Monthly Archives: December 2008

Well at least they were candid…

Economics, Politics,

From change.gov:

Q: “Will you consider legalizing marijuana so that the government can regulate it, tax it, put age limits on it, and create millions of new jobs and create a billion dollar industry right here in the U.S.?”

– S. Man, Denton

 

A: President-elect Obama is not in favor of the legalization of marijuana.

I’m happy to see that the administration didn’t skip over this kind of question. I think it shows an unusual level of political inclusiveness.

Personally, I am in favor of legalizing marijuana — and I believe it’s only a matter of time — but now isn’t the time or place. Doing such a thing would have very little overall benefit, while burning copious amounts of precious political capital. (Which I believe Obama will use to push through his green programs and his healthcare proposals.)

I also disagree with the assertion that marijuana will create a multi-billion dollar industry, because once you let supply and demand function more freely, the scarcity premium is minimized. (Though this slack may be taken up by higher bureaucratic costs.)

In terms of demand, I see marijuana more like the cigar business than the cigarette business: while there is doubtless a large number of regular users, I suspect they are the relative minority in the pot-smoking demographic.

On that note, I think I feel a larger drug post coming on soon in the next couple of days…

S. 3729: Banning emission taxes on livestock

Economics, , , , ,

A followup to Sunday’s post on Pigovian emission taxes on cows… A bill proposed to ban taxes on livestock flatulence. Fulltext unavailable, so here’s the summary:

A bill to amend the Clean Air Act to prohibit the imposition of a fee or tax for direct gaseous emissions by livestock.

The bill is sponsored by Byron Dorgan, a Democratic Senator from North Dakota. The bill isn’t terribly surprising given that North Dakota’s largest industry is agriculture.

Brokaw quizzing Obama on Pigovian gas taxes

Economics, Politics, , ,

Right around the 7 minute mark on this past weekend’s Meet the Press. (The video should start playing just as Brokaw asks him about it.)

Obama’s response pretty much jives with what I said last week about now not being the right time, but when Brokaw pushed him, he kind of waffled on the possibility of a gas tax hike in the future. Impossible to read into his response at all because it’d be detrimental politically to do so. (Though if he slipped it in at the beginning of his term, it might be forgotten at the end of four years.)

It’s right around the 7 minute mark, and the video should start playing right as Brokaw asks the question.

Profit maximization in pharmaceuticals

Business, Economics, , , , ,

From a microeconomics exam recently. The source article is “How a Drug Maker Tries to Outwit Generics” from the WSJ. (If that link doesn’t work, here is a PDF of the fulltext.)

Describe the nature of demand for Provigil. How much market power is there and why? If Cephalon raised the price of Provigil by 74%, with no apparent increase in production costs, does that mean that Cephalon was not initially pricing to maximize profits from Provigil? By raising the price, are they now profit-maximizing? Discuss. How would you expect the introduction of generics to affect the demand for Provigil? The price of Provigil has been raised before Nuvigil is launched. Discuss how the demand for Nuvigil would have been affected if the price of Provigil was not increased. Evaluate Cephalon’s strategy as a means of achieving its goal of corporate profit maximization.

Provigil is in extremely high demand; the trouble is that it is expensive, and it is almost never covered by people’s insurance. Right now, the average wholesale price (AWP) for 30 count of Provigil 200mg is $361. Provigil is also in an interesting place in terms of patent protection. It’s not a new drug, and through manipulating pharmaceutical patent law, Cephalon (who acquired the IP for the drug when they bought out Lafon) has been able to extend the life of the patent two or three times.

In healthcare, supply and demand do not function freely. In Provigil’s case, there is a distortion: one needs a prescription to buy it. In terms of price, there is another distortion: third party insurers will not pay for it. (9 out of 10 times it requires a prior authorization, which is almost always denied.) There are substitutes for Provigil. While it is the only drug of its kind, the stimulant ADHD medications promote wakefulness as well, though they often have other undesirable side effects, and are contraindicated in patients with anxiety and panic disorders and in patients with cardiac arrhythmias, hypertension, etc. Provigil, with its different mechanism of action, does not have these limitations because it does not function like drinking a cup of coffee. It simply removes fatigue and promotes wakefulness in the same way that it’s opposite, Benadryl, makes you sleepy and dopey. (Indeed, Benadryl is a messy antihistamine that works in the body and in the brain, and Provigil is a pro-histamine that works only in the brain.)

Because of the lack of competition within the pro-histamine drug class, Cephalon does have some market power. In my view, Cephalon was not profit maximizing for the long-term until these recent price hikes (more on that in a bit), because Provigil has always been expensive relative to its other patent-protected, cross-class competition (ADHD meds). Had they priced their medications right along at $100-150/month, they might have made up in volume what they would have lost in price. It’s not possible for me to know that, but I know that there is quite a bit of off-label demand from prescribers who would like to use Provigil, but cannot because it’s too expensive to buy out of pocket for most patients, and the majority of insurers will not cover it. The only way to know this for sure is to wait until the generic is released, and then see if there is a generic modafinil boom. I expect that there will be because it’s an excellent drug for many conditions that it’s not technically indicated for. (When I did graduate psychopharmacology, the one of the answers for many of our case studies was often modafinil, with the inside joke being “Just kidding, it won’t be covered so let’s not waste our time.”)

Now that Cephalon has raised the price by 74%, they are potentially sacrificing profits for the short-term, but maximizing them for the long-term. In the short-term, they are only potentially sacrificing profits because Provigil is never covered without a prior authorization to begin with. As patients not buying the drug out of pocket all have PAs in effect, that authorization does not expire just because there’s a price bump. Those prescribers who are successful in getting Provigil approved for their patients are unlikely to have a harder time getting it approved now that the price has gone up, because that’s not how the PA process works (even though I know that’s probably counter-intuitive).

What Cephalon will do is bump Provigil’s price while there’s still a brief amount of time left on its patent. Then they will release Nuvigil, while Provigil still has some patent life left. (Usually it’s a 6 to 9 month window on the patent for the old drug.) Nuvigil, priced in a more friendly fashion will almost immediately replace Provigil as the drug of choice. Cephalon will fund lots of studies that show that Nuvigil works great for those off-label things that prescribers have been using Provigil right along for, they will win FDA approval to use Nuvigil for these now-approved indications, and they’ll market the hell out of Nuvigil for these new uses.

In the meantime, the patent protection on Provigil will come to an end, just as Cephalon’s marketing campaign for Nuvigil is winding down, and most patients that were on Provigil will have been switched to Nuvigil (because it’s cheaper and ostensibly “better”), and then generic Provigil will hit.

For about two months, the prescription benefit managers (PBMs) will do nothing. People will fill their monthly Nuvigil scripts, and then the clinical pharmacists working for the PBM will have finished their research, made their recommendations, and the formularies will change. Nuvigil will suddenly require a prior authorization, and pharmacies will begin faxing doctors’ offices to change from Nuvigil to the newly-generic Provigil. And doctors will sign off on this switch back to the old drug because doing prior authorizations is a giant pain in the rear, and the opportunity costs associated with taking 15 extra minutes to fill out paperwork for each Nuvigil Rx is enormous.

Nonetheless, Cephalon is profit-maximizing in the long-run by doing this because despite the delayed shift from Nuvigil back to the generic Provigil, there will be some folks that remain on the Nuvigil. How many will depend on pricing. So long as Cephalon isn’t price-gouging on the new drug the way they are on the old one, PBMs may be more lax about requiring PAs or trials of other drugs before approving the Nuvigil. (Instituting a PA, after all, creates inefficiency and requires the hiring of more personnel to process the PAs, etc.) Gouging is, of course, a relative thing.

This kind of behavior happens all the time in the prescription drug industry. AstraZeneca did it with Prilosec. They jacked the price of 40mg Prilosec way up (AWP is currently $247, though it was over $300 just a few months ago), released 40mg Nexium at a lower price (AWP currently at $181), and then generic Prilosec hit the market, and took back a bunch of marketshare, but not all. Nexium remains a very profitable drug, despite there being the evidence that suggests that it is only marginally better than Prilosec, if that. (Most AstraZeneca-funded studies compared 20mg of Prilosec to 40mg of Nexium, and only published this detail in the fine print. I actually had a talk with an AstraZeneca sales manager about it a few years back after he moved to Forrest, and he admitted that Nexium was only created to perpetuate the revenue stream.) In the industry, we call this game of patent-extension “evergreening” and there are a huge number of drugs that bear this label: Lexapro (based on Celexa), Nexium (Prilosec), Nuvigil (Provigil), Clarinex (Claritin), Xyzal (Zyrtec), Pristiq (Effexor), Trexima (Imitrex+Naprosyn); the list goes on and on and costs the healthcare system billions every year.

An example of a company that didn’t do this, and is NOT profit-maximizing is Sanofi-Aventis with Xyzal, which I mentioned above, and they ended up with a drug that was dead in the water on arrival. Xyzal was supposed to replace Zyrtec which was losing its patent protection, but because SA didn’t take the necessary steps the way Cephalon is and AstraZeneca did, their drug went nowhere. It was released about a year ago, and I can count on one hand the number of prescriptions I have filled for it. Zyrtec, on the other hand, was one of our fastest movers. (And is now available over the counter which killed script volume for it.) On the other hand, Sanofi-Aventis is still making money from the over-the-counter sale of the old Zyrtec, so they are maximizing profits in the second best way. (Having a patent monopoly for an Rx-only drug is more lucrative because you can charge prices that you’d never make up for even with the oceans of relatively undistorted free-market OTC volume.)

In my 8 years in the pharmaceutical industry, Cephalon is a company that I simultaneously loathe and admire. I dislike them because their drugs are very expensive when common sense suggests that they probably shouldn’t be (Provigil was invented in the 1970s). On the other hand, I find myself admiring them because they are incredibly legally savvy. If this savvy is present in their pricing discussions — and I have no reason to think that it is not — there is a good possibility that they are indeed profit-maximizing within their legal constraints. I know that earlier I suggested earlier that they might make more money in volume if they lowered their prices, but most PAs will not be approved unless the indication is on-label or you are a specialist, and since Provigil only has one indication, they might indeed be profit maximizing inasmuch as they can realistically be in a heavily distorted market. The information asymmetry here means I can do no more than speculate.

Pigovian taxes on cows

Economics, , ,

As suggested by the EPA:

On a serious note, in the story, the farmer featured complained about how such a tax would hurt him financially. While that may be true, it should be irrelevant. If there is truly an externality here and it can be effectively measured and properly implemented, then there should be a tax on cows in the amount that is equivalent to the negative harm done per cow. That’s all that matters. It all hinges on the extent to which cows cause global warming and the extent to which global warming harms society.

I don’t know what kind of market cows are, but I would imagine it’s probably close to perfect competition suggesting that the tax would likely be borne by him, the producer rather than us, the consumers. They’re talking about $175/cow/year tax. On the other hand, this farm received $561,695 in federal subsidies from 1996-2006.

A good first step would be getting rid of these subsidies entirely, which would let the market correct itself inasmuch as it can before trying to internalize these negative externalities. It would make more sense to remove the existing distortion, see what happens in the market, and then layer on the Pigovian tax.

Let the number of cows produced decrease in a two-step process, rather than shocking the market all at once which would probably unfairly tarnish the idea of a Pigovian tax as a policy tool. (“Look what happened to the price of beef and dairy when we…!” etc.)

Via Greg Mankiw.

The gender gap in Thursday’s employment statistics

Economics,

The Boston Globe didn’t put a fine tip on Thursday’s BLS report (PDF).

1,069,000 fewer men are working than a year ago. 12,000 more women are working.

Here’s their chart:

Boston Globe 2008 labor statistics

 

Many economists have picked up on the dismal news about unemployment, but the only one really talking about the gender disparity is Mark Perry, but he hasn’t really gone into depth about why this statistic is the way it is, besides the obvious: more men work in industries that were harder hit than women. This is obvious, and it can be clearly seen in the chart from the Globe above.

My mom had an interesting take on this employment news. Her first reaction was, “Well I’m not surprised. Men make more than women, so it makes more sense that they’d let men go before women.” There’s a substantial amount of data to back this up. The most recent numbers that I’ve seen have women earning 77 cents for every dollar a man earns, on average. Therefore laying a man off has more of an impact on the bottom line than laying a woman off.

The other thing to consider is the rates of attendance in college for men. While there are certainly holdouts in academia that are dominated by men, overall attendance in college has already tipped in favor of women, and it’s expected to reach 60/40 female/male ratio by 2009. This trend shows no signs of reversing, and frankly it’s got me worried.

I don’t think education is, or should be treated as, a zero-sum game. Women don’t have to “win” at the expense of men, and vice versa. There are no winners and losers in education — it’s one of those things where all of society benefits the more it has. (We call these positive externalities, which is why we subsidize institutions and projects that have them with public money.)

In 1960, what I’ll call “affirmative action” for women began, and there were 1.6 males for every female graduating from college. In 2003, that ratio was 1.35 females for every male. In 2006, women made up 58% of undergraduates, and this trend is increasing. Men simply don’t apply to college in the numbers that women do. A widely disseminated article in the NYTimes, written by an admissions officer illustrates the point nicely:

Few of us sitting around the table were as talented and as directed at age 17 as this young woman. Unfortunately, her test scores and grade point average placed her in the middle of our pool. We had to have a debate before we decided to swallow the middling scores and write “admit” next to her name.

Had she been a male applicant, there would have been little, if any, hesitation to admit. The reality is that because young men are rarer, they’re more valued applicants. Today, two-thirds of colleges and universities report that they get more female than male applicants, and more than 56 percent of undergraduates nationwide are women. Demographers predict that by 2009, only 42 percent of all baccalaureate degrees awarded in the United States will be given to men.

We have told today’s young women that the world is their oyster; the problem is, so many of them believed us that the standards for admission to today’s most selective colleges are stiffer for women than men. How’s that for an unintended consequence of the women’s liberation movement?

I don’t have an answer about what, if anything, should be done about this trend. I do believe that the educational system is failing the male sex in this country, and it’s going to be a while before this trend is reversed simply because of the lag effect. I think society has forgotten about the boys while placing most of the focus on improving girls’ performance in school.

Moreover, I think these employment numbers may be the first reflections of this trend. By and large, there aren’t many well-paying jobs for women that do not require a college education. Men can fairly easily make money doing physical labor — which tends to pay well — than can women. Consequently, a college education may be less desirable for a man contemplating post-high-school job options. I don’t know; it’s been quite a while since I was in high school, and not going to college was never an option.

Of course the downside to this is that recessions that hit construction and other similar industries disproportionally affect men. In this particular instance, I would expect that these numbers will not look so bad in another 12 months, if for no other reason that Obama is planning some serious stimulus to be spent by state governments on infrastructure projects which will likely put these laborers back to work. This was announced in his most recent weekly address, which I’ve embedded (now in HD!) below:

Even without the investment in infrastructure, I would expect the disparity to decrease somewhat as the recession settles in and unemployment and overall employee churn stabilize.

Things I’d like to see: 4 dimensional isoquant

Economics,

Neoclassical production function Y = f(K,L) giving us a basic, two-axis isoquant with technological advances pushing us to lower isoquants:

Isoquant

Pretty basic.

Now taking materials and energy considerations into account Y = f(K,L,E,M) which can’t be represented on a two-dimensional surface without lumping three of the factors together to tease out whatever relationship you’re trying to represent graphically.

I don’t know how useful it would be to see all four constraints mapped separately, but I think it would look pretty cool if it could be done. Alas, I am neither a graphics expert nor mathematician, so I’ll leave the feasibility discussion to others…

Now is not the time for a Pigovian gas tax

Economics, Politics, , , , , , ,

Wrote this a little while back. The macro policy bits in the second to last paragraph may or may not remain my opinion in the light of some of the data that Mankiw has posted here. Let’s just say my thinking is… fluid on the more Keynesian bits I’ve referenced. I’m going to have to read the whole paper (PDF) in the near future.

Several weekends ago, the Washington Post editorial board came out in favor of a Pigovian gas tax. A guest op-ed in the New York Times advocated essentially the same thing. For those unfamiliar with the concept, a Pigovian tax is a fee levied on a particular good or service designed to reduce consumption of that good or service to compensate for a negative externality. Even if the revenue raised from the tax is returned to the public in the form of an income subsidy, it has a real tendency to reduce consumption of that particular good or service, even though an individual has experienced no real drop in income. (They have not dropped to a lower indifference curve.)

In the case of gasoline, the tax has many reasons: pollution generated by the combustion of fossil fuels isn’t accounted for because clean air never enters a market system, therefore it has no market price so we treat it as free. (Obviously clean air has value even though we don’t buy or sell it.) Another externality is the US’s reliance on foreign oil, often provided by otherwise hostile nations who derive their economic power from US petrodollars. There are several other, more wonkish reasons for desiring a Pigovian gas tax as well.

In general, I consider myself a bandwagon fan of the Pigou club. I agree with their aims, and Pigovian taxes have demonstrated a remarkable ability to meaningfully compensate for externalities otherwise unaccounted for in a free market system. However, now is not the time to institute such a tax. At a time when the federal government is considering a large-scale stimulus package that certain Keynesians think needs to be in the neighborhood of US$600 billion to have any chance of working — a figure that jives with China’s US$585bn package — the tremendous drop in gas prices is equivalent to a US$318 billion stimulus package that Uncle Sam doesn’t have to ultimately borrow from China or sovereign wealth funds to put into play in the here and now.

This trumps any marginal environmental benefit that might be gained by instituting a Pigovian tax at this moment in time.

Recession economics suggest that when all normal tools of correction have been tried, the government should increase spending and/or cut taxes. Trying to close a budget deficit while in the middle of a recession will only exacerbate the economic turmoil, and you run a very real risk of pushing a recession into a depression. (Though a nation’s long-term stability obviously requires fiscal responsibility, which the US has been lacking in recent years.) Raising taxes takes money out of consumers’ pockets, and cutting government spending tends to lead lead to lost jobs. Obviously lost jobs and decreased consumer buying power are undesirable. Doing nothing can cause the recession to deepen, and doing too little is no better than doing nothing at all. The question isn’t whether we need a stimulus package, the question is how big it needs to be. Therefore we should take what the burst petroleum speculation bubble has given us, and let it ride until the current economic crisis has passed.

It would have been better for the WaPo and NYTimes to have published these pieces back in the spring and summer — not in the middle of a recession. During the Democratic primary, Senator Clinton suggested rolling back the federal gas tax, which was a pretty bad idea. Ironically, if we still had $4/gallon gas prices today, her ideas might make more sense, except that a temporary reprieve of the relatively small federal gas tax wouldn’t amount to very much. However given petroleum’s relatively low cost right now, rolling back the gas tax temporarily wouldn’t amount to much in the way of meaningful consumer relief. ($31.46 billion on the generous side — an amount in the same ballpark as the recent Citigroup bailout.) When the seas are calmer, then we should discuss nifty tricks like Pigovian taxes and other consumption taxation vehicles as part of a responsible long-term fiscal policy.

Now is not the time to balance the budget. While there will always be arguments over timing, it seems obvious to me that instituting a Pigovian gas tax today — or even this year — isn’t in the US’s, or the world’s best interest. Let’s revisit this idea sometime in 2010. Hopefully by then, we’ll have weathered the worst of this recession.