What Sets Prices?

Dean BakerDean Baker wrote a very short blog post the other day that gets at an important economic point that most people seem to miss, If Drug Companies Could Charge Higher Prices, Why Aren’t They? It refers to a Katie Thomas and Robert Pear New York Times article that claims that the government plans to pay drug companies less for medications as part of Medicare. “Some have speculated that other consumers could end up paying for the cost savings if drug makers raise their prices to account for the lost revenue.”

What journalists just flunked Econ 101?

Yet, this is an incredibly common fallacy. The idea is that the price of a product is some function of how much it costs to make it. Wrong! In fact, this is what drug patents are all about. They create an artificial monopoly so that drug companies can charge far more than they would cost in a free market (much less what they would cost based only on production expenses).

Think of it in terms of a new piece of electronics. The cost of producing flat screen televisions have gone down over the last ten years, but that isn’t the main reason the prices have gone down. When a product is new, its profit margin is high. Because it’s new. Because people will pay more to be the first. Because they’re idiots. (I think so, anyway; I am most definitely not an “early adopter.”)

So here’s the ultimate rule of business: products are priced so as to maximize profits. As Dean Baker’s headline indicates: drug companies would charge more if they could. The very fact that the government is able to pay less for the drugs proves the point. Why don’t the drug companies just refusing the sell the drugs at that price? Because they are still making money! That reminds me of a joke.

Two haberdashers are talking. The first one says, “I lose a dollar on every hat I sell!” The second one says, “How do you stay in business?” The first one replies, “It’s the volume!”

So the drug companies are not going to sell at a loss to the government, regardless of how big a customer it is. A high volume of losses is a big loss, just as for the haberdasher in the joke. So don’t fall for this fallacy. It pops up a lot. You especially see it used to argue against corporate taxes. People say, “If you raise the corporate tax, the corporations will just pass it on to the customer!” No, not really. In fact, with corporate taxes, it makes even less sense, because corporate taxes are only paid on profits.

Don’t be like Katie Thomas and Robert Pear. In fact, unless it’s Paul Krugman, be skeptical of any economic information you get from the New York Times. And note: the Sunday New York Times does not cost $5 because that’s what it costs to produce. In fact, the Sunday Times has been $5 for over a decade. You’d think Thomas and Pear would have noticed that.

Harry Reid Has Soured

Harry ReidJohn Nichols is angry at Harry Reid. Of course, who isn’t. Let’s look back at a little Harry Reid history, shall we? In January 2011, Harry Reid just said no to filibuster reform. (Note: he said no in 2009 too, when he could have changed the rules over a Republican filibuster!) But then Reid changed his mind. Last May, he went to the Senate floor and said, “If there were ever a time when Tom Udall and Jeff Merkley were prophetic, it’s tonight. These two young, fine senators said it was time to change the rules of the Senate, and we didn’t. They were right. The rest of us were wrong—or most of us, anyway. What a shame.”

This is what people hate about liberals. Sure, in the abstract liberals stand for something. When it is theoretical whether to reform the filibuster, Harry Reid is there to give a full-throated endorsement! But after a few months tick away and he has the ability to actually do the reform, he goes all soft: “The Democrats will someday be in the minority and we will want the filibuster!”

(As I’ve said ad nauseam, this shows a shocking lack of political savvy. The Republicans, for all their faults, are not a bunch of spineless assholes. What they believe in is generally all wrong, but I will grant them that they actually do believe in it. They will destroy the filibuster the moment it is to their advantage. And when they do, Harry Reid will be out of office and he’ll say, “If there were ever a time when Tom Udall and Jeff Merkley were prophetic, it’s tonight. These two young, fine senators said it was time to change the rules of the Senate, and we didn’t. They were right. The rest of us were wrong—or most of us, anyway. What a shame.”)

This week when the Republicans filibustered Chuck Hagel’s nomination as Secretary of Defense, Harry Reid was shocked, shocked I tell you! He was again on the floor of the Senate, “It is shocking that our Republicans colleagues would leave our nation without a secretary of defense with all the things going on and when we’re in a war.” As Nichols points out, if Reid means troubling or unsettling, then yes, it is shocking. But if he means surprising or unexpected? Well then, I have two little words for the majority leader: fuck you!

Basically, everyone told Reid this, except, you know, his political enemies. People claim that doing the same thing twice and expecting something different makes you insane. That’s not true. But it does make you a dumbshit. Let’s see now, Reid got a handshake agreement from McConnell in 2011. And it was worthless! So Reid got a handshake agreement from McConnell in 2013. And it is worthless!

There are really only two ways to look at this. Perhaps Reid really is as big a dumbshit as he appears to be. Or, and I think this is more likely, he cares far more about his “friends across the isle” in the senate than he does about the United States of America. Regardless, that mother fucker better not try to get another term as senator in 2016. His “use by” date is long expired.

Afterword

Jonathan Bernstein has argued that Reid could fix the filibuster at any time. Unfortunately, I just spent a half hour trying to find the article and I can’t.

Paradox of Existence

Why Does the World Exist? Jim HoltI was doing a job at a church and I had to be reminded by my partner not to discuss, you know, theology. This is because the Baptists we were working for might mistake the question I raised with some children as anti-religious. The question: if God created the universe, what created God? This is, of course, the ultimate theological question that all religions try to answer. But I have to admit, most Christians I talk to are so obtuse that they do indeed see the question as more an affront to religion than a basis of it.

One of the children I was speaking to actually gave me a great answer. He smiled and shrugged. That very nimbly sums up my theological thinking. Existence itself makes no sense and I’m quite happy with that.

I just finished reading Jim Holt’s Why Does the World Exist? I wrote my thoughts about this subject before reading it, as a kind of test to see if the book changed my thinking. And it did: I now realize that all of the thinkers who deal with this stuff are deceiving themselves in very clever ways. It is all intellectual folderol designed to hide the great paradoxes that are existence.

There is just something at the base of my being that finds infinite time and spaces and the feedbacks they imply very comfortable. I have no problem believing in an infinite number of universes. There would have to have always been an infinite number of universes because existence has always been. There is no beginning and there is no end. Or the beginning and end are the same thing in some kind of Mobius strip of time and space. Regardless, we are parochial by nature. We are part of the universe and thus can never really understand it.

Why Does the World Exist? is filled with really smart people. But in the end, the only one who speaks to me is Adolf Grunbaum. This is strange, because after first reading him, I hated what he had to say. Basically, he nullifies the very question of why anything exists. He claims that this is just our prejudice. (He doesn’t say this, but I suspect that it comes from the fact that we start out nonexistent—or at least we think we do.) On first brush, I felt that his answer to the question was to not answer the question. But actually, his thinking is more or less the same as mine: it only seems natural that nothing should exist because of our parochial nature.

But there is one thing I got from the book: a quote from Claude Levi-Strauss on a 91st birthday celebration. It gets to the heart of what I have long thought about dying. “Montaigne said that aging diminishes us each day in a way that, when death finally arrives, it takes away only a quarter or half the man. But Montaigne only lived to be fifty-nine, so he could have no idea of the extreme old age I find myself in today.” Exactly! The way I see it is that I am constantly dying. Through the wonders of metabolism, I am always turning into to something else. It is a chemical trick that I think that I am something. Instead, I am a series of related things. And who knows? Maybe the infinite things that I have thought myself to be all still exist and my tiny collection of cells that make up my consciousness is just too focused on chasing some kind of time gradient to notice. Regardless, it won’t be me who dies, because I am not dead.

I wonder if such thoughts bother other people. To me they are a welcome respite from the horrors of politics and all the other trivialities that make up everyday life. As such, Why Does the World Exist? is a fun read for those so inclined. And there are cool things in the book like how one might create a new universe in the lab. I knew I should have taken more chemistry when I was in school!

Afterword

The only other book by Holt that I’ve read is Stop Me If You’ve Heard This. It is a history and philosophy of jokes. Holt is my kind of guy. He clearly understands what is important: existence and jokes!

GOP Could Claim Victory But Won’t

SequesterGreg Sargent (with the help of Paul Van de Water of the Center on Budget and Policy Priorities) has an idea for how Republicans can win the Sequester fight. He notes that winning this fight is all about appearances. Thus far, the Democrats have agreed to $1.5 trillion in spending cuts and the Republicans have agreed to $700 billion in new tax revenue. If the Republicans just accept a one-to-one spend and revenue package to cancel the Sequester, they will have succeeded in getting 1.6 times as much in spending cuts as revenue increases. They should take it and declare victory.

But they won’t. Sargent writes that the Republicans have already defined victory as a total rout. And this is now what the Republican base expects. A moment’s thought will show that this is ridiculous. The Republicans are saying, “Let’s replace all these military spending cuts with Medicare cuts!” But somehow, they’ve convinced themselves that the previous spending cuts don’t count because “that was then.” And that the Fiscal Cliff tax increases should count because “that was now.” The previous spending cuts don’t matter in this debate but the previous revenue increases do matter. What it seems to all come down to is that the Republicans feel that they were humiliated in the Fiscal Cliff deal and the Sequester is where they get their revenge. It’s just silly.

Once again we come back to this tactical philosophy that if they can’t get everything they want (or at least 98%), they are going to take their toys and go home. I use a lot of hyperbole in my writing. But it really does seem that the Republicans behave on the level of five-year-olds. This goes back a lot further than Mitch McConnell’s statement that their number one goal was to make Obama a one term president, but that statement is telling. What he’s saying is that nothing else is as important, “If we Republicans don’t hold the White House what’s the point of being in Washington at all?”

I still think it is possible that somehow we will come up with a replacement for the Sequester. The Republicans have a habit of thinking (or pretending) that they have leverage that they don’t. And then they figure it out at the last minute. “It’s called wisdom; it comes to some suddenly.” But maybe it is just that the 100 or so totally crazy House Republicans have to be pacified until the end. I don’t really know. What is clear, however, is that Republicans continue to not only embarrass themselves, but our entire democracy.