The Rising Price of Anti-Cancer Drugs

Every now and then, you read a story about a very expensive prescription drug that seems to have a real but modest health benefits. A few years back, an anti-melanoma drug called ipilimumab (brand name Yervoy) became available for sale from Bristol-Myers Squibb. The price was  $120,000
for a full course of therapy, and the expected gain in life expectancy was four months. Are these examples just a few outliers? Is there a trend toward more expensive drugs? David H. Howard, Peter B. Bach, Ernst R. Berndt, and Rena M. Conti tackle this question in \”Pricing in the Market for Anticancer Drugs,\” which appears in the Winter 2015 issue of the Journal of Economic Perspectives.

(Full disclosure: I\’ve worked at the Managing Editor of JEP since the inception of the journal in 1986. All JEP articles from the most recent issue back to the first are freely available on-line courtesy of the American Economic Association, which funds the journal.)

Howard, Bach, Berndt, and Conti look at the 58 anticancer drugs approved for sale in the U.S. between 1995 and 2013. Before each drug is approved, various clinical trials and studies are done, and these studies provide an estimate of the median expected extension of life as a result of using the drugs. Then based on the market price of the drug when it is announced, it\’s straightforward to calculate the price of the drug per year of life gained. This figure shows, for the new anti-cancer drugs over the last two decades, how the the drug price per year of life gained has been rising over time.

 As the best-fit line shows, back in 1995 the new drugs were costing about $54,000 to save a year of life. By 2014, the new drugs were costing about $170,000 to save a year of life. This is an increase of roughly 10% per year. 

How can this kind of increase persist? The authors point out that Medicare or some other form of insurance is often paying for these drugs, so patients do not face the prices directly. Thus, one theory involves \”reference pricing,\” in which each new drug is set a little higher in terms of cost per life saved than the previous one. The controversy fades over what seemed at the time to be  extraordinarily high price for certain drugs 10 or 15 years ago. The view of payers about what is \”reasonable\” to pay are pushed upward.

An alternative view points out that certain government programs now require that pharmaceutical companies sell discounted drugs to certain buyers (the \”340B program\”). When government-run health care providers in other countries negotiate prices with U.S. pharmaceutical manufacturers, they also seek to get a discount. For the drug manufacturers, if you know that a substantial part of your market is going to demand a \”discount,\” then you have an incentive to set the initial price higher as a kind of benchmark for future negotiations–especially if you know that third-party payers in the U.S. will grumble and moan about that high price but eventually pay up. 

The size of the U.S. market for anti-cancer drugs was $37 billion in 2013. I certainly have no objection to any person paying for these drugs themselves, or for people buying an insurance policy that will pay for these drugs if needed. But I also would have no problem with an insurance company offering a lower-priced policy with the explicit provision that it won\’t cover these very expensive drugs. And of course, one of the many discomfiting peculiarities of American health care policy is that on one hand we agonize over how to pay for helping those with low incomes receive adequate health insurance, while at the same time having a government program (Medicare) pay an amount that would cover health insurance for multiple families for a year for a drug that adds a few months to life expectancy. 

The Journey to Becoming a School Reformer

Roland Fryer offers an insightful and charming essay about his journey to becoming a K-12 school reformer in \”21st Century Inequality: The Declining Significance of Discrimination,\” appearing in the Fall 2014 issue of  Issues in Science and Technology. This is an edited version of the Henry and Bryna David Lecture, which Fryer delivered at the National Academy of Sciences on April 29, 2014.
Video and powerpoint slides from the actual lecture are available here.

As Fryer tells the story, he was \”asked in 2003 to explore the reasons for the social inequality in the United States.\” He looked at data from the \”National Longitudinal Survey of Youth, focusing on people who were then 40 years old.\” He looked at the raw differences in averaged outcomes between blacks and whites on a number of dimensions. Then he adjusted the data for the test scores of the 40 year-olds back when they were eighth-graders—essentially, this means comparing blacks and whites who had the same test scores back in eighth grade. Remarkably enough, the wage gap between black and white 40 year-olds essentially disappeared after adjusting for eighth-grade test scores. On average, blacks were less likely to attend college than whites, but after adjusting for eighth grade test scores, blacks were more likely to attend college. A number of subtantial black-white differences remained after adjusting for eighth-grade test scores, but the size of such differences was diminished.

Here\’s one of Fryer\’s slides from his talk, showing the average black-white differences, and then the differences after adjusting for eighth-grade test scores.

Fryer describes his reaction in this way: 

\”In two weeks I reported back that achievement gaps that were evident at an early age correlated with many of the social disparities that appeared later in life. I thought I was done. But the logical follow-up question was how to explain the achievement gap that was apparent in 8th grade. I’ve been working on that question for the past 10 years. I am certainly not going to tell you that discrimination has been purged from U.S. culture, but I do believe that these data suggest that differences in student achievement are a critical factor in explaining many of the black-white disparities in our society. It is no longer news that the United States is a lackluster performer on international comparisons of student achievement, ranking about 20th in the world. But the position of U.S. black students is truly alarming. If they were to be considered a country, they would rank just below Mexico in last place among all Organization of Economic Cooperation and Development countries.\”

The next question is when did black students start falling behind. Fryer writes:

When do U.S. black students start falling behind? It turns out that development psychologists can begin assessing cognitive capacity of children when they are only nine months old with the Bayley Scale of Infant Development. We examined data that had been collected on a representative sample of 11,000 children and could find no difference in performance of racial groups. But by age two, one can detect a gap opening, which becomes larger with each passing year. By age five, black children trail their white peers by 8 months in cognitive performance, and by eighth grade the gap has widened to twelve months. 

It is remarkable to me that most of the cognitive performance gap for eighth-graders is already apparent for five year-olds. As I\’ve commented on before in \”The Parenting Gap for Pre-Preschool\” (September 17, 2013), one possible reaction here is to think more seriously about home visitation programs for at-risk children in the first few years of life.  Another possible reaction is to think about expanding preschool programs for 3-5 year-olds, but at least some of the evidence on whether these programs have any lasting effect is rather discouraging (although the case is somewhat stronger for focusing preschool programs on at-risk children).

Fryer\’s approach has been to focus on how to improve school achievement, and as an economist, he began with a charmingly straightforward approach of paying students to read books and to pass tests. Here\’s a sketch of his longer description of what he did:

As befits an arrogant economist, my first thought was that this will be easy: We just have to change the incentives. …  My solution was to propose that we pay them incentives now to reward good school performance. 

Oh my gosh, I wish someone had warned me. No one told me this was going to be so incredibly unpopular. People were picketing me outside my house saying I would destroy students’ love of learning, that I was the worst thing for black people since the Tuskegee experiments. Really? Experimenting with incentives when nothing else seems to work is the equivalent of injecting people with syphilis without informing them?
We decided to try the experiment and raised about $10 million. We provided incentives in Dallas, Houston, Washington, DC, New York, and Chicago. We also, just for fun, added a large experiment with teacher incentives just to cover all our bases, to make sure that we had paid everybody for everything. ….  

What we learned through this $10 million and a lot of negative press and angry citizens is that kids will respond to incentives—and that incentives to teachers do not have a significant effect on student achievement. They will do exactly what you want them to do. By the way, they don’t do anything extra either. I had this idea that they were going to discover that school is great and to try harder in all of their subjects, even those that do not provide incentives. No. You offer $2 to read a book, and they read a book. They are going to do exactly what you want them to do. That showed me the power, and the limitations, of incentives for kids.\”

So Fryer and fellow researchers began to study successful charter schools, like the Harlem Children’s Zone led by Geoffrey Canada, as well as some less successful schools. The team spent several years interviewing and videotaping, and came up with five rules to follow to close the academic achievement gap. Here are the five (from the slides accompanying Fryer\’s talks), with some comments from Fryer.
More time in school. 

\”Simple. Effective schools just spent more time on tasks. I think of it as the basic physics of education. If your students are falling behind, you have two choices: spend more time in school or convince the high-performing schools to give their kids four-day weekends. The key is to change the ratio. … In the case of Harlem Children’s Zone’s Promise Academy, students have nearly doubled the amount of time on task compared to students in NYC public schools.\”

Human Capital Management

\”For teachers, it is important that they receive reliable feedback on their classroom performance and that they rigorously apply what they learn from assessments of their students to what they do in the curriculum and the classroom.\”

Small Group Tutoring

\”The third effective practice was what I call tutoring, but which those in the know call small learning communities. It is tutoring. Basically what they do is work with kids in groups of six or fewer at least four days per year.\”

Data-Driven Instruction and Student Performance Management.

\”Even low-performing schools know that data are important. When I visited a middling school, they would be eager to show me their data room. What I typically found was wall charts with an array of green, yellow, and red stickers that represented high-, mid-, and low-performing students, respectively. And when I asked what has this led you to do for red kids, they would say that they hadn’t reached that step yet, but at least they knew how many there are.When I asked the same question in the data rooms of high-performing schools, they would say that they have their teaching calibrated for the three blocks. They would not only identify which students were trailing behind, but would identify the pattern of specific deficiencies and then provide remediation for two or three days on the problem areas. They would also note the need to approach these areas more diligently in future editions of the course.\”

Culture and Expectations 

\”The icing on the cake was that effective schools had very, very high expectations of achievement regardless of their social or economic background.  … The essential finding is that kids will live up or down to our expectations. Of course they are dealing with poverty. Of course 90% of the kids have single female head of households. They all have that. That wasn’t news. The question is how are we going to educate them?\”

Maybe this five-step approach sounds too commonsensical and simple to work? Fryer\’s group managed to try out their approach in a group of 20 Houston public schools, including four high schools, with 16,000 students. Here were the results: 

\”When we began, the black/white achievement gap in the elementary schools was about 0.4 standard deviations, which is equivalent to about 5 months. Over the three years, our elementary schools essentially eliminated the gap in math and made some progress in reading. In secondary schools, math scores rose at a rate that would close the gap in in roughly four to five years, but there was no improvement in reading. One other significant result was that 100% of the high school graduates were accepted to a two- or four-year college.\”

These methods involved a lot of change at the schools involved, including changing a number of principals and teachers. But the same student body that had been dramatically underperforming was no longer doing so. Fryer draws the hard lesson explicitly. We know many of the changes that ccan be made to improve low-performing schools dramatically within a few years. The financial costs of these changes are manageable. But the school systems that need to be changed, and many of the people currently working in those systems, are not ready to make the needed changes. He says:

\”It is not rocket science. It is not magic. There is nothing special about it…. We are now repeating the experiment in Denver, Colorado, and Springfield, Massachusetts. We actually do know what to do, especially for math. The question is whether or not we have the courage to do it.\”

How Much Deleveraging Has Happened?

The Great Recession of 2007-2009 was born in excessive debt. Of course, this statement strips away all manner of important details: the housing price bubble, subprime mortgages, collateralized debt obligations, credit rating agencies, affordable housing mandates, financial institutions bettign their companies on being able to roll  over huge amounts of very short-term financing every day, lax financial regulation, and more. While the manifestation of excessive debt happened in a particular way in 2007-2009, the general link between excessive debt and economic instability is a familiar story to economists. It\’s sometimes called a leverage cycle or a financial cycle. The basic notion is that when economic times are good, borrowing and risk-taking can rises to unsustainable levels, so that when times turn bad, the crash is especially hard.

Here in early 2015, how much has the U.S. economy and the world deleveraged–that is, reduced its debt? The McKinsey Global Institute tackles this question in a February 2015 report, Debt and (Not Much) Deleveraging, written by Richard Dobbs, Susan Lund, Jonathan Woetzel, and Mina Mutafchieva.

The amount of debt in an economy includes government, corporate, and household debt. Here\’s a picture of total debt by country. The horizontal axis shows the total debt/GDP ratio as of the second quarter of 2014. The vertical axis shows the change in the debt/GDP ratio from 2007 to 2014. Advanced economies are the yellow dots, while emerging and developing economies are the gray dots.

Several interesting patterns emerge from this figure.

1) The countries with higher debt/GDP ratios (on the horizontal axis) are mostly advanced economies, while the countries with lower debt/GDP ratios are mostly emerging and developing economies. This pattern is somewhat expected. A eocnomy with very little debt is a country where financial markets are underdeveloped (Nigeria) or ill-functioning (Argentina). As per capita GDP rises in a country, the debt/GDP ratio also tends to rise, reflecting the development of financial markets. As the McKinsey report explains:

Some of the growth in global debt is benign and even desirable. Developing economies
have accounted for 47 percent of all the growth in global debt since 2007—and three-quarters of new debt in the household and corporate sectors. To some extent, this reflects
healthy financial system deepening, as more households and companies gain access
to financial services. Moreover, debt in developing countries remains relatively modest,
averaging 121 percent of GDP, compared with 280 percent for advanced economies. There are exceptions, notably China, Malaysia, and Thailand, whose debt levels are now at the level of some advanced economies.

2) Some of the the countries with the highest change in debt/GDP ratios (on the vertical axis) are the countries that, if you read the headlines, you would expect to be there: Ireland, Greece, Portugal, Spain.

3) Some of the countries with the highest levels of debt/GDP ratios and also the highest growth in debt are there in part because of their role as global financial hubs, like Ireland and Singapore. The report explains:

As a major business hub, Singapore has the highest ratio of non‑financial corporate debt in the world, at 201 percent of GDP in 2014, almost twice the level of 2007. However nearly two-thirds of companies with more than $1 billion in revenue in Singapore are foreign subsidiaries. Many of them raise debt in Singapore to fund business operations across the region, and this debt is supported by earnings in other countries. Singapore has very high financial-sector debt as well (246 percent of GDP), reflecting the presence of many foreign banks and other financial institutions that have set up regional headquarters there. Ireland has the second-highest ratio of non‑financial corporate debt to GDP in the world—189 percent in 2014. But this mostly reflects the attraction of Ireland’s corporate tax laws, which lure regional (and sometimes global) operations of companies from around the world. Foreign-owned enterprises contribute 55 to 60 percent of the gross value added of all companies in Ireland and, we estimate, at least half of Ireland’s non‑financial corporate debt.

4) Among other high-income countries, Japan\’s extraordinarily high debt/GDP ratio of 400% stands out. Among the emerging countries, China stands out, both for having one of the highest debt/GDP ratios among the emerging economies (217%), but also for  having experienced by far the biggest rises in debt/GDP ratio from 2007 to 2014, at 83 percentage points.

5) Among the advanced economies on the figure, the U.S. economy is one of the lowest in terms of debt/GDP ratio (233%) and also one of the lowest in terms of the rise in debt/GDP ratio from 2007-2014 (16 percentage points) When you dig into the underlying statistics a bit more, the U.S. economy had a rise in goverment debt equal to a 35 percentage point rise in its debt/GDP ratio. However, the U.S. economy also had by far the biggest decline in household debt of any of the countries on the figure, equal to a fall of 18 percentage points in its debt/GDP ratio. The U.S. also had a dramatic fall in financial sector debt, equal to a fall of 24 percentage points in its overall debt/GDP ratio (and a close second to Ireland for biggest fall in this category).

Of course, the declines in household and financial sector debt in the U.S. economy are part of the reason for why the economic recovery has proceeded as such a sluggish pace. But the good news is after the excessive indebtedness of U.S. households and its financial sector back around 2007, real changes have occurred.

Follow-up: Opting Out of the US Corporate Income Tax

A couple of months ago, I posted on how a growing share of US firms were \”Opting out of the US Corporate Income Tax\” (December 22, 2014), by instead choosing to incorporate in the form of a partnership or an S-corporation in which the business earnings are only taxed through the individual income tax of the owners. Paul Burnham offers an updated figure on these issues at the blog of the Congressional Budget Office.

The vertical axis includes all business receipts. About 90% of business receipts go to firms that are limited liability corporations; the other 10% would include, for example, a sole proprietor business where the owner remains personally liable for debts incurred by the business. Of the business receipts going to limited liability corporations, Burnham reports that a large share of business receipts ar going to \”S corporations and limited liability companies, whose profits are taxed only at the individual level. That shift caused the share of business receipts attributed to C corporations to fall from 87 percent in 1981 to 62 percent in 2011. As a result, federal tax revenues are lower than they would otherwise be, but incentives for investment and the efficient allocation of resources are probably greater.\”

Business Receipts of Firms with Limited Liability, by Type of Taxation
Discussions of corporate income tax and how to reform it would be wise to remember that the share of business income covered by the corporate income tax is 62% and falling. 

A Snapshot of University and College Endowments

How much money do colleges and universities have in their endowments? How are they investing the money? What returns are they earning? The National Association of College and University Business Officers does a survey of these questions each year, and ome results from its 2014 survey are now available.

What colleges and universities have the largest endowments? Here\’s a list of the top 40, with Harvard leading the way at $35 billion.  The numbers are large for many of these nonprofit institutions. One caveat: The numbers are not adjusted for the number of students at each of these institutions. For example, #1 Harvard has a total enrollment of a little more than 20,000 students, while the University of Texas system enrolls more than 200,000.

How concentrated are the endowment assets? Of the 832 total isntitutions, the top 10.9% with endowments of more than $1 billion each hold 74% of all endowment assets. Public institutions hold about one-third of endowment assets.

How do colleges and universities invest their endowment funds? It varies considerably according to the size of the endowment. The institutions with the biggest endowments put well over half of their funds into \”alternative strategies,\” which according to the report is defined as \”Private equity (LBOs, mezzanine, M&A funds, and international private equity); Marketable alternative strategies (hedge funds, absolute return, market neutral, long/short, 130/30, and event-driven and derivatives); Venture capital; Private equity real estate (non-campus); Energy and natural resources (oil, gas, timber, commodities and managed futures); and Distressed debt.\” Institutions with smaller endowments put a much larger share into \”domestic equities\” in particular. Interestingly, the dividing line here really is by size of endowment: public and private institutions allocate their endowments in very similar ways. 

 Finally, how did those investments perform in 2014? As one might expect, returns for domestic equities, fixed income, and international equities are all quite similar across endowments of different sizes. But the big endowments over $1 billion get a substantially higher return on the \”alternative strategies\” than do smaller endowments–which of course explains why they have a large share of assets in this category. In particiular, the large endowments get much better returns in the \”alternative\” categories of private equity and ventur capital. One suspect that there is some combinatino here of better-paid investment professionals at these schools who are networked into better quality opportunities in private equity and venture capital than are available to schools with smaller endowments.

Table 1: Average Return by Asset Class for Fiscal Year 2014

Winter 2015 Journal of Economic Perspectives On-line

Since 1986, my my actual paid job (as opposed to my blogging hobby) has been Managing Editor of the Journal of Economic Perspectives. The journal is published by the American Economic Association, which several years back made the decision–much to my delight–that the journal would be freely available on-line, from the current issue back to the first issue in 1987. The journal\’s website is here. I\’ll start here with Table of Contents for the just-released Winter 2015 issue. Below are abstracts and direct links to all the paper. I will probably blog about some of the individual papers in the next week or two, as well.


Wealth and Inequality
Daron Acemoglu and James A. Robinson, “The Rise and Decline of General Laws of Capitalism”
Charles I. Jones, “Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality”
Wojciech Kopczuk, “What Do We Know about the Evolution of Top Wealth Shares in the United States?”
Thomas Piketty, “Putting Distribution Back at the Center of Economics: Reflections on Capital in the Twenty-First Century”
Marion Fourcade, Etienne Ollion, and Yann Algan, “The Superiority of Economists”
Allen R. Sanderson and John J. Siegfried, “The Case for Paying College Athletes”
David H. Howard, Peter B. Bach, Ernst R. Berndt, and Rena M. Conti, “Pricing in the Market for Anticancer Drugs”
Wallace E. Oates and Robert M. Schwab, “The Window Tax: A Case Study in Excess Burden” 
Andrei Shleifer, “Matthew Gentzkow, Winner of the 2014 Clark Medal”
Brett M. Frischmann and Christiaan Hogendorn, “Retrospectives: The Marginal Cost Controversy”
Timothy Taylor, “Recommendations for Further Reading”
Correspondence: “Fair Trade Coffee,” Victor V. Claar and Colleen E. Haight . . 215
Editorial Note: “Correction to Richard S. Tol’s ‘The Economic Effects of Climate Change’” 


Wealth and Inequality

\”The Rise and Decline of General Laws of Capitalism,\” by Daron Acemoglu and James A. Robinson
Thomas Piketty\’s (2013) book, Capital in the 21st Century, follows in the tradition of the great classical economists, like Marx and Ricardo, in formulating general laws of capitalism to diagnose and predict the dynamics of inequality. We argue that general economic laws are unhelpful as a guide to understanding the past or predicting the future because they ignore the central role of political and economic institutions, as well as the endogenous evolution of technology, in shaping the distribution of resources in society. We use regression evidence to show that the main economic force emphasized in Piketty\’s book, the gap between the interest rate and the growth rate, does not appear to explain historical patterns of inequality (especially, the share of income accruing to the upper tail of the distribution). We then use the histories of inequality of South Africa and Sweden to illustrate that inequality dynamics cannot be understood without embedding economic factors in the context of economic and political institutions, and also that the focus on the share of top incomes can give a misleading characterization of the true nature of inequality.

Full-Text Access | Supplementary Materials

\”Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality,\” by Charles I. JonesSince the early 2000s, research by Thomas Piketty, Emmanuel Saez, and their coauthors has revolutionized our understanding of income and wealth inequality. In this paper, I highlight some of the key empirical facts from this research and comment on how they relate to macroeconomics and to economic theory more generally. One of the key links between data and theory is the Pareto distribution. The paper describes simple mechanisms that give rise to Pareto distributions for income and wealth and considers the economic forces that influence top inequality over time and across countries. For example, it is in this context that the role of the famous r – g expression is best understood.

Full-Text Access | Supplementary Materials

\”What Do We Know about the Evolution of Top Wealth Shares in the United States?\” by Wojciech Kopczuk
I discuss available evidence about the evolution of top wealth shares in the United States over the course of the 20th century. The three main approaches—the Survey of Consumer Finances, estate tax multiplier, and capitalization methods—generate generally consistent findings until mid-1980s but diverge since then, with the capitalization method showing a dramatic increase in wealth concentration and the other two methods showing at best a small increase. I discuss strengths and weaknesses of different approaches. The increase in capitalization estimates since 2000 is driven by a dramatic and puzzling increase in fixed income assets. There is evidence that estate tax estimates may not be sufficiently accounting for mortality improvements over time. The nonresponse and coverage issues in the SCF are a concern. I conclude that the changing nature of top incomes and the increased importance of self-made wealth may explain difficulties in implementing each of the methods and why the results diverge.

Full-Text Access | Supplementary Materials

\”Putting Distribution Back at the Center of Economics: Reflections on Capital in the Twenty-First Century,\” by Thomas Piketty
When a lengthy book is widely discussed in academic circles and the popular media, it is probably inevitable that the arguments of the book will be simplified in the telling and retelling. In the case of my book Capital in the Twenty-First Century (2014), a common simplification of the main theme is that because the rate of return on capital r exceeds the growth rate of the economy g, the inequality of wealth is destined to increase indefinitely over time. In my view, the magnitude of the gap between r and g is indeed one of the important forces that can explain historical magnitudes and variations in wealth inequality. However, I do not view r > gas the only or even the primary tool for considering changes in income and wealth in the 20th century, or for forecasting the path of income and wealth inequality in the 21st century. In this essay, I will take up several themes from my book that have perhaps become attenuated or garbled in the ongoing discussions of the book, and will seek to re-explain and re-frame these themes. First, I stress the key role played in my book by the interaction between beliefs systems, institutions, and the dynamics of inequality. Second, I briefly describe my multidimensional approach to the history of capital and inequality. Third, I review the relationship and differing causes between wealth inequality and income inequality. Fourth, I turn to the specific role of r > g in the dynamics of wealth inequality: specifically, a larger r – g gap will amplify the steady-state inequality of a wealth distribution that arises out of a given mixture of shocks. Fifth, I consider some of the scenarios that affect how r – g might evolve in the 21st century, including rising international tax competition, a growth slowdown, and differential access by the wealthy to higher returns on capital. Finally, I seek to clarify what is distinctive in my historical and political economy approach to institutions and inequality dynamics, and the complementarity with other approaches.

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\”The Superiority of Economists,\” by Marion Fourcade, Etienne Ollion and Yann Algan
In this essay, we analyze the dominant position of economics within the network of the social sciences in the United States. We begin by documenting the relative insularity of economics, using bibliometric data. Next we analyze the tight management of the field from the top down, which gives economics its characteristic hierarchical structure. Economists also distinguish themselves from other social scientists through their much better material situation (many teach in business schools, have external consulting activities), their more individualist worldviews, and their confidence in their discipline\’s ability to fix the world\’s problems. Taken together, these traits constitute what we call the superiority of economists, where economists\’ objective supremacy is intimately linked with their subjective sense of authority and entitlement. While this superiority has certainly fueled economists\’ practical involvement and their considerable influence over the economy, it has also exposed them more to conflicts of interests, political critique, even derision.

Full-Text Access | Supplementary Materials

\”The Case for Paying College Athletes,\” by Allen R. Sanderson and John J. Siegfried
Big-time commercialized intercollegiate athletics has attracted considerable attention in recent years. Popularity of this uniquely American activity, measured by attendance, television ratings, or team revenues, has never been higher. At the same time, however, several high-profile scandals exposing unseemly behavior on the part of players, coaches, and even respected higher education institutions—as well as questions about the distribution of the enormous revenues pouring into university athletic departments—have marred the image of these college football and men\’s basketball programs. Currently there are several legal challenges to the National Collegiate Athletic Association (NCAA) and its member institutions that may change dramatically and permanently the arrangements between the NCAA cartel, its member colleges and universities, and the \”student-athletes\” who play on the teams. These challenges all focus on the NCAA\’s collective fixing of players\’ wages. We describe this peculiar \”industry,\” detailing the numerous market imperfections in both output and labor markets, the demand for and supply of college athlete labor, and possible alternative arrangements in the college athlete labor market, including the ramifications of compensating players beyond the tuition, room, board, books, and fees that some current players already receive as grants-in-aid.

Full-Text Access | Supplementary Materials

\”Pricing in the Market for Anticancer Drugs,\” by David H. Howard, Peter B. Bach, Ernst R. Berndt and Rena M. Conti
In 2011, Bristol-Myers Squibb set the price of its newly approved melanoma drug ipilimumab— brand name Yervoy—at $120,000 for a course of therapy. The drug was associated with an incremental increase in life expectancy of four months. Drugs like ipilimumab have fueled the perception that the launch prices of new anticancer drugs and other drugs in the so-called \”specialty\” pharmaceutical market have been increasing over time and that increases are unrelated to the magnitude of the expected health benefits. In this paper, we discuss the unique features of the market for anticancer drugs and assess trends in the launch prices for 58 anticancer drugs approved between 1995 and 2013 in the United States. We restrict attention to anticancer drugs because the use of median survival time as a primary outcome measure provides a common, objective scale for quantifying the incremental benefit of new products. We find that the average launch price of anticancer drugs, adjusted for inflation and health benefits, increased by 10 percent annually—or an average of $8,500 per year—from 1995 to 2013. We argue that the institutional features of the market for anticancer drugs enable manufacturers to set the prices of new products at or slightly above the prices of existing therapies, giving rise to an upward trend in launch prices. Government-mandated price discounts for certain classes of buyers may have also contributed to launch price increases as firms sought to offset the growth in the discount segment by setting higher prices for the remainder of the market.

Full-Text Access | Supplementary Materials

\”The Window Tax: A Case Study in Excess Burden,\” by Wallace E. Oates and Robert M. Schwab
The window tax provides a dramatic and transparent historical example of the potential distorting effects of taxation. Imposed in England in 1696, the tax—a kind of predecessor of the modern property tax—was levied on dwellings with the tax liability based on the number of windows. The tax led to efforts to reduce tax bills through such measures as the boarding up of windows and the construction of houses with very few windows. In spite of the pernicious health and aesthetic effects and despite widespread protests, the tax persisted for over a century and a half: it was finally repealed in 1851. Our purpose in this paper is threefold. First, we provide a brief history of the tax with a discussion of its rationale, its role in the British fiscal system, and its economic and political ramifications. Second, we have assembled a dataset from microfilms of local tax records during this period that indicate the numbers of windows in individual dwellings. Drawing on these data, we are able to test some basic hypotheses concerning the effect of the tax on the number of windows and to calculate an admittedly rough measure of the excess burden associated with the window tax. Third, we have in mind a pedagogical objective. The concept of excess burden (or \”deadweight loss\”) is for economists part of the meat and potatoes of tax analysis. But to the laity the notion is actually rather arcane; public-finance economists often have some difficulty, for example, in explaining to taxpayers the welfare costs of tax-induced distortions in resource allocation. The window tax is a textbook example of how a tax can have serious adverse side effects on social welfare. In addition to its objectionable consequences for tax equity, the window tax resulted in obvious and costly misallocations of resources.

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\”Matthew Gentzkow, Winner of the 2014 Clark Medal,\” by Andrei Shleifer
The 2014 John Bates Clark Medal of the American Economic Association was awarded to Matthew Gentzkow of the University of Chicago Booth School of Business. The citation recognized Matt\’s \”fundamental contributions to our understanding of the economic forces driving the creation of media products, the changing nature and role of media in the digital environment, and the effect of media on education and civic engagement.\” In addition to his work on the media, Matt has made a number of significant contributions to empirical industrial organization more broadly, as well as to applied economic theory. In this essay, I highlight some of these contributions.

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\”Retrospectives: The Marginal Cost Controversy,\” by Brett M. Frischmann and Christiaan Hogendorn
From 1938 to 1950, there was a spirited debate about whether decreasing-average-cost industries should set prices at marginal cost, with attendant subsidies if necessary. In 1938, Harold Hotelling published a forceful and far-reaching proposal for marginal cost pricing entitled \”The General Welfare in Relation to Problems of Taxation and of Railway and Utility Rates.\” After several years and many pages of discussion, Ronald Coase gave a name and a clear formulation to the debate in his 1946 article \”The Marginal Cost Controversy.\” We will tell much of the story of this controversy by comparing the frameworks of Hotelling and Coase, while also bringing in other contributors and offering some thoughts about contemporary relevance. The arguments marshaled by Coase (and his contemporaries) not only succeeded in this particular debate, as we shall see, but more generally served as part of the foundation for various fields of modern economics, particularly institutional, regulatory, and public choice economics as well as law and economics. Yet the underlying issues are quite difficult to resolve, and the strengths and weaknesses of the arguments for marginal cost pricing can turn on specific elements of the industry.

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\”Recommendations for Further Reading,\” by Timothy Taylor
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\”Fair Trade Coffee: Correspondence\” Victor V. Claar and Colleen E. Haight
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Editorial Note: Correction to Richard S. Tol\’s \”The Economic Effects of Climate Change\”
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The Disconnections of Unemployment Insurance

You might think that those who are unemployed would be eligible for unemployment insurance, but you would be wrong. To be eligible to receive unemployment insurance, you need to meet certain qualification tests typically based on earnings in the previous year or so. As a result, many of the unemployed do not receive unemployment insurance.

Here\’s a striking figure from a February 2015 report by Claire McKenna, \”The Job Ahead: Advancing Opportunity for Unemployed Workers,\” written for the National Employment Law Project. The vertical axis measures the share of unemployed workers receiving unemployment insurance. The yellow shaded area shows that the about 30-40% of the unemployed receive unemployment benefits paid for by the regular state-run unemployment insurance programs. During times when unemployment rates are stuck at high leves–typically just after the recessions shown by the shaded gray areas–the federal government steps in and offers extended periods of unemployment insurance benefits. During these periods, shown by the blue shade areas in the figure, the share of unemployed receiving unemployment benefits can get higher, reaching about two-thirds of the unemployed after the Great Recession. The federal extension of unemployment insurance has now expired. The share of the unemployed receiving unemployment insurance is now at the lowest level in this time period going back to 1972.

The NELP report lays out a policy agenda for the reform of unemployment insurance. For example, it includes additional funding for reemployment and training services; encouraging part-time employment while the unemployed receive benefits; and making unemployment benefits more accessible to the part-time, temporary, and low-income workers who are less likely to have a high and continuous enough level of earnings in the previous year to meet the current eligibility tests now. Readers interested in redesiging the unemployment insurance system for the 21st century might also might also check my February 13, 2013 post on \”Rebuilding Unemployment Insurance.\”

1,000 Conversable Posts

As a one-person blogging operation bobbing along in the oceanic vastness of the internet, every little once in awhile I feel a need to commemorate my own efforts. It\’s a little pathetic, I suppose, like throwing yourself a birthday party. But it beats not having a birthday party at all. This week, the total number of posts on this \”Conversable Economist\” blog since its beginning in May 2011 has now exceeded 1,000.

I understand, of course, that 1,000 posts is only significant because it\’s a round number for a species with 10 fingers. If humans counted in base 9, then I would have passed the round number of 1,000 in base nine (which would be nine cubed or 729 as written in base 10) more than a year ago.  I have a friend who points out that if you use your fingers as binary up-or-down digits, you can then use your two hands to count up to a 10-digit number in base 2, and 1,111,111,111 in base 2 is 1,023 in base 10. In a few weeks, I can celebrate that landmark number next. (Yes, my friends and I are a good time crew, no doubt about it.)

As the number of posts on this blog heads into four digits (in base 10), I find myself mulling several questions. Readers of this blog, especially those who check in on a semi-regular basis, are welcome if so moved to send feedback to me at

1) Should my posts on average be shorter? 

A typical length for one my posts is about 1,000 words of text, and often a few figures or tables as well. Thus, those of you who have been following me over the years may now have read about a million words from me. Sure, a certain proportion of that total is made up of quotations sliced from articles that I am discussing.  My point is that compared to many blogs, the posts here are relatively long. I have mixed feeling here. There\’s an old line, apparently dating back to Blaise Pascal, that a piece of writing is long because the author lacked time to make it shorter. For me, it\’s paradoxically true that writing shorter posts would probably take me longer. In addition, part of my reason for doing the blog is to extend my memory by saving quotations and figures and tables from stuff I read so that I can find them later. However, I could maybe put up some much shorter posts, like just a link to a study or a single figure or a quick quotation.

2) Should I post more often? 

My answer is \”no,\” because of that nasty constraint of 168 hours per week that plagues us all. This blog is an unpaid hobby, and with family, paid work, and the rest of that thing called \”having a life,\” I\’m already pushing the limits to how much time I can reasonably put into the blog.

3) Should I post less often? 

I\’ve been posting about five times a week, typically on weekdays. Is my \”hit rate\” of interesting posts high enough to justify this volume? Or should I drop down to 3-4 posts per week?

4) Should I shift the focus of the blog more toward my own opinions and analysis? 

 The usual approach of this blog is to discuss a report or research paper that I\’ve read. My opinions about what issues are interesting and what facts and analysis are persuasive are of course implicit in my choice of material. But I often let the report or research paper that I\’m discussing do most of the talking. My explanation for this approach appears on my FAQs page:

The word “conversable” was suggested to me by the Scottish philosopher/economist David Hume, in his 1742 piece “Of Essay Writing.” In that essay, Hume laments the separation of the “learned” and the “conversable” world. Hume wrote:

“The separation of the learned from the conversable world seems to have been the great defect of the last age, and must have had a very bad influence both on books and company: for what possibility is there of finding topics of conversation fit for the entertainment of rational creatures, without having recourse sometimes to history, poetry, politics, and the more obvious principles, at least, of philosophy? Must our whole discourse be a continued series of gossiping stories and idle remarks?” Hume concludes: “I cannot but consider myself as a kind of resident or ambassador from the dominions of learning to those of conversation, and shall think it my constant duty to promote a good correspondence betwixt these two states, which have so great a dependence on each other.”

In Hume’s spirit, I will attempt to serve as an ambassador from my world of economics, and help in \”finding topics of conversation fit for the entertainment of rational creatures.\”

My usual belief is that passing along facts and analysis is a more useful social function than whether I feel a need to emote. To put it another way, I do not view this blog as an exercise in personal psychotherapy. After all, whether readers agree with me or even have a clear sense of what I  believe doesn\’t seem all that important. It\’s not like I\’m running for office. Whether readers agree with my opinions or not, the actual facts and analysis that I pass along may be of interest. But I do sometimes give a little more free rein to my own voice, and I could presumably get the mush out of my mouth and do that more often.

5) Should I continue blogging more-or-less as I\’ve been doing, on the philosophy that if it isn\’t broke, don\’t fix it? 

For now, this approach is working for me. One main reason for starting this blog was as an aid to my memory. I read widely, but I have sometimes had trouble remembering where I saw I certain fact or figure or table or useful explanation. On the blog, I can easily find those materials again as needed. The blog has also been a useful discipline for me, encouraging me to track down and read through reports and research papers that I might only have skimmed before.

But the honest truth is that those personal factors alone probably wouldn\’t be enough for me to keep the blog going. I like having readers. It pleases me that this blog has now just reached 2 million page-views–which doesn\’t count all of those viewing it by email, RSS feed, or some other form of reposting. Thus, if you\’re a regular reader, many thanks. If you\’re an occasional reader, drop in more often. Those who like what I\’m doing on this blog are always going to be a selective group. But if you know someone who might enjoy the blog–whether its a friend or a classroom full of students–please do me a favor and pass along the web address.

Corporate Tax Reform: The Opening Obama Administration Bid

There has been some hope that as President Obama and the Republican Congress face off, corporate tax reform might be an area where compromise and progress might be possible. But given how the issue is laid out in the Analytical Perspectives volume of the 2016 Budget of the United States Government (this is the budget asproposed by the President), the potential for common ground doesn\’t look very big. Here\’s how the budget document sets up the discussion of corporate tax reform in Chapter 12, under the subheading \”Reserve for Business Tax Reform that is Revenue-Neutral in the Long Run\”:

The number of special deductions, credits, and other tax preferences provided to businesses in the Internal Revenue Code has expanded significantly since the last comprehensive tax reform effort nearly three decades ago. Such tax preferences help well-connected special interests, but do little for economic growth. To be successful in an increasingly competitive global economy, the Nation cannot afford to maintain a tax code burdened with such tax breaks; instead, the tax code needs to ensure that the United States is the most attractive place for entrepreneurship and business growth. Therefore, in the Budget, the President is calling on the Congress to immediately begin work on business tax reform that achieves the following five goals: (1) cut the corporate tax rate and pay for it by making structural reforms and eliminating loopholes and subsidies; (2) strengthen American manufacturing and innovation; (3) strengthen the international tax system; (4) simplify and cut taxes for small businesses; and (5) avoid adding to deficits in the short-term or the long-term.

Consistent with these goals, the Budget includes a detailed set of business proposals that close loopholes and provide incentives for growth in a fiscally responsible manner.

The Administration proposes that these policies be enacted as part of business tax reform that is revenue neutral over the long run. As a result, the net savings from these proposals, which are described below, are not reflected in the budget estimates of receipts and are generally not counted toward meeting the Administration’s deficit reduction goals. However, as part of transitioning to a reformed international tax system, the President’s plan would impose a one-time transition toll charge of 14 percent on the $1 to $2 trillion of untaxed foreign earnings that U.S. companies have accumulated overseas. The Budget proposes to use the one-time savings from this toll charge to pay for investment in transportation infrastructure.

Certainly, a substantial number of Republicans in Congress would be in agreement that the corporate tax code is too full of \”special deductions, credits, and other tax preferences,\” and that a revenue-neutral tax reform to simplify the tax code and bring down tax rates is a worthy goal. The problems arise when you start digging into the details.

Table 12-3 in the chapter lists about 67 provisions of the corporate income tax that the Obama Administration proposes altering for this grand trade-off. I\’ve created a table of the 10 provisions that would increase federal revenue by more than $1 billion in 2017 (some of the provisions take a year or two to phase in).

This list of corporate tax revenue-raisers, waiting to be traded off for lower rates and tax simplification, raises several questions.

1) As you can see, adding up the 10 provisions in the table would raise an estimated $49 billion in revenue. However, the total revenue raised by all 67 provisions in the table is only $18.9 billion. This arises because many items in the table do not increase tax revenue, but instead spend it. For example, there is $13.5 billion in 2017 in extra tax breaks for various provisions under the category of \”Simplification and  tax relief for small business.\” There is another $11.7 billion for various tax breaks under heading of \”Incentives for manufacturing, research, and clean energy.\” Clearly, the temptation to redistribute the \”special deductions, credits, and other tax preferences,\” rather than ending them, remains strong.

2) As you look more closely at the revenue raisers, many of them fall into a few broad categories. The first three items, for example, have to do with corporations that have international operations. For a quick overview of what the specific proposals mean, you can check the explanations in the budget document. Here, I\’ll juse make the point that the U.S. is unique among the major economies in that it claims the right to tax the profits of U.S. corporations wherever in the world they are earned. Other countries only tax profits earned within their borders. Of course, this is one reason why U.S. companies sometimes seek to merge with a foreign firm and transfer their official ownership abroad. A foreign-controlled domestic company in the United States is taxed only on its U.S. profits; in contrast, if a company with the same structure is a U.S.-controlled firm, then the U.S. government claims the right to tax its foreign profits as well. This is a real issue for US corporate tax reform in a globalizing economy, and the approach in this budget document bascially just doubles down on going after revenue from abroad.

3) Some of the proposals here seem to be ideas whose time may have come. For example, the LIFO method of accounting for inventories refers to a last-in-first-out approach. Imagine a manufacutring company that buys a set of physically identical inputs over time, but the price of those inputs rises and falls. Thus, when the company pulls an item out of inventory and uses it, should it count as the cost the more recent purchase price, or an older purchase price (say, the FIFO or first-in-first-out method). There are reasonable arguments and well-established accounting rules for letting firms use LIFO and FIFO smooth out their expenses on fluctuating input prices over time. That said, corporations do use these tools to reduce their taxes. The International Financial Reporting Standards (IFRS) do not allow LIFO, which means that many international firms have already changed. In a globalizing economy, this seems like change worth making.

4) As the budget document notes, the Obama administration also proposed a one-time tax on the previously untaxed foreign income, which the budget estimates would raise $56 billion in 2017. As is well-known, U.S. corporations are holding something close to $2 trillion in profits they have earned abroad outside the United States, in part because they would have to pay taxes on those funds if they bring them back to the U.S., and so they keep some flexibility for making future foriegn investments if they wait before repatriating the funds. The budget proposes spending these one-time funds on transportation infrastructure. Again, this proposal assumes that the U.S. government should continue being the only country that seek to tax corporate profits wherever they are earned in the world, not just in the U.S. For those interested in reforming the corporate tax code, it will not feel \”revenue-neutral\” that the budget is proposing a net of $18.9 billion as tradeoffs for reforming the corporate income tax, while proposing that more than three times as much be taken out of the corporate tax system and spent on transportation.

5) Those who study business income in the U.S know that 90% of all U.S. businesses, now representing about one-third of all business income–and rising–do not fall under the corporate income tax. They are individual proprietorships or so-called S-corporations that instead are taxed under the individual income tax. Tinkering with the corporate income tax does not address this issue of businesses that are finding ways to organize themselves so that they are outside the traditional corporate income tax. For many economists, an important concern is that goal corporate income can often be taxed twice: for example, when a firm pays taxes on profits, and then distributes some of those profits as dividends that are taxed under the individual income tax. The true challenge of corporate tax reform is both to make sure that corporate income is taxed, so that corporations don\’t function as a huge tax shelter, but also to assure that corporate income is taxed only once, so there is no bias created against the corporate organizational form.

President Obama has put forward one vision of corporate tax reform as far back as 2012, and other proposals are floating around. But judging from how the issue is laid out in this year\’s budget, a revenue-neutral simplification that resolves the international issues and addresses issues of alternative corporate forms like S-corporations is going to be hard to find.

The Blurry Line Between Competition and Cooperation

I wrote \”The Blurry Line Between Competition and Cooperation,\” a short article published today at the website of the Library of Economics and Liberty.

If you aren\’t familiar with this libertarian-leaning website, it has several facets worth checking out regardless of your political persuasions. Along with the short articles like my own, the website includes:
Here are the opening paragraphs of my article: 

What is the opposite of \”competition\”? If you fear that this is a trick question and run off to check a synonym/antonym dictionary, you will find an answer that probably came to mind in the first place: \”cooperation.\” Indeed, many people view economics as morally suspect because they perceive economics as emphasizing competition, rather than the arguably more virtuous approach of cooperation.

When I bump into this concern, I often respond that economics seeks to analyze the world as it is, not as we might prefer it to be. We live in an economy in which consumers often seek the best deal; workers commonly seek the job with the best mixture of work conditions and compensation; and firms seek higher profits. If you want to discuss the real-world economy, diagnose problems and suggest solutions, the presence of competition and self-interest among individuals and firms is typically a useful working assumption. The study of economics and public policy would be quite different in a hypothetical world of perfect cooperators.

This response typically works, in the sense that the questioner is more or less satisfied with having received an answer. However, I fear that it concedes too much ground. Specifically, it risks conceding that competition and cooperation are, indeed, opposites, with vice on one side and virtue on the other. But this is a false dichotomy.

And the closing paragraphs:

If both competition and cooperation are understood as voluntary choices (and, after all, \”involuntary cooperation\” is an oxymoron), then a fully planned economy would be the opposite of both competition and cooperation. When government dictates prices and quantities, a planned economy eliminates the incentives of market participants—whether suppliers, producers, or consumers—either to compete or to cooperate.

Those of us who self-identify as economists should not wear the terminology of \”competition\” as a badge of shame, while wistfully contemplating a presumed ideal of cooperation. For the study of economics, as in the real-world economy, the concepts and practices of competition and cooperation are inevitably interlocking.