbarino state: Thus, while volunteer and nonvolunteer donor characteristics may differ, on the critical issue of blood safety, we find no evidence that countries with higher percentages of volunteer donors provide safer blood.\”

In the U.S, a divergence emerged in the 1970s when the blood supply became almost entirely dependent on voluntary donors, while the supply of blood plasma came to rely on paid donors. Slonim, Wang, and Garbarino write: \”In contrast to most high-income countries relying on
100 percent volunteer plasma supply, by 2004, 81 percent of US plasma supply was collected from paid donors. In 2004, the United States collected almost 70 percent of the world’s plasma, with 40 percent eventually used in North America, 32 percent used in Europe, and 19 percent used in Asia.\”

This divergence raises some uncomfortable questions for those who believe strongly that the blood supply should depend on volunteer donors. Why are all the arguments for volunteer blood donors equally true for plasma donors? More important, it raises a question of whether the U.S. and other countries that use a volunteer blood donor system are using a method that has worked fairly well in providing a steady supply, but is not providing a larger supply that would over time encourage innovation in health care goods and services that rely on blood. Here is how Slonim, Wang, and Garbarino make this point:

However, it is impossible to say how well the volunteer [blood donor] system has performed in an absolute perspective; for example, it is possible that if the blood supply was to increase via a market mechanism that priced blood to its marginal value, then healthcare providers would find innovative uses for it such as the recent trials on the use of plasma derivatives to treat Alzheimer’s. In other words, volunteer supply may meet current demand because the health industry is not aggressively pursuing research and development that might lead to greater demand for blood that they recognize the volunteer system cannot supply.

The volunteer system, however, has not done well in meeting plasma demand. The United States is the only country that is totally self-sufficient in all blood and plasma products and has accomplished this using a mostly for-profit plasma industry. Most other countries have to import at least some plasma products, with the single biggest importers being Germany, Austria, and Spain. Many countries remain unwilling to pay for plasma donations due to concerns regarding safety and ethics, which may explain the dramatically different usage rates for plasma products. For instance, in 2006 the US health care system used 105 grams per/1,000 people of the dominant plasma product (immunoglobulin) which was more than 250 percent of the rate in Italy, the United Kingdom, Germany, the Netherlands, and Japan, suggesting that the noncompensated plasma collection system might be limiting potential usage in many countries.

Making a transition from a volunteer blood supply to more of a paid blood supply seems to me fraught with practical difficulties. Disrupting the established methods of blood supply should not be done lightly. But it also seems to me that the issues here are neither about the safety of blood from paid donors, given the capabilities of modern blood testing, nor are the issues about the risk of exploiting paid blood donors, given that such arguments would apply equally well to the already widespread practice of paying plasma donors. The real issues should be about the practicalities of making such a change to more paid blood donation, at least in a partial way, and about the potential costs and benefits from such a transition.

Every two years the Council on Economic Education publishes \”Survey of the States: Economic and Personal Finance Education in our Nation’s Schools.\”

With two high-schoolers and a middle-schooler in my own family, I\’m well aware that class-time is tight, and it is impractical to just keep adding subjects and material.  Also, I have some qualms about how economics is sometimes taught at the high school level as a sort of watered-down intro college course, rather than as a subject with practical skills and lessons for everyday life as a consumer, worker, borrower and saver, insurance purchaser, manager, citizen, and voter. But it also seems to me that high school students face some genuine financial dangers in this world of credit cards and payday loans, rental agreements and lease-to-buy deals, choices among insurance policies with different deductibles, student loans and car loans–and these dangers that can seriously undermine their financial start as young adults. Thus, I do think it\’s worth finding some ways to squeeze in some additional learning about economics and financial health. What are the US states generally up to along these lines?

One eye-opener in the CEE report is that the question of whether a state \”requires\” economics in the curriculum often does not have a yes-or-no answer. Instead, the answer can be thought of as a set of questions: Does the state include economics in its standards? Is there a requirement that the standards be implemented? (Apparently, a \”standard\” and whether the standard is implemented are separate decisions!) Is there a requirement to offer a specific high school course? Is there a requirement that students take that high school course? Is there required testing of economic concepts?

Here\’s a table showing the trends in these categories since 1998. Economics is included in more standards, even in standards that are required to be implemented. However, fewer than half the states require offering a high school course in economics, or require that the course be taken by students.

What are the similar factors on the personal finance dimension? There was a huge jump in adding personal finance material to school standards from 1998 to 2000, and the requirements to implement these standards have grown over time. However, relatively few states require offering or taking a course in this area, and there is little testing of these topics.

My children joke about having yet another lecture on the perils of drugs, alcohol, and smoking, or about the need to stand up to bullies. Those subjects are worth addressing. But my suspicion is that many high school students will suffer from severe episodes of poor financial health in the 5-10 years after they leave high school–and that the prevalence of such episodes could be reduced with improved high school education in this area.

The teeth-whitening industry has seen substantial growth in recent years, which raises this question: Should it be illegal for someone other than a dentist to do teeth-whitening? And do dentists as a group get to make this decision?

Here\’s a discussion of how this issue came to the fore in North Carolina, taken from a 2012 brief written by the Federal Trade Commission when the case of North Carolina State Board of Dental Examiners v. Federal Trade Commission  before the U.S. Fourth Circuit Court (citations and footnotes omitted for readability):

Since 1989, peroxide-based teeth whitening has become one of the most popular cosmetic dental services. Teeth whitening is available as an in-office treatment, or take-home kits, by dentists; as over-the-counter products; and at salons, malls, and other convenient locations by non-dentists. Although all these methods employ peroxide, they vary in important respects, including immediacy of results, ease of use, necessity of repeated application, need for technical or professional support, and price. Thus, while dentists’ “chair-side” services are quick and effective—usually providing results in a single visit—they are also “the most costly” alternative. At the other end of the spectrum, over-the-counter products, with relatively low concentrations of peroxide, are the least expensive, but with highly variable efficacy, as they require diligent and repeated application by consumers.

Growing demand for teeth whitening services led, around 2003, to the entry of non-dentist providers. These providers generally occupy an intermediate level—in terms of cost, convenience, and efficacy—between  dentists’ chair-side services and over-the-counter products.  They utilize intermediate-concentration peroxide, in a single, consumer-administered application, lasting an hour or less. Non-dentist services are often offered at prices hundreds of dollars less than dentists’ in-office services.  As competition from non-dentists mounted, North Carolina dentists demanded that the Board “do something” about the new market entrants.

These complaints apparently had almost nothing to do with consumer safety. They were almost entirely about the competition from lower prices for these services. Here\’s how members of North Carolina\’s Board of Dental Examiners are selected:

It consists of six licensed dentists, elected directly by other state licensed dentists; one licensed dental hygienist, elected by other licensed hygienists; and one consumer member, appointed by the governor. The six dentist-members must also be active practitioners while on the Board; thus, they provide for-profit dental services (some including teeth whitening), and have a significant financial interest in the business of their profession.

Unsurprisingly, this group decided that non-dentists should be barred from offering teeth-whitening services. These decisions about what only certain licensed practitioners are allowed to provide are typically not challenged by the antitrust authorities, so it was somewhat surprising that the FTC challenged this practice, and that the decision was upheld by the U.S. Fourth Circuit Court of Appeals. The case has now reached the the U.S. Supreme Court.

The broader issues at stake here go well beyond teeth whitening services in North Carolina. Aaron Edlin and Rebecca Haw review the arguments in \”Cartels by Another Name: Should Licensed Occupations Face Antitrust Scrutiny?\” which appears in the April 2014 issue of the University of Pennsylvania Law Review. Edlin and Haw point out that there are now hundreds of licensed occupations, like the dentists in North Carolina, who are often defining certain activities that those who lack such licensing are forbidden to do. They set the stage this way (again, footnotes omitted):

Once limited to a few learned professions, licensing is now required for over 800 occupations. And once limited to minimum educational requirements and entry exams, licensing board restrictions are now a vast, complex web of anticompetitive rules and regulations. . . . State-level occupational licensing is on the rise. In fact, it has eclipsed unionization as the dominant organizing force of the U.S. labor market. While unions once claimed 30% of the country’s working population, that figure has since shrunk to below 15%. Over the same period of time, the number of workers subject to state-level licensing requirements has doubled; today, 29% of the U.S. workforce is licensed and 6% is certified by the government. The trend has important ramifications. Conservative estimates suggest that licensing raises consumer prices by 15%. There is also evidence that professional licensing increases the wealth gap; it tends to raise the wages of those already in high-income occupations while harming low-income consumers who cannot afford the inflated prices.

As one starts trolling through specific examples of occupational licensing, state-by-state, a number of examples at least raise the question of whether the rules are more about protecting higher prices for some providers than providing services for consumers. Here are some examples from Edlin and Haw\’s discussion:

\”Where licensing was once reserved for lawyers, doctors, and other “learned professionals,” now floral designers, fortune tellers, and taxidermists  are among the jobs that, at least in some states, require licensing. … In Louisiana, for example, all flower arranging must be supervised by a licensed florist. . . . Minnesota (along with several other states) now defines the filing of horse teeth as the practice of veterinary medicine, a move that has redefined an old vocation as a regulated profession subject to restricted entry and practice rules. . . .Several states even prohibit the sale of caskets by anyone other than licensed funeral directors. . . . And although Louisiana restricts the sale of caskets, it does not regulate the design of caskets or even require that bodies be buried in a casket at all. . . . 

State cosmetology boards have responded to competition from two increasingly popular practices—African-style hair braiding and eyebrow threading—by demanding that braiders and threaders obtain cosmetology licenses before they can lawfully practice their craft. Neither practice requires sharp instruments or chemicals, and neither involves a significant risk of infection. Now manystate cosmetology boards want braiders and threaders to attend two years of school (with a price tag of $16,000) to learn cosmetology procedures and techniques irrelevant to their practice, pass an exam, and pay yearly dues to maintain a license in cosmetology—a profession they have no interest in
practicing. . . .

For example, in many states, dental licensing boards restrict the number of hygienists a dentist can hire to two.72 The anticompetitive effects of this restriction are well known; in 1987, the FTC published a policy paper showing that dentist-to-hygienist ratios tend to raise prices but not quality. . . .At least one state has taken the hygienist restrictions further. In 2001, the South Carolina Board of Dentistry required that exams performed by a licensed dentist accompany all cleanings. The rule frustrated the state legislature’s attempt to extend in-school dental cleanings to rural and other underserved children. ….

Nurse practitioners and physician assistants are trained in some of the same skills as family practice physicians but need not learn the more advanced skills essential to obtaining a medical degree. . . . For many procedures, outcome studies reveal that the extenders’ services are as safe and effective as that of physicians. Extenders have been essential to low-cost convenience clinics like CVS’s MinuteClinics and public health initiatives aimed at serving low-income individuals with restricted access to medical care. Undoubtedly influenced by powerful lobbying from the American Medical Association (AMA), twelve states (including more populous states such as California, Texas, and Florida) require physician supervision over all nurse practitioner activity. Several states prohibit nurse practitioners from prescribing medication. . . . In addition, many states define title certification and abstraction as the “practice of law,” which effectively inflates demand for legal services by requiring attorney representation at all real estate transactions.

Other \”recent additions to the list of professions requiring licenses include locksmiths, beekeepers, auctioneers, interior designers, fortune tellers, tour guides, and shampooers.\” Of course, the standard argument in favor of occupational licensing is that it protects consumers by assuring that they will receive higher-quality services. In many cases, this argument seems very unlikely to be true. For example, there didn\’t seem to be any evidence that the non-dentist teeth whitening services in North Carolina were ineffective or harmful to consumers. Consumers wouldn\’t seem to be at any particular health or safety risk from unlicensed flower arrangers. And if you don\’t like the service provided by a hair-braider or an interior designer, well, just like if you don\’t like a certain restaurant or movie theater, you can exercise your power as a consumer not to give them any more business.

But the connection between occupational licensing and quality of service can also be examined more systematically. These rules about what services need an occupational license vary considerably across states. In practical terms, this variation across states is part of what helps licensing to restrict competition from those in other states: indeed, Michelle Obama has advocated policy changes so that states would recognize certain out-of-state licenses held by military spouses. In research terms, the variation across states has allowed a wave of studies to confirm that occupational licensing is often quite effective at raising prices, but the quality benefits are often difficult to find in the data.

Edlin and Haw take a middle ground here. They argue that occupational licensing may have benefits for consumers in some cases, but they also argue that when those who are licensed start setting the rules for what those who are not licenses are allowed to do–like the nondentist teeth whiteners in North Carolina–then the competition authorities like the Federal Trade Commission should be allowed to challenge these rules. They write: \”Our proposal recognizes the potential benefits of licensing—preventing charlatanism and injury to the public—but rejects the idea that the potential
benefits justify total antitrust immunity for licensing.\”

Copyright protection has lost touch with its intended purpose. Derek Khanna lays out some striking evidence in \”Guarding Against Abuse: Restoring Constitutional Copyright,\” published as R Street Policy Study No. 20 (April 2014).

As a starting point, the fundamental purpose of copyright is not to help authors gain a reward in the market. The fundamental purpose is to advance science and the arts, which means encouraging others to build on pre-existing work. For this purpose, copyright protection must strike a balance between protecting the ability of authors to earn a reward, on one side, but also assuring that what they have created enters into the public domain so that it can be used by others, on the other side

Here\’s the purpose of copyright according to the U.S. Supreme Court (Feist Publications Inc. vs. Rural Telephone Service Co., 499 US 340 [1991], citations omitted): \”It may seem unfair that much of the fruit of the compiler\’s labor may be used by others without compensation. As Justice Brennan has correctly observed, however, this is not \”some unforeseen byproduct of a statutory scheme.\” . . . It is, rather, \”the essence of copyright\” . . . and a constitutional requirement. The primary objective of copyright is not to reward the labor of authors, but \”[t]o promote the Progress of Science and useful Arts.\” Art. I, § 8, cl. 8. . . .To this end, copyright assures authors the right to their original expression, but encourages others to build freely upon the ideas and information conveyed by a work.\” Just to be clear, the quoted passage about \”the Progress of Science and useful Arts\” is from Art. I, § 8, cl. 8 of the U.S. Constitution.

Here\’s the heart of Khanna\’s argument (footnotes omitted):

That original U.S. statute created a 14-year term, with the option of a 14-year extension if the author was still alive. Until 1976, the average copyright term was 32.2 years. Today, the U.S. copyright term is the life of the author, plus 70 years. By contrast, patent terms have changed very little. Today’s term for utility patents is either 17 years from patent issuance or 20 years from patent filing, whichever is longer. (The term for design patents, which resemble copyrights in some key respects, is still the original 14 years.) As legal historian Edward Walterscheid puts it,  while patents and copyrights were included in the same clause of the Constitution and originally had the same or similar durations, the patent term has increased by just 43 percent while the copyright term has increased by almost 580 percent. Congress must justify why a 20-year term can provide sufficient incentive to inventors, but not to writers and artists.

 There\’s a lot of history and law about why this has happened: for even more detail than this article, you can look at Khanna\’s articles in the Cardozo Arts and Entertainment Law Journal here and here. Here, I just want to focus on the some of the peculiar results from this large and fairly recent extension of copyright–basically, a lot of stuff that would have gone off copyright in the last few decades is now still covered, and trying to figure out what is still covered by copyright from a few decades back can be quite difficult. Here are some examples lifted from Khanna\’s essay (with footnotes omitted for readability).

The \”Happy Birthday to You\” example

\”As one clear illustration of the costs of extremely long copyright, Warner/Chappell claims a copyright to “Happy Birthday to You,” which the Guinness World Records book calls the most famous song in the English language. Due to the copyright claim, every time someone wants to use a portion of this song in a video or performance, they have to pay a license fee or risk being sued. The Warner/Chappell claim is based upon a published version of piano arrangements from 1935. The authenticity of the claim is under dispute, with some arguing that the song was written earlier and by someone else. Robert Brauneis of George Washington University Law School has argued pretty persuasively that Warner/Chappel does not own a lawful copyright to this song. But while the court tries to sort this out, people will have to pay rents to Warner/Chappel to publicly perform the most famous song in the English language. This discourages some people from performing this song publicly. Restaurants such as Applebee’s and Shoney’s have developed songs that are used instead of “Happy Birthday to You” to avoid copyright infringement and avoid paying hefty royalties. . . .So far, they have collected an estimated more than $2 million annually in licensing fees for the song. According to one estimate, it is the song that earns the highest royalty rates. Under current law, “Happy Birthday to You” will remain under copyright until 2030, but we should expect a push to continue to expand copyright even further beyond 2030.\”

Learning about the U.S. Civil Rights Movement

Excessively long copyright terms help explain why Martin Luther King’s “I Have a Dream” speech is rarely shown on television, and specifically why it is almost never shown in its entirety in any other form. In 1999, CBS was sued for using portions of the speech in a documentary. It lost on appeal before the 11th Circuit. If copyright terms were shorter than 50 years, then those clips would be available for anyone to show on television, in a documentary or to students. When historical clips are in the public domain, learning flourishes. Martin Luther King did not need the promise of copyright protection for “life+70” to motivate him to write the “I Have a Dream” speech. (Among other reasons, because the term length was much shorter at the time.) … 

Eyes on the Prize is one of the most important documentaries on the civil rights movement. But many potential younger viewers have never seen it, in part because license requirements for photographs and archival music make it incredibly difficult to rebroadcast. The director, Jon Else, has said that “it’s not clear that anyone could even make ‘Eyes on the Prize’ today because of rights clearances.” The problems facing Eyes on the Prize are a result of muddied and unclear case law on fair use, but also copyright terms that have been greatly expanded. If copyright terms were 14  years, or even 50 years, then the rights to short video clips for many of these historical events would be in the public domain.

The Problem of \”Orphan Works\” Where the Copyright Holder from a Long-Ago Work Cannot be Located

Carnegie Mellon University
Libraries submitted a filing to the Copyright Office last year
explaining that, when they tried to digitize and provide
web-based access for their collection, 22 percent of the publishers
could not be found. Google Books digitizes a large
amount of the world’s books. Alas, for many older works, it
is extremely costly or impossible for them to track down the
rightful owner of the work. …

In 1930, 10,027 books were published in the United States. In 2001, all but 174 of these titles are out of print. But for the Sony Bono Copyright Extension [Act of 1998], digital archives could be made
of remaining copies of the 9,853 works not currently being published. But under CTEA, and with likely future term extensions, digital archivists “must continue to wait, perhaps eternally, while works disappear and opportunities vanish.” As one example, the early volumes of periodicals such as the
New Yorker, Time magazine and Reader’s Digest “provide an unparalleled window into early 20th century American life and culture [but] few if any of these works can be found online because they are still under copyright. Until they fall into the public domain, the process of clearing rights for each
article, drawing, and photograph makes digital archiving of
such composite works practically impossible.”

Plays and Music

How many plays from the 1920s, 1930s and 1940s have high schools had to pay large fees to license and reproduce? Certainly those plays are not too old for literary and cultural value. Under a shorter copyright term, as the founders intended, written music from that era would be available to anyone for free with the click of a button, rendering most of the early jazz movement in the public domain. Would schools not be more likely to have jazz clubs for students if most of the music could be printed for free? . . . A number of orchestras have stopped performing Peter and the Wolf, by Prokofiev, because when the work returned to copyright protection after having been in the public domain, the cost of sheet music became prohibitive. In a survey by the Conductors Guild, 83 percent of orchestral conductors have a general practice of conserving resources by limiting their performances and recordings of copyrighted works. About 70 percent said they are no longer able to perform some works previously in the public domain . . .\”

The \”Missing 20th Century\” of Books

When books enter the public domain, there is an explosion in readership and availability, because public domain works can be provided for free online. In fact, works are significantly more available once they enter the public domain. A 2012 review of books sold through Amazon showed that those published after the critical public domain cut-off date of 1923 are available at a dramatically lower rate than books from the prior century. This is what The Atlantic magazine has referred to as “The Missing 20th Century.” The spike in availability starts right after works enter the public domain. This study shows there are 700 percent more books available from the 1910s than from the 1950s, even though there were many more books published in the 1950s. Another study by the same economist showed that, when books enter the public domain, audio versions of those works become significantly more available and are of equal quality to those of copyrighted books.

These examples can be multiplied, but I hope the basic lesson is clear. Excessively long copyright terms are not serving the purpose of promoting the arts, but have become a trough where lawyers, big corporations, and political interests joust and feed. Those who hold copyrights for successful older materials would of course like to see those copyrights extended. This no surprise, of course. I\’m sure that those who hold patents on, say, successful prescription drugs would like to see the patents extended, too. But it is, of course, wild ironic that the Disney Company manages to lobby for continual extensions of  copyright to keep exclusive rights to Mickey Mouse and others–when so many the classic movies of that the company produced were based on works in the public domain: for example, Snow White, Sleeping Beauty, the music in Fantasia,  Jungle Book, Pinocchio, Aladdin, Beauty and the Beast, Alice in Wonderland, Swiss Family Robinson,and many more. 

And just in case you think this is over? Khanna points out that the forces arguing for ever-longer copyright have inserted a provision in the drafts of the trade agreement called the Trans-Pacific Partnership Treaty which would extend copyright to life of the author plus 100 years–and by making this part of an international agreement, it would then become much more difficult for Congress to alter it in the future.

The North American Free Trade Agreement turns 20 this year. What\’s has it done? Gary Clyde Hufbauer, Cathleen Cimino, and Tyler Moran discuss the evidence in \”NAFTA at 20: Misleading  Charges and Positive  Achievements,\” written for the Peterson Institute for International Economics (May 2014, Number PB14-13).

For those who don\’t remember, NAFTA was a burning political issue of its time, perhaps the single largest  issue launching Ross Perot as a third-party candidate for president in 1992. In June 1992, before the November election, Perot was for a time polling ahead of both George Bush and Bill Clinton. NAFTA was the first time the U.S. had signed a major trade agreement with a country that wasn\’t another high-income country, and Perot and others made dire predictions about the result. Hufbauer, Cimino, and Moran summarize the political debate:

\”In truth the claims on both sides of the NAFTA issue 20 years ago were overblown. Since the Mexican economy is less than one-tenth the size of the US economy, it is not plausible that trade integration could dramatically shape the giant US economy, even though integration could exert a substantial impact on the relatively small Mexican economy. But exaggeration and sound bites are the weapons of political battle, and trade agreements have been on the front line for two decades. President Bill Clinton, for example, declared that NAFTA would “create” 200,000 American jobs in its first two years and a million jobs in its first five years. Not to be outdone, NAFTA opponents Ross Perot and Pat Choate projected job losses of 5.9 million, driven by what Perot derided as a “giant
sucking sound” emanating from Mexico that would swallow American jobs. Both of these claims turned out to be overblown, especially the one advanced by Perot and Choate.\”

Of course, most economists see trade agreements in a fundamentally different way than these kinds of politically driven predictions, not about adding to the total number of jobs nor subtracting from the total number of jobs in any significant way, but instead about adding competitive pressures that restructure the labor market–adding jobs in some areas and reducing them in others. The restructuring of an economy from lower-productivity to higher-productivity jobs is a fundamental part of what raises the standard of living over time. Public policy has a legitimate role to play in smoothing this transition.

Hufbauer, Cimino, and Moran point out that every year, even when the economy is growing well, about four million Americans lose jobs involuntarily through layoffs or shutdowns. They estimate that about 5% of this job churn, perhaps 200,000 jobs per year, can be attributed to expanded trade with Mexico.  Despite the dire predictions of NAFTA opponents, the U.S. economy boomed through the rest of the 1990s, and after the 2001 recession, the unemployment rate was 5% or less from June 2005 through February 2008, before the Great Recession hit with full force. NAFTA had essentially no effect on the total number of US jobs.

As the Pew surveys on public perception of FTA [free trade agreement] effects on jobs seem to confirm, American workers who owe their jobs to rising exports are usually oblivious to their dependence on foreign sales (in sharp contrast to workers who lose their jobs to rising imports). Based on the increase in US exports to Mexico, averaging $25 billion annually between 2009 and 2013, about 188,000 new US jobs were supported each year by additional sales to Mexico. The figure is almost as large as the jobs lost, but the jobs gained in other sectors pay better. On average, the export-related jobs pay 7 to 15 percent more than the lost import-competing jobs. Th e wage diff erential, while positive, is only part of overall US gains from trade with Mexico. . . .

Amidst the arithmetic of jobs lost and gained, it should not be forgotten that a large portion of two-way trade among the NAFTA economies represents imported intermediates that raise the competitiveness of US firms, enabling them to improve their export profile in world markets. In other words, imports benefit not just US consumers but also US firms that can acquire just the right intermediate components at the right price. . . . [G]ains to the US economy average several hundred thousand dollars per net job lost.

What about effects on wages? Interestingly, it turns out that various studies which do find that U.S. trade with China has had a negative effect on US manufacturing wages, similar studies do not find that trade with Mexico has had a similar effect. They explain:

Possibly the main reason the wage impact between Chinese and Mexican imports differs is that US trade with Mexico is roughly balanced and has a large intraindustry component (e.g., autos and parts shipped in both directions), whereas US trade with China is highly unbalanced and entails very large US imports of consumer goods in exchange for much smaller US exports of capital goods. Because of these features, US imports from Mexico compel considerably less job churn between industrial sectors than US imports from China, and this could account for the difference in estimated wage impact.

Overall, here\’s a picture showing how bilateral merchandise trade between the U.S., Canada, and Mexico has risen since the passage of NAFTA. The blue bars show bilateral imports and exports  before the free trade agreement; the dark green bars show how much trade would have increased if it had just mirrored overall economic growth; and the light green bars show the increase in trade above that level.

Hufbauer, Cimino, and Moran estimate the gains in this way:

\”Ample econometric evidence documents the substantial payoff from expanded two-way trade in goods and services. Through multiple channels, benefits flow both from larger exports and larger imports. … The channels include more efficient use of resources through the workings of comparative advantage, higher average productivity of surviving firms through “sifting and sorting,” and greater variety of industrial inputs and household goods.  … As a rough rule of thumb, for advanced nations, like Canada and the United States, an agreement that promotes an additional $1 billion of two-way trade increases GDP by $200 million. For an emerging country, like Mexico, the payoff ratio is higher: An additional $1 billion of two-way trade probably increases GDP by $500 million. Based on these rules of thumb, the United States is $127 billion richer each year thanks to “extra” trade growth, Canada is $50 billion richer, and Mexico is $170 billion richer. For the United States, with a population of 320 million, the pure economic payoff is almost $400 per person.\”

As we look around the globalizing economy today, one emerging pattern is regional mixtures of the technology and design skills of high-income countries with the manufacturing skills of lower income economies. We see Factory Asia, with Japan and Korea partnering with China, Thailand, Indonesia, and others. We see Factory Europe, with Germany in particular partnering with countries of eastern Europe. And we see Factory North America, with the U.S. and Canada partnering with Mexico. In a sense, the NAFTA agreement back in 1994 was a test of the willingness of the U.S. economy to embrace–at least hesitantly!–the future of a globalizing economy. As the bulk of the world economy continues its shift toward middle income economies, the U.S. economy will face a continual series of adjustments to the globalizing  economy in the decades ahead.

The definition of \”chronic disease\” is a little loose, but it generally refers to persistent conditions that for the population as a whole can often be addressed with preventive measures, lifestyle changes, or prescription drugs. In \”Checkup Time: Chronic Disease and Wellness in America,\” a January 2014 report published by the Milken Institute, Anusuya Chatterjee, Sindhu Kubendran, Jaque King, and Ross DeVol point out: \”According to the Centers for Disease Control and Prevention (CDC), chronic illness affects one of every two adults in the U.S., and they are responsible for 75 percent of health-care costs.\”

Their report estimates costs for five most common chronic diseases: cancer, diabetes, heart disease, hypertension, and stroke. One set of costs are treatment costs; a much bigger cost is the reduction in GDP when people are unable to work to their usual productivity, or at all. Of course, the measure here underestimates the full social cost because it does not seek to place a monetary value on the costs of death and suffering.

Efforts to reduce the  burden of chronic disease have had some successes. As the Milken report notes:

\”Strategies to battle heart disease have had the most success in lowering prevalence and easing the economic burden. Much of the credit goes to public anti-smoking initiatives. …  Learning from that, we can be optimistic that aggressive campaigns to address obesity, improve nutrition, and motivate physical activity will bear fruit in the future. Simple physical movement not only helps to control weight but has been effective in cutting cholesterol levels. Keeping bad cholesterol in check through exercise and nutrition can restrain the menaces of stroke and hypertension. . . . More personalized treatment before disease onset can reduce incidence, and better disease management can curtail the need for sudden visits to expensive sites of services, such as emergency rooms and hospital admissions.The American College of Cardiology and American Heart Association now recommend statins for people at risk of heart disease. If diabetes patients and their doctors manage the disease well, they can avoid potentially grave glycemic events that send costs climbing. \”

Similarly, the Centers for Disease Control notes on its website: \”Four modifiable health risk behaviors—lack of physical activity, poor nutrition, tobacco use, and excessive alcohol consumption—are responsible for much of the illness, suffering, and early death related to chronic diseases.\”

In short, finding ways to deal better with the incidence of chronic disease offers the possibility of a three-way win: 1) better health and improved life expectancies for many 2)  helping to hold down health care costs by avoiding costly episodes of hospitalization; and more speculatively, 3) the possible of building a new job-rich industry with the task of helping those with chronic diseases stick to their daily regimen.

This last point is worth a bit more explication. A chronic disease can be thought of as a set of conditions where the incidence and/or the severity of the condition can be greatly reduced if people f they take the recommended medications, or follow the recommended diet, or do the recommended exercises. However, if a person who already has with a chronic condition doesn\’t follow the day-to-day recommended regimen–say someone with high blood pressure or a diabetic–the result can be a severe and costly episodes of hospitalization. The U.S. health care system is generally quite good at dealing with poor health after it occurs, but traditionally, it has not been primarily focused on prevention, wellness, and helping peoples stick to their health regimens. The Milken report notes:

\”Outside of the medical complex, there is much room for improvement in wellness and illness prevention initiatives. A range of organizations, such as employers, local government agencies, and nonprofits, can promote healthy living through wellness programs. Integrating exercise, nutrition awareness, and other good-for-you practices is the cornerstone of preventing chronic disease and reducing health-care costs.\”

Personal habits and public policies regarding cleanliness changed so much in the 19th and into the early 20th century that historians sometimes write of a \”sanitation revolution,\” which led to dramatic improvements in public health. It\’s time to ramp up a \”chronic disease revolution,\” which would include the health care system but also reach beyond it. Modern information technology, and the coming arrival of the \”Internet-of-things\” will open up new possibilities here. A pillbox could be wired into the Internet, and if it isn\’t opened at the appropriate times during the day, the person would receive a text or email, and then a phone call, and then maybe a personal visit of reminder. It\’s now possible for a home machine to take a small blood sample from a diabetic, analyze that sample, and send in the results. Information technology makes it much easier to have interactive systems that offer reminders about diet or exercise. The benefits from improved management of chronic conditions is potentially very large.