Should we really let the FDA be captured?

        Biogen, a biotech company worth over $30 billion, just got FDA approval for a $56,000 Alzheimer’s drug that is not proven to be effective. When I read this, I was inundated by the stench of regulatory capture emanating from this approval. Not only does this affect those who need the drug, the average Medicare Part B (medically-necessary services) insurance premiums will rise by over 14%. Biogen might be the most recent offender, but this analysis has led me down a rabbit hole tattooed by a theme of capitalism not caring about virtue.

        What I find most stunning is that the FDA seems to see no immorality in having massive companies push through layers of internal dissension to get approval for drugs that are not fully studied or proven to be clearly effective. That seems wrong to me. Capture seems like a mostly-fair side effect of a free market system, but that doesn’t mean it should rear its head in every bureaucracy without anyone batting an eye. Normally regulatory capture deserves careful thought, but not diligent combat. In the case of the FDA, combat seems most appropriate. There’s a difference between the shipping industry seeking fixed-prices and individual companies within the biotech industry seeking barrier control. The latter deals with potentially life-saving medications that have real physiological impacts (on top of financial impacts) on a large portion of our population.

Everybody Hates the IRS

Before my dad retired, he was a senior executive at the IRS, and he reported to the Commissioner of the IRS. Part of his role involved reviewing the budget for his department so that he could present it to the Commissioner. This would then be incorporated into the final budget proposal. 

My dad noted that the IRS budget proposal was typically more than they actually needed. The budget-maximizing bureaucrat model would suggest that the Commissioner is misleading Congress about the true needs of the IRS. Congress is forced to accept their proposals. Though this may reflect the behavior of other agencies, this is not the case for the IRS. Congress typically rejects significant components of the IRS's proposal.

For the past decade, members of Congress have voted to decrease the size of the IRS. My dad complained that this has truly affected its operational capacity. The IRS has substantially cut their staff, and, as of 2017, I believe my dad still used Microsoft Office 2007 on his work laptop. Simply put, voters hate the IRS, and it is politically popular to decrease their budget. The Commissioner has learned to overestimate the proposal because he knows that Congress will only approve a fraction of the budget. The Commissioner hopes that enough will be left in the appropriations bill to keep the IRS functional. Therefore, a more appropriate assessment is that legislators will do what is necessary to be reelected.

Looking Forward: The Effects of Climate Change on Bureau Efficiency

This week we discussed how it is possible make comparisons across government agencies in regards to the legislature's demand for bureau output. Some agencies have marginal political benefits that are relatively elastic, while others are relatively inelastic; the more inelastic these marginal political benefits are, the more important the agency is, and the less efficient they can be. This is due in part to the take-it-or-leave-it nature of bureau proposals and the fact that bureaus are essentially monopolistic suppliers of their output. The elasticity of demand for agency output can also change over time. As Alex Tabarrok's seminar showed, a prime example was the relatively inelastic demand for CDC output during the pandemic which allowed for increased inefficiency. 

With this in mind, let's turn our attention to climate change and its impact on bureaus such as the Environmental Protection Agency. As we have all likely seen, the effects of climate change have become more prominent in recent years and are predicted to worsen unless significant changes are made. Thus, the marginal political benefits of environmental regulation will likely become more inelastic in the coming years. However, with a more inelastic demand comes the increased capability to shirk responsibility. So, as we near the point of irreversible damage to our climate and are in desperate need of the EPA's output, will we see a decrease in agency efficiency? Only time will tell.

Red meat: to subsidize or not to subsidize?

 We have spent some time theorizing the “why” of regulation. As we saw in class, Stigler’s “Capture Theory” provides an intuitive explanation: claiming that regulation is “acquired by the industry and is designed and operated primarily for it”. This somewhat scary idea, however, is walked back by Peltzman in his “Toward a More General Theory of Regulation”. What is clear from these works is that for-profit industries are incentivized to lobby their respective governments for industry control and/or economic support, but can only attain such if they are agreed to by vote-maximizing representatives.

Thus, a recently published article titled “Nearly all global farm subsidies harm people and planet – UN” especially peaked my interest as a public choice academic. This text lays out how the global climate change threat is being intensified by governments subsizdizing the production of red meat and dairy as well as the need to re-allocate resources towards more eco-friendly agriculture. According to a UN report discussed in the article, a stark 90% of the $540 billion in annual global support provided to farmers does more environmental harm than good. Further, an estimated $12 trillion in damage is done per year with the current level of regulation on a global basis, which greatly favors the environmentally-tolling production of meat and dairy (in terms of subsidies). 

An analysis of the effect this regulation has on total welfare across the impacted markets is necessary to determine the usefulness of these policies; we must consider whether the benefits these subsidized farmers are enjoying outweigh the costs. $12 trillion is no small number, so perhaps total welfare is being decreased as a result of regulation—as theorized by Peltzman. If this is the case, what will it take for these policies to change? And when? The answer lies in the attention the issue (or set of issues that this gets grouped in to) receives among voters and whether it will drive vote-maximizing representatives to alter their legislative course. 

Senior Bureaucrat Professor Coppock

I’m feeling oddly sentimental writing this final post, almost like I didn’t spend every week stress procrastinating them. Yes, it is possible to be super stressed about something yet still refuse to start it... I guess you know what they say about seeing the past in rose coloured glasses. 

Since Professor Coppock said he was a bureaucrat, the idea of the Public Choice Agency has stuck in my head. Let’s suspend reality. Do Profesor Coppock and the Public Choice blog post-producing agency hold up to the Traditional Model of Bureaucracy? Let’s assume blog posts are the agency’s output. Is the output hard to measure? How many are too many? How do we know the work is all of good quality. Even though Professor Coppock knows the measure of the output quality (four points hopefully, five if we are lucky), would others who are not a part of the agency know? How would one differentiate between a 3 and a 4 or even harder when it would be awarded a five? Is this class a monopoly supplier? Although I’m sure there’s another public choice class somewhere in the country making blog posts about issues, there is not another UVA public choice class writing them currently. Obviously, no other school compares to our economic prowess, so I would say we are a monopoly supplier on blog posts. Apart from Professor Coppock, there is no other alternative source on whether these posts are good or not *cue Professor Coppock screaming, “you can’t handle the truth.” Since these two assumptions regarding the monitoring problem hold up, I’m starting to believe that we just might be an agency. Let’s see, are we overproducing blog posts at a level that is not optimal in order to maximize? Of course not. Who wouldn’t want 150 so posts on public choice topics to read... Guess we aren’t an agency after all. 

The Principal-Agent Problem: I Am the Principal, the Agent, and the Problem

    My house of nine(!) people has begun to deal with the problems of shirking. All of us usually expect somebody else in the house to do the chores, which means none of the chores really get done. In contrast with the traditional (and highly time-consuming) methods of making a chore chart or having a house discussion about chore delegation, we simply get to the point where a house member can't bear the house being in shambles, so they text the group chat or members individually and delegate tasks that need to be done. 

    With this strategy, a task not being done can be blamed on an individual member, not the collective. This also leads to any one member of the house being a principal, agent, or both at any given time. The power structure is indiscernible in the house, with every member being under the will and in control of every other member. As a result of this, there is plenty of room for slack. No member owes anything to any other member so we can all misbehave, or shirk, without any real consequence. However, the social norm in place is to not redistribute tasks unless somebody offers to take the task from you because they desperately want it to be done. Whoever holds out longest, or cares the least, about any given task ends up doing the least amount of chores. 

    The industrial organization of our house does not have clear authority or any clear structure at all which leads to a lot of slack (me being a strong slacker myself). My public choice solution? Appoint a house representative unanimously to divvy up all the tasks however they wish with a month long term, with voting on the last day of every month for a new representative (or the same one if they do their job well). If someone doesn't do their task by the end of the month, they are disqualified from getting the position the next month. Sure, there might have to be stipulations to stop the representative from giving all the work to one person, among other issues, but I've run out of room to write about it so I'll just leave it to readers to work out the kinks.

The New Yorker and Selective Incentives

In class a few weeks ago, we discussed Olson’s theories about successful groups. We learned that it is easier for small groups to mobilize and overcome organizational problems, but there is a way for large groups to organize: selective incentives. Selective incentives are private goods or benefits given to people on the basis of whether they contribute to a collective good, thereby incentivizing people to join groups. They motivate members of latent groups to “act in a group oriented way”. 

 

This reminded me of the free tote bag that comes with a subscription to The New Yorker, which incentivizes many people to contribute to the collective good that is the magazine. Tote bags are really trendy right now, and some people even subscribe to the magazine for the bag alone. The bag can also have expressive value, and make people look educated or cultured. 

But I want it because it’s cute. Maybe I’ll subscribe.

Political Party Division on Committees

    In my social policy class, I am currently working on a project where you create a bill for a social issue that needs reform. Once you have selected a topic and the action needed, you must find how to best get your bill passed: finding a congressperson who will sponsor your bill. In class, we discussed the best strategy for getting the bill in the hands of the person who will best champion it. The most difficult part of this is deciding who on the committee would be best to go to. We asked ourselves questions such as "Is their state one that this issue is particularly problematic for?" and "What is their party?". When choosing a member, we were taught that party matters as you might need to choose a representative whose party doesn't usually vote for your issue to ensure that their base backs it. This is due to the immense amount of political division currently.     Looking at committees and voting through an economic lens produces a different picture regarding political parties. Weingast and Marshall state that committees align the two different parties because of their interest in the specific topic. However, we learned that party did not matter as representatives would shoot down helpful legislation to please their base. This begs the question, although they are both interested in the same topic, are they both on the committee to ensure that the other side does not negatively affect the issue due to having opposing views on it (in their eyes)? While theoretically, Weingast and Marshall are correct in assuming that since all members have a common interest, they must align on their views, in practice, the parties generally have very different views on the same issue. As we have previously have studied, political representatives are self-interested actors who will act to be re-elected. Although unlike my social policy professor suggests they might instead be acting for special interest groups rather than their constituents. Is the only answer that representatives will trade votes to get legislation they want to be passed in the future?

Amy Klobuchar and Tom Cotton as Preference Outliers

On November 5th, Senator Amy Klobuchar (Democrat - Minnesota) and Senator Tom Cotton (Republican - Arkansas), introduced bipartisan legislation that would "make it more difficult for dominant online platforms to make acquisitions that harm competition and eliminate consumer choice." Senator Klobuchar is the Chairwoman of the Senate Judiciary Subcommittee on Competition Policy, Antitrust, and Consumer Rights, and Tom Cotton is also a member of the subcommittee (which is part of the Senate Judiciary Committee). The bill is called The Platform Competition and Opportunity Act and targets large tech companies such as Amazon, Alphabet, and Google amongst others. The language of the bill, however, is very specific in regards to which companies it covers. It would apply only to acquirers with market capitalizations or net annual sales in excess of $600 billion, as calculated when the bill becomes law (via a 180-day trading average). 

What's interesting, is that this specific language excludes companies like Walmart and Target, which are headquartered in Minneapolis, MN, and Bentonville, AR, respectively. They are two of the fastest-growing e-commerce platforms in 2021 (26.4% growth and 12.5% growth respectively) and are two of the largest employers in each state (Walmart is the sole largest employer in AR). In this way, Senator Klobuchar and Senator Cotton are prime examples of "preference outliers" with regards to e-commerce platform regulation, as they are well-poised to reap the benefits of legislation that gives companies in their state a comparative advantage nationwide. It is also an example of assumption 1, that congresspeople represent politically responsive interests of their constituents, in this case, the companies that are massive employers in each state and likely spend money lobbying each candidate.