Of Economics and Oscars

by robekulick

As a result of the Oregon Trail Computer Game like March snowstorm here in DC, the planned presentation of my PhD research to the econ department at UMD got canceled. When I found this out Sunday, I gave into my girlfriend and agreed to watch the Oscars with a few friends.

I wasn’t up on many of the movies this year so people had to tell me what most of the movies were about. When someone started explaining the Dallas Buyers’ Club, I was pretty surprised to learn that someone had managed to make a movie about a topic that has been discussed by economists for a long time.

From what I’ve gathered (and from looking it up subsequently), the main premise of the Dallas Buyers’ Club is that a man with HIV whose body is having a difficult time tolerating what at that time was the only approved treatment for HIV, AZT, goes to Mexico where he gains access to a non-FDA approved drug. That drug works much better for him and so he ends up smuggling the drug from Mexico to the United States to provide it to other people with the same problem.

The people I spoke to seemed pretty shocked that the FDA would prevent people from accessing a beneficial treatment that could save their lives. This is an issue that I’ve always found interesting and was first introduced to through Milton Friedman’s book “Free to Choose.” I found a link to the chapter that discuses it here.

When I first read this a number of years ago, the thing I was most struck by was the estimate that for every year Beta blockers were available in other countries but not in the United States approximately 10,000 lives a year could have been saved.

Of course, an overly permissive drug approval regime can cost lives too. Friedman discusses that the push for increased oversight by the FDA occurred after the famous thalidomide tragedy from 1961-1962. He ultimately concludes:

“Granted all this, may these costs not be justified by the advantage of keeping dangerous drugs off the market, of preventing a series of thalidomide disasters? The most careful empirical study of this question that has been made, by Sam Peltzman, concludes that the evidence is unambiguous: that the harm done has greatly outweighed the good. He explains his conclusion partly by noting that ‘the penalties imposed by the marketplace on sellers of ineffective drugs before 1962 seems to have been sufficient to have left little room for improvement by a regulatory agency. After all, the manufacturers of thalidomide ended up paying many tens of millions of dollars in damages –surely a strong incentive to avoid any similar episodes. Of course, mistakes will still happen— the thalidomide tragedy was one—but so will they under government regulation.”

Whether you accept Friedman’s cost-benefit analysis or not, a regulatory regime like the FDA drug approval process can lead to the perverse situation where someone doing something beneficial for society can run afoul of the law. The particular episode of this highlighted by the movie does a good job of indicating the potential human cost of over regulation. Of course, to the extent that it would have been prevented by the FDA, the thalidomide tragedy also highlights the potential cost of under regulation. It’s no wonder that making effective policy is so difficult.