BY Kevin

Valuing Labor for Labor's Sake

Tyler Cowen explains what I'd term a new and improved labor theory of value: people value artwork more the longer it takes to produce. Since this is rooted in the arbitrary subjective values of different persons, not some arbitrary but falsely objective standard, it has a place in the modern toolkit of economics.

Excellent post!

12/30/2003 07:34:32 PM
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BY Kevin

When do Medications Really Expire

I was recently forwarded a small piece by Richard Altschuler entitled DO MEDICATIONS REALLY EXPIRE? Try An Experiment With Your Mother-In-Law, which though it is written as a humorous anti-corporate diatribe, made when wonder whether drug expiration dates are a form of regulatory capture to increase product sales, or whether they are just minimum-cost responses to regulatory requirements. The author notes the following "facts":

First, the expiration date, required by law in the United States, beginning in 1979, specifies only the date the manufacturer guarantees the full potency and safety of the drug -- it does not mean how long the drug is actually "good" or safe to use. Second, medical authorities uniformly say it is safe to take drugs past their expiration date -- no matter how "expired" the drugs purportedly are.

The first is a true, though slightly misleading, assessment. The second is false--I mean really false. He continues:

One of the largest studies ever conducted about "expired drug" labeling was done by the US military 15 years ago, according to a feature story in the Wall Street Journal (March 29, 2000), reported by Laurie P. Cohen. The military was sitting on a $1 billion stockpile of drugs and facing the daunting process of destroying and replacing its supply every 2 to 3 years, so it began a testing program to see if it could extend the life of its inventory. The testing, conducted by the US Food and Drug Administration (FDA), ultimately covered more than 100 drugs, prescription and over-the-counter. The results showed that about 90% of them were safe and effective as far as 15 years past their original expiration date.

This gives a really bad impression of the safety of taking expired meds. Starting in 1979, the FDA required drug companies to put expiration dates on products before marketing them. Companies must run a time-consuming and costly series of internationally standardized tests to figure when drugs dip below 100% potency. Then there is company-regulator bickering, and finally approval. Companies can petition to extend expiration dates, should they want to., and can provide scientific evidence. As you can see, nothing really stops a drug company from not petitioning to extend, although it would have to commit scientific and legal fraud to shorten the inital expiration period.

What I found out is that we don't have much data on optimal shelf lives of drugs, first and foremost because it is very costly to obtain. And who wants drugs to be even more costly?

Where do I get my facts--the American Medical Association. It is true that the AMA wants the FDA to review shelf lives of prescription meds. But it notes:

Once the manufacturer’s container is opened and drug product is transferred to another container for dispensing or repackaging, the expiration date no longer applies. The USP has developed recommendations for pharmacists to place a "beyond-use" date on the label of the new container. There is little scientific basis for "beyond-use" dates. However, the American Pharmaceutical Association (APhA) encourages, and 17 states require, that pharmacists place a "beyond-use" date on the label of the prescription container that is dispensed to the patient.

Expiration dates ARE what you see on over-the-counter drugs, but aren't always what you see on a bottle of prescription meds, which should be no later than the expiration date, but not legally so in all states. Still, I won't be fooling around with either prescription or non-prescription meds after the date on the bottle. The in-depth report of the AMA concluded from the miltary study that:

To date, the SLEP program has evaluated and tested 312 drug products to determine if specific drugs maintained their stability profiles past their labeled expiration dates. Many of the drug products tested did maintain their stability profiles well past their expiration date, up to as much as an additional 107 months. However, not all of the tested products maintained their stability profiles past the labeled expiration dates. Furthermore, certain lots of some drug products did not maintain their stability profiles past the expiration date, while other lots of the same drug product did.

I don't play craps with drugs. But I also found out something that really surprised me:

Furthermore, PhRMA [Pharmaceutical Research and Manufacturers of America] notes that most innovator [non-generic] drug products that are close to expiration can be returned to the manufacturer for credit.

Does your pharmacy take back almost-expired meds? I never thought about returning them for store credit, as I am [luckily] very healthy and spend little on medication.

12/30/2003 10:16:11 AM
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BY Kevin

Carnival of the Capitalists

The American Mind hosts the holiday issue of the CoTC. If you like T&B, you'll love the CoTC.

12/29/2003 01:42:57 PM
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BY Kevin

Iraqi Monopolization and Price Control of Gasoline

Chief Wiggles writes (scroll all the way down):

Gas Shortages:

Several of you have inquired concerning the report gas shortages here in Iraq, wondering how in a country rich with oil can there be a shortage of gas. The gas shortage is real, lines running for miles, as people wait for hours to get their share of the precious fuel.

I am writing up a report on this very subject. I don’t have conclusive proof or evidence yet, but it appears that much of the shortage the Iraqi people are experiencing is self-induced by other corrupt Iraqis. Many of the gas-tanker-drivers are selling off their loads to black marketeers, where they can get a much higher price. In turn this gas is being sold on the black market here or is being exported to neighboring countries like Turkey and Iran where they can receive 3 and 4 times the value. These guys are real racketeers, creating a huge problem for their own people. It is a real travesty.

My first thought is that there must be price controls on wholesale or retail gasoline sales. Otherwise, there would be no reason for a black market to exist at all. I found out that not only is the price ceiling set really low, there is a state monopoly on retail gasoline stations.

Given that domestic supply is 55% lower than pre-war production, if "official" prices were freely-floating like black-market prices, one would think that prices would rise to attract gasoline from Turkey and other countries, especially since automobiles have been flooding into Iraq. But the apparent free-market in automobiles combined with price control and prohibition of competition in gasoline supply has caused one enormous waste of time:

Aside from regular requirements, demand has fundamentally increased. More than 100,000 cars were imported into Iraq since the end of the war and a lack of electricity has raised demand for generators and fuel to run them.

Another estimate puts demand increases much higher,

Some 250,000 to 400,000 new cars have flooded into Iraq since the war, imported from Kuwait, Jordan, and Syria, increasing the demand for fuel.

Either way, the price difference between "official" and black market sources is astounding:

With residents lining for up to a day to fill up with gasoline at Baghdad‘s pumping stations for less than one cent per liter, children by roadsides touting cans were offering a swift service for 12 times as much.

Please note that the price of illegal has more than halved in seven months, even as the official price has dropped from 3 cents to 1 cent, according to this VOA report from May 2003:

Few gasoline stations are open in Baghdad, and there are cars lined up for several kilometers at those that are operating.

Drivers are waiting six hours or more to reach the pumps. Those with time and patience can buy gasoline for just three U-S cents per liter at the official price.

And for those in a hurry? Well, a thriving black market is available if they are willing to pay up to 25 cents a liter.

Still, one cent is the current official price.

Iraq imposed gasoline rationing yesterday as it stepped up efforts to cope with a shortage of fuel in this country with the world’s second-largest oil reserves, the Oil Ministry said.

"Each driver can have only 50 liters, not more, at the price of 20 dinars (one cent) each liter," Asem Jihad, the spokesman for Iraq’s Oil Ministry, said...

Beginning yesterday [December 10, 2003], gas station operators who sell to the black market can be jailed for between three and 10 years, he said

Perhaps, just perhaps, official prices (both 3 cents and 1 cent) were set too low. Perhaps this policy was a partial cause of the large influx of automobiles. If that were true, it is Iraqi gas policy and the CPA that is causing the shortage, not black-marketers.

I think it is indisputable that black markets arise in response to profit-opportunities. In my view, they do not cause "shortages", and can actually increase total supply, However, black markets cause portions of supply to be sold only to those willing to pay market prices, giving the appearance that there's not enough to go around. One could counter that black marketers are "holding back" (anticipating further price rises) but that makes little sense given the wide availability of the illegal product in Baghdad.

Part of that black-market is resale of legal gas purchases:

Black marketeers, clutching rubber siphon pipes and jerrycans of yellow gas, are a common sight on the sides of roads.

Abu Mohammed normally drives a taxi, but he says it is more profitable to sell the gas in his tank on the black market than drive customers around Baghdad.

"It's my first day doing this," he says. "I queued from midnight to 6 a.m. to fill up my car with gas. My tank holds 24 gallons and I have already sold 5 gallons."

Abu Mohammed sells his gas at the black market rate of 750 Iraqi dinars (37.5 cents) a liter, 10 times the legal price...

"People were buying fuel here and then emptying their tanks and selling it on the side of the road," says Mr. Zubaydy [director of a state-owned Liberation gas station]. "There's nothing we can do about it."

Maybe you can't, Mr. Zubaydy, but your superiors can--have them raise your price, or open more pumps! Or better yet, permit competitors to open pumps, negotiate their own deals with foreign suppliers, and create their own supply chains.

That might work, but it might not. Some people--even those who run the gas stations--doubt the existence of a product shortage, because gas stations don't run out of gas. It seems there just are too few pumps:

"It's very embarrassing and shameful," says Mohammed al-Zubaydy, the director of the state-owned Liberation gas station as he eyes the queue stretching up the road. "We have enough benzene, but the problem is the crowd."

12/29/2003 12:43:19 PM
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BY Kevin

Name that Retailer

Lileks, shopping in an empty Mall of America, purchases a "Santa's Cookies" plate with matching glass in a store with a witty saleswoman, Chistmas tree ornaments half off before Christmas, and an offer of 10% off if he opens up a credit account.

Can you guess which of the 520 stores he was shopping at? My money would have been on The Bombay Company, but that's apparently not in the MOA--the closest location being the infamous Southdale.

12/24/2003 08:57:17 AM
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BY Kevin

Dean's Penchant for Socialism

Steve Verdon notes that Howard Dean's New Social Contract calls for a lot of public provision of private goods. I'm used to these demands, but one particular statement of Dean's went beyond expanding government inefficiently:

It is time for us to spell out a new social contract a fundamental renegotiation of the rights and responsibilities of the critical actors in the American economy: families, corporations and government.

This led to my incensed comment:

Dr. Dean, let me make this clear. My individual rights are not negotiable. My responsibility over my family is not negotiable. My right to earn a living for myself is not negotiable.

Stay the hell out of my private life.

On Dean's part, this is just grand rhetoric. On my part, this is pure personal opinion.

But I think it's important to state openly that I disagree with Dean's implicit assertion that individuals are not "critical actors in the American economy." For families, corporations, and goverments--not individuals--to be the core owners of "rights" and entrusted with "responsibilites", a new social contract would indeed be required, because individuals would lose rights and responsibilities of a more fundamental kind... the kind that are not negotiable.

12/19/2003 05:03:34 PM
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BY Kevin

On Teaching Economic Models

Arnold Kling asks: Is trying to teach economics without math a misguided project?

As a math/stat major in college, I look at the question more broadly: To what extent could I teach anything using math?

Sure, I can pretend (with a glorious hubris) that everything I see in the real world can be represented by fully specified vectors of quantities, related by specific equations, giving stochastic or deterministic answers. I can pretend that distilling concepts into functions is the key to understanding theory, and that regression is the key to understanding history. But the truth is there's no a priori reason to expect any aspect of the real world to be simple enough (or simplifiable enough) for mathematical results to provide an accurate description (or an accurate abstract model) of reality.

Frankly, from my point of view, there is no "intrinsic" relation between math and anything. It is not a question of "relations"; it is a question of accuracy and utility of the model. It's a question of observation whether any specific real-world system can be successfully modeled by any specific algebraic system--with the measure of success depending on the goals of the model.

Some models -- like the (Newtonian) classical mechanics -- highly approximate the actual known universe for many purposes. Others -- like n-commodity general equilibrium theories -- don't approximate any known universe for many purposes.

There are some theories which are esstentially mathematical--like CAPM and options pricing theory--for which we apply operators to functions of variables and get in return some other functions of variables. For these models, the goal is to retrieve a specific function or to calculate an arithmetic output, and we have no choice but to use mathematics.

But if our goal is to teach that trade is always beneficial to both parties, regardless of initial endowments of resources or productivity, I think we can do this without specific functional forms (and strange words like "endowments").

At its root, mathematics is just an extensive form of formal logic; so I could re-read Arnold's question to read, Is trying to teach economics without formal logic a misguided project?

My answer: Hell no! But if by some chance using mathematics--or formal logic--would make teaching economics easier, by all means do so, but unless the material calls for it, I'd leave the math at home.

12/18/2003 04:02:02 PM
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BY Kevin

The E-rate Program: An Incentive for Development and Fraud

The FCC has a set of rules that shift onto wireline telephone subscribers a large part of the cost of providing "needy" schools and libraruies broadband internet access and computer equipment. It's called the E-rate program. The discounts are hefty:

The District's public school system qualifies for an 80 percent discount under the program. This allows D.C. libraries to pay just 20 percent of the cost of buying and installing computer and Internet equipment. The remaining 80 percent of the cost is picked up by the E-rate program. In contrast, schools in Montgomery County, one of the region's wealthiest counties, get a 49 percent discount under the program.

How did organizations respond to these massive incentives towards Universal Service?--with a rapid deployment of the internet in schools and libraries.

Since the fund was launched in 1997, it has paid to connect more than 90 percent of the nation's classrooms to the Internet. It is authorized to spend about $2.25 billion a year.

I'll refrain from analyzing the costs and benefits of wiring every classroom, and will note the unintended responses to these incentives:

The FCC’s inspector general, seeking an additional $3 million for E-rate oversight, is monitoring more than two dozen E-rate fraud investigations by local, state and federal authorities. In a semi-annual report due for release next week, the FCC’s IG is expected to highlight areas of concern in the E-rate program. In two previous reports, the FCC watchdog has attempted to draw attention to a problem that could turn out to be a case of massive, unprecedented fraud in a government-sponsored telecom program.

Already, two men--one in New York and another in California--have pleaded guilty to federal violations associated with E-rate grant competition.

I particularly like the egregious example of the elementary school that purchased a million dollar server. But in our fondness for government criticism, we shouldn't overestimate the amount of fraud--yet we need make sure we don't underestimate it either. The FCC Inspector General's report notes:

We are actively supporting twenty-two (22) investigations and monitoring an additional thirteen (13) investigations. Allegations being investigated in these cases include the following 5:

• Procurement fraud - lack of a competitive process and bid rigging
• False Claims -- Service Providers billing for goods and services not provided
• False Statements by Applicants and Service Providers
• Ineligible items being funded
• Beneficiaries not paying the local portion of the costs resulting in inflated costs for goods and services to the program and potential kickback issues.

Beneficiaries of the public largesse now have to wait three years before transferring equipment to others, and can only upgrade twice every five years.

12/18/2003 01:01:19 PM
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BY Kevin

Freer Trade with L.A.

Elizabeth Becker reports on progress in trade talks between the U.S. and Latin America. This is a regurgitation of a press release and canned activist responses, with little skepticism or analysis, but mixed with a few good nuggets:

Currently, the annual trade between the United States and the four CAFTA countries is valued at $15.4 billion, with nearly three-fourths of the products from Central America already entering duty free under special preference programs.

El Salvador, Guatemala, Honduras and Nicaragua signed onto the Central American Free Trade Agreement, although Costa Rica didn't, because the U.S. wants them to open up the Costa Rican telecom industry, leading to separate talks. The Times article emphasized that the two biggest parts of the deal are opening up U.S. agricultural markets and strengening of foreign intellectual property rights--protecting the big bad drug companies from foreign "competition" (i.e. patent violators). This last set of treaty provisions has activists howling:

"Lives will be at stake when Congress considers the CAFTA deal," said said Asia Russell of Health GAP. Generic competition has lowered HIV drug costs within Central America and is beginning to increase access to treatment for some. If Bush gets his way, CAFTA will lock countries into tough new patent rules that will drive the cost of life-saving drugs up and delay or obstruct generic competition."

But looking at the four-page official press release, we see that although exact details about the agreement have NOT been publicly released ("The draft text of the agreement will be released in January"), if or when it is passed into law, the actual effects of CAFTA will be far broader and more important than mere patent protection. In fact, patent protection is only a small part of the entire deal:

State-of-the-art free trade agreements like the CAFTA not only reduce barriers to U.S. trade, but also require important reforms of the domestic legal and business environment that are key to encouraging business development and investment. Such reforms include providing greater transparency for government actions and rule making; strengthening the rule of law; and improving the protection and enforcement of intellectual property rights.

Let me rephrase: this treaty will stop four Latin American governments from engaging in a ton of anti-market behavior. If we want "developing" countries to actually develop, their central and regional government politicians and bureaucrats must be stopped from graft, theft, and manipulation or control of core business activities.

We can also look at the CAFTA fact sheet for more information about the trade deal. Upon enactment, many provisions would have immediate effect, but others would only kick-in (and lock-in) years down the road. In addition to provisions that clarify government procedures, and require publishing of rules on the the internet, and the others that "Protect the Environment" and promote "Worker Rights", these are some of the highlights:

1. Elimination of all tarriffs on U.S. consumer and industrial goods in 10 years.
2. Immediate duty-free status for IT, agricultural and construction equipment, paper products, chemicals, and medical and scientific equipment
3. Tariffs on most U.S. farm products will be phased out within 15 years.
4. Textiles and apparel will be duty-free and quota-free immediately if they meet the Agreement’s rule of origin, promoting new opportunities for U.S. and Central American fiber, yarn, fabric and apparel manufacturing. The agreement’s benefits for textiles and apparel will be retroactive to January 1, 2004.
5. Substantial market access to service provision, subject to very few exceptions, using the so-called "negative list" approach.
6. U.S. financial service suppliers have full rights to establish subsidiaries, joint ventures or branches for banks and insurance companies.
7. Removes most local residency requirements, which had imposed significant barriers to U.S. professionals.

The more controversial parts are for patents, trademarks and copyrights:

1. Patent terms extended to compensate for delays in granting the original patent, consistent with U.S. practice
2. Grounds for revoking a patent are limited, thus protecting against arbitrary revocation.
3. Test data and trade secrets submitted to a government for the purpose of product approval will be protected against unfair commercial use for a period of 5 years for pharmaceuticals and 10 years for agricultural chemicals. Closes potential loopholes to these provisions.
4. Requires a system to prevent the marketing of pharmaceutical products that infringe patents.
5. Provides protection for newly developed plant varieties./LI>
6. Copyright owners maintain rights over temporary copies of their works on computers, which is important in protecting music, videos, software and text from widespread unauthorized sharing via the Internet.
7. Mandates both statutory and actual damages for copyright infringement and trademark piracy.
8. End-user piracy is criminalized--providing strong deterrence against piracy and counterfeiting.

12/18/2003 11:16:08 AM
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BY Kevin

Book Review: Railway.com

Robert Miller's new monograph, Railway.com (free via PDF, £12.50 for paperback) compares the history and development of the Early British Railways (EBR) with the recent telecom experience in the United States. The comparison is far more fruitful than I anticipated: using simple data analysis and a detailed description of the major and minor players in the EBR, Miller defends the role and outcomes of competition among the EBR. Miller shows that the role of competition is multi-faceted: to increase the speed and density of development, to lower fares and charges, and to actually foster a spirit cooperation among businesses.

He defends both the railway stock bubbles and the broad gauge railway; he says that those who criticize either do not understand the positive economic role that they play: the market process determines which companies deserve to succeed, and brings about superior economic and technological standards. As far as the bubbles go, Miller distinguishes between fraudulent or nonexistent rail companies, and actual rail companies, for whom the little and big stock market manias were of no long-term consequence.

But I find technology more fascinating than stock charts--the latter often being gossip more than economics. To me the broad gauge vs. standard gauge debate is another hideous example of nonexistent "lock-in" of inferior technologies by market processes. Miller notes that the selection of CDMA standard for 3G wireless telecommunications by the EU has only hindered development of advanced wireless in the EU.

In the end, letting multiple incompatible systems emerge is what competition is all about. The "waste" of multiple systems is actually the benefit of a market process based on trial and error.

What is this process of competition? The first frieght and passenger railways were built along trunk lines that generated the greatest traffic and greatest profits. What amounted to "free entry" into the industry meant that monopolies were quickly faced with competing lines. In order to continue dominance, it was thought that the most extensive network must be assembled (even if just to exclude competitors from gaining a foothold in one's "territory"). Hence branch lines were extended regardless of the profit they would bring. And these branch lines had little chance of being as profitable as the earlest trunk lines. But this is network economics, and I'll let Miller explain the rest to you, if you're so inclined.

Hat tip to Richard Ebeling of the Foundation for Economic Education.

12/12/2003 04:30:25 PM
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BY Kevin

What Health Insurance Crisis?

Tyler Cowen asks the question: Who are the uninsured in the US?

His clear and informative answer: Immigrants, Hispanics, students, the unemployed, and accounting errors.

If you're a policymaker interested making sure everyone has healthcare "access", you might also want to consider just how much of a financial incentive it would take to get everyone insured voluntarily, even if your preferred solution is mandatory government "insurance".

Study after study has shown that there is a core group of Americans who demand massive financial incentives to voluntarily purchase health insurance. In plain English, some people value health insurance less than other goods and services. Might I suggest that any scheme that requires these people to purchase insurance might actually make them worse off...

12/4/2003 08:42:01 AM
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BY Kevin

Brink Lindsey: Say Goodbye to Steel Tariffs

In a big win for American consumers, President Bush will eliminate his March 2002 steel tariffs, even though he wants to replace them with a real-time steel import monitoring system so as to pinpoint when and where steel imports "surge."

The article quotes Brink Lindsey (I miss his blog), who thinks the alternative steel-aid measures are just smoke and mirrors:

Brink Lindsey, a trade expert at the Cato Institute, a Washington think tank, said the package the administration was assembling to replace the tariffs amounted to little more than a fig leaf for the domestic industry.

"The existence or nonexistence of an import monitoring system is not going to make that much difference," he said. "And the pledge on more international talks is lip service as well. The talks haven't gone very far and they are not likely to go very far."

UPDATE: Others have useful links and comments:

1. Tyler Cowen
2. Jane Galt
3. Brad Delong
4. Bonobo Land
5. Rule of Reason

Meanwhile: Kikuchiyo demands the repeal of crawfish tariffs.

12/4/2003 08:21:47 AM
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