Wednesday, 29 July 2015

TPP Drug Trade-offs

I don't think that the extensions to drug patents hinted at under TPP are for the good. But it isn't obvious that they aren't.

Let's run the story.

Most new drug development happens in the US and EU, with more coming in now from China as well. It is ridiculously expensive to develop new drugs. Some of that is because the FDA makes things harder than they need to be, but a lot of it is real cost. The US has pretty strong drug patent protection to encourage investment in new drug development: nobody will spend hundreds of millions, or more, on drug research that might lead to one or two commercially viable breakthroughs if they can't reap the rewards on the ones that pan out.

On that story, New Zealand and others have been free-riding pretty hard. Don't get me wrong - this is great for New Zealand. We get a pile of generics out of India when they come off-patent here and the drug system saves tons of money. But we're contributing rather less to the general "let's develop more new drugs" effort. Price controls on pharmaceuticals do discourage new development (and here's similar EU evidence), and new pharmaceutical innovation saves lives.

You could imagine an international convention, agreed to by everybody, that would reduce global free-riding on research done in the EU and US in order to get more new drugs developed. We in New Zealand would pay more than we're paying now, but we'd also be paying a fairer share of the development costs of new drugs. Optimal pricing should still involve poorer countries paying less than richer ones, but you'd also have expected things like iPads to sell for less in New Zealand than in the US on the same kind of grounds - so that part might disappoint.

But think about the rhetoric on "doing our part" on global warming, and wonder why the same "doing our part" arguments haven't been made about pharmaceutical innovation to save lives.

Why am I still sceptical? The overall system still seems broken. First order gains in getting new drugs would come not by pulling a few more dollars out of places like New Zealand but rather by fixing the FDA so developing new drugs weren't so expensive in the first place. If there were an overall deal that improved processes at the FDA* while also making sure that everybody paid their fair share, that would be a winner for me.

At least that's my point estimate - I put a pretty wide confidence interval around it though.

* On that, I generally agree with Alex Tabarrok. See here here and here, for example. And Doug Bandow.

Tuesday, 28 July 2015

Returns to education and the decline of the Marines

Oh, folks will have fun working out explanations for this one.


Brookings suggests that increasing college graduation rates could be behind it, where a college degree is required to become an officer. The drop in the IQ threshold for getting a college degree then is reflected in the chart above. But that can't be all of it, as the Marines could increase the GCT requirement for admission if the parchment no longer signals ability and if ability really matters more than parchment. It seems more likely that they're just not able to draw as well from higher ability cohorts.

Other plausible candidate explanations, though without data. They're all testable though:

  • Higher opportunity costs for high IQ people since the 80s.
  • Greater cultural disparaging of the military in elite circles, so it is not aspired to by those of higher ability.
  • Decreasing trust in that military is a force for good or really much needed (see the decline as the Soviets turned friendlier under Gorbachev, the levelling off and rise around Gulf War I, and the resumed decline after that).
  • Fewer smart but lower income kids needing to use ROTC to afford college with expansions in student aid. 
I'd bet on the first and last being most important. 

A Hogan Compendium

Here's the complete list of posts by Seamus Hogan. Blogger doesn't make it easy to sort things by author, so I've just pulled them all into this post. I've bolded some of my favourites. They're sorted by category, then by date, with the most recent ones first. If I've missed any, let me know.

Cricket and Sports Economics:
Capital Gains Taxes. Seamus's argument against capital gains taxes, as best I'm aware, remains unanswered by NZ's CGT proponents.
Electricity markets
NZ Policy and Politics more generally.
Housing
Economics
The move to Wellington
The merits of the programme-that-was at Canterbury
Oh, Christchurch.
Miscellany
It all counted for, as Seamus might have put it, three-fifths of five-eights of bugger all for PBRF, but there's some great stuff in there.

And I will particularly miss his habit of emailing me pointing out errors in posts I've had in draft. I'll have to rely more heavily on post-posting review by readers leaving comment.

My NBR column on Seamus is here; the post of 18 July is here. His family are collecting memorial notes here

And here's Seamus's lecture on cricket, economics and the WASP.

Monday, 27 July 2015

Glass Mountain

We always kept a sharp eye on the ditches when I was a kid riding in the back seat. Why? The glint of a beer bottle meant $0.10. Collect a dozen of them and you've got a $1.20. So Mom and Dad would have to keep a foot hovered over the brake just in case one of us saw a bottle - or even better, an abandoned case of empties. Then off to the Altamont Hotel to turn them in.

The Canadian system worked because all the bottles were standardised. There were two dominant brewers who used identical bottles. State-run liquor outlets combined with a bit of distribution through licensees like rural hotels meant a very limited number of distribution outlets: the trucks that dropped off the bottles could presumably pick up the empties for the run back to the distribution outlet.

I don't know whether the economics of the Canadian set up stacked up, but it was a system that could have made sense given the way the rest of it ran. In all cases, you have to weigh up the costs of picking bottles up, making sure none of them were chipped or damaged, cleaning them, and getting them back to the bottler, against the costs of making new bottles. If you don't like monetary calculations and prefer some kind of environmental accounting, there's carbon costs from picking up old bottles, from the hot water needed to clean the old ones, the cost of the water itself, and of the detergents that then go out into the sewers.

Radio New Zealand reported on a pile of broken glass bottles in an abandoned quarry down in Southland. It looks like Invercargill does not have a great sorting facility, so Auckland's glass recycler doesn't want the product.
The director of Invercargill's recycling contracter, Southland DisAbility Enterprises, Ian Beker says even if OI would take the glass in Southland, the cost of freighting it there is not economic. He told New Zealand Geographic that the best thing Southlanders could do is put their bottles into the general rubbish bound for the landfill.
This prompted some twitterings about how New Zealand needs to move to a deposit scheme like the one I grew up with in Canada. But that's really unlikely to be a good idea.

First, we have beautiful diversity in packaging styles. Tuatara won awards for its lizard-themed bottles. Some brewers use a standard bottle, but lots of the bigger ones have their own custom bottles. That means that a deposit scheme would have to sort the bottles before they could be returned to their homes. The costs would not be low. Different shapes and sizes would mean a harder job cleaning them all properly. Further, you'd have to store small-volume niche bottles until you'd accumulated enough to send back to the brewer.

Second, any brewer who wants to run his own deposit scheme can do so. Some of the craft brewers with more expensive glass did so in Christchurch, but I've lost track of the state of play on that one.

If it is more expensive to clean and reuse a bottle than to press new bottles, we waste resources in recycling them. And I can't see any plausible externality story around it. Landfill operators have to buy land in competitive markets; if old quarries were more valuable as something else, somebody else would have bought it instead. Councils typically charge for rubbish collection. If they have the marginal cost of rubbish collection wrong, that's a bigger issue than just glass bottles. But think about it more carefully: glass is about the safest, easiest thing in the world to put in a landfill. It doesn't leach or leak. Nothing dangerous. No smells and nothing to blow away in a stiff breeze to inconvenience neighbours. It won't emit methane while decomposing. It eventually will turn into coloured sand.

It would be very easy to waste a pile of resources by requiring Invercargill to upgrade its facilities, just because some folks don't like the idea of that there is an old quarry full of old glass.

There's no shortage of land in New Zealand that can be used for storing old glass. If there ever were, the price of it would bid up, the cost of dumping would increase, and things that today aren't worth recycling would be. When I lectured on environmental economics as part of my current policy issues course at Canterbury, I'd figured that if Christchurch went through a Kate Valley sized landfill every year instead of every thirty, and if they were built on prime dairy land instead of scrub wasteland, it would still only cost about $2 per person per year in land costs for landfill.

Bottom line:

  • Landfills should charge tip fees that reflect the cost of building, maintaining and running them. There can be reason for undercharging to reduce littering, but the resulting mild subsidy to landfill will be general across all waste streams, not specific to glass, and glass is one of the less harmful things to have in landfills.
  • If it is cheaper to dispose of a glass bottle in a landfill than it is to clean it and return it to the bottler, or to use it as feedstock in making new bottles, that typically means we would be wasting real resources if we forced it to be recycled. Since transport costs matter and since small centres can't afford expensive sorting facilities, it can make perfect sense for some places to recycle glass and others to use landfill.

Previously:

Saturday, 25 July 2015

Prohibition's horrible tradeoffs

You grow pot in an illegal market; your toddler daughter eats a lot of it. If you take her to the emergency room, you'll likely be arrested. If you don't, very bad things could happen.

I applaud Shain Iperen for finally making the right choice.

But we should condemn prohibitionist approaches for making that a hard decision.
A drug expert has called on Northlanders to keep all drugs out of children's reach after an 11-month-old girl became seriously ill from eating cannabis her drug-dealing father left in the kitchen.

The father, Shain Iperen, was a drug dealer who only sought medical help for the girl 24 hours after she ate the dope, but initially denied any exposure by the child to drugs when questioned by doctors.

The 27-year-old only admitted what happened to her after toxicology results at Whangarei Hospital showed an extremely high level - at the upper most limit - of screening undertaken for tetrahydrocannabinol (THC, the active ingredient in cannabis) present in her urine.

The toddler was semi-comatose, unresponsive to voice, and only responsive to stimuli by movement of her limbs when brought to the hospital on February 27.

Iperen pleaded guilty in Whangarei District Court to two charges of dealing with cannabis oil, one of ill-treatment of a child, and a representative charge of manufacturing cannabis oil.
In how many US states must marijuana be legalised before New Zealand finally figures out that the UN convention is a bit less binding that it's thought?

Friday, 24 July 2015

In praise of academic paternalism

I've used this week's New Zealand Initiative column at The NBR, in part, to pay a little tribute to Seamus, whose funeral is today. 

I start out in The NBR piece by critiquing the ever-trendy push to abandon the standard economic curriculum in favour of critical theory. 

Unfortunately, at least some higher-ups in NZ academia think it a grand idea. One might suspect that social pressure among some of their colleagues makes having market-friendly economists around somewhat embarrassing for them. 

But there's also a sense that it might boost student numbers if we catered to students' innate preferences rather than trying to provide an education. Customer choice is important, but we abandon what it means to be an academic department if we drop core theory in favour of the flash-trendy feel-good. Paternalism is needed in academia because the students don't know what they need until they've studied it. It's the academics' job to keep abreast of what's important and to make sure that students are getting the training they need, regardless of what they think they want when they start the degree. If they want a degree in mush-headedness, there are plenty of other departments willing to provide certification in it. 

And from there, I talked about Seamus's contribution:
For the eleven years I taught in Canterbury’s economics department, we provided what I think was the country’s best technical training in microeconomics. That was due, in no small part, to my good friend, and then-colleague, Associate Professor Seamus Hogan.
Seamus died last Friday, aged 53, of a brain aneurysm.
Seamus trained a generation of Canterbury economists. His intermediate-level course in microeconomic theory gave every student the technical background they would need to understand either mainstream problems or those coming from the fringes. His honours-level capstone course built on those foundations to show students the cases in which the standard model worked, the cases in which it didn’t, and the ethical presuppositions of different frameworks. In highlighting just what was meant by an efficiency norm, it was deeply critical of parts of the mainstream consensus. But it simply could not be done without the technical and mathematical apparatus established earlier on.
To put it tritely, you can’t think outside of the box unless you understand the box very well indeed. Sure, you can stand on the fringes and yell about the evils of neoliberalism, as many of those re-tweeting Parker’s article like to do, but your critique will be as empty as Jenny McCarthy’s condemnation of vaccines. Seamus taught his students to build the boxes and then twirl them on their index fingers.
Seamus’s students knew how lucky they were to have received proper training in economics with him, rather than a Post-Autistic-styled curriculum. A memorial webpage is already filled with their tributes. One of his students, who spent time at the Reserve Bank before heading off for a doctorate at Berkeley, rightly identified him as the “key factor in making Canterbury economics graduates so well represented in Wellington.” Seamus set and maintained the rigorous academic culture in the department that would not compromise the quality of the teaching programme and that would not pander to trendy, but ultimately fruitless, critiques of the mainstream.
Being able to understand the standard framework matters because so much is built upon it. 
...
Earthquakes brought budget cuts. Scepticism of the value of rigorous theoretical approaches relative to Manchester-style critiques meant the end of Seamus’s courses, despite their popularity. Seamus died six months after moving his family to Wellington, where he had joined Victoria University’s School of Government.
Academia needs a little paternalism. The tributes of those who have gone through the courses should count for more than the whims of those who do not yet know better, and now will not get the chance to.
I'm back in Christchurch for the day serving as pall-bearer and will say a few words in memorial at the service.

Some in the Department at Canterbury have set up a GiveALittle page accepting donations towards the continuing education of the Hogan kids. I'd be surprised if Seamus hadn't adequate life insurance, as he was one of the most ridiculously conscientious people I've known, but if it feels good to help a little, hit the link. I've suggested that it be put towards continued musical tuition. It mattered a lot to Seamus, and they've lost their main tutor.

The bigger issues around what Economics departments now can and should offer are, for me, under a Somebody Else's Problem field. But I don't envy my former colleagues their task: I think they're now at a staffing complement of 8.5, including two teaching fellows, where before the earthquakes we were 19.6.

Thursday, 23 July 2015

LVRs and the Very Serious People

The Very Serious People understand the political constraints under which policy operates. They often overestimate the bindingness of those constraints, but the rest of us underestimate them. Here's Tyler:
I think of it this way: the People are Very Serious if they realize that common sense morality must, to a considerable extent, rule politics. At least if voters are watching.

So what is common sense morality in this context? It embodies a number of propositions, including, for instance (with cultural variants across nations):
  1. Political decisions should be based on what people and institutions deserve, based on their prior conduct and also on their contributions to the general good.
  2. Economic nationalism.
  3. Traditional morality, based on respect for authority, repayment of debts, savings, and hard work.
  4. Inflation is bad, in part because it violates #1 and #3, and in the case of the eurozone it often violates #2 as well.
  5. “I don’t care what you all say, the government should be able to find some way of arranging things so that I don’t have to suffer too badly from this.”
Now here’s the thing: common sense morality very often is wrong, or when it is right that is often with qualifications.
Therefore at the margin there is almost always a way to improve on what the Very Serious People are pushing for. The Very Serious People realize this themselves, though not usually to the full extent, because they have been cognitively captured by their situations. They see themselves as “a wee bit off due to political constraints,” instead of “a fair amount off due to political constraints.” So there is usually some quite justified criticism of the Very Serious People. Common sense morality is needed at some level, but still at the margin we wish to deviate from it.
Indeed. Now let's think about LVR policy. The first round could only ever take the edge off of the housing price run-up; the second round was targeted at investors when the main risk to financial stability came from owner-occupiers and when there was no evidence of risk to financial stability. As Mike Reddell continues to point out, and as we've argued here before, it is really really hard to come up with a coherent justification for the LVR policy as it was implemented or sold. Seriously - go read the stuff from Harrison that Reddell is citing. See also the NBR here.

The people inside RBNZ are not idiots. A lot of them know that the public justifications for this stuff are nonsensical.

What worse thing might they have been trying to forestall with the LVR policy? Being seen to be doing something slightly useless and minorly harmful can be a lot better than being forced to do something very costly.