Dollars and Jens
Wednesday, August 24, 2005
The long-term elastic demand for gasoline
If there's a canonical example of a consumable that has an inelastic short-run demand — meaning people tend to keep buying the same amount when the price suddenly spikes — but a much more elastic demand over the longer-run — i.e. people eventually cut their usage when a price increase is sustained — it's gasoline. People often seem to have a better intuitive grasp of the first part than the second, to a certain extent viewing gasoline consumption as inevitable. How do people respond over a longer-period of time?
- Over a long enough period of time, they move to somewhere that will require less driving, in terms of a commute or other everyday activities; perhaps they were going to move anyway, and it influences the choice of destination, or perhaps they were considering it and this is enough to make them decide to do it.
- They'll buy a new car — likewise, possibly incidental to the price of gasoline, but when they find themselves in the market anyway, it affects their interest in good milage.
- Even more quickly than that, they may be influenced to carpool, where the inconvenience of sharing a ride may have been too great before, or the inconvenience of simply finding someone with whom to share it.
Monday, August 22, 2005
Hurricane futures market
The hurricane futures market.
Saturday, August 20, 2005
To start with a disclaimer, this is all written off-line, from memory, late in the evening. I may have slightly misremembered a fact or two, and there are many other facts which I don't know. Also, if Colby Cosh contradicts me, trust him, and if Derek Lowe contradicts either of us, ignore both Cosh and me.
Merck has long been known in the pharmaceutical industry as among the most innovative companies, if not the most innovative large company. They spend less time working on "me too" drugs — i.e., drugs that compete with other drugs on the market — and more time working on riskier solutions to unsolved problems.
As Jim Collins details in Built to Last, this is not because of a particular management group so much as a long-standing culture. Collins relates the story of a drug they created to treat river blindness, a third-world disease. They knew that the people who contract this disease can not usually afford brand-name drugs, but Merck hoped to recoup its investment by selling the drug to a charity. When they could find no such charity, they produced it anyway, at a loss. The reason given was not that the CEO had a personal desire to spend shareholders' money in this fashion, but rather that the employees would have been demoralized if the drug they worked so hard to create didn't end up actually helping people. They came to Merck to make people healthier, and Merck was going to see that that happened.
A lot of drug companies have hit a rough patch over the last few years, and there has even been talk of whether the drug industry has done all it can do with small molecules (as opposed to genomics). Merck has had more than its share of pain. In 2003, about four of their phase III trials concluded, all in failure. And, of course, there's Vioxx.
Cox-II inhibitors, of which Vioxx was the first, are safer than the class of drugs they supercede, but they are not asprin, let alone harmless. This is one reason why they require a prescription. Of course, in our wacky health-care system, requiring a prescription often means the consumer has to pay less, because insurance picks up most of the tab, and somehow "safer than its predecessors" got translated into "safe". Merck appears to have, at best, failed to correct this understanding, and deserves blame for that.
Once the resulting problems were noticed, Merck pulled Vioxx off the market. I thought this an overreaction, if an understandable one — Merck wanted to reassure consumers, employees, and the rest of the public that they weren't going to sell anything unsafe. Pfizer later added an extra warning to their own Cox-II inhibitor, and I believe Vioxx is back on the market with extra labeling indicating who should be taking it and who should not be. This is roughly what I wanted them to do. Vioxx does, after all, do more good than harm for many people, and they should be allowed to benefit from it.
This is my perception of Merck. This is the context in which I saw the verdict that Merck is liable for $24 million for contributing to a man's death and around $200 million in punitive damages, with further lawsuits doubtless in the works. I would think $24 million high, even if I weren't sympathetic to the defendant; I have little to say about punitive damages, except that I've never seen the logic in awarding them to the plaintiff.
Merck is not perfect. Nor is any large organization — men, as the saying goes, are not angels, and large organizations of people are less inclined toward nobility than are individuals. When Merck's employees do good, Merck profits, and when their employees do bad, and are not checked, it is reasonable to hold Merck liable. But it's difficult to see such a blow to a company which has been among the best in its class, and which is already on its knees.
Friday, August 19, 2005
why price controls are bad
It will, no doubt, surprise you to hear I'm generally a fan of the free market; I actually provide this link to a primer at Marginal Revolution on nonpecuniary rationing largely because I was recently in a discussion that very briefly touched on rent-control, which suffers the same problems and yields, in large part, to the same analysis as in the example given.
Tuesday, August 16, 2005
negotiations / game theory
In an article about a baseball player who hit for the cycle, this caught my attention:
Under the mutual option on his 2006 contract, the Giants can elect to keep him for $5 million. If they decline, Winn can elect to stay for $3.75 million or become a free agent.Of course, if the Giants think he would elect to stay, it is in their interest to decline their option on him, even if they want to keep him; accordingly, it is in his interest to make it appear he doesn't wish to stay.
I think it would have been interesting to have him write down a number, no more than 5,000,000, and the Giants write down a number, no less than 3,750,000; he would play for a salary equal to the average of the two numbers if the Giants' number was greater than or equal to his, and he would be released if their number was lower than his. This situation is a bit more symmetric, but may be more prone to breakdown; as the contract was actually written, one side (Winn) is ultimately left to choose whether to take the contract or not, at which point further bluffing won't work. It might be that my technique would be more likely to see each side pushing for too much, and him leaving, even if both sides wanted him to stay.
When the OMB revised its numbers sharply downward in July, to $333 billion, the doubting Thomases seemed to have a good case. Now, however, the CBO, which is generally seen as more level-headed, has followed suit. In its Budget and Economic Outlook, released on Monday August 15th, the CBO’s projections moved roughly into line with the administration’s, forecasting a shortfall of $331 billion, or roughly 2.7% of GDP.The long-run (nominal) GDP growth projections I've seen are 5.2%. If the deficit stayed at 2.6% forever, the ratio of debt to GDP would asymptotically approach one half; this is somewhat higher than it is now, though on the same order. The debts of most industrialized nations seem to be in this ballpark as well, though Japan's is multiples higher.
More significantly, Douglas Holtz-Eakin, the CBO's director, gave a warning that the improvement, while welcome, seemed to be largely temporary.This is more significant, and this is in a period when the economy is doing quite well, and deficits should be lower than their long-term average. On the other hand, I have trouble putting too much force behind the argument that making the deficit a lot smaller right now should be a big priority when interest rates all the way out on the curve are lower than that 5.2% I mentioned earlier. What does concern me more is the long-term, structural problem:
But there’s one prediction it is making with a high degree of confidence: Social Security and Medicare, America’s old-age programmes, will eat up an increasing share of federal spending and thus spell big trouble for the budget.But you knew that.
The article goes on to mention the
"twin-deficit hypothesis", which argues that Mr Bush’s spendthrift ways are driving up the current-account deficit and putting the country in danger of a catastrophic revaluation of the dollar.This hypothesis comes from the accounting identity that national savings — viz. private savings (which are negative) plus government savings (which are negative) — minus net exports must equal investment in the country; more or less, the money we're sending overseas in exchange for our trade deficit is going to be invested in dollar-denominated assets. The logical jump is to assume that a change in government deficits affects nothing else in the equation except net exports, which, therefore, must vary exactly with government deficits; in its exact form (as with many economic statements in their exact forms) it is untenable, but even approximately it seems to be at odds lately with data. Either way, the case can be made that
"Not catastrophic" seems a poor guideline for fiscal policy
Saturday, August 06, 2005
How economists think about prices
This is as interesting for pedagogy as for the nominal topic.