What Happened?: Republicans on Trade

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I’ve mentioned in passing the oddity of Democrats being more supportive of free trade than their supposedly capitalism-loving Republican opponents. A brand new poll by POLITICO and the Harvard T.H. Chan School of Public Health further confirms this shift. Some of the findings:

  • 47% of Republicans think free trade has hurt their communities, twice that of Democrats (24%). Only 18% of Republicans think free trade has helped, while nearly twice as many Democrats do (33%).
  • When broken down by country (Canada, EU, Japan, South Korea, Mexico, China) and by party, Republicans exceed both Democrats and Independents on every country in claiming that trade hurts. Over 60% of Republicans think trade with Mexico and China have hurt Americans. Democrats were surprisingly the lowest on every country.
  • “54% of Democrats believe that free trade has lost more U.S. jobs than it has created, compared to 66% of Independents and 85% of Republicans. Similarly, 38% of Democrats believe free trade has lowered U.S. wages, compared to 50% of Independents and 66% of Republicans. Only 8% of Republicans, 11% of Independents, and 19% of Democrats think free trade has led to higher wages for U.S. workers” (pg. 3).

There’s much more, including attitudes about the state of the economy and the Affordable Care Act. As one who grew up in a conservative household, I find this all rather worrying. As Trump’s senior policy adviser and economist Peter Navarro told POLITICO, “There’s been a schism for a long time between registered Republicans and the party leadership. That was the essence of the primary election. You had a group of insider politicians singing the same old globalization song. And one candidate saying the emperor has no clothes.” The problem, of course, is that the emperor is fullyclothed.

The Republican party has become a party of mercantilists.

Economic Freedom and Crises

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Ha. No.

Economic crises are often blamed on the abstraction “capitalism.” But does economic freedom lead to economic crisis? A new study argues ‘no’:

In this paper, I explore the politically contested association between the degree of capitalism, captured by measures of economic freedom, and the risk and characteristics of economic crises. After offering some brief theoretical considerations, I estimate the effects of economic freedom on crisis risk in the post-Cold War period 1993–2010. I further estimate the effects on the duration, peak-to-trough GDP ratios and recovery times of 212 crises across 175 countries within this period. Estimates suggest that economic freedom is robustly associated with smaller peak-to-trough ratios and shorter recovery time. These effects are driven by regulatory components of the economic freedom index.

An ungated version of the paper can be found here. Check it out.

If the Chair Industry Was Regulated Like the Drug Industry

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There is another pharma scandal in the news over the astronomical increase in EpiPen’s price. Yet, before we begin to blame and denounce the abstraction “capitalism” for all our woes, it might be useful to recall my post on the Shkreli/Daraprim scandal and its discussion of healthcare regulations. This new case appears to be incredibly similar and the site Slate Star Codex has an excellent post contrasting the way the drug industry operates compared to the chair industry:

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?

The answer?:

The problem with the pharmaceutical industry isn’t that they’re unregulated just like chairs and mugs. The problem with the pharmaceutical industry is that they’re part of a highly-regulated cronyist system that works completely differently from chairs and mugs.

If a chair company decided to charge $300 for their chairs, somebody else would set up a woodshop, sell their chairs for $250, and make a killing – and so on until chairs cost normal-chair-prices again.

And in his final act, he drives the point all the way home (worth quoting at length):

Imagine that the government creates the Furniture and Desk Association, an agency which declares that only IKEA is allowed to sell chairs. IKEA responds by charging $300 per chair. Other companies try to sell stools or sofas, but get bogged down for years in litigation over whether these technically count as “chairs”. When a few of them win their court cases, the FDA shoots them down anyway for vague reasons it refuses to share, or because they haven’t done studies showing that their chairs will not break, or because the studies that showed their chairs will not break didn’t include a high enough number of morbidly obese people so we can’t be sure they won’t break. Finally, Target spends tens of millions of dollars on lawyers and gets the okay to compete with IKEA, but people can only get Target chairs if they have a note signed by a professional interior designer saying that their room needs a “comfort-producing seating implement” and which absolutely definitely does not mention “chairs” anywhere, because otherwise a child who was used to sitting on IKEA chairs might sit down on a Target chair the wrong way, get confused, fall off, and break her head.

Image result for chair break gif…Imagine that this whole system is going on at the same time that IKEA spends millions of dollars lobbying senators about chair-related issues, and that these same senators vote down a bill preventing IKEA from paying off other companies to stay out of the chair industry. Also, suppose that a bunch of people are dying each year of exhaustion from having to stand up all the time because chairs are too expensive unless you’ve got really good furniture insurance, which is totally a thing and which everybody is legally required to have.

And now imagine that a news site responds with an article saying the government doesn’t regulate chairs enough.

The State of Modern Economics

Herbert Gintis

Economist Herbert Gintis has an excellent piece over at Evonomics on the current state of economics, including developments in behavioral and evolutionary economics and their relationship to traditional economic theory. Gintis has done some fine interdisciplinary work and I’m greatly anticipating his forthcoming book Individuality and Entanglement: The Moral and Material Bases of Social Life. For Gintis, “The most creative behavioral and evolutionary economists remain inspired by the successes of, and consider their work as extensions of traditional economic theory. The most creative supporters of traditional economic theory, in turn, embrace behavioral and evolutionary perspectives and build on its insights.” Gintis walks the reader through a helpful analysis of general equilibrium, comparative statics, economic dynamics, and economic policy. He notes, “Traditional microeconomic economic theory is at its best in analyzing general equilibrium and comparative statics. Behavioral and evolutionary economics have as yet neither altered nor added to our understanding of general equilibrium and comparative statics.” It is in the case of dynamics “that traditional economic theory has the least to offer. Microeconomic theory has virtually nothing to say about market dynamics when there is more than a single good.” He claims that macroeconomics was a framework “economists invented wholecloth…for dealing with economic dynamics that has nothing to do with the microeconomic model of general equilibrium.” While macroeconomics is “widely taught in economics departments and policy makers pay attention to it faute de mieux…it is frankly virtually worthless, except in the very short run, where the near future can be reliably forecast from the recent past.” Gintis recognizes that “the economy is a complex dynamical system and nobody, not even the experts who spend all their time studying the economy, can predict even the direction of the long-term effects of most regulatory changes on the position of individual economic actors.” It is here that he bridges evolutionary economics with traditional, providing much-needed feedback to both the right and left of the political divide:

Evolutionary models of economic dynamics invariably assume adaptive expectations rather than rational expectations. Adaptive expectations assume individuals tend to copy the most successful behavior of others whom they observe in the market, with innovation taking place through random variation.

In the popular press, free market lovers blame financial crises on government intervention, and intervention lovers blame financial crises on insufficient regulation. Neither view is correct. The recent financial crisis was due to improper regulation of the financial sector. The notion that the financial sector of a market economy is robust in the absence of extensive regulation is simply an article of faith unsupported by theory or experience. Evolutionary economists are working on a theory of the financial sector that fits synergistically with our models of generalized market exchange and technological change, but no general model has yet been developed.

He continues by dissecting both market and state failures, which should be an eye-opening discussion for both free-marketers and those favoring more state intervention. In conclusion, he writes,

It is a serious error to reject standard economic theory on the grounds that it supports a free-market ideology. It does nothing of the kind. Correctly deployed, it carefully explains where, how, and when to intervene in the regulation of market exchange. Evolutionary and behavioral game theory are wonderful additions to the economist’s repertoire, but they complement rather than undermine traditional public sector economic theory. The most serious defect in traditional economic theory is its treatment of economic dynamics, and it is here that behavioral and evolutionary theory has the most to contribute.

Some criticize standard economic theory for failing to take into account that reliance on markets promotes selfishness and greed. The evidence from behavioral economics is quite the contrary. Even hunter-gatherers and members of other small-scale societies act more fairly if their society has significant contact with the larger market economy. And we must never forget that virtually every powerful pro-democratic, anti-racist and anti-sexist movement for social change in the world has taken place in market economies with democratic political institutions. Milton Friedman noticed this in his famous Capitalism and Freedom, and it remains valid even more a half-century later.

Check out the full article. It’s one I’ll be continually revisiting.

When Profits Are Sinister

Profit is often a dirty word among certain political ideologies. However, for those who defend the importance of profits, it is necessary to realize that sometimes they are signs of something amiss. As economist James Bessen explains,

Profits are up. Operating margins for firms publicly listed in the US show a substantial and sustained rise. Corporate valuations are up as well. That is good news for managers and investors. But is it good news for society?

Economists such as Joseph Stiglitz and Luigi Zingales find the rise potentially troubling for two reasons. First, higher profits create greater economic inequality. Rising aggregate profits correspond to a decline in labor’s share of output, contributing to stagnant wages. Also, greater profits for some corporations but not others may create greater wage inequality.

Second, the rise in profits might represent a decline in competition and, with that, a decline in economic dynamism. While a dynamic, competitive economy rewards innovative firms with high profits and punishes poor performers with low profits, sustained aggregate profits suggest, instead, that firms are able to get away with higher prices because competition is limited. Firms engage in political “rent seeking”—lobbying for regulations that provide them sheltered markets—rather than competing on innovation. If so, then high profits portend diminished productivity growth.

However, the increase in profits could be due to firms “increasingly making profitable investments in new technology, in IT, or in their organizational capabilities.” Bessen’s new research paper gets to the bottom of it:

I find that investments in conventional capital assets like machinery and spending on R&D together account for a substantial part of the rise in valuations and profits, especially during the 1990s. However, since 2000, political activity and regulation account for a surprisingly large share of the increase.

This is how rent-seeking, pro-business (vs. pro-market) attitudes, and crony capitalism drag down our economy.

Check out the full article over at Harvard Business Review.

Mass Flourishing: A Lecture by Edmund Phelps

This is part of the DR Book Collection.

In debates over capitalism and everything else, it is easy to forget that economies do far more than merely provide goods, services, and wages. Innovation doesn’t just apply to the iPhone, but to art, literature, jobs, etc. According to Harvard’s Edward Glaesar, this is one major takeaway from Nobel economist Edmund Phelp’s Princeton-published book Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change:

The book eloquently discusses the culture of innovation, which can refer to both an entrepreneurial mind-set and the cultural achievements during an age of change. He sees modern capitalism as profoundly humanist, imbued with “a spirit that views the prospect of unanticipated consequences that may come with voyaging into the unknown as a valued part of experience and not a drawback.” The dismal science becomes a little brighter when Mr. Phelps draws the connections between the economic ferment of the industrial age and the art of Beethoven, Verdi and Rodin.

The book also provides an epic takedown of the enemies of economic dynamism: socialism and corporatism. Even though this is well-traveled ground, it is nice to have a Nobel laureate addressing these ideologies head-on in an academic publication given their growing popularity among young people. For those who may wonder about the connection between “the good life” (flourishing) and economics, this book is for you.

You can see Edmund Phelps present at the Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA) below:

The Capitalist Welfare State

The merits of the social democratic Nordic countries have once again become popular in American political discourse due to their praise by presidential candidate Bernie Sanders. This revival of the “U.S. vs. Sweden” debate reminds me of the following interview with Swedish economist Andreas Bergh:

Bergh presents a fairly clear view of the difference between what some have called the administrative state vs. the social insurance state. For those interested in his research–which is quite relevant to the current political climate–check out his aptly titled blog The Capitalist Welfare State.

Shkreli, Price Hikes, and Capitalism (Act 2)

780 - Smarm Cat

779 - Perfect CapitalistBack in September the Internet was momentarily preoccupied by news that Turing Pharmaceuticals (run by Martin Shkreli) had purchased a company which made the generic drug Daraprim. Darapim “is used to fight toxoplasmosis, an infection to which unborn babies, AIDS patients, and certain cancer patients are vulnerable,” wrote Martin Tillier at NASDAQ.com. Darapim had been sold for less than $15 / pill, but Shkreli raised the price by more than 5,000% to $750 a pill. This–along with the news that VW had been faking emissions tests–made it “a bad week for capitalism.”

Lots of folks used this as an object lesson in why capitalism is bad, and so the torrent of memes began. I’ve collected a few in this post to give you a sample.

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But then the story got a little bit more interesting. As the Daily Banter so elegantly phrased it: Free Market Capitalist Martin Shkreli Gets Screwed By Free Market Capitalism.

You see, Darapim is not protected by any patents because it is such an old drug. If it was protected by patents, then Shkreli could charge whatever he wanted without fear of immediate competition, but that wouldn’t be the free market at work. That would be government regulation at work, since government regulation is the thing that would be preventing competitors from selling the drug, too. So Darapim was only being manufactured by one company (the one that Shrkeli bought), but there was nothing to prevent other companies from entering the market.

When Darapim was priced at $13.50, no one bothered to compete. This is primarily because setting up a new drug manufacturing line is expensive and–although Darapim is a life-saving drug for the folks who need it–not many folks need it. But when Shrkeli hiked the price to $750, it created plenty of room for competitors to offer their own products.

And now one has. San Diego-based Imprimis Pharmaceuticals Inc. has stepped in to offer Darapim from their website for less than $1/pill. Live by the sword, die by the sword. Or, in the words of finance professor Ramon P. DeGennaro, “Nothing protects consumers better than competition.”

Couple of notes for those interested in the economics, by the way. This isn’t just a textbook econ 101 case of market entry. If nobody wanted to compete at $13.50/pill, then any company who entered after Shkreli raised the price to $750 would have offered their competing product at a price lower then $750, but higher than $13.50. If they could have made a profit at less than $13.50, they would likely have done so already. But Imprimis is selling Darapim for less than $1/pill. Why?

The answer is PR. Imprimis will probably lose money on every pill they sell, but–because Darapim is not a product that is going to get popular–they also already know the maximum amount they stand to lose, and they see that as an expenditure for a brilliant marketing campaign. Think of all the goodwill and publicity that Imprimis gets from standing up as the good guy to oppose Shkreli’s creepiness and greed. So this is about competition, but it’s about competition in a dynamic, interactive system with many, many products and services rather than just a simple case of competition in a single market with a single product.


The Capitalist Conscience

The above graph comes from the World Values Survey Database. As you can see, the vertical line moves from traditional values (religion, ritual, hierarchy, authority) to secular values, while the horizontal line moves from survival values (economic and physical security) to those of self-expression. Social psychologist Jonathan Haidt provides this helpful explanation:

The best way to understand the graph is to consider that nearly all societies used to be agricultural societies. Pre-industrial farming cultures generally have traditional and survival values (they cluster in the bottom left quadrant of the map). Life is hard and unpredictable, so you should do your duty, pray to the gods, and cling to your extended family for protection.

But as countries industrialize and people leave the land and enter factories, wealth rises and values shift.  Interestingly, countries don’t just move diagonally, from the poor quadrant (currently occupied by the Islamic and African nations) to the rich quadrant (anchored by Scandinavia, in the upper right). Rather, there is a two-step process. First, countries move upward, from traditional/survival values to secular/survival values. When money comes from fitting yourself into the routines of factory production, there’s little time or room for religious ritual. People express materialistic values in this quadrant—they want money, not just for security, but for the social prestige it can buy.

…Societies [then] transition to more service-based jobs, which require (and foster) very different skills and values compared to factory jobs. Also, as societies get wealthier, life generally gets safer, not just due to reductions in disease, starvation, and vulnerability to natural disasters, but also due to reductions in political brutalization. People get rights. The net effect of rising security is to transform people’s values in ways that the modern political left should love.

Haidt’s conclusion? “Capitalism changes conscience.”

Shkreli: Product of Capitalism or Red Tape?

Martin Shkreli, hedge fund manager and founder of Turing Pharmaceuticals, has been described as the “most hated man in America” and an example of “everything that is wrong with capitalism” due to his company’s acquisition of the rights to the drug Daraprim and the jacking up of the price from $13.50 to $750 per pill. While incentives (a word typically associated with capitalist rhetoric) obviously played a role, it may not be due to the supposed exploitative underpinnings of capitalism and for-profit business. Blogger Will Wilkinson makes a number of important points over at the Niskanen Center on the perverse incentives created by regulation:

Bringing a copy of Daraprim to market would require filing an Abbreviated New Drug Approval with the FDA…The FDA is notoriously slow and the process is expensive…Shkreli was willing to pay such a huge sum because he could see that no Daraprim copies were in the regulatory pipeline, meaning that, for a time, he would have a monopoly and could reap monopoly profits by callously demanding exorbitant prices from patients who have no alternative to the drug. The scandal of Martin Shkreli’s profiteering tells us very little about capitalism, per se, but it does tell us a lot about the perverse market incentives that overzealous regulation can create.

Drawing on an argument made by economist Alex Tabarrok, Wilkinson points how difficult it is to get a generic drug approved in the U.S., noting that “it’s illegal to sell imported generic versions of the drug that have not been independently approved by the FDA. Some of these generic brands have been blessed by European countries with perfectly sane and safe drug approval processes, but the U.S. won’t recognize foreign vetting, and insists on wasting resources, time, and lives with redundant oversight…If “capitalism” is a system of competitive markets in which prices adjust with supply and demand, then it definitely wasn’t capitalism, in that sense, that led Shkreli to charge $750 for something that costs pocket change on a free market. The culprit is a regulation…that makes it illegal for Americans to buy well-tested, imported generics on the open market.”

Finally, he places growing inequality at the feet of rent-seeking:

In an important new essay in National Affairs, Steven Teles, a political scientist at Johns Hopkins, points out that a fair number of the top 1% of earners owe a sizable part of their incomes to regulatory barriers to entry. Doctors, dentists, and lawyers all profit from licensing schemes that limit competition. Car-dealerships are, more or less, politically-granted concessions protected from competition. Government contractors and consulting firms that specialize in regulatory compliance reap outsized gains from heavily politicized markets. “[R]ents are pervasive in the fields of finance, entertainment, and technology,” Teles observes...[I]f Teles is right, regulation-loving progressives will need to reconcile themselves to the fact that the economic inequality and injustice they deplore may be driven in no small measure by regulations they might otherwise favor. This suggests that fighting inequality requires more than taxing America’s Martin Shkrelis more heavily—though it may require that, too. Pushing for a more equitable economy also means pushing for reforms like ending the ban on the importation of prescription drugs that have been deemed safe by, say, Canada or Germany. Which is to say, well-targeted “deregulation” is the egalitarian’s friend.

Wilkinson concludes by stating that “Martin Shkreli’s brazen legal fleecing would be impossible in an unfettered market. He bought himself a monopoly made entirely of health-and-safety red tape.” And while outrage is warranted, “we ought to be outraged also because Shrkeli’s racket is a straightforward consequence of stupid over-regulation and symptomatic of the way badly fettered markets generate injustice.”