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All posts by Ben Miller

Pharmaceutical Investment Saves Lives: Innovation in Cancer Treatments Well Worth the Cost

A new NBER paper from Columbia University economist Frank Lichtenberg examines how pharmaceutical innovation correlates to fewer deaths among people with certain types of cancers. Fewer cancer patients died before the age of 75 if their particular type of cancer had experienced more medical innovation.

The basic message here is intuitive—new drugs and treatments save lives—but Lichtenberg does a good job of breaking down the costs and benefits. He estimates that medical innovation saved more than 100,000 years of aggregate life in Canada alone, at a cost of $2,730 per year based on the total spending for drugs to treat those forms of cancer.

Unfortunately, Lichtenberg does not factor in R&D costs for the discovery and development of these drugs. He does estimate the cost if the drugs had been brand name (versus the generics they are assumed to be), which comes out to $11,000. This is still significantly below estimates for the value of a year of life, and it is possible to assume that prices would be set by private companies high enough to recoup their research investments. This leaves only the question of public investments in R&D;

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New Report on R&D Tax Incentives Shows Best Practices

Earlier this year the European Commission released a substantial report on R&D tax credits throughout the EU and several other OECD countries including the United States and Japan. R&D tax credits have been widely adopted across the developed world since the United States introduced the Research and Experimentation tax credit in 1981: only two countries in the EU do not have tax policies intended to encourage R&D.

The report is a thorough meta-study looking at the existing economics literature and available data on R&D-focused tax policy, including the impact of R&D tax policies on R&D expenditure, innovation, employment, productivity, and other factors. It also covers the literature on how corporate tax policy can affect the location of R&D and patents. Finally, the report examines the details of various tax policies and benchmarking them based on what they determine to be best practices.

The report makes a number of facts clear. First, despite a broad range of findings, “the vast majority” of studies surveyed show that R&D tax incentives are effective, with the most recent (and rigorous) studies finding that a 10% in the user cost of R&D results in a

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Health Innovation More Valuable Than Previously Thought

Innovation is frequently underemphasized in the economics literature because it is qualitative by nature, and qualitative changes are hard to measure. A new NBER paper by three economists, Lakdawalla, Reif, and Malani, makes some progress toward a better measure of innovation, specifically innovation in health care. They show that by ignoring the way medical innovations help reduce risk, previous studies have tended to underestimate the true value of medical innovations—by as much as 30-80%.

To arrive at their estimates the authors use a new way of valuing risk. Our health is inherently risky, which is why we have health insurance for smoothing expenses out over time and between people. Innovation is also risky, which is why investors in startups often expect high returns and we often look to the government to fund basic research. But Lakdawalla, Reif, and Malani show that risks don’t always add up—sometimes they cancel out. Risks taken to innovate and create new health products and treatments can reduce health risks for people, because new innovations help keep us safer and healthier.

When risks taken in health innovation pay off, the reward they bring isn’t just the

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Study of Patents Shows Importance of Fed-Funded Research

A new report from Battelle based on methodology from the Academy of Radiology Research shows how federal R&D funding succeeds in producing patents. The report examines essentially all federal R&D, including not only the Department of Defense and the National Institutes of Health but also the Department of Energy, the National Science Foundation, NASA, and other agencies. It finds that, per patent, public-sector agencies provide a return comparable to private-sector ones—or even cheaper. Recent public sector budget cuts, therefore, can be expected to significantly hurt our scientific progress.

The agencies vary significantly in terms of how productive they are and how successful their patents are. Some agencies in particular, such as the National Institute of Biomedical Imaging and Bioengineering (NIBIB) have exceptional records for producing research that is widely useful: NIBIB is estimated to spur an additional $578.2 million, or 25 patents, for every $100 million in R&D expenditures. The DoD and NASA, on the other hand, are less efficient at producing patents at only around 2-3 patents per $100 million in R&D expenditures. (although, as the report notes, defense spending is more likely to be classified and thus not

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New Administration Budget has Smart Proposals for Boosting R&D

The U.S. corporate tax system hasn’t had a major overhaul since the early 1980s, and it’s getting long in the tooth. One part that is particularly dated is the research and experimentation (R&E) tax credit provision. The new 2016 administration budget makes some important changes to the R&E credit. The credit was first implemented as a two-year trial run over 30 years ago in 1981, and has been renewed continually since then, eventually adding an updated “alternative simplified credit” (ASC) as the old credit became too unwieldy in many instances. Despite proven success as shown in many academic studies, however, the credit is continually forced to be renewed. The new administration proposal takes the obvious step of making the credit permanent, eliminates the outdated “traditional” credit making a stronger ASC the sole form of the credit, and incentivizes R&D in universities startups by increasing the amount of the credit that companies can claim for outside R&D expenditure.

While the R&E credit has evolved over the past three decades, both its core structure and its temporary span have stayed the same. It is clearly out of date: the law still

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R&D Credits Essential for Competitiveness: New Evidence

A new SSRN paper finds that research and development (R&D) helps manufacturers keep ahead of competition from imports. U.S. manufacturing firms in industries with strong import competition from China fared better 50 percent better when they had larger stocks of capital used for R&D. While this finding is intuitive, it provides an important piece of evidence that reiterates a critical point about the U.S. economy: international competitiveness is extremely important and smart R&D policy (including tax credits) is a key method of maintaining it.

The authors Johan Hombert and Adrien Matray use granular industry-level data on imports from China and show that these imports have a significant impact on the performance of U.S. manufacturing firms. They then examine whether this impact changes depending on how much R&D capital firms have. In order to make sure the R&D capital isn’t related to other factors, they use state-level changes in R&D credit policy during the 1980s.

Their results here show that firms that had access to cheaper R&D and were thus more likely to acquire more R&D capital had an easier time “climbing the quality ladder” and staying competitive in the face

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Our Automatic Assumptions about Automation

Senator and likely presidential hopeful Marco Rubio (R-FL) appeared on last Tuesday’s The Daily Show with Jon Stewart, promoting his new book and weathering an endless stream of jokes about his home state of Florida. While the discussion covered a range of policy ground, we wanted to highlight one comment by Senator Rubio that showed an all too common misunderstanding of innovation and automation.

Rubio said, “The concern I have about the minimum wage increase is that we have been told by the CBO and independent analysts that it will cost certain jobs. And that happens when some businesses will decide that well, you’ve now made our employees more expensive than machines so we’re going to automate. So in 5-10 years it’s going to happen anyway but this will accelerate this process, when you go to a fast food restaurant it will not be a person taking your order, there will be a touchscreen there that you will order from and when you get your order it will be right. [uneasy laughter] But the point is, if you make that person now more expensive than that new technology, they’re going

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Mobile Telecom Offers Enormous Benefits, Finds New Report

Boston Consulting Group and Qualcomm have just released a new report examining the impact of mobile devices on the economy, focusing on the benefits mobile brings to small businesses and consumers in six countries including the United States, Germany, Korea, Brazil, China and India. The authors estimate that mobile technologies increase consumer welfare by the equivalent of 10 percent of total income in developed countries, and 20-45 percent of total income in developing countries. In fact, the total value that mobile brings to consumers is estimated to be more than double the size of the of the entire mobile industry revenue.

These economic gains have been enabled by remarkable technological progress. Global average cost per megabyte has declined from nearly 98 percent between 2005 and 2013, while maximum data speed has increased from ~10 to 250 mbps over the same period. These vast changes in cost and performance have made mobile technology affordable to billions of people around the world. Even so, more technological progress is necessary: 90 percent of mobile technology users report having problems with their connection. 5G and 6G technologies will continue to improve access and connectivity

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Can Competition Hurt Innovation?

A new NBER paper, “Starving (or Fattening) the Golden Goose?: Generic Entry and the Incentives for Early -Stage Pharmaceutical Innovation” (summarized here), asks whether competition from generic drugs disincentivizes research. The authors, Branstetter, Chatterjee and Higgins, find that this does broadly seem to be the case: drug development activity decreases after generic drugs are introduced. This result highlights the important tradeoff between research and consumption. When consumers pay for drugs, intellectual property (IP) policies play a large role in determining how much of that cost goes toward future drug development.

Pharmaceutical markets are risky: drug development takes 12 years from initial pre-trial preparation to bringing a drug to market, and between the complexity of the human body and the extended regulatory approval process only a small proportion of drugs make it all the way to market. Of the ones that do, a small minority make up the large majority of profits.

This riskiness means that policies play a critical role in getting pharmaceutical markets to work correctly: if companies do not have incentives that outweigh the risks, they will not invest in researching new drugs and bringing them

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Developing Countries Need Robots Too

Ask any economist why some countries are poor and some countries are rich, and they will probably answer, “productivity”. Essentially, this means that people in rich countries are rich because they are able to create more wealth with less effort. But how do they do this? One of the primary ways is through better technology.

Unfortunately, instead of being recognized for its contribution to wealth, better technology is all too often demonized as a threat to employment, particularly in low-income countries without social safety nets. Intuitively, people care more about the jobs and income streams that already exist than the potential future savings from automating their jobs–a bird in hand, as they say. But a new paper by Mehmet Ugur and Arup Mitra of the University of Greenwich shows that even in very poor countries, technology is far less threatening than it may appear.

We have argued here before that robots are not taking our jobs: in the long run on a macro level productivity increases have no relationship with either the total number of people employed or with the level of unemployment. This is because when automation or

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