Follow the Silk Road

9106979_SStretching some 4,000 miles, the “Silk Road” was a trade network connecting the continent of Asia. From around 200 B.C., the route, running from China to India, to the Mediterranean Sea, the horn of Africa, and beyond, is largely credited for opening up trade in much of the world, leading to the development and exchange of everything from spices and cloth, to religions and political philosophies.

In 2011, a new Silk Road sought to once again bridge the gap between buyers and sellers. Instead of exchanging cloth, however, this Silk Road was best known for allowing individuals to buy and sell illegal drugs.

Known as part of the “dark web,” the Silk Road website allowed users to anonymously buy and sell goods and services without government intrusion. Using the anonymizing software, TOR, the site effectively obscured the online identities of both buyers and sellers, meaning that even the authorities would be unable to identify Silk Road users. The site accepted no electronic forms of payment other than Bitcoin, meaning users could not be traced via their credit card information. By March 2013, the site had some 10,000 products available for purchase and oversaw more than $1.7 million in transactions a month. Approximately 70 percent of these sales were for illicit drugs.


In Memoriam: Nathan Rosenberg (1928-2015)

NathanRosenbergI have just received the sad news that Nathan Rosenberg has died. Nate was an outstanding economic historian, and in my early years in the profession I viewed him as the very model of the kind of economic historian I wanted to become. He reviewed many of my early papers before their publication, and when the publisher was looking for a reviewer of the manuscript that became my first book (published in 1971), I suggested Nate as the reviewer, and he did excellent work in advising me about revisions of my manuscript.

In later years I kept in touch with Nate, though less frequently as the years went by and our career paths diverged. When David J. Theroux and I were creating The Independent Review in 1995, I asked Nate to serve on the journal’s board of advisers, and he did so from then on. Nate had many lovely stories to tell in addition to the scholarly information he shared with so many of us. I recall his telling me once about how as a boy he delivered a Yiddish newspaper in Brooklyn.

James Poterba has written the following notice of Nate’s passing.

I write with the sad news that Nathan Rosenberg, a pioneer in the study of the economics of technological change who also served as Stanford University’s representative on the NBER Board of Directors from 1980 until 2010, passed away on Monday at the age of 87.

Nate received his undergraduate degree from Rutgers, and his Ph.D. from the University of Wisconsin. He began his academic career at Indiana University, and served as a faculty member at the University of Pennsylvania, Purdue, Harvard, and the University of Wisconsin before moving to Stanford in 1974. Nate was the Fairleigh S. Dickinson, Jr. Professor of Public Policy, Emeritus, at Stanford, and an NBER board member emeritus, at the time of his death.

Nate’s research was primarily concerned with the economics of innovation, and he drew on historical as well as contemporary evidence to illuminate the economic forces that influence the rate of technical progress. His work had a powerful impact on both the micro-economic and macro-economic understanding of the role of innovation in economic growth, as well as on the recognition of the impact of institutions and policy in shaping the innovation process. His contributions were widely celebrated. When the Society of the History of Technology awarded him the Leonardo da Vinci Medal, the citation described him as having ‘almost single-handedly changed the way economists and economic historians think about technology and the nature of economic change.

We have lost a great scholar and friend; he will be deeply missed.

The Decline in R&D Efficiency in the Drug Industry

25149632_MPanel “a” in the graphic below shows that the number of new drugs approved by the U.S. Food and Drug Administration (FDA) per billion U.S. dollars spent on research and development (R&D) in the drug industry has halved about every nine years since 1950, in inflation-adjusted terms. This represents a decline in drug R&D efficiency of around 80-fold, which should concern everyone.



Aspirations and Policies

beyondpolitics_updated_nf_180x270Political rhetoric tends to obscure the difference between aspirations and policies. Aspirations are goals people would like to achieve, whereas policies are the means for achieving them. For example, the Obama administration has mandated automobile fuel efficiency standards that require a fleet average of 54.5 miles per gallon by 2025. This is an aspiration, not a policy.

An example of a policy would be a requirement that passenger cars have engines with displacements no greater than 1.6 liters, or an increase of $2 per gallon in federal motor fuel taxes to encourage conservation. Policies state what will actually be done to try to further a goal, perhaps in addition to stating of what the policies hope to accomplish.

You will notice, as campaign season is upon us, that political rhetoric is mostly about aspirations, and rarely about policies. Political candidates talk about problems with the status quo, and their aspirations for improving things. They talk about what they want to accomplish, but not what policies they favor for accomplishing their aspirations.

The reason is that everyone can agree the status quo is not ideal, so calls to improve the status quo receive widespread support. Hope and change. Just don’t be specific about what policies will drive that change. Lots of people will agree that things can be improved, but fewer people will agree that any specific policy will actually lead to improvement. So, politicians talk in terms of aspirations rather than policies.

It is OK to be against current policies. Political candidates can oppose Obamacare, for example. But it is politically dangerous to offer specific policies to enhance or replace it.

Libertarian policies have trouble gaining widespread support because they are policies rather than aspirations. Privatize the roads? Do away with occupational licensure? Those are policies that many people will oppose. Reduce traffic congestion? Give consumers the freedom to choose who they hire? Those are aspirations that people will support.

Even less controversial policies, like giving families the freedom to choose which schools their children can attend, will meet with heated opposition. But improving the quality of education is an aspiration that will find support.

Ultimately, political leaders need policies to implement their ideas, but to get elected in the first place, political candidates do better to campaign on aspirations rather than policies.

Libertarian aspirations should be political winners. Most people are in favor of having more freedom, and when asked whether people would rather make their own choices, or have someone in government make their choices for them, how many people will choose the latter? When asked whether people would prefer a less intrusive government or a more intrusive one, how many people will choose the latter?

One problem with advancing libertarian ideas in a democratic society is that libertarians focus their messages more on policies than on aspirations. Rather than campaigning on “It’s morning in America” or “Hope and change,” they’re saying “Abolish the Fed.” Politics is one area in which vague aspirations win out over concrete ideas.

Bernie Sanders and the Leaky Bucket of Income Redistribution

BernieSandersVermont Senator and presidential hopeful Bernie Sanders has pushed the American left to make income inequality a focal point of the 2016 elections. Echoing Thomas Piketty, the recently debunked economic pop star, Sanders has stated: “In America we now have more income and wealth inequality than any other major country on earth.” While not technically accurate, this rhetoric has inspired calls for redistributive tax policies.

Advocates for reducing income inequality may have the best of intentions or merely be indulging in political grandstanding. But if they wish to be taken seriously, they should first determine whether or not redistributive policies are truly effective at fixing the purported problem.

It’s commonly believed that taxation can combat inequality through progressive redistribution. Numerous studies, however, have shown that the economic and societal outcomes of income redistribution policies are inefficient. In other words, they destroy wealth in the process of transferring it.

Two of the most comprehensive empirical studies in this area are Public Spending in the 20th Century, by Vito Tanzi and Ludger Schuknecht, and Filip Palda’s paper “Fiscal Churning and Political Efficiency” (Kyklos 50:2, May 1997). Both studies use a metric called ‘churning’ that measures the degree to which taxes levied on citizens to support new social programs actually transfer capital right back to the original taxpayer.

Tanzi and Schuknect looked at large-scale growth in government spending since the middle of the twentieth century and found that the growth in government spending, specifically in transfer and welfare programs, coupled with the increases in taxes to finance the increased spending, has resulted in no measurable or real benefits for citizens. Citizens would be better off, their study suggests, if either: (1) government spending on social programs were made more efficient by reducing spending on transfers and welfare by the degree of fiscal churning or (2) transfer and welfare programs involved a decrease in the tax burden for those whom the programs are suppose to help. (The second alternative would allow the intended beneficiaries to have more capital and freedom to decide what services they view as most beneficial, compared to the current state, in which government officials decide what the poor and middle classes need without the knowledge or accountability to make an accurate assessment.)

In other words, Leviathan taxes with one hand and then with the other hand passes out transfers back to the taxpayer. Worse, taxed capital goes through multiple levels of bureaucracy before it’s returned, resulting in overall losses for taxpayers.

Keynesian economist Arthur Okun was on the mark with his witticism about the difficulty of efficient redistribution: “The money must be carried from the rich to the poor in a leaky bucket. Some of it will simply disappear in transit, so the poor will not receive all of the money that is taken from the rich.”

Bernie Sanders seems oblivious to all of this. He proposes turning the United States (which churns about 9 percent of its transfer payments) into a welfare state like Sweden (which Tanzi and Schuknecht found churns 34 percent of its transfers) or Canada (which lies at the average of the O.E.C.D. countries, which Tanzi and Schucknecht conservatively found to churn 11.7 percent and which Palda estimates the degree of churning to be between 15.2 percent and 49.2 percent). (Tanzi and Schuknecht reach the same general conclusion as Palda, but whereas their study made cross-country comparisons, Palda’s paper looked in greater detail just at Canada.)

Wasting resources and incurring large costs for no welfare gain is a zero-sum game that has had little to no effect on the equalization of incomes. Moreover, these transfer programs are wasted on social services which, even apart from the problem of churning, are inefficient and ineffective.

Robert Higgs, among others, has noted that these publicly provided services have crowded out voluntary institutions that make a vibrant free market. Social services could be provided through market-based private charity. This would give citizens the freedom to help the poor in ways that they think are the most beneficial.

If a moral case is to be made for government policies that help the poor and reduce inequality, then surely the best approach is through open borders, free trade, and capital mobility—not inefficient, wasteful government bureaucracy.

[Alexander Demitraszek is a 2015 summer intern at Independent Institute and a senior at Methodist University majoring in financial economics and math.]

Bobby Jindal’s Attack on Scott Walker’s Health Plan Is Off-Base

JindalWalkerYesterday, I wrote a column at Forbes addressed Governor Scott Walker’s health plan in largely positive terms. Governor Bobby Jindal, a competing Republican presidential contender, has launched a broadside against Walker’s plan, describing it as a “new federal entitlement.”

The charge is way off-base. Governor Jindal proposed a health reform back in 2014, via his America Next policy shop. The point of contention is that Governor Jindal’s proposal would not offer everyone a refundable tax credit. Instead, it would eliminate the exclusion of employer-based health benefits from taxable income and replace it with a standard deduction.

I discussed the proposal when it was issued. True, it is an easier switch than a refundable tax credit. On the other hand, a deduction does nothing for low-income households – which means the welfare state continues to exist. Governor Jindal himself proposed throwing $100 million more at states to fund their medical safety nets.

You can say (and I might agree with you) that the federal government should get out of the safety-net business. Nevertheless, the federal government is an income-tax devouring and debt-generating machine. As long as it remains so, states and citizens will call upon it fund welfare programs.

The tax treatment of health benefits must follow the tax code. It cannot lead it. Governor Jindal has not proposed a massive overhaul of federal taxation. Even Senator Rand Paul’s proposal to rip up the IRS and start again would give us a 14.5 percent flat tax on household incomes above $50,000 (for a family of four). The federal government would remain the dominant tax collector and still fund welfare programs.

My view is that the federal government should fund a tax credit for every household. For those who cannot or will not use it to pay for their own health care, the government can use it to fund Medicaid. (See John C. Goodman, A Better Choice, especially p. 58.)

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For the pivotal alternative to Obamacare, please see A Better Choice: Healthcare Solutions for America by John C. Goodman (Independent Institute, 2015).


Anthony de Jasay: Political Philosopher Par Excellence

tir_20_1_210Anthony de Jasay isn’t a household name, but he should be. The former Parisian banker is one of the most original thinkers in political philosophy today, and his insights on the nature of liberty, justice, and the state have major implications for how we might improve our governments, communities, and culture.

The Summer 2015 issue of The Independent Review features a symposium on Jasay’s work, with contributions by G. Patrick Lynch, Hartmut Kliemt, Pierre Lemiux, André Azevedo Alvez, Carlo Ludovico Cordasco and Sebastiano Bvetta, and David M. Hart. (Also in this issue, Michael Munger reviews Jasay’s latest book, Social Justice and the Indian Rope Trick.)

Jasay’s striking originality makes him hard to classify. His writings suggest an affinity for classical liberalism, but he has criticized that tradition for its “unrestricted wishful thinking.” He is admired by public-choice scholars, but he takes issue with the constitutionalism of James M. Buchanan. And although he advocates free markets, he has called Austrian School economist F. A. Hayek “startlingly naïve.”

Nevertheless, Jasay’s freshness and profundity have earned him high praise from serious, liberty-minded readers. About his 1985 treatise, The State, symposium editor G. Patrick Lynch writes: “In this work, Jasay provides as realistic and unromantic a vision of the foundations of government as one can image.”

To understand the state, Jasay says we must first view it as a single agent with self-interested goals. Then we must ask: What would you do if you were the state?

Jasay’s approach inspires our contributors to tackle a host of important questions: How might a government be designed to minimize any threats to liberty? Why does Jasay find fault with Buchanan’s and Rawls’s “contractarian” theories of government? And how might public goods be provided without the use of government coercion to deal with the free-rider problem?

Jasay made his reputation by illuminating timeless theoretical issues, but he has also written numerous popular columns on current affairs. The final article in our symposium compares this work to that of Frédéric Bastiat, the 19th-century French individualist whom Schumpeter called “the most brilliant economic journalist who ever lived.” The verdict? Jasay brille!

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The Independent Review, a journal devoted to political economy, public policy, and intellectual history, is published quarterly by Independent Institute. SPECIAL OFFER: If you’re not already a subscriber, sign up for the print version and receive a FREE book. eSubscriptions are available via an app for Apple iOS and Amazon Kindle.

CalSTRS Boss Jack Ehnes Deceives Californians About Funding

CalSTRS CEO Jack Ehnes

CalSTRS CEO Jack Ehnes

Jack Ehnes, CEO of the massive California State Teachers’ Retirement System (CalSTRS), deceived the public in a recent blog post opposing public pension reform in California:

CalSTRS has not taken any “pension holidays,”’ which means contributions have been made continuously, thus reinforcing the sustainability of the fund.

Ehnes fails to indicate whether: (A) $1 was contributed to the pension fund each year; (B) the full “annual required contribution” (ARC) was contributed to CalSTRS each year, ensuring enough money to pay all promised benefits; or (C) something in between was contributed. Only (B) would be prudent financial management.

So which was it? Let’s check the facts.

Former Federal Reserve Board Chairman Paul Volcker and former New York Lieutenant Governor Richard Ravitch, looked into the funding of several state public pension systems and found that over just a six-year period, CalSTRS’s ARC was underpaid by a staggering $11 billion (see p. 38 of the report).

Volcker and Ravitch reported that more than $27 billion should have been invested in CalSTRS from 2006 through 2011 to keep it on track, but only $16 billion was invested. In 2013, in fact, CalSTRS had the largest skipped ARC in the country, according to Stanford University researcher David Crane.

CalSTRS is the poster child for irresponsible and inefficient management of a public pension system, as evidenced by its $74 billion deficit (self-reported by CalSTRS). Because the ARC was massively underpaid, CalSTRS lost decades of compounded earnings, so now taxpayers are on the hook to pay ballooning “catch-up” contributions as mandated by Assembly Bill 1469.

CalSTRS mismanagement makes the case for meaningful pension reform in California. Jack Ehnes gives everyone good reason to distrust government pension bosses.

My new book California Dreaming: Lessons on How to Resolve America’s Public Pension Crisis explains which pension reforms should be adopted.

Game Developers Face Final Boss: The FDA

hazardous_180x270Absent the FDA, Americans would be healthier and happier.” —Robert Higgs

As I drove to work the other day, I heard a very interesting segment on NPR that featured a startup designing video games to improve cognitive skills and relieve symptoms associated with a myriad of mental health conditions. One game highlighted, Project Evo, has shown good preliminary results in training players to ignore distractions and stay focused on the task at hand:

“We’ve been through eight or nine completed clinical trials, in all cognitive disorders: ADHD, autism, depression,” says Matt Omernick, executive creative director at Akili, the Northern California startup that’s developing the game.

Omernick worked at Lucas Arts for years, making Star Wars games, where players attack their enemies with light sabers. Now, he’s working on Project Evo. It’s a total switch in mission, from dreaming up best-sellers for the commercial market to designing games to treat mental health conditions.

“The qualities of a good video game, things that hook you, what makes the brain—snap—engage and go, could be a perfect vessel for actually delivering medicine,” he says.

In fact, the creators believe their game will be so effective it might one day reduce or replace the drugs kids take for ADHD.

This all sounds very promising.

In recent years, many observers (myself included) have expressed deep concerns that we are living in the “medication generation,” as defined by the rapidly increasing numbers of young people (which seems to have extended to toddlers and infants!) taking psychotropic drugs. As experts and laypersons continue to debate the long-term effects of these substances, the news of intrepid entrepreneurs creating non-pharmaceutical alternatives to treat mental health problems is definitely a welcome development.

But a formidable final boss stands in the way:

[B]efore they can deliver their game to players, they first have to go through the Food and Drug Administration—the FDA.

The NPR story goes on to detail on how navigating the FDA’s bureaucratic labyrinth is akin to the long-grinding campaign required to clear the final dungeon from any Legend of Zelda game. Pharmaceutical companies are intimately familiar with the FDA’s slow and expensive approval process for new drugs, and for this reason, it should come as no surprise that Silicon Valley companies do their best to avoid government regulation. One venture capitalist goes so far as to say, “If it says ‘FDA approval needed’ in the business plan, I myself scream in fear and run away.”

Dynamic, nimble startups are much more in tune with market conditions than the ever-growing regulatory behemoth that is defined by procedure, conformity, and irresponsibility. As a result, conflict between these two worlds is inevitable:

Most startups can bring a new video game to market in six months. Going through the FDA approval process for medical devices could take three or four years—and cost millions of dollars.

In the tech world, where app updates and software patches are part of every company’s daily routine just to keep up with consumer habits, technology can become outdated in the blink of an eye. Regulatory hold on a product can spell a death sentence for any startup seeking to stay ahead of its fierce market competition.

Akili is the latest victim to get caught in the tendrils of the administrative state, and worst of all, in the FDA, which distinguished political economist Robert Higgs has described as “one of the most powerful of federal regulatory agencies, if not the most powerful.” The agency’s awesome authority extends to over twenty-five percent of all consumer goods in the United States and thus “routinely makes decisions that seal the fates of millions.”

Despite its perceived image as the nation’s benevolent guardian of health and well-being, the FDA’s actual track record is anything but, and its failures have been extensively documented in a vast economic literature. The “knowledge problem” has foiled the whims of central planners and social engineers in every setting, and the FDA is not immune. By taking a one-sized-fits-all approach in enacting regulatory policy, it fails to take into account the individual preferences, social circumstances, and physiological attributes of the people that compose a diverse society. For example, people vary widely in their responses to drugs, depending on variables that range from dosage to genetic makeup. In a field as complex as human health, an institution forcing its way on a population is bound to cause problems (for a particularly egregious example, see what happened with the field of nutrition).

The thalidomide tragedy of the 1960s is usually cited as to why we need a centralized, regulatory agency staffed by altruistic public servants to keep the market from being flooded by toxins, snake oils, and other harmful substances. However, this needs to be weighed against the costs of keeping beneficial products withheld. For example, the FDA’s delay of beta blockers, which were widely available in Europe to reduce heart attacks, was estimated to have cost tens of thousands of lives. Despite this infamous episode and other repeated failures, the agency cannot overcome the institutional incentives it faces as a government bureaucracy. These factors strongly skew its officials towards avoiding risk and getting blamed for visible harm. Here’s how the late Milton Friedman summarized the dilemma with his usual wit and eloquence:

Put yourself in the position of a FDA bureaucrat considering whether to approve a new, proposed drug. There are two kinds of mistakes you can make from the point of view of the public interest. You can make the mistake of approving a drug that turns out to have very harmful side effects. That’s one mistake. That will harm the public. Or you can make the mistake of not approving a drug that would have very beneficial effects. That’s also harmful to the public.

If you’re such a bureaucrat, what’s going to be the effect on you of those two mistakes? If you make a mistake and approve a product that has harmful side effects, you are a devil incarnate. Your misdeed will be spread on the front page of every newspaper. Your name will be mud. You will get the blame. If you fail to approve a drug that might save lives, the people who would object to that are mostly going to be dead. You’re not going to hear from them.

Critics of America’s dysfunctional healthcare system have pointed out the significant role of third-party spending in driving up prices, and how federal and state regulations have created perverse incentives and suppressed the functioning of normal market forces. In regard to government restrictions on the supply of medical goods, the FDA deserves special blame for driving up the costs of drugs, slowing innovation, and denying treatment to the terminally ill while demonstrating no competency in product safety.

Going back to the NPR story, a Pfizer representative was quoted in saying that “game designers should go through the same FDA tests and trials as drug manufacturers.” Those familiar with the well-known phenomenon of regulatory capture and the basics of public choice theory should not be surprised by this attitude. Existing industries, with their legions of lobbyists, come to dominate the regulatory apparatus and learn to manipulate the system to their advantage, at the expense of new entrants.

Akili and other startups hoping to challenge the status quo would have to run past the gauntlet set up by the “complex leviathan of interdependent cartels” that makes up the American healthcare system. I can only wish them the best, and hope Schumpeterian creative destruction eventually sweeps the whole field of medicine.

Abolishing the FDA and eliminating its too-often abused power to withhold innovative medical treatments from patients and providers would be one step toward genuine healthcare reform.

Bundled Payments, Barely Hatched, Go the Way of the Dodo

HealthInsLast month, I wrote about Accountable Care Organizations (ACOs), medical groups accountable to the federal government for management of healthy populations. Even Zeke Emanuel recognizes that they are failing. Dr. Emanuel advised Medicare to “lump together” all the services associated with a procedure, such as a hip replacement, and pay one fee for the entire services.

As I noted, Medicare already does this via its Bundled Payments for Care Initiative (BPCI), which launched in 2013. At the time, hospitals and other providers were offered voluntary participation. Just a few weeks ago, Medicare decided to make bundled payments mandatory for some procedures in some areas. Now we know why: Providers are learning that the bundles don’t work.

Whether we call them “lumps” or “bundles” the results of the voluntary initiative are coming in and they are telling pretty much the same story as the ACO experience:

Medicare’s voluntary test of bundled payments added new contracts in July, but about two-thirds of the hospitals, medical groups, nursing homes and other providers that had initially enrolled instead dropped out.

The initiative, known as the Bundled Payments for Care Improvement initiative and launched under the Affordable Care Act, initially attracted nearly 7,000 providers that agreed to formally review how they could enter bundled-payment contracts with Medicare. The CMS announced on Thursday that 2,100 providers finished that review and entered contracts under which Medicare will bundle the costs of treating various conditions—heart failure, joint replacement, stroke, heart attacks—into a single payment.

The reason for the failure of both initiatives is the same. ACOs are accountable to the federal government instead of their patients. Similarly, the “bundles” are bundled by the federal government. The only way to figure out which services should be bundled together in one payment is to let entrepreneurs try different bundles and let patients decide which to choose.

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For the pivotal alternative to Obamacare, please see A Better Choice: Healthcare Solutions for America by John C. Goodman (Independent Institute, 2015).