Principles-Based Regulation for Food and Drugs

Anahad O’Connor writes,

The Food and Drug Administration frequently recalls dietary supplements that are found to contain banned substances. But a new study suggests that many of these products return to store shelves months later with the same dangerous ingredients.

With principles-based regulation, you look at companies to see if they have processes in place to ensure that they follow the right principles. Do the health-food stores have people in charge of checking the labels of what they put on shelves? Do the companies that manufacture drugs have people in charge of making sure that they do not put known dangerous chemicals into the drugs? Do the companies that import drugs from overseas have processes in place to ensure that they are not tainted? etc.

When you find processes that are flawed, you order fixes. When find an absence of processes, you impose heavy penalties, which might include prison for the executives.

W Bent the Cost Curve

Loren Adler and Adam Rosenberg write,

Despite constituting barely more than 10 percent of Medicare spending, our analysis shows that Part D has accounted for over 60 percent of the slowdown in Medicare benefits since 2011 (beyond the sequestration contained in the 2011 Budget Control Act).

So, it was not so much Obamacare that slowed the growth in Medicare spending. It was the market-oriented and much-reviled prescription drug plan enacted under President Bush.

Tax-free Savings Accounts

Chris Edwards says that they are working in Canada.

In just the past year, TFSA account assets increased 34 percent, and the number of accounts increased 16 percent. In June 2014, 13 million Canadians held $132 billion in TFSA assets. Given that the U.S. population is about 10 times that of Canada, it would be like 130 million Americans pouring $1.3 trillion into a new personal savings vehicle.

Edwards also links to a 2002 proposal for Universal Savings Accounts.

Of course, if you believe in secular stagnation or the r-g is a big problem, then the last thing you want to see is more saving.

The Financial Supermarket Bubble and Banking History

Here is a chart, using the Google ngram tool, showing the frequency of the appearance of the term “financial supermarket” over time.

Note the spike in the mid-1980s. Given that these are books, which appear with a slight lag, I would say that the spike in the media was in the early 1980s.

At this panel, I don’t know whether I will have time to get into the history of bank concentration in the U.S., but here it is.

1. The market share of the largest banks follows a hockey stick pattern since 1950. It stayed very low until the late 1970s, and then around 1980 it started to grow exponentially. Growth of banks had been retarded by ceilings on deposit interest rates, branching restrictions, and Glass-Steagall restrictions. Banks had been trying to find loopholes and ways around these restrictions, and regulators had been trying to close the loopholes. Then, during the period 1979-1994, the regulators stopped trying to maintain the restrictions, and instead cooperated in ending them. That was when the hockey stick took off.

2. The regulators thought that this would bring more competition and consumer benefits. What the banks had in mind was something else. That is where the chart comes in. The bankers all thought that “cross-selling” and “one-stop shopping” would be killer strategies in consumer banking. In 1981, when Sears bought Dean Witter, many pundits thought that putting a brokerage firm inside a department store was going to be a total game-changer.

3. It turned out, though, that consumers did not flock to brokerage firms in department stores, or to any of the other one-stop-shopping experiments in financial services. The economies of scope just weren’t there.

4. Meanwhile, concentration in banking soared thanks to mergers and acquisitions. I’ve read that JP Morgan Chase is the product of 37 mergers and Bank of America is the product of 50. All of these took place within the past 35 years.

5. Just five years into this exponential growth process, Continental Illinois became insolvent, and that was when “too big to fail” began. So out of the 35 years where we were on the exponential part of the hockey stick, 30 of them have taken place under a “too big to fail” regime. In short, the concentration in banking got started during the “financial supermarket” bubble, and from then on was supported, if not propelled, by “too big to fail.” But the market share of the biggest banks is not something that grew naturally and organically out of superior business processes.

6. As another historical point, when the S&L crisis hit, the government set up the Resolution Trust Corporation. Each failing institution was divided into a “good bank” and a “bad bank,” with the good bank merged into another bank and the assets of the bad bank bought by the RTC. While this was a somewhat distasteful bailout, it was conducted under the rule of law. When TARP was enacted in 2008, Congress and the public were led to expect something similar to the RTC, with TARP used to buy “toxic assets” in a blind, neutral way. Instead they ended up calling the biggest banks into a room and “injecting” TARP funds into them. They also spent TARP funds on restructuring General Motors. It was the opposite of government acting in a predicable, law-governed way. It was Henry Paulson and Timothy Geithner making ad hoc, personal decisions. I think that in the U.S., that is what bank concentration leads to–arbitrary use of power. That is why as a libertarian I do not think that allowing banks to become too big to fail is desirable.

Some Uncharitable Thoughts

Regarding Mark Thoma’s links from the other day.

1. Will Americans ever vote for a far-reaching wealth tax?–Roger Farmer.

No, but we will have one, anyway.

2. Enhance Stability by Improving Culture–William Dudley.

Look who’s talking.

3. Is mortgage credit too tight?–Calculated Risk.

Not by the standards currently set by politicians. If you tell banks you have zero tolerance policy for making type I errors (making loans that eventually default), you have to expect many type II errors (passing up good loans). Of course, 10 years ago, the political pressure was the opposite.

Surveying the War on Poverty

Michael Tanner looks at a lot of literature. His conclusion:

Looked at objectively, continuing the War on Poverty is unlikely to further reduce poverty, increase self-sufficiency, or expand economic mobility. More anti-poverty programs and more welfare spending are not the answer to continued poverty. Fifty years of failure is enough.

Of the many papers he refers to, I looked at one by Bruce D. Meyer and James X. Sullivan.

We find that consumption poverty, after adjusting for biases in price indexes, declined by 26.4 percentage points between 1960 and 2010

What they argue is that consumer prices rose less rapidly over the past 50 years than the official figures show. That means that real incomes were lower 50 years ago than the data would indicate. That in turn raises their measure of poverty fifty years ago.

I am not sure whether or not I agree. I

In any case, the poverty rate is one of the most messed-up statistics out there. You would think that poverty would be defined in absolute terms, as the ability to afford X amount of food, Y amount of medical services, Z amount of housing, etc. Instead, it is defined in relative terms, so that if you were to double everyone’s income, poverty would remain the same.

Quarantine the FDA

Robert Goldberg writes,

These companies could start producing Ebola vaccine/treatments tomorrow — except that the Food and Drug Administration’s insistence on randomized studies and endless demands for more data means firms have to spend millions on paperwork instead of producing medicines.

Try to imagine a randomized study for an ebola vaccine conducted on human beings. “We’re going to expose hundreds of people to ebola, half of whom will have been given the vaccine and half of whom will have been given a placebo.”

One idea I have is a separate agency that uses principles-based regulation instead of rules-based regulation. Companies could elect to abide by this alternative regulator and bypass he FDA.

Having said that, I am generally not in favor of taking the latest media-inflated crisis and saying that it confirms one’s political outlook. And I am not suggesting that the ebola story should be used to confirm mine.

A Thought From Marc Andreessen

He says,

what if we had Math 101 online, and what if it was well regarded and you got fully accredited and certified? What if we knew that we were going to have a million students per semester? And what if we knew that they were going to be paying $100 per student, right? What if we knew that we’d have $100 million of revenue from that course per semester? What production budget would we be willing to field in order to have that course?

Pointer from Tyler Cowen.

I might push back and say that the same course is unlikely to work well for all one million students. As I have said before, the key is not so much in presenting content. It’s giving students feedback in a way that maximizes their rate of progress.

Political Order and Political Decay

That is the title of Francis Fukuyama’s latest book. I have started reading it. So far, I would summarize it as saying that government must overcome both market failure and government failure. That is, it needs to be effective at providing public goods while serving everyone equally (not succumbing to the problems of public choice). I might summarize this as follows:

Public Goods Provided Public Goods Not Provided
Treats People Equally good government weak government
Privileges Elites crony government predatory government

Think of Denmark as good government, China as crony government, Zaire under Mobutu as predatory government, and Afghanistan as weak government. I assume that “political decay” will mean the movement from good government toward either weak government or crony government.

For a review by someone who has finished the book, see Michael Barone.

Better than HBR on Two-sided Markets

Jean Tirole and Jean-Charles Rochet wrote,

The starting point for the theory of two-sided markets by contrast is that an end-user does not
internalize the welfare impact of his use of the platform on other end-users.

If Anita’s attendance at the singles bar would attract more men, then Bonnie, Christine, and Debbie should subsidize Anita’s attendance. (Similarly, Anita should want to subsidize the others.) But the transaction costs of doing this are high compared to having the singles bar do the subsidizing. On the other hand, at a brothel, the same externalities do not apply.