The Wall Street Journal - 22.08.2019

THE WALL STREET JOURNAL. Thursday, August 22, 2019 |A17

W

hat’s the best way to
measure economic
well-being in a coun-
try as large and di-
verse as America? One
crucial tool is price indexes, which
allow us to take common measures of
flourishing—hourly earnings, median
household income, poverty, gross do-
mestic product and productivity—
and remove the impact of inflation to
allow meaningful comparisons across
time periods.
Yet the economists, statisticians
and agencies that create price in-
dexes overwhelmingly agree that of-
ficial measures of inflation are sig-
nificantly overstated, leading to an
understatement of America’s well-be-
ing. The government uses these same
price indexes to adjust transfer pay-
ments and tax brackets, driving up
federal debt.
The consumer-price index was
conceived as “an upper bound on a
cost of living index,” according to the
agency that compiles it, the Bureau
of Labor Statistics (BLS). George
Stigler, a Nobel laureate and one of
the past century’s top economists,
chaired the 1961 Price Statistics Re-
view Committee, which found a “sys-
tematic upward bias in the price in-

dices.” In 1996 Michael Boskin, a
former chairman of the Council of
Economic Advisers, headed another
blue-ribbon commission, which con-
cluded that, despite improvements,
the CPI was still overstating inflation
by some 1.1 percentage points a year.
Alan Greenspan, then chairman of
the Federal Reserve, agreed and
called on Congress to correct the
overstatement. And in 2010 Erskine
Bowles, a former chief of staff to
President Clinton, co-chaired the
Commission on Fiscal Responsibility
and Reform and recommended a
more accurate measure of inflation
to index entitlement spending.
If consumers always bought the
same amounts of the same goods and
services, the CPI would provide an
accurate picture of inflation. But
when relative prices change, tastes
shift or new products are introduced,
consumers substitute relatively

Americans Are Richer Than We Think

cheap or more-preferred items for

relatively expensive and less-pre-

ferred ones. As cellphone prices have

fallen, for instance, consumers have

shifted away from landlines. The CPI

calculations didn’t capture the price

drop from that substitution.

Price indexes attempt to address

new or improved items by splitting

their prices into quality improve-

ments and pure price changes. But

extensive research has demonstrated

that current methods of separating

quality and pure price changes con-

sistently overstate inflation.

The CPI for All Urban Consumers,

or CPI-U, and its derivative CPI for

Wage Earners and Clerical Workers,

CPI-W, are the most widely used ad-

justments for inflation. They have

been revised over time, but improve-

ments have been applied only pro-

spectively. A second official index,

the CPI-U-RS (research series), incor-

porates many of the CPI-U improve-

ments retrospectively, improving the

accuracy of historical comparisons. A

third index, the Personal Consump-

tion Expenditure Price Index, or

PCEPI, improves on the CPI-U-RS by

accounting for changes in actual con-

sumer expenditures in real time.

Despite the consensus that CPI-U

overstates inflation more than CPI-U-

RS, which in turn overstates inflation

more than PCEPI, the government

continues to base its calculations on

a variety of indexes rather than use

only the most accurate. BLS adjusts

average hourly earnings with the

CPI-W, which led it to find a 6% in-

crease in real average hourly earn-

ings between 1975 and 2017. The

more accurate CPI-U-RS shows real

hourly earnings rose 10%, and the

still-more-accurate PCEPI shows real

hourly earnings rose 23%, nearly four

times the number BLS reports.

The Census Bureau uses CPI-U to

inflate poverty thresholds and finds

the incidence of poverty was un-

changed from 1975 to 2017. Using the

CPI-U-RS shows a decline in poverty

of 14%, and using the more accurate

PCEPI produces a 26% decline. The

bureau, however, uses CPI-U-RS in-

stead of CPI-U to deflate median

family income, publishing its findings

of a 21% increase, which would be

smaller by more than half using the

CPI-U and larger by two-thirds using

the more accurate PCEPI.

Even PCEPI significantly over-

states consumer price increases. Two

recent studies, one by Bruce Meyer

and James Sullivan and another by

Brent Moulton, combine more than

50 credible studies documenting spe-

cific overstatements in consumer

price indexes. For example, studies of

personal electronic devices showed

overstatements of between 3.6 and

5.8 percentage points annually be-

cause the value of new features was

either understated or missed com-

pletely. Annual price increases for

medical care were 3 percentage

points too high because they didn’t

account for the greater efficiency

and improved outcomes from new

drugs and procedures. No price index

takes account of the fact that each

month more than twice as many peo-

ple get medical advice from WebMD

as visit the doctor’s office in Amer-

ica. Shelter inflation was shown to be

overstated by 0.25 percentage point

annually because indexes ignored in-

creased living space and added mod-

ern conveniences in homes.

When corrected for documented

price overstatements, real average

hourly earnings from 1975 to 2017 are

shown to have risen some 52%, not

6%—an additional $6.77 an hour. Real

median household income increased

68%, not 21%—$17,060 more annually.

Gross domestic product grew 253%

rather than 216%—$6,312 of addi-

tional output per capita. Productivity

expanded 142% rather than 117%—$10

of additional value for every hour

worked. And published poverty inci-

dence fell by almost half. Combined

with the 67% drop in poverty that

comes from accounting for all gov-

ernment transfers, poverty incidence

sank from 12.3% to about 2%.

By overstating inflation, CPI in-

dexes inflate real spending in Social

Security, federal employee retire-

ment, military retirement and pov-

erty programs like Supplemental Se-

curity Income. Overstating inflation

also overstates the minimum-income

threshold to qualify for Medicaid,

food stamps and other subsidies. Tax

brackets are indexed to chained CPI-

U (C-CPI-U), an index similar to the

PCEPI. If all transfer payments from

2000 forward had been adjusted

with the same C-CPI-U now used for

taxes, the federal debt would be $1.1

trillion, or 7%, lower. If the tax code

and transfer payments had been in-

dexed to an even more accurate in-

dex embodying all known price-index

overstatements, revenues since 2000

would have been more than $1 tril-

lion higher, transfer payments $2.6

trillion lower, and the national debt

23% lower.

Since PCEPI and C-CPI-U overstate

inflation less than other official in-

dexes, it would seem reasonable to

adopt one of them immediately for

all historical comparisons, official

statistical estimates, and inflation

adjustments for taxes and spending.

Much of this change could be made

administratively. The Trump admin-

istration and Congress should sup-

port research and development nec-

essary to create a more accurate

measure of inflation and enact laws

requiring the use of that measure

across the government.

We are having major debates

based on measures that are demon-

strably wrong. We are artificially in-

flating government benefits and cut-

ting taxes based on bad measures of

inflation. As a nation, we need to get

our facts straight.

Mr. Gramm is a former chairman

of the Senate Banking Committee.

Mr. Early served twice as assistant

commissioner at the Bureau of Labor

Statistics. This article is adapted

from a forthcoming book with Bob

Ekelund, “Freedom and Inequality.”

By Phil Gramm
And John F. Early

LAURA BUCKMAN/BLOOMBERG

Our flawed measures

of inflation understate

wealth and improvements

in consumer well-being.

OPINION

A ‘Fact

Checker’

Declares War

On Satire

By Kyle Mann

I

f your job is to make people

laugh, what do you do when your

brand of humor is classified as

dangerous?

I run the Babylon Bee, a satirical

website, and we’ve had to face that

question a lot lately. The “fact check-

ers” at Snopes.com—once a reliable

source for distinguishing reality from

urban legends—have been smearing

the Bee as “fake news.” They don’t

seem to have a problem when we

make fun of Trump-worship, conser-

vatives, fundamentalism and mega-

churches. But when we target Demo-

crats and the left, suddenly we’re

branded liars.

The most recent controversy be-

gan when Snopes published a thor-

ough “debunking” of our satirical take

on Georgia state Rep. Erica Thomas’s

false claim that a white man in a su-

permarket told her to “go back to

where you came from.” Our humorous

headline: “Georgia Lawmaker Claims

Chick-fil-A Employee Told Her to Go

Back to Her Country, Later Clarifies

He Actually Said ‘My Pleasure.’ ”

Snopes knew this was a joke but

questioned our “brand” of satire. The

website called us “junk news” and a

“ruse.” It accused us of intentionally

“muddying the details” of a current

event to “fool” people.

In response our CEO, Seth Dillon,

instructed our lawyers to demand an

edit of the article and appealed to the

public on social media. The scolds at

Snopes seemed to comply and re-

moved the worst bits from their

piece. But they then rolled out a new

rating, “Labeled Satire,” which is

meant to suggest that we are some-

how making jokes in bad faith. Here’s

the explanation of the new rating:

“Not all content described by its cre-

ator or audience as ‘satire’ necessar-

ily constitutes satire, and this rating

does not make a distinction between

‘real’ satire and content that may not

be effectively recognized or under-

stood as satire despite being labeled

as such.”

Snopes proceeded to publish a

long-winded piece explaining why it

“fact checks” humor in the first place

and reposted a summary of an un-

published Ohio State University study

on satire in which the authors claim

the Bee’s material is “among the

most shared factually inaccurate con-

tent” they’d found.

If I told you the Ohio State study

looks like a setup, with researchers

providing grossly inaccurate summa-

ries of the Bee’s stories and asking

participants if they’re true or false,

you might think I was satirizing

these people. Nope—it’s true. Our

headline “Nation Awaits Apology

From Media That Pushed Fake News

Story for Two Years,” for example,

was summarized as “Most Americans

believe that major media companies

should apologize for pushing the

now-debunked news story of collu-

sion between President Trump and

Russia.” Our article never made that

assertion, and their hacked-up ver-

sion misses the joke—which assumes

the nation isn’t holding its breath for

an apology for the collusion hoax.

In short, they drained the humor

from our jokes, then feigned shock

when research subjects failed to see

it.

This ugly dispute has demon-

strated the danger of assigning au-

thority to supposedly unbiased fact-

checkers. They have the power to slap

a joke they don’t like with a “false”

rating and defame the authors as pur-

veyors of lies and fakery. Last year

Facebook threatened to forbid us to

collect money from ads, and even to

boot us entirely, after Snopes “fact

checked” a piece of ours headlined

“CNN Purchases Industrial Washing

Machine to Spin the News.”

Life isn’t always “true” or “false,”

and mockery, like art, is especially

averse to easy labels. Scams and

hoaxes are fairly called lies. Opinion

and satire involve layers of context

and interpretation—and, yes, bias.

It’s dishonest for “fact checkers”

like Snopes to treat satirical sites

like ours as if we claimed to be ob-

jective news sources simply in order

to saddle us with the “fake news”

sobriquet.

Lies claiming to be objective truth

are a problem, and sometimes people

mistake satire for fact. But let’s not

give up our sense of humor just be-

cause some “fact checker” pretends

not to have one.

Mr. Mann is editor in chief of the

Babylon Bee.

When we make fun of

liberals, Snopes pretends

to take us seriously and

labels our jokes ‘false.’

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Time to Throw In the Towel on Biosimilars

A

major reason drugs are even
mildly affordable in the U.S. is
that cheap generic copies can
eventually flood the market. But first
the Food and Drug Administration
grants new drugs a few years of mo-
nopoly “exclusivity.” For decades
this high-price-before-low-price
model has fueled astounding phar-
maceutical innovation while also
providing long-term access to impor-
tant treatments.
But today this model is in trouble.
An entire class of high-priced medi-
cines, called biologics, may never face
strong competition from copycats.
These drugs—which are used for can-
cer, rheumatoid arthritis, and other
serious illnesses—accounted for 37%
of all spending on drugs in 2017 even
though they were only 2% of all medi-
cines dispensed. While chemical drugs
can be easily mimicked by generic
drugs, biologic drugs are made in ge-
netically engineered cells, a process
that cannot be perfectly copied.
It wouldn’t be the end of the world
if a few biologics—like the breast-
cancer drug Herceptin, first approved
in 1998—stayed overpriced. But now
there are dozens of biologics that
may command high prices in perpetu-
ity. We estimate that Americans are
spending $50 billion more each year
than if the low-price part of the sys-
tem were working for biologics.

We recently proposed that the gov-

ernment regulate the prices of older

biologics while allowing the market

to set prices for newer and more in-

novative ones like gene therapies.

Scott Gottlieb, the Food and Drug Ad-

ministration’s recently departed com-

missioner, disagreed. He tweeted in

April that “it’s far too early to throw

in the towel on biosimilars.”

Biosimilars are near-copies of the

original biologic drug, similar but not

the same. They are Washington’s fa-

vored way to introduce price competi-

tion for brand biologics. But because

biosimilars aren’t and cannot be iden-

tical to the original biologics, the gov-

ernment appropriately requires that

they undergo extensive testing before

going on the market.

This creates two new problems.

First, onerous testing requirements

raise costs, delay market entry, and

reduce the number of competitors.

Even under ideal conditions a brand

biologic might face only two or three

competitors over many years. This

would exert only mild price pressure

on the original drug—far less than

the rapid and intense price pressure

on chemical drugs from generics.

The average sales price of the

brand biologic Neupogen, which in-

creases white-blood-cell counts in

cancer patients, is higher today than

when it entered the market in 1991,

though it has two competitors. Even

the Biosimilars Council says biosimi-

lars will only save around $50 billion

over the next decade, about what we

believe could be saved each year

through price regulation.

The other problem is that large

clinical studies of biosimilars them-

selves slow the pace of innovation

by diverting patients from other

studies of promising new treat-

ments. Nearly 3,000 women had to

undergo clinical trials of four bio-

similars that may someday modestly

dent the price of Herceptin. Mean-

while, clinical trials of cancer immu-

notherapies are short more than

100,000 patients.

The most valuable and scarcest re-

source in pharmaceutical innovation is

patients willing to participate in risky

research. That resource shouldn’t be

squandered on copycat medications

that by definition cannot be better

than drugs already available on the

market.

Even today there are barely a

dozen biosimilars on the U.S. market

and no competitors on the horizon

for dozens of biologic drugs. The bar-

riers to entry are so high that even

the hundreds of millions in sales

these uncontested products generate

isn’t enough to attract even one com-

petitor.

Thus it is time to throw in the

towel on biosimilars. After a biologic

drug’s exclusivity period is over—the

FDA currently protects biologic drugs

for 12 years—government should reg-

ulate its price to provide a fair profit

for its manufacturer. The pricing for-

mula would incorporate all produc-

tion and distribution costs, including

reinvestment in manufacturing facili-

ties and a reasonable profit bench-

marked to other commodity manu-

factured products. Costs, margins

and profits would be reported and

then confirmed by an independent

auditor, like the system used to pay

hospitals for inpatient care. The

manufacturer would be required to

keep supplying the drug to the U.S.

for that guaranteed profit or sell the

business to a firm that will. Many in-

vestors would find such a business

attractive.

Most issues in drug pricing are

contentious. Ending monopoly pric-

ing after a company has been re-

warded for innovation isn’t. Pursuing

biosimilars might seem like a solu-

tion, but this approach is drawing

patients away from studies of newer

therapies even as it fails to control

costs. Price regulation may be a

tough sell in some quarters, but it’s

the best way to keep the promise of

America’s extraordinary pharmaceu-

tical industry alive.

Dr. Bach is a physician and the Di-

rector of the Drug Pricing Lab at Me-

morial Sloan Kettering Cancer Center.

Mr. Trusheim is a visiting scientist at

the MIT Sloan School of Management

and strategic director of MIT New

Drug Development Paradigms.

By Peter B. Bach
And Mark Trusheim

Biologic drugs don’t face

strong competition, and

Washington’s preferred

solution slows innovation.

An Associated Press dispatch pub-

lished in the Aug. 28, 1977, edition of

the New York Times:

COPENHAGEN, Aug. 27 (AP)—A

Danish historian says in a new book

that his Government turned down a

bidbytheUnitedStatesin1946to

buy Greenland.

Prof. Tage Kaarsted based his

600-page history of Danish political

affairs during the period between

1929 and 1953 on public records and

hitherto secret Government files.

Professor Kaarsted said in a pre-

publication interview that the United

States offer to buy Greenland was

made by Secretary of State James F.

Byrnes to Foreign Minister Gustav

Rasmussen of Denmark during a

United Nations meeting in New York

in 1946.

According to the author, Mr.

Byrnes told Mr. Rasmussen that

Greenland was nothing but a huge

lump of ice that happened to be of

great strategic importance to the

United States but could never be

anything but a burden to Denmark.

No price was discussed, said.

The Danish Government never se-

riously considered the offer, Mr.

Kaarsted said, but he says Mr.

Byrnes was serious in making it.

Notable & Quotable: Greenland