Why Europeans really do need American healthcare

Psychiatrist and blogger Scott Alexander has been on a tear lately about the price of pharmaceuticals in America, in particular the EpiPen, a common device used to treat people who have had severe allergic reactions. The EpiPen’s price has been hiked by about 400% since 2007, which left-wing website Vox blames America’s lack of price controls for but Scott blames on America’s cronyish regulation:

Let me ask Vox a question: when was the last time that America’s chair industry hiked the price of chairs 400% and suddenly nobody in the country could afford to sit down? When was the last time that the mug industry decided to charge $300 per cup, and everyone had to drink coffee straight from the pot or face bankruptcy? When was the last time greedy shoe executives forced most Americans to go barefoot? And why do you think that is?

It’s a fascinating piece and worth reading in full.

But what I’m really interested in is a part of his follow-up piece where he looks at rates of pharmaceutical innovation in the US, compared to countries with price controls:

1. Golec & Vernon (2006) say that as a result of European drug price regulation, “EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms [over a 19 year period].”
2. Eger and Mahlich (2014) find that among pharmaceutical companies, “a higher presence in Europe is associated with lower R&D investments. The results can be interpreted as further evidence of the deteriorating effect of regulation on firm’s incentives to invest in R&D.”
[…]
So by my count, there are eight-and-a-half studies concluding that price regulation would hurt new drug innovation, and one-half of a study concluding that it wouldn’t. I’ve tried to eliminate all the studies sponsored by the pharmaceutical industry from this list, but I might have missed some.

Scott also cites an impressive-looking RAND Corporation paper which tries to project the consequences of government price-caps in healthcare.

In the short-term, things get better – drugs are cheaper. Great! But in the longer-term, things get worse. Much worse. Innovation declines and life expectancies fall in both the US and Europe.

Which makes me think that, as bad as the US system is in many ways, there’s a very important silver lining. All that money and intellectual property protection create much, much bigger incentives for healthcare innovation in the US than in Europe.

And that allows those of us in price-controlled countries to get something like the best of both worlds: cheap(er) drugs, but lots of research for new drugs, funded by our less fortunate friends in the United States. In a very important sense, it looks as if we’re free riding on American healthcare spending.

None of which is to say that the US system isn’t a dog’s dinner. Read Scott’s posts to get a flavour of that. But it does make smug posts and charts like the one above, which laugh at the nutty Americans and their wild, wasteful overspending, look quite silly. Without Americans spending all that money on healthcare, those of us living in price-controlled European systems would be living shorter lives, too.

The dirty little secret about GDP

An interesting point made in The Times about GDP:

For even GDP — the greatest, most definitive statistic of all — is really just a survey too. Forms are posted out to a selection of companies where they are filled in and sent or faxed back (“Informed estimates are sufficient for our needs”, says the bumf). Those figures go into a model and soon enough they become GDP. The size of Britain’s economy, the question of whether we are in or out of recession, the fate of governments — ultimately it all hangs on a questionnaire.

Well, yes, obviously it's a survey for as Hayek pointed out we cannot possibly gain enough information to really measure something as complex as an economy. There is the idea that we should move more to tax data - but the problem with that is that we know very well that people lie about taxes.

But there's actually something much more important than this. GDP isn't what we're interested in. It's a proxy, an interesting and useful proxy but a proxy all the same.

What we want to know is "How well off are the people?" We want to know this so that we can consider whether what we're doing makes them better off again or not. And our problem with GDP is that we're measuring things at market prices. What people actually pay for things.

Yet we know very well that this is not the price at which people actually value something. If a producer were able to price discriminate so that we each paid exactly what something was worth to us then it would be of course. And they attempt this. VW sells much the same car under the Skoda, VW, Audi and so on brands, each at a different price, in an attempt to do such price discrimination. But it doesn't work entirely.

The usual rule of thumb is that this consumer surplus, this value that we gain but which we don't have to pay for, is about equal to recorded GDP. So our consumption value is really some 200% of recorded GDP.

Which is where our problem comes in. Because the digital world would appear to be changing that multiplier. WhatsApp appears in GDP as something like $30 million, $50 million. There's no sales of it, no revenue from it, just the cost of the engineers working on it. And yet this is something that a billion people use for their telecoms needs, or some of them. The value in actual human value as consumption is obviously more than $100 million a year.

We must therefore remember not only that GDP is a proxy for what we really want to know but also that it's becoming an ever less reliable one.

What would it be like if the government really did run the economy?

It's very difficult indeed for us to map out exactly how it would all turn out if the government really were to run the economy in detail. Thus we need to try and find a comparator, somewhere that has two economic systems and we can observe the different outcomes.

We can of course think of the grand experiment that was the 20th century. Those places that had state socialism ran a race against those that used markets and the state socialism lost. But of course no one calls for such any more - at least we are continually assured.

But there are people calling for a democratic economy - that is, one where everything is decided through voting on committees. Others call for the bureaucratic economy, where the committees decide and there're even those absurdists who demand a Courageous State, where politicians decide each detail.

What we would like to find therefore is somewhere which has something like our market mix and right next to it something more like that state run and controlled economy so we can observe the different outcomes. Fortunately we have this - the United States. Government, planning, bureaucratic control, once again lose: 

Imagine if the government were responsible for looking after your best interests. All of your assets must be managed by bureaucrats on your behalf. A special bureau is even set up to oversee your affairs. Every important decision you make requires approval, and every approval comes with a mountain of regulations.

How well would this work? Just ask Native Americans.

The federal government is responsible for managing Indian affairs for the benefit of all Indians. But by all accounts the government has failed to live up to this responsibility. As a result, Native American reservations are among the poorest communities in the United States.

Hmm, perhaps government isn't the way to run life and the economy then?

What’s to be done with the House of Lords?

Two recent events have brought back into prominence that hardy perennial House of Lords Reform. The first event was former prime Minister David Cameron’s disastrous Resignation Honours List. The second event was the vocal threat by Baroness (Patience) Wheatcroft that she and a claque of similarly-ignorant peers would seek to block Britain’s forthcoming Brexit and do so from the (unelected) House of Lords.

Because of all that the new prime minister Theresa May has been obliged to raise the priority of House of Lords Reform, as if she hasn’t got enough on her plate already. So as a helping hand, here are the seven basic principles for her and her advisers to consider:

1. We always need a Second Chamber to keep tabs on the first.

2. The British people should have the last say who sits in it. Ten Downing Street should have nothing to do with choosing virtually all its members.

3. Its members should each only ever be elected once, so they are not constantly buttering up their voters seeking to get re-elected. They have independence of mind. Bruce Tulloch examined that distorted motivation in an Institute of Economic Affairs pamphlet published decades ago. He called the problem “The Vote Motive”.

4. Currently the Lords has far too many members. As with all legislatures 250 is ideal, 400 should be tops. The current 797 is utterly ridiculous.

5. It must not become a political clone of the House of Commons.

6. Its members should possess a worthy level of experience and expertise and be expected to lead the House on their specialist areas. In the process they should expose the House of Commons for what it is: far too many bumbling over-opinionated ignoramuses who succeed only in bringing the whole of politics into disrepute.

7. The major political parties should have as little as possible to do with its membership.

***

None of those seven points is even remotely original. I first heard them in 1974 at a formal Chambers of Commerce gathering, almost half a century ago. They were expounded by a very clever, original-minded accountant from Birmingham called Bruce Sutherland. 

Bruce held the interesting distinction of being chairman of both the Chambers of Commerce and also the CBI Taxation committees - the only person to straddle both. In passing one might fairly observe that Patience Wheatcroft was working in the same building at the same time as a junior journalist of the London Chamber of Commerce's monthly magazine.

So now let’s move on from that, adding in a few tweaks of my own. The most important question, as always, is how anyone gets on a ballot paper, especially for the House of Lord. All too often, it’s simply a shoo-in after that anyway. Ten Downing Street often prefers, or rather in the pre-crony era used to prefer, experts in their own particular field, and not mere sycophants. I quite like that previous idea as well, so let’s stick with it.

8. So if we want clever surgeons or clever architects to become candidates for the Lords (they are not yet members, of course) then let the Royal College of Surgeons, or the Royal Institute of British Architects choose them from among their own number. They, better than anyone, know who would be the most suitable.

Let all the royal-somethings get a shout, plus bodies such as the Chambers of Commerce, the CBI, the legal profession, the military, the churches, the TUC and indeed the Commons and the Civil Service itself. Indeed that could well give the Palace something to think about as well. If a few eccentric-somethings get on the list it hardly matters because none of them will go any further.

In effect, the process of selecting future members of the House of Lords has been Privatised.

9. And at that point we could also re-admit all the hereditary peers to the process as well. Some of them are very clever, almost more clever than parliament deserves.  Ralph Percy, aged 59, Duke of Northumberland, does an excellent job with all his highly-skilled farming mates. He lives in Alnwick Castle and all around him are the arable farms of his tenants.

Northumberland is very rich and I wager most of his tenant farmers are millionaires too. They run their farms on a very large scale, essentially organising a know-how co-operative. Not a fool among them; Ralph Percy would never allow that.

The late Gerald Grosvenor, Duke of Westminster, was one of the world’s most expert - and philanthropic - property developers.  I would have a man like that as my Member in the Lords any day of the week.  Some of the world’s finest inner suburbs of Mayfair, Belgravia and Pimlico were mainly the Westminster’s own work.  It was the farming family of the Grosvenors who spotted the potential of their lands and turned themselves into Britain’s richest Dukedom in the process.

Therefore we need about eighty constituencies, substantially more than there are states in the USA. In a sense it is an extension of the way each American state has a Senior and Junior Senator, and I consider that a wise principle we ought to adopt over here; it would make for admirable continuity.

The insanity of the JRF's latest poverty campaign

We've kept something of a wary eye on the Joseph Rowntree Foundation's ruminations on poverty over the years. Near a decade back they started that idea of the living wage. Ask people what people should be able to do if they're not in poverty. Along the lines of Adam Smith's linen shirt example. So far so good - but it was a measure of what is it that, by the standards of this time and place, people should be able to do and not be considered to be in poverty. 

In this latest report of theirs they are saying that if the average family isn't on the verge of paying 40% income tax then they're in poverty.

This is not, we submit, a useful or relevant measure of poverty. But it is the one that they are using. Here is their definition:

In 2008, JRF published the Minimum Income Standard (MIS) – the benchmark of minimum needs based on what goods and services members of the public think are required for an adequate standard of living. This includes food, clothes and shelter; it also includes what we need in order to have the opportunities and choices necessary to participate in society. Updated annually, MIS includes the cost of meeting needs including food, clothing, household bills, transport, and social and cultural participation.

JRF uses 75% of MIS as an indicator of poverty. People with incomes below this level face a particularly high risk of deprivation. A household with income below 75% of MIS is typically more than four times as likely to be deprived as someone at 100% of MIS or above. In 2016, a couple with two children (one pre-school and one primary school age) would need £422 per week to achieve what the public considers to be the Minimum Income Standard, after housing and childcare costs. A single working-age person would need £178 per week

Having an income that is just 75% of these amounts –£317 for the couple and £134 for the single person – is an indication that a household’s resources are highly likely not to meet their needs. The further their incomes fall, the more harmful their situation is likely to be.

So that's £16,500 a year for the high risk of deprivation and £22,000 a year for poverty. But note (this for the average family, two plus two) that this is disposable income after housing and childcare costs. We must add those back in to get the other definition of disposable income, the one that ONS uses.

Average rent is £816 a month, average childcare costs are £6,000 a child a year.

That's therefore £38,500 a year or £44,000 a year in actual consumption possibilities for such a family. That higher number marks poverty, the lower potential deprivation.

As ONS tells us (and this is disposable income, after tax and benefits, before housing and childcare) median household income in the UK is:

The provisional estimate of median household disposable income for 2014/15 is £25,600. This is £1,500 higher than its recent low in 2012/13, after accounting for inflation and household composition, and at a similar level to its pre-downturn value (£25,400)

And do note that ONS definition:

Disposable income:

 Disposable income is the amount of money that households have available for spending and saving after direct taxes (such as income tax and council tax) have been accounted for. It includes earnings from employment, private pensions and investments as well as cash benefits provided by the state.

The JRF is using a definition of poverty that is higher than median income for the country. This is insane. It gets worse too. The band for higher rate income tax starts at £43,000. The JRF is defining a two parent, two child, household beginning to pay higher rate income tax as being in poverty.

To put this another way, a British family in the top 0.23% of the global income distribution for  an individual is in poverty and one in the top 0.32% of that global distribution is deprived. Yes, after adjusting for price differences across countries.

The British population is some 1% of the global population. It's not actually possible for us all to be in anything more than the top 1% of the global income distribution.

This simply is not a valid manner of trying to define poverty.

It's wonderful how this profit motive thing works, isn't it?

That rocket which blew up was carrying a satellite aimed at aiding Facebook in delivering free, if limited, internet to the poor of the world. We are told this is a bad thing:

But if we’re slightly more cynical about the whole endeavour, it’s not hard to see why Facebook might be so keen to provide these services beyond its possibly genuine desire to create a more connected world. Facebook’s user base has reached near saturation point in the US and Europe, making countries such as Nigeria and India potential goldmines when it comes to new sign-ups. More users, and more user data, benefit Facebook in one extremely simple way – financially.

Like it or not, this financial consideration is a significant factor in the way that the company both provides its services and limits access to others. 

We see the same facts and consider them rather differently. In pursuit of filthy lucre, of gelt, a profit hungry organisation is now providing free, even if to a limited version of it, access to the internet to the poor (or perhaps will be when they can manage to loft a satellite). In the absence of this profit hungry company, motivated by absolutely no more that the desire to stack the cash ever higher in the vault, there would be no such internet access for the poor, limited or not.

At which point Hurrah! for greed and the profit motive say we. And it puzzles us deeply that people will fret over the motivation and not look instead at the actual result.

Then there's this of course:

So far so good, right? Well, kind of. Providing access to the internet is a noble cause, particularly in parts of the world where it is severely limited or even non-existent. But should this infrastructure belong to a private company like Facebook, or should it be state-owned and maintained? Far be it from me to question the true nature of CEO Mark Zuckerberg’s philanthropy, but no matter how charitable a cause Facebook is championing, its primary aim is to make money – often from monetising its users’ data.

That's just a rerun of an ancient argument. When steel and coal were the big important industries then the left said that government must control them. When the telephone landline network was important then the state must provide that. Now that the internet has mushroomed up entirely free of state interference (except, perhaps that starting point in Arpanet) and is important then of course the state must provide and or control it. Because anything important must be controlled by the state, no other reason.

But we do admit that we rather like, even though we disagree with, the underlying economic argument being used.

"So, these blokes over here will provide this infrastructure and service at their own expense and for free to users. Anyone who wants to build the same or similar is of course entirely free to do so."

"No, we must tax the people so the state can build it."

"Err, why?"

"Because."

Richmond Times-Dispatch the largest-circulation newspaper to ever endorse a Libertarian Party candidate

As far as I can tell, the Richmond Times-Dispatch has a higher circulation than any other newspaper to endorse a Libertarian Party candidate for US President, something it did on Saturday when it threw its hat into the ring for Gary Johnson.

Here's what it said:

In this autumn of our electoral discontent, hope springs, as it so often does in the American republic, from unexpected precincts. Much of the country is distressed by the presidential candidates offered by the two conventional political parties. And for good reason. Neither Donald Trump nor Hillary Clinton meets the fundamental moral and professional standards we have every right to expect of an American president.

Fortunately, there is a reasonable — and formidable — alternative. Gary Johnson is a former, two-term governor of New Mexico and a man who built from scratch a construction company that eventually employed more than 1,000 people before he sold it in 1999. He possesses substantial executive experience in both the private and the public sectors.

More important, he’s a man of good integrity, apparently normal ego and sound ideas. Sadly, in the 2016 presidential contest, those essential qualities make him an anomaly — though they are the foundations for solid leadership and trustworthy character. (At 63, he is also the youngest candidate by more than half a decade — and is polling well among truly young voters.)

I don't think Gary is going to win, and I usually think you should vote for the lesser of two evils—or save the time, if you're not in a marginal state—but there nevertheless is something very cheering about this endorsement. I hope that a solid vote for Johnson (or a solid expected vote) will push the other candidates toward more libertarian policies.

US Presidential Election 2016: what’s the worst that could happen?

For anyone who is economically literate, concerned about civil liberties, opposed to corruption and cronyism, in favour free trade and fiscal conservatism, supportive of peaceful internationalism, and/or in possession of a conscience, the 2016 US Presidential election is unlikely to produce a good result.

Hillary Clinton’s Democratic campaign amounts to a Frankensteinian attempt to create a powerful but confused and unnatural electoral monster. In essence, she is seeking to sew together a continuation of the Obama-era status quo, a pitch to the centre and disaffected establishment Republicans, a pandering to Sanders-inspired left-wingers, and a kids-gloves approach to populist dissatisfaction.

Donald Trump’s Republican platform is a hodgepodge of bad ideas. The central narrative and policies turn on isolationist-nationalism and authoritarian populism, exemplified by aggressive nativist rhetoric and opposition to immigration, international institutions, and trade deals. Trump also has a confused foreign policy, synthesising isolationism with erratic aggression.

This has been combined with the usual Republican package of tax cuts and deregulation. However, any continuity with conservatism is a veneer and should be of no comfort to principled Republicans. Trump’s proposed tax cuts are unfunded, and would add at least $10 trillion to the budget deficit. His enthusiasm for deregulation seems confused, given his platform’s support for reinstating Glass-Steagall. And a moderate-alienating social platform sits in uncomfortable tandem with Trump’s own ambivalence on these issues.

It is, therefore, ambiguous how either candidate would actually govern. Clinton is more predictable and will probably fall back on continuing Obama’s policies with a more hawkish outlook on foreign affairs. Platitudes and watered down policies will be offered to the left, whilst centrists and moderate Republicans will have to make do with stability.

A Trump Presidency would have uncertainty as its defining characteristic. It is impossible to tell which, if any, of his policies he actually believes in or intends to implement, even if his flip-flopping is set aside. Does he actually want to pull out of the UN? Would he actually rip up existing trade agreements? Would he really consider using nuclear weapons? Does he genuinely intend to build The-WallTM on the Mexican border and ‘Make Mexico Pay’? Does he really think he can ‘bring back jobs’ through protectionism? Has he even read NAFTA?

If his expressed views and attitudes are taken at face value, he remains unpredictable. Asides from the contradictions between his policies, his temperament and belligerence appear to pose something of a security risk. The exact nature of his isolationism is unclear, as is the extent and manner of any realignment in US-Russian relations. It is also unclear exactly how far any trade war with China would go. Many of his policies are also near impossible to achieve. Attempting to follow-through on banning Muslims from entering the USA, building The-WallTM, and mass deportations will cause chaos.

Even a Republican controlled Congress is likely to resist Trump’s most draconian and nonsensical policies. Trump is likely to respond by trampling any constitutional restraints. Civil disobedience and resistance would be likely, as would spiralling cycles of violence. And if, as is likely, building a 2000-mile wall and deporting 11 million people cannot be done, the frustrated response of Trump’s base could be very dangerous.

Given all of the above, and how objectionable and destructive many of Trump’s policies are in themselves, a Clinton win is the less bad option. Whilst the Democratic platform falls somewhat short on civil liberties, surveillance, and criminal justice reform, it is at least not flirting with fascism. Likewise, whilst Clinton has embraced populism on trade (a reversal that exemplifies her lack of consistency and principle) and has picked up fiscally irresponsible ideas (such as ‘free college’) from Sanders, her budget adds less to government debt than Trump’s, and she at least doesn’t seem to be under the impression that she can personally manage a multi-trillion dollar economy as a dictatorial CEO.

It is also important that Clinton does not win an overwhelming mandate. The very real flaws with her candidacy should be reflected electorally, and her ramshackle coalition should not be proven viable. Paradoxically, Trump must also lose by a large margin. If Trump loses by anything less than a landslide, his impact on the Republican Party will be deep and permanent. It will remain a nativist-populist party, with any commitment to small government, fiscal responsibility, individual liberty, and tradition a distant memory. He will also have succeeded in making openly bigoted and inflammatory discourse, as well as uninformed and fantastical policies, mainstream and electorally viable.

Trump must receive less than 40% of the vote, whilst Clinton should not win more than 50%, with the gap being filled by third party candidates. In an ideal world, the Johnson-Weld ticket would win by a landslide (and a sane Republican Party would have nominated them itself). As it is, this is a somewhat unlikely result. However, the opportunity for the Libertarian Party to make a significant breakthrough is real. It is worth remembering that Ross Perot received 19% in 1992 and George Wallace received 13% in 1968.

If Johnson can break double-digits, dissatisfaction with the two main parties, and the importance of a fiscally conservative but socially tolerant bloc, cannot be ignored. I would say the same of the Green Party, as a principled liberal-left is desirable, if it were not for Jill Stein’s apparent commitment to the kookiest and most irresponsible aspects of the eco-left.

This election may not provide any good options. But it’s clear what the least damaging result would be.

Madsen in photographs

Two of my friends have put together this somewhat unusual video of my life as told through photographs. It's a rather remarkable record, running from when I was a few weeks old through to the present day. Somewhere about the middle of it I helped found the Adam Smith Institute. I hope there will be future updates!