Real-World Economics Review Blog

from Dean Baker

I have tremendous respect for both Paul Krugman and former FTC Commissioner Lina Khan. That is why it was frustrating to see their brief discussion of pharmacy benefit managers (PBMs) in a longer interview that Krugman did with Khan.

Khan noted how, in her role as FTC commissioner, she sought to crack down on anticompetitive practices by PBMs that raised drug prices. While Khan was likely right that PBMs were abusing their market power to push up prices, she and Krugman both missed the 800-pound gorilla in the room. Drugs are expensive because of the government, specifically government-granted patent monopolies.

I know I harp on this point endlessly, but it is a big deal, both in terms of money ($550 billion a year in aggregate) and because it directly affects people’s health and ability to stay alive. The key point here is that we don’t need patent monopolies to finance the development of new drugs; we can do it through other mechanisms, such as direct public funding. We already do this to a substantial extent through the National Institutes of Health and other government agencies.

There are three reasons why this is a huge deal:

1. Drugs are cheap to manufacture and distribute. In a free market, it would be rare that a drug would ever sell for more than $20 or $30 a prescription. It is absurd that some sell for twenty, thirty, or even one hundred times this amount. That forces people in bad health, or their families, to struggle to get insurers to pay for the drug or to beg for the money.
2. The huge markups are a recipe for corruption of the sort we see with PBMs. The full story is actually far worse. The markups give drug companies enormous incentives to lie about the safety and effectiveness of their drugs. They do this all the time, most notably when they misled doctors about the addictiveness of the new generation of opioids, contributing to the opioid crisis.
   Economists have a saying about how best to eliminate the corruption associated with a black market: Take the money out by making the item, say alcohol or marijuana, legal. This logic would apply beautifully to ending patent monopolies on prescription drugs.
3. Patent monopolies only provide incentives to develop a patentable product. Insofar as there is evidence that diet, exercise, or environmental factors matter for controlling or preventing a disease, drug companies have no incentive to pursue the research. You can’t get a patent on broccoli.

Read more…

from Dean Baker

There is an effort by several progressive unions and other organizations to put a 5% wealth tax for the state’s billionaires on California’s ballot this fall. It’s not clear they will succeed in getting it on the ballot or how the initiative will do (I’m in), but Donald Trump has already one-upped them. Thanks to his management of the economy and his decision to go to war in Iran, he has reduced the wealth of the country’s richest people by far more than the sponsors of this initiative could ever hope.

In 2026 to date, the S&P 500, a broad measure of the stock market, is down by almost 7.0%. The NASDAQ, which is where the tech companies controlled by folks like Elon Musk and Mark Zuckerberg live, is down by almost 10%. That means Trump may have cost Musk $60 billion, and that’s in just three months. Who knows where he will be by the end of the year.

If anyone thinks I’m being perverse by celebrating a decline in the stock market, try thinking again, or just thinking for the first time. The stock market is not a measure of economic well-being. It is a measure of the wealth of people who own stock.

There are three basic reasons for the stock market to rise. The first is the expectation that the economy will grow more rapidly and that corporate profits will therefore rise more rapidly along with the rest of the economy. The second is that investors expect that after-tax profits will rise at the expense of wages or due to lower taxes. The third is due to a bubble, or “irrational exuberance” to use former Fed Chair Alan Greenspan’s great term.

Only the first reason reflects good news for the economy. The other two are negatives from the standpoint of the bulk of the population. There is no reason for the rest of us to be applauding a shift from wages to profits or a larger share of the tax burden to be left to ordinary workers. Nor should we be delighted about a bubble that distorts investment decisions and gives the rich even more disproportionate ability to command economic resources while it lasts. Read more…

from Dean Baker

There is a widely told story among elite pundit types that the US economy is soaring ahead, and Europe’s economy is mired in stagnation. As is the case most of the time when there is an elite consensus, it is wrong. A new post by Seth Ackerman shows that the differences in growth, and especially productivity growth (GDP per hour of work), are driven almost entirely by differences in measurement, not differences in economic performance.

This reality is likely to be a serious blow to proselytizers of the American model, where we let clowns like Elon Musk and Mark Zuckerberg run roughshod over any laws that limit their ability to harm workers, consumers, or the environment. Paul Krugman had already put a serious dent in their American model boosterism by pointing out that the alleged America-Europe productivity growth gap was really a California-everyone else growth gap. Krugman pointed out that if we pulled out California, productivity growth in the rest of the country looks pretty much like Europe.

(Productivity is the focus of these comparisons and not per capita GDP because there is a large GDP gap simply because workers in the US put in many more hours. In Europe, five or six weeks a year of vacation is standard as well as paid family leave and sick days. Thirty five hour workweeks are also common. The decision to work fewer hours is a value choice, where people can make different calls, not evidence of superior economic performance.)

But the piece by Ackerman goes even deeper. Read more…

from Dean Baker

If anyone doubted that the rich would use their control of the media to push their agenda and silence dissent, CBS removed it with its decision to censor the scheduled 60 Minutes broadcast on CECOT prison. CECOT is the notorious maximum security prison in El Salvador where Trump has sent a number of the people that he has deported. There have been numerous accounts of torture and abusive treatment in the prison, which presumably would have been highlighted in the segment.

CBS, under its new ownership, decided that we shouldn’t see the 60 Minutes segment, or at least not the one its team had prepared for broadcast last night. Apparently, they were worried it would offend the Trump administration.

According to a leaked account, Bari Weiss, the right-wing zealot that the new ownership put in charge of CBS News, decided that the program could not air without an interview with Stephen Miller, Trump’s deporter-in-chief. The producers of the show had apparently already reached out to the White House, as is their standard practice, but they refused to comment, presumably choosing to instead attack the broadcast as unfair and unbalanced after it ran. Read more…

from Dean Baker

Trump first announced his massive tariffs on “Liberation Day,” which was April 2. This was supposed to be the beginning of the United States rebuilding its manufacturing capacity. Since Liberation Day, the economy has lost 60,000 manufacturing jobs, factory construction is down at least 5 percent, and inflation has risen to 3.0 percent. 

It is also clear that businesses and consumers here have paid Trump’s tariffs, not foreigners as Trump seems to believe. Import prices have risen since Liberation Day. These are the price of the goods we import before Trump imposes his tariffs. If exporters are eating the tariffs, then the import price index should have fallen considerably. The data show this is not true. Read more…

from Dean Baker

I heard people who read the column I wrote last week on the AI bubble complain that, by rooting for its collapse, I was hoping for the failure of the US economy. Nothing could be further from the truth.

The logic of a run-up in asset prices being a bubble is that it is not grounded in reality; it is fake. The best analogy would be counterfeit money. Suppose some brilliant person devised a way to make up trillions of dollars of counterfeit money that we would all accept as real money, because we couldn’t tell the difference.

While the counterfeiter was working at their printing press, it might actually look like a good thing for the economy. After all, they and their friends would be buying all sorts of things with their counterfeit money. This would be driving demand in the economy and creating jobs. If someone exposed the counterfeiters, this demand and the jobs they create would disappear. 

This is all true, but a deeper look shows the darker side. First, they don’t just create demand, they also drive up prices. This can be seen very clearly with the AI bubble. Read more…

from Dean Baker

Earlier this week The New York Times ran a big think piece by The New Atlantis editor Ari Schulman, on whether “science is broken,” and whether NIH director Jay Bhattacharya can fix it. Incredibly, the word “patents” did not appear once.

That is incredibly bizarre. The high prices for drugs and other innovations that patent monopolies allow companies to charge are the basis for most of the corruption we see in health science. This is the main reason that medical journals cannot trust the articles submitted accurately reflect research done by the authors.

The point is simple and straightforward. As a result of patent monopolies, there is an enormous amount of money at stake in biomedical research, unlike research in Astronomy or English Literature. While there are always instances of academics plagiarizing the work of others, or inaccurately representing sources and data, the problems in other fields are nowhere near as large as is the case with biomedical research.

The consequences for public health of the perverse incentives created by patent monopolies are very real. Being able to charge prices that are ten times, or even a hundred times, the free market price gives drug companies enormous incentive to misrepresent the safety and effectiveness of their drugs. We saw this most clearly with the opioid crisis, but the corruption issue arises all the time. Read more…