Friday, November 12, 2004

Max Speaks, and He Listens and Replies

Max Sawicky kindly (and constructively!) responds to my recent post about whether we need to reform Social Security today. His original statement began:

There is absolutely no reason at present to make changes in Social Security, except out of political fear of the Right.
As I noted, first in "Why is Social Security a Campaign Issue?" and then again in the post to which Max is responding, my reason is that we make the problem about $300 billion worse every year that we delay. This is roughly the interest that we accrue on the unfunded obligation of $10.4 trillion in a year when the real interest rate is 3 percent, as in the 2004 Trustees Report's long-term assumptions.

I should reiterate that my preferred solution--raising the age of full benefit entitlement (with some other modifications) for future beneficiaries--does not require new funds to flow into the system today (or ever). And there is no need to do that immediately, except to give people as much time as possible to react to the new law and plan accordingly. If we don't mind giving them one fewer year of notice, then I don't suspect that we would mind enacting the same reforms to plug a $10.7 trillion hole tomorrow rather than a $10.4 trillion hole today. But taking a "wait and see" approach does not strike me as sound fiscal management.

In addition, to the extent that the reforms will include raising revenues in the near-term to provide investment returns to support benefits in the future (whether through personal accounts or the Trust Fund), then delay does have distributional consequences across different age cohorts. According to the way Social Security played out in this year's campaign, neither side was willing to ask more of or give less to those cohorts who are "at or near retirement." If an additional year of delay means one more birth cohort crosses the threshold of being "at or near retirement," and thus exempt from its share of filling the $10.4 trillion hole, then we should reform sooner rather than later.

I don't think Max and I disagree about the math underlying this calculation, but we do disagree about how relevant it is. Max writes:
I don't get excited about measures of the present value of unfunded liabilities from now till forever because I think they are jive. It's a way of ginning up a huge number. If you want to do that, compare it to the present value of GDP.
Fair enough. In "How to Reform Social Security, Part I," I noted:

Once new revenues are being added to the system, then it becomes important to figure out where they should go--the Trust Fund or personal accounts.

Confronted with that choice, I opt for personal accounts. For me, an immediate and permanent contribution of 3.5 percent of taxable payroll into personal accounts for all workers, in addition to the 12.4 percent payroll tax that they and their employers already pay, is preferable to the current system. The contributions are 3.5 percent because that is the amount that the Social Security actuaries say is required to restore solvency even if invested entirely in Treasury bonds. But such a reform, though preferred to the current scenario, is also far from ideal.

The 3.5 percent figure is roughly what Max is asking for in the way to make the comparison. (The small difference is that taxable payroll is projected to fall by about 5 percentage points relative to GDP over the next 75 years.) Max and I can differ on how much confidence we have in the Social Security actuaries' projections. The Trustees Report does contain some sensitivity analyses and additional projections that factor in uncertainty, but not on these two measures. The latter projections do suggest that there is essentially no chance that the system won't be running annual deficits in 75 years. Factoring in the uncertainty suggests to me that there is more, not less, of a need to act sooner rather than later.

Max also wonders:

One thing that is baffling about this whole privatization campaign is why a knowledgeable person like Andrew would prioritize the 2042 problem over the 2018 problem. The latter date is of course about when income tax revenue will be needed to redeem obligations to the Trust Fund and, by extension, Social Security beneficiaries.

In fairness, I have never thought of this as a 2042 problem, or even a 2018 problem. (That was, if I recall, the third paragraph in this post by Max.) To me, it is a 2004 problem that I don't want to mushroom into an even bigger problem, in 2005, 2018, 2042, 2080, or any year at all. Entitlement programs should be projected to be in balance--period. Accomplishing that requires changes in the programs in the future (if not the present). Those changes should be debated and legislated sooner rather than later, so that the changes can spread the burden as evenly as possible across cohorts.

Max concludes with some statements about the politics of reform:
As far as politics goes, you can hardly blame the Dems for declining the opportunity of leading with their chins with tax increases and benefit cuts, in the face of a hugely fiscally irresponsible Administration.
What does he mean? Of course I can blame them, like I did here. And I can also try to point them to "Democrat-friendly" reforms like the Diamond and Orszag plan, like I did here. Social Security's unfunded obligations are not a creation of the Bush administration and have been widely discussed for over a decade. The Democrats and Republicans alike have had ample opportunity to behave responsibly on entitlements. Some have, but most have not, and the sooner the first group can prevail, the better off we'll be.


Anonymous said...

Perhaps you can blame the Democrats, but no one will take you seriously about the politics of Social Security. I'm willing to venture a prediction: no matter what Social Security reform the Bush administration eventually comes up with, if anything passes it will, at best, keep the unfunded obligations of Social Security the same and will, more likely, will increase them substiantially. The reason I am confident about this is because, unless you honestly believe the government can make money by borrowing it and investing it in the stock market (which, at bottom, is what assuming greater returns from private accounts means and sounds quite dubious to me) the only way to cut the unfunded obligations of Social Security are to increase funding or cut expenditures - neither of which this administration has shown any inclination to do on any issue.

Anonymous said...

(1) Do you think that the Bush administration is at all likely to back the kind of proposal that you favor?

(2) Assuming arguendo that the current reports of the likely Bush proposal - i.e., merely diverting a portion of current social security taxes to private accounts, without other reforms - do you favor such a reform (as opposed to doing nothing for now)? As suggested by the above comment, wouldn't such a proposal just make the short and medium term (2018) problem worse, without making the long term problem (2042) much (if at all) better?

LRose said...

There are a group of debt mongers, mongering end of the world figures for affording Social Security and Medicare. The figures are stretched out over much of a century, when we have trouble planning accurately for 5 or 10 years, and the figures are so glum as to suggest we begin asking our parents not to bother going on living past 60. Nonsense. Social Security is fine for another 38 years, and we can surely extend the fineness beyond with ease if we care to. We can as well afford to care for our parent's medical needs. Enough with the end of the world stories that are simply designed to erode support for Social Security and Medicare, and the heck with those who need the programs.

LRose said...

A friend just sent me an investment portfolio that was put together several years ago by an adviser at Bank America. The portfolio is rather large. What startled me was the way in which the only thing that seemed to matter to the adviser was making sure the funds chosen had absurdly high yearly fees and 5% sales charges. Since the portfolio is quite large, simply increasing the size of investments in a given fund with a sales charge could easily have been used to cut the size of the charge. Nope.

The idea of most investment companies gaining access to private Social Security accounts, strikes me as most dangerous. Wonder what Eliot Spitzer thinks?

LRose said...

The problem I have is generally agreeing with you, and wishing I did not. We took a regressive payroll tax that was supposed to have generated enough of a surplus to support baby boomers, especially those will most need the support, and used the excess funds for general spending. Now, we learn there is a problem and our precious children will be sore pressed to support us. Good grief.

I care about us and I care about the children, and I find the idea of weakening the intergenerational commitment to Social Security most disheartening.

LRose said...

An aside: Two subjects that economists are paying scant attention to are the investigations of Eliot Spitzer, now on insurance brokers and insurers; and, the problems surrounding the use of Vioxx and possibly Bextra long after warnings about the drugs were steadily sounded. The Vioxx of the warning on Vioxx was so complete, the only reason the drug was pulled from the market was because Merck was trying to expand its use and funded a double blind study thinking there was a separate use for the drug, You or Brad might post on such issues now or then.

LRose said...

Despite Warnings, Drug Giant Took Long Path to Vioxx Recall

This article was reported and written by Alex Berenson, Gardiner Harris, Barry Meier and Andrew Pollack.

In May 2000, executives at Merck, the pharmaceutical giant under siege for its handling of the multibillion-dollar drug Vioxx, made a fateful decision.

The company's top research and marketing executives met that month to consider whether to develop a study to directly test a disturbing possibility: that Vioxx, a painkiller, might pose a heart risk. Two months earlier, results from a clinical trial conducted for other reasons had suggested such concerns.

But the executives rejected pursuing a study focused on Vioxx's cardiovascular risks. According to company documents, the scientists wondered if such a study, which might require as many as 50,000 patients, was even possible. Merck's marketers, meanwhile, apparently feared it could send the wrong signal about the company's confidence in Vioxx, which already faced fierce competition from a rival drug, Celebrex.

'At present, there is no compelling marketing need for such a study,' said a slide prepared for the meeting. 'Data would not be available during the critical period. The implied message is not favorable.'

Merck decided not to conduct a study solely to determine whether Vioxx might cause heart attacks and strokes - the type of study that outside scientists would repeatedly call for as clinical evidence continued to show cardiovascular risks from the drug. Instead, Merck officials decided to monitor clinical trials, already under way or planned, that were to test Vioxx for other uses, to see if any additional signs of cardiovascular problems emerged.

It was a recurring theme for the company over the next few years - that Vioxx was safe unless proved otherwise. As recently as Friday, in newspaper advertisements, Merck has argued that it took 'prompt and decisive action'' as soon as it knew that Vioxx was dangerous.

But a detailed reconstruction of Merck's handling of Vioxx, based on interviews and internal company documents, suggests that actions the company took - and did not take - soon after the drug's safety was questioned may have affected the health of potentially thousands of patients, as well as the company's financial health and reputation.

The review also raises broader questions about an entire class of relatively new painkillers, called COX-2 inhibitors; about how drugs are tested; and about how aggressively the federal Food and Drug Administration monitors the safety of medications once they are in the marketplace.

The decisions about how to test Vioxx were made in a hothouse environment in which researchers fiercely debated how the question should be pursued, and some even now question whether the drug needed to be withdrawn. It also took place amid a fierce battle between Vioxx and Celebrex in which federal regulators said marketing claims ran ahead of the science.

Today Merck faces not only Congressional and Justice Department investigations, but also potentially thousands of personal-injury lawsuits that could tie the company up in litigation for years and possibly cost it billions to resolve.

In late September, more than four years after that May 2000 meeting, Merck announced that it was pulling the drug off the market because a long-term clinical trial showed that some patients, after taking the drug for 18 months, developed serious cardiovascular problems. The data that ultimately persuaded the company to withdraw the drug indicated 15 cases of heart attack, stroke or blood clots per thousand people each year over three years, compared with 7.5 such events per thousand patients taking a placebo.

But the company never directly tested the theory that it used to explain the worrisome results of the clinical trial in 2000. Merck was criticized for what some charged was playing down the drug's possible heart risks; in one case, it received a warning letter from the Food and Drug Administration for minimizing 'potentially serious cardiovascular findings.'' And when outside researchers found evidence indicating Vioxx might pose dangers, Merck dismissed their data.

In 2001, Dr. Deepak L. Bhatt, a cardiologist at the Cleveland Clinic, proposed to Merck a study of Vioxx in patients with severe chest pain. Merck declined, saying the patients proposed for the study did not reflect typical Vioxx users. In Dr. Bhatt's view, the company feared what it might find if it directly examined the dangers of Vioxx, one of Merck's biggest products, with sales last year of $2.5 billion.

'They should have done a trial like this,' Dr. Bhatt said. 'If they internally thought this drug was safe in patients with heart disease, there was no reason not to do it.'

Merck executives said last week that the company acted responsibly, voluntarily withdrawing Vioxx as soon as it had clear evidence the drug was harmful. And they said that even if they had conducted the type of study they discussed internally and rejected in 2000, the company might not have detected Vioxx's risks any sooner.

'Merck wasn't dragging its feet,'' said Kenneth C. Frazier, the company's general counsel. 'It's pretty hard for me to imagine that you could have done this more quickly than we did.' The F.D.A., which Merck consulted, also agreed that designing a trial to specifically assess Vioxx's cardiovascular risks would have been difficult and, unless constructed to provide benefits to patients, would have been unethical as well.

But the F.D.A. itself is now under scrutiny for its handling of Vioxx. Congressional investigators are looking at whether the agency, which is charged with protecting Americans from dangerous medicines, was too lax in its monitoring of the mounting evidence against Merck's drug. Internal memos show disagreement within the F.D.A. over a study by one of its own scientists, Dr. David Graham, that estimated Vioxx had been associated with more than 27,000 heart attacks or deaths linked to cardiac problems.

So far, no clinical evidence has linked the next best-selling version, Celebrex, to cardiovascular risks. But its maker, Pfizer, has acknowledged that its other COX-2 drug, Bextra, has been shown to pose risks to patients after heart surgery. Scientists outside the company say there is evidence that Bextra's problems may affect wider groups of patients.

LRose said...

I can too write! Oh dear...

The warning on Vioxx was so completely masked, the only reason the drug was pulled from the market was because Merck was trying to expand its use and funded a double blind study thinking there was a separate use for the drug, You or Brad might post on such issues now or then.

LRose said...

'The Truth About the Drug Companies' and 'Powerful Medicines': The Drug Lords

DURING the past year, when I was driving my children to school, I'd hear the same advertisement on the radio again and again. You've probably heard it too: as somber music played in the background, a young man, his voice cracking, explains how he developed a rare and deadly form of cancer. He wonders if he will ever play baseball with his son, and then relates how, thanks to a company called Novartis and its new cancer treatment (never mentioned, but a drug called Gleevec), he's been given a new lease on life.

What is most fascinating about this ad is that it should seem necessary. As Marcia Angell points out in ''The Truth About the Drug Companies: How They Deceive Us and What to Do About It'': ''Truly good drugs don't have to be promoted. A genuinely important new drug, such as Gleevec, sells itself.'' So why advertise a cancer drug that cures a fatal leukemia and has no competition? The answer, of course, is that Novartis is not advertising Gleevec, but the company itself -- and the virtues of the drug industry as a whole. Why? Because, as Angell notes, a ''perfect storm'' of indignation -- on the part of consumers, regulators+and even doctors -- may be developing around the pharmaceutical business.

In just one week this summer, the news included reports that Schering-Plough pleaded guilty to cheating Medicaid; the city of New York sued leading pharmaceutical companies, including Amgen, Bayer, Bristol-Myers Squibb, Eli Lilly, Johnson & Johnson and Merck, for inflating costs and defrauding taxpayers; Janssen Pharmaceutica Products admitted it had withheld from the public information about potentially fatal side effects in a schizophrenia drug it markets; and Wyeth settled yet another in the multibillion dollars' worth of lawsuits against it by people who suffered permanent injury from use of the fen-phen weight-loss drugs. All this against a broad public perception of price-gouging, lack of innovation and bombastic self-congratulation. And that brings me back to the Novartis ad.

An alternative history for Gleevec is recounted in both Angell's methodical multicount indictment of the drug industry and Jerry Avorn's entertaining jeremiad, ''Powerful Medicines: The Benefits, Risks and Costs of Prescription Drugs.'' In this less heroic version, several decades of dogged research by academic scientists -- much of it paid for by American taxpayers through the National Institutes of Health -- had teased out the molecular details of chronic myelogenous leukemia, a rare and fatal hematological cancer. Researchers at Novartis (then Ciba-Geigy) created several compounds that in theory might throw a monkey wrench into the process by which blood cells become cancerous. But these potential miracle drugs sat on the shelf untested, until Brian Druker, a researcher at the Oregon Health and Science University, asked for the compounds and became the first to discern their anticancer properties in the lab dish. Even that wasn't enough. As Avorn tells it, ''Novartis had so little interest in committing resources to the drug's development that cancer researchers had to resort to the bizarre tactic of sending a petition to the company's C.E.O., signed by scientists in the Leukemia and Lymphoma Society of America, imploring him to make more drug available for clinical studies.''

Novartis has overcome its lack of enthusiasm -- it now charges $27,000 for a year's supply of Gleevec. But those heart-warming ads, now the centerpiece of the Novartis corporate identity, say more than intended about how today's pharmaceutical industry takes credit where little is due. As both Angell and Avorn lay out in painstaking, often enraging, detail, a self-serving mythology -- promulgated on a scale possible only in a business with annual worldwide revenues of $400 billion -- has enveloped the pharmaceutical industry. Angell and Avorn cut through the haze, arguing persuasively that Americans are paying an enormous amount of money for some very mediocre medicines.

The rising voices of disillusionment have the credentials to back up their scorn.

LRose said...

Do New Drugs Always Have to Cost So Much?

AMERICAN politicians are so perplexed about how to deal with prescription drug prices that the best solution they can offer is to effectively import a Canadian law - by buying drugs subject to Canadian government price controls - rather than pass one of their own.

There are, however, more straightforward ways to get cheaper drugs than by borrowing price fixes from across the border. Some economists say the government can reduce pharmaceutical prices by changing how the nation pays for innovation.

Prescription drugs are expensive by design. They cost a lot to invent but are relatively cheap to make, so companies receive patents from the government that grant them a monopoly and enable them to sell the medicine at a premium. In doing so, the idea goes, drug makers recoup their investments in research and development and are encouraged to invent more.

But some economists say that there is no inexorable economic reason for drug prices to be as high as they are. 'Patents are one way to get medical innovation, but they are not a fact of nature,' said Michael R. Kremer, an economics professor at Harvard. 'It is worth looking for alternatives.'

Strong patent protection has allowed substantial spending on innovation. American drug companies invested $33 billion in it last year, according to the Pharmaceutical Research and Manufacturers of America, a lobbying group. But this arrangement has a measurable economic cost, keeping drugs from consumers who would buy them if they were priced like other competitive commodities - marginally above production costs.

That is not the only inefficiency that patents breed. In the insured health market, where neither patients nor their doctors actually pay for drugs, drug companies are subject to all manner of perverse incentives. For instance, they can reap more from investing in marginal improvements over existing therapies - and buying ads to persuade patients to pay big markups for them - than from investing in riskier, ground-breaking drugs.

The Food and Drug Administration has classified only about 20 percent of the drugs developed over the last 10 years as qualitative breakthroughs. Even though they spend more on research, pharmaceutical companies are finding fewer new drugs. In a report this year, the F.D.A. said that the way drugs are developed 'is becoming increasingly challenging, inefficient and costly.'

One alternative is to have the government pay directly for research, which some economists say could maintain innovation while reducing drug prices. The government already spends almost $30 billion a year on basic drug research at National Institutes of Health laboratories and at universities, much of which results in new drugs. It would be relatively straightforward to extend this to cover the research now done in drug company labs, economists say.

There are other alternatives. For example, the government could compensate drug companies for their inventions as an incentive for them to keep innovating. How to determine how much an innovation is worth? One possibility would be for the government to selectively buy patents at a premium over the price a private bidder was willing to offer, and then put them into the public domain, Professor Kremer said. Aidan Hollis, an assistant professor of economics at the University of Calgary in Alberta, devised a different approach: the government would set up a fund to compensate drug companies based on how much their new drugs improve the quality of life and how often they were used.

These alternatives would carry several benefits, economists say. In addition to making drugs available at lower prices, they would make it much less profitable for pharmaceutical companies to spend millions of dollars to develop drugs, like Nexium and Clarinex, that are protected by patents but offer little improvement over similar drugs already on the market.

The goal is not to spend less to develop new drugs, Professor Hollis said, but to get more therapeutic bang for the buck - by channeling investment to where it matters most - as well as to increase access to the resulting drugs. 'This can be done within the same budget as we devote to pharmaceuticals now,' he said.