Krugman's argument is a bit more subtle than how it is portrayed. He does not argue that debt does not matter, but rather that stimulus now will lower debt/gdp ratios in the future, by causing GDP to grow faster than the debt is accumulating. The real gap in this argument , that he never addresses (ever), is whether that is true or not. He simply assumes that because austerity does not seem to be working that the inverse must be true: that stimulus will produce a permanent increase in the rate of GDP growth. This is not necessarily true and is frankly not very likely to be true. It is hard to imagine how a temporary stimulus should produce a permanent increase in output. The only way is if it leads business to permanently expand production (through hiring and capital investment), but i can assure you that most businessmen are much more likely to meet what is obviously a temporary blip in government induced demand by temporary hiring or simply ignore it completely. Krugman is an extremely smart guys who has been right most of the time, but he has simply never made a persuasive argument in support of the idea that temporary stimulus will actually produce permanent increases in growth rates (frankly, neither did Keynes). The real role of stimulus is to very inefficiently provide funds to persons who would otherwise be in financial extremis and default on their debt obligations causing a Minsky cascade of defaults. It would be vastly more efficient to do this by providing highly target debt relief to aid in rapid deleveraging , but even liberals find the moral hazard and inequity of that approach unacceptable.
Procyon I will try to respond to your note as if you intended it to be a reasonable and useful contribution to the substantive problem of how we actually continue to pay for medical innovation now that the US has decided that it cannot fund it alone. The reality is that the VC system in the US funds the vast majority of early stage drug and medical device development. Eleven out of thirteen new breakthrough drugs and all such medical devices approved last year, were funded by the VC system. Those are the facts. Larger companies have 'offshored' their key RD activities to the VC community because it is simply too risky for them and because we do it better. The return on capital in this sector of the VC industry has been low relative to other risky investment, suggesting that the profit levels for drugs and devices are not excessive. This activity must be paid for somehow. Historically it was paid by the US consumer in the form of high prices, with those high prices subsidizing the availability of those drugs to the rest of the world. My perfectly reasonable suggestion was that we replace that subsidy, which will soon disappear, with a fairer worldwide cost sharing system that would eliminate 'free riding' by those who can pay (the first world) and set affordable, but not zero, prices for those who cannot pay much. India is somewhere in between, but can surely afford to shoulder some non zero portion of the cost of such innovation. The argument that we should subsidize the profits of the generic drug industry in India, by allowing them to simply steal the drugs does not seem reasonable. As the American people and Congress come to understand the extent of the free riding and outright theft that has been occurring, the reaction could be very damaging to trade with the developing world. It is in everybody's interest to find a practical solution to this impending disaster.
A few points on Stiglitz's musings beyond the narrow issues in Myriad. First, the suggestion that the patent system is the key driver of "corruption", because patents make it profitable. Yes , profit is required for anyone to engage in bribery, but that is true in all industries and a trivial observation. As Stiglitz must know, the real reason for this kind of bribery, in medicine and any other industry, is the 'agency' problem. The person taking the bribe is able to direct someone else's money to flow in a preferred direction. That is a real problem in medicine just as it is with 'purchasing managers' for manufactures and many others, but has nothing to do with patents. In fact, the DOJ turns a blind eye to such 'bribery' when they think it lowers their costs. For example they permit 'group purchasing organizations' to legally bribe purchasing managers of hospitals to use monopsony power to force prices down. Even more incredible, and soon to become a major scandal, the US government is now launching a kickback program of its own, where it will pay doctors directly to deny care to patients, either by using inferior technology or even more directly. The potential for bribery of physicians as agents, by either industry or payers is a well known problem. We once attempted to limit it by requiring that physicians pledge to act only in the interest of patients and not accept bribes either from those wishing to overuse or overpay for care, or ,just as damaging, under-use and underpay for care. It was call the Hippocratic oath.
Where to begin? First, Stiglitz is simply wrong on certain key facts. He suggests that Myriad's discovery 'would have been made in any case' merely through the decoding of the human genome. Really? There are thousands of decoded genes whose function remain completely unknown. Myriad's contribution, and the hard part of genetic research, was discovering the casual relationship between the genes and breast cancer. This discovery effort is ongoing, costs billions of dollars and is incredibly risky. It is possible that it would occur at some level if funded entirely by the government, but it is embarrassing for a Nobel prize winning economist to imply that the incentive provided by patent monopoly has not vastly increased the scale of investment and the pace of discovery. He further suggests that the patents have impeded academic research. Ridiculous. Academic research is completely exempt from the patent laws. True , these selfless academics cannot commercialize their academic discovery, for a strictly limited time period, but that is what Stiglitz is objecting to in the first place. Finally, it is worth emphasizing that the patent monopoly is only granted for twenty years, a reasonable and limited period, especially when compared to other truly outrageous 'intellectual property' grants such as copyright, which is granted for 75 years after the death of the creator. We seldom hear objections to protecting Mickey Mouse cartoons for this period from economists, perhaps because such protections also apply to their extremely profitable textbooks. I happen to agree that Myriad's patents on the actual Brac1 genes themselves should probably not be allowed, but this is entirely different from disallowing their patent on the predictive value of the genes for breast cancer. An analogy that may be easier for Stiglitz to relate to would be patenting the symbols of hieroglyphics versus a copyright on the translation into English.
While it is true that the global IP system for medical innovation needs to be seriously rethought, the Indian patent decision on Gleevec is clearly wrong. The court basically held that the improvements to an older and unpatented version of the drug were not significant enough to justify a patent on the new version. In that case why doesn't India simply use the older unpatented drug? The answer, which demonstrates the venality of the Indian court's decision, is that the older drug does not in fact work well at all and the improvements that Novartis was trying to patent were critical to its efficacy. The Indians, as usual, are simply unwilling to pay Novartis for inventing a drug that actually works. Beyond Gleevec, the system which supports worldwide medical innovation is failing. The United States has long subsidized virtually all medical innovation in the world by being willing to pay extremely high prices for new drugs and devices. These prices are routinely two to three times higher than prices in the rest of the developed world (set through monopsony purchasing systems) and vastly more than the OUS 'average price' which includes prices near zero in kleptocratic states such as India. The rest of the world free rides on this American subsidy, as the authors clearly know and implicitly endorse. Unfortunately, the American public can no longer afford this subsidy, and it is obvious that as the subsidy is removed , innovation will decline. American venture capital investment in medical innovation has already declined by 70% in anticipation. The solution to both providing drugs to poor populations while simultaneously supporting the huge cost of innovation is for the US to force a worldwide drug pricing system that reduces US prices, raises them in the rest of the developed world and allows reasonable (not zero) income adjusted pricing in the third world. This is likely to emerge as a major fair trade issue in the future. There is sufficient aggregate demand and income across the world at large to pay for medical innovation if everyone will pay their 'fair share', but not if monopsonists in Europe and kleptocrats in India will not.
Who’s Afraid of the Big Bad Debt?
Krugman's argument is a bit more subtle than how it is portrayed. He does not argue that debt does not matter, but rather that stimulus now will lower debt/gdp ratios in the future, by causing GDP to grow faster than the debt is accumulating.
The real gap in this argument , that he never addresses (ever), is whether that is true or not. He simply assumes that because austerity does not seem to be working that the inverse must be true: that stimulus will produce a permanent increase in the rate of GDP growth. This is not necessarily true and is frankly not very likely to be true.
It is hard to imagine how a temporary stimulus should produce a permanent increase in output. The only way is if it leads business to permanently expand production (through hiring and capital investment), but i can assure you that most businessmen are much more likely to meet what is obviously a temporary blip in government induced demand by temporary hiring or simply ignore it completely. Krugman is an extremely smart guys who has been right most of the time, but he has simply never made a persuasive argument in support of the idea that temporary stimulus will actually produce permanent increases in growth rates (frankly, neither did Keynes).
The real role of stimulus is to very inefficiently provide funds to persons who would otherwise be in financial extremis and default on their debt obligations causing a Minsky cascade of defaults. It would be vastly more efficient to do this by providing highly target debt relief to aid in rapid deleveraging , but even liberals find the moral hazard and inequity of that approach unacceptable.
India’s Patently Wise Decision
Procyon
I will try to respond to your note as if you intended it to be a reasonable and useful contribution to the substantive problem of how we actually continue to pay for medical innovation now that the US has decided that it cannot fund it alone.
The reality is that the VC system in the US funds the vast majority of early stage drug and medical device development. Eleven out of thirteen new breakthrough drugs and all such medical devices approved last year, were funded by the VC system. Those are the facts. Larger companies have 'offshored' their key RD activities to the VC community because it is simply too risky for them and because we do it better. The return on capital in this sector of the VC industry has been low relative to other risky investment, suggesting that the profit levels for drugs and devices are not excessive. This activity must be paid for somehow. Historically it was paid by the US consumer in the form of high prices, with those high prices subsidizing the availability of those drugs to the rest of the world.
My perfectly reasonable suggestion was that we replace that subsidy, which will soon disappear, with a fairer worldwide cost sharing system that would eliminate 'free riding' by those who can pay (the first world) and set affordable, but not zero, prices for those who cannot pay much. India is somewhere in between, but can surely afford to shoulder some non zero portion of the cost of such innovation. The argument that we should subsidize the profits of the generic drug industry in India, by allowing them to simply steal the drugs does not seem reasonable.
As the American people and Congress come to understand the extent of the free riding and outright theft that has been occurring, the reaction could be very damaging to trade with the developing world. It is in everybody's interest to find a practical solution to this impending disaster.
Lives versus Profits
A few points on Stiglitz's musings beyond the narrow issues in Myriad.
First, the suggestion that the patent system is the key driver of "corruption", because patents make it profitable. Yes , profit is required for anyone to engage in bribery, but that is true in all industries and a trivial observation. As Stiglitz must know, the real reason for this kind of bribery, in medicine and any other industry, is the 'agency' problem. The person taking the bribe is able to direct someone else's money to flow in a preferred direction. That is a real problem in medicine just as it is with 'purchasing managers' for manufactures and many others, but has nothing to do with patents.
In fact, the DOJ turns a blind eye to such 'bribery' when they think it lowers their costs. For example they permit 'group purchasing organizations' to legally bribe purchasing managers of hospitals to use monopsony power to force prices down.
Even more incredible, and soon to become a major scandal, the US government is now launching a kickback program of its own, where it will pay doctors directly to deny care to patients, either by using inferior technology or even more directly.
The potential for bribery of physicians as agents, by either industry or payers is a well known problem. We once attempted to limit it by requiring that physicians pledge to act only in the interest of patients and not accept bribes either from those wishing to overuse or overpay for care, or ,just as damaging, under-use and underpay for care. It was call the Hippocratic oath.
Lives versus Profits
Where to begin?
First, Stiglitz is simply wrong on certain key facts. He suggests that Myriad's discovery 'would have been made in any case' merely through the decoding of the human genome. Really? There are thousands of decoded genes whose function remain completely unknown. Myriad's contribution, and the hard part of genetic research, was discovering the casual relationship between the genes and breast cancer. This discovery effort is ongoing, costs billions of dollars and is incredibly risky. It is possible that it would occur at some level if funded entirely by the government, but it is embarrassing for a Nobel prize winning economist to imply that the incentive provided by patent monopoly has not vastly increased the scale of investment and the pace of discovery.
He further suggests that the patents have impeded academic research. Ridiculous. Academic research is completely exempt from the patent laws. True , these selfless academics cannot commercialize their academic discovery, for a strictly limited time period, but that is what Stiglitz is objecting to in the first place.
Finally, it is worth emphasizing that the patent monopoly is only granted for twenty years, a reasonable and limited period, especially when compared to other truly outrageous 'intellectual property' grants such as copyright, which is granted for 75 years after the death of the creator. We seldom hear objections to protecting Mickey Mouse cartoons for this period from economists, perhaps because such protections also apply to their extremely profitable textbooks.
I happen to agree that Myriad's patents on the actual Brac1 genes themselves should probably not be allowed, but this is entirely different from disallowing their patent on the predictive value of the genes for breast cancer.
An analogy that may be easier for Stiglitz to relate to would be patenting the symbols of hieroglyphics versus a copyright on the translation into English.
India’s Patently Wise Decision
While it is true that the global IP system for medical innovation needs to be seriously rethought, the Indian patent decision on Gleevec is clearly wrong.
The court basically held that the improvements to an older and unpatented version of the drug were not significant enough to justify a patent on the new version.
In that case why doesn't India simply use the older unpatented drug?
The answer, which demonstrates the venality of the Indian court's decision, is that the older drug does not in fact work well at all and the improvements that Novartis was trying to patent were critical to its efficacy. The Indians, as usual, are simply unwilling to pay Novartis for inventing a drug that actually works.
Beyond Gleevec, the system which supports worldwide medical innovation is failing. The United States has long subsidized virtually all medical innovation in the world by being willing to pay extremely high prices for new drugs and devices. These prices are routinely two to three times higher than prices in the rest of the developed world (set through monopsony purchasing systems) and vastly more than the OUS 'average price' which includes prices near zero in kleptocratic states such as India. The rest of the world free rides on this American subsidy, as the authors clearly know and implicitly endorse.
Unfortunately, the American public can no longer afford this subsidy, and it is obvious that as the subsidy is removed , innovation will decline. American venture capital investment in medical innovation has already declined by 70% in anticipation.
The solution to both providing drugs to poor populations while simultaneously supporting the huge cost of innovation is for the US to force a worldwide drug pricing system that reduces US prices, raises them in the rest of the developed world and allows reasonable (not zero) income adjusted pricing in the third world.
This is likely to emerge as a major fair trade issue in the future.
There is sufficient aggregate demand and income across the world at large to pay for medical innovation if everyone will pay their 'fair share', but not if monopsonists in Europe and kleptocrats in India will not.