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Not business but finance models

Financialized business models sticks to faith based “Market knows best” rule.

…The number of MBAs graduating from America’s business schools has skyrocketed since the 1980s. But over that time, the health of American business has decreased by many metrics: corporate R&D spending, new business creation, productivity, and the level of public trust in business in general.

There are many reasons for this, but one key factor is that the basic training that future business leaders in this country receive is dictated not by the needs of Main Street but by those of Wall Street. With very few exceptions, MBA education today is basically an education in finance, not business—a major distinction. So it’s no wonder that business leaders make many of the finance-friendly decisions. MBA programs don’t churn out innovators well prepared to cope with a fast-changing world, or leaders who can stand up to the Street and put the long-term health of their company (not to mention their customers) first; they churn out followers who learn how to run firms by the numbers. Despite the financial crisis of 2008, most top MBA programs in the United States still teach standard “markets know best” efficiency theory and preach that share price is the best representation of a firm’s underlying value, glossing over the fact that the markets tend to brutalize firms for long-term investment and reward them for short-term paybacks to investors. (Consider that the year Apple debuted the iPod, its stock price fell roughly 25 percent, yet it rises every time the company hands cash back to shareholders.)

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R and D

Angry Bear has over the years described the Pharma industry and its spending on Rand D and stock buybacks, among other developments in comparing US health outcomes to other countries.

Via New York Times discussing this study at Ineteconomics.

US Pharma’s Financialized Business Model
JUL 2017 |

Price gouging in the US pharmaceutical drug industry goes back more than three decades. In 1985 US Representative Henry Waxman, chair of the House Subcommittee on Health and the Environment, accused the pharmaceutical industry of “gouging the American public” with “outrageous” price increases, driven by “greed on a massive scale.” Even in the wake of the many Congressional inquiries that have taken place since the 1980s, including one inspired by the extortionate prices that Gilead Sciences has placed on its Hepatitis-C drugs Sovaldi since 2013 and Harvoni since 2014, the US government has not seen fit to regulate drug prices. UK Prescription Price Regulation Scheme data for 1996 through 2010 show that, while drug prices in other advanced nations were close to the UK’s regulated prices, those in the United States were between 74 percent and 181 percent higher. Médecins Sans Frontières (MSF) has produced abundant evidence that US drug prices are by far the highest in the world.

The US pharmaceutical industry’s invariable response to demands for price regulation has been that it will kill innovation. US drug companies claim that they need higher prices than those that prevail elsewhere so that the extra profits can be used to augment R&D spending. The result, they contend, is more drug innovation that benefits the United States, and indeed the whole world. It is a compelling argument, until one looks at how major US pharmaceutical companies actually use the profits that high drug prices generate. In the name of “maximizing shareholder value” (MSV), pharmaceutical companies allocate the profits generated from high drug prices to massive repurchases, or buybacks, of their own corporate stock for the sole purpose of giving manipulative boosts to their stock prices. Incentivizing these buybacks is stock-based compensation that rewards senior executives for stock-price “performance.”

Like no other sector, the pharmaceutical industry puts a spotlight on how the political economy of science is a matter of life and death. In this paper, we invoke “the theory of innovative enterprise” to explain how and why high drug prices restrict access to medicines and undermine medical innovation. An innovative enterprise seeks to develop a high-quality product that it can sell to the largest possible market at the most affordable price. In sharp contrast, the MSV-obsessed companies that dominate the US drug industry have become monopolies that restrict output and raise price. These companies need to be regulated.

“The key cause of high drug prices, restricted access to medicines and stifled innovation, we submit, is a social disease called ‘maximizing shareholder value,’” the study’s authors concluded.

This concept, the authors said, is actually “an ideology of value extraction.” And chief among the beneficiaries of the extraction are drug company executives, whose pay packages, based in part on stock prices, are among the lushest in corporate America.

“There’s no shortage of spending on R&D in the U.S. economy, and no shortage of spending on life sciences, even though it has declined somewhat in real terms,” one of the authors, William Lazonick, a professor of economics at the University of Massachusetts, Lowell, said in an interview. “But there really is very little drug development going on in companies showing the highest profits and capturing much of the gains.”

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It’s the Debt, Stupid

Dan here…another post by Steve

Why Tyler Cowen Doesn’t Understand the Economy: It’s the Debt, Stupid

Steve Roth | November 16, 2015

In a recent post Tyler Cowen makes an admirable effort to lay out his overarching approach to thinking about macroeconomics, revealing the assumptions underlying his understanding of how economies work. (Even more salutary, this has prompted others to do likewise: Nick Rowe, Ryan Avent.)

Cowen’s first assertion:

In world history, 99% of all business cycles are real business cycles.

This may be true, but it is almost certainly immaterial to the operations of modern, financialized monetary economies. He acknowledges as much in his second assertion:

In the more recent segment of world history, a lot of cycles have been caused by negative nominal shocks.  I consider the Christina and David Romer “shock identification” paper (pdf, and note the name order) to be one of the very best pieces of research in all of macroeconomics.

That paper, which revisits and revises Friedman and Schwartz’s Monetary History, is clearly foundational to Cowen’s understanding of how economies work, so it bears examination — in particular, its foundational assumptions. The Romers state one of those assumptions explicitly on page 134 (emphasis mine):

…an assumption that trend inflation by itself does not affect the dynamics of real output. We find this assumption reasonable: there appears to be no plausible channel other than policy through which trend inflation could cause large short-run output swings.

This will (or should) raise many eyebrows; it certainly did mine. Because: it completely ignores the effects of inflation on debt relationships.

It’s as if Irving Fisher and Hyman Minsky had never written.

Assuming “inflation” means roughly equivalent wage and price increases, at least over the medium/long term (yes, an iffy assumption given recent decades, but…), inflation increases nominal incomes without increasing nominal expenditures for existing debt service. (Yes, with some exceptions for inflation-indexed debt contracts.) Deflation, the reverse. Nominal debt-service expenditures are (very) sticky. Or described differently: inflation constitutes a massive ongoing transfer of real buying power from creditors to debtors — and again, deflation the reverse.

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Nation “Too Broke” for Universal Healthcare to Spend $406 Billion More on F-35


Nation “Too Broke” for Universal Healthcare to Spend $406 Billion More on F-35

f-35_
(Photo: Forsvarsdepartementet/flickr/cc)

The nation’s most expensive weapons program isn’t done showing U.S. taxpayers how much it will ultimately cost them, with Bloomberg reporting Monday that the F-35 fighter jet budget is now predicted to jump by a cool $27 billion.

“Think about [F-35's] $405 billion price tag when a family member dies of a preventable disease. Get angry.”

Though the estimated future cost of the program had previously hovered at a mind-boggling $379 billion, an updated draft that could be submitted to Congress as early as today will reportedly exceed $406 billion—a nearly 7 percent increase.

The new cost increases may come as a hit to President Donald Trump, who has bragged about his ability to get weapons manufacturers to offer the Pentagon “better deals.”

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GOP leaders definitely knew about hacking — did they benefit too?

Via Salon, Digby writes:

GOP leaders definitely knew about hacking — did they benefit too?

McClatchy also reported that the Justice Department is looking into “whether Trump’s campaign pointed Russian cyber operatives to certain voting jurisdictions in key states – areas where Trump’s digital team and Republican operatives were spotting unexpected weakness in voter support for Hillary Clinton.” That’s an issue I’ve written about previously here on Salon, based on some post-election investigative reporting by the New York Times.

This raises once again the question of just what was going on in the Republican Party during this period. After all, it wasn’t just Donald Trump who benefited from Russian hacking. The GOP-dominated House majority was a major beneficiary as well.

Remember, the congressional leadership knew in 2015 that it was happening. Reuters has reported that the so-called Gang of Eight (Republican leaders in Congress) was told that Russian hackers were attacking the Democratic Party but that the information was so top secret they could not share it. As we know, hackers attacked the Democratic National Committee and the personal email of Clinton campaign chair John Podesta. But they also hacked the Democratic Congressional Campaign Committee, and information gleaned from that hack was put to use in some 2016 campaigns for Congress.

Also recall that one month before Donald Trump Jr. took that meeting with the Russian lawyer, House Majority Leader Kevin “loose lips” McCarthy was talking about Trump’s connections to Vladimir Putin in a room full of Republicans

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How do households build wealth

Dan here….Steve Roth in 2014

How Do Households Build Wealth? Probably Not the Way You Think. Three Graphs

Steve Roth | October 28, 2014 12:52 pm

US/GLOBAL ECONOMICS

Work hard. Save your money. Spend less than you earn. That’s how you become wealthy, right?

That’s not totally wrong, but if you think that’s the whole story — or even a large part of the story – you may be surprised by this graph:

Screen shot 2014-10-28 at 8.45.12 AM

(Note: these are not realized capital gains, which really only matter for tax purposes. If the value of your stock portfolio or house goes up for twenty or thirty years, you’ve made cap gains even if you haven’t “realized” them by selling.)

Household “saving” — households spending less than they “earn” – contributes a remarkably small amount to increasing household net worth. And that contribution has shrunk a lot since the 90s.

Screen shot 2014-10-28 at 9.00.09 AM
The accounting explanation is simple: “Income” doesn’t include capital gains; it comprises all household income except capital gains. So capital gains are also absent from “Saving” — Income minus (Consumption) Expenditures. (This is why HouseholdSavings1 + HouseholdSaving ≠ HouseholdSavings2 — not even vaguely close.)

The capital gains mechanism appears to dominate the ultimate, net delivery of rewards to household economic actors. Earning more and spending less is weak beer by comparison.

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Former Ohio official who accidentally released Social Security numbers is on Trump’s voter fraud panel

Former Ohio official who accidentally released Social Security numbers is on Trump’s voter fraud panel LA TImes reports:

The Republican gubernatorial primary was just weeks away, and then-Ohio Secretary of State Ken Blackwell had his sights set on securing the nomination.

Blackwell had served as mayor of Cincinnati and state treasurer before becoming Ohio’s top elections official, so a bid for governor in 2006 seemed a logical next step in his political career.

But in March of that year, his office caused a stir: The full Social Security numbers of 1.2 million Ohio voters were posted accidentally on the secretary of state’s website.

A month later, in a separate incident, Blackwell’s office inadvertently distributed voter lists with the Social Security numbers of 5.7 million voters. The numbers, by law, are supposed to remain private.

Blackwell, 69, has been tapped to serve on the Trump administration’s bipartisan voter fraud commission, an endeavor election officials nationwide have called a waste of time.

The panel, officially called the Presidential Advisory Commission on Election Integrity, asked secretaries of state nationwide to provide voters’ personal information, including names, addresses and the last four digits of Social Security numbers. The commission has faced intense pushback from both Democrats and Republicans, while a watchdog group has filed a lawsuit arguing the commission’s request breaches privacy laws.

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