What happens if we reduce drug prices by 70%?

Senator Warren's proposed policy fails a benefit-cost test:

Between 1982 and 2015, for example, the US saw the launch of 719 new drugs, the most of any country in the sample; Israel had about half as many launches. By looking at the resultant change in each country between mortality and disease, Lichtenberg calculated that the years of life lost before the age of 85 in 2013 would have been 2.16 times as high if no new drugs had been launched after 1981. For a subset of 22 countries with more full data, the number of life-years gained in 2013 from drugs launched after 1981 was 148.7 million.

How does Google auction ads?

Note the analogy to second price auctions--the highest rejected bid determines the price.  Because advertisers do not pay what they bid, they are willing to bid their values.

Fight in the Eurozone about negative interest rates

New EU Bank Head Christine Lagarde, pushing for lower interest rates and a weaker euro, said "We Should Be Happier To Have A Job Than To Have Savings," appealing to voters as producers, not consumers.

Lagarde's direct attempt at shaming Europe's fiscal conservatives was nothing short of shocking: normally ECB officials avoid naming individual countries in public statements, because their mandate is to act in the interests of the eurozone as a whole. But when Lagarde made her speech she had not yet officially taken over at the Frankfurt-based institution — she succeeds Mario Draghi on Friday.

We somehow doubt this "explanation" will fly with the German population, which sees itself as funding peripheral Europe's profligate ways for the past decade, even as it benefited from the weak euro to supercharge the German export machine.

Lower interest rates weaken the Euro because fewer people want to keep savings in euros at such low rates (they sell euros and, e.g., buy dollars to invest in the US), and more people want to borrow in euros (the carry trade), change euros to, e.g., dollars to invest in the US.  This weakens the euro relative to the dollar, which increases employment in the EU via an increase in export demand.  But EU consumers are hurt by higher import prices.

HT:  ZeroHedge.com

Switzerland vs Sweden

NY Times on Sweden:

Die-hard admirers of Scandinavian socialism overlook the change of heart in countries such as Sweden, where heavy government spending led to the financial crises of the 1990s. Sweden responded by cutting the top income tax rate from nearly 90 percent to as low as 50 percent. Public spending fell from near 70 percent of G.D.P. to 50 percent. Growth revived, as the largest Scandinavian economy started to look more like Switzerland, streamlining government and leaving business more room to grow.

Same article on Switzerland:

Capitalist to its core, Switzerland imposes lighter taxes on individuals, consumers and corporations than the Scandinavian countries do. In 2018 its top income tax rate was the lowest in Western Europe at 36 percent, well below the Scandinavian average of 52 percent. Government spending amounts to a third of gross domestic product, compared with half in Scandinavia. And Switzerland is more open to trade, with a share of global exports around double that of any Scandinavian economy.

HT:  MarginalRevolution.com

CPI Audio: EU vs. US antitrust

Audio presentation by some middling economists:

Never start a land war in Asia (or a price war)

Competition has brought pizza prices down to $0.75/slice in a midtown Manhatten, with a predictable response:

... [One of the competitors] Eli Halali made it clear that 75 cents was a temporary price point. He said he could not make money at that level and eventually would return to $1. He said that if Bombay/6 Ave. Pizza went back to $1, he would as well.

This public statement seems like what the FTC called an "invitation to collude" in its suit against Vlassis who made a similar offer to end a price war with News America:

If News America continued to compete for Valassis customers and market share, then Valassis would return to its previous pricing strategy, and the price war would resume.

..., Valassis made the foregoing proposal with the intent to facilitate collusion and without a legitimate business purpose. ... Valassis’ statements described with precision the terms of its invitation to collude to News America. If the invitation had been accepted by News America, the result likely would have been higher FSI prices and reduced output

FSI refers to newspaper inserts, the product in question.

HT: Greg Mankiw

Hard to Find Good Hitman

Outsourcing is fraught with perils. You give up some control over product quality and your supplier has different incentives. That is what happened when the Chinese businessman, Tan Youhui, sought to take out a competitor, Wei Mou. Not having the requisite skill set himself, he hired a hitman. But the hitman outsourced it to another hitman for half the contract value. Who then outsourced it again. Who then outsourced it again. Eventually, the fifth in the chain became incensed at how much the value of the contract had fallen, which eventually led to the police finding out about the plot.

Privately funded, Randomized Control Trials for policy

Results from the first four RCT's funded by Arnold Ventures.

Here are the results for charter schools:

The study found that students who won a KIPP middle school admissions lottery were 6 percentage points more likely to enroll in a four-year college than students who lost the lottery (47% of lottery winners enrolled vs. 41% of lottery losers). We view this finding as highly suggestive but not yet strong evidence of an effect because it did not quite reach statistical significance (p=0.085). The study also found a 4 percentage point increase in the rate of persistence through the first two years of a four-year college (30% vs. 26%), but this finding was not statistically significant and so is preliminary and not reliable (p=0.23). These effects of winning a KIPP lottery (i.e., the “intention-to-treat” effects) are the primary study findings based on the researchers’ pre-registered analysis plan.

However, only 68% of students who won a KIPP lottery actually enrolled in a KIPP school. In an exploratory analysis, the study found that the effect on these 68% (i.e., the “treatment-on-treated” effect) was a 9 percentage point increase in enrollment in a four-year college and a 6 percentage point increase in persistence. The enrollment effect approached statistical significance (p=0.085); the persistence effect did not. [2]

I am left wondering whether this effect is biased due to the presence of competition, e.g., there is some evidence that public schools get better when a competing charter schools opens up.  If so, control group students who went to a public school that also gets better, would bias the estimated effect towards zero.   

HT:  David S.

How many economists does it take to eliminate discrimination against women?

None--the market will do it. If enough employers indulge a taste for discrimination (animus based) against women, this can creates opportunities for rivals to hire women, and make the same goods at lower cost. This seems to be happening in South Korea where US firms are hiring over-qualified, and under-employed Korean women:

Jordan Siegel of Harvard Business School reports that foreign multinationals are recruiting large numbers of educated Korean women...., lifting the proportion of a firm’s managers who are female by ten percentage points raises its return on assets by one percentage point...

In contrast to animus based discrimination, statistical discrimination is profitable.

Why is PG&E shutting down power in California?

The incentives are clear:  to avoid liability from fires caused by its power lines.

PG&E filed for bankruptcy in January after amassing tens of billions of dollars in liability related to two dozen wildfires in recent years. As speculation grew that its equipment might be the cause of the Kincade Fire, its stock price plummeted about 30 percent on Friday to $5.08, a small fraction of its 52-week high of $49.42.

Liability laws are designed to give potential wrongdoers (tortfeasors) incentives to take appropriate care (by investing in safety measures), so that they do not cause too much harm to others.  However, shutting down power causes just as much harm to some consumers as the risk of fire.

A better solution would be to invest more in infrastructure, but PG&E is a regulated monopoly, which means that prices are set by the state.  OK, what are the incentives of the regulators?

the Office of Ratepayer Advocates ... has typically argued against maintenance and safety expenditures, so that rates can be kept low.

OK, now that we understand the problem, run it through the problem solving algorithm of Chapter 1:

1. Who made the bad decision?  PG&E shuts down its power grid to avoid lawsuits rather than investing in better infrastructure that can withstand high winds.
2. Do they have enough info to make a good decision?  Yes
3. Do they have the incentive to do so?  No.  The price regulator wants to keep prices low by preventing PG&E from making costly safety investments that would justify a rate increase.  

Post a better solution in the comments.

HT:  MarginalRevolution.com 

UPDATE:  Ted Nordhaus' Twitter Thread