Free Trade and Rent Seeking Euro Pharma

I have always detested the normative descriptor “free” in front of international trade deals.  On one level it is oxymoronic ™ to call something “free” when it is in the furtherance of buying and selling more things not about increasing the supply of free things.

On a more serious plane, trade agreements are not about removing regulations but more often than not about harmonizing them.  For example, in the negotiations between Canada and the EU to conclude a bilateral trade deal the Europeans are leaning heavily on Canada to change its patent regime on pharmaceuticals so that European drug makers can bilk an extra 3 billion a year in prescription drug costs.  An article over at the globe summarizes the proposal as follows:

  • Extending the term of patent protection by up to five years if drugs are stuck in the regulatory approval process;
  • Lengthening the period of data exclusivity, which prevents generic companies from using data from clinical trials to create similar drugs, from eight years to 10 years or more; and
  • Strengthening notice of compliance regulations, which ensure that generic companies are respecting patents, by adding an appeals process.

Shorter, increase the length of patent protection for Big Pharma thus increasing the time for them to harvest monopoly profits.  This is classic rent seeking behaviour.  Interestingly most free trade fan boys (economists) push trade deals because they promise to undermine rent seeking by domestic producers.

It is time to normatively rename free trade agreements (FTA) to Rent Seeking Trade Agreements (RSTA).

IMF research paper: “Inequality, Leverage and Crises”

A recently released research paper coming out of the IMF is worth your time. Particularly so if you find yourself making what you take to be a serious argument about the link between inequality and macroeconomic stability but can’t seem to get any respect. Over thirty years of neoliberalism it has been constantly argued that inequality was good for growth and economic stability; this IMF paper argues the opposite and has the neat feature that it is based in evidence rather than in elegant counter intuitive theory.

Below is the abstract for the research paper by Michael Kumhof and Romain Rancière (hat tip to Andrew Jackson over at PEF)

The paper studies how high leverage and crises can arise as a result of changes in the income distribution. Empirically, the periods 1920-1929 and 1983-2008 both exhibited a large increase in the income share of the rich, a large increase in leverage for the remainder, and eventual financial and real crisis.

The paper presents a theoretical model where these features arise endogenously as a result of a shift in bargaining powers over incomes. A financial crisis can reduce leverage if it is very large and not accompanied by a real contraction. But restoration of the lower income group’s bargaining power is more effective.

Ideological Capture and the Death of the Functionalist Capitalist State

Marx and Engles once famously quipped in an obscure text somewhere that “the executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie.” In modern theory this economistic and functionalist rendering of the state has been widely rejected for reasons I will not bother to outline here.

As a first cut theory of the modern capitalist state I, however, had always thought it was rather an astute observation. Business owners have collective needs they can not or will not independently provide and yet require these goods and services in order to conduct their affairs. They need independent courts to police and enforce private contracts, they eventually figure out they need a common currency, a reliable system of roads etc, etc. The solution to this collective action problem is the state. Indeed much of the history of liberalism can be read as a conversation about what the proper functions of the state ought to be and how to protect it from being hijacked by the popular classes to provide for their collective needs. That is why in that same obscure text Marx and Engles called for the extension of the vote to non-property owning individuals. What a Radical Idea!

What strikes me, however, about the latest wave of austerity sweeping through the advanced capitalist zone is the degree to which the state is failing to act as the executive committee of the bourgeoisie. When you read Keynes’ General Theory it is palatable the degree to which he was frustrated by the state’s failure to do its job and save the capitalist class from itself. In our contemporary period of growing myopathy economists like Paul Krugman seem gobsmacked on an almost daily basis at the failure of the present administration in the US to act accordingly. What Paul and many others do not seem to be able to figure out is why?

I think the failure of the state to act as the committee for managing the general affairs of the capitalist class is rather simple: both the bourgeoisie and its representatives—politicians—have been consumed by the ideology they have been selling.

Neoliberalism was about making the world a better place to be a capitalist. As such, it was also about getting citizens to internalize the needs of business as their own. Everyone and every institution were asked, prior to making any practical suggestions to ask themselves what would a business person do? So successful was the campaign to get citizens across the world to internalize the needs of capital that even the elites ended up drinking the cool-aid they sold. Put differently neoliberalism moved from being the Noble Lie to the prize winning Noble Truth.

I am going to coin a new term here and call this phenomenon “ideological capture”; which no doubt, in the case of the US is reinforced by an almost complete “regulatory capture.” Indeed so complete has this ideological capture been that it appears as though instead of individual states acting on behalf of the collective needs of the entire bourgeoisie individual states are rather acting as the executive of a single capitalist firm and viewing the societies they govern as one giant business enterprise. This in train is leading to a whole host of jumbled thinking not the least of which is the package of compositional fallacies and outright contradictions masquerading as fiscal prudence.

In another post perhaps I will take the time to catalogue them all. But of course all of this is a rather moot point. Even if the managers of the capitalist enterprise called the modern state woke up and decided that they would save capitalism from and for the capitalists it is not at all clear how they would do it. Let us say for argument sake I agree with people like Krugman and think that fiscal expansion across the capitalist zone coupled with a real effort on the coordination on international imbalances—as opposed to the bizarre spectacle that was the G20 meeting in Korea—would go some way to stop the haemorrhaging. The fact remains the neoliberal growth model is a failed experiment. A reset back to 2005 will not do the trick; nor 1996; nor 1985; nor 1976; nor the summer of 68.

There are in fact three resets and not one that have to be pulled-off. To meaningfully deal with international imbalances we are going to have to deal with both the class and the environmental imbalances (that was euphemistically put). These are all massive problems with very politically complex solutions to be worked out. Neoliberalism has served to hyper accelerate all three imbalances and there is nothing I am seeing from the Very Respectable People (VRP) like Krugman that betrays any sense of what is really required. To make matters worse VRP are on the outside of the debate which gives a good indication of just how far off is a meaningful consideration of the immensity of the tasks at hand given they are only one quarter of the way there and sitting on the benches.

Marx and Engles quipped somewhere in an obscure text second only in obscurity to the Bible that Capitalism creates its own gravediggers. Some good irony then that the state is busy performing this historical mission that was once bequeathed to the working class.

Extend and pretend

It is bad when the most pertinent of commentaries gets no response. What is ironic here is that at the micro level banks are telling their public stop pretending we are not extending even though they face near zero costs or in the case of the US negative costs.

You leave out an important scenario: in a zero interest rate environment, no bank is bad. This is why otherwise insolvent banks like Bank of America or Citi can stay solvent. It doesn’t matter the proportion of non-performing loans on the asset side as long as its cost of funds is minimal. Banks are thus engaged in a race with time to capture a positive return to recapitalize before interest rates rise.

Posted by: Guillaume | November 08, 2010 at 10:48 PM

Yep extend and pretend. That is the future but it is not as yet the present.

Potash, Economic Nationalism, and National Champions

Harper did the unthinkable. It is only in the rarest of circumstances that the federal government actually uses its powers of review to quash foreign takeovers. Yet this is not really where the action is–that is, what caused the cons to deny BHP bid to take over Potash.

The action is just beginning. In less than 12 hours from now the major Canadian print media outlets–from the globe and mail through to the National post and Macleans, are going to be blitzed by a uniform message: the conservative government was wrong to kill BHP’s bid. The chief purveyors of this line are going to be, of course, Andrew Coyne and Stephan Gordon. And both are likely to riff off the same logic.

The argument will most likely be something like the following. Investment decisions that are made in the context of competitive private markets produce the most efficient outcomes. Public attempts to interfere with that outcome are most likely to be sub-optimal. Of course we could point to Canadian banking legislation which effectively guarantees an oligopolistic market structure and then point out that these same talking heads prattled on about our regulatory environment being responsible for avoiding the excesses of the GFC. But having a general comprehension problem in moving from point A to B they will of course celebrate the beauty of free markets.

But wait there is more. There is always, of course, more with talking head economists. Even if they grant that potash and the potash industry is far from a competitive industry–indeed BHP’s bid is largely about consolidating the market to guarantee price making capacity–they will pull out plan B.

Plan B is rather devious. Plan B says that even when the norms of perfect competition are violated government intervention is not necessarily warranted. The inspiration here is some pissy little paper written by Hayek. I won’t tangent. The cut and thrust; the pith and substance here is that even under imperfect competition private market structured are subject to outside scrutiny and competitive pressures such that we can proceed as though the results of perfect competition nearly apply. The government on the other hand when picking a national Champion will have no such information and might as well be flipping a nickel to make its choice.

This is a stupid argument. The very fact that BHP is making an offer gives the state an indication that Potash is a viable national Champion. But wait here is more. Potash is strategic: there is every good reason to believe that in a world of increasing consumption fertilizer, like oil, is going up.

So between the market structure and future path of potash prices it should be incredibly hard to paint a picture of government interference causing a net loss.

But both the abstract science and the empirical reality be damned because the real action here is about precedent. The last thing the Coyne’s and Gordon’s of this world want is a positive example of the public interest trumping private profits with the math on the side of the public.

The United States gets Sid Hatfield back: Sheriff tells banks to FO

I do not know how many of you have been following the criminality in the foreclosure sector south of the line but I have for several months via the blog Naked Capitalism which has been doing intense coverage for some time.

This story broke on CNBC

CHICAGO – Two of the largest U.S. mortgage servicers have said they will resume home foreclosures, but a big-city sheriff has news for them: he won’t enforce their foreclosure evictions.

The sheriff for Cook County, Illinois, which includes the city of Chicago, said on Tuesday he will not enforce foreclosure evictions for Bank of America Corp, JPMorgan Chase and Co. and GMAC Mortgage/Ally Financial until they prove those foreclosures were handled “properly and legally.”

Bank of America, the largest U.S. mortgage servicer, and GMAC, on Monday both announced rollbacks from their foreclosure moratoriums.

The announcement by Cook County Sheriff Thomas Dart comes after weeks of damaging accusations of shoddy paperwork that may have caused some people to be illegally evicted from their homes.

“I can’t possibly be expected to evict people from their homes when the banks themselves can’t say for sure everything was done properly,” Dart said in the statement.

“I need some kind of assurance that we aren’t evicting families based on fraudulent behavior by the banks. Until that happens, I can’t in good conscience keep carrying out evictions involving these banks,” he added.

This is a massive development. You know it is bad, beyond bad stinks in fact to the high heavens when the local sheriff tells the big boys to fuck-off. It made me think of Sid Hatfield and the Matewan Massacre.

This could indeed be the turning point.

Mankiw was right, incentives do matter

It turns out that Greg Mankiw perhaps was *mostly* right: incentives do matter. To understand to what extent and how far my dear readers you will have to do three things.

First you will have to read Mankiws original article here. Then you will have to watch this 10 minute long animated lecture here (h/t Marc Lee) and then you will have to read Iglika’s post over at the Progressive economics blog. I know that is about 30 minutes of your time dear reader but I promise you will be rewarded for doing your homework and be equipped to make a difference.

My take away from the three homework assignments is this. If we combine Iglika’s post with Marc’s video link and reflect back on Mankiw’s now infamous article in the NYT we are left with one of three conclusions.

A) Mankiw is wrong.

B) The type of intellectual work he does is akin to basic mechanical manipulation of say moving a mountain of manure from spot X to spot Y.

C) A & B are correct if, and only if, Mankiw does not generalize from what he does for work to what real professionals do for work.

Take away is that both incentives and the type of work being done matter.

Cutting through bullshit with a particle beam

Sometimes trolling through the comments section on other blogs is a pleasure. Especially so when it is a blog (and the only blog) I have been banned from. From time to time you read a comment that is so apt, such an elegant summary of the real matter at hand, that you just can’t help but say to yourself, through a tear stained laughter, damn that is spot on. So without further introduction here is said commentary lifted from the comments section over at WCI:

Greg Mankiw compares the current tax system to a hypothetical zero tax system.

To make it a fair comparison, one should wonder what would be the working opportunities for M. Mankiw in a state of total anarchy without any public infrastructure, police, public education, public health agency,…
My best guest is that M. Mankiw would be a peasant giving a part of his crop to the local warlord for protection…

Posted by: Mercure | October 12, 2010 at 08:33 PM

Sounds about right.