Bryan Caplan  

FDA: Public, Economists, and Specialists

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I've come across two interesting surveys on the Food and Drug Administration.

The first is the latest gem by the Kaiser Family Foundation. Among other topics, it has the dirt on public opinion about regulation of drugs. Does the public favor more, less, or the same amount of regulation of the following?

Area                                    More Regulation  Status Quo  Less
Limiting price of prescription drugs 65% 14% 14%
Prevent misleading statements 51% 39% 6%
Make sure prescription drugs are safe 50% 39% 8%

Another interesting Kaiser finding:

The public’s concerns about prescription drug prices and drug company profits translate into support for many proposals to control drug costs. For example, in 2005, almost two-thirds (65%) of the public say there should be more government regulation of prescription drug prices, and 70% of these people (or 46% of all adults) continue to support more regulation of prices even it leads to less research and development of new drugs.

Plainly, then, all of the economic arguments in favor of deregulation of drugs have fallen on deaf ears. No surprise there. Until I studied economics, I heard nothing but stories about how the FDA saved us from thalidomide.

The second interesting survey comes from Dan Klein's and Charlotta Stern's paper "Is There a Free-Market Economist in the House?" Klein and Stern asked AEA members their attitude about FDA regulation. Results:

Attitude          %
Strongly Support 48%
Support Mildly 22%
Mixed Feelings 15%
Oppose mildly 8%
Oppose strongly 6%

Kind of makes you wonder if the economic arguments are as one-sided as I suggest. Notice, however, that economists are clearly more opposed than the public. Most of the public wants more safety regulation; they go beyond mere support for the status quo. And economists are about as likely to favor abolition (that's what I take "strongly oppose" to mean, anyway) as the public is merely to favor less regulation.

What happens, however, if we listen to economists who specialize in the FDA, rather than random economists at the AEA? Klein reports that opposition becomes very one-sided indeed:

Alexander Tabarrok and I review much of the literature in our website “Is the FDA Safe and Effective?” (FDAReview.org). We include a compendium of 22 quotations by economists calling for significant liberalization of FDA control, and we explain that we have been unable to find quotations favorable to current levels of control by economists who work on the FDA. I believe economics reaches a clear conclusion in favor of significant liberalization of FDA control of pharmaceuticals. Thus, given the range of response options provided by the question, the first two options [strongly support/mildly support] are simply wrongheaded.

Bottom line: The public thinks the FDA is great. Regular economists think it's pretty good. And economists who specialize in the FDA think it's pretty bad. I think I see a familiar pattern.


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COMMENTS (14 to date)
El Presidente writes:

I agree with the logic about the constraining effects of the FDA's regulatory powers on entrepreneurial product development. I tend to agree that we would have a greater of variety of therapies addressing more problems if we removed current regulations. The argument against these regulations is basically that it harms the profitability of innovation limiting new drug development to those drugs which have a very broad or otherwise very profitable application. However, there is an alternative to removing oversight.

I find it interesting that we typically give much less attention to the structures within our society that suggest to companies that they must always pursue higher and higher profit margins. When the rates of profit rise in the larger economy drug companies, many of which are publicly traded, have to compete more vigorously for limited investment dollars. They therefore have an incentive to give up on promising therapies if the market for them is too narrow or if development might take too long for the tastes of investors. No apology is made to the families of the deceased because of the demands of investors. Instead, we stipulate the need for the economic sovereignty of the capitalist. We then tend to argue against the necessary counterpart, regulatory authority, in a bad game of chicken and egg.

A rise in regulatory authority accompanying a rise in profits is a pattern that repeats itself in several areas. It is a dangerous one as well according to Hayek and Friedman and I see few ways to preempt this course of events other than rescinding protections currently afforded to corporations. Incorporation limits liability and facilitates higher profit margins than those available to other business forms (proprietorship, partnership). These profits may be the source of our discontent. We may be overpaying entrepreneurs in general causing a sort of complacent selfishness and all the while assuming that this is the necessary course of things.

The bottom line may be that we're all going to die sooner or later and our ability to delay death might be overvalued in comparison with our ability to improve life.

Xavier writes:

I strongly disagree with El Presidente. As best I can tell, he's afraid that if the drug industry is ruled purely by market forces, companies will avoid working on profitable drugs when the market is too narrow or when development is too lengthy or costly. That makes no sense. Firms in a free market take what profitable opportunities they can. If they refuse to develop drugs with a small market or high development costs, it is because those opportunities are not profitable. Companies shouldn't work on those drugs. The social costs of development outweigh the social benefits.

Then you complain that profits are too high (without any explaination as to why that's a problem except a vague citation to Hayek and Friedman) and blame the existence of the corporate form. Your only argument for why we should prefer partnerships and sole proprietorships is that they are less profitable (that's a good thing?). Unless you can make some argument that drug profts are above the competitive level, which would haven't, I don't see how high profits are a problem.

Actually, we probably would see excessive profits in the pharmaceutical industry if only sole proprietorships and partnerships were allowed to compete. Developing drugs is extremely capital-intensive. Without access to capital markets, very few people would be able to finance development. That would impose substantial barriers to entry and give drug-makers far more pricing power. It would also substantially reduce the number of new drugs developed. If you're afraid that the drug industry is harmed by competition for "limited investment dollars" why would you want to further limit the available investment dollars by cutting off access to the capital markets?

wkwillis@intergate.com writes:

The worst thing about the FDA is it's strong step function in qualifications for drug use. Too much regulation before the drug is introduced, and none thereafter unless newspaper headlines are too common to ignore.
A better policy is to skip the last stage of testing and release the drugs on a probationary basis. Instead of testing on 1, 10, 100, 1000, 10,000 people, and then no testing, we should test on 1, 10, 100, 1000, and then require that the users fill out forms (require means that you can't dispense the drugs unless the users report back to the FDA on how the drugs worked and the side effects).
Motivating people to send the forms back to the FDA is the drug company's problem. Rewards for returned forms, price refunds, nagging, it's the company's problem.
We should release drugs earlier and accept that most drugs will have to be recalled or restricted in use. Some because they only work for a few people, some because of rare and unpleasant side effects that aren't rare enough.

Lawrance George Lux writes:

Bryan,
Economists always look for Production efficiency, and perceive Quality safety as statistical numerial data. Example: Your are a prospective Father, whose wife is going into Childbirth; would you accept a Local Painkiller which had only 13 out of a 1000 adverse effects, and only killed the Mother and Child 7 out of 10,000 times used? The Public, including Economists, might not trust Economic theory as much as you desire. lgl

Mark Horn writes:

LGL,

I'm not an economist (just a wannabe) but I want to know what the cost of "Quality safety" (sic) is. If it's a choice between:

  • Natural childbirth for free,
  • Your hypothetical painkiller for $10 with the 7 in 10000 chance of death, and
  • Some other painkiller that's 100% safe at a cost of $100 million, then
  • I suspect that most people will simply choose option 1. Which, in this case, is not an awful choice. People can live with the pain of childbirth - provably: my wife has done so 3 times. It's a much more interesting question when option 1 involves certain death. Now option 2 looks pretty darn good.

    The problem is that the FDA forces option 3 at ridculous cost without any regard to the public's desire for something like option 2. And when individuals choose option 1, they don't get to avoid funding option 3.

    My point: safety is not the only variable upon which people make decisions. The presence of the FDA, on the other hand, makes it the only variable because people consume more safety than they might if they were directly funding the safety.

    $.02 - please critique any mistakes.

    Timothy writes:

    Nobody's forcing you to take that therapy. You might take it if it was cheaper and you were poor. Or if you were willing to accept the risk. You don't have to do that, you can opt for something else. Nobody buys, it isn't profitable, gets nixed.

    Now, though, the FDA decides for me what an acceptable level of risk is. I'm young and healthy, COX-2 inhibitors help my joint problems (years of track and cross-country hurt my knees), now the FDA is saying I shouldn't take them because they could increase my risk of heart attack. I have virtually zero risk of heart attack, and I'm willing to accept a higher risk if it means my knees don't hurt anymore. Why give the FDA that choice? Why not leave it up to me?

    Dave Meleney writes:


    You link approvingly to FDAReview.org and at that site they chart Peltzman's results which seem to indicate we've been loosing about 60% of our new pharmaceuticals ... those we might be getting if not for the 1962 Kefauver-Harris Amendments.

    60% for 40 years should add up to a lot of lost lives...Do you find his work convincing?

    Don't we need some rough estimates of the loss of life involved here to get something going on FDA reform, or at least to stave off the wrong kind of reform? If life expectancy increased by 7 years from '62 to '02 in spite of the K-Harris amendments and if even 1/4 of that was due to better drugs, and if the drugs we failed to develop but would have, were even half as lifesaving..... that's nearly a year for everyone. When do we open the champaign, and where is the billionaire with a slowly progressing illness to fund the new understanding?

    Is Michael Milken the only one who takes his illness personally enough to go out and reform the system?

    Thalidomide had specific and gruesome victims ... where are the photos of people who've died because drugs got delayed so long?

    If journalists often prefer a story with a victim and a victimizer ... and are already prone to cover the Canadian re-import issue, but need a new angle ... where is the economist who's telling them about how much of my parent's drug bill is really a subsidy for someone's parent in Canada or Germany?

    Robin Hanson writes:

    To me the big question is how award the public is that the experts disagree with them, and how much the public would change its view if it were more aware of this disagreement. If the public would change its view, then the question is an institutional one -- how can we inform the public of this disagreement at the lowest possible cost?

    dsquared writes:

    That link makes no sense in the context in which Bryan has used it. Gary Becker does not "specialise in the FDA" and nor do Peter Temin or Milton Friedman (to take the names I recognise).

    Also "economists" here is used to mean "people with advanced degrees in economics"; not people who do economics as their profession and not academics. A quick google search reveals that many of the people on the list of quotes appear to list their primary affiliation as a thinktank; one of them actually works for "Corporate Strategic Planning" at Pfizer!

    I think that Bryan is materially misrepresenting his actual evidence here.

    El Presidente writes:

    To Xavier:

    Let the market demand what profit it will. But let that profit be regular for all competitors and let those competitors compete without shirking their respective responsibilities to society. Crocodile tears for regulation of corporations are nonsense. Corporations are public trusts not private property. Capitalism is not absolution for fraud or negligence.

    The suggestion that social costs of therapy development exceed the social benefits, and that this is the real reason they are not pursued to conclusion, assumes that a corporation's leaders weigh both of these considerations. They, in fact, weigh neither, unless you assume their consideration of benefit and cost are necessarily synonymous with that of society at large. That is a real stretch.

    About the references . . . Hayek and Friedman both disparage the employment of government regulations in Capitalism and Freedom and The Road to Serfdom, and describe them as tools of last resort because they believe these tend toward socialism and a general decline in individual freedom. I didn't think this required additional specificity or explanation. I believe this is a faithful though brief summation.

    In addition, Dr. Smith reports from his observations and reflections that, "When profit diminishes, merchants are very apt to complain that trade decays; though the diminution of profit is the natural effect of its prosperity, or of a greater stock being employed in it than before." (Wealth of Nations, Book 1, Ch. 9) In the same chapter he concludes, "In raising the price of commodities the rise of wages operates in the same manner as simple interest does in the accumulation of debt. The rise of profit operates like compound interest. Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people."

    I echo this criticism if only to say that we set our own bar (profit expectations) artificially high then heroically rise to the challenge laying waste to the “public good”. I’m sure you’re also aware of the increasing corporate profits and GDP and declining real wages in our country over the last 30 years. Smith correctly suggests that profits should lead but wages must follow in economic prosperity. They haven’t. Why do you suppose that is? Are you shocked that people are suspicious and crave government protection? I would hope you'd be worried instead.

    dr writes:

    Timothy:

    1. The increased CV risk is believed to be cumulative. Your knees are going to hurt for a long time, so it's significant for you too.
    2. COX-2's don't work any better for pain relief than other NSAIDs, their only advantage is reduction in GI side effects. Unless you've had serious GI events, I don't understand why a COX-2 would be needed.
    3. If after all this you still want one, there are several others still on the market. Only the worst offender got pulled, and by the company itself, not the FDA. If Vioxx were the only drug in its class, and offered unique risk-benefit tradeoffs, it might have been different, but it's not. Even Vioxx may be reintroduced, with a few more warnings on the label.

    Noumenon writes:

    dsquared: It's good to see my natural cynicism covered up for my laziness! I had a feeling there was something fishy about "economists who specialize in the FDA," that they might be economists hired to specialize in criticizing the FDA, but I didn't bother to check. Milton Friedman indeed.

    Mark writes:

    D-squared is right that few of the economists in the linked article actually "specialize in the FDA." In addition to Becker, Friedman and Temin, I can add from personal knowledge that Leffler (a protege of a grad school prof of mine) is primarily an I-O/antitrust guy, while Higgs is an economic historian.

    I also googled some of the others. Calfee is a think-tanker (AEI). Keith is an "independent consultant" who used to work for Pfizer--arguably a drug policy expert of a sort (but her quote is hardly an assessment of the FDA as a whole--it's mostly about aspirin use). Holcombe and Campbell seem to be, based on their published papers, public finance guys; both also appear to be public choice schoolers and borderline neo-Austrians. Gieringer apparently did a dissertation on the policies of the DEA, he now appears to be primarily some sort of director for NORML. Grabowski is a legitimate health economist who has done several papers on durg regulation policy. Klein has one paper on the FDA listed on his vita which seems to be published in a legit journal.

    On the whole, the quotations are far--very far--from being the voice of expertise that Bryan wants us to think they are.

    dr writes:

    I wrote, wrt Vioxx:

    there are several others still on the market

    By "several" I meant two: Bextra and Celebrex. Bextra got pulled yesterday, by the FDA against Pfizer's wishes, so now there's only one left. Just FYI.

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