266 (25 May 2016)

Welcome to week 266!  The articles below caught my attention this week.  Please note that what are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********).  The links to articles preceded by [SR] require a subscription to be read in their entirety, although complete articles may frequently be found by an Internet title search.

(19 May 2016): “How Big Pharma Uses Charity Programs to Cover for Drug Price Hikes” (http://www.bloomberg.com/news/articles/2016-05-19/the-real-reason-big-pharma-wants-to-help-pay-for-your-prescription)

——–“In August 2015, Turing Pharmaceuticals and its then-chief executive, Martin Shkreli, purchased a drug called Daraprim and immediately raised its price more than 5,000 percent.  Within days, Turing contacted Patient Services Inc., or PSI, a charity that helps people meet the insurance copayments on costly drugs.  Turing wanted PSI to create a fund for patients with toxoplasmosis, a parasitic infection that is most often treated with Daraprim.  Having just made Daraprim much more costly, Turing was now offering to make it more affordable.  But this is not a feel-good story.  It’s a story about why expensive drugs keep getting more expensive, and how U.S. taxpayers support a billion-dollar system in which charitable giving is, in effect, a very profitable form of investing for drug companies—one that may also be tax-deductible.”

********As the article notes, charities like PSI provide “cover” for the enormous price increases on some drugs.  One might say they “enable” such price increases.  This topic is touchy but worth the time to become a little more informed about it.  The article includes access to an 11-minute interview with one of the authors of the story, in which some of the issues are laid out more fully.  In economic terms, the copays financed by pharmaceutical firms via contributions to charities ensure that the quantity of a drug demanded will decline much less than would be the case in their absence.  In other words, the copays make the demand more inelastic than would be the case in their absence, reducing revenue loss from declines in units sold as prices increase.  It is not surprising, then, that some charities have drawn attention to the return on investment pharmaceutical firms can make by making contributions to them.

(21 May 2016): “Smoked” Cuba’s Cigar Industry Isn’t Ready for Its American Moment” (http://www.wsj.com/articles/smoked-cubas-cigar-industry-isnt-ready-for-its-american-moment-1463767535)

——–“For more than 50 years, Cuba hasn’t been able to sell its cigars its giant neighbor to the north, the world’s largest cigar market.  Now, with the U.S. moving to restore trade with Cuba, excitement is building that a great opportunity is at hand.  If the trade embargo is lifted anytime soon, however, Cuba is unlikely to be ready.”  For one, the “amount of tobacco under cultivation in Cuba declined 65% between 2009 and 2014, to 21,733 acres, and annual tobacco production declined 21% to about 20,000 tons.”  The land that has gone out of tobacco has either been left fallow or moved to more economically productive crops, like cucumbers.  Also contributing to the challenges of expanding production is a lack of resources, such as fuel and fertilizers, and a paucity of people who can hand roll cigars.

********The article points to the many challenges faced by cigar producers as they hope to scale-up production.  Cuba’s response to the (likely) drop of the trade embargo will provide a useful test of how a relatively socialistic regime responds to an increase in market demand.  In the meantime, what is the explanation for the decline in cigar exports since 2006 and the decline in land cultivation in Cuba since 2009?  A decrease in global cigar demand, presumably.  Some of that demand, no doubt, was driven by the U.S. even though imports to the U.S. were illegal.

(21 May 2016): “How the West (and the Rest) Got Rich” (http://www.wsj.com/articles/why-the-west-and-the-rest-got-rich-1463754427)

——–“Nothing like the Great Enrichment of the past two centuries had ever happened before.  Doublings of income . . . had happened often, during the glory of Greece and the grandeur of Rome, in Song china and Mughal India.  But people soon fell back.”  What caused the Great Enrichment?  “The usual explanations follow ideology.  On the left, from Marx onward, the key is said to be exploitation. . . . On the right, from the blessed Adam Smith onward, the trick was thought to be savings. . . . A recent extension of Smith’s claim . . . is that the real elixir in institutions. . . . But one of the explanations gets it quite right.  What enriched the modern world wasn’t capital stole from workers or capital virtuously saved, nor was it institutions for routinely accumulating it. . . . capital became productive because of ideas for betterment . . . As Matt Ridley put it in his book The Rational Optimist (2010), what happened over the past two centuries is that ‘ideas started having sex.’ . . . The coupling of ideas in the heads of the common people yielded an explosion of betterments.”  Why did ideas start having sex?  “The answer, in a word, is ‘liberty.’”  But ‘equality’ and ‘liberalism’, in their special meanings, also played a role.

********This article was written by Deirdre N. McCloskey, distinguished professor emerita of economics, history, English and communication at the University of Illinois at Chicago, who is the author of the recently-released Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World (http://www.amazon.com/Bourgeois-Equality-Capital-Institutions-Enriched/dp/022633399X/).  This is the third and final volume of “McCloskey’s ambitious trilogy arguing that bourgeois values, rather than material circumstances, catalyzed the past server centuries’ explosion in wealth” (http://www.amazon.com/Bourgeois-Equality-Capital-Institutions-Enriched/dp/022633399X/).

(24 May 2016): “The Invention Of Retirement” (http://daily.jstor.org/the-invention-of-retirement/)

——–Retirement “as a mass phenomenon didn’t start as a way for older people to enjoy themselves.  In a 1978 paper for the Journal of Social History, Carole Haber explains how social and industrial events in the late nineteenth century led to the creation of old-age pensions and mandatory retirements.”  During that time, “employers like railroads, factories, and mining companies were under rising pressure from labor unions.  To pacify workers, they began adopting benefit programs, including old age pensions. . . . Haber notes that employers set mandatory retirement ages of 65 or 70.”  Economist Francis Amasa Walker “advocated for laws keeping workers from continuing on the job ‘beyond the term which physiological science accepts as consistent with soundness and vigor.’  As the twentieth century dawned, efficiency experts insisted that older works dragged down the pace of operations.  Or as Haber puts it, ‘The industrial pace, all agreed, used up the laborer, leaving him at sixty-five little more than a shell of his youthful self.’”

********A link to Haber’s article is provided at the end of the article.  It is interesting to note that F.A. Walker passed away when he was 56.  You can learn more about Walker, who was the president of MIT for 15 years, at: https://en.wikipedia.org/wiki/Francis_Amasa_Walker.

(25 May 2016): “The Real Reason Fine Art Costs So Much” (http://daily.jstor.org/the-real-reason-why-fine-art-costs-so-much/)

——–“Christie’s spring art auction this year featured a sculpture of Hitler—made with materials including human hair—selling for $17.2 million, and a lithograph of a Mona Lisa with a mustache and goatee bringing in $1.2 million.  To outsiders, art auctions can seem like a parody of bizarre spending by wealthy people, writing in Winterthur Portfolio in 2008, John Ott explained how they got that way, starting in the late nineteenth century.  Ott writes that in order to understand the origins of art auctions, we need to look at the art collectors of the Gilded Age.”

********Evidently awareness of class identity of the time played a role in the development of art auctions that spoke directory to a new elite identity.  A link to Ott’s article is provided at the end of the article.

(25 May 2016): “You Worked Monday.  Why Not Get Paid Monday?” (http://www.bloomberg.com/news/articles/2016-05-25/you-worked-monday-why-not-get-paid-monday)

——–“Cash crunches . . . lead many people to pile up credit-card debt, bounce checks, or turn to payday lenders, which charge high interest rates and fees for making loans against your paycheck.  The result can be additional fees for late payments and overdrafts in a financial spiral.”  But there is another option.  Employers with “a service called PayActiv . . . lets employees withdraw a portion of the money they earn, as they earn it, without waiting for a paycheck.  The transaction fee is $5.”  Recently, PayActiv won “a Best of Show award at FinovateSpring 2016 for its use of technology to ease the ‘cash flow struggles of working families.’”  In a “sign of the times, ride services such as Lyft and Uber have rolled out Instant Pay and Express Pay services for their drivers.”  Notes Ryan Falvey, who works for the Center for Financial Services Innovation, “So many of our financial services today are based on a stability of lifestyle and income that very few people have now.”

********I thought the point made by Ryan Falvey was both interesting and important.  The article also contains a valuable comparison of the cost of various short-term loans, ranging from borrowing from an IRA to payday loans.  Short-term loan counselling is probably something that needs to be made more widely available.

May you have a good week!

Bruce

 

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