My former colleague Bryan Collinsworth:
Yale had developed d4T, one of the first AIDS drugs. Folks working on the ground in places like sub-Saharan Africa were seeing these immensely expensive prices. Pharmaceutical companies said, “We aren’t going to lower these prices. We’re going to protect our patents.”
Students at Yale said, “Wait a minute, the university originally developed this. Isn’t the dynamic a little different with a university? Look at our mission statement, look at the public funding we get. Shouldn’t we reach out to Bristol Myers Squib [the company selling the drug]? We’re the ones who licensed it.”
The students started causing a ruckus about that. They worked with the developer who [created d4T], William Prusoff. He said, “The goal of my research was to save lives, not to bring licensing revenue into Yale University.”
Eventually Yale did renegotiate with Bristol Myers Squib. There was a massive 90 percent price drop for HIV/AIDS treatment. You’ve seen this huge expansion [of AIDS drug availability] over the past decade for people largely due to these big price reductions. Programs like PEPFAR [George W. Bush’s program to treat AIDS in Africa] started buying generics. That doubled the number of people they could treat overnight.
Interesting Ryan Avent:
In 2006, growth looked healthy. Real output grew at just about the ideal pace, even as residential investment shrank at an eye-popping clip. Yet strangely the Fed kept tightening. Its benchmark rate went up another 100 basis points in 2006. By early 2007 the economy was growing below trend. What’s more, further declines in residential investment seemed to be as much a symptom of that broader decline as a cause of it. Even so, the Fed didn’t begin loosening policy until September of 2007, at which point the financial crisis had begun. The Fed then remained behind the curve until the acute phase of the crisis dragged down all sectors in unison. The government then threw everything including the kitchen sink at the economy, eventually putting a floor under the collapse.
In hindsight, the nasty recursive loop toward acute financial crisis was clearly operating by the second half of 2006. Why didn’t the Fed step in to prevent a downward spiral? Maybe because it was slow to perceive trends or because it lacked good real time data. Maybe because rising oil prices muddied the waters. But maybe because it was extremely sensitive to criticisms of past reactions to asset prices, which struck critics as inegalitarian or as contributing to moral hazard, or both. The Fed may have thought (or behaved as if it thought) that a slowdown generated by a deflating housing sector should not be resisted, lest the bubble simply grow larger or reckless traders fail to learn their lesson.
It seems to me that this may be a very bad way to make policy. And the proof is in the pudding. I contend that the crisis itself did much more to generate moral hazard than an effort to prevent a demand collapse would have done, in two ways. First, from the onset of acute crisis in the second half of 2008, financial losses were overwhelmingly driven by macro financial and economic dynamics rather than micro dynamics. So rather than investors reaping what they sowed, everyone in financial markets lost vast amounts of money. Instead of instructing institutions to invest carefully lest they lose their shirt, the Fed encouraged firms to invest riskily, since risky bets pay off in good times and are chalked up to the uncontrollable forces of crisis in bad times.
And second, of course, the extreme danger of the crisis led the government to throw moral hazard concerns overboard entirely. After Lehman, the government had to advertise loudly and clearly that no other shaky dominoes would fall. Good and bad banks alike, they all were under the government’s protection at that point (provided they were systemic enough).
The crises of 1907 and 2008 are not the only ones to fit this pattern. America’s economy was also slowing well before the crash of 1929, in part because of Fed interest-rate hikes designed to teach an exuberant Wall Street a lesson. Central banks might have learned a critical lesson from recent economic turmoil: that economic disasters occur when central banks think to use weak demand to punish reckless investors or fight moral hazard. Sadly central bankers appear to be moving in the wrong direction, becoming more ready to conclude that weak demand is an acceptable price to pay for bubble prevention.
The tricky thing to know is what would have unfolded had the Fed moved in 2006 and 2007 to break the vicious financial-demand cycle. The ideal outcome would probably have been one in which the Fed focused its attention on preventing a big fall in nominal output growth. In that case the late 2000s might have looked a lot like the late 1980s and early 1990s, in the aftermath of the Savings and Loan and Latin American debt crises. Real output growth would probably have slowed even as nominal output stayed high, leading to a rise in inflation. Once the financial danger was over, the Fed might then have triggered a disinflationary recession, but with nominal rates having crept up with inflation there would be little risk of hitting the zero lower bound. It would not have been a comfortable experience. Many mortgages would have defaulted, and there would have been plenty of real financial losses and perhaps some big institutional failures. But by not allowing demand to collapse the Fed might have been able to keep problems contained and avoid a once-in-80-years economic disaster.
Monetary policy matters.
They say they hate inflation. What they actually hate is government action.
Scott Sumner explains:
Recall that my only disagreement with Plosser is that he supports inflation targeting. But even if I was convinced to shift to that position, I’d still totally disagree with him about the current stance of monetary policy. If the Fed should focus like a laser on its 2% inflation target and ignore unemployment (which seems to be Plosser’s preference) then they should adopt a far more expansionary monetary policy. But he seems to favor a tighter policy.
One speaker after another talked about policy like we were back in the 1970s, instead of seeing the slowest growth in M* V since Herbert Hoover was president. Why isn’t Bernanke a big hero on the right? The Fed is producing very low inflation. Talking to individual people didn’t help much, as there was a wide range of views. Some thought inflation was actually much higher than reported (it isn’t.) Some pointed to asset price inflation (even though they had not cried “deflation” when asset prices were plunging in 2009.) Some thought the inflation would show up later (it clearly won’t.) In fairness, some favor no inflation at all, or even mild deflation, so for them money really is too tight.
But my overall reaction is that the conservative/Austrian/monetarist/classical liberal/libertarian/RBC schools of thought are too influenced by a combination of massive deficits, massive QE, near-zero interest rates, and simply assume that with all this stimulus we must have high inflation, or else it’s just around the corner. So they end up “crying fire, fire in Noah’s flood,” as Ralph Hawtrey described similar conservative fears in the 1930s. Another period of near-zero rates, QE, big deficits, etc. Another period where (in retrospect) conservatives were wrong.
The windshield, Dr. Nass said, was in danger of becoming just another screen.
“Imagine you get into an autonomous car, and it’s sunny outside, your suburban road is empty and you’re playing ‘Angry Birds,’ ” Dr. Nass said in an interview with Automotive News earlier this year, referring to the video game franchise.
“An hour later, the car asks you to take over within 10 seconds. Except now, it’s pouring rain, there’s tons of traffic downtown and the car to your left rear is behaving erratically. These are things you would have noticed if you were driving.
“But now you are dropping in from outer space, basically. We have no idea whether people can mentally prepare themselves for this.”
…One of his most publicized research projects was a 2009 study on multitasking. He and his colleagues presumed that people who frequently juggled computer, phone or television screens, or just different applications, would be skilled at ignoring irrelevant information, or able to switch between tasks efficiently, or possessed of a particularly orderly memory.
“We all bet high multitaskers were going to be stars at something,” he said in an interview with the PBS program “Frontline.” “We were absolutely shocked. We all lost our bets. It turns out multitaskers are terrible at every aspect of multitasking. They’re terrible at ignoring irrelevant information; they’re terrible at keeping information in their head nicely and neatly organized; and they’re terrible at switching from one task to another.”
He added, “One would think that if people were bad at multitasking, they would stop. However, when we talk with the multitaskers, they seem to think they’re great at it and seem totally unfazed and totally able to do more and more and more.”
Computers are very far from being able to be good managers: sit down, set expectations, measure performance. You need humans to do that. — Tyler Cowen
Interesting piece on Tim Armstrong and AOL has this nugget about AOL saving itself through massive sale of software patents:
In late June Apple and Microsoft had finalized an agreement to jointly acquire the patents of failed telecom giant Nortel for an astounding $4.5 billion.
AOL general counsel Julie Jacobs was on vacation in the Northern Neck area of Virginia off Chesapeake Bay, but when she saw the news of the Nortel sale, she made a work call immediately.
She called one of her deputies, Sarah Harris, AOL’s intellectual property expert. Jacobs told Harris to engage a firm to conduct a valuation of AOL’s patent portfolio right away.
Because Armstrong had insisted that AOL retain its patents after its spin-off from Time Warner, Jacobs knew the company had a lot of them. It was time to find out how much they were worth.
Over the next six months, it became obvious the patents were worth a lot.
There should be a follow-up story about how AOL even got these patents approved in the first place…
One AOL executive remembers sitting at a desk at AOL’s office in Dulles, reading an AOL patent for a technology where a user inputs geographic Point A and geographic Point B, and gets turn-by-turn directions back. This executive thought: Everyone in the world is violating that patent. There were many more like that. AOL owned patents for the foundations of the Internet: instant messaging, email, chat rooms, shopping carts, Internet radio, and search. Another sign that AOL had something with its patents were the 17 unsolicited offers to buy them made during 2011.…Then, in early March, an industry rival inadvertently did Armstrong and AOL a huge favor. New Yahoo CEO Scott Thompson, also dealing with an activist investor, had decided to make money from Yahoo’s patent portfolio by suing Facebook over 10 patent violations.
This put Facebook in a patent-buying mood. On a Saturday in early March, Facebook COO Sheryl Sandberg called Tim Armstrong to find out if AOL’s patents were for sale.
Armstrong said yes, and the talks quickly resulted in a stunning offer from Facebook. It wanted to buy AOL’s patent portfolio for a billion dollars.
A billion dollars!
At the time, AOL’s entire market cap was only a little more than a billion dollars. A surprise billion dollars in the bank would almost certainly end the proxy fight with Starboard.…Finally, he negotiated a deal with Microsoft CEO Steve Ballmer to sell 800 of AOL’s patents for $1.1 billion. This deal was far more favorable than the deal Facebook had offered because it left AOL with a number of patents the board thought it would need in the future. AOL cleverly structured the deal so that some of the companies it had acquired a decade before, including Netscape, were sold with the patents. That way it could mark the sale down as a loss and avoid paying a high tax bill.
The week AOL announced the patent sale publicly, its stock went up 43% in one day.
Net substitution would be a big deal, if true, because alcohol does so much more harm than cannabis that a small reduction in the alcohol problem would, in social-cost terms, outweigh even a big increase in the cannabis problem due to legalization. — Mark Kleiman