Summer Vacation and Teachers

Somewhat predictably, a few posts about American schools’ summer vacation have been popping up on the blogosphere. Slate republished an article explaining the origins of the three-month break, and Matt Yglesias linked back to an old post discussing how the summer vacation period contributes to the achievement gap.

While both posts (and the studies they link to) focus on the effect summer vacation has on learning, one issue that I think has been overlooked is the effect such reforms would have on teachers. A recent editorial in the New York Times detailed how teachers in the United States are drastically underpaid:

At the moment, the average teacher’s pay is on par with that of a toll taker or bartender. Teachers make 14 percent less than professionals in other occupations that require similar levels of education. In real terms, teachers’ salaries have declined for 30 years. The average starting salary is $39,000; the average ending salary — after 25 years in the profession — is $67,000. This prices teachers out of home ownership in 32 metropolitan areas, and makes raising a family on one salary near impossible.

So how do teachers cope? Sixty-two percent work outside the classroom to make ends meet. […]

Imagine a novice teacher, thrown into an urban school, told to teach five classes a day, with up to 40 students each. At the year’s end, if test scores haven’t risen enough, he or she is called a bad teacher. For college graduates who have other options, this kind of pressure, for such low pay, doesn’t make much sense. So every year 20 percent of teachers in urban districts quit. Nationwide, 46 percent of teachers quit before their fifth year. The turnover costs the United States $7.34 billion yearly. The effect within schools — especially those in urban communities where turnover is highest — is devastating.

Of course, this isn’t the story you’ve been getting if you’re following politics in Wisconsin (and elsewhere), where teacher unions are being blamed for fiscal excess and have become common targets for attack by politicians. But even if you blame teacher unions for problems in America’s schools, it doesn’t mean teachers are properly paid: bargaining with cash-strapped state and local governments, public employee unions typically cause fiscal problems by conspiring with those governments to defer fiscal obligations (such as through deferred-payment pension plans) or guarantee non-monetary benefits (such as teacher tenure and other measures to improve job security). Thus, despite collective bargaining power, teachers remain underpaid–and our unwillingness to pay them more contributes to the problems of public sector collective bargaining.

This leads back to summer vacation: right now, the three-month vacation for teachers (though it’s hardly a vacation for most teachers, who continue to work in some capacity) is one non-monetary benefit that teachers get in exchange for their subpar pay compared to other professionals. I find it plausible that abolishing summer vacation may, by making school a year-round endeavor, increase the status of teaching and thus lead to higher pay.

On the other hand, looking at teacher unions’ bargaining positions (read: the way teachers seem to be targeted first for cuts), it seems equally likely that if summer vacation is eliminated, teachers’ salaries will not improve. What’s more, many teachers joined the profession under the assumption that they would have summer vacations off, potentially making the loss of that vacation worth more to them than some paltry increase in salary that may accompany it. This is especially true for potential parents, who may be attracted to teaching over other professions with a worse work-life balance.

Given that teachers are already underpaid and overworked, I lean toward not scrapping summer vacation. That being said, I see arguments for both sides. It’s very possible that the benefits to children from learning year-round could outweigh any potential drawbacks to teachers. I just tend to be sympathetic to the view that “reforms” which make it less attractive to be a teacher have negative consequences for children as well. To improve learning, you need to improve teaching.

LCD Soundsystem, Ticket Pricing, and IPOs

LCD Soundsystem is one of my favorite bands, and the favorite band of Stone Soup guest blogger Thomas. Unfortunately, they will no longer be producing music together, and planned a final, farewell show at Madison Square Garden. This farewell show is the subject of much media frenzy because, apparently, no one was able to get tickets for it. One Slate writer recounts her experience trying/failing to get tickets:

At 11 a.m. on Friday, Feb. 11, Ticketmaster was scheduled to put tickets to the show on sale. At exactly 10:50 a.m. on Friday, I went to Ticketmaster’s site and set up the appropriate purchase page. At 10:58, I started refreshing constantly. At 11, poised and ready, I got … nothing. The site said there were no tickets available. I reloaded the page madly, and then tried with a new browser window. No tickets. Not even in the nosebleed section.

Twitter was abuzz with chatter on how it was impossible to obtain LCD Soundsystem tickets. The Onion’s AV Club joked, “Anyone who’s glanced at their Twitter feeds this morning knows that the inability to purchase tickets to LCD Soundsystem’s Madison Square Garden farewell show rivals Mubarak’s exit for topic du jour.”$50 tickets appeared shortly thereafter for thousands of dollars apiece on reseller websites like StubHub. As the Slate article explains, and as the LCD Soundsystem frontman James Murphy ranted about, the problem was caused by scalpers who used computer programs to circumvent Ticketmaster’s [pathetic?] Captcha system and snap up all the tickets within seconds of release. A few pre-sales, and hold-backs from the band and venue, may have reduced the actual ticket supply. The illegality of paperless tickets (in New York)–where fans must present the purchasing credit card on the night of the concert–eliminated one method of solving the scalping problem. Anyway, Murphy mitigated the problem by announcing the band would play four additional shows at Terminal 5 before the MSG concert, which he hoped would depress ticket prices for the MSG show and, in an ideal world, screw over the scalpers a little bit.

A lot of people have mourned the naivete of James Murphy, and called for an auction-based system where fans could buy tickets closer to their actual value. Matthew Yglesias writes:

Optimal allocation of LCD Soundsystem tickets requires demand-responsive ticket pricing. But good rock bands are not composed of narrow-minded amoral profit-maximizers. Consequently, they’re motivated to price tickets at a lower level than the market will bear leading, in turn, to middlemen getting the rents. What’s needed is a way for bands to price tickets at demand-responsive levels in a way that’s consistent with the norm that the guys in a cool band shouldn’t be narrow-minded profit-maximizers. The best solution here, I think, is charity. Someone (Bono?) needs to set up a trust fund to which bands will allocate the excess revenues that accumulate when the market price of concert tickets exceeds the “fair” price as determined by the bands’ moral intuitions. In that case, instead of a situation where “[t]ickets with a face value of $49.50 were going for 12 times that” on a secondary market you’d have a scenario where tickets are going for $500 and $450 out of that goes to the trust fund. The fund could take the money and give it to poor people in Africa and India.

In fact, I don’t think there’s anything suboptimal about the ticket pricing. The goal of selling tickets is not merely to make money, or even to ensure your fans can see you, but to generate buzz about your music/record and in so doing increase sales. Buzz is created when there is high demand for a scarce product–when tickets are unobtainable, not when the price is set high enough that just enough people buy them to fill the venue.

Felix Salmon blogs about this (coincidentally I had the same idea and started writing this post on the 17th, but I was too lazy to finish it, and he published it on the 19th) and compares it to IPO pricing.

People sympathetic to the band, like Rob Cox, claim that LCD Soundsystem and its promoters didn’t understand the economics of scarcity when they put the MSG tickets on sale. I, by contrast, think they understood the economics of scarcity all too well — and successfully used it to generate buzz and publicity. What really happened here, I think, is akin to the IPO of theglobe.com back in 1998, where the supply of new shares was so tiny that the price soared from $9 to $97 on the first day of trading. In turn, that generated lots of headlines, and ensured that the number of people who had heard of the website increased by orders of magnitude.

Supply and demand for concert tickets aren’t static numbers which then get reflected in prices. There are complex feedback loops here too: scarcity and price mechanisms can feed back into increased demand for tickets. Certainly this story has meant a large increase in the number of people who know that LCD Soundsystem is playing its last-ever gig at MSG in April. It’s surely naive to think that all the second-order effects here were completely unintended.

In fact this occurs all the time in IPOs. For an investment bank (underwriter), setting the price for an IPO can be tricky because since there is no existing trading of shares, it can be hard to value the company and decide how much to pay for an unknown quantity. In a phenomenon called “underpricing”, the share of an IPO will tend to jump up significantly within the first day of trading, i.e. there is a large percentage difference between the “offer price” and the share price traded on the first day:

Since the 1960s, this ‘underpricing discount’ has averaged around 19% in the United States, suggesting that firms leave considerable amounts of money on the table. Underpricing has tended to fluctuate a great deal, averaging 21% in the 1960s, 12% in the 1970s, 16% in the 1980s, 21% in the 1990s, and 40% in the four years since 2000 (reflecting mostly the tail-end of the late 1990s internet boom). Clearly, underpricing is costly to a firm’s owners: shares sold for personal account are sold at too low a price, while the value of shares retained after the IPO is diluted. In dollar terms, IPO firms appear to leave many billions ‘on the table’ every year in the U.S. IPO market alone.

There are many theories rationalizing this apparently irrational phenomenon (many addressed in the paper linked to above), and they can also be made to apply to concert ticket pricing. Julian Franks argues that it is advantageous for the pre-IPO shareholders to underprice because it leads to oversubscription and rationing–an investment bank will have to reduce the block size of shares sold to their customers because so many of them want to purchase the IPO, and the bank wants to satisfy many customers. This rationing can create diffuse shareholder rights, and discrimination on who is sold large shares of the company. From a band’s point of view, cheap ticket prices may be better if you want the opportunity for poorer, younger, and more hip/exciting fans to predominate in the audience rather than wealthier, but more subdued fans–Brooklyn vs. Westchester. They’d rather have fans willing to camp out for tickets, than those who will only click a button to pay higher prices.

Underpricing is also beneficial for the underwriters of an IPO. The paper cites a study which “find[s] that overpricing (but not high levels of underpricing) lead to a decrease in the lead underwriter’s own stock market value, whereas moderate levels of underpricing are associated with an increase in stock market value”. One explanation is that underpricing and the subsequent rise in stock price enhances the reputation of the underwriter because the IPO went really well, and future companies will seek to go public with that underwriter. Similarly, a sold-out venue or sky-high ticket prices is much more beneficial to the reputation of a band manager or concert organizer than an event that is full, but with no additional demand for tickets.

So when LCD Soundsystem and other bands decide to offer their tickets at low face-value prices, they’re making a strategic economic decision that is mirrored by companies like VISA and I-banks like Goldman Sachs–hardly the stuff of charitable fools. Even if paperless tickets were made legal, or some perfect Captcha system emerged to prevent any scalper from purchasing a large quantity of tickets (but secondary markets like StubHub would still exist), bands and band managers would/should still endeavor to underprice their tickets.

Constitutionality of the Individual Mandate, and Regulating “Economic Inactivity”.

A friend of mine had dinner last week with one of her friends who was in town for the American Conservative Union’s Conservative Political Action Conference (CPAC), and asked for some tips on talking to a hard-core conservative about health care reform, especially in light of two rulings from federal judges in VA and FL that invalidate ACA in part, or in toto. Instead of sending her a list of articles that I had read, I thought I’d summarize my impressions in a blog post. (Apologies if you’ve read all these arguments elsewhere, already.)

For many conservatives, the central problem with the Affordable Care Act is the “individual mandate”. Prof. Randy Barnett, of Georgetown Law, wrote early on in an op-ed in the Washington Post:

But the individual mandate extends the commerce clause’s power beyond economic activity, to economic inactivity. That is unprecedented. While Congress has used its taxing power to fund Social Security and Medicare, never before has it used its commerce power to mandate that an individual person engage in an economic transaction with a private company.

But, as many more qualified legal scholars have noted, Congress does not rely on the Commerce clause alone. The power to “to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes”, while broadly conceived in such cases as Wickard and Raich, is being used to regulate the insurance industry–to create health care exchanges, to prohibit discrimination against preexisting conditions, etc. The idea that in order to have insurance we must have everyone participate–the so-called “individual mandate”–is empowered by the Necessary and Proper clause.

The owner of this home was taxed for inactivity.

Universal participation in health insurance was deemed necessary by Congress for the effective operation of that scheme, that is, the risk pool will be insufficiently large, or the elimination of preexisting conditions limits would encourage selection bias. As Prof. Tribe points out in a recent op-ed, it was necessary to Scalia, concurring in Raich, when the federal government quashed even small, purely intrastate marijuana operations: “Our cases show that the regulation of intrastate activities may be necessary to and proper for the regulation of interstate commerce in two general circumstances.” In the landmark case McCulloch, Chief Justice John Marshall writes: “Take, for example, the power ‘to establish post-offices and post roads’ [an enumerated power of Congress]. This power is executed by the single act of making the establishment. But, from this has been inferred the power and duty of carrying the mail along the post-road, from one post-office to another. And, from this implied power, has again been inferred the right to punish those who steal letters from the post-office, or rob the mail.” So even though postal carriers were not mandated by the Constitution, and even though Congress is not supposed to deal with intrastate commerce, both of those things are necessary to the achievement of Congress’ constitutional ends. That is, Marshall explained, if “the end be legitimate,” then “all means which are appropriate, which are plainly adapted to that end… are constitutional.”

Of course, as many people have pointed out, the government is not creating a “mandate” in the sense that it will jail you for your “economic inactivity”. It is going to tax your income if you aren’t paying health insurance premiums. So the part of the Constitution that specifically relates to the individual mandate is in fact the General Welfare Clause, whereby “Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States…” And the decision on what constitutes “general welfare” is for the democratically-elected Congress to decide, not activist judges. Justice Cardozo wrote in Helvering v. Davis:

“The line must still be drawn between one welfare and another, between particular and general…There is a middle ground or certainly a penumbra in which discretion is at large. The discretion, however, is not confided to the courts. The discretion belongs to Congress, unless the choice is clearly wrong, a display of arbitrary power is not an exercise of judgment. This is now familiar law.”

So far we’ve talked about whether the government can regulate your “economic inactivity”, I also wanted to give an example in which government clearly does regulate your “economic inactivity”.

One example is blight law. In Virginia, for example, if a property is vacant, or subject to many complaints, or is in a dilapidated condition or lacks normal maintenance or upkeep, it may be subject to a blight declaration:

After the owner is notified that the property is blighted if the property owner does not remove the blight or present an acceptable plan to cure the blight within a reasonable period of time, under powers granted under the Code of Virginia, the County can declare, by ordinance, any blighted property as a nuisance and then compel the abatement of the nuisance.

If the owner or owners fail to abate the nuisance, the County may do so and charge and collect the cost thereof from the owner of the property in any manner provided by law for the collection of state or local taxes.

In San Francisco:

But if the property is privately held, the DPW will have to determine the owner’s name and then contact that person about the applicable code violations. The owner will receive a notice from the city giving him or her 30 days to clean up and/or repair the property. If the owner does not respond or comply, the DPW may go there and do the work, billing the owner for the services or placing a lien against the property for repayment.

Mike Dorf pointed out that governments can also mandate positive actions in other arenas: jury duty, schooling your children (state gov.), Selective Service, and even vaccination. Jury duty, for example, is necessary if the federal government is to provide the juries alluded to in the Bill of Rights, in the course of prosecuting federal crimes. And for the originalists out there, as early as 1792, Congress passed a militia act (since repealed) that required citizens between 18 and 45 to “provide [themselves] with a good musket or firelock, a sufficient bayonet and belt, two spare flints, and a knapsack, a pouch, with a box therein, to contain not less than twenty four cartridges, suited to the bore of his musket or firelock, each cartridge to contain a proper quantity of powder and ball; or with a good rifle, knapsack, shot-pouch, and powder-horn, twenty balls suited to the bore of his rifle, and a quarter of a pound of powder”.

In the blight example these are state laws, but they derive that power from the same type of police or taxation powers as the federal government, and philosophically the theory is the same. So it’s clear that “economic inactivity” is still “activity” in the sense that your inaction can effect commerce generally–an unwillingness to maintain your property can be a nuisance and eyesore for a community, an unwillingness to educate your kids creates dumb citizens, and an uninsured person will impact the health care system by going to emergency rooms when they do get sick, or relying on family and friends to support them when they get ill. A 2008 Kaiser study finds that “the uninsured will spend $30 billion out-of-pocket for health care in 2008 while receiving $56 billion in uncompensated care, three quarters of which will be from government sources.” It is equally clear that the government can, and currently does, regulate “inactivity”, the government can compel behavior, and at the very least, the government can tax.

In Defense of Farm Subsidies

A while ago I thought it would be fun to have an “In Defense Of” series that would present arguments for some oft-not-supported causes. Stay tuned for Defenses of Robert Bork and Clarence Thomas…

While debating for Columbia, Josh and I were also responsible for teaching debate to interested students. One aspect of the style we participated in was that the government team proposed the “case” in each round, and unlike [m]any high school debate formats, the “case” was unrestricted by any previously determined resolution. However, there were a handful of prohibitions designed to keep the rounds fair, and one of these was the injunction against “tight cases”–ideas that were so obviously true or one-sided that no matter how well the opposition side argued, they wouldn’t be able to defeat the case. A good example, often used in philosophy, of this is the moral proposition that “we should not torture innocent babies for fun”. Another common example used in illustrating a “tight case” was “the government should end farm subsidies”.

There is a litany of reasons against farm subsidies, which I will briefly mention. Budget hawks harp on their enormous expense. Direct aid to farmers totals around $15-20 billion each year, and one report that aggregated indirect subsidy (i.e. programs for irrigation, export credits, nutrition food aid and loan guarantees) claimed that total direct and indirect aid exceeded $180 billion. Health-conscious critics like Mark Bittman will point out that overproduction of corn allows the cheap production of high fructose corn syrup and all the sugary, diabetes-causing products it engenders, not to mention the corn-fed snack industry. For those who oppose the conglomeration of power in the hands of a few, the Farm Bill disproportionately pays out to large agribusinesses, and not small farmers. Overproduction of wheat, corn, livestock require oil-based fertilizers that destroy the soil and environment. And finally, though I may be missing a few reasons, farm subsidies allow American food producers to dump cheap wheat and corn on the world market, and destroy the livelihood of local farmers in developing countries where agriculture is the primary comparative advantage. Without food subsidies, the argument goes, these local farmers would either be self-sufficient feeders, or could sell their foodstuffs in the market at the same price as American companies.

Let’s look at the last point a little bit. I found a website that showed world production of the three most important cereals: corn, wheat, and rice. (albeit from 2003).

Corn Total Production, Mt %world prod. yield, Mt/ha
World 637,444,480
United States 256,904,560 40.3 8.92
China 114,175,000 17.9 4.85
Brazil 47,809,300 7.5 3.7
Mexico 19,652,416 3.1 2.53
Argentina 15,040,000 2.4 6.47
Wheat
World 549,433,727
China 86,100,250 15.7 3.91
India 65,129,300 11.9 2.62
United States 63,589,820 11.6 2.97
Russia 34,062,260 6.2 1.71
France 30,582,000 5.6 6.23
Rice
World 588,563,933
China 166,417,000 28.3 6.07
India 132,013,000 22.4 3
Indonesia 52,078,832 8.8 4.54
Bangladesh 38,060,000 6.5 3.43
Vietnam 34,518,600 5.9 4.63

One thing I found interesting was theyield, or metric tons of a commodity produced for each hectare planted. The United States, for example, produces 8.92 metric tons of corn per hectare, but the productivity ranges widely, down to Russia’s meager 1.71 metric tons of wheat per hectare. It seemed to me that richer countries generally had higher yields than poorer countries, and in fact a country like Eritrea yielded only 0.24 Mt/ha for wheat and 0.33 Mt/ha for corn. Kuwait and Qatar, on the other hand, have double digit yields of 20 and 12.5, respectively, for corn, despite not being known as particularly fertile places. This makes sense, because a major component of your yield is whether you can afford fertilizer, pesticides, genetically modified crops, or modern machinery. This is not to say that some poorer developing countries do not have excellent climates for agriculture–Egypt, for example, has corn:wheat:rice yields of 7.71, 6.15, and 9.43. Clearly it has retained its historic reputation as a regional breadbasket.Yet even in Egypt, after the building of the Aswan dam, cereal production hasn’t been the same and the country is now the world’s largest importer of wheat.

Just as obviously, it is not so that developing countries have a comparative advantage in agriculture. It seems foolish, in retrospect, to lump together countries like Egypt and Eritrea, which has less than 0.5 yields for both corn and wheat. Even though agriculture is the main economic activity of that latter country, it is subsistence agriculture at best–plagued by manmade disasters like war and deforestation, but also by erosion, drought, and insect infestations. Comparative advantage should not be measured in terms of what uneducated people with time on their hands can traditionally do–modern agriculture is for those with good soil, temperate climate, adequate rainfall, and the technology to maximize those geographical advantages. Nor is it profitable to be an agrarian society, where the majority of people are involved in farming; on the contrary, a nation of small farmers is usually quite impoverished. The fact that America feeds poor people in Africa through cheap corn and wheat, brought about by farm subsidies, is a good thing for countries that don’t have the god-given nor man-made tools to grow as efficiently, and their real comparative advantage is not time for agriculture, but cheap labor galvanized into factory work (think China, Thailand). (note: some Western African countries have a comparative advantage in cotton, but, as far as I know, not wheat/corn/rice).

The other thing I found interesting was that the United States is a Top 5 Producer of both Corn and Wheat, and ranks 11th in terms of Rice. The corn production is astounding: over 40% of the global supply! Recent news has been dominated by coverage of political protests in Egypt and Tunisia, and the specific timing is often attributed to rising food prices. Indeed similar riots occurred in Egypt in 2008, when there was also a wheat shortage, and food prices are higher in 2011 than in 2008, in fact the highest ever since the UN’s Food and Agriculture Organization began indexing prices in 1990. Already, half the Egyptian family’s budget is spent on food. Other Middle Eastern rulers are taking heed. In Bahrain, King Hamad raised government subsidies on flour, poultry, and meat. “Algeria, Libya and Jordan have either relaxed food taxes or duties on food imports or cut prices of staple food. Elsewhere in the Gulf, Kuwait recently introduced a generous stipend and free food for its citizens until March 2012 to ease the pain of higher costs.” Note the benevolence of these dictators is targeted toward food.

Why are wheat prices suddenly so high? The heat wave and fires in Russia/Ukraine, combined with floods in Australia severely diminished the harvests of those major exporters. India and Pakistan both suffered flooding as well. Russia, the world’s 6th largest exporter of wheat, canceled exports. Now China may also be contributing to the problem, as major agricultural regions face the worst drought in centuries, as reported yesterday in the NYTimes. China is a self-sufficient nation with very little exporting or importing, though with many mouths to feed, and a poor harvest could make China’s rich government, with $2.85 trillion in foreign exchange reserves, a big buyer in the international arena, raising prices in an already unstable market.

What does this have to do with farm subsidies? They were originally created in the U.S., in response to the Great Depression, to combat boom-and-bust pricing patterns for agriculture. In bumper years, prices would plummet and it’d be hard to make a profit in an oversaturated market. In lean years, farmers would lose their harvests and need to take on loans just to replant, while the consumer suffered from fluctuating prices. Government subsidies provided a price floor, and income was guaranteed no matter how low prices got. In return, farmers were incentivized to overproduce–there was, after all, a buyer of last resort–and food became cheap and plentiful.

Now in the United States we don’t worry about expensive food; our problem is overeating. But the food riots across in the world, in Manila and Mexico, Cairo and China, remind us why we spend in order to have years of plenty. If America stopped its farm subsidies and American farmers produced only what was domestically needed and a little more, no longer flooding the world market with cheap wheat and corn, would this unpredictable world food crisis have been even more severe? Would the food crisis be better if the U.S. had never had farm subsidies to begin with, and there were small farmers in developing countries trying to feed the Sphinx and the Dragon? Food protectionism costs a lot, no question. But in these modern times with poor countries developing slower than their populations are growing, food security affects global stability. America is no longer merely protecting itself from hunger, but, as an able producer of surplus food, serves as bulwark against global hunger–the farmer of last resort.

Continue reading

A Charity Premium and Premature Taxation, pt 1.

All things being equal, is it better to have tax revenue or untaxed charitable donations? From a taxation point of view, I think the fact that we don’t tax donations to non-profits indicates that we believe whatever percentage that would have gone to the Treasury is better spent by a non-profit, whether American Red Cross, Doctors Without Borders, or even individual private schools and universities.

The reputation of government spending does little to suggest otherwise. Politicians’ pet projects can be notoriously wasteful. Though perhaps Josh can better comment on this, Boston’s Big Dig cost $14.6 billion to push a 3.5 mi. highway underground. Cost effective? The infamous bridge to nowhere, the Gravina Island Bridge, was projected to cost nearly $400 million, all to connect a city less populous than this author’s New Jersey suburb to an island of 50 residents and an airport.

Government benefits and pension plans are so generous they have been bankrupting states during this recession. The fattest pension check in New York State weighs in at a whopping $261,037 annually, all while the holder simultaneously earns $280,000 in salary as SUNY Albany president. And of course, 20 cents of every dollar taxed these days goes into the Defense or Homeland Security Budget and deceptively, a borrowed nickel goes to the separate, unbudgeted, and outrageously expensive Iraq and Afghanistan wars. Always frustrating is government spending financing the government debt, which of course is expected to increase due to recession borrowing. And if we value current worldwide suffering more than potential suffering of indebted Americans, it’s better to spend money helping people now than later.

For many, government spending priorities just don’t reflect those of rational and progressive citizens. I’m not even talking about libertarians, though as Josh pointed out, the existence of a charity premium is a strong case for a smaller government. Spending $663 billion on Defense while Energy gets $26 billion, National Science Foundation gets $7 billion, and NIH gets $32 billion. For people interested in… say, science research and a cure for cancer… this is not an ideal allocation of resources. Donating to Columbia University, on the other hand, or Howard Hughes Medical Institute, or the Susan G. Komen Foundation, can seem like a smarter way of promoting more important societal goods.

It’s hard to imagine that particularly efficient charities like the Gates Foundation, or Partners in Health, or any of the others we’ve named so far, couldn’t spend their money better, and create more utility for people, than the U.S. government. This suggests that there’s a “charity premium” (if I may boldly coin a term) when your dollar is invested by a good non-profit instead of by the government. Put another way, if you could choose to either donate your money to the government, or donate it to charity, donate it to charity.

A few criticisms. Are charities more efficient than government agencies? Not all, but some, certainly. Charities are independently rated. On Charity Navigator, for example, any charity that spends less than 30% of its budget on program expenses automatically gets zero stars. Charities that spend too much of its budget on fundraising similarly are downgraded. Of course, it can be possible to fudge the numbers in order to game the ratings. For example, opening an office in New York is an administrative expense. Opening an office in Sri Lanka, on the other hand, can be written off as a program expense. However, there are runaway hits. Freakonomics authors reported that “Smile Train has performed more than 280,000 cleft surgeries in 74 of the world’s poorest countries, raising some $84 million [in 2007] while employing a worldwide staff of just 30 people.” There could also be increased regulation and oversight of non-profit reporting, and non-profits that do not meet certain goals could be downgraded by the government itself, and donations to these non-profits may be taxed. In terms of salaries and pensions, I suspect that anyone who has looked at Idealist.org or worked for a non-profit would agree that overall, non-profit spending on salaries is pretty reasonable. “I work for a non-profit” is universally accepted as a euphemism for sacrificing earning power to contribute toward a higher good.

While libertarians would love the existence of a charity premium, I don’t think the charity premium necessarily endorses all of the libertarian agenda. There are some services that non-profits or profit-driven organizations cannot tackle. Defense spending may be bloated, but simply for legal and liability reasons private entities wouldn’t be able to field even a defensive army, much less continuously invest in weapons that likely aren’t going to be used. Expensive long-term projects might not be able to bear the risk of a non-profit hitting a bad fund-raising year, so government deficit spending flexibility can be a good thing. Private administration of  justice would be profoundly unjust. And un-flashy places to invest, like building a road in poor rural part of American, would simply go undone without government.

Still, as long as there are clearly bloated areas of government spending, common stories of corruption, extensive government waste, and over-generous retirement packages, I conclude that the government should be making do with less. In that case, more utility comes from donating your money to a charity than to the government. More improvement of human life is obtained when a non-profit invests the 35% of your charitable donation that would otherwise be going to the Treasury.

So in this blog post we’ve discussed whether there is a charity premium on money spent. Return for Part 2, where I hope to propose a change to tax policy (above the deductibility of charitable donations) to take advantage of the charity premium.

Reading assignment for next post: Gates & Buffett campaign to raise $600 billion from America’s super-rich.

The Antibiotics Shortage and How to Solve It.

update (11/5/2010) :: The NYTimes published a good article about subsidizing antibiotic research: http://www.nytimes.com/2010/11/06/health/policy/06germ.html?ref=antibiotics

The U.S. Should Establish a No-Fault Antibiotic Injury Program.

Few inventions in the history of mankind have saved more lives than antibiotics. Antibiotics are compounds that can kill or inhibit (long enough for our immune systems to kill) microorganisms–bacteria, fungi, and protists. In 1928, Alexander Fleming discovered penicillin, a substance exuded from a humble fungus that would spawn the modern pharmaceutical industry and revolutionize our lives both in war and in peace. Manufactured in time for WWII, penicillin saved countless lives that, in previous wars, would have been lost to bacterial infection. Despite the ever-increasing deadliness of modern weapons, equally rapid innovations in medicine and pharmaceuticals, especially antibiotics, has steadily lowered the likelihood of death in war. In every American war since they started counting, more soldiers died due to disease (or accident) than on the battlefield. In the Civil War, 224,097 died of disease or accident compared to 140,414 battle deaths; in WWI, over half of the deaths were attributable to disease. WWII was the first war where more soldiers were killed by fellow man than by microorganism, with under 30% of deaths due to disease. In times of peace, antibiotics are used from the beginnings of our lives to the very end, everywhere from combating bacteria that kill women in childbirth, to fighting pneumonia that wracks our aged lungs. 

And yet these vital drugs that we daily take for granted, no longer fearing every minor scratch or major gash, are quickly running out.

The first problem is bacterial resistance. Over time, bacterial strains will naturally mutate and evolve, through natural selection, to become immune to once-effective antibiotics. This process is exacerbated when patients do not take their full course of antibiotics–feeling better, they decide to stop taking their medicine early, thus allowing the small amounts of bacteria still alive (the ones resistant to the medicine) to grow, restart the infection, and spread to other hosts. Sometimes antibiotics can be overprescribed (for example, in common cold cases), which gives bacteria exposure to the antiobiotic and starts the resistance clock. Bacteria can also get exposure through our use of antibiotics in agriculture–approximately 60% of antibiotic usage in the United States. Bacteria can exchange genes that confer resistance to antibiotics across strains, and even across species, through plasmid transfer. This enables bacterial strains to accumulate resistances, and leads to the development of multiple-drug resistant bacteria (MDRs). Bacteria could also increase their expression of resistance genes, for example, in increasing the amount of pumps that filter out the antibiotic. Microbiologist Kenneth Todar writes,

70 percent of the bacteria that cause infections in hospitals are resistant to at least one of the drugs most commonly used for treatment. Some organisms are resistant to all approved antibiotics and can only be treated with experimental and potentially toxic drugs. An alarming increase in resistance of bacteria that cause community acquired infections has also been documented, especially in the staphylococci and pneumococci (Streptococcus pneumoniae), which are prevalent causes of disease and mortality. In a recent study, 25% of bacterial pneumonia cases were shown to be resistant to penicillin, and an additional 25% of cases were resistant to more than one antibiotic.

A few famous examples of MDR bacteria include multiple-drug resistant tuberculosis (MDR TB), and Methicillin-resistant Staphylococcus aureus (MRSA). Drug-resistant TB requires treatment with more expensive and dangerous second-line TB drugs, and if the TB develops resistance to those second-line drugs as well, there are few good options for the third line. MDR TB is a serious public health problem in the developing world where the WHO is seeking to eradicate TB. Resistant staph infections are a pressing concern in the First World. In the United States, a Department of Health and Human Services study estimated 390,000 hospitalizations from MRSA cases in 2005, and researchers estimated 17,000-19,000 deaths were attributed to MRSA. It’s important to remember that despite antibiotics, infections remain the second-leading cause of death in the world, and this is a problem not limited to the Third World, but right in our backyards, in our local hospitals and community health clinics.

Despite the steadily decreasing supply of antibiotics, drug companies are not rushing out new antibiotics, nor do they have clinical trials already on track. For example, despite the resistance of gram-negative bacteria, a “study released about a year ago by the Infectious Diseases Society of America found no drugs in middle- or late-stage clinical trials directed specifically at Gram-negative organisms.”

Why are drug companies unexcited about inventing life-saving products? Antibiotics are less profitable than drugs like Lipitor and Viagra that are used to treat chronic conditions and that are chronically consumed; they are taken for short treatment courses, and doctors, cognizant of the resistance problem, are loathe to overprescribe them. Antibacterial resistance can render a drug obsolete, so drug companies must bear the risk of losing all profitability even before the life of the patent expires.

Due to the low profit margins of antibiotics, drug companies are particularly sensitive to profits that are lost from drug liability suits–the cost of hiring lawyers, and the risk of losing millions. These facts mirror, in fact, the conditions experienced by vaccine manufacturers in the 1980s. Vaccine manufacturers threatened to abandon the market because of the threat of lawsuits over vaccine-related injuries. Congress, fearing a vaccine shortage and public health crisis, passed the National Childhood Vaccine Injury Act of 1986, which shielded vaccine manufacturers from many tort claims, and established a Vaccine Court to adjudicate payment from a no-fault injury fund. Instead of suing a vaccine manufacturer and proving negligence, individuals would/must file a claim before the Vaccine Court (Court of Federal Claims) and merely demonstrate they were injured by the vaccine. If successful, they would be paid damages from the Vaccine Fund, which is funded from small surcharges on every vaccine purchase. This, apparently, assuaged the fears of vaccine manufacturers, and our nation’s (and the world’s) vaccine crisis passed. A similar system should be created for antibiotics, and perhaps it, alone, will be sufficient as well to encourage antibiotics research.

This system benefits not just drug companies, but plaintiffs as well. Under the vaccine injury program, for example, the legal fees for bringing a claim forward are reimbursed by the Vaccine Fund, not out of the plaintiff’s pocket, or out of the plaintiff’s damages check. Additionally, victims have a difficult time winning tort claims against large multinational corporations and their legions of lawyers. Companies have a huge incentive to resist and drag out even valid injury claims, for fear that one winning suit will become the seed for hundreds of others. As with medical malpractice suits, even if the odd plaintiff wins, the vast majority will lose and end up with nothing. With medical malpractice, the doctors “lose” as well because they have to spend so much money on lawyers/insurance. Analogously, drug companies lose when they are forced to spend money on lawyers despite the low profit margins of antibiotics. With an injury fund, the majority of legitimately injured claimants can receive compensation and funds for future medical care, and drug companies can keep their profits.

While shielding drug companies from liability goes against the sentiment in last year’s Wyeth v. Levine ruling, this plan is also beneficial from a regulatory point of view. If antibiotic suits are preempted, the safety judgments on antibiotics will be performed by FDA instead of state juries. Where juries see only the terrible, individual harms in front of them and may be careless in punishing drug companies (and disincentivizing their activities), FDA is in a better position to perform a holistic cost-benefit analysis of drug safety vs. drug accessibility. They see all those who would suffer if deprived of a drug, even a drug that carries dangerous risks. This concern is true of all drugs, but I think particularly true in cases of vaccines and antibiotics, where the public health concerns are tremendous.

Under this plan, the vast majority of legitimate injury victims will receive fair compensation, going through a claims court, without needing to attempt a long and painful tort process. This plan saves millions of lives, as antibiotic manufacturers, hopefully like vaccine manufacturers did in the 80s, will find a no-fault liability system sufficient to re-stimulate their investment in antibiotic research. Government subsidy of pharmaceutical research in antibiotics, and increased government grants for university development of antibiotics could also go a long way toward restoring the healthy profitability and incentive for antibiotic research, and this tort scheme would only serve to supplement any additional incentives the government could enact. These life-saving drugs could perhaps become even cheaper as drug companies no longer need to create legal war chests in case of tort suits, or no longer need to front the whole sum of R&D costs, increasing the availability of these drugs in the Third World, and saving millions more lives abroad.

In these times of corporate repugnance, it seems distasteful to erect yet another shield for large businesses to protect themselves from judgment at the hands of the people, before twelve angry men. Yet the alternative, a shortage of novel antibiotics to combat newly-mutated bacterial strains, is far more perilous to the public health.

Chinese Currency Revaluation is Overrated

I am always frustrated by the amount of China-bashing that goes on in the United States media. Robin Hanson recently blogged about his survey of the top articles on China written in the NYTimes and Washington Post. He concluded:

Yup, top US newspapers are in full fledged China bashing mode.  Anyone think a list of the last ten articles about Britain or Canada would be nearly as negative? The odd thing is that this media tries so hard to appear objective.  Yet they are blatant about the most obvious bias one should expect from national news: a bias toward negativity about rival nations.  Apparently we are most blind to our most obvious biases.

China has a lot to be criticized for, to be sure, but is all the scrutiny deserved? Its human rights record lags far behind that of the United States and other European countries, yet there are far worse (where’s the daily coverage of Sudan these days?). It’s portrayed as obstructionist in climate change, yet the U.S. is just as unwilling to engage in substantive reform, and we’ve blogged in the past about what the U.S. should be doing even without Chinese cooperation. It’s China’s fault that we had this housing crisis; if only their obsession with saving all the time didn’t provide us with so much cheap credit! China’s investment fuels our deficit spending… not our wildly spendthrift Congress. Most disappointing is how much the U.S. worries about China, when we should be spending more time worrying about ourselves: our education system, our economy, our civil rights record. Whatever happened to personal responsibility?

The most common criticism of China that seems to pop up everywhere I look is China’s policy of keeping its currency, the RenMinBi (RMB), or Yuan, pegged to the U.S. dollar. According to some economists, including Paul Krugman, this keeps China’s exports artificially competitive, and according to less scrupulous minds, hurts American manufacturing and is responsible for our giant trade deficit. But as you suspected from reading the title of this post, those claims are overrated.

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