Except in rare cases, pharmaceutical companies develop drugs for the U.S. market. For drugs that make it in America, potential sales in Europe, Japan, Canada, China and elsewhere are gravy. Drugs that can’t make it in the U.S. are scuttled. Probable success in America is a necessary and sufficient condition for the development of new drugs. There are four main reasons for this: This is from Charles L. Hooper and David R. Henderson, “Expensive Prescription Drugs are a Bargain,” Wall Street Journal, September 13, 2022 (September 14 print edition.) Why did the Journal give it the title it did? It’s accurate. Here’s another excerpt: Research by Columbia University economist Frank Lichtenberg suggests that 73% of the increase in life expectancy that high-income countries experienced between 2006 and 2016 was due solely to the adoption of modern drugs. He also found that the pharmaceutical expenditure per life-year saved was $13,904 across 26 high-income countries and $35,817 in the U.S. Most Americans would pay $36,000 to live an extra year. We also address the fact that governments around the world free ride on Pharma’s R&D that we Americans pay disproportionately for. In short, it sucks to be us. But we still get a good deal, as the paragraph above shows.   (0 COMMENTS)

At TheMoneyIllusion, commenter Jeff recently argued: A common sense objection JSP [Joe SixPack] might make would be to ask for proof that authorities even *can* “stabilize” any of the quantities they talk about targeting. Isn’t it possible that a large economic system is simply too complex to “stabilize” in such a fashion? Has it ever really been demonstrated in all of history, excepting brief interludes supported by fortuitous tailwinds? Potentially, with a lot of effort, you could perhaps stabilize one dimension, one specific quantity, but not without creating such large stresses in other dimensions that you risk ripping apart the entire machine (a la American flight 587: I can see why people might say this, but I think it’s wrong.  It’s true that I’ve suggested that NGDP targeting would help to stabilize the economy.  But I bet you could find people who believe that a gold standard would provide for a more stable economy.  That doesn’t mean they favor using monetary policy to directly stabilize the real economy.  Rather, they think that pegging the price of gold at a fixed amount would indirectly help to provide an environment more conducive to overall economic stability. I certainly don’t favor trying to stabilize the real economy in the way a communist regime might have attempted with a 5-year plan.  Rather I favor stabilizing the value of money, in the hope that this indirectly leads to a more stable real economy. Instead of pegging the price of gold at a fixed amount, I favor pegging the price of NGDP future contracts at a specific amount.  In both cases monetary policy is merely trying to stabilize money in terms of one asset price, not trying to micromanage an entire complex economy. In the same comment section, commenter Alex S. correctly points out that the Keynesians are the ones that propose a complicated policy of macroeconomic stabilization: In the Keynesian world (in the policy world, this is the lens that both left- and right-leaning policymakers tend to think of the economy through—though they tend to differ on parameters such as effects of tax cuts) first comes RGDP, then PGDP (GDP price level), and then some afterthought called NGDP. You forecast actual and potential RGDP to get the output gap, and plug that into a Phillips Curve to forecast PGDP (inflation). Then, you combine your RGDP and PGDP forecasts to get NGDP that goes into an appendix, if even that. Thus, NGDP and any target applied to it, is intricately dependent on your RGDP and PGDP forecasts, making it difficult for Keynesians to see the relevance of NGDP. In the Keynesian world, the interest rate path that is communicated affects the output gap (RGDP against trend RGDP), which then affects inflation (PGDP). In other words, your instrument (interest rate target) comes ahead of your goals because it is your primary way of…wait for it…”communicating the stance of monetary policy.” This creates a lot of uncertainty about the one thing the Fed actually controls: the expected path of the level of NGDP. They are the ones guilty of thinking that monetary policy can skillfully control real variables such as real GDP and employment.  I say just control one nominal target, and let the real economy adjust to that nominal equilibrium. PS.  There is a rumor that I plan to retire tomorrow.  After working almost continually since age 13, I need a break. (I’m almost 67-years old.) But fans of market monetarism should not be discouraged, as not much will actually change.  I’ll still be discussing my ideas in my two blogs, and have a book on monetary policy that will come out later this year.  The main difference is that I’ll no longer collect a nice 6-figure income for working from home. Seriously, I’d like to thank all of the people that I worked with at the Mercatus Center.  David Beckworth is doing a great job as the monetary policy program director, and I am very optimistic about program’s future.  Also thanks to Pat Horan, who did a great job as program manager, and all of the other talented people involved in the program. (0 COMMENTS)

Jon Murphy’s post this morning reminded me of a job I had when I was 12 or 13 in which I helped internalize what otherwise would have been an externality. I posted about it briefly here, but I’ll say more. The house I lived in in Carman, Manitoba was on a busy highway about 1/4 mile from Syl’s Drive Inn. Don’t ask me why it it’s called “Inn” instead of “In.” I remember it as having one n in the 1960s, but my my memory may be imperfect. The Drive Inn, which opened in April each year and closed in October, was owned by Quentin Sylvester. It served chips (our word for French fries), hamburgers, hot dogs, milkshakes, soft ice cream cones, and pop (our word for sodas.) There was one nasty problem: some customers, after eating in their cars, would throw their garbage on the road. Either Quentin Sylvester was a very observant man or he got complaints from residents nearby. Either way, he came up with a solution: hire someone to clean the streets of garbage for about 3 blocks towards downtown from the drive-in. He came to me and offered me 50 cents per day to come to his drive in early in the morning (about 6:30 a.m.), clean the area on his property and burn the trash, and then scour the street (highway) for garbage over those 3 blocks. I accepted. (Many years later, I introduced my daughter to Syl and told her about how much I had been paid. He told me that he would have been willing to bargain to 75 cents. Damn!) Although I didn’t keep close track, my guess is that the trash over those 3 blocks was over 80 percent of the trash that customers dumped off-site. By the way, I have a vague recall (although it is vague) that after a few weeks of doing this, I realized that it wasn’t much bother to pick up other trash that clearly wasn’t from Syl’s. There wasn’t much of it. I didn’t pick up icky cigarette butts though. (0 COMMENTS)

The government of the United Kingdom will cap energy prices paid by households, which have jumped following the reduction of supplies from Russia. Apparently, one goal, if not the goal (since households could have been simply subsidized to dampen the shock), is to reduce the rate of inflation (see “U.K. Government to Cap Household Energy Prices for Two Years,” Wall Street Journal, September 8, 2022): The move is aimed at preventing inflation from rising even faster in a country that already has the highest rate among Western nations at 10.1%. If inflation can be reduced by price caps on a few goods, capping all prices would eliminate inflation. Why didn’t we think of that before? The error is that tapping one (relative) price—for example, the price of natural gas—will do nothing to reduce inflation, which is an increase in all prices irrespective of the movement of prices relative to each other. Perhaps the confusion comes from the fact that the measure of inflation (the Consumer Price Index or other similar indexes) must, of necessity, rely on the observation of actual prices, which incorporate both inflation and changes in relative prices. A change in a price is equal to its change relative to other prices plus inflation, the latter being, to repeat, a change in the general price level (see my post “The Elementary Basics of Inflation”). Another way to clear the confusion is the following. Suppose there were no inflation. The elimination by the Russian government of 40% of the gas supply in Europe would result in roughly the same increase in gas prices as we now see. The current rate of inflation, about 10%, is tiny compared by the recent increase in the European gas price of as much as 1000%. Without a cap, the jump in the price of gas would be compensated by a reduction of other prices as people would want to buy fewer other goods and services in order not to reduce too much their consumption of gas or gas-produced goods. (Technically, this approach is informed by the monetarist theory of inflation and by general-equilibrium theories where changes in relative prices come from a move along the production possibility frontier.) My argument is not only that price caps will merely hide inflation, which is pretty obvious. It is that price caps interfere with the change in relative prices, which is essential to the transmission of price signals regarding relative scarcities in the economy and, thus, essential to economic efficiency. Capping a price (say, gas) whose increase would have signaled an increased scarcity of the related good will have two efects: it will modify the statistical estimate of inflation, but without changing the underlying inflation at all; and it will mess with the price of gas relative to other goods.  Gas will remain no less scarce, as shortages or the need of government subsidies to producers will show. But the cap will blur the correct signaling of the new scarcity, encouraging more consumption and, without subsidies, less production of the scarcer good—that is, it will prevent an efficient adaptation to the new situation. This is why “we,” meaning Western governments and most economists, do not generally think about reducing inflation by capping prices, let alone by capping only a few prices. Ignoring this will have dire political and economic consequences. (Incidentally, a few rulers, like president Richard Nixon in the early 1970s, did think of controlling inflation with economy-wide price controls, and failed: see Hugh Rockoff, Drastic Measures: A History of Wage and Price Controls in the United States [Cambridge University Press, 1984], even if this author does not agree with all my argument.) (0 COMMENTS)

I live in Asheville, North Carolina.  Asheville is a major hub of craft beer production, something which I greatly enjoy.  I like to go to the pizza place down the road from me, order a pizza to-go, sit at the bar, and try different brews on tap.  Ordinarily, I do not pay too much attention to the bill.  The prices for the beers are all uniform, and my pizza order doesn’t tend to vary much, so I know what the bill will be. However, my last trip was different.  As I was waiting for them to run my card, I was looking over the receipt they gave me and noticed a charge at the bottom for the pizza: “Take-out container fee.”  I paid my tab and went home and did a little exploring.  I wanted to see if this fee was something imposed by the city or county or just something the restaurant wanted to do to try to discourage food and take-out waste.  Turns out, it was the latter: the restaurant imposed that fee to discourage people from using take-out containers that would just end up in landfills or as litter on the side of the road. The pizza place’s actions demonstrate the economic solution to externalities.  An externality is a cost imposed on individuals external to (i.e. not participating in) the commercial transaction.  The solution is to get the people internal to (i.e. participating in) the commercial transaction to take into account these external costs.  In technical terms, the solution is to have the externality internalized. Most economics textbooks will discuss various government solutions for internalizing the externality: cap & trade, taxes, and regulation tend to be the most discussed.  In his famous 1960 article The Problem of Social Cost, Ronald Coase pointed out that government solution need not be the only, or even primary, way to solve externalities.  Coase pointed out that property rights developed so that people can negotiate and internalize the externality themselves in a similar manner to my story above.  Coase did point out that transaction costs can prevent these negotiations from taking place, and that the government can act as a sort of “super-firm” to reduce the transaction costs.  Many textbooks will touch on Coase, but then glibly dismiss him by saying some variation of “but transaction costs are high and thus government must step in.” But are the transaction costs as high as one might think?  The issue of transaction costs is usually just asserted, taken as self-evident, and rarely (if ever) proven.  One thing that is generally not taken into consideration is a parallel set of virtues that developed along with property rights: social virtues (or the lessons we learn on how to live in a society). Typical externality analysis assumes that the people internal to the transaction do not care about anyone but themselves; the candymaker and their patrons do not care that the noise from their machines prevents the doctor next door from being able to hear his patients (to use Coase’s example).  But humans do not live in such a world.  Adam Smith and other moral philosophers discuss at length how we learn and care about each other.  We want to be both loved (i.e. we want people to like us) and be lovely (i.e. we want to deserve to be liked).  Consequently, we take into account the external costs of our actions, at least to some extent.  We want to be good neighbors, good stewards, good people.  Even in the abstract, we take “other people” into account in our decision-making processes.  I should note this point is not wholly original to me: I read James Buchanan’s discussion in Chapter 5 of Cost and Choice as laying the foundation of this point. The pizza restaurant in Asheville is trying to do what they consider to be “the right thing.”  And they are using economics to accomplish it.  Their behavior, as well as the general moral sentiments we all exhibit, suggest to me that the transaction costs of internalizing an externality are not as large as interventionists assume.  Consequently, discussions of taxes or other interventions are prima facie premature. Even in the face of highly complex issues such as global warming, we should not assume high transaction costs.  Just as property and property rights evolved to solve the highly complex (and high transaction cost!) problem of dealing with other people, so too did other virtues develop to help deal with other externalities as well. Pigouvian taxes are probably not the optimal (or even a welfare-improving) solution to externalities.  Given moral sentiments and the already existing internalizing effects they develop, already existing implicit taxes, and public choice issues, taxation would likely be suboptimal.  The burden of proof is on the interventionist to show that their solution would work, not merely assume that it would.   Jon Murphy received his PhD in economics from George Mason University and is an Instructor at Western Carolina University. (0 COMMENTS)

To the Founding Fathers it was free libraries. To the 19th century rationalist philosophers it was a system of public schools. Today it’s access to the internet. Since its beginnings, Americans have believed that if facts and information were available to all, a democratic utopia would prevail. But missing from these well-intentioned efforts, says author […] The post David McRaney on How Minds Change appeared first on Econlib.

The decline has been broad‐​based and dramatic. Some 146 out of 165 jurisdictions saw their scores fall from 2019 to 2020, the most recent year for which there is internationally comparable data. Some of the reasons for the decline include “massive increases in government spending, monetary expansion, travel restrictions, [and] regulatory mandates on businesses.” And although the report does not take a position on the efficacy of policy responses to the pandemic, it finds that the decline “Erases a decade’s worth of improvement in the global average and is more than three times larger than the global decline witnessed in the 2008/09 financial crisis. The coronavirus pandemic was undoubtedly a catastrophe for economic freedom.” The U.S. rating fell as did its ranking, from 5th in 2019 to 7th in 2020. This is from Ian Vasquez, “Global Economic Freedom Declined Sharply in Wake of Pandemic,” Cato at Liberty, September 8, 2022. Vasquez is discussing Economic Freedom of the World: 2022 Annual Report, published annually by the Fraser Institute in Vancouver, Canada and the Cato Institute in Washington, D.C. This project, which has been going for a few decades, is one of the most valuable data-mining projects in economics. It gives us a report card every year, with about a 1.5 year lag, on how economic freedom is faring in the majority of countries in the world. With the strong measures most of the world’s governments took to deal with the pandemic, from huge increases in government spending, to restrictions on travel, to closing businesses, and more, it shouldn’t be surprising that economic freedom fell more in a year (2020) than in any other year since the scholars started measuring it. Of particular interest to me, given my dual citizenship (Canada/U.S.), for a number of years recently Canada was economically freer than the United States. For example, in 2013 (2015 report), Canada had a rating of 7.89 out of 10 and was ranked 9th in the world, above the United States, which was rated at 7.73 and was 16th in the world. In 2014 (2016 report), Canada moved up, getting a rating of 7.98 and ranking 5th, while the United States, with a rating of 7.75, stayed at 16th. In 2015 (2017 report), the U.S. and Canada were tied at 7.94 with a ranking of 11th. In 2016 (2018 report), United States had a rating of 8.03 with a ranking of 6th while Canada was at 7.98 with a ranking of 10th. After that, Canada never caught up to the United States, but in 2017 (2019 report) both rose in the rating and the ranking. The U.S. rose to 8.19 with a ranking of 5th and Canada rose to 8.08 with a ranking of 8th. That was the peak ranking for both. In 2018 (2020 report), the U.S. fell to 6th although its rating rose slightly to 8.22. Canada fell to 9th, although its rating rose slightly to 8.17. They diverged even further in 2019 (2021 report), with the U.S. at 6th with a rating of 8.24 and Canada at 14th with a rating of 8.06. In 2020 (2022 report), the United States was 7th, with a rating of 7.97, while Canada was 14th with a rating of 7.81. I’ll have more to say as I work through this year’s report and compare to past years. (0 COMMENTS)

The rise of libertarianism in Latin American is making free market capitalism fashionable in recent years. Indeed, the popularity of intellectuals like Axel Kaiser in Chile, Gloria Álvarez in Guatemala or Javier Milei in Argentina would have been difficult to conceive a few years ago. In many cases, these icons and their supporters dominate the economic conversation on traditional and social media. Intellectuals on the left have not been slow to react to this surge in the popularity of free markets and accuse their defenders of being extremist. In ¿La rebeldía se volvió de derecha?, historian Pablo Stefanoni asks the question of whether being ‘rebellious’ is now a synonym of being right-wing. Historian Federico Finchelstein also explicitly equates economically libertarian ideas in Latin America with ‘post-fascism’ in his Breve historia de la mentira fascista. These comparisons are also common in mainstream American media. (Examples are to be found in academic journals and the press.) But free-marketeers are far from being far-right or fascist. If anything, this confusion just reveals the degree to which society has moved to the left in the past century. Indeed, as we will see, it would be impossible to call free-marketeers ‘extremist’ without taking into account a particular evolution of ideas and policies over time. Many of the most popular economically libertarian proposals in Latin America would have been described as ‘classical liberal’ just about a century ago. In Argentina, for example, Javier Milei initially became known because he called to eliminate the Central Bank. And in fact, Argentine classical liberals voiced their concerns about the existence of such an entity before its creation in 1935. Specifically, classical liberals (and even socialists) warned that political pressure on the Central Bank could allow governments to impose indirect taxes on everyone— which is exactly what happened. It is unsurprising, then, that there are renewed calls for eliminating this institution in 2022, after decades of high inflation. Yet the idea of doing away with the Central Bank, which was all but extreme some decades ago, seems ludicrous even to free-market proponents today. More generally, free-marketeers face an ideologically uneven playing field in Latin America. If we take government size as a variable, we notice that average public spending levels in Latin American countries has increased from being marginal to accounting for well over 30% of GDP. However, public discourse has become so skewed to the left that the ‘burden of proof’ lies on libertarians to prove why the size of the government should be reduced to a level that only a few decades ago would have been deemed compatible with classical liberalism and even social democracy. In the Uruguayan 2019 presidential election, for example, the mere idea of fiscal adjustment was described as ‘savage’ by the left-wing candidate. This shows to what extent leftist positions have become the standard against which ideas and proposals are to be measured. In The New Politics of the Welfare State, Paul Pierson argued that the development of the welfare state makes reducing the size of government an increasingly unpopular option, since so many depend on it for a living. In Latin America, the same logic can be applied to a country like Brazil in terms of trade: For decades, protectionist policies have created so many interest groups which depend on high tariffs that even Paulo Guedes, an ardent supporter of free trade who since 2018 is the Minister of Economy, faces serious difficulties in lifting them. Yet this does not preclude left-wing analysts from accusing him of being part of the far-right, as if the world with fewer protectionist barriers that existed in the past could not even be conceived. Left-wing intellectuals are using the term ‘libertarian’ in order to identify extremism: But this ‘extremism,’ at least with regards to economics, is merely a function of time. Central banks, tariffs, the very size of government: Many ideas that are promoted by libertarians were, in the past, backed by classical liberals and even progressives whom nobody would have accused of extremism. Just because the anti-capitalist left has become mainstream in Latin America in recent times does not mean that there are no precedents for free-market capitalism, so next time you hear someone describing free-market economics as extremist, remind them of historical context — They will have to think again and offer actual arguments in order to delegitimize capitalism. If they are able to.   Marcus Falcone is the Project Manager of Argentina’s Fundación Libertad the host of the Téngase presente podcast and a bi-monthly contributor to Argentina’s edition of Forbes. (0 COMMENTS)

Among the many explanations or interpretations of the roaring buzz that followed the death of the queen of England and the proclamation of the new king, I note three plausible ones, from the most comforting to the most concerning—in a classical-liberal or libertarian perspective. The first, optimistic, interpretation is that people (by which I mean “most people”) like a hands-off distant sovereign as opposed to an omnipresent harasser. They would rather see the photograph of a constitutional, i.e. limited, monarch in government offices than a meddling and divisive fifty-percent-plus-one president. The queen has arguably never done anything against one of her subjects, contrary to Trump or Biden. In a fertile imagination, the queen might evoke Anthony de Jasay’s “capitalist state,” which reigns but does not govern, that is, does not impose costs on some subjects for the benefit of others, and whose only role is to prevent the establishment of a state that would govern. This overly optimistic view is attenuated by the fact that the queen did allow the decline of English liberty (although she could probably not have prevented it). As a symbolic representation, compare the 96 cannonballs that mourned her passing with the interdiction for any subject who is not in her majesty’s service to have a revolver in his nightstand drawer. Moreover, by any account, the start of the decline of English liberty preceded Elizabeth II’s reign anyway. A second interpretation is that people simply like ceremonial rites, decorum, and tradition, which is very different from what they get under egalitarian and totalitarian democracy, a sausage factory of discriminatory laws that take sides for some subjects and against others, and change every few years under the cheers of a passing numerical majority and the shouts of an exploited minority. Passing through checkpoints is not a ride in a carriage drawn by white horses. A ceremonial king or queen makes the subjects feel above all that. As de Jasay notes, however, a state that looks innocuous may just serve to “disarm mistrust.” In this perspective, the main benefit of the good queen may be a fairy tale for her subjects to dream about. They love royalty like they are fans of celebrities. The propaganda power of the state should not be ignored. Instead of a queen or a king, the French have the timeless Marianne, an attractive woman who represents the republic (see image below). How can that be dangerous? The third and most pessimistic interpretation of the buzz around Elizabeth II and Charles III, is that people may long for a glamorous and powerful sovereign to obey. James Buchanan was caught wondering if individuals really want equal liberty as classical liberals have assumed for a few centuries. The British cry “long live the King” could be analogous to the proud “Trump is my president” or possibly “Biden is my president” of  Americans. The actual mix of these explanations across the different individuals may determine how far we are down “the road to serfdom.” (0 COMMENTS)

Obviously not, but it’s worth considering why they are not. In America today, the woke are mostly known for two characteristics:1. Concern for the disadvantaged.2. Favoring oppressive (and often bigoted) policies to advance the interests of various groups.One famous woke tactic is to try to shut down innovation with claims of “cultural appropriation”. They might try to cancel a person for producing a work of art merely because the artist belongs to the “wrong” ethnic group. That’s pretty much the textbook definition of bigotry.As recently as 1997 a white author wrote Memoirs of a Geisha.  The film version starred a Chinese actress (Ziyi Zhang.)  That sort of multiculturalism is increasingly taboo. Miniso is a retailer that sells Japanese-styled products.  Irene Zhang reports that Chinese nationalists are complaining that Miniso is engaged in cultural appropriation: A few weeks ago, Chinese social media users found a post on Miniso’s Spanish Instagram account selling qipao-clad Disney dolls as “Japanese geisha.”Cue the patriotic boycott. With 2442 likes, the third top comment under Miniso’s corporate statement on Weibo reads, “Don’t bother. Please close your stores, thank you.” So apparently Japanese geishas are not allowed to wear a qipao?  Are Chinese people allowed to wear Italian suits?   I’m guessing that Italians are flattered if foreigners wear their elegant suits.  Chinese nationalists ought to be proud if Japanese dolls wear the equally elegant qipao.  And the bigotry also operates in the opposite direction: Eager to violently impose unenforceable cultural borders, nationalists have carried out shocking abuses of power — like in the case of Suzhou police detaining a woman for wearing a kimono.  So why don’t we consider Chinese nationalists to be woke, given that they have adopted some of the worst aspects of wokeness?   It’s a mistake to define any cultural movement along a single axis.  Woke people would insist that they merely want to help the unfortunate.  Critics often claim that the woke are nothing more than bigots engaged in reverse discrimination and cancel culture.  Reality is more complicated than either of these caricatures.  (I recommend this long Noah Smith post on wokeness, which discusses many of its positive qualities, but ends with some reservations about their tactics.) Right wing nationalists in places like China and India increasingly adopt the language of the woke to pursue entirely different goals than the woke pursue in America.  The outrage of Chinese nationalists is not about concern for the oppressed—it’s been 80 years since the Japanese were oppressing the Chinese people.  Indeed the biggest recent problems in China have been the CCP killing tens of millions of their own people.  Their motivation is pure nationalism. (Thus they do not express concern about the Uyghurs or Tibetans.)  Unfortunately, the worldwide nationalist wave is far from cresting.  I fear that Ukraine is merely the canary in the coal mine—much worse will come unless the world returns to the globalization drive of the 1980s and 1990s.   (0 COMMENTS)