Beat The Press

"How Uber Got Lost," Headline Writer Badly Needed at NYT

I know that it is not always easy to write a headline for an article, but this one for a book excerpt should not have been a rush job. The piece, from a new book by Mike Isaac, describes the arrogance and stupidity by Uber and its found, Travis Kalanick. The gist of the piece (haven't seen the full book) is that Kalanick was an arrogant jerk who didn't know what he was doing, but hero-worshipping brainless investors decided that he was a visionary.

Given the argument in the piece, it is absurd to make the claim in the headline that Uber was somehow "lost." The point is that Uber was never there. Kalanick never had a profitable business model, he just convinced idiots with money to put a lot of it behind his hare-brained project.

Maybe in the future the New York Times should suggest that headline writers read the piece for which they are writing a headline.

The U.S. Economy Is NOT the World's Largest

I know that reality often has little place in our political debates, but is there any way we can the New York Times and other news outlets to stop saying that the U.S. economy is the world's largest? It happens not to be true.

According to the I.M.F., using purchasing power parity measures, which most economists view as the best measure, China passed the United States in 2015 and is now more than 25 percent larger. Maybe reporters and editors get a kick out of saying that the U.S. is the world's largest economy, but since it happens not to be true, it would be good if they stopped saying it.

Another Argument for Free Market Drugs: Limits on Supply of Patients for Clinical Trials

In a very interesting column in the Wall Street Journal, Peter Bach and Mark Trusheim argue that biosimilar drugs have been ineffective in providing effective competition for biological drug. The gist of the argument is that the testing process required for a biosimilar is lengthy and expensive.

Furthermore, this testing requires a large number of patients for clinical trials.This can lead to the perverse situation where testing for a biosimilar could be pulling potential patients from being used in a trial for a potentially important innovative drug.

If we think of patients with specific diseases who are available for clinical trials to be a limited resource, then it poses a serious problem for the having biosimilars as an effective mechanism for bringing down the price of biologic drugs through competitions. (Standard generics don't need clinical tests, they just have to demonstrate chemical equivalence.) 

Bach and Trusheim argue for price controls as the best alternative. While this is reasonable given the current funding system, it is difficult to believe that the government will somehow be getting it right, in terms of awarding the right price to appropriately compensate companies for their drugs. (Not that they are rewarded correctly now; their payments are already largely politically determined.)

It would make far more sense just to do the funding upfront on long-term contracts, with all results in the public domain. In the case of biologic drugs, where there really cannot be effective competitors for the reasons Bach and Trusheim explain, having a single supplier on contract and guaranteed a normal mark-up over production costs should do the trick.

In this story, biologic drugs would sell for hundreds of dollars, or perhaps low thousands, for a year's dosage, not hundreds of thousands. (For more, see Rigged, chapter 5 [it's free].)


Quick Note on Downward Jobs Revisions

The Bureau of Labor Statistics reported that its benchmark revision to its job numbers shows that the economy created 501,000 fewer jobs between March of 2018 and March of 2019 than previously reported.There are a few points to be made about this number.

First, there is nothing fishy here. Trump has zero to do with the data that comes from the Bureau of Labor Statistics (BLS). BLS is staff by committed professionals who would sure raise a big stink if Trump tried to tamper with the data.

I should also point out that it would be exceedingly difficult for someone to change the data if they did not have a very good idea what they were doing, and even then they would almost certainly have to bring dozens of people in on the scheme. If someone did something like just 100,000 to the monthly job growth number, they would be nailed in a minute. Other numbers would not fit and it would be easy to see that the fake number was out of line.

Anyhow, the revision is based on state unemployment insurance filings, which give a virtual census of payroll employment in the United States. The original data come from the BLS' monthly Current Employment Situation survey. This is a large survey of businesses, but it is a survey, so that means there will be some error.

The next issue is why the survey would be so far off. (The 501,000 reduction is much larger than a normal revision.) In addition to the survey results, BLS imputes figures for "births" and "deaths" of firms. Births refers to new firms, which could not be included sample because they are new. Deaths are the firms that go out of business and aren't so polite as to answer the survey before they shut their doors.

BLS imputes numbers for births and deaths using a model that estimates these data based on growth in output and related factors. It usually is reasonably accurate, but in this case it clearly was not. (I'll make a small criticism of BLS here. They typically show the error as a percent of total employment, which makes it look small. It came to 0.3 percent last year. But what we really are measuring with the survey is the change in employment, which was just over 2 million, which means the error was 25 percent. That is a big deal.)

Anyhow, what this revision means is that we saw more firms die or fewer new firms formed than the model projected. (Actually, the issue is jobs, not firms, but presumably these go together.) That may mean nothing or could suggest that either or both, more firms are going out of business or fewer firms are being started than we should expect, given other factors in the economy.

That brings us to my last point, when we have large downward revisions, it usually is associated with a recession. The downward revision in 2009 was over 900,000 and 2002 it was over 300,000. It is unlikely that we will find that we were actually in a recession between March of 2018 and March of 2019, but add this to the list of worrying data points. It seems that something is not right with the economy.

CEOs Say They Will Stop Maximizing Shareholder Value, Be Better If They Stopped Maximizing CEO Compensation

The Washington Post had a major front page article announcing in the headline "Group of top CEOs says maximizing shareholder profits no longer can be the primary goal of corporations." The piece refers to a statement by the Business Roundtable, a group comprising many of the country's largest companies, which argues for an alleged shift in direction.

The problem with the statement and the piece is that that there is little evidence companies have been maximizing shareholder profits in the last two decades. The average real return to shareholders since December of 1997 is 4.8 percent. This compares to a longer term average of more than 7.0 percent. (I went back to 1997 instead of taking the more natural 20-year average to avoid distortions created by the stock bubble. The twenty year return has been just 3.6 percent.) These relatively low returns are especially striking since corporations have gotten so much assistance from government tax cuts over this period.

Rather than maximizing shareholder returns, it seems more plausible that CEOs have been maximizing CEO pay, which has risen 940 percent since 1978. Excessive CEO, which comes at the expense of the corporation, is far more pernicious than returns to shareholders. While shareholders include middle class people with 401(k)s and pension funds, every dollar that goes to CEOs goes to someone in the 0.01 percent of the income distribution.

More importantly excessive CEO pay distorts pay structures in the economy as a whole. If the CEO is earning $15 million, the rest of the top five corporate executives likely earn close to $10 million and even the third tier likely earn well over $1 million. This affects pay structures elsewhere. Presidents at universities and large non-profits now routinely make over $1 million a year and government cabinet secretaries whine about the sacrifice of public service where they make $211,000 a year.

It would be much better if our top CEOs started bringing their pay down to earth than change a focus that they don't in any obvious way now have.