Often, when we observe that something does not work correctly (that is, according to consumer demand and the likely opportunity cost of production), we discover that a restraining regulation is the culprit. Consider hearing aids. Why are they so expensive, typically thousands of dollars? Until two years ago, a Food and Drug Administration regulation forbade their sale over the counter and required an audiologist’s prescription (Dominique Mosbergen and Julie Jargon, “FDA Clears Hearing Aids for Over-the-Counter Sale,” Wall Street Journal, August 16, 2022). Whether we model the prescription obligation as a government restriction on supply or as an excise tax on consumers, the effect was higher prices, a reduction in the size of the market, and less incentive for innovation. Who knew what consumers were missing? We got part of the answer when Apple announced that it will soon offer a software update for its $250 AirPods Pro 2 that will give them a hearing-aid function for low-to-medium hearing loss (FDA restriction will remain in place for more severe cases). The conspicuous shape of the AirPods has the drawback of advertising that one is hard of hearing, but some old people may think that wearing them looks cool (see Ben Cohen, “Apple Has a Hot New Product. It’s a Hearing Aid,” September 13, 2014). This new competition from outside the previously regulated market will likely cause a fall in the prices of more conventional hearing-aid devices. How many months earlier would people with hearing problems have been able to use the new device if it had not been regulated out? It is true that a technological innovation or the adaptation of existing technology was necessary, but technology depends on research and research depends on the expectation that its products can be profitable. We still have to wait to see how well the AirPods will work as hearing aids, but we know that this innovation and many others are less likely to happen if they are legally impeded. The story illustrates a more general argument for individual liberty, well formulated by Friedrich Hayek (see Volume 1 of his Law, Legislation, and Liberty, originally published in 1973): Since the value of freedom rests on the opportunities it provides for unforeseen and unpredictable actions, we will rarely know what we lose through a particular restriction of freedom. … And so, when we decide each issue solely on what appear to be its individual merits, we always over-estimate the advantages of central direction. On the market, you don’t have to “vote” with your single ballot to get what you want or to hope that entrepreneurs and innovators will offer you goods or services you would want if only you knew they existed. The only requirement is that enough consumers, but not necessarily a majority or some politically vocal minority, will be probabilistically willing to pay for it. Contrast this with the ideal government of Rexford Guy Tugwell (1891-1979), a believer in government planning and close collaborator of Franklin D. Roosevelt. In a 1932 American Economic Review article, he wrote: New industries will not just happen as the automobile industry did; they will have to be foreseen, to be argued for, to seem probably desirable features of the whole economy before they can be entered upon. (See also my Regulation review of his 1933 book Industrial Discipline and the Governmental Arts; also available in pdf format, pp. 71 ff.) On the political “market,” could you have effectively voted for iPhones or AirPods that can be used as hearing aids? Lobbying politicians or regulators is costly, especially for what only exists in entrepreneurs’ or innovators’ minds. How do we know what we are missing with the 188,346 pages of federal regulations, not counting state and local regulations? The question is relevant in all countries. ****************************** (0 COMMENTS)

As I’m sitting here writing this, I’m in a record/cocktail lounge sipping on a negroni.  One of the owners, who makes the best cocktails west of the Mississippi River and is dressed like the guys from Wayne’s World, were sponsored by Buc-ee’s, and I were chatting about the comings and goings of the food scene in town.  In town we have this wonderful thing called the Beer-muda Triangle: three craft breweries that offer live music and a welcome respite from Busch Light and Stag.  The owners and brewmasters of these breweries are here with us in our conversation. The topic of the day: how to best support the town’s monthly First Friday, sort of a pub-crawl-meets-art-exhibit.    These guys working together is nothing new; they’ll collaborate with other businesses and each other to introduce novel ideas.  For example, two of these breweries don’t have food service licenses.  To save on the cost, they’ll stock some restaurants’ menus and you can order directly through them, add it to your tab, and get the food delivered from a few doors down.  Talk about a win-win-win!  The brewery doesn’t need to foot the expense and liability of a kitchen, and they get to keep your butt in a seat.  I don’t have to leave to get food and only have one bill to deal with.  The restaurant doesn’t need to foot the expense and liability of a liquor license and they get to keep selling their food to people who aren’t even on property!  These kinds of collabs are great ways to compete and still complement each other. Competition is often viewed as cutthroat.  Firms can use the political process to protect themselves from competition or target their competitors. For example, The Wright Amendment of 1979.  Repealed in 2014, the Wright Amendment was a federal law that governed traffic at Dallas’s Love Field.  Enacted after Southwest Airlines’s refusal to vacate Love for Dallas-Fort Worth airfield, it prohibited any airline from operating transport-category aircraft with more than 56 seats to anywhere beyond Texas and the surrounding states. (American Airlines, a major competitor to Southwest and also based in the DFW area was grandfathered in, of course.) As I sit sipping on my cocktail I’m mulling these ideas around in my head.  Who said competition needs to be cutthroat and adversarial?  At the end of the day, everyone around me is competing for my hard-earned entertainment dollar.  Yet, here they are, fully aware of their competition and seeking to create their own niche.  It seems counter-intuitive that they would be here, effectively undermining their competitive edge; however, these guys understand the environment they operate in.  They can’t compete with the macro-breweries and chain restaurants on price, but they can on variety.  This additional variety creates more wealth; not just for the Beer-muda Triangle, but for all of us as well.  We have a wealth of choices and novel experiences available to us to spend our entertainment money.  Working together, but with their own self-interest at heart, these guys compete, collaborate, and create. In a world where open and honest competition is in short supply, it is encouraging to see that at least in our own microcosm the utter cynicism of the world around us has yet to take hold.   (0 COMMENTS)

The story was NOT apocryphal. An email from Marjorie Oi, the widow of the late economist Walter Oi, prompted this post. I had written an appreciative piece in Regulation in 2014, shortly after Walter Oi died in December 2013. I often don’t like the titles that editors choose; I usually prefer my own. But I couldn’t have done better than the title that the Regulation editors chose: “The Moral Vision of a Blind Economist.” It emphasizes Walter’s work in helping end the draft and keeping the draft proponents at bay when they wanted to reintroduce it. By the way, reading it now after not having not done so for years, I think that it’s in my top 20 of the over 400 popular pieces I’ve written. I want to quote one passage before I get to the passage that Marjorie emailed me about. One example of Walter’s persistence in his professional work is his role in helping prevent the reintroduction of the draft. From time to time since the draft ended, there have been calls for renewing it. One happened in the late 1970s, after a few years in which the U.S. military was not recruiting the number of high-quality people it wanted. Sen. Sam Nunn (D-Ga.) led the charge. Walter, like Meckling, the Hoover institution’s Martin Anderson, and Milton Friedman, realized that the all-volunteer force needed defend- ing, and he did so. He attended the Hoover-Rochester Conference on the All-Volunteer Force in December 1979, the first conference on the draft to be held since the 1966 Chicago conference. The papers and proceedings of that conference were published in the 1982 book Registration and the Draft. Walter, who loved pithy lines, gave a great illustration in response to the claim that a draft would conscript from the powerful as well as the weak. Said Walter: “The Commonwealth of Massachusetts gave [draft] deferments to all members of the legislature and to the fellows of Harvard College.” Now to the passage in my article that Marjorie referred to. I first met Walter when I was a graduate student at UCLA and he came to give a paper on workmen’s compensation in our Law and Economics seminar, run at the time by my mentor, Harold Demsetz. Walter was well along in his presentation and had actually put some numbers on the board and, if I recall correctly, an equation or two. i was sitting beside a student named Ed Rappaport. Ed wanted to ask Walter a question and so he raised his hand. He kept his hand in the air and I whispered, “Ed, he’s not going to call on you. He’s blind.” “Really?” responded Ed. “Yes,” I replied, “that’s why that dog is sitting in the corner.” That’s how good Walter was at presenting. This next story may be apocryphal, but I think it’s true. Walter was at a conference where another economist was writing a long equation on the board. I’m guessing the economist had to have been saying the terms out loud as he wrote. Walter raised his hand. “Yes?” the economist said. Walter: “That third term in the equation. Shouldn’t that be a minus sign, not a plus sign?” The economist turned and looked at the equation. After a pause, he said, “Oh, yes. Thank you.” It turns out that the story is true. Here’s how I know. In a September 18 email, Marjorie wrote: I was looking up some information for my daughter [Eleanor] to use in a presentation about Walter’s work in ending the draft and one of the articles I sent her is your Cato piece about Walter. In it, you mention the story of Walter noting an incorrect equation in a seminar at Rochester. I can now confirm that the story is true.  A former student of Walter’s, [X–Marjorie doesn’t have permission to quote him by name], just moved into my retirement community. He was a graduate student and at the seminar where Walter pointed out the error. I’ve heard the story many times from many people, but never from a primary source. [Franco] Modigliani was giving the seminar. Hope you are keeping well.   (0 COMMENTS)

Tyler Cowen recently linked to a study that suggests the public does not believe in supply and demand, at least when applied to the housing market: Recent research finds that most people want lower housing prices but, contrary to expert consensus, do not believe that more supply would lower prices. Before addressing housing, it’s worth noting that a similar sort of pessimism crops up in many other contexts.  And as we’ll see, it is a mistake to view this pessimism as a denial of the supply and demand model—something else it going on. Consider the following two scenarios, presented to an average person: A.  A firm faces much higher costs for an important ingredient to its product. B.  A firm benefits from much lower costs for an important ingredient for its product. In each case, what is the firm likely to do?  To an economist, nothing could be simpler.  Our models are symmetrical.  A profit-maximizing firm will have an incentive to raise prices in case A, and cut prices in case B.  (BTW, theory predicts these outcomes even if the firm is a monopoly.) Over the course of my life, I’ve found that this is not how average people look at things.  It’s not a question of not being aware of supply and demand, they have asymmetric pessimism.  What are the causes of this pessimism? 1. Perhaps the asymmetric pessimism is true.  Maybe firms really would raise prices in case A, but not cut them in case B.  In any meaningful long run sense this is not the case.  But it is not impossible that consumers might have noticed a few real world examples of prices not being cut right away, due to nominal “price stickiness”. 2. In a generally inflationary environment, people might correctly notice prices rising much more often than they fall.  Economists are interested in relative prices, but the average person looks at nominal prices.  If a firm raises prices by 2% in a year of 4% CPI inflation, that’s a price cut to an economist and a price rise to an average person. 3.  Perhaps people are reluctant to sound naive, or pollyannish.  I’m hardly the first person to notice that pessimism is more intellectually fashionable than optimism.  People like Stephen Pinker are viewed as notable contrarians merely for pointing to a bunch of positive trends that every half way educated person should already know about.  The world is getting richer, healthier and safer?  What else is new?  But apparently he has become a controversial figure. 4.  The media mostly reports bad news.  So what is a voter to think when asked if some new government policy would fix some long standing problem?  Do they expect to wake up next year to newspapers reporting that our economic problems are now solved and that housing is now “affordable”? 5.  Equating greed with high prices.  Actually, firms that cut prices after input prices fall are being “greedy”.  But many people probably assume that the profit-maximizing option in that case is to not cut prices.  Because they’ve already decided that firms are greedy, they then reason backward to the conclusion that prices won’t be cut. I suspect that people do believe that the laws of supply and demand apply to the housing market.  Ask them what will happen to apartment rents if a flood of immigrants pour into their town.  I suspect that they are answering a different question from what an economic pollster thought they were asking.  The pollster might think they’re asking, “Other things equal, how does more housing supply impact price?”  The public might respond as if asked “If this regulatory tweak happens, do I expected apartment rents to be lower a year from today?   In my view, these poll questions are not particularly useful.  Instead, envision a country where one political party is opposed to building more housing and the other political party favors a massive push to increase the supply of new housing.  And also suppose that these policy views are widely known among the public.  Now ask a young voter about to graduate from college which party is likely to make housing more affordable. We don’t need to speculate on that question.  A few months ago the British Conservatives campaigned on a somewhat Nimby platform, whereas Labour ran on a strongly Yimby platform.  Check out this survey from the recent election: You might assume that this pattern is due to the fact that richer people vote Conservative.  But it’s not that simple: In fairness, a portion of Conservative voters were retirees with modest incomes, who may have been more affluent when younger.   (0 COMMENTS)

[Editor’s note: This is part 3 of a three-part series. You can read part 1 here, and part 2 here.] Good institutions can be hard to come by, however, especially in The Mummy and The Mummy Returns. Institutions are at various stages of development in the story, from the ad hoc criminal justice system, the availability of goods and services in markets, the legal structure that incentivizes competition among private actors for the extraction of public resources such as Hamunaptra, and underdeveloped public goods relative to demand. The Mummy begins with Evelyn rescuing Rick from a death sentence that seems as arbitrary in how the law is delivered as in how it is undone. All Evleyn needs to do, apparently, is name the right price to buy someone out of jail – or an execution. Although this works out for Rick, Evelyn, and Jonathan, one is left wondering about the people who cannot buy their way out of an arbitrary incarceration and execution, as well as those who can.  After the Medjai first attack the riverboat carrying the two teams to Hamunaptra, Evelyn, Rick, and Jonathan lose all their supplies, tools, clothing, and horses. Fortunately, they are able to successfully buy replacements at a nearby community. Unfortunately, the market was not large enough to replace Evelyn’s lost toolkit, a niche product for which there is not sufficient market demand to incentivize suppliers to provide it on a regular basis. Instead, Rick steals a replacement toolkit from the American team and so demonstrates how in the absence of market exchange, some individuals may turn to theft instead, as people compete over scarce resources. The lack of reliable transportation systems also presents a problem in both films, including interruptions to riverboat services through attack and fire, the loss of horses on the wrong side of the river, and in the sequel The Mummy Returns, Imhotep taking exclusive control of the only available train system. However, at least in The Mummy Returns, the opportunity for exchange saves the day (and presumably Alex), when Rick is able to barter for private transportation systems that have evolved alongside – or to address – the poor provision of public transit. Incomplete markets are not the only institutional challenge the protagonists face, however. The Medjai spend three millennia guarding Hamunaptra to prevent Imhotep’s re-birth, but in an infinitely repeated game, it was truly only a matter of time before a determined librarian evaded their defense system. In the case of both Beni and Rick, the benefits of returning to Hamunaptra outweighed the costs, as the gold cellars and treasure without a clear claimant inspired several groups to compete over the lost city.  Perhaps instead of trying to forever hide Hamunaptra from the public eye, the Medjai could have established a property claim to the site after the pharaohs were gone. The site could even have been designated as a national treasure and protected as a public good (or a public bad that everyone must avoid). In fact, perhaps there were property rights before British imperialism – demonstrating how good institutions are hard to get back, especially when parties cannot trust each other. Either way, clearer property rights might have dissuaded extraction by Egyptologists and librarians that would eventually trigger the Hom Dai. The Medjai could have prevented trespassers and even reinvested the treasures of Hamunaptra back into the community. Instead, we observe the problem of the commons, where goods are ransacked and destroyed by interlopers, and the entire necropolis – and the wealth of Ancient Egypt – sinks into the sand dunes at the end. The opportunity cost of losing such a cultural inheritance would be immeasurable. On the other hand, several characters establish salvage rights to what they take out of Hamunaptra – despite Imhotep’s protests to the contrary. Conclusion Despite these economic losses, characters engage in the best strategic behavior they can. Evelyn uses game theory to outmaneuver the warden when bargaining for Rick’s life on the execution block, and she does the same with the rival Egyptologist when the American fortune hunters stake a claim to the dig site that Evelyn, Rick, and Jonathan had found first. Evelyn recognizes that adventuring is not a one-stage game, but a series of interactions that take place over a long time and require cooperation. It will have to remain an unanswered question: what would have happened had Evelyn pursued the study of economics rather than Egyptology and archaeology? (0 COMMENTS)

…people are utility monsters when it comes to themselves. But something happens when you have children. This is how Erik Hoel begins this thoughtful conversation with EconTalk host Russ Roberts. According to new parent Hoel, life is no longer “a constant, almost exhausting game of optimization.” He has found a great relief in no longer being a utility monster. (Russ, in one of several nods to his granddaughter allows that eventually one might get to become a “fun monster.”) This episode was inspired by a piece Hoel wrote on his Substack, in part bemoaning the vogue of media stories from people who regret having become parents. While Hoel (and Roberts) admit that there is some truth to the stories about the vagaries of parenting (domestic Gulag???), they both wonder why such stores haven’t prompted a mountain of replies about how great parenting is? Let’s hear what you have to say. Share your thoughts and experiences in the comments below, or drop us a line at econlib@libertyfund.org. We love to hear from you.     1- Mary the color scientist/ Dennett’s intuition pumps (KC post) how like parenting? (actual experience v “knowing from the outside” (RR bot convinving to people who don;t have kids) EH Universlaity. a certain class of parents who all try hard and do well-   2- Hoel says that becoming a parent has caused him to feel less jaded. What do you think he means by that, and how might this claim comport with your own experience? In a particularly lovely part of the conversation, Hoel recounts the joy of recounting “the lore of the world” to his son. (Hoel notes his fascination with whales, as Russ recounts his granddaughter’s with owls.) Says Hoel, “as you’re explaining these things, you begin to realize how absolutely crazy it is that we sort of live in a world of this much complexity and with this much background.” What are some examples of such lore you’ve rediscovered when explaining it to a child? Hoel offers a gentle critique of modern picture books, suggesting that earlier classics (think Jan Brett) offered much richer art. To what extent do you think that the more simplistic art (according to Hoel) in more modern picture books diminishes the wonder about “the lore of the world.” How much of this is related to the way in which we “read” such books to children?   3- Hoel and Roberts discuss the most recognized parenting styles: authoritarian, authoritative, permissive, and uninvolved. Which one do you think would be the most effective, and for what reasons? What should the goal of parenting be, and how does this affect the choice of parenting style? (Russ mentions the Pygmalion effect here, and both acknowledge the seemingly natural desire to instill our own preferences in our children.) Hoel suggests real life parenting calls for selecting a strategy based on particular contexts? What are some examples of situations in which each of the above styles might be warranted? For those of you who are parents, how have you navigated this selection process?   RR- never suggest treat kids as blank slates; parenting as an education process; Eh most parental pressure os based within standard school system- “rat race” to RR education of the great geniouses of the past- John Stuart Mill v Terence Tao 4- homesehooling/CPS- requires a culture of toleraance we’ve not done a good job in creating; too may reports waste time, so not spent on serious cases; RR in Americam today, so much more tolerance in some things, and so luch lessin othere? examples? EH fear of being judged as a parent     (0 COMMENTS)

Howard Hughes was one of the richest people in the world during his lifetime. He was also a bit of an eccentric fellow (putting it mildly). But I recently learned an interesting tidbit about his life that puts into perspective just how much wealthier we are today in ways that simply can’t be captured by mere reference to GDP accounting.  Hughes was an insomniac and a movie buff. Unfortunately for him, late night programming was very limited. He wanted to have more options available for what to watch during his sleepless nights. And, with his not inconsiderable resources, he managed to find a solution. He ended up buying a TV station, KLAS, in 1967 for the price of $3.6 million dollars, which would come out to just under $34 million dollars today adjusting for inflation. Now in control of his own private TV station, he could ensure movies would be broadcast at all hours. And apparently, it wasn’t uncommon for him to decide he didn’t like what was being shown and simply call the station to tell them to play something else instead. As a result, anyone else who was watching the station would suddenly find themselves confused as the movie they were in the middle of watching was suddenly switched to something else. Hughes was a wealthy man. But at the same time, he had to spend what in todays money would be tens of millions of dollars in order to get a service that was vastly inferior to what anyone with a Netflix subscription has available to them today. Hughes could have burned through his entire fortune without ever coming close to gaining the dizzying variety of entertainment that you or I can have today for a trivial amount of money. If you look at Hughes’ net worth during his life (even without adjusting for inflation!), by all standard measures he was a vastly wealthier person than I am. But I would never be even slightly tempted to exchange my current standard of living for the standard of living Hughes had during his life. And 1967 isn’t exactly ancient history. One doesn’t have to look that far back to see how the luxuries of wealthiest people alive a generation or two ago couldn’t even begin to approximate what today is so abundant as to be considered trivial.  If I suggested to someone right now that their grandchildren will have things that are beyond the reach of Elon Musk or Jeff Bezos with all their riches today, they may think that’s a fantastical claim. But it’s a claim that we can accurately make now about ourselves and Howard Hughes, or John Rockefeller, or any other wealthy person from even a generation ago. So the next time you settle down on your couch and log into your Netflix account, take a moment to be grateful that you don’t have to live like Howard Hughes. When you turn your air conditioning on to take the edge off a hot summer day, be grateful that you don’t have to live like John Rockefeller. When you put some antibiotic ointment over a little cut, thank your lucky stars that your medical care is so much better than what was available to the son of President Calvin Coolidge, who died when a blister on his toe got infected. And be grateful in the knowledge that your grandchildren will be thankful that they don’t have to live like Elon Musk or Jeff Bezos live today.  (0 COMMENTS)

Almost every time I see an expert interviewed on the macroeconomy, they suggest that a substantial portion of the inflation over the past 5 years has been supply side. That’s wrong; none of it has been supply side. I’d go even further; essentially none of the inflation over the past 50 years has been supply side.To be clear, I am speaking of the total cumulative increase in prices over 5 years, or over 50 years. It is true that some of the inflation in 1979 was supply side, as well as some of the inflation during 2008, or 2022. There have been individual years where negative supply shocks pushed up prices, but just as many years where positive supply shocks pushed down prices. Many experts implicitly seem to think there’s some sort of “ratchet effect”, where negative supply shocks push up prices, and then inflation settles back to its average rate. That’s false. When negative supply shocks are not causing inflation to rise above average, positive supply shocks cause it to fall below average. West Texas crude currently trades at just over $70/barrel.  The graph below shows real oil prices over the past 80 years (deflated by the CPI): Adjusted for inflation, oil prices are about the same as they were in the late 2010s, and about the same as they were in the mid-1970s.  That means that the nominal price of oil has risen at roughly the same rate as the overall CPI over the past 5 years, and indeed over the past 50 years.  Oil doesn’t explain long run inflation at all. [To be fair, there was a permanent one-time rise in real oil prices during 1973, when the OPEC moved the industry from being a competitive market to a cartel.  Since then, it’s been mostly fluctuations round a real price of about $70/barrel.] When oil prices rise faster than the CPI, it puts upward pressure on the CPI.  Technically, the Fed could prevent this, but due to its dual mandate it generally allows higher oil prices to pass through to higher consumer prices.  When oil prices rise slower than the CPI, it puts downward pressure on the CPI.  Because oil prices have risen at roughly the same rate as the CPI over the past 5 years, and even over the past 50 years, oil shocks have had essentially no long run impact on the cost of living.  None.  The same is true of food price shocks, supply chain shocks, and other types of supply shocks.  They are a non-factor for long run inflation. So why do so many experts insist that supply shocks played a big role in the unusual inflation over the past 5 years?  They seem to have made the following error.  They correctly observed that negative supply shocks pushed consumer prices higher during 2022, but forget to note that positive supply shocks had an equally powerful downward effect on inflation during other recent years.  In other words, the supply shock part of the problem really was transitory.  So why wasn’t the overall inflation rate transitory, as many had predicted?  The answer is simple.  All of the cumulative inflation since 2019 is demand side, and demand side inflation is permanent.  PCE inflation over the past 5 years has exceeded the Fed’s 2% target by a total of nearly 8%.  NGDP growth has exceeded 4%/year by a total of roughly 10%.  That’s the entire problem—supply shocks have nothing to do with it.  If anything, we’ve had enough positive supply shocks (mostly immigration) to hold inflation 2% below the level you would expect from the extreme demand stimulus that was provided.  The Fed actually got lucky. (0 COMMENTS)

Editor’s Note: You may have heard that price theory needs a revival. We agree. The economic way of thinking has of late been subsumed by mathematical analysis absent intuition. Fortunately, Professor Bryan Cutsinger is here to help. We are happy to present this first in what will [for now] be a monthly series in which Cutsinger presents price theory questions for your consideration. Professor Cutsinger will be present for two weeks for feedback in the Comments section, helping you to “solve” each problem. We can’t wait to see your responses!   Question 1: In his book, Basic Economics, Thomas Sowell (2015) writes, “the price which one producer is willing to pay for any given ingredient becomes the price that other producers are forced to pay for that same ingredient” (p. 20). With that quote in mind, consider the following scenario:  The demand to drink milk rises while the demand for milk in the form of cheese, ice cream, and yogurt remains the same. Assume that the supply of milk is perfectly inelastic. Explain why the elasticities of demand for milk in these other uses determine how much milk will be reallocated from these uses for direct consumption. (0 COMMENTS)

  I finally got around to watching a Cato Institute forum from May in which Cato health economist Michael Cannon discusses with health economist Luca Maini of Harvard Medical School and  health economist Pragya Kakani of Cornell Medical School the effects of Medicare price negotiation on drugs. The forum is “At What Price: Determining Pharmaceutical Prices in Medicare,” May 22, 2024. (You can listen at 1.25 speed.) The bottom line is that the negotiation will only slightly reduce the present value of the revenue stream that goes to pharmaceutical companies and, therefore, will only slightly reduce the discovery and introduction of new drugs. The person who lays this out most clearly is Professor Kakani. Her presentation is third, and goes from 41:30 to 55:40. Notice the requirements for a drug to be subject to Medicare negotiation. Kakani shows an interesting slide on that at the 46:49 point. The drug must be a brand-name drug, it must give rise to more than $200 million in annual Medicare expenditures, it must be on the market for at least 9 years (for small molecules) or 13 years (for biologics), and must face no competition from generics or biosimilars. She also lays out 3 other categories that are exempt from price negotiation. Kakani shows that in steady state, only $43 billion of Pharma’s $1.1 trillion (in 2022) would be on drugs subject to Medicare negotiation. (She assumes that the price negotiation has been in place for years and thus gets to a steady state.) That’s only a 4% hit. If the Inflation Reduction Act (which introduced price negotiation) cut the relevant drug prices by 50%, global revenues would fall by 2% (50% times 4%.) She then takes an extreme case: a drug with high Medicare exposure (2/3 of revenue from the US vs. the actual average of 30 to 40%) and a 67% reduction in prices due to negotiation (rather than the Congressional Budget Office’s estimate of 50%.) She then estimates that in present value terms, there would be an 11% drop in revenue. One reason is that the price negotiation comes after the drug has been around for a long time; the further out in time, the lower the loss to Pharma in present value terms. (She doesn’t state what interest rate she uses.) All the heavy lifting happens by the 54:40 point. At 1:07:00, Michael Cannon points out that Sam Peltzman found in the early 1970s that the 1962 law that required proof of efficacy reduced the stream of new drugs by 60%. That suggests an idea: repeal the 1962 law and have the FDA certify safety, not efficacy, as it did pre-1962 and then we would have way more innovation on net, even with the Medicare price negotiation.   (0 COMMENTS)