Saturday, November 13, 2021

Social Justice Thrives in Cook County during Tradeoff Holiday

During this terrible pandemic, a silver lining has been that many inconvenient tradeoffs no longer apply. A Yale study showed that paying people not to work does not, for the time being, prevent anyone from working. Perhaps also emptying the prisons can enhance public safety. We can have social justice and safety at the same time.

Figure 1 below shows points-in-time numbers of people in Illinois prisons who were convicted in Cook County and admitted to prison within the past half year. The stock of new convicts had been between 3000 and 4000, until the pandemic when it dropped to 1000. Figure 2 limits the sample to convicted murderers. They had been entering Illinois prisons at a rate of about 130 per year (65 per half year), until the first half of 2020 when the rate dropped to about 40 per year (20 per half year).





I hope that Chicago-area activists can work to help maintain this progress. Perhaps they could even lend some expertise to the rest of Illinois (not shown in the charts above), which has missed a social-justice opportunity by continuing to admit convicted murderers to prison at pre-pandemic rates.

Formerly experts thought that incarceration enhanced public safety.  But that was based on old data, examined by researchers lacking sufficient social-justice training.  Especially during a pandemic, there is no reason to worry about adverse consequences until somebody has conducted a new study using state-of-the-art empirical methods.

A troublesome skeptic might insist on metrics to indicate when the tradeoff-holiday has ended, when the path to safety might again involve more incarceration rather than less. Could it be dangerous to barrel forward on the social-justice highway, when at any moment we could find ourselves in high-speed reverse?

Such a reactionary critic forgets that social justice is crowd sourced. The overwhelming odds are that one of us will notice the situational shift and promptly alert the polity. In the worst-case scenario, remember: if we want to make an omelette, we must be prepared to break a few eggs.

[Update: Cook County Prosecutor Kim Foxx is often credited with reducing incarceration.  This week the American Constitution Society and the Black Law Students Association of UChicago Law School hosted her.  Did you encourage her to keep making the omelette?!]

Thursday, November 4, 2021

3rd release of Build Back Better: 7 million less employment

Last night a third release of BBB was shown to the public.  Both in pages and overall economics, it is in between the 1st and 2nd editions.

First-release items resurrected yesterday

  • Repeal of Trump's terrible rebate rule (Section 139301).  It is likely illegal so repealing it does nothing but CBO probably will credit Dems with cutting about spending by about $200B with this provision.
  • Drug "Price Negotiation Program" (Section 139001).
  • Rx "Drug Inflation Rebates" (Section 139101).
  • Favors to labor unions such as allowing union dues to be tax deductible (Section 138514) and giving the National Labor Relations Board new authority to levy hefty penalties on employers (Section 21006, which was also in previous releases).  
  • E-cigarette and tobacco taxes (Section 138520).
  • Federal family leave (Section 130001).
Important items maintained from the 2nd release
  • Affordable housing (still $150B across various sections such as 40001ff).
  • Expanded ACA premium tax credits (Sections 137301ff).
  • New federal childcare (Section 23001) and preK programs (Section 23002), including massive hidden taxes on marriage.
  • Child Tax Credit expansion (Section 137101ff).
  • Partial launch of the Green New Deal (various sections such as 136001ff).
  • Medicaid expansions (various sections).
  • Privacy regulation (Section 31501).
New item: Increase annual cap for deduction of State and Local Taxes (SALT) from $10K to $72.5K (Section 137601).  About 8 percent of filers are affected by this.  I guess that about 6 percent of filers are workers who would go from a binding cap to a nonbinding cap.   For such people, IF the federal and SALT rates remain constant, the overall marginal tax rate on labor income falls.  This is my assumption for the table below, but I note that lifting the SALT cap encourages states to increase SALT rates (for everyone, not just the 8 percent) and discourages states from cutting rates.  Moreover, the additional SALT revenues from those rate changes may well be spent on programs that pay people not to work.

This table shows 14 BBB provisions with significant hidden effects on incentives to work.  (My earlier post provides more detail on those incentives).  The final column of the table shows an estimated impact of these hidden incentives on FTE employment, allocated among the 14 provisions.  This does not include any employment effects of funding BBB with income taxes on households (Sections 138201ff) and businesses (Sections 138101ff).




Thursday, October 28, 2021

Revised Build Back Better: Cliffnotes

Hidden Work Disincentives

I had been tracking 13 types.  Three disappeared from today's revised bill.  The Medicaid expansions appear to be less.  Affordable housing was cut in half (still at $150B).  Dems once aspired to allow union dues to be tax deductible but that was cut.  Many other pro-union provisions remain.

The new childcare program has now replaced an income phaseout above 250% median income with a cliff.  This change from last month's bill to lastest draft has little effect on the average marginal tax rate because the same funds are being phased out over a narrower range.  I.e., a few people see very large additions to their marginal tax rate while others disincentivized with a phaseout now see no addition.

The "green energy" provisions have a lot of producer-protectionist elements in them, which add to the labor wedge much like excise taxes do.  However, the green energy provisions were scaled back in today's revision.

The Obamacare expansion (pp. 1458ff) is a bit more aggressive than last month's BBB bill.  The revision stops indexing -- ie health insurance gets more expensive over time and it is 100% taxpayer problem rather than plan members'.

My summary of marginal-tax-rate and employment effects are shown in the table below.  More derivations are available in my report although that report refers to last-month version.


Hidden Marriage Disincentives

Replacing the childcare phaseout with a cliff increases the (already remarkably large) marriage disincentive because even a father with moderate earnings will, if he joins the family, push them beyond the range of eligibility.  I.e., the family with married parents will likely be paying full price.  The various, and extreme, provisions to inflate the full price of childcare remain in the revised bill.

Pharma scores two wins

The news came out early that this bill would not have prescription-drug price controls.  But it also allows Trump's terrible rebate rule to continue.  Even Biden was expecting the revised bill to contain a repeal, with much savings in corporate welfare that could be put toward "transforming America."  Should I start calling it "Biden's terrible rebate rule"?

Employers are still the enemy

The revision maintains the directive for OSHA to increase employer fines by at least 10X (Section 21004).  Among other things, a private-sector employer with an unvaccinated employee on the payroll will be punishable by a fine of up to $1,365,320 PLUS up to $136,532 per day that employment continues (yes, $51 million per employee per year; note that the statute dictates specific amounts and that the amounts be annually indexed).  This far exceeds the social cost, if any, of employing such a person.

However, revised bill does not mandate employers to provide retirement accounts.  I am expecting this onerous mandate to show up in the new retirement bills introduced this week in House and Senate, but for now this element of freedom remains in employer-employee relations.

Thursday, October 14, 2021

Childcare in "Build Back Better"

Because childcare is said to be a highlight of the “Build Back Better” bill, I read through the bill and made notes here as to childcare provisions and some of their economic incentives, aside from the obvious that new spending must someday be financed with taxes.  You will be surprised at the disparity between what the bill incentivizes and what we're told it will do.

[For provisions less related to childcare, see my earlier summary.]

Section 23001 of the "Build Back Better" bill would use the Obamacare mold to create a federal childcare program.
  • Low-cost (a.k.a., "low quality") childcare would be prohibited unless the provider were to forgo all federal dollars, which would involve something like having zero children from a family at or below $200K annual income.
    • Childcare workers would have to be paid as much as elementary-school teachers.
    • According to the Bureau of Labor Statistics, elementary school teachers earned an average of $63,930 annually in 2019.
    • The same BLS data show childcare workers earning an average of $25,510.  I.e., under BBB childcare would have to pay them 151% more.
    • A 151% increase is similar to the increase in individual health insurance premiums that occurred when Obamacare came into effect.
    • See also Section 132002f (which appears to be eliminated in the Nov 3 revision).  Complying with all of these statutes, certifications, and the implementing final rules will add administrative costs to childcare.  E.g., just as physicians today complain about paperwork taking away from their real job, so will childcare providers under BBB.
    • Much of the extant supply of childcare is provided at a church or other faith-based location, but federal funds for expanding supply cannot be used there (this prohibition is about 80% of the way through the long Section 23001).  The result will be creating supply at locations that could not otherwise pass the market test because they are too costly or offer insufficient quality (by parents' assessment).    
    • When quality regulation was tried in Quebec, the results were opposite of advertized intentions:
      • there were “increases in early childhood anxiety and aggression”
      • “there was a large, significant, negative shock to the preschool, noncognitive development and health of children exposed to the new program, with little measured impact on cognitive skills.”
      • “worse health, lower life satisfaction, and higher crime rates later in life.”
      • HT Ryan Bourne
  • Families would pay on a sliding scale.  i.e., earning more means paying more for the same childcare.
    • Above 150% median family income ($102K annually), the implicit marginal tax rate would be 7% until the benefit is exhausted.
      • For a family with two children, they would face the 7 percent rate until income was beyond $400K
    • Between 75% and 150% median, the implicit marginal tax rate is about 14 percent.
    • The sliding scale is based on HOUSEHOLD income: the implicit marriage tax could easily be $20K per year that a couple has children under age 5.  [this is not the only marriage tax in BBB]
      • The unintended (?) consequences do not stop there.  Adding to the pool of "deadbeat dads" further discourages work because of the "overhang" (an economics term) of mounting child support debt.  As a UWisconsin study put it, "greater debt has a substantial negative effect on both fathers’ formal employment and child support payments."  See also this article.  
      • For most families, the childcare costs of having additional children 0-4 would be zero.  This will affect the number and spacing of births , and by this channel could reduce employment of mothers.  Also incentives to keep cousins in the household.
  • Although there are loopholes, child eligibility requires a parent to be employed (part-time is OK), self-employed, engaged in job search, job training, school, or on medical leave.  It’s OK if a second parent does no work (but see the marriage tax above).
Section 23002 creates a universal public pre-school program
  • no tuition charged to parents
  • applies to exactly two cohorts of children (age 3 and age 4).
Section 132001: Federal funding for childcare information services (i.e., finding childcare).  Less than 1/1000th of the funds spent in Sections 23001 and 23002.

Sections 137102f: Expanded Child Tax Credit (CTC).  See here for a detailed analysis of how the expansions discourage work, especially among single mothers.

Section 137201: Expanded Child and Dependent Care Tax Credit (CDCTC, not to be confused with the CTC).  This credit is tied to employment.  On the other hand, it is phaseout with income.  Therefore its net effect on national employment (not counting the tax increases that will eventually be needed to pay for it) will be less than the effects cited above.  Section 137202 is a similar provision administered on the employer side, but is not phased out with income and therefore expanding it is more likely to encourage work.  However, this provision is apparently rarely used by employers: see CBO's revenue score from the American Rescue Plan, which had the same provision except on a temporary basis.

Section 137301: a per-employee business credit of up to $5,000 annually is available for operators of childcare facilities (I don't think a household employing a nanny would count).  This might, to a small degree, offset the higher wages that such facilities would be required to pay (recall the 151% increase cited above).   [This was eliminated from later drafts]

Wednesday, October 6, 2021

Build Back Better's Hidden but Hefty Penalties on Work

Largely by stepping toward an economy in which workers bear the burden of distributing healthcare and housing with little regard to ability or willingness to pay, the Build Back Better bill (BBB) would implement the single largest permanent increase in work disincentives since the income tax came into its own during World War II.

The bill would also reduce work by limiting competition in the labor market, imposing employer mandates, and increasing consumer prices for telecommunications, energy, and other products.   All of these disincentives go on top of those already in the baseline due to a continuing portfolio of federal, state, and local tax, spending, and regulatory policies.

The implicit employment and income taxes in BBB would increase marginal tax rates on work by about 7 percentage points.  I expect that such a change in the disincentive would reduce full-time equivalent employment by about 4.5%, or about 7 million jobs. 

Penalizing Work and Hiring

The disincentives are delivered through two fundamental economic mechanisms.  First and foremost is the creation and expansion of employment-tested benefits.  Full-time employment is a major barrier to participating in the programs, even if that employment does not produce much income.  Especially, BBB allows even America’s highest-income households to participate in subsidized “Obamacare” insurance plans as long as they are not engaged in any job that offers health insurance.  For most full-time workers, their employment status by itself excludes them and their family from the additional Obamacare subsidies delivered through BBB, especially its sections 137501 and 137502.

[Some employers will respond to BBB by dropping their coverage, but from an employment-incentive perspective this only changes the form of the full-time employment tax to the Affordable Care Act’s (ACA’s) employer penalty for not offering coverage.  The salary equivalent of that penalty is almost $4,000 per full-time employee per year].

Family medical leave is another benefit tied to not working.  Section 130001 is quite explicit that eligibility requires a caregiving activity “in lieu of work, other than for monetary compensation.”   Family medical leave is a cash benefit paid in proportion to the number of hours of such caregiving.  [Presumably the beneficiary could not both engage in a normal work schedule and claim such caregiving activities, but the details would be the subject of future executive-branch rulemaking.  If double-dipping were rampant, this would raise expenditure on the program thereby requiring additional taxation that would itself discourage work.]

BBB also creates and expands employer mandates, with compliance enforced with penalties that are proportional to employment, regardless of how rich or poor the employees may be.  An example of a proportional employer-penalty scheme is BBB’s new requirement to administer IRA deductions from employee paychecks, with all employees enrolled by default.  The penalty for non-compliance is $10 per employee per day (Section 131101), which is similar in magnitude to the ACA’s penalty for failing to provide health insurance.

Section 21004 increases penalties on employers for failure to comply with federal occupational safety, health, and labor-standards requirements.  The increases are tenfold or more.  For example, the penalty for a large (100+) employer to employ an unvaccinated person is between $50,000 and $700,000 per violation and an additional $70,000 per day, all rescaled for the inflation adjustment prescribed in the statute.  This could amount to $51 million (sic) for every year that each unvaccinated person remains on the payroll.

These and other parts of BBB further reduce employment by suppressing competition in the labor market.  Such provisions seek to prevent non-union workplaces, which are almost 95 percent of all private employment, from distinguishing themselves from unionized workplaces.  Others put nonunion workplaces at an outright disadvantage.  [The labor union movement, of course, is an attempt to restrict or monopolize the supply of labor in order to extract higher employee compensation.]  Section 138514 would allow union dues to be deductible from federal income tax, putting about $400 million per year on the union side of the economic scale.  Other sections, such as 132002, target “infrastructure grants” to “labor unions and other employers … that pay the prevailing wage.”  Section 136401 creates a credit for the purchase of an electric vehicle that “satisfies the domestic assembly qualifications” (that is, unionized).

 

Penalizing income

The second mechanism is income-tested benefits, which discourage the earning of income by withholding benefits as a household’s income rises.  For example, Section 136407 creates a tax credit for 15 percent of the price of the purchase of an electric bicycle, but the credit is reduced $0.20 per additional dollar earned by the household.  More important, from an aggregate perspective, are the various additions to major income-tested programs such as Medicaid, “affordable housing” and the Child Tax Credit.  By my count, the various new affordable housing subsidies in BBB exceed $220 billion over ten years [two days after I wrote this, CBO estimated $312 billion].

Other provisions are, legally or economically, new excise taxes.  These discourage work by reducing real wages, especially to the extent these policies raise consumer prices by protecting incumbent producers.  A major example is section 31501, which directs the FTC to further enforce “privacy” rules that are effectively prohibitions on lower cost internet plans.  When President Trump and the 115th Congress repealed such prohibitions, the cost of internet service dropped so sharply and immediately that the consumer savings drew the attention of then Federal Reserve Chair Janet Yellen due to its visible effect on the overall Consumer Price Index.  This shows why we can expect higher prices for internet plans under BBB.

A plethora of “green policies” have a similar effect on prices of transportation and energy, such as taxes on methane emissions (Section 30114), subsidies to rural utilities (Section 12007), and green electricity programs (Sections 30411, 136101).  Undoubtably the BBB will be sold as a windfall for the poor, but all of the bill's explicit and implicit excise taxes are particularly regressive.

 

Projected Employment Effects

The magnitude of BBB’s disincentives for work and hiring varies across households and firms.  They also vary by margin of response, such as adjusting work schedules, the duration of employment, or the duration of nonemployment.  Properly measured disincentives also reflect the reality that benefit takeup is typically well below one hundred percent.  I estimate that, on average, BBB implicit employment and income taxes would add almost seven percentage points to the marginal tax rate on labor income.  At least another two percentage points would someday be required to finance its projected $220 billion contribution to the annual federal budget deficit.

These disincentives are on top of the many other taxes on income, payroll, and sales; other implicit and explicit employment taxes; and longstanding income-tested benefits.  Even ignoring the additional financing, the disincentives would reduce the share of marginal product kept by the average worker from about 0.52 to 0.45, which is a reduction of about 13 percent.  I expect that such a change in the disincentive would reduce full-time equivalent employment by about 4.5%, or about 7 million jobs.  Perhaps employment would prove to be more sensitive to incentives, as it did during the 1990s welfare reform (see also the update below), or less sensitive, but 7 million is a good point estimate.

I estimated the 7 percentage points by aggregating the disincentives in the various sections of BBB.  The largest is the expansion of subsidies for Obamacare exchange plans.  Using the same methods as Mulligan (2015), I estimate that these subsidies by themselves add almost three percentage points.

For the employer IRA mandate, I estimate 0.5 percentage points, which is the average result from two methods.  One method is from Council of Economic Advisers (2019) analysis of the removal of an IRA mandate.  The second method is, based on the Harberger triangle method, to take half of the penalty and apply it to the 33 percent of workers who do not currently have pension coverage through an employer.

Although the BBB’s expanded Child Tax Credit (CTC) has received much attention, I do not find that it adds much to the marginal tax rate on labor income.  The CTC expansion removes a negative tax on labor income, but that applies only below the poverty line and is offset to some degree by expansions in the Earned Income Tax Credit.  The CTC creates a new five percent phaseout range, but my estimates from the Current Population Survey suggest that less than five percent of nonelderly persons aged 21-64 are in a household that with 2019 incomes that would be in that range.  I therefore estimate the expanded CTC’s contribution to the marginal tax rate increase to be only 0.24 percentage points.

For several other provisions, such as the Medicaid expansion in states that opted out of the original ACA expansion, the new Medicaid home and community-based programs, and affordable housing, I assume that each dollar budgeted in BBB translates into the same contribution to disincentives as each dollar expected to be spent on the expanded subsidies for exchange plans.

I assume that the effects on restraining competition in labor markets are the same as Council of Economic Advisers (2019) found for four Obama-era regulations intended to bolster unions (the Fiduciary rule, the Persuader rule, and two joint-employer rules).  I assume that the Green Energy components of BBB contribute one-fifth to the labor wedge of what Fitzgerald, Hassett, Kallen and Mulligan estimated for Biden’s campaign promises regarding renewable energy.

Many of the details of the BBB programs will remain unknown until it becomes law and executive agencies issue their rules for administering them.  Although I assume that benefit takeup is well under 100 percent, I may still have overestimated it in which case BBB would be more of an adverse productivity shock and less of a work disincentive.

[Adverse productivity shocks tend to have comparatively small employment effects and large adverse effects on wages, capital investment, and living standards.  As such, they have a lot in common with BBB’s prescriptions for higher marginal tax rates on corporate and noncorporate businesses, which are not analyzed here.  I have also not yet quantified the disincentive effects of various unemployment-benefit sweeteners in BBB, such as the Section 137507 that makes exchange plans essentially free during any calendar year in which a person has unemployment compensation.]

[Update: Many economists studying the EITC and CTC give a lot of attention to the option of having zero earnings during a full calendar year.  It is a fact that BBB gives almost every parent a significant bonus for choosing that option.  I find this option to be hardly relevant for a large majority of adults, but another approach would be to conclude from welfare reform and EITC changes that low-skill single mothers will be very responsive to the BBB's new subsidies for zero work.  If so, perhaps I underestimate the national employment effect by a million or so.  Thanks to Kevin Corinth, Bruce Meyer, Matthew Stadnicki, and Derek Wu]

[2nd update: BBB reduces childcare costs for some families and increases it for others.  Most important for these purposes, the bill's new childcare subsidies introduce a new set of income phaseouts much like Obamacare did in 2014.  Including the various childcare/credit programs, I now project BBB's employment impact to be -9 million.]

As a younger Barrack Obama put it (watch for about 80 seconds), "I am absolutely convinced ... we have to have work as the centerpiece of any social policy."]

Friday, July 30, 2021

Michael T. Maloney: A Few Memories

Michael T. Maloney passed away this week. We both loved applied price theory and golfed to the exact same handicap.

We both liked sailing too and together sailed around Long Island in less than 24 hours. He frequently asked why we had to spend so much time scouring the ocean for our competition. To this day I don’t know how to answer this question coming from a first-class IO economist, but perhaps he did not want to imitate Ahab too much.



I wish to find better pictures (Skip has several on facebook) but here we are crossing the starting line first in 2011. Below we are about half way down the island on the ocean side.




Our 2011 corrected finish time was the best in that year’s fleet (and many other years’ fleets). We (Mike and me and 2 others) especially liked beating the two U.S. Navy college teams, which had crews of a dozen each, larger boats, and of course government money.

We almost lost Mike a few years ago when he parked in front of his house, went inside, and minutes later saw his Suburban completely crushed by the falling of a large tree.

An indicator of both how he viewed economics as a unified field and how much he enlivened his department is the number of colleagues who published articles with him despite coming from different subfields. Bobby (McCormick), Skip (Sauer), Bob (Tollison), Bruce (Yandle), Bentley (Coffey) and Matt (Lindsay), to name a few. Also many Clemson students.

Mike was particularly saddened when Matt Lindsay passed away in 2015. I hope they are together again.

Saturday, March 27, 2021

Misleading Baltimore Stats for Celebrating Lax on Crime

In 2020, the City of Baltimore stopped prosecuting "minor charges" such as drug crimes.  The headlines are that 2020 crime "went down a lot" from 2019.  Homicides fell by 13.

Not mentioned is that, over a similar time frame (2020 Q1-Q3 vs 2019 Q1-Q3), "Opioid Intoxication Deaths" increased by 48 persons (at an annual rate).  That is an increase of 36 percent, compared to 21 percent for the rest of the state of Maryland or 3 percent for Baltimore 2018-2019. 

Of course a lot of unusual things happened during the pandemic, which was also experienced by the rest of Maryland and the world.  But is there any reason to be confident that lax enforcement of drug laws would not increase activity associated with fatally dangerous drugs?

Tuesday, March 2, 2021

How Chicago Economics is Helping End a Pandemic: Interview with Murphy, Philipson, Topel

Covid-19 has disrupted much of human life, but Operation Warp Speed has drastically mitigated the costs of the virus. The $10 billion federal program launched in April 2020 encouraged and accelerated the development and mass manufacturing of COVID-19 vaccines, streamlined Federal approval for vaccines and their manufacture, and provided Federal funds for private vaccine research and advance-purchase orders.  COVID-19 vaccines are currently being administered to the general public at least six months earlier than expected.  Vaccinating the population against COVID-19 six months earlier was worth about $1.8 trillion to the U.S. alone in terms of lives saved and accelerating the return to normal schooling, work, socializing, etc. (Mulligan and Philipson 2020).

Operation Warp Speed is a historic milestone for economic research on medical innovation that occurred over decades on the University of Chicago campus.  Chicago’s research results, traditions, and emphasis were brought to the federal government in 2017 by several of its faculty and alumni.  In the three years before COVID-19 came to the United States, that economic team showed the President of the United States how federal policy reforms were delivering real value to consumers by encouraging innovation in healthcare industries.  Also before the pandemic, the team prepared and published a blueprint for vaccine innovation during a pandemic that would become the intellectual foundation for Operation Warp Speed.  This document tells the story of the program’s University of Chicago origins.   The document traces the economics of the program back to underlying UChicago economic principles on regulation generally and health economics specifically, following the contents of a recent video conversation I had with University of Chicago colleagues Kevin M. Murphy, Tomas J. Philipson, and Robert H. Topel.


 

UChicago on Regulatory Barriers in Healthcare

Operation Warp Speed, especially its economic elements, emerges from a large body of UChicago research centered around the unintended consequences of health regulation. Many economic frameworks developed in the Chicago price theory tradition allow for both quantitative work and application across various industries. An early piece by Milton Friedman and George J. Stigler, Roofs or Ceilings? found that housing regulation exacerbated housing problems rather than making them better (Friedman and Stigler 1946).  Stigler would dedicate much of his career to developing the economics of regulation, including the famous “regulatory capture theory.”  As Stigler put it in his 1971 paper, “as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit … regulatory policy will often be so fashioned as to retard the rate of growth of new firms” (Stigler 1971).

A famous 1973 paper by Chicago’s Sam Peltzman applied the entry-barrier theory specifically to the regulation of drugs, vaccines, and medical devices.  He observed that the U.S. Food and Drug Administration’s (FDA) approval procedures amounted to industry entry barriers, concluding that “consumer losses from purchases of ineffective drugs or hastily-marketed unsafe drugs appear to have been trivial compared to their gains from innovation” (Peltzman 1973).  Peltzman’s approach was appreciated throughout the profession,[1] including a book from M.I.T. Professor Peter Temin also concluding that FDA delays were too long (Temin 1980).  More recently, Tomas Philipson and Chicago alumnus Eric Sun concluded that FDA pre-market regulation and post-market tort liability acted as a double tax on product development (Philipson and Sun 2008).  With Eric Sun and other coauthors, Philipson conducted cost-benefit analyses of the tradeoff between speed and safety, concluding in 2008 that FDA was putting too much weight on safety.  This work influenced FDA deregulation efforts during the Bush Administration, although that administration continued to be frustrated by the fact that FDA “steadily disregarded many of the [] provisions” of laws intended to get FDA to move faster (Gottlieb 2010).

Regulate or Deregulate?

Philipson joined the Trump Administration in 2017 and Mulligan in 2018, both in its White House Council of Economic Advisers (of which Philipson would ultimately become Acting Chair).  These issues arose immediately in connection with President Trump’s campaign promise to lower prescription drug prices.  He appointed FDA Commissioner Scott Gottlieb, who had been critical of FDA delays.  Trump’s economic team, which included Chicago economists Anna Wong, Don Kenkel, Eric Sun, Kevin Corinth, Paula Worthington, Rich Burkhauser and Troy Durie, predicted that deregulation would reduce drug prices because reduced FDA barriers would result in more new drugs and more manufacturers of existing drugs to compete for consumer dollars.  On the other side was Health and Human Services (HHS) Secretary Alex M. Azar II, who proposed a “drug pricing blueprint” that would add regulations on everything from television advertisements to business-to-business price controls.  Although deregulation was a pervasive theme in his administration, the President was no ideologue but rather just looking for results.

In a 2018 report that was little noticed at the time (Council of Economic Advisers 2018), CEA laid out and updated Peltzman’s case that FDA regulations are entry barriers that reduce entry and raise prices. It showed that Gottlieb’s deregulation was in fact increasing entry of generic drugs and predicted that lower prices would follow.  The CEA received their first sense of progress on January 10, 2019, with the confidential advance release of the Consumer Price Index (CPI) report for December 2018.  It showed that 2018 was the first calendar year since 1972 that retail prescription drug prices actually fell even though consumer prices generally were increasing.  The CEA composed a message to be posted on the President’s Twitter account the next day.  But this message had to be approved by HHS, which was loathe to release something so contrary to its perceived “need for regulatory action” in the face of purported “prices of existing drugs [that] have been rising in the United States much more rapidly than warranted by inflation or costs” (United States, Department of Health and Human Services).  Mulligan convinced the President’s communication team that the CPI is reliable and is telling us something important.  The President would brag about the result in everything from impromptu press briefings to his State of the Union address.  Although none of us knew what 2020 would bring, the President was also getting valuable experience at, and witnessing results from, removing barriers to medical innovation, especially at the FDA.

 

The Value of Medical Innovation during a Pandemic

UChicago’s Tomas J. Philipson and Richard A. Posner founded the field of economic epidemiology, which emphasized that the costs of a contagious disease are not limited to the health losses of those who contract the disease because many others upend their lives in order to stay healthy (Posner and Philipson 1993).  In 2006, Kevin M. Murphy and Robert Topel’s “Value of Health and Longevity” assessed the valuation of improvements in health expenditures and their policy implications (Murphy and Topel 2006).  This study calculated the value of innovations that occurred in the past, the potential value that can occur in the future from reducing the incidence, and the mortality of various diseases.  They even looked at the value of innovation to reduce mortality from contagious respiratory diseases, of which COVID-19 proved to be an example.  Gary Becker, Tomas Philipson, and Rodrigo Soares estimated the health component of economic growth associated with the value of health improvements (Becker, Philipson and Soares 2015).  Part of Becker’s UChicago course on human capital looked at the value of preventing a worldwide pandemic (Jaffe, Minton, Mulligan and Murphy 2019).

Chicago’s emphasis on medical innovation profoundly influenced the White House economic team.  Judging from the 74 Economic Reports of the President (ERPs) published since the Truman Administration, no economic team gave so much attention to medical innovation.  The 2018 ERP had a full chapter about the health sector, half of which was about "Improving People’s Health through More Access to Medical Innovations" and "Encouraging Innovation, and Making It Affordable."  The 2019 ERP (p. 18) cites FDA deregulation as one of the highlights of the year and devotes twelve pages to how FDA reforms increased competition and reduced prescription drug prices.  The same report also looks at the possible negative innovation effects of a proposed Federal ban on for-profit healthcare.

The 2020 ERP updated the status of the FDA reforms in its chapter about deregulation, its chapter about healthcare, and its chapter about competition policy.  It also cited the new Right to Try law and relaxed regulatory barriers to treating chronic kidney disease (Council of Economic Advisers 2020).  

In order to continue to add to the formidable intellectual capital stock of Chicago economics, Tomas J. Philipson and Casey B. Mulligan have developed a new initiative supporting economic research on healthcare markets and medical innovation. The initiative takes the unique approach of addressing issues specific to health care through a broader economic lens, applying insights from industrial organization, macroeconomics, finance, labor economics, and other fields. Some of the key focus areas investigated so far are FDA hedges, financial health engineering to support medical research, the effects of reference pricing on market entry, and innovation incentives and disincentives in NIH funding. In April of 2020, Mulligan published a report on the excess burden of COVID-19 and the value of medical innovation that assesses the total cost of COVID-19 in the U.S. (Mulligan 2020). Later, Mulligan and Philipson estimated that Project WARP Speed was worth $1.8 trillion due to getting COVID-19 vaccines at least six months before anybody expected. The initiative is currently planning a conference in the Spring of 2021 around the many issues of technological change in healthcare, including the measurements and determinants of these innovations.

Although COVID-19 would not arrive in the U.S. for two more years, Trump’s CEA was also being asked by the National Security Council’s biodefense team to look at the economics of vaccine innovation during pandemics.  This was an opportune time to bring the Chicago tradition on regulation together with its results on epidemiology and the value of medical innovation.  In a report published in September 2019, CEA concluded that “…improving the speed of vaccine production is more important for decreasing the number of infections than improving vaccine efficacy” and emphasized the need for large-scale manufacturing and the possible advantages of public-private partnerships” (Council of Economic Advisers 2019).  

 

Presidential Human Capital

The CEA vaccine report prompted a President’s Executive Order, also before the current pandemic, noting that “viruses emerge from animals … that can spread efficiently and have sustained transmission among humans.”  President Trump concluded that “vaccination is the most effective defense….”  As two of Trump’s former senior staff members put it “when COVID-19 emerged, the White House was ready and expeditiously applied the report's deregulatory and fiscal lessons to streamline FDA approval for vaccines and their parallel manufacturing on a large scale” (Grogan and Philipson 2020).

Mulligan and Philipson were in the Oval Office with the President and his economic team in February 2020 (when COVID-19 cases just were beginning to spread in the U.S., and before Operation Warp Speed).  His staff continued to worry that the FDA would not be interested in removing any more approval barriers.  But the President was confident, telling them that “I’ve done it before and will do it again … bring the FDA management in here.”  He and his administration not only knew why approval barriers needed to be removed but knew from prior experience how to do it.  By the end of that calendar year, two vaccines were approved, produced, and beginning to be delivered to the American population.

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Footnotes


[1] See the 2001 survey by Klein and Tabarrok.