December 2009 inflation data showed the U.S. Consumer Price Index rising at an annual rate of 2.7 percent over the preceding 12 months. After several months of negative numbers earlier in the year, it appears that the threat of deflation has receded.
Just a few months ago, some economists were more pessimistic. When the economy enters a severe recession, conventional monetary policy can lose effectiveness. As interest rates fall to near-zero, banks tend to accumulate excess reserves. At the same time, velocity may slow down. As a result, the link between monetary policy instruments and GDP weakens, and the central bank finds itself "pushing on a string."
In 2002, Ben Bernanke, then a newly-appointed Fed governor, dealt with these issues in a speech entitled "Deflation: Making Sure 'It' Doesn't Happen Here." In the speech, he proposed that if a threat of deflation ever did loom, the Fed could maintain effectiveness of monetary policy by taking unconventional actions, including buying longer-term securities and extending loans to financial institutions outside the commercial banking system. He was confident that if the Fed was bold enough to use all the tools at its disposal, "It"--Japanese-style sustained deflation--could not happen in the United States.
Now that the Fed appears to have saved us from the threat of deflation, it must turn its attention to finding an "exit strategy" for reabsorbing the massive quantity of liquidity it has injected into the financial system. Already, the Fed has begun to unwind some of its positions, but bank reserves are still extraordinarily high. More work remains to be done to make sure the economy does not come out of recession straight into inflation.
Click here to download a free set of PowerPoint slides that show the lastest inflation data and highlights of monetary policy over the last two years. If you find them useful in your economics course, please post a comment or send me an e-mail. I'd like to know how you use this material, and what you'd like to see next.
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Friday, January 22, 2010
Tuesday, January 19, 2010
Are Pay-for-Delay Drug Deals Anticompetitive?
In January, the Federal Trade Commission published a new study claiming that so-called pay-for-delay drug deals are costing consumers $3.5 billion per year.
Pay-for-delay drug deals are, in large part, an unintended consequence of the Hatch-Waxman Act of 1984, which was intended to allow earlier market entry for generic drugs. Under certain conditions, Hatch-Waxman allows generic drug makers to begin selling their products before the patent on the brand-name drug expires. However, producers of generics who attempt to use this early-entry mechanism are sometimes sued by the brand-name producer. Often, the suits never come to trial. Instead, a pay-for-delay deal is reached in which the maker of the brand-name drug pays a large sum to the generic manufacturer, in return for which the latter agrees to stay out of the market. The FTC calculates that the average delay achieved by such deals is 17 months.
Pay-for-delay deals are profitable for both companies if the payment is smaller than the profit that would potentially be lost by the brand-name manufacturer, but greater than the potential profit earned by the generic producer. Both elementary economic theory and empirical evidence suggest that this condition will often be satisfied. It is equally clear that consumers are the losers when such deals are reached.
The legal status of pay-for-delay deals is murky. In the early years after passage of Hatch-Waxman, they were considered anticompetitive per se, and very few such deals were made. Then, beginning in 2005, federal appeals courts determined that the deals were legal, after all. The number of such deals increased rapidly.
Now there is a push to end pay-for-delay deals once and for all. They are under attack both by the Federal Trade Commission and the Antitrust Division of the Justice Department. In addition, the House version of the omnibus health care bill currently under consideration by Congress would outlaw pay-for-delay. The Senate version does not include this language. (The final fate of the legislation is not yet known as this is written.)
To download a free set of PowerPoint slides that explain the pay-for-delay controversy, follow this link. The slides include a simple graphical model that can be used as a classroom example in your principles of microeconomics course. If you find the slides useful, please post a comment, or send me an e-mail.
Pay-for-delay drug deals are, in large part, an unintended consequence of the Hatch-Waxman Act of 1984, which was intended to allow earlier market entry for generic drugs. Under certain conditions, Hatch-Waxman allows generic drug makers to begin selling their products before the patent on the brand-name drug expires. However, producers of generics who attempt to use this early-entry mechanism are sometimes sued by the brand-name producer. Often, the suits never come to trial. Instead, a pay-for-delay deal is reached in which the maker of the brand-name drug pays a large sum to the generic manufacturer, in return for which the latter agrees to stay out of the market. The FTC calculates that the average delay achieved by such deals is 17 months.
Pay-for-delay deals are profitable for both companies if the payment is smaller than the profit that would potentially be lost by the brand-name manufacturer, but greater than the potential profit earned by the generic producer. Both elementary economic theory and empirical evidence suggest that this condition will often be satisfied. It is equally clear that consumers are the losers when such deals are reached.
The legal status of pay-for-delay deals is murky. In the early years after passage of Hatch-Waxman, they were considered anticompetitive per se, and very few such deals were made. Then, beginning in 2005, federal appeals courts determined that the deals were legal, after all. The number of such deals increased rapidly.
Now there is a push to end pay-for-delay deals once and for all. They are under attack both by the Federal Trade Commission and the Antitrust Division of the Justice Department. In addition, the House version of the omnibus health care bill currently under consideration by Congress would outlaw pay-for-delay. The Senate version does not include this language. (The final fate of the legislation is not yet known as this is written.)
To download a free set of PowerPoint slides that explain the pay-for-delay controversy, follow this link. The slides include a simple graphical model that can be used as a classroom example in your principles of microeconomics course. If you find the slides useful, please post a comment, or send me an e-mail.
Saturday, January 16, 2010
2009: A Bad Year for Jobs, but Some Light at the End of the Tunnel
2009 Was a bad year for the U.S. job market. Unemployment hit a peak rate of 10.1 percent in October, and barely edged down to 10.0 percent in November and December. There was a glimmer of hope when 4,000 payroll jobs were added in November, but payroll employment declined again in December, by 85,000 jobs.
Some observers were heartened by the fact that unemployment did not rise to its previous post-World War II peak of 10.8 percent, recorded in December 1982. A more significant ray of light at the end of the tunnel was the fact that the rate of job loss slowed dramatically toward the end of the year, compared with monthly losses in the hundreds of thousands in earlier quaters.
Looking beneath the headline unemployment and payroll numbers, it was harder to find good news. The structure of unemployment by duration worsened significantly. By year's end, nearly 40 percent of the unemployed had been out of work six months or more. Long spells of unemployment are considered especially damaging since they may lead to a loss of job skills.
Broader measures of labor market hardship also worsened. Some observers consider the measure "U-6" to be the best measure of labor market hardship. In addition to workers included in the standard measure (which includes only those who are not working, but actively looking for work), U-6 adds others who suffer from bad labor market conditions. These include discouraged workers and other marginally attached workers, who say they would look for work if they thought any work was available, and also people with part time jobs who say they would prefer to work full time. U-6 rose from 13.5 percent of the labor force in December 2008 to 17.3 percent in December 2009. Furthermore, U-6 edged slightly higher in November and December, even after the standard measure of unemployment flattened out.
To download a free set of PowerPoint slides summarizing the 2009 employment situation, follow this link. Feel free to cut-and-paste the slides into your lectures, or assign them to your students as independent reading. If you like the slides, please post a comment or send me an e-mail.
Some observers were heartened by the fact that unemployment did not rise to its previous post-World War II peak of 10.8 percent, recorded in December 1982. A more significant ray of light at the end of the tunnel was the fact that the rate of job loss slowed dramatically toward the end of the year, compared with monthly losses in the hundreds of thousands in earlier quaters.
Looking beneath the headline unemployment and payroll numbers, it was harder to find good news. The structure of unemployment by duration worsened significantly. By year's end, nearly 40 percent of the unemployed had been out of work six months or more. Long spells of unemployment are considered especially damaging since they may lead to a loss of job skills.
Broader measures of labor market hardship also worsened. Some observers consider the measure "U-6" to be the best measure of labor market hardship. In addition to workers included in the standard measure (which includes only those who are not working, but actively looking for work), U-6 adds others who suffer from bad labor market conditions. These include discouraged workers and other marginally attached workers, who say they would look for work if they thought any work was available, and also people with part time jobs who say they would prefer to work full time. U-6 rose from 13.5 percent of the labor force in December 2008 to 17.3 percent in December 2009. Furthermore, U-6 edged slightly higher in November and December, even after the standard measure of unemployment flattened out.
To download a free set of PowerPoint slides summarizing the 2009 employment situation, follow this link. Feel free to cut-and-paste the slides into your lectures, or assign them to your students as independent reading. If you like the slides, please post a comment or send me an e-mail.