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Lawrence Lee
Morgan Stanley
Declan McCullagh
Project Syndicate

Old Material, from early 2003

Drug Patents and Poor Countries

John E. Calfee does not think that poor countries are well served by a regime that breaks drug patents and enables them to obtain generic drugs at the cost of production.

Today, hundreds of biotech firms, many of them in India and other developing nations, are taking financial risks trying to solve difficult problems. But they are aiming at the U.S. market, not their own. They know that if they find, say, a malaria vaccine, the new WTO rules will be used to declare a national health emergency and invite generic manufacturers to steal all possible profits.

Discussion Question. Why is it more natural to want to think of drug research as communal property than to recognize the value of incentives in encouraging drug research?

Supply-side Economics for Israel

When it comes to the Israeli economy, I am a supply-sider.

Israel's difficulties resemble those of France or Germany, the exemplars of Eurosclerosis. Their high unemployment rates are due largely to regulations and taxes that undercut the ability of businesses to create jobs and blunt the incentive of individuals to work.

Discussion Question. How has the violence in Israel affected aggregate demand and aggregate supply?

Recent Trends in Income and Wealth

The Federal Reserve Board has published an article summarizing the results from its latest survey of consumer finances. The press is focusing on findings that include a more unequal distribution of income and broader ownership of stocks. The authors note that from 1998 to 2001,

Among groups defined by education of the family head, net worth rose only for the groups at the opposite extremes: families headed by persons without a high school diploma or its equivalent and families headed by persons with at least a college degree.

Often, people interpret this sort of study as if identical families were being analyzed at different points in time. In fact, the families are different. I like to use the metaphor of an escalator, in which you observe some families starting at the bottom (as new households or new immigrants) and others closer to the top. What the survey provides is a snapshot of the escalator in 2001, which can be compared with a snapshot of the escalator in 1997.

Discussion Question. If income and wealth rose in all quintiles of the distribution but rose most rapidly in the top quintile, is this good or bad?

A Deflation Primer

From 'Jane Galt':

Scott Rosenberg wonders if the deflation we may be facing is due to cheap Chinese production.

Umm. No.

... we've been importing from China, and before that Japan, for decades -- no deflation. Finally, trade is a relatively small part of the US economy.

The kind of deflation that economists worry about is the kind that is caused by a mismatch between the supply of money and the demand for it. Specifically, people want to hold more money and spend less, so you need more money in circulation.

To paraphrase her icon, Milton Friedman, deflation is everywhere and always a monetary phenomenon.

Discussion Question. Even if competition from Chinese producers were significant, why would we expect that it would affect the price level but not the rate of inflation?

Lucas vs. Tobin

The late Nobel prize-winner James Tobin once quipped, "It takes a lot of Harberger triangles to fill an Okun gap." What he meant was that the economic losses due to supply-side inefficiencies were small relative to the losses caused by high unemployment during recession.

This month, another Nobel prize-winner, Robert Lucas, claims to refute that claim.

The potential gains from improved stabilization polices are on the order of hundredths of a percent of consumption, perhaps two orders of magnitude smaller than the potential benefits of available "supply-side" fiscal reforms.

The difference between Tobin's view and Lucas's view boils down to this: Lucas views macroeconomic performance in terms of deviations around a trend. Thus, for every recession, there is an equal-and-opposite boom. Stabilization policy would reduce the magnitude of booms as well as recessions.

For Tobin, in contrast, the economy is either at full employment or in recession, There is no such thing as a boom that offsets a recession. The output lost in a recession is never recovered.

Lucas's reputation in the profession ranges from grudging admiration at the low end to adoration at the high end. I am an outlier in this regard. I see Lucas as a contemptible con artist who has done more harm than good. I believe that he has made a career out of deliberately mispresenting macroeconomics. The profession is worse off for his presence, with his supporters wallowing in ignorance and his opponents wasting time fending off his fallacies. The calculations based on deviations around trend are a typical example.

Update: Again, bear in mind that he would not have a Noble Prize if my opinion were at all typical.

Discussion Question. If lost output were not lost permanently, but were always made up in a subsequent boom, would macroeconomics ever have been considered a significant subject for study?

Deficits and Interest Rates

According to standard macroeconomic models, cutting taxes should lead to higher interest rates. However, as Bruce Bartlett points out, estimates of the magnitude of this effect are elusive.

Former Clinton economist Brad DeLong recently called for the resignation of Council of Economic Advisers Chairman R. Glenn Hubbard for supposedly saying so, in contrast to what he wrote in his own textbook.

In fact, Hubbard's views are well within the mainstream of economists. In a December 10 speech at the American Enterprise Institute, he pointed out that many older textbook analyses of the impact of deficits on interest rates failed to take into account world capital flows, which are in the trillions of dollars per year. "The bottom line," he said, "is that real interest rates are not dictated by country-specific short-term deficits."

In principle, a cut in tax rates should reduce revenues, increase the deficit, and increase real interest rates. However, in practice, this is difficult to measure. Bear in mind that deficits and interest rates are both endogenous variables. Therefore, there is no stable relationship between deficits and interest rates.

Also, as Hubbard points out, the effect of a tax cut may be to increase capital inflows, causing a lower increase in domestic interest rates and a larger increase in foreign interest rates than in a closed-economy textbook model. However, to the extent that such capital inflows occur, the stimulative effect of the deficit is reduced by lower net exports. Thus, Hubbard's argument in no way justifies denying that some of the stimulative effect of deficits is offset by countervailing effects in financial markets.

Discussion Question. If higher deficits are only slightly stimulative, does this mean that we should aim for a smaller deficit--or for a larger one?