Gov Official: Your drug is too expensive.
Pharma: It costs us a lot to develop, we need to charge 100 for it.
Gov Official: 50.
Pharma: No, we cannot sell it this cheap. How about 95?
Gov Official: Nope, it’s either 50 or nothing.
Pharma (grumbling): Ok, 50, but we’re not happy.

Here’s how I think they’ll go:

Gov Official: Your drug is too expensive.
Pharma: It costs us a lot to develop, we need to charge 100 for it.
Gov Official: 50.
Pharma: Let us think about it.

Pharma leaks a story about government death panels putting a value of life. Some congressman are asked about it my a news station friendly to the opposition party. A bipartisan effort is made to care for the needy.

Pharma: We thought about it and it’s still 100.
Gov Official: Ok.
Pharma: Next year, we’ll have a cost of living increase. It’ll be 110.
Gov Official: Let us think about it.
Pharma: Maybe this should a public discussion.
Gov Official: No need, 110 is very fair.

Your ability to negociate is exactly defined by your ability to walk away. In many of these cases, there is no way that the government will walk away. If anything, it’s the providers who routinely threaten to walk away from Medicare!

What do you think that doctors and patients would feel and do if there was a guideline for what fraction of a doctors Medicare cases could be prescribed brand-name medication or referred to specialists? The reason that the US government doesn’t do this now is because people don’t want it to do it. In other countries, the general population accepts this (in large measure because the richer, more educated, population who would protest is the one who ends up getting those brand-name medications and expensive procedures).

One of the most irritating things about the health care debate from the liberal side is that they propose often very sensible ideas, but then fail to actually argue that it should be done, saying they’ll press for them in 2016 if only you agree to spend a few billion dollars now.

Two weeks ago, as the FDA revoked the license for Avastin for breast cancer as evidence mounted that it is ineffective and it may even be detrimental. Medicare immediately announced it would continue covering it at full cost! What is stopping Medicare from taking advantage of this long-hanging fruit: stop paying for a very expensive treatment that probably makes people worse. It could do it now. There will be a backlash, sure; why won’t there be one in 2016?

How can I be poorer than I thought? How can a society be poorer than it thinks? A few thought experiments

1. Researcher A thinks he found a cure for prostate cancer and takes out a patent. When the FDA reviews the evidence, it turns out that the data was mis-interpreted and it is no better than placebo. A is no longer rich. Also, society is much poorer because it does not have a cure for cancer.

2. Young Athlete B thinks that he can make the professional leagues. He knows he won’t be the MVP, but he’ll get drafted. It turns out he does not get picked by any team. B is poorer than he thought. Society, however, is pretty much the same: all of the extra income that B lost is not going to someone else. However, it is still possible that there was mal-investment: B spent his teenage years training instead of getting an education. If many young people do that, then it is possible that society ends up poorer than it otherwise would be. However, society is no poorer when compared to the moment just before the draft: it had M would-be-atheletes and expected to end with N < M draftees, and this is exactly what happened.

3. Rich Non-Profit Institution C has a large old art collection, which it values at $1B. Due to the crisis, it sells off its collection to focus on its mission. At auction, the collection only raises 0.5B. C is much poorer, but society is just the same. This type of being poorer does not aggregate. After all, there was someone else who thought they would have to pay $1B for the collection and is actually richer. The use value of the artworks did not change. There is no mal-investment either. This is an instance of a pure aggregation fallacy.

4. Baker D has 1000 cookies to sell for $1/each at a sale. However, only half as many people show up and he only makes $500. D is poorer than he thought. Society is no poorer before the sale starts. Of course, even a large society can think it would be able to export some good and then it turns out that people do not want to buy it.

*

A common conception of the crisis is that There were too many houses built in the US as people thought they could get rich on real estate. It turns out that house prices will not rise forever, so people are actually poorer than they thought.

This makes no sense: if there are too many houses in the US, then the US is richer than it thought, not poorer. People who own the houses might be poorer as owners, but even they are richer as potential buyers (after all, most people sell their house when they want to buy a new house). This wealth loss does not aggregate as what one person will have lost is exactly offset by another having to pay less. There was no misperception of the use value of the houses. If there are “too many” of them, that’s a good thing!

There might be a small effect, where Americans thought they could export their houses to incoming immigrants.¹ As immigration dries up (and, in the case of Mexico, it might have gone into reverse), there are fewer people willing to come work in exchange for houses on US soil. Is this the narrative of the recession: Americans built a lot of houses for Mexicans immigrants, but then the government did not let the Mexicans come and buy them. Not really very convincing (it could be true, though—look at the states which had the biggest busts).

I can hear the objection: if having too many houses is so great, how come Detroit isn’t booming? Well, in the case of Detroit (and other similar cities), the empty houses are a symptom, not a cause. The city of Detroit is losing population despite having cheap housing; not because of it. Do you think the city would be better off if it bulldozed enough houses to get prices all the way up to, say, Cleveland prices? During the New Deal, people actually did things like this, culling millions of pigs during a crisis, but most economists now think that it totally misguided. Additionally, the Detroit example does not apply: there are issues with the sort of population that is attracted to very low rents and abysmal public services. They are often those without a job or prospects of ever getting one. But, again, this problem does not aggregate: if every city had lower rents, these people would not move to all of them (there are only so many of them).

*

There is still a whole lot of naïvety in the above argument.

After all, just because there are more houses and people are richer, there might still be major rigidities in the economy that make it so that simmultaneously (1) there are a lot of empty houses and (2) there are fewer households being formed. As it turns out, this is exactly what is happening. This is a mix of behavioural factors (households, like companies, don’t want to mark to market when prices are going down, although they were often happy to do so on the upswing), and contractual rigidities. But these rigidities are not about wealth, at least not real wealth. And here, I stop disagreeing with Scott Sumners and direct you to him for the argument on NGDP.

¹ Why not consider selling a house to an immigrant a form of export?

Slobodan Milosevic arrives at the UN War Crimes Tribunal in The Hague, 2000

1. Rumours abound that Qaddafi might be seeking an exit strategy. One of the issues that must be on the table is whether Qaddafi should stand trial for his crimes. Officially, Britain is saying that yes, of course.

2. Traditionally, the outcome for Qaddafi would be a nice comfy house in the French Riviera, forever surrounded with syncophants scheeming a return to power and eventual, embittered death in luxury. Not sightly, immoral even.

3. However, as Benjamin Constant pointed out 200 years ago, you should never give a man in power the choice between keeping that power (by any means possible) and facing the guillotine. While the guillotine is off the table, the feeling remains. Qaddafi must now either (1) fight it out or (2) end in humiliation.

4. If Milosevic had reasonably expected to end up in court, would he have given up so peacefully? Milosevic is the best-case-scenario for the American action: an example of an air force only action that resulted in the desired political objectives.

5. The embarassing thing is that No one has the power to negociate peace with Qaddafi. No one can negociate away the possibility of ICC prosecution in exchange for peace. Effectively, the ICC treaties have made peace negotiations illegal. Not all peace negotiations, of course, just those that would interest Qaddafi. Which is effectively the same.

6. The last point is not strictly true, the US could give Qaddafi exile privileges. Probably. How would the American Courts react to an extradition request?

The idea that you need to protect patients from themselves and so, you cannot know what your own DNA is is something for another day.

[These results] reminds me of the commonplace observation that while charters might work for some students — say, students with engaged parents — the poorest, most difficult-to-educate kids don’t benefit from charters. One gets the impression that the opposite is true. Better-off students don’t need charters, while poor students seem to get a lot out of them.

This might be why it’s poor parents who campaign for charter schools and better-off liberals who are againts them.

Until recently, it was always argued that the Chinese central bank would never abuse its position vis a vis the US because a US fiscal crisis would become a US economic crisis and that would hurt China through its export dependency. Mutual Assured Economic Destruction.

It turns out that China has, to a larger extent than previously appreciated, decoupled from the US. It’s not so export-dependent. A crisis can be pretty nasty in the US while China chugs along. So, MAED is not true. China could probably punish the US much more than it hurts itself.

I guess that people in Washington and Beijing have already started taking this into account in China-US relationships, but I haven’t seen it mentioned in public too often.

Greg Mankiw writes an open letter to the POTUS-elect telling him, amongst other things, to listen to his economists.

Mankiw’s advice a couple of months back was vote the economics advisor, not the candidate. In this aspect, Obama won easily. Yet, one always had the feeling that his economics advisors weren’t aware that Obama doesn’t have Reagan’s views of economics.

One of the interesting things in the first months of the presidency will be the tension between Obama’s plans and his economics advisors ideas. As Mankiw points out, McCain’s health-care plan (one of McCain’s better ideas but bad politics—a clear case of a candidate advocating good policy over good politics) was actually advocated first by Obama’s own Jason Furman (who also called Wal-mart a great progressive success story).

Under a Democratic congress eager for change power, I fear that the Chicago economists will be rapidly put to the side.