Category Archives: Economics

The economics of atheletes’ salaries

A friend updated their Facebook status to lament overpaid athletes relative to seemingly more important things like… saving lives. It seemed an opportune moment to flesh out the economics of athletes’ paychecks.

It’s true, athletes may play a kid’s game, but bear in mind that no matter the sport, they are employing millions of people both directly and indirectly. The people in the back offices, the groundskeepers, the people that work for the TV networks, the people that work for the advertisers, etc. So while your average athlete may bring in $3-500K/yr (not everyone’s a superstar), they’re generating billions in economic wealth that’s spread over many, many working people like you and I.

The other thing to consider is that health care is a cost, not a wealth-driver in the macroeconomy. Buying health services is always an inferior choice to spending your money in another way, unless you need that service. (This is one of the reasons I feel that healthcare shouldn’t count as a positive input into GDP calculation.)

So anyway, I can understand the frustration associated with high salaries for athletes, because what they do at a fundamental level is so trivial. But I can also understand why athletes are paid the way they are. From a narrow point of view, their contribution to society is very small. But from a higher-level view, their contribution is much greater than we often given them credit for:

  1. Hit a ball with a stick or save a life?
  2. Save a life or create 10,000 direct jobs and support millions of others with the through the interaction by yourself and your team with your opponents?

Who contributes “more” to society is less clear from PoV #2. From a low-level one-on-one perspective, the physician saving a life does. But from society’s point of view, #2 is obviously the winner, outliers (maybe) excepted.

I don’t say any of this to marginalize those who work in the healthcare or teaching professions. It is not my intent to diminish what they do in any way. One of the problems associated with teaching and being a physician is that it’s so hard to measure their long-run economic impact on a society because the gains may take a lifetime to measure in the case of early childhood education, or may be represented as hours of productivity saved in the case of a medical intervention.

It’s quite a bit easier to measure TV viewership, sponsorship monies, and whether or not your stadium is full on game day than it is to measure lifecycle productivity gains.

We could get normative and make judgment calls about what should happen and how people should be paid based on the inherent value of the job they do, but these are meaningless arguments because in order to effect any of them, we’d have to shift society’s values. Everything in our economy is a byproduct of consumer priorities: where consumers choose to spend their scarce resources (money). Salaries are a byproduct of these consumer choices, and nowhere is this more pronounced than in the entertainment business.

Paradox of thrift? Really? Where?

Krugman’s reading the BEA data, but I think the data is probably wrong about the average consumer:

Yesterday’s report on consumer incomes, spending, and saving showed a sharp rise in the personal savings rate; it also showed a decline in nominal personal incomes, the third in a row, reflecting the weakening economy.

From the report:

Personal saving — DPI less personal outlays — was $378.6 billion in December, compared
with $299.1 billion in November. Personal saving as a percentage of disposable personal
income was 3.6 percent in December, compared with 2.8 percent in November.

That doesn’t jibe with’s analysis of consumer trends:

But what the data, the hard facts, mean for you – if you run a consumer business – is that your customers are spending $400 less each month than they were a year ago, have burned through half of their savings, and on average have taken on an additional $5k in debt.

I’m sure there are confounding factors on both sides, but I’ll take’s assessment because it accounts for people from the bottom up, rather than the top down, and is far more accurate precisely for this reason.

For those of you curious, mint is a personal finance tracking website. Think Quicken or Money, only it’s web-based, and as a result, mint is able to track trends in interesting ways that looking at the economy from 30,000 feet is unable to do.

What the stimulus vs tax cuts debate misses

A week or two ago, Greg Mankiw and Nate Silver had a bit of a back-and-forth on stimulus vs tax cuts. In order:

  1. Mankiw’s NYTimes article
  2. Silver’s response
  3. Mankiw’s “teachable moment” reply
  4. Silver’s retort

Ignoring the attitude readily apparent on both sides, I was struck by how much this tiresome debate over taxes vs direct stimulus actually misses. Indeed, many of the other macroeconomic factors seems equally important, and without solving these other problems, the current debate — while fun and exciting — is ultimately pointless.

Tyler Cowen’s 8 reasons we are in a recession:

  1. We have zombie banks.
  2. There is considerable regulatory uncertainty in banking and finance.
  3. There is a negative wealth effect from lower home and asset prices.
  4. There is a big sectoral shift out of real estate, luxury goods, and debt-financed consumption.
  5. Some of the automakers are finally meeting their end, or would meet their end without government aid.
  6. Fear and uncertainty are high, in part because they should be high and in part because Bush and Paulson spooked everyone.
  7. International factors are strongly negative.
  8. There is a decline in aggregate demand, resulting from some mix of 1-7.

I don’t think any serious person would argue with this list.

As I see it, the problem with stimulus seems to be that it doesn’t address anything but decreased aggregate demand. A real problem, sure, but not the only problem.

To my way of thinking, tax cuts will do a couple of things:

  1. Offset some of the negative wealth effects associated with depressed home and asset prices.
  2. Offset some of the longer-term effects of our debt-financed consumption of the last 8 years. I see a tax cut as being better for individual credit card companies and loan companies than it is for the economy as a whole. If the money returned to the taxpayer is used to pay down debt, it does nothing for the macroeconomy in the short run.

Stimulating demand directly through government purchasing/construction/etc sidesteps these two problems. But it also does nothing to help with anything except problem #8, especially if you’re looking at a multiplier of ~1.

All in all, which one is “better” is a pointless argument because a sound plan would have both. (And indeed the recovery act has both.)

So where are the policy debates over zombie banks? There’s debate over better regulation, but it’s not especially informed debate; it’s more like “Omg we need more regulation!” where regulation is left undefined for all intents and purposes as far as I can see.

Why aren’t we talking about negative wealth effects? We can impact them somewhat directly via tax credits, but nobody is talking about tax credits for this specific reason. Maybe because explaining what a negative wealth effect is to a layperson is difficult to do? I don’t know. It’s not sexy? That seems a more likely explanation. It’s not terribly partisan? That seems even more likely.

The auto industry is obviously being hotly debated, and conservatives seem to think that a chapter 11 restructuring is the best way to go. I don’t necessarily disagree with that, but going through chapter 11 requires financing… otherwise it turns into a chapter 7 liquidation, which is clearly undesirable. How about making the auto bailouts contingent upon using that taxpayer money to restructure, in effect making the taxpayers the DIP financiers? I haven’t heard that mentioned as a possibility, but I hardly think I’m the only person on the planet who hasn’t wondered if this could be done.

How can we restore consumer confidence? The new administration taking office will help with that somewhat, but I don’t see any ready-made solutions in the economists’ handbook except for (maybe) time and getting the other 7 factors under control.

In the final analysis, I want to know why we are beating the stimulus vs tax cuts drum exclusively when there are so many other factors in play. Krugman’s hammering of the Keynesian, great depression angle seems incredibly narrow because this recession strikes me as being somewhat different, and supply-siders like Mankiw hammering the tax credit/cut/rebate angle miss so many other factors that need to be talked about. (Though to be fair, Mankiw doesn’t talk exclusively about the tax angle the way Krugman seems to with his Stimulus Now! rhetoric.)

Am I totally off-base in thinking that both sides are being somewhat partisan, here, which is ultimately bad for meaningful discussion?

A little light reading…

I had printed out a bunch of entries by Andy Harless, and they’ve been sitting in my To Read pile for a couple of weeks. I know they’re dense, so I had been putting them off.

  1. In Case of Emergency Break Glass, a brilliantly-titled piece on Frédéric Bastiat’s well-known Parable of the broken window. He explains why the fallacy doesn’t hold true today with modern consumers’ consumption and saving habits. Essentially if we break a window today, our present consumption isn’t lessened. Instead, we save a bit less, and because we don’t know when we will die, our future consumption likely isn’t impacted much if at all, either. This results in a net gain to the macroeconomy.
    While Andy is correct about consumer behavior, I do find myself wondering if M. Bastiat was also correct — in his own time. In poorer times, might a broken window have actually led to lower present and future consumption? I suspect so, especially without ready access to easy consumer credit.
  2. To Monetize or Not to Monetize: Who Cares?, a look at the interplay between the Fed and the Treasury with respect to expected consumer behavior and the fungibility of T-bills vs money. I must confess that I don’t understand most of it, yet.
  3. Dynamic Scoring, a shorter entry on real costs of stimulus relative in terms of tax revenue and GDP. This particular sentence caught my attention and simultaneously boggled my mind:

    So if a tax cut or an expenditure increase were expected to create, say, a million extra jobs, then, under normal economic conditions, the Fed would simply raise interest rates enough (according to its best estimate) to destroy a million jobs. (If the Fed didn’t think the demand for those million jobs would be potentially inflationary, then it would already have tried to create them.)

    Emphasis his. The idea of the Fed doing something to destroy jobs seems non-sensical at first, even though I know it makes perfect sense.

Even though I am an econ major in my last semester, I don’t have any formal macroeconomics under my belt, nor do I have any finance/monetary policy anywhere, either. I’m getting all of that in the next three months. Despite this, I do have a pretty good grasp of macro theory in general, though I do feel the distinct lack of framework on which to hang this kind of material when I read it. Thankfully that will be remedied quickly.

(You’ll notice that it doesn’t stop me from jumping into the deep end, because that’s just the way I roll…)

9 bills on the table in front of the 111th Congress:


TARP reform with fulltext. Introduced by Barney Frank (D-MA).

On Executive compensation:

SPECIFIC REQUIREMENTS- The standards established under paragraph (1) shall include–

(A) limits on compensation that exclude incentives for senior executive officers of an assisted institution which received assistance under this title to take unnecessary and excessive risks that threaten the value of such institution during the period that any assistance under this title is outstanding;

(B) a provision for the recovery by such institution of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later found to be materially inaccurate;

(C) a prohibition on such institution making any golden parachute payment to a senior executive officer during the period that the assistance under this title is outstanding;

(D) a prohibition on such institution paying or accruing any bonus or incentive compensation, during the period that the assistance under this title is outstanding, to the 25 most highly-compensated employees; and

(E) a prohibition on any compensation plan that would encourage manipulation of such institution’s reported earnings to enhance the compensation of any of its employees.

Good, good. There’s lots more in that bill if you’re interested. Moving on…

  • H.R. 391: To amend the Clean Air Act to provide that greenhouse gases are not subject to the Act, and for other purposes.
    Greenhouse gases aren’t toxic to people per se, the way the other pollutants covered in the Act are. As much as it pains me to say it, this restriction probably makes sense. Greenhouse gases should be addressed in their own bodies of legislation instead of being shoehorned into a bill that was never meant to account for greenhouse-type externalities.

  • H.R. 374: To require the closure of the detention facility at Guatanamo Bay, Cuba, to limit the use of certain interrogation techniques, to prohibit interrogation by contractors, to require notification of the International Committee of the Red Cross of detainees, and for other purposes.

  • H.R. 426: To amend the Internal Revenue Code of 1986 to reduce the depreciation recovery period for certain roof systems.
    Fulltext not available, but if it’s what I suspect it is — an amendment to the IRC that allows for a quicker accounting depreciation schedule for roofing systems — it’s a win for whatever businesses have these systems. The quicker you can write off a capital expense, the better it is for your bottom line.

  • H.R. 448: To protect seniors in the United States from elder abuse by establishing specialized elder abuse prosecution and research programs and activities to aid victims of elder abuse, to provide training to prosecutors and other law enforcement related to elder abuse prevention and protection, to establish programs that provide for emergency crisis response teams to combat elder abuse, and for other purposes.
    My family owns a homecare agency for seniors and disabled, and elder abuse — usually through neglect — is quite common. I’ll be interested to read the fulltext when it’s available.

  • H.R. 429: To permit the televising of Supreme Court proceedings
    Change we hope to believe in… continuing the opening up and focus on transparency of government procedure. Sponsored by a Republican, no less.



  • H.R. 423: To provide compensation for certain World War II veterans who survived the Bataan Death March and were held as prisoners of war by the Japanese.
    The Bataan Death March took place in 1942… 67 years ago. Most of these folks are probably already dead. Why now? I’m not against it; it just seems a little late.

  • H.R. 364: To restrict nuclear cooperation with the United Arab Emirates, and for other purposes
    The fulltext of this bill is not available, unfortunately. It’s a bipartisan bill, which surprised me; I would have pegged it as a Republican machination. In general, I am in favor of nuclear power, and while I realize that there’s not a single country on Earth that has nuclear power without some nuclear weapons capability, nuclear power is ultimately a clean, environmentally-friendly means of generating electricity. I don’t see the UAE as a particularly dangerous entity. They’re fairly progressive as Muslim nations go, and they’re interested in moving away from a petroleum-based economy, which is a good thing.



  • H. J. Res. 17: Expressing support for designation of the month of October 2009 as “Country Music Month” and to honor country music for its long history of supporting America’s armed forces and its tremendous impact on national patriotism.
    Introduced by Ted Poe (R-TX). I’m not sure how this particular bill could possibly reinforce certain stereotypes more than it already does. It’s like a pre-packaged joke just begging to be used in a bad sitcom. And I resent the insinuation that music is patriotic because it may include jingoistic overtones and the glorification of “small town” values.

Well at least they were candid…


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

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

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

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.